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

Good morning, everyone. Thank you for joining our webcasting call on the results of the Watches of Switzerland Group for the half year to October '23. We have previously reported Q2 and H1 revenues to the market, and we have presented the status of the company and plans for our group with LRP, and therefore, this presentation is reasonably concise allowing more time for Q&A. Our agenda this morning, I'll present an overview of the group's performance. Anders Romberg, CFO, will then present the financials, then we will present a summary of our LRP headlines and numbers together following which we'll open the lines for Q&A. We are very pleased with our strong first half performance in the U.K. and the U.S. despite a challenging economic environment. Group revenue growth of 2% at constant currency, flat at reported rates, strong U.S. revenue growth of plus 11% at constant currency. Adjusted EBITDA of GBP 94 million was 8% down at constant currency, 10% at reported rates. EBIT of GBP 73 million, achieving a margin of 9.6%, which was down 170 bps versus last year due predominantly to a reduction in net margin from product mix and interest-free credit costs. Net cash of GBP 16 million compared to GBP 26 million borrowing at half 1 last year with cash conversion of 60%, 700 bps higher than last year. We've now completed the acquisition of the luxury showrooms from Ernest Jones. These stores had a combined LTM sales of around GBP 45 million. We have successfully launched Rolex Certified Pre-Owned in both the U.K. and the U.S. We communicated our LRP through FY '28 on the 7th of November. Our FY '28 goals in the LRP represent a more than doubling of our sales and profits. Looking here at the sales mix in more detail, the rapid growth of our U.S. business means that U.S. sales in the half are now 43% of the group total. Compared to fiscal year '19, total year of 24%. We see the U.S. market as underdeveloped, and we are very pleased with our growth and momentum in the U.S. Our group sales in the half were 95% to domestic clients, and this compares to 67% in fiscal year '19. International sales have been hugely impacted by the removal of VAT-free shopping in the U.K. following Brexit. We have more than compensated for this market loss with a successful increased focus on the domestic client. I'm very pleased to confirm the completion of the asset purchase of a group of 15 showrooms from Ernest Jones in the U.K. This was previously reported at '19. However, 4 mono-brand stores have been sold separately. Ernest Jones is part of the Signet Group, which is predominantly a U.S.-based group focused on diamond jewelry. Ernest Jones ceased partnering with Rolex in 2012, but continued our relationship with most other luxury watch brands. The showrooms that we are acquiring include a total of 76 luxury watch brand agencies, including OMEGA, Cartier, Breitling, Tudor and TAG Heuer. These showrooms are very much in our space with great potential for growth, all in good geographical locations complementary to our current estate with good teams, locations and clients. The focus immediately is to rebrand the stores, leverage our group systems, implement our client service and merchandising and of course, the training and support of our new colleagues. The preowned market is huge, particularly in the U.S. and represents a major opportunity for the Watches of Switzerland Group. We have now launched Rolex CPO in the U.S. and U.K. to add to our already successful Analog:Shift business in the U.S. and U.K. pre-owned. We have launched Rolex CPO in 7 showrooms in the U.S. in July. We're now in 14 and in 5 showrooms in the U.K. in September, and we're now intend with Metrocentre effectively launching this week. Half 1 has been our busiest on record for developments with new showrooms in all markets, including the transformation of a number of large turnover showrooms in the U.K. which we have now reopened across November and early December to maximize trade in the holiday season. We have a healthy pipeline into fiscal year '25, including the opening of the flagship Rolex Boutique on Old Bond Street in autumn 2024. We continue to invest in our Goldsmiths Luxury designs with expanded and elevated showrooms, providing dedicated space for luxury watch brands, increased space for luxury jewelry brands, and new areas of hospitality and client service. In September, we completed the most significant and largest transformation for Goldsmiths in Liverpool City Center, 6,500 square feet across 2 floors of luxury watches, luxury jewelry, including a 1,200 square feet Rolex room and a 500 square feet Cartier room. We have also introduced many new jewelry brands, including Pomellato and Fred. Since the half year, we have opened a relocated Rolex Boutique in Orlando, Florida, and completed Goldsmiths Luxury transformations in Birmingham Bullring, Manchester Trafford Center and Newcastle Metrocentre. We have also successfully developed a new design for Mappin & Webb focused on a more modern contemporary look, whilst respecting the great heritage of the brand. We have opened in New York, Guernsey, Glasgow and Bluewater, you can see here opens next week. We are delighted with the success of Soho and Hudson Yards in our New York flagships. These showrooms continue to grow in sales, and we believe we can continue to grow in Manhattan and the Tri-State area. American Dream, New Jersey opened firstly in May anchored by Rolex. One Vanderbilt will be our next Manhattan flagship located next to Grand Central Terminal at the base of arguably the premium office tower in New York City. This building has hosted the first Amex Centurion Lounge, which spans a full floor of the building. The boutique is anchored by Cartier and OMEGA and will open in Q4 of this fiscal year. Branded jewelry is a market we have highlighted to apply our winning model. Mappin & Webb Manchester, a new store concept will open in autumn 2024 with an impressive lineup of international luxury jewelry brands that will be originally exclusive and also designer brands, men's jewelry and Mappin & Webb jewelry. The Mall of the Netherlands, near the Hague will be our first multi-brand location in Europe, and the first entry to the market for the Watches of Switzerland brand. We have a great lineup of brands, including Cartier, OMEGA, Breitling, Tudor and TAG Heuer and the showroom is due to open by October 2024. E-commerce continues to be a key area of focus, not just in driving sales through this channel, but supporting client journeys ahead of visiting our showrooms. Sales were down 3% at constant currency for the half, reflecting tough comparatives and a higher mix of jewelry through this channel. We continue to invest in the customer journey, both online and through our virtual boutique to ensure each client gets a journey that meets their needs. I'll join you again shortly, but now I'll pass over to our CFO, Anders Romberg.

Thank you, Brian, and good morning, everyone. I'm Anders Romberg, CFO for the group, and I'll now take you through the financials. This is presented on a pre-IFRS 16 basis and exclude exceptional items. The reconciliation to the statutory numbers are included in the RNS. Revenue growth for the half was plus 2% on a constant currency basis and flat on a reported basis. Growth was driven primarily through luxury watches with the jewelry market software. The U.S. has continued strong growth with sales of plus 11% on a constant currency basis. In the U.K. and Europe, sales declined by 4%, with Q1 impacted by timing of supply. We're confident that we're continuing to take market share in both regions. Net margin for the half was 80 basis points down versus last year, reflecting adverse product mix and impact of interest-free credit cost. Adjusted EBITDA declined by 8% on a constant currency basis or 10% on a reported basis to GBP 94 million. Adjusted EBIT declined by 15% to GBP 73 million, which I'll talk you through on a subsequent slide. Financing costs decreased by GBP 800,000 as higher market lending rates were offset by savings made as a result of the refinancing in May '23, lower level of drawdowns and increased interest income and cash balances. The effective tax rate was 29% for the half, exceeding the standard U.K. rate due to higher chargeable taxes on U.S. profits. For the full year, I expect the effective tax rate to be around 27% to 28%. Adjusted EPS for the half was 21.5p, a decline of 23%. The profit reduction for the half was primarily driven by reduction in margin rate from product mix and higher interest-free credit cost. Our cost base increased from opening of new showrooms, but was partially offset by management of our existing cost base. Depreciation increased by GBP 3 million, reflecting the increase in capital and an adverse year-on-year exchange rate impacted EBIT by GBP 2 million. Moving to the balance sheet. The increase in PPE results from our ongoing showroom investment program and the increase in right-of-use assets and lease liabilities due to expansion of our showroom network. Inventory increased to GBP 400 million, 5% higher than the first half of '23, driven by an increase in number of showrooms and the increase in the unit value of our stock from pricing. This was mitigated by strong management of stock holding in other areas of our business. It is important to remember that there is really no obsolescence in our inventory. Net cash was in line with year-end at GBP 16 million and GBP 42 million ahead of prior year. On the cash flow, adjusted EBITDA was GBP 94 million. The working capital outflow of GBP 8 million represents the inventory build for new showrooms, less than associated offset in trade payables. The increase in tax payments reflects the higher rate of U.K. corporation tax versus last year. Free cash flow conversion of 60% was 700 basis points favorable to last year. We continue to invest in the showroom expansion and refurbishment program, with multiple new showrooms delivered across all regions, our expansion plan has been more front-end weighted, and we expect capital spend to be lower in the second half, reflecting full year guidance of GBP 80 million. Net cash was in line with year-end at GBP 16 million, GBP 50 million of our lending facility was also paid down in the half as we manage cash and interest costs tightly. Post half year, we completed the Ernest Jones transaction at a consideration of GBP 44 million. Today, we are reiterating the guidance that we gave last month when we released our Q2 trading update. Guidance is based on visibility of supply of key brands, reflects confirmed showroom openings. It excludes M&A and is based on a second half average rate of $1.25 to the pound. With that, I'll hand you back to Brian.

Thanks, Anders. We were delighted to share our updated long-range plan on the 7th of November. Our performance tracked significantly ahead of our previous LRP and we are confident of significant growth over the next 5 years. This plan has been built in granular detail with key building blocks shown on the slide. All of our capital investments work, delivering strong ROIs and paybacks. Looking firstly at showroom investment, this is by no means just refurbishment. These projects, in most cases, involve showroom expansion, will always include additional brand distribution and can often be showroom relocation. Our cash payback, which we review ongoing is between 2 and 3 years. Investing in our showrooms is a key driver of profitable growth, and we have the clearest visibility and most exciting investment program in our LRP. The preowned market represents a major opportunity for the Watches of Switzerland Group. We have now launched Rolex CPO in the U.S. and U.K. to add to our already successful Analog:Shift and U.K. Pre-Owned businesses. We will progressively expand distribution of our CPO to all Rolex agencies, U.K. and U.S., and we will rebrand non-Rolex CPO to Analog:Shift in the U.K. We will increase distribution of Analog:Shift in both markets, and we will support the business with in-store presentation and marketing and develop the online sector. Branded luxury jewelry is a significant opportunity for the group. We have success and credibility through our growth in luxury watches. We have learned a great deal about luxury branded jewelry from recent acquisitions of Betteridge and Mayors in the U.S., and we have decades of heritage in jewelry here in the U.K. We are now ready to focus on this category. We will open a new concept store dedicated to luxury branded jewelry in the center of Manchester. This showroom will include many brands available for the first time outside of London, including a De Beers boutique. We will introduce a prestigious luxury jewelry brands to our multi-brand luxury showrooms in both the U.K. and U.S. and online. Our new store developments all include expanded space for luxury jewelry and lounge and hospitality areas conducive to jewelry selling. We will support these plans with a full marketing program of advertising, PR and events. Online is a major growth opportunity and our size and scale is going to help us grow ahead of the market. We will continue to add luxury watch brands along with developing the online success of Rolex Certified Pre-Owned and our own Analog:Shift Pre-Owned, as well as developing a strong luxury jewelry branded proposition. We've had great success in driving growth through acquisitions such as Mayors, Betteridge and Wynn and identifying new projects and opportunities in underserved markets, such as Hudson Yards and Soho in New York. We believe there is significant opportunity for growth in these areas, and we have projected significant investment to deliver the growth potential. And I will now pass over again to Anders to give you the financial summaries of our LRP.

Thanks, Brian. Overall, we enter the next 5 years with better visibility of projects than when we did our last 5-year plan back in '21. The focus on luxury jewelry and pre-owned watches are both new versus what we included in our last plan. In the U.K., we expect a sales CAGR of between 8% and 10%, about 2% to 3% ahead of the expected market growth. This is less than what we achieved between 2020 and '23. During the past 4 years, the U.K. market had severe disruption through lockdowns and loss of tax-free to overseas clients. Sales to our domestic clients in the past 4 years has grown at a CAGR of 21%. We've gained market share through our capital programs and expansion of our mono-brand concept while driving our e-commerce channel. In addition, we will increase our focus on pre-owned watches. Rolex Certified Pre-Owned is off to a good start and branded jewelry, which both are mostly additive to our existing business. We also have the benefit from the Ernest Jones Showroom acquisition and e-commerce growth. The U.S. market growth is expected to outpace the U.K. as it still is, in our view, underdeveloped. We anticipate the market to grow at an average between 8% and 10%. We have planned a sales CAGR of between 20% and 25% in this market, so well ahead of the market growth. The market is fragmented and consolidation is an opportunity. So acquisitions form part of our growth strategy. In addition to this, there are quite a few locations that we define as underdeveloped and it should have distribution of luxury watches. So to gain distribution, you don't always have to acquire business. We have identified quite a few such locations and are discussing them with our brand partners. The pipeline of new projects is giving us good visibility over the years to come. We have seen the benefit of our capital programs in Mayors and at the Wynn Hotel in Las Vegas and don't expect this to change as we complete the upgrade program over the next few years. The 3 Betteridge showrooms will be completed by FY '26. Rolex Certified Pre-Owned is off to a good start, and we're expanding the number of points of sales. The U.S. is by far the biggest market for jewelry, and we will be more active in this segment over the next 5 years. Our e-commerce is still in the early stage. There is a huge market opportunity in the U.S. e-commerce space. We think the EU will contribute between 4% and 6% of our sales at the end of the planning period. This will include acquisitions. Over the 5-year period, we plan to spend between GBP 300 million and GBP 350 million of showroom CapEx. Our historical return on capital investment has been very good. Our payback on capital programs has averaged out between 2 and 4 years depending on format and location. We also plan to spend between GBP 350 million and GBP 500 million on acquisitions and new projects over the period. This could obviously go up if further opportunities were to materialize, but this is what we used in our plan. The plan calls for more than doubling of sales and EBIT over the 5 years. This chart illustrates the building blocks behind our model and in the case where we see the market opportunities. Vertically shows in which market, we see the opportunity and horizontally indicates the size of the opportunity. Capital investment into existing showrooms is a proven model with good returns. We plan to spend between GBP 300 million and GBP 350 million in this area, which includes space expansions and/or relocations. E-commerce growth is expected to continue and Certified Pre-Owned will further drive growth in this channel. Certified Pre-Owned is a segment we expect to add to our underlying growth. Luxury branded jewelry is an area where we see significant growth potential, and we will expand our distribution in this area. We just closed the acquisition of the Ernest Jones showrooms, and this will drive further growth in the U.K. In addition to this, we have planned to spend between GBP 350 million and GBP 500 million on acquisitions in new showrooms. Our track record on acquisitions is very good with a payback of 4 to 4.5 years. This will predominantly be in the U.S. and EU markets. We expect improved operational leverage by between 50 and 150 basis points. With this, I will now hand over to Brian for some closing remarks. Thank you.

Thank you, Anders. We have confidence in our model, which has driven incremental sales in the half. We continue to operate at pace, investing in our showrooms, completing the acquisition of Ernest Jones luxury showrooms and successfully launching Rolex Certified Pre-Owned. We look forward to a busy holiday trading period and continuing to execute on our long-range plan objectives.