Pandora A/S

CSE:PNDORA

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the PANDORA A/S Investor Presentation for Q1 2018. Today, I am pleased to present Magnus Jensen, the Head of Investor Relations. [Operator Instructions] Magnus, please begin.

[Magnus Thorstholm Jensen, VP & Head of Investor Relations]

Good morning, everyone, and welcome to the conference call for PANDORA's results for Q1 2018, which we released this morning. I'm Magnus Jensen from PANDORA's Investor Relations team. And with me, I have our CEO, Anders Colding Friis; and CFO, Peter Vekslund. I'll now hand over to Anders who'll give you an overview of our strategic progress and the performance for the quarter before Peter goes into more details on the numbers. Finally, Anders will conclude the presentation, and then we'll be happy to take your questions. Before handing over to Anders, I'd like you -- to point your attention to the disclaimer on Page 2. Now please turn to Slide 3. Anders, please.

[Anders Colding Friis, President, CEO & Member of Management Board]

Good morning, everyone, and thank you for joining the call this morning. As expected, we started the year with moderate growth, and we are on track to meet our targets. At the same time, we've made good progress on our 2022 strategy, which we outlined at the Capital Markets Day. We have momentum on each of our 4 strategic pillars: innovating affordable jewelry, agile manufacturing, digitalizing the brand experience and winning in omnichannel retail. I'm especially happy to see that our new Spring collection, including PANDORA Shine, was received well by consumers in all our markets. This confirms our capacity to provide more newness, which is top on our agenda.Meanwhile, we saw an unexpected slowdown in China. We've already taken action to turn that around, and I will come back to this later.Please turn to Slide #4. Revenue for the first quarter was DKK 5.1 billion and increased 6% in local currency compared to the first quarter of last year, or minus 1% in Danish kroner. As we have guided previously, the year has started with growth slightly below the full year expectations of 7% to 10%. During the quarter, we launched several new products will be -- which will be key drivers of our growth. We delivered an EBITDA margin of 32.6%. As in previous years, we expect the year to be back-end loaded in terms of profitability.We've continued to return cash to our shareholders. And in the first quarter, we returned DKK 1.2 billion. We paid out DKK 1 billion as dividend and used the rest to buy back shares.Now please turn to Slide #5. Now let me give you an update on the progress that we've made against our strategic priorities.Starting with products. We launched the first collection created by our new design team, the Valentine's collection in January and the Spring collection in March. The Spring collection contained the first products from our gold-plated concept, PANDORA Shine. The collection, and not the least the PANDORA Shine concept, was well received across markets. In total, we launched more than 150 products. We renewed the product assortment even more. For the rest of 2018, we'll launch an additional 500 new products. This will also include a new Charms and Bracelet concept.In terms of digitalizing the brand experience and improving the consumer journey, we successfully merged our 2 online platforms, the eSTORE and the PANDORA.net. We did this in March without affecting traffic to our site. To increase the control of our network, we added 48 PANDORA-owned concept stores to our retail network, 17 of these were acquired from franchisees. Combined with strong performance in our eSTORE, this resulted in growth of 41% in local currency. Revenue from our retail network now represent 51% of revenue compared to 38% in the first quarter of last year. Our agile manufacturing track is also progressing. We have now installed plating lines in our crafting facilities, and we are currently testing. As most of you know, we plate our products externally, but from the fourth quarter, we'll be able to do this in-house.Now please turn to Slide #6. As mentioned earlier, we've seen a slowdown in China during the quarter, with revenue growth of 16% and negative like-for-like in the mid-teens. Valentine's Day and Chinese New Year occurred at the same period this year, and that had some impact. However, we have conducted extensive analysis to understand this trend in China, and we've identified 2 main issues.First, we've seen a notable increase in the grey market trading. Our analysis suggests that this has an impact of around 10% to 15% of growth in China for the quarter. The trading is mostly done on the larger online sites where we do not currently sell our products. We are already working on reducing this, and we will proactively manage and limit unofficial sales channels. It seems that the parallel importing is coming from wholesale accounts across all PANDORA regions.Secondly, our marketing activities had not -- has not been sufficient to drive traffic across China. This means that awareness around our new products is too low, but also the general awareness could be stronger. We are increasing our marketing spend in the remaining part of the year.With that, we believe we are addressing the issues and we will see a gradual improvement over the year.With that, I hand the word over to Peter.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Thank you, Anders. Now please turn to Slide 7. We delivered a total revenue for Q1 of DKK 5.1 billion, an increase of 6% in local currency or a drop of 1% in Danish kroner. Growth mainly came from a strong performance by the eSTORE as well as the acquisition of stores, which contributed with DKK 288 million. We increased revenue in PANDORA-owned retail by 41% in local currency, and it now represents 51% of total revenue compared to 38% in Q1 of last year. Growth was driven by network expansion of 24% and the acquisition of stores, which added another 17%. Like-for-like for the quarter was flat, which was primarily a consequence of the negative like-for-like in China.Our eSTORE showed strong performance across all major markets and increased 53% in local currency. The eSTORE now represents 9% of group revenue and is on track to meet our target of 10% to 15% of group revenue by 2022. Revenue from franchise concept stores decreased 10% in local currency. The decrease was mainly due to our acquisition of franchise stores as well as weak performance in some of our larger markets, as it will take some time before we see sufficient newness in the product assortment. Revenue from other point of sale in the wholesale channel decreased 18% in local currency. This was caused by a negative development in the U.S. as well as in Italy, where we have closed several multi-branded accounts. Also, like-for-like in other point of sales are generally underperforming our concept stores.Revenue from third-party distributors decreased 23% as we acquire distributors. If we exclude Spain, Belgium and South Africa, where we have taken over distribution, revenue from third-party distributors was only slightly down.Now please turn to the next slide, where I will talk you through the performance in each of the 3 regions.Starting with the Americas. The reported revenue of DKK 1.4 billion decreased 4% in local currency, primarily driven by development in the U.S. Revenue in the U.S. decreased 8% in local currency, primarily due to a negative development in the physical store network, including a drop in other point of sales, where around 100 more accounts were closed over the last 12 month.The eSTORE continues to perform extremely well and contributed to a positive like-for-like growth in the U.S. of 9% in the owned and operated network. Momentum in Latin America continued to be positive. Revenue increased 24% in local currency, and we opened net 48 concept stores in the last 12 months. EMEA generated revenue of DKK 2.5 billion, bonding to an increase of 16% in local currency. Revenue in Italy increased 14%; while revenue in France was up 11%, thanks to the positive concept store revenues; while revenue from other point of sales declined. Revenue in the U.K. was flat, with an underlying negative like-for-like in physical stores, offset by a strong performance in the eSTORE as well as acquisitions. Germany continues to perform well with a 19% growth. Revenue in Asia Pacific was DKK 1.2 billion, an increase of 1% in local currency. The lower growth in Asia Pacific was mainly due to the slowdown in growth in China, which Anders has covered, as well as a 4 percentage point decline in Australia. Australia continues to be challenged by a lack of newness, but we also continue to see a decline in revenue from Chinese consumers.Now please turn to Slide 9, which is an overview of our 5 product categories. Revenue from Charms was DKK 2.9 billion, an increase of 2% in local currency. Growth came mostly from the continued success of the PANDORA Rose collection as well as the launch of the PANDORA Shine collection. Despite the new launches, Charms continues to be impacted by lack of newness. Revenue from Bracelets increased 10% in local currency, supported by the launch of several new bracelets; while revenue from Rings increased 5%, impacted by lower in-store activity during the quarter compared to Q1 2017.Demand for Earrings and neckwear remains strong, and they delivered local currency growth of 16% and 28%, respectively.Now please turn to Slide 10. Gross margin for the quarter was 75.8% compared to 73.3% last year. The increase was driven mostly by the share of revenue from PANDORA-owned retail, which had a positive impact of around 3 percentage point. This was partially offset by metal mix, mainly related to a higher share of revenue from PANDORA Rose and PANDORA Shine, with an impact of around 1 percentage point. OpEx grew 7.6 percentage point for the quarter, mainly driven by a significant increase in sales and distribution costs. Sales and distribution costs increased to 26.8% of revenue compared to 21% last year, driven mainly by the increase in share of revenue from owned retail as well as 1 percentage point impact from amortizations of acquired stores and distributors. Also, marketing saw a slight increase, which was due to the launch of PANDORA Shine.Administrative expenses increased 8%, which was more or less all driven by one-off costs related to organizational changes. Finally, our profitability was impacted by around 1 percentage point from currency, which all together resulted in an EBITDA margin of 32.6%, compared to 36.4% in Q1 of 2017.Now please turn to Slide 11. Free cash flow in the quarter was DKK 439 million compared to DKK 1.1 billion Q1 2017. The lower cash flow was mainly due to lower EBITDA as well as a negative impact of around DKK 300 million from tax payments, primarily related to taxes paid on earnings from PANDORA production company in Thailand, which we announced at the full year results in February.The operating working capital for the quarter was 14.6% of revenue, an increase of 0.3 percentage point compared to last year. The increase was mainly related to an increase in receivables, and days sales outstanding were at 66 compared to 42 days same quarter last year. The increase in days sales outstanding was mainly due to revenue in the first quarter being skewed towards the end of the quarter. One of the reasons being the success of the Spring collection, which was delivered late in the quarter. Furthermore, the acquisition of our Spanish distributor had an impact of around DKK 130 million on receivables.Before I hand over to Anders, let me grab this opportunity to say thanks for the discussions over the last 16 quarters of financial reporting. As announced in January, I have resigned from my position. And from next quarter, Anders Boyer will take over as the CFO.And with that, I'll hand over to Anders.

[Anders Colding Friis, President, CEO & Member of Management Board]

Thanks very much, Peter. Now please turn to Slide #12. As mentioned earlier, we maintain our full year guidance of 7% to 10% revenue growth in local currency and an EBITDA margin of approximately 35%.Looking at the second quarter of '18, we expect currency headwind of around 6%, given today's foreign exchange rates. Regarding EBITDA for second quarter, we still expect the first half of 2018 to be significantly lower than the second half. Now please turn to Slide #13. To summarize the quarter. We grew revenue by 6% in local currency and delivered an EBITDA margin of 32.6%. A moderate quarter is expected and on track to reach our full year targets. We see some challenges in China, but we believe we have identified the root causes and are taking steps to address them. We've made strong progress on our strategic strategy towards 2022 with the improvements on all 4 strategic pillars, and our new products have been well received, which is one of the main drivers of growth as we look ahead.Thank you very much for listening, and we'll now take questions. Operator, please.

[Operator]

[Operator Instructions] Our first question comes from the line of Michael Rasmussen of ABG Sundal Collier.

[Michael K. Vitfell-Rasmussen]

I'd like to address my first question on China, please. So when exactly did you see things turned around to be more negative in China? And are you going to take PANDORA's products on these platforms that you mentioned yourself? And finally, on the commercial plan, does that include price reductions, so you get prices down towards the level of Australia? My second question goes to the momentum that you talked about at the end of the first quarter in relation to your net working capital comment. Has that momentum continued into the month of April? Is that why you so firmly reiterate your full year guidance?

[Anders Colding Friis, President, CEO & Member of Management Board]

Let me do the first one. If we look at China, we saw in the quarter and in the early part of the quarter that our figures were getting a little bit weaker, so that was when we started doing it. So we've actually already done the plan, and we've also implemented the plan in China. If we look at the prices, clearly, we are always monitoring the prices in our markets, and this is 1 of the things that we are looking into. But whether this would mean that we would increase prices somewhere or look at decreases other way is not something where we have any plans at this point.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

As to the question on the current trading in April, well, let's not comment on that. But from the beginning of the year, we have said that growth will accelerate throughout the year, and we are on track with the plans.

[Michael K. Vitfell-Rasmussen]

So Anders, on your comments, it basically means that you took action quite early in Q1, and this belief that you already have seen the positive impacts from your actions, is that why you are so positive of you being able to turn this China story around?

[Anders Colding Friis, President, CEO & Member of Management Board]

Well, I think we saw the indications. And of course, we took some time to do the analysis and make the plan, but it was already implemented in the end of the quarter. And what you should expect in terms of the development in China looking at the remaining part of the year is that, gradually, you should see our figures improve. That's what we have in the plan and that's what we expect.

[Michael K. Vitfell-Rasmussen]

And the best of luck, Peter.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

You're welcome. Thank you.

[Operator]

Our next question comes from the line of Chiara Battistini of JPMorgan.

[Chiara Battistini, Co]

My first question, again, on China. Anders, you commented the Shine and Spring collections were well received in all regions. Can I just confirm that, that includes China as well? And on China, also on your comment that your -- you said that you already execute on your plan. Does that mean that some of the stepped up marketing investments are already included in the Q1 figures, please? And then the second question on e-commerce. You mentioned that you already did the merger of the 2 online platforms. When did you do this in the quarter? And can you comment on the impact you saw from this merger, the impact to growth? And also, can you remind us of how many eSTOREs you opened in the last 12 months and the impact to growth from that, please?

[Anders Colding Friis, President, CEO & Member of Management Board]

Very happy to do so. If we look at China, also in China, the new products were well received, so we also saw a very positive reception in the Chinese market. There is no execution on the plan in terms of marketing for the first quarter, it is only happening in the second quarter of this year. If we look at e-commerce, we merged on the 13th of March, the 2 platforms. And we were actually positively surprised to see how little impact it had in terms of negative development in traffic. So I would say, well done of our people who've been working on this for a long period of time. And now we are in a situation where we can actually strengthen our new single platform, which we are looking very much forward to do. And then on the last question, maybe Peter will take that.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes. On -- Chiara, on the eSTOREs, most recently, we have opened in Singapore, Spain and also South Africa. But this is not something that will have a major impact on our like-for-like numbers, which I guess is the underlying question.

[Chiara Battistini, Co]

Yes. So just to confirm, because from the merger of the 2 platforms, I would have actually expected a boost to growth rather than a headwind. So just to confirm, basically, the growth that we're looking at in e-commerce is quite organic. That's what I'm trying to get to.

[Anders Colding Friis, President, CEO & Member of Management Board]

Yes. But maybe I should say, Chiara, when we merged the 2 platforms the -- and the -- our -- we expected to see a loss of traffic based on the fact that when you put it all on one platform, you lose some of the organic growth, and we saw a lot less of that than we had expected. So actually, our own expectations were losing traffic in connection to the merge. And we haven't seen that, so that was a very positive one for us.

[Operator]

Our next question comes from the line of Kristian Godiksen of SEB.

[Kristian Godiksen, Analyst]

So firstly, do you still expect a sequential increase rest of the year in both local currency growth and also in like-for-like, and is that already from Q2? That was my first question. And the second one, I guess the most important driver for acceleration in growth is all these new products. And hence, could you give us an indication of the magnitude in the improvement of the like-for-like since the launch of the new products compared to January and February where you did not have the products?

[Anders Colding Friis, President, CEO & Member of Management Board]

Thanks for your questions. If we look at the growth over the year, what you should expect, and I think we also said that at our Capital Markets Day, is that as we add more products into the assortment, we expect it to be gradual over the year. That's also the reason why we, in our guidance, communicated an expectations of a lower growth in the first quarter. If we look at the new products, we are encouraged with what we've seen. I also think that it's a little bit early because we only had 2 weeks of trading in the quarter on the new platform. Clearly, we put a lot of focus on the launch of the PANDORA Shine new concept, and that was very well received. So we are encouraged with what we see, but it's too early to put out numbers.

[Kristian Godiksen, Analyst]

Anders, but I think you also -- I guess, you also had the numbers for April and mid-May here. So just to get a feel of the 4 biggest -- obviously, it's the innovation we have talked about a lot and that was also the main reason why 2017 was not as impressive as we had hoped for. So I guess that's the main reason why we should expect this pick-up from Q2 and the rest of the year. So can you give us some kind of indication of the magnitude you've seen in the pick-up?

[Anders Colding Friis, President, CEO & Member of Management Board]

I think what I can say is that we've seen a positive contribution to our assortment. We also see positive like-for-like numbers compared to previous launches. So we are quite encouraged with what we are seeing at this time.

[Kristian Godiksen, Analyst]

Okay. Now nothing about single-digit, mid-single-digit, high single digit, double, something?

[Anders Colding Friis, President, CEO & Member of Management Board]

As you noticed, you're not getting a number.

[Operator]

Our next question comes from the line of Anne-Laure Bismuth of HSBC.

[Anne-Laure Bismuth]

Yes, it's Anne-Laure Bismuth from HSBC. I just wanted to come back on the slowdown in China and to better understand how you can keep your guidance with the China slowdown, that [ you were ] anticipating that when you gave the guidance, does that mean that you have already seen the slowdown early February? And my second question is regarding the marketing expenditure. So given the support that you had in China, does that mean that we should expect the marketing to [ essentially ] shoot towards the higher end of the 9%, 10% range that you mentioned before? Does that mean that it should be closer to 10% in full year '18?

[Anders Colding Friis, President, CEO & Member of Management Board]

First one, the -- if we look at China, it was, as we also said, a surprise to us. But in business, there are positive and negative surprises. If we look at a couple of other areas where we've seen a positive development in the quarter, that would be Latin America, where we started our efforts in 2017 and we've seen a very strong start of 2018 there. Also, Germany, which used to be our market of trouble, has actually developed nicely, and we see the brand strengthening in the German market. So there's always a balance between different things. If we look at the marketing, we expect it to still be between 9% and 10%. If you want to put a closer range to that, it'll probably skew towards the high end of that range.

[Operator]

Our next question comes from the line of Fredrik Ivarsson of Kepler Cheuvreux.

[Fredrik Ivarsson, Equity Research Analyst]

First one, yet another one on China. Given what's going on there at the moment, do you feel like you might have been too aggressive on the expansion there? And should we expect you to be maybe more cautious until you see some positive trends? That's my first question. And second one on the sales and distribution costs, they were obviously up almost 6 percentage points in relation to sales versus Q1 last year. How much of that is explained by higher PANDORA-owned stores? And how much is due to more negative leverage from poor like-for-like in the brick-and-mortar store network?

[Anders Colding Friis, President, CEO & Member of Management Board]

Thank you, Fredrik, for your questions. I'll do the first one and Peter will get back to the second one. And the answer is very simple and very short to the first one. No, we do not believe that we've been too aggressive in our development in China. What we can see is that there's a couple of other root causes which we are addressing in the plan, both increasing marketing but also looking at how we can limit the black market or grey market part of it. Be aware of the fact that we can never close down the black market. The black market is clearly a reflection on the fact that we are the most well-known jewelry brand in the world, and we will see things like that. But we do believe that we have levels to use to reduce it.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes, thank you. And the question on sales and distribution cost, basically, it's -- the increases is all related to the increased share of owned and operated. Remember, it includes also 1 percentage point from amortization of rights when acquiring distributors. And finally, that when looking at this percentage of sales and distribution costs to revenue, then we will see leverage later in the year as revenue will pick up. So for the full year, still around 23% to 25% of sales and distribution costs to revenue ratio, probably towards the 25%.

[Fredrik Ivarsson, Equity Research Analyst]

And a follow-up on the Chinese expansion then. Should we expect you to keep on rolling out stores in the range of 40, 50 per year until 2022 then?

[Anders Colding Friis, President, CEO & Member of Management Board]

Yes, you should. I don't think we've given that to 2022, but at least for the next couple of years, we believe that that is the right number of openings to have in China. And bear in mind that our stores are highly profitable in the Chinese market, so they are really, really good. So there is definitely no reason to change that.

[Operator]

Our next question comes from the line of Lars Topholm of Carnegie.

[Lars Topholm, Co]

Yes, 2 questions on my side. One goes to the receivables, you commented a bit on it, Peter, in your presentation. But your non-retail revenue is down by DKK 671 million. Your receivables are up by DKK 350 million. And relative to non-retail revenue, they are actually all-time high. And this, of course, reflects the new collections. But as Anders pointed out, they have just been selling for 2 weeks in the quarter. So this increase in receivable, does that basically illustrate that stores enter Q2 with higher inventories than normal? Or what additional flavor can you put on that increase in trade receivables? And then a question for you, Anders, because it's now roughly 3 months since you took over responsibility for the U.S. after Scott. So just wonder what your initial observations are, if there are things you're going to change? I'm particularly interested to hear your view on what level of promotional activity you think you should keep. And maybe also comment on whether Spend More Save More campaign should be repeated because I understand the last couple of those didn't work that well. So any color on what you see in the U.S. and what you would like to change.

[Anders Colding Friis, President, CEO & Member of Management Board]

Thank you very much for your question, Lars. I'll do the second one and then Peter will get back to the first one. If I look at the initials observation, I must say it's been a pleasure to dig a little bit deeper into the U.S. market. And there's clearly a lot of things which is happening there. One of the things which is not happening is that the retail market is still where it is. But if we look at our own performance, one of the things that we have a strong focus on doing now and which we will reinforce further as we move forward and get our new President, Americas onboard is our retail performance. And I have seen and then I'm happy to see that more efforts going into it, but also a positive result on it. We have also now eSTORE picking up and doing more, and we see positive results coming out of that. So that's just a couple of the things. Clearly, the U.S. market is probably the market in the world where the interest in newness is biggest. And thereby, we also see gradually as we move through the product launches of 2018 that we expect that to have a positive impact. And so far, so good. The reception in the U.S. of the new products has also been good. If we look at the promotional activities, that is an interesting subject and also something that we've spent some time looking into to try to understand what are the right ones. And as you point out, Lars, just repeating a promotion that you have done before doesn't mean that you get the same or better results. Sometimes, you actually get the opposite. So one of the learnings that we have, which is actually built into our trading plans for 2018 and further, is that we need to rethink our promotional plans at all times and try to mix and do different things. And clearly, that would also mean that from time to time, we'll hit it right, and at other times, we'll not hit it so right. So that is one of the things that we will do. If we look at the promotional level, there are no changes to what we've talked about previously. We'll still continue focusing on having a bit less in the last part of the year.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes. And Lars, the question on receivables. Receivable increased by DKK 350 million, of which DKK 130 million is related to Spain, when revenues skewed towards the end of the quarter. And a couple of reasons. First of all, Mother's Day, which was launched in stores on the 12th of April, was shipped, of course, at the end of March. So all of that was shipped to franchise and wholesale partners. Furthermore, the spring collection of around 150 DVs launched in mid-March was also shipped to partners, so that we have a receivable at the end of the quarter. And in general, you could say that our franchise and wholesale partners, they have very much been anticipating and looking forward to our new collections, meaning that they have ordered the Spring collection and also Mother's Day, and therefore, revenue came late in the quarter. And we do have more products this year than last year in both Mother's Day and also in the Spring collection.

[Lars Topholm, Co]

The shipping of Mother's Day, was that different compared to last year?

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes, that was different to last year. Last year, it was better in both March and April. This year, it was all in March, simply to get the products in stores by 12th of April.

[Lars Topholm, Co]

That's fantastic. And also, good luck moving forward, Peter. And I have some more questions, but I'll jump into the queue again.

[Anders Colding Friis, President, CEO & Member of Management Board]

Thank you.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Thank you very much, Lars.

[Operator]

Our next question comes from the line of Hans Gregersen of Nordea.

[Hans Gregersen]

First of all, like-for-like. If we assume a 1% like-for-like growth in the quarter, what would that amount to in kroners? So if you can give an indication so we have a magnitude of what like-for-like means in Q1. Second question, moving to China. Can you elaborate on how -- you mentioned that the grey market accounted for between 10% to 15% of the market. How that has evolved during '17, '18, and what it will take for you to onboard '18, which had on top of the platform you already have in China?

[Anders Colding Friis, President, CEO & Member of Management Board]

Yes. What we've seen is that we've seen a -- quite a big growth in that, and we want to have a rough -- it's more or less doubled if you look at where we came from in terms of the magnitude of it. So it's quite a bit that we've seen. And presently, we have an agreement with Tmall, an exclusive agreement, and that will run out in a few months. And then we'll evaluate and look at are there other platforms that we would want to engage with at that time. But right now, we stay with Tmall. If you look at what we have of options of doing it as a supply-side and demand-side for this, and clearly, what we can do is clamp down harder on it, on the supply part into the -- or in the Chinese market. And then the demand part is, we are looking at where does the product come from. We've actually made some acquisitions of product through these channels to find out where's the -- where have they [ arisen ] from. We see quite a bit coming out of EMEA as one. And clearly, we also see that some of that has a wholesale background. So that gives us an opportunity to try to focus on that and stop as much as we can. But it will still be there. We can't take it all of it. And Peter will take the other question.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes. On your question on the like-for-like and some sensitivity on that, you would say PANDORA-owned retail, DKK 2.6 billion, of which concept stores is around DKK 2.5 billion, including online. And of that, we have a base included in the like-to-like calculation of around DKK 1.8 billion. So with that, you can play with the numbers and do some sensitivity.

[Hans Gregersen]

So just to confirm. So what you're saying, Peter, is that 1% like-for-like is roughly DKK 18 million?

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

In rough numbers, there is a lot going into this. But just to give the magnitude of the numbers, this is ballpark right thinking.

[Hans Gregersen]

Yes. And just on the grey market, you commented about doubling. Is that referring to Q1 year-over-year? I know it's difficult numbers.

[Anders Colding Friis, President, CEO & Member of Management Board]

It is. I can confirm that, Hans.

[Operator]

Our next question comes from the line of Thomas Chauvet of Citi.

[Thomas Vincent Chauvet]

Two questions. Firstly, coming back to the Thailand markets. Would you think the increase year-over-year of Thailand market, could that come from the stronger renminbi at the start of the year, leading towards a price gap? And Anders, when you said, if I understand correctly, that you're not planning to reduce the price gap with other regions, what is the rationale for that? Obviously, I guess you want to protect profitability. Secondly, on Rings, it's become an important part of your business. It had a pretty good momentum last year, particularly in the second half. The slowdown in Q1 is a bit abrupt. Could you share some thoughts on whether this category has become more competitive? Or is it just a matter of you introducing more new products in coming quarters? And finally, can you confirm you still have no plan to enter the engagement rings business?

[Anders Colding Friis, President, CEO & Member of Management Board]

I will be very happy to. If we look at the increase, I think what is very, very clear in China is that this grey market is a pretty well-organized market. And clearly, currency differences has and plays an impact -- or price differences plays a role in how big those markets is going to be. But it is something that we have seen and we will see in the future also. When I said we don't have plans at this time, I also said -- and that's something that is important, that we are looking at prices across the different markets. But whether we are going to increase some or decrease others or exactly what we are going to do, we haven't firmed up our plans on at this time. But it's clearly something that we are monitoring. We can see that the price index, as you might know, for China is higher than other markets. And clearly, that also has an impact on this market. So it is one of the things we are looking at, but it can be increasing prices in 1 market or decreasing it in other markets. No plans at this time. If we look at Rings, we have seen a development in the quarter, which is more or less in line with the development we have in PANDORA. So 5% compared to the 6% overall growth. And remember that Rings is now around 14% of our total sales, so it's become a very big category in PANDORA. What you should expect in terms of the different categories over time is that there will be differences from quarter to quarter depending on the activities we have in individual quarters. And in the first quarter of this year, we actually actively decided to have a little bit less activity on rings, and that meant that the growth of rings were a little bit weaker than the other categories. But it has already grown into a big part of the PANDORA assortment. But do expect that over the years, we will see fluctuations in the growth of the different new categories depending on our activities. And the last question, we have no plans to go into engagement or wedding rings, but we do see consumers who are using our products both for engagement and weddings, and that's, of course, also encouraging.

[Operator]

Our next question comes from the line of Zuzanna Pusz of Berenberg.

[Zuzanna Pusz, Analyst]

So I just have 2 questions. First of all, on China -- well, I guess a follow-up. But I'm just trying to understand, why have you spotted the weakness just only now? I mean, I guess there have been some concerns about the slowdown in China for a while, and I understand that also pricing contributes to the grey market. But could it be that perhaps that weakness in the market has been underestimated? Or is there any really anything specifically that led to this weakness coming only just now? Or have you been seeing it and basically observing what's been happening in the market over the last couple of quarters already? And the second question, that's a follow-up actually from some of the comments you made at the CMD. I think it was mentioned that you were looking at potentially launching some omnichannel services, that you were speaking to some of your franchise partners on how this could work. Is there any update you could give us on that? How this could exactly be executed? When any of that could be launched?

[Anders Colding Friis, President, CEO & Member of Management Board]

Thank you very much. Yes, I think you always wonder when you are sitting and running a business, could you have seen this prior? We have seen a spike in the grey market, and we've seen that in Q1. So that is one thing, which of course has gotten our attention. If we look at the development, we've seen a strong growth. And we have also anticipated that the growth in percentage should go down, but we have really seen a steep decline in this quarter. So I think that's very much what we can see. We can see that the -- what we are doing now, we have initiated the plans and we are also seeing that the plans are working in the market. If I look at omnichannel services, we -- it is one of the things where we feel that this is an area where we need to meet the consumers' demand. And we've had the discussion with franchisees, and let me just focus on the market which I'm spending most of my time right now, which is the U.S. And there, you can see that it is planned to be something that we will -- we do in during 2018. We are discussing with our franchisees to find the right model still, but we have good progress in that. I don't want to go too far in that because it is still an ongoing discussion. One more thing which is important to mention is that we have, in the quarter, also, strengthened our e-commerce team. We've hired and established a position, head of e-commerce in PANDORA, and we've already seen some good ideas and also activities coming out of that. So we have Kyle Walsh who has joined us and is leading our e-commerce activities across the group.

[Zuzanna Pusz, Analyst]

Okay. Perfect. And just 1 thing to clarify on China. So you've mentioned that the plans have been initiated already, let's say, working. But have you already seen any pickup in traffic? Or is there any figure that -- maybe any color you could give us to be a bit more reassured that actually that the full year outlook is not -- well, it's something you can deliver on?

[Anders Colding Friis, President, CEO & Member of Management Board]

Clearly, we are then moving into the quarter we are in and not last quarter. But I will say that we have initiated the plans, and we believe that we will see a progression during the year, where we would slowly but surely see it working. And I can also say that we already see a little bit of positive indications at this time. But expect it to come during 2018.

[Operator]

Our next question comes from the line of Frans Hoyer of Jyske Bank.

[Frans Hoyer, Senior Analyst of Equities]

I'm sorry it's about China again and the grey trading. I understand that you've already implemented various actions to try and stop the supply into that market. Are you seeing actually any impact on the availability to consumers on these various websites yet?

[Anders Colding Friis, President, CEO & Member of Management Board]

No. We haven't been able to -- clearly, there are 2 things. The availability, we can't see a big difference at this time. There are a couple of different sources into China. One of them where we can do something is, if it comes from wholesale customers around the world, that's an area where we can monitor and try to find out where it comes from, and we have seen a couple where we have identified that. The other part which is Chinese residents in other markets also buy PANDORA products. They do that retail and then ship it into China, and that's the part which will be there and normally be there. What we can do in China is, if they use our assets like the pictures that we have, we can actually address that and that helps us address the issues. So we can do some to challenge it, but there is a limit to how much we can do. But we do believe that we can work quite a bit with this.

[Frans Hoyer, Senior Analyst of Equities]

Okay. And also given that novelty is such a key factor here, could you talk about the progression going forward in terms of the importance of the products that are not performing? And I mean the weighting of the 2 categories, those that perform and those that don't, when are we going to see a meaningful shift in that balance, please?

[Anders Colding Friis, President, CEO & Member of Management Board]

If we look at the plans for 2018, it is to introduce 650 new products, which is an absolute all-time high. So what you should expect is that, that goes into that assortment. And even in some of the '16 and '17 assortment, where we've seen the weaknesses, we have products which is performing pretty well. And clearly, we'll keep that in the assortment. But we'll do a bigger shift of products during the year. But what you can expect is that it will be an ongoing process as we introduce the product during 2018.

[Frans Hoyer, Senior Analyst of Equities]

Did you -- how much did you do of the 650 in Q1?

[Anders Colding Friis, President, CEO & Member of Management Board]

We have around -- you can say 500 products to go at this time. So we've done 170 products so far.

[Frans Hoyer, Senior Analyst of Equities]

And is Q2 going to see increased momentum behind that effort?

[Anders Colding Friis, President, CEO & Member of Management Board]

Well, what we are going to do is to have it lined out for the year. So 170 is quite a bit. So but you can say it's around 1/4 of the products that we're going to put into the products. So see a continuous development over the year, that's what you should expect.

[Frans Hoyer, Senior Analyst of Equities]

Okay. And finally, a question on the diversification away from Charms and Bracelets in the U.S. I believe that was a very slow process in the beginning. I was just wondering if you could talk about that, also given that you've been looking deep into that business recently. Is that diversification happening now more actively, or is it still an issue to be addressed?

[Anders Colding Friis, President, CEO & Member of Management Board]

It is definitely happening now. I think it's not away from Charms and Bracelets, but it's on to also embracing the other categories. I think that's our mindset on the development of the new categories. But the Americas in general, but -- and the U.S. specific, have embraced the new categories in a much better way, so we've seen very, very nice progress on that over the past couple of years. So they have catched up to the average of PANDORA.

[Frans Hoyer, Senior Analyst of Equities]

So Rings are now roughly the same as share of U.S. sales as for the group?

[Anders Colding Friis, President, CEO & Member of Management Board]

In rough figures, yes.

[Operator]

Our next question comes from the line of Klaus Kehl of Nykredit Markets.

[Klaus Kehl]

Yes, Klaus Kehl from Nykredit Markets. Two question. First of all, if I a look at the like-for-like, then you have -- in your own stores, then you have around, yes, 0% here in Q1. But as you have mentioned a couple of times, the online part is doing very well. So if I do the math and exclude online, is it then around correct that your like-for-like in the physical stores must be in the range of minus 5% here in the quarter? That will be my first question.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

So on the calculation, 0% including online, of course; excluding, then it's negative in that. And around 5%, I mean, is ballpark right.

[Klaus Kehl]

Ballpark right, okay. Second question would be your depreciations are up quite a lot here in Q1, and you have made a couple of acquisitions in Spain, et cetera. So I was just wondering, this run rate we are seeing here in Q1, is that also a fair guesstimate for the full year? Meaning that your depreciations will go up to around DKK 1 billion for the full year? That will be my second question.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes. So the level we see on depreciation and amortization in Q1 is expected to continue. We include Spain for the full year, the amortization of the right of acquiring Spain will be included. And then, as you know, we have ongoing investments in IT that will start also having a meaningful impact on amortizations. So expect the level to continue for the year.

[Klaus Kehl]

Okay. So it gradually go above DKK 1 billion?

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

This is the level for this year. And then as we have invested heavily over the last couple of years, then it will most likely increase.

[Operator]

Our next question comes from the line of Kristian Godiksen of SEB.

[Kristian Godiksen, Analyst]

Just 2 follow-ups from my side. So I was wondering which of your 4 largest markets that is the most [ foreign ] to you as you have a negative like-for-like for the physical stores in all of this 4 main markets? And now I'm referring to U.S., U.K., Australia and also now in China. And also, where you are just seeing [indiscernible] that one should expect positive like-for-like for physical stores for the group in your strategy plan? So I guess when you expect that to materialize? And then, on the second question, if you could talk a bit about the positive impact on the gross margin one should expect when you're being able to plate your products yourself from fourth quarter this year.

[Anders Colding Friis, President, CEO & Member of Management Board]

If you look at the 4 largest markets, you can say that we would expect that they would all be impacted by the new products that we are launching. And as you said, if we look at our ambition that we also talked about in connection to the Capital Markets Day, it is to have a positive like-for-like number in our physical stores, absolutely. So we would expect also in those markets to see an improvement over the year. Remember, now you talked about the 4 largest markets, but Italy is actually bigger than the U.K. in this quarter, so that was very, very nice to see that picking up quite a bit. If we look at our new plating lines, they will be -- they are being installed. I've actually received the first product of coming out of that, which is really nice to see. And it will be starting up for commercial production in the last part of the year. There will be a ramp-up curve, but we do expect to see some positive margin impact of that. But don't expect it to be humongously big.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

And maybe just to comment on that. As -- Kristian, as you know, at the Capital Markets Day, we said that we would see over the period, the strategy period, around 2 percentage point impact from product innovation, and that is a bucket of us in-sourcing PANDORA Shine and PANDORA Rose. But some of that efficiency will be offset by increased complexity and details in our products. So I guess what I'm saying is don't put in a lot of production efficiency in your model. What we said at the Capital Markets Day, that still stands.

[Operator]

Our next question comes from the line of Lars Topholm of Carnegie.

[Lars Topholm, Co]

Yes, just 2 follow-ups. Back to China, and you mentioned that, year-on-year, you think parallel imports took 10% to 15% of the growth. I wonder if you can comment on the difference between Q4 '17 and Q1 '18 because your growth was 62% in local currency in Q4 '17 and now down to 16%. So is parallel imports significantly different compared to Q4 '17? And then a household question, how many SKUs do you have in total right now, give-and-take?

[Anders Colding Friis, President, CEO & Member of Management Board]

Yes. Well, we saw -- there are a couple of things, Lars. I think that when we look at China, it's not just grey market. There's also other things which is affecting, and that is also why we talked as we did about marketing being 1 of them. But we did see quite a big pickup in the first quarter of 2018. So -- and if we look at the number of SKUs, it's 1,565.

[Operator]

Our next question comes from the line of Hans Gregersen of Nordea.

[Hans Gregersen]

Yes, 2 questions, please. In terms of guidance for Q2, can you give any direction in terms of the EBITDA versus Q1? And then, secondly, you mentioned there were some -- as far as you understood from trying to buy the products on the Chinese grey market, that certain parts were supplied by wholesalers. How quickly can you close this wholesaling down?

[Anders Colding Friis, President, CEO & Member of Management Board]

If we look at the EBITDA guidance first, it -- what we've said, and that is still the case, that you should expect the second half to be significantly higher than the first half. So that would mean that you should expect something which is less than our guidance in the second quarter guidance for the year also as we did in the first quarter. If we look at supply by wholesalers, what is happening is that we are looking and finding some and closing them. But sometimes, what happens is that then other supply areas will open up. So this is something that we are monitoring on a running basis, and we will look at it. So to expect that we can get that fully under control is probably -- would be too naïve on our side. But bigger supplies, we can find, and we do.

[Hans Gregersen]

But what are your remedies? I mean, how quickly can you, let's say, cancel a wholesale agreement if you catch them in doing so? And then coming back to the EBITDA margin. Can you be a little bit more precise with the EBITDA margin, how will that develop sequentially, up or down or flattish?

[Anders Colding Friis, President, CEO & Member of Management Board]

Well, if we look at the -- we can -- if we see a breach on our agreement, we have, in our agreement, an opportunity to cancel those agreements. Clearly, what we normally start by doing is having a good conversation. I don't think we can get into more of the details here. And Peter has a comment on the EBITDA margin.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes. On the EBITDA margin, just translating what has been said earlier, then an EBITDA margin in Q2 around the same level as in Q1, so more or less flattish. Don't expect a big pickup in Q2. Historically, there has been a 4 percentage point difference between second half and first half, so that is also, ballpark, what is expected this year.

[Operator]

Our next question comes from the line of Fredrik Ivarsson of Kepler Cheuvreux.

[Fredrik Ivarsson, Equity Research Analyst]

One more question from my side here. Back on the comments about the 9% like-for-like-in the U.S., obviously driven by the eSTORE. And correct me if I'm wrong here, but I believe you said that online share of your reported revenues was around 10% in the end of last year. I just wonder, can you confirm that? And can you also confirm that it's growing ahead of group average?

[Anders Colding Friis, President, CEO & Member of Management Board]

I can confirm that. What you should expect is that there is a phasing over the year in terms of like-for-like numbers, so it's always highest in the last quarter of the year.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes. And on the eSTORE share of revenue in the U.S., that is around group average still.

[Operator]

Our last question comes from the line of Anne-Laure Bismuth of HSBC.

[Anne-Laure Bismuth]

I just wanted to come back on the gross margin expansion of the 250 basis point that you had in Q1. And should we expect the same contribution from the stock conversion from wholesale to retail of 300 basis points for the year? And what could be the impact of FX on the gross margin development for full year '18? And my other question is about the admin expenses and the organizational changes that you mentioned that impacted Q1 '18. Can you elaborate more about this organizational changes, please?

[Anders Colding Friis, President, CEO & Member of Management Board]

I'll do the last question and then Peter will do the first one. When we look at the organizational changes, we've had quite some changes in the management board of the company, but we also had organizational changes in EMEA and in the Americas, broader sense. So all of that together has meant that we've had some extraordinary expenses that we have called out in the admin part in the quarter.

[Peter Vekslund, Executive VP, CFO & Member of Management Board]

Yes. As to the other questions, then on the gross margin, as you know, we do not guide as such on the gross margin, but we do give some indication, and there will be some impacts also positively on the gross margin going forward. Total impact on EBITDA from more owned and operated, around 1% for the full year. And we did see an impact, negative impact from FX on the margin in Q1. But currently, for the full year, we do not see any impact from FX.

[Anders Colding Friis, President, CEO & Member of Management Board]

Thank you very much. And thank you very much for listening in on the call today and for all your questions. And we would wish you a very, very nice day. Thank you.