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

Good morning, and welcome to the Watches of Switzerland Q2 Trading Update. My name is Charlie, and I'll be coordinating the call today. [Operator Instructions] I'll now hand over to your host, Brian Duffy, Chief Executive Officer, to begin. Brian, please go ahead.

Thank you, Charlie. Good morning, everyone. Welcome to our call. Thanks for joining us. You'll be hearing from me, Brian Duffy, CEO of the group. I'll be giving some more background to our trading performance that we reported this morning. And then our CFO, Bill Floydd, will comment on our guidance, and then we'll both be happy to take whatever questions you have. Quarter 2 fiscal year '23 was another strong quarter for our group, bringing to a close a strong first half. Q2 sales grew 30% at reported rates, 21% in constant currency. Half 1 sales grew 31% as reported and 23% in constant currency. There was some disruption during the quarter, but our model and our teams, in particular, prevailed and once again delivered good results. We've had a busy program of new openings and reopenings of refurbished stores with Battersea in London, a real standard project. Sales were consistently good throughout Q2, and we finished the quarter on a strong trend. We experienced good sales growth across our portfolio of leading brands. The category is very dynamic in terms of new products and marketing, and we are working more and more closely with our partners to bring this excitement to our clients. In the U.S., sales for the quarter were plus 74% in reported currency, plus 46% in constant. The U.S. represented 42.5% of group sales. The U.S. is now the #1 market globally for luxury Swiss watches, and we believe that our analysis of the underdevelopment of this market due to underinvestment in retail is now clearly proven and supported by the industry. The U.S. market is now our top priority for Swiss luxury watch brands. We are building our team and our resources in the U.S.; we're gaining market share, and we're very confident of the long-term growth potential in this market. In the U.K., sales were plus 9%. U.K. is the #1 market globally in terms of sales per capita for the domestic market for luxury watches. Group sales in the quarter were almost all to domestic clients with very low levels of tourism. The absence of duty-free sales in the U.K., which is unique to this country, will continue to depress total -- tourist sales for the foreseeable future. We have a leading share of the U.K. market. We've had that for some time, and we further enhanced our leading position during the quarter. We're excited to have launched our entry into the EU market with the opening of 4 mono-brand showrooms in Stockholm and Copenhagen in the half. The boutiques look great. We have fantastic teams, and we are building our presence and resources in these markets. We believe that Nordics are underdeveloped for luxury watch retail, and we have very good prospects for growth. Turning to first half profitability. We expect half 1 adjusted EBIT to come in between GBP 86 million and GBP 88 million with the prior period margins benefiting from GBP 5 million of the U.K. business rates relief. On the question of whether there are signs of a market slowdown, our situation is that we are not experiencing any measurable negative impact on demand at this time. Our client registration of interest list continue to grow. Sales are strong, and we exited the quarter with good momentum. As we reported at the end of Q1, we are clearly aware of the macroeconomic forecasts, and we have included some caution in our outlook for the potential of a more challenging condition in half 2. We would remind everyone, however, that the supply/demand dynamics of the luxury watch markets are atypical and also that the WOS Group is well positioned to gain market share. In all luxury markets, as I'm sure many of you have experienced whether travel, hospitality or retail, that it's been difficult to maintain levels of luxury client service during this period. The success of our business has allowed our group to invest in luxury client service with the Xenia program with which we are experiencing very positive response to this program from our clients and directly in our sales. Finally, I'm very pleased to report that our foundation trustees have now approved donations of GBP 2.7 million cumulative of the accumulated GBP 4.5 million contributed by the group to the foundation. These donations have gone to local charities in the U.K. of food banks, fuel banks, defenses trust and crisis. And in the U.S. to Habitat for Humanity and food banks. We were also the headline sponsor for the Prince's Trust Palace to Palace Bike Ride; 100 of our colleagues and friends participated. And through that participation, we raised a further GBP 100,000. So in summary, we remain very much on track. Our markets are good. Our model is working. We're confident about the guidance that we're issuing today, confident about and focused on our long-range plan objectives. But also very conscious of our responsibility to our colleagues in the broader community. My thanks to our teams who have done a fantastic job as ever and continue to inspire and deliver in equal measure. I'll now pass over to Bill.

Thank you, Brian, and good morning, everyone. Turning to the guidance. And as a reminder, we present guidance reflecting our current visibility of supply from key partner brands, announced pricing, confirmed showroom refurbishments, openings and closures. Uncommitted capital projects and acquisitions are excluded and the guidance is presented on a pre-IFRS 16 basis. Our previous guidance used a sterling/dollar rate of $1.30 to the pound. Guidance is now upgraded to reflect movement in foreign exchange with H1 actualizing at $1.19 to the pound and H2 projected using a rate of $1.20. On a constant currency basis, revenue and adjusted EBIT guidance are unchanged. And as we stated in the Q1 announcement, continue to anticipate the potential for more challenging market conditions in the second half. On revenue, we've increased guidance by GBP 50 million with the range now at GBP 1.5 billion to GBP 1.55 billion. Guidance for adjusted EBITDA margin remains at 0 to 50 basis points improvement. Adjusted EBIT guidance increases by GBP 6 million to a range of GBP 163 million to GBP 175 million. We have provided further details in the announcement, including the key headlines when using IFRS 16. From an FX sensitivity perspective, a $0.05 movement in the H2 average rate would have a revenue impact of around GBP 15 million and GBP 2 million adjusted EBIT impact. Going forward, we believe that the strength of the luxury watch and jewelry categories with the unique supply/demand dynamics of luxury watches underpinned by client registration lists together with our brand partnerships and the success of our model will continue to support long-term sustainable sales growth. We remain confident in the long-range plan objectives. I'll now hand you back to Charlie for questions.

[Operator Instructions] Our first question comes from Melania Grippo of BNP Paribas Exane.

This is Melania Grippo from BNP Paribas Exane. I have 2 questions. So I would like to know, I mean, you said you commented on the fact that your environment is still good. Could you please tell us if you see any differences across the U.K. and the U.S. in terms of price points? I mean, how is the high end behaving compared to the more entry price points? And also what should we assume are your profitability drivers for the rest of the year, but also going forward?

Thanks, Melania. We obviously, as we presented to you many times and when we enter the U.K. -- U.S. market rather and with the IPO, we're convinced of our structural underinvestment in the market, which I think is now proven. So we have that structural weakness that's been addressed by investment in the market coming from the brands, coming from retailers and the results are there to see and you see the Swiss export data; the U.S. is clearly getting great support in terms of supply, but also as I say, in terms of the investment overall. So the U.S. market from a growth standpoint is definitely more dynamic overall. But in the U.K., this market has been so strong for so long, continues to go well. We continue with applying our model. As I said, we've been really active on investment in new projects, gaining market share. So we've -- the proportions that we talked about in the long-range plan, U.K., U.S. growth, kind of remains a focus overall, although we're clearly ahead of the numbers in particular with what we've done in the U.S. through existing store and acquisition. In terms of consumer behavior, overall, from a pricing standpoint, well, first of all, the U.K. has had much more price increases. We had 2 waves of price increases, which were entirely currency related. But the dollar being so strong, some price increases were put through at the start of the year and there haven't been any since. The average price of luxury watches have always been higher in the U.S. with the dollar as noted, actually that differential is even greater. In terms of consumer behavior within price, we've experienced consistently over the last couple of years, a real preference for the consumer to move up on average price, and to move towards more gold. We can't get enough gold products and whether completely 18-carat gold or gold and steel. So it really has a consumer preference to move any precious materials overall, whether that's seen as a hedge against inflation or whatever the motivation, that's definitely what we're experiencing and we're chasing more gold products right now than we are steel. Other than that, no real discernible difference. Overall, we are seeing a younger consumer demographic. Overall, we're seeing a really good spread of interest in watches and niche brands doing particularly well overall. So I think overall, it's a very dynamic market and a very good time for the luxury Swiss watches.

On the profitability drivers question, Melania. So you would expect the net margin to kind of stay where it is. Product mix, broadly unchanged. Continue to get operating leverage from overhead. And then, I think, the other thing to just bear in mind is inflation. We're well insulated from inflation compared to most. So things like utilities is a very small part of our cost base. So overall, confident with the guidance of 0 to 50 basis points margin for the year.

Our next question comes from Karina Nugent of Goldman Sachs.

The first one just revolves around the conversion of the waitlist. A common pushback we get from investors is that waitlist may be growing, but you don't need to put a deposit down or anything to secure that place. Are you seeing anything changes in the uptake when people are made available in terms of that product that they're after, particularly on the brands that are not typically on waitlist? And then secondly, I wanted to ask about your allocations from Rolex. Has anything changed since the start of the fiscal year in terms of your expected allocation from them? Are you benefiting from continued disruption in China, for example? And then finally, as we think about the broader macroeconomic environment potentially getting more challenging, do you see any potential to accelerate your expansion plan in that regard, whether there's cheap opportunities for M&A or store rents?

Thanks, Karina. Conversion of waitlist has always been very high, and there's really no change. We don't especially track it [other than] anecdotally, and we -- as we've said, we're adding more people. And when the calls are made, people are in the store within 24 hours, getting listed and looking to get a product. So no reading of any change in those circumstances and very, very high levels of conversion. Anybody we find who chooses not to buy it's because they got the product somewhere else or they have personal circumstances or whatever that may change their mind. But honestly, we just move on to the next person and keep very, very high and no change. Allocation, we haven't seen a significant change in allocation during the year in terms of the units from key brands. Pricing has got better. Obviously, the price of all products has gone up. So that benefits the ASP. Mix has been a bit better too, sort of impacting the ASP as well. But as Bill said, we always reflect our most recent information. But from just repeating myself from a volume viewpoint, it hasn't changed in a measurable way. And the commitments would be honored and we obviously have only got a couple of months to go now. M&A-wise, we've always been active. We remain active in U.S. and now in Europe. I think as everybody knows, it tends to be smaller, family-owned businesses that we are having discussions with and it all takes time. It takes a lot of due diligence in terms of availability of information and so on. But no real change in behavior. I don't think overall either from us or from the potential sellers and remains a focus for us, and we remain as committed to adding to our business through M&A as we were when we presented the long-range plan.

Karina, you had one there on store rents. Typically, what we do is take a 10-year lease with a 5-year break, and we'd always look at the end of that 5 years of do we want to continue. Typically, if we continue after the 5 years, then we'd refurbish it and that would then involve a conversation with the landlord at the same time.

Our next question comes from Jon Cox of Kepler Cheuvreux.

Jon Cox with Kepler here. A couple of questions for you. Just on the like for like, trying to strip out some of the shop openings that you've had. Is there much of a material impact on those sales figures that we see from the 9 stores you opened in the quarter and obviously, you've been opening stores on a rolling basis. Ahead of that, maybe it's just a couple of points, maybe it's more, maybe it's not. And just what you think the trend has been, it really comes back down to this, is there a slowdown happening? Do you think that stripping out all of that you are seeing maybe some deceleration in the top line? That's the first question. Second question, just back on to the waiting lists, and I know it's a bit of an old chestnut, but just wondering in terms of if you had to fill that waiting list today, what would that be in terms of your annual revenue? Is it like 1/4 of your revenue? Is it 1/3? Is it a bit more? And you mentioned about that growing a little bit. Just wondering how much did it grow? Is it just really fractional 0.1%? Or is it a bit more meaningful in terms of maybe a couple of percent. And then just a last question on China and all of these discussions about opening up. And clearly, you guys could benefit if we got more Chinese tourists in. You do allude to the fact that clearly, with the duty-free not really helping so much at the moment. And I know there's lots of discussions going on about that and whether you may be actually not doing so well. If the Chinese come back, maybe they won't go to the U.K., they'll go to Paris or elsewhere to buy their luxury watches. I'm wondering if you have any thoughts on that. And sorry, I just want to tack one on. In terms of your allocation, I've heard that some watch brands are now starting to cut back, particularly for those watches that may be typically abundant just in anticipation potentially of a slowdown. You don't seem to be seeing any sign of that at all. And I'm just wondering what your thoughts are into 2023 on that.

Okay. Jon, I've got a few things to get through there. The best -- the most significant adjustment you would look at in terms of our trend to come up with an LFL is taking out U.S. acquisitions and we give that number. Once you've done that, you're not far away from what really is kind of organic growth. We did quite a few openings like Battersea and so on, but obviously, very late in the quarter overall and late in the half, didn't really have an impact, to be actually probably have more disruption with construction and significant stores that were closed for periods, including Meadowhall configuration and Sheffield and another store in Southampton and some others. But if you take out the acquisitions in the U.S., you're really not far off of dealing with what has been an LFL trend for us. Overall, it's obviously still very positive. And trend deceleration, honestly, we're on it in terms of analyzing our sales. I mean daily sales by brand, by store, and we look at it frequently. Throughout the day we're getting reports. So we're constantly looking at trends. But the ups and downs always happen in retail. On explanations with regards to specific brand situations on deliveries or comping this year or last year on new products or whatever it might be, we have had some disruptions that I mentioned like during the Queen's funeral or the hurricane in the U.S. We had the Betteridge store that we acquired. We closed down for a couple of days as we completely re-did the stock again because we had some challenges there and relabeled all our stock. So these are the explanations that we have for the ups and downs. We haven't really ascribed anything at all to a change in consumer sentiment. But as both Bill and I have said, we are anticipating, along with everybody else, that there is potential for a change in sentiment and behavior, but we haven't seen anything yet. Waitlist, we don't give out specific numbers, but it's not a percentage of annual revenue. It's more like a multiple; pretty significant depth of the waiting list. We are adding to them. And again, we don't give percentages or numbers overall. But net-net, we are adding more names to the waiting list than we're able to take off. We have got a lot more edited and analytical on the waitlist today than we've been historically given its importance. So we're in more control of it. We're not letting people put their name down for large multiples of product. We're making sure that people are not putting their names down in different formats, Brian Duffy, B. Duffy and Mr. Duffy, whatever. But having done all of those edits and so on, we're still looking at a net-net growth of the waitlist. We are not anticipating, and we haven't projected in our long-range plan or guidance, any benefit to come from Chinese tourism whenever it returns. There's a lot of views out there as to will the Chinese consumer be as willing generally to spend on travel versus domestic. I think it's an open question that's out there. And then, of course, we have the duty-free situation. Our view, I'm very confident that the duty-free situation will be changed at some point. It was obviously changed for a few days during September. But I'm pretty confident that it will change. There's evidence out there to say that the U.S. -- U.K. exchequer is losing from the potential loss of tourist business, but we have not projected any tourist business recovering at all in any of the numbers. And I don't think it will do significantly until duty free does come back. Allocation cut back, production cut back, I'm totally unaware of. We spent a lot of time in Switzerland recently. I was there on Monday on the jury of the GPHG doing the choice of award-winning watches and I wasn't hearing anything at all then about any negativity. But still overall, we are short of a lot of products. I think a lot of the brands are still a bit constrained by component manufacturing, case and dial components and metals. So I'm not at all hearing of any kind of a cutback in allocation or production.

[Operator Instructions] Our next question comes from Natasha Brilliant of Crédit Suisse.

I've got 3 questions, please. First of all, just coming back on tourism. And I hear what you're saying on Chinese tourism. Has there been any change in terms of the mix of tourists, say, versus local demand in the U.K., particularly from the U.S. and the Middle East after the summer? So have you seen any changes there? Second question on credit sales. Can you just remind us what percentage of customers purchase on credit, both in the U.K. and the U.S. and if there's been any notable changes to those numbers in recent months? And then the third question is on mono-brand stores, obviously proving to be a successful strategy. Are there any brands for which you don't currently have mono-brand stores, but where there might be potential to open some? These are my 3 questions.

Will you do credit, Bill?

Yes, I'll cover off credit, Natasha. So credit sales represent 10% to 12% of sales. That hasn't changed in this half. But in terms of the proportion of sales of going through credit, the cost has obviously with increased interest rates, and the teams have done a fabulous job of managing that as best they can. And the other thing just to remember on credit sales is that we act as an intermediary. So we don't bear the credit risk if there is a higher rate of default going forward.

I want to then, Natasha, Americans and Middle Easterns clearly are out shopping, but predominantly in Europe. And again, I've been there recently, and there are -- I was in the Mandarin Oriental in Paris, it was all Americans. And they were all out shopping for sure. So I think it's very, very evident that people and organizing their alternatives are definitely planning, particularly Americans planning to shop in Europe. We're not seeing much of that here in the U.K. We have obviously a bit of difficulty kind of recording it because we used to use VAT-free sales as the record of tourism overall. Now we get credit card data, but even that's not 100% reliable because there's a lot of people who live here at a full-time or part-time, who will use credit cards. So overall, U.S., the Middle East has it nudged up maybe 1% from 2% to 3% or whatever, it's of that sort of dimension, really not significant at all. Mono-brands, we clearly have strong partnerships, strategic partnerships on mono-brands with Breitling, with Omega, with TAG Heuer, with Tudor. We're now 3 mono-brands in the U.K. with Tudor, 2 in the U.S., just opened our first Longines. I say we just opened, I think it's next week, we open our first Longines mono-brand in the epicenter of luxury retail known as Glasgow. We have our Belgrade mono-brand in the U.S., and that's going very well as we've reported, and we'd like to do more of that. And we have other discussions that would go in the format works very, very well. The ability to do adjacent brands together that gives the economy of share back of house and management, so and works very well, too. So it's a successful format overall, and we're clearly ahead of the market on it.

Our next question comes from Rogerio Fujimori of Stifel.

Bill, I have 2 questions. Could you remind us of the magnitude of the second price increase in the U.K. for Rolex and the other leading watch partners in September, just to help us understand the contribution to your Q2 exit rate in the U.K. and the pricing tailwind for H2? And then a follow-up question on customer behavior in the U.S. and the U.K. Could you talk about what you are seeing in terms of contribution to growth from your top spending VIP existing customer base versus perhaps more aspirational new consumers? I think any insights into the behavior of your top spending customers, especially as macros get a bit more challenge in H2 would be great.

Yes, on pricing, Rogerio. So Rolex did a price increase in September of averaging 5%. That's U.K. only and is a reflection of sterling/Swiss franc exchange rates, we think. The other brands, not all but largely, have done similar kinds of price increases. But again, in Europe only; we've not seen anything in the U.S. of any magnitude since the beginning of the year.

On customer behavior, we are tracking repeat customer behavior and overall spend patterns and new customers. We are particularly good at recruiting new customers; we're obviously very, very visible where we are, U.K. and U.S., very active digitally and the Internet is, I think, having a huge beneficial impact on this market as people tend to do the research and so on online. So it's really helped us recruit new clients as well. And we've got a healthy increase from them both. Actually, more of an increase in repeat clients overall. I mean, the exact stats, we're still just refining and questioning and future updates that might be able to give more specific information on that consumer split, but I'm very confident that directionally, we're increasing in both and a higher proportion of repeat customers expanding their spending with us.

[Operator Instructions] Our next question comes from Flavio Cereda of Jefferies.

Just 2 quick questions from me. First one on the whole issue of duty-free and tourist sales. So if I talk to some of your far smaller competitors in Europe say, for example, in Milan. What I'm finding out is that the whole -- the presence of American tourists, which, of course, has been much stronger in, say, Milano, Paris compared to London this summer. It works for jewelry. For watches not so much for the very simple reason, they don't have the watches to sell. Like you, they don't have the Rolex, they don't have the [indiscernible] they don't have the [Omega]. So only for a handful of brands we seem to benefit. So I just wonder is it significant at all for you this really this reversal, which you say and hopefully eventually will come? And number two, on the mono-brands that you're opening in Europe, the Breitlings of this world, performance so far is as expected is reassuring. You're comfortable that these brands will continue to perform well.

Yes. Flavio, yes, I agree and I think the removal of duty-free kind of coincided with a significant change towards a lot of products being available and waitlist only. And therefore, been less available to tourists. So I take your point. And there still is a reasonable amount of products at good value. We do invest in stock; our stores are filled; there's a lot of product for sale, and I think if we had duty-free, we'd be enjoying more tourist business now, and we would enjoy more when the Chinese start traveling again. But I take your point, and it is correct that a lot of product is -- nobody is able to move around country and get access to Rolex, Patek, the [indiscernible] as you rightfully say. And just on that finally, [I'm] on this group of retailers that are representing the luxury retail industry with the government, and we have pretty solid evidence of the fact that this is a net loss to the exchequer and we're desperately keen that an independent study is done so that we can all look at independent analysis together and hopefully make the right decisions sooner rather than later. But as I said earlier, we aren't assuming any change in any of the numbers that we've been presenting. The mono-brands in Stockholm and Copenhagen are collectively on plan overall, doing a bit better in Stockholm than we are in Copenhagen but it's very much early days. And of course, it's lumpy, some spectacular days, some disappointing days. But overall, enough for us to feel very positive of the potential in the markets overall. So confident that they're a really good basis for expansion.

[Operator Instructions] We currently have no further questions. I'll hand back over to Brian Duffy for any closing remarks.

Thanks, Charlie. Thanks again, everybody, for joining us. And our summary is that we carry on as we were in Q1. We're not seeing a huge change in the marketplace. We're, obviously, coming into now the Christmas season. We're very, very well prepared for U.K. and U.S. We'll get the chance to update you all sooner rather than later because we're going to have a half year final audited numbers that we'll be presenting to you in early December. So we will get a chance to update you then on what's happening in the -- on Christmas and whether or not our perspective has changed. But very, very pleased with our performance. Really grateful to all of our teams. We're working extraordinarily hard with the activity that we've been on across all of our geographies. But so far, so good. And thank you all for joining us. Thanks for the support and very much thank you to our great teams.

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