Watches of Switzerland Group PLC (WOSG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Watches of Switzerland Quarter 4 and Full Year 2020 (sic) [ 2022 ] Trading Update. My name is Kiernan, and I'll be coordinating the call for you today. [Operator Instructions] I'll now hand over to Brian Duffy to go ahead. Please go ahead.

Thank you, Kiernan, and good morning, everybody. Welcome to the call. Thanks for joining us. I'm assuming that most of you will have been through the RNS that we issued this morning. So I'm not going to repeat all of the detail that's there. I'll just give a bit more color to results and then I'll pass over to our CFO, Bill Floydd, who will take you through our guidance for fiscal year '23. We're very pleased to report our results, 48% sales growth in Q4, 40% for the year. And some important points I'm going to make and interpreting these numbers for you. Our sales were almost entirely to domestic clients, 97% domestic, U.K. and U.S. Pre-COVID full year '19 international sales without bringing the combined tourism and airport sales about 32% of the group. Fiscal year '22, it was 3%. So a lot that we had to overcome in that loss of our base. The brand mix has changed significantly. Super high demand brands, Rolex, Patek and Audemars, are all [indiscernible] clients. Our showroom stock is used for client demonstration purposes only. Growth for these brands was completely in line with our expectation, although significantly lower than the average growth that we had for the group overall. On the other hand, the other luxury watch brands grew by more than double in the year and clearly that was the biggest significant contribution to our growth. There's great dynamism, innovation and investment [indiscernible] watch markets in the U.K. and the U.S. Luxury watches grew overall by 36%. Luxury jewelry has also been very strong, growth of 86%. And we have renewed focus in the jewelry sector. The Watches of Switzerland investment-led model of scale, technology and highest resources and expertise has enabled our group to make good gains in the market from our both existing network growth and from incremental projects. Profitability improved. Our EBIT profitability margin improved between 170 and 210 bps. And cash generation for the year has been very good. So we're carrying strong momentum into fiscal year '23. Some very exciting projects ahead for us. Our team are doing a fantastic job. They are the best and they have credit for the success that we are reporting. Just before handing over to Bill, who will comment on guidance, I want to mention our foundation that we're very proud of. So the Watches of Switzerland Group Foundation was formally registered in the fiscal year '22, became fully active during the year. The group has paid GBP 4.5 million for the foundation in fiscal year '22. We have a great Board of trustees, all fully engaged in what we're doing, and they have approved donations to homeless charities including foodbanks and [ fuel banks ] and the Prince's Trust. Our colleagues engagement and volunteering has been great. Our U.S. registration of charity has just recently been completed and progressing projects and partners in the U.S. and once again planning to fully engage a lot of American colleagues. So all in all, we start a new fiscal year with positive and optimistic energy and confidence in developing against our Long Range Plan goals. So I'll now pass over to our CFO, Bill Floydd, to take you through our guidance.

Thanks, Brian. Good morning, everyone. So in terms of the guidance for FY '23, we're presenting this on an organic basis and committed projects only. So -- and -- we go into the year with good momentum. We anticipate that the disruption from the pandemic is now largely behind us. And we are seeing good recovery in footfall and airport traffic as well. In terms of the numbers, we're guiding revenues to between GBP 1.45 billion and GBP 1.5 billion. Adjusted EBITDA on IES basis of flat to plus 0.5%. EBIT in the range of GBP 157 million to GBP 169 million. CapEx stepping up to between GBP 70 million and GBP 80 million, but that will still leave us with year-end net cash of between GBP 35 million and GBP 40 million.

Okay. And with that, we'll happily move to your questions.

[Operator Instructions] We have our first question from [indiscernible] from Goldman Sachs.

I have 2. So the first one is just about the demand dynamics as we go into the next fiscal year. You've already called out continued strength in luxury watches and jewelry. I just wanted to confirm that, that was the case in the first 2 weeks of this fiscal year. And if there's anything to call out in terms of changes to consumer behavior. For example, have you anything in the fashion and classic segment? I realize it's a small part of your business, but it would perhaps be one of the first to show any sign of weakness if there's any macroeconomic uncertainty. And my second question is on supply. As we look ahead into FY '23, do you think -- what is the supply dynamic like broadly? But then also do you think there's any possibility to benefit from supply reallocations from the brands, particularly given the situations in Russia and China? And would this represent any upside -- potential upside to your guidance?

Thanks, Karina. We honestly haven't seen any change in the dynamics that we experienced throughout fiscal year '22. As Bill mentioned, we are seeing a ton of traffic in some areas that will obviously be incremental. The airport was very, very small. We're seeing the tons of traffic in London and in New York. And again, that traffic, particularly folks working and -- have been slow to return, but it's happening now. Vegas, overall occupancy and whatever has been good. But the convention calendar hasn't been as complete and attendance hasn't been what was typical [indiscernible] There are specific areas we point to of likely improvement because you're physically going to have more people in these towns that we're doing business in. But -- I mean overall, the dynamics haven't changed. About 2.5 weeks in actually, and honestly, no change overall in the market dynamics that we're experiencing. What did you call the group of consumers actually that you said [indiscernible]

Just the fashion and classic, that lower-end segment, I know that it's a small part of your business.

It is a small part of our business. It's predominantly a part of our online. And I'm unaware of any impact has been in that category either. Our jewelry business depends more on sort of traffic. But again, it's remained very strong. So honestly, that's very early stage of the new fiscal year. We haven't seen a difference. The market is very, very strong with lot more product fundamental, which kind of takes me on to your second point. And I was in Switzerland last week and seeing many of the brands directly. And obviously they're all experiencing a downtime in China. It's pretty public. Now what's happening particularly in April, first quarter wasn't what everybody was hoping for, but April, there's been a much more negative impact with the lockdowns in Shanghai, and clearly, the overall distribution and logistics [indiscernible]. Should that result in more product being available for the known Chinese market, logically, yes. I mean, again, we haven't seen any impact on that yet. But yes, logically, you would think there should be some more products around.

We have our next question from [indiscernible] from BNP Paribas.

Yes. It's Antoine Bregeaut, BNP Paribas Exane. Three questions. First of all, with regards to the outlook for the brands with super high demand towards the sort of algorithm of growth for this year in terms of price and volume. My second question is on the margins. You're expecting it to be flat and 50 basis points improvement in adjusted EBITDA. So what are the moving parts behind that? I think there was some -- still some one-off benefits of COVID [indiscernible] any color on investment that are going to be made this year. And finally, when you mentioned that the guidance is without acquisitions. So our likely acquisition this fiscal year, of course, we're not expecting you to disclose anything, but more like are there rather like short-term prospects? So yes, what's the sort of pipeline looking like?

Thanks, Antoine. On price and value, the dynamics we experienced this year as the consumer is definitely open and willing and acting in a way of higher prices, so more gold -- more sterling, gold, less steel. So the consumer has definitely been happy to price up throughout the year. However, when you then look at the mix of businesses we reported, the super high demand has been pretty modest and the increase on the other brands has been double. That mix impact by brand leads to our used ASP for us. So our volume increase in fiscal '22 was because of the sales increased because ASP went down single digit purely because of mix. Within each brand, the ASP went up quite significantly. So this year, we have price increases that have all been announced. We're not planning or expecting any more in the calendar year, somewhere around 4% or 5%. Year-on-year will the mix change? Much less, so I think the big change all have been last year. But we'll see. As we've said, there's dynamic momentum across the whole category. And the known super high demand brands are in a better situation with regards to supply. The margin, Bill, do you want to comment on?

Yes. So margin, Antoine. We're guiding to flat to plus 0.5%. I mean I would look at that in a couple of ways. So first of all, the margin progression over the last couple of years has been superb. We clearly have ambition to drive the margin higher. But we need to get some time under our belt to be confident in that. But at the moment, I'm good with the range we've given. There's a few things that still need to wind out from COVID as well. So there's a little bit of rate holiday and the like in the U.K. that need to wind out over the course of the next few months. But overall, we've got a bit of -- we've had a bit of a margin hit on Rolex in the U.S., which will work its way through as well. But overall, we should make up for a lot of that with volume. So that's the reason for the guidance being where it is.

And then finally, in terms of acquisition, I think we're very clear when we did our Long Range Plan, acquisition was a key part of the growth strategy, specifically in the U.S. and in Europe. Remains the case. And we remain active in the year. We acquired businesses, 5 stores with sales -- combined sales value of around $100 million, all in the U.S. And -- but -- as we've continually said, as family businesses, we understand things take a lot of time to resolve those [indiscernible] And we've got to be patient, and we've got to get to know people and people have to be very comfortable that their heritage in many ways or legacy will be in our hands. So it'll take time. We never look to overpay, of course. And it remains a part of our strategy for the foreseeable future.

We have our next question from Erwan Rambourg from HSBC.

Erwan Rambourg from HSBC. Three questions, if I can. I was wondering if you could give us an update on where you believe your market shares stand following this very strong end of the year in both the U.K. and the U.S. Secondly, I understand you have your allocation for calendar '22 from the super high end brands but -- high demand brand, sorry. But the understanding is they will still contribute less as a percentage of sales as was the case already last year. Is there hope that at some stage you maybe have more production coming or at some stage that those brands can grow at the same pace than the average? Or is that just structural? And then maybe thirdly, anecdotally, as Rolex seems to be out of stock pretty much everywhere, how easy is it to convert first-time purchasers who want a Rolex to other brands? And I don't know if there's a percentage or if you could comment on which other brands might benefit from the fact that there are no Rolexes to buy. And so by default, where do you try to convert them to? And is it efficient?

Erwan, market shares are kind of difficult for us. We've been reluctant to quote it because of concerns of kind of lack of shared information, but we have [indiscernible] data in the U.K. But even then, we know there are adjustments that we know that we have to make [indiscernible] doesn't result in the main kind of representative. So we do things like the accounts the companies that give us one source of accurate shipments out from them. And we speak to the brands and try and understand what the overall growth levels are in the marketplace. We [indiscernible] and therefore, we know if we're gaining share or not. And that's the thing that I probably track more than anything. Is the brand overall in the market? Tells that, and we -- normally, they're willing to give us an indication. We know how well we are doing. And therefore, we're gaining share or not. I think across the other luxury brands, we've definitely gained share [indiscernible] in the U.K. market. We are the biggest in the U.K. I'm very clear to everybody and we're continuing to gain share. We have the specifics that we're doing of increased distribution. Model brands are increasing distribution and presence. Our online positioning is clearly very strong for us again, and that's performing. So we have a very strong market share position in the U.K. and it's improving. The U.S. situation with market data is even worse than it used to be. NPD tracking the market, but it really wasn't represented at all. It was a source of something, but we really had to constitute market data independently. And again, it's quite a job. It's a matter of gathering all the brands and looking at distribution. So it's not something that we're again excited with knowing exactly where we are from a market share standpoint. Again, we do the same thing, trying to understand their trend and know where our [indiscernible] share. Once again, particularly in the U.S., we've made some important strides in gaining share. I would say that our share there in the U.S. is definitely double digit now. But clearly, a hell a lot to go at as the case in Europe. We do get calendar indications of intake as you know from Rolex. We get kind of fiscal year -- we have fiscal year indications from Patek and Audemars a slightly different calendar. And my job is to try and continually get more and justify more and look for opportunities. And the biggest justification we have for getting more products as investment that we make in terms of real production from these brands, they're very, very discrete. I really don't intend to give market information. So along with everybody else, I'm largely speculating on it. The only exception is Audemars have said that they are increasing the production capacity. But even then, it's relatively modest, around 10,000 units. So we'll see, but the mix may well change in the same direction that entered this year. But I think the significance of the change might be a little less. What we do with Rolex is we try and tell Rolex, of course, that's our job. We don't have products that we can present to clients and store and go through the whole selling routine, but we then give the news regarding the wait times overall. But of course, if somebody is looking at Submariner and then told it's going to be a matter of years before they get it, then the next thing we would want to present to them is an Oyster Perpetual within Rolex [indiscernible] but less and so on. Our priority, of course, is always to sell the brand that the client is interested in. But if somebody is -- and as many people are buying for a special occasion and want to buy something that day or short term, inevitably, they'll look at other products. And I think it's fairly obvious the brands that they looked upon is alternative, other sport watch brands, be it OMEGA, Breitling, [indiscernible] and so on for men. Cartier with the next obvious Gucci in our experience for women. And it just depends, if somebody want to buy a watch that day, then clearly, we have a huge assortment of product to present to.

We have our next question from Daria Nasledysheva from Bank of America.

I have 3. In other luxury watch brands, do you see any risk, more and more challenged demand dynamic in light of some sort of a deteriorating macro economic backdrop given this year was an extraordinary one for the brands as they recover from a relatively low base? So do you think consumer sentiment fundamentally changed to normal luxury brand? I just wanted to get your view on that. The second one would be, could you please discuss the firmness of your waiting list for super high demand brand? How likely someone to actually drop out of the wait list given the length of the wait list to model? And the third one would be whether you could please elaborate a bit more on the inflationary pressures that you're seeing in the business within OpEx specifically.

I think there's real dynamism with these luxury watch brands we're talking about, Cartier, OMEGA, Breitling, TAG Heuer, Tudor. And across the whole spectrum, smaller brands doing extraordinary well. Girard-Perregaux is doing well as a brand with Laureato range. Zenith is having a great success. [indiscernible]. There's great dynamism. And we think the biggest single factor is the market is underdeveloped. We believe that of the U.K. And the U.K. is a very strong market. But we still believe and I think we're proving day in, day out that it's underdeveloped. There's more demand out there. There's more demand that can be stimulated, which obviously, we look to do with our beautiful stores and platform marketing and the client service that we give. The underdevelopment of the U.S. market is even more evident. And we did anticipate and go into the U.S. that the non-super high demand brands will proportionately perform better. And what's happened is it's gone beyond our expectations, but nevertheless, that was the direction of travel that we anticipated. So -- and what comes along with that sort of success and momentum is more investment, more support. And that's what's happening. The brands are investing more in product development and marketing. The retail sector is clearly investing more. We are and also within the market are doing the same. So there's a lot of investment going into the market, a lot of expansion and elevation of the presentational products. So honestly, we don't think there's anything really short term about it. We think as a positive momentum and all of our experience pretty much underwrites that overall. We find the waiting list to be very firm actually. And we experienced at the end of April. We're calling the clients saying, "Good news. You've been waiting for a year, but your product is now available." The clients tend to be in the next day to make an appointment as soon as they're available. But they're pretty quick to come to the store to clearly have the pleasure of buying something that they've been waiting for. So the waiting list, we find, are pretty firm. Because it's become such an important part of our business, we're trying to get more methodical on recording analysis and continual communication with clients and waiting list to manage the patience overall. But it's firm and dependable in terms of converting it to sales overall. Bill, do you want to go to...

Yes. I'll pick up on that. So we're in a position where we're relatively well insulated from inflation compared with most others out there. So in round numbers, 75% of our cost base is the product that we buy and we operate on fixed margins with the brand. So if the wholesale price goes up 5%, the retail price goes up 5%. And we honor the price rises that the brands ask us to put through. On the rest of the cost base, the next biggest component is people costs. That's about 10%. Clearly, we've got pressure there as everyone does. But we -- where we operate, we are one of the places I think where people would like to work on the high street. We already pay people comparatively well. We're always doing what we can to make sure that we make the overall employee value proposition as strong as possible. After that, rent is our next biggest part of the cost base, and that is largely fixed. We've got a few turnover rents. But by and large, that's fixed. And we're on leases that are 5 to 10 years generally, so we've got good protection on that. And the team have done a fabulous job over the last couple of years of getting the lease agreement in really good shape. So -- and then after that, it's marketing. So we're not immune to inflation, but I think we are in a more isolated place than most other people are out there at the moment.

We have our next question from Kate Calvert from Investec.

Three for me, please. First of all, in the U.S., have you seen any pickup in consumers buying watches on credit? The second question, again, in the U.S. Can you talk about where you're up to with the integration of the 5 stores acquired in the States, mainly with regards to the retail side of them? And my final question is, what actually is your average selling price of non-supply-constrained watch brands?

Okay. We'll just [indiscernible].

U.S. credit.

I don't think so. I don't think there's a change. If anything, I think overall COVID period, the amount of credit sales in the U.S. has been down.

Overall.

Yes. So no change and certainly no pickup in credit overall. Where we are with the 5 stores acquired, so 3 Ben Bridge stores. We've actually -- the first, the biggest one is in Greenwich, Connecticut. And we have signed a lease to expand their presence with the store next door and just working through exactly how we're going to configure that, but that will expand within this financial year. We're also looking to expand the stores in Vail and Aspen. We again have an agreement to expand in Aspen, not all of what we're hoping for. We're looking for more space there. We're still working on it. So I honestly wouldn't think that Vail and Aspen will significantly impact on this fiscal year. But we'll see -- we're working on it. The store in Plano [indiscernible] Plano, Texas, we acquired a business that doesn't have Rolex, but we had [indiscernible] the exclusivity in the mall. So the store with Rolex will open within this fiscal year. And we're still working on the exact timing, but it's all designed and that deal is done. Minneapolis, we have reallocated? No, we haven't. We have refurbished the store or changed the format of the store, turned it on to watches only, Watches of Switzerland Group. [indiscernible]. The landlord there, who are the same landlord as American Dream, have a really good plan of creating a more destination luxury area that, of course, we would be a key part of. So -- but that's more in their hands than us at the moment. As to exactly when that happens, we're not planning it in the fiscal year. The ASP, Bill?

ASP of non-high -- super high demand is around about GBP 3,000.

We have our next question from Richard Taylor from Barclays.

I know you [indiscernible], but can you just talk to the inventory situation here? I mean, obviously, you've doubled sales in the year. So are there some models within this area where you actually can't get enough stock as well? And sort of related to that, what is your closing inventory position as that's sort of representative of where stock is in the business overall?

Yes. A good question. We do have shortages, I think, across all of those brands. We can't get enough Santos from Cartier. We can't get enough -- much product from Cartier. We can't -- from OMEGA, we can't get enough Bond watches. We're still at huge demand for the Bond watch. They're same men watch, so we don't -- can't get enough of the men watch. We can't get enough [indiscernible] We're trying to get more gold products from them. So the shortage overall is a bit unusual with all these brands. I would say when we always have some degree of shortage, particularly when new products come in and take off as they often do, but very often chasing supply. On the other brands, Breitling, can't get enough. [indiscernible] we've been chasing across the board as demand. There was -- and [indiscernible] something a bit of a challenge in the industry with subcontractor component manufacturers. And again, I was there last week and hearing the specifics of what was going to suppliers of cases and dials and air springs and whatever. And that across the board impacted production capacity. But that's largely improving overall. And that definitely impacted TAG Heuer towards the end of last year and the fourth quarter. We can't get enough [indiscernible] You name it, we're kind of chasing volume somewhere across all of these brands. We have been -- we would say maybe bold in terms of our commitments. We could see the way the market was headed. We were very positive about our prospects. So we were very upfront in terms of making our commitments to buy. That definitely favored us in Q3 and Q4 of the last fiscal year. And we remain in that position. We're obviously a very big player for all of these brands and, accordingly, I think, able to secure good supply overall. Inventory at the end of it?

So inventory is up at the end of the year, Richard. But partly as a result of the acquisitions that we've done earlier on in the year. Ben Bridge, in particular, carries a lot of jewelry inventory. And we are getting hold -- as much product as we can, we're getting hold of. If you want to work out a number, I think you probably got enough component parts from where we've said we've landed on net debt and the guidance on CapEx that you could probably back into it reasonably well.

Okay. And then just a quick follow-up. So the lack of availability on some of those, is that more to do with some of the production issues and components that you mentioned, Brian, rather than sort of a lack of willingness of those brands to give you stock and keeping it themselves?

Yes. there is that -- fundamentally, it's the demand that's there. Obviously, that's putting pressure on supply. And then, yes, I mean, the component -- when we all first experienced lockdown, there's big concerns and people are more pulling back than expecting what happened, which was a more positive market overall. So you had the actual lockdown experience, then you had better conservatism, and there's been catch-up getting played pretty much ever since. But it's definitely a better situation. And a lot of the subcontractors have scaled up, a lot of the movement manufacturers have scaled up and quite a number of the brands have scaled up their production capacity. So it was a bit of a challenge, I think, for the industry overall over Christmas period. As I said, we got ahead of it. And I think we're in better shape than most. And the overall situation has definitely improved.

We have our next question from Flavio Cereda from Jefferies.

Brian, following up on the last questions on the non-supply demand brand because I guess that's where the focus is. Do you -- given that some of them do have their own PTC, their own retail exposure, do you find that they are -- is it more of a challenge in terms of getting more timepieces and you need more selling space, you need to do more monobrand stores? You need to engage with them a lot more because I'm finding that, I guess, some of them are also starting to play the game right, if you want to buy a particular Santos watch, you need to be Cartier compliance and other timepieces, I believe. So that's kind of changed a bit. And I was wondering if you call out any of these brands that you think are doing a particularly good job in probably elevating the profile and the perception of the brand? And also, my other question was just sort of we're clear on this. Bill, when you mentioned about the Rolex margin hit in the U.S., can you explain exactly what you mean by that?

Flavio, there definitely is an elevation of all of these brands going on. As I mentioned earlier, the momentum, the success brings with it really good developments of products and increase in marketing. The infrastructure, I think it's important too, more people there that can really help us on logistics and getting distributions approved and stores designed and whatever. One of the biggest areas I think, though, that's very, very clear that in terms of investment is within retail. We are investing more of our whole formula and success, and model in the U.K. has been through investment, stores, technology and marketing. And we have -- that's obviously what we're doing in the U.S. There's more scope for investment in the U.S. as we've contended all along. And that's where you can see a really big difference. I mean I think if you look at distribution in Manhattan today versus where it was 5 years ago, it's pretty much revolutionized. So that's why I'm pretty confident about the trends that they're all now getting supported. These are wealthy groups, as you know better than anybody. And the amount of investment and support that's happening, the products that's now being seen out there in the market and friends telling other friends of what a great timepiece that they bought. All of that is not natural momentum. So I think it's a pretty exciting thing for the category.

So Flavio, on Rolex margins. The margins that we've had in the U.S. have always been higher than we've had here in the U.K. and elsewhere in Europe, I believe. That's because U.S. stores were typically less productive. As time progresses and we get more productive and retail the brand better, we've got more productive. This was something that was anticipated in the Long Range Plan that the U.S. margin would come in line with the U.K. margin over time. And that's what's happened. So it's something that we knew was going to happen at some point. It's probably happened a little bit earlier than we would have liked. But it's coming with effect from 2022.

[Operator Instructions] We currently have no further questions on the line. I'll now hand back to Brian Duffy for closing remarks.

Thank you. Thanks, everybody, for your questions and joining us. So we feel good about what we reported to you this morning. We feel good about our prospects of the new financial year that we're 2.5 weeks into. We also get a bit a lot things that we're doing in our community, the foundation that we set up this year where we paid GBP 4.5 million into that, and it's now been in the process of getting allocated to good causes. Our focus of the foundation is on the cities, the communities that we live and work in. And we've approved significant donations to charities for foremost food banks and now [ fuel banks ] of course. And we continue to expand our work with the Prince's Trust. We've got it up and running in the U.S. So we feel very good about that and feel great about our relationship with our colleagues. They've done a tremendous job for us and continued to be enthusiastic and very, very professional in everything that we're doing. So again, thank you for joining us and look forward to seeing you next time. Thanks.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.