Pandora A/S

CSE:PNDORA

Earnings Call Transcript 2019-Q1

[Michael Bjergby]

Yes, good morning, everyone, and welcome to the conference call for Pandora's Q1 2019 results. My name is Michael Bjergby from the Investor Relations team. And with me here today at the Pandora Head Office in Copenhagen, I have our very new Alexander Lacik -- new CEO, Alexander Lacik, sorry. I have our CFO, Anders Boyer as well as my IR colleagues Brian and Christian.We have our Q&A session at the end of the presentation. Please limit your questions to only 2 at a time and get back into the queue if you have additional questions.First of all, please pay attention to the disclaimer on Slide 2, where we have also outlined the agenda of the call. Anders will obviously be the main presenter today, considering that it is actually Alexander's 11th working day into the job.Now, Alexander, we're looking forward to having you here. A warm welcome to you. And please go ahead and introduce yourself to start with.

[Alexander Lacik, CEO, President & Member of Management Board]

Thank you, Michael, and good morning to everybody on the call. This is an important time, not just for myself, but even more so for Pandora. I've spent most of my professional career in large, complex and successful multinational companies. There are at least 2 things they have in common. First, they're consumer centric. So the journey starts from the outside and in. Secondly, they deliver on the consumer insights through brands. My experience has been that these 2 factors paired with an obsession for excellence and execution is what sets companies apart.I'm confident that my experiences will be instrumental in helping Pandora. The company has some solid foundations on which we will build the future. We have a world-class supply chain. Charms is a strong product concept. And consumers also give us a clear license to expand into adjacent jewelry segments. Finally, we have a deep reaching distribution network that gives consumers all around the world physical as well as virtual access to Pandora.While there is a strong foundation in place, let me be the first to recognize that the company faces some serious challenges. Importantly, the characteristics of these challenges also offer great potential. Pandora is a clear turnaround case, a situation which I faced previously and feel very excited to deal with.On a more personal note, I'm married and have 4 children in the ages of 10 to 21. I grew up in Sweden, but as you can see from my bio, I've spent most of my professional career on the international circuit. Now my family and I have moved back to Sweden, and we refer to Stockholm as home.Moving onto Page 4, let me just give you a few observations from my first 10 or 11 days, depending on how you count, with the company. As you can imagine, I've been on the sidelines for a while, which has given me the opportunity to familiarize myself with the company. I step into a situation where a transformation agenda has been formulated and is wrapped under the program name NOW.The analysis, in my opinion, is honest and thorough, with some clear work streams attached to it, ranging from demand generation, winning in China, digital capability enhancements as well as a strong cost squeeze. I fully support the transformation effort. The program is in full swing, and I'm looking forward to drive this hard to ensure we structurally change the trajectory of Pandora.Based on my experience, this transformation will not happen overnight. So we need to stay patient as we're delivering the various aspects of the program. I think I will leave it with these thoughts for now. In the coming days, I'm looking forward to meet some of you, and I'm eager to understand your perspectives of Pandora.I will now hand over to Anders, our CFO, to take you through Q1 and the progress on Programme NOW. Please, the stage is yours.

[Anders Boyer-Søgaard]

Thank you, Alexander. And let's move to Slide #5. And on Slide 5, we have a quick summary of the development in the first quarter. And in fact, it can be said in sort of 3 key short messages. First of all, the first quarter was weak, and it was partly weak due to our deliberate commercial reset, which has a temporary negative impact on the top line and the bottom line.But having said that, the main reason that Q1 was weak continues to be due to decreasing traffic in our physical stores. The weak performance was not a surprise for us, and we had anticipated that when we made the guidance. And so therefore, we also -- the financial guidance for the year remains unchanged.Secondly, we’re still of the opinion that Programme NOW will turn around our like-for-like performance, but it is a 2-year journey and we will not have any material revenue effect from now before late 2019.Last, I would like to say that we continue to take prompt and tough actions as we are progressing on Programme NOW. And today, we're announcing closing of an additional 50 concept stores and further significant reduction of staff in Thailand on the back of an increase in productivity.So please turn to Slide 6 for an overview of the financial performance in the first quarter. And I'll just touch upon a few of the points here. When we made the guidance, we said that like-for-like during '19 would be worse before it gets better. And it did get worse with like-for-like of minus 10% in the first quarter. However, it is also -- like-for-like is also impacted by our deliberate decision to reduce promotions.Organic revenue growth was well below the full year guidance, also as expected, and the reduction of inventories and sell-in packs impacted organic growth negatively in the quarter. And we expect organic growth in Q1 to be the lowest in '19 as especially the negative revenue impact from the reduced sell-in packs and the inventory changes will be less of a drag in the quarters to come.The cost reduction program progressed well, both on cost of goods sold and on OpEx. And on the cost of goods sold, the progress is visible with highest gross margin in fact in the history of Pandora in the first quarter of '19.And cash flow also continues to be quite strong, enabling us to pay out around 16% of our -- 15% to 16% of our market cap to investors in '19.Before we go into the -- if we move to Slide 7, before we go into the details of Programme NOW, I think it deserves or needs to be highlighted again how large the transformation Programme NOW is across the business on culture, on how we operate the business on the organization. And Programme NOW is not a quick fix, but it's a 2-year transformational journey.Then please move onto Slide 8, where you can see the sort of 4 main work streams or steps of Programme NOW. In general, Programme NOW is progressing well. And this is -- these 4 work streams is what we communicated back in February when we made the full year announcements. And on top of these 4 work streams, we also have the network strategy, where we're taking another large step today. And we'll get back to that in just a second.So in general, on Programme NOW, I can say that the commercial reset has been initiated. Commercial pilots are showing early and promising results. The cost reductions is progressing as planned. And finally, we are laying the foundation for working as a truly global and professional company.Then please turn onto the next Slide #9 in order to dig a bit more into the details on the network strategy. As you probably recall, we took the first step on the network strategy back in November last year, where we significantly reduced the number of concept store openings, and we practically stopped buying back distributors and franchise stores for now.Since then, we have been investigating and analyzing the store network from a brand, revenue and profitability point of view. And generally, we have a very strong and very profitable network. But as like-for-like was negative in 2018 and we also expect it to be down to negative high single digit this year, the profitability of some of the stores is not surprisingly coming under pressure. It's not many, but it's still some.So in 2018, less than 20% of our stores were directly loss making, while most stores are sort of on a store-by-store basis actually margin accretive to the group. And that is very, very remarkable and very strong starting point. So less than 20 of our stores. Thank you, Michael. That's very different. It's, let's say, 1.5% of our stores. Thank you for that correction. That's important not to get that wrong.But we want to derisk the financial profile of the company, and we want to protect our margins. And with that starting point, we have decided to close 3 buckets of stores. And these closers are over and above what was included already in the guidance back in February.So first of all, we want to close the few loss-making stores that we have. And that's a given. That's a no-brainer I'm almost tempted to say. But secondly, we will also be closing stores with a margin diluting and where we don't see a near-term prospect to improve the margins.And lastly, we will close stores in catchment areas with more than 1 store and where there are reasonable expectations to regain enough revenue in other stores or online for that matter. But we're still developing and refining our catchment area framework and methodology. But there are a significant, not surprising, significant number of stores with overlapping catchment areas. And given the high gross margin that we have, they don't need to recapture a lot of revenue for it to be EBIT accretive when you close a store. And as an example, if we have a 20% EBIT margin owner-operated store, it only requires that we recapture around 25% of the lost revenue for it to be neutral on absolute EBIT, and that is something that we need to look further into in the future.So we have identified around 50 concept stores to be closed when the rental agreements with the landlords run out or earlier if that prove to be a better business case. And the financial implications for this year '19 will be limited. But going into 2020, the closings will have a slightly accreting impact on the EBIT margin.So then let's move onto Page 10. In the annual report for '18, we said that we would reduce the nonvalue adding discount periods while still maintaining the promotions during the key gifting events. And this is exactly what we have done in the first quarter. So in the first quarter, we reduced the number of promotional days by 30% on average across the bigger markets.And the largest impact on revenue in Q1 is seen in the eSTORE, where we're now only using the online sales tab periodically, all with less products, all with a lower average discount. So all in all, we're tracking in line with the plan on the commercial reset on reducing promotions. And we still expect a one-off impact on sales and like-for-like to the tune of 2% to 4% in '19.Then please move onto Slide 11. Back in February, we highlighted 5 key areas that we believe will help Pandora get back to positive like-for-like and reignite the passion for Pandora. And that's the 5 areas that you can see on this slide. And the sum of the parts of this slide is what we are calling a brand relaunch. And these 5 areas are still the central building blocks, and we're making great progress across all of them ahead of our brand relaunch later in 2019.Today, I will just elaborate on a few of them and share some of the pilots and activities that we have done and are planning to do. So please move onto Slide 12. We believe that Pandora has been underinvesting in marketing and actually quite significantly so. And as you know that, that was part of the diagnosis ahead of Programme NOW.Our modeling and external benchmarking shows that there's a good return for every additional krone or dollar that we spend on marketing. And that's a good return both in terms of like-for-like growth and in terms of EBIT, absolute EBIT and in terms of EBIT margin.And there's also an important data point in our internal benchmarking supporting the marketing model, and that's in the US. The US has been performing relatively better than the rest of Pandora for some time. And that same goes for the performance here in the first quarter of '19.And in the US, we also spend more on marketing than in the rest of Pandora. And that's both in percent of revenue and in absolute terms. So therefore, we have decided to initiate a number of new marketing pilots. And the ambition is to confirm that, by investing in marketing, we will be able to change or improve the momentum and drive profitable growth. And as part of these pilots, we're investing between DKK 50 million and DKK 100 million in Q2 and then again in the third quarter in 3 selected markets, being the UK, Italy and China.During the first quarter, we also initiated a collaboration with the Colombian singer Shakira. And we made a couple of influencer or several influencer collaborations in Canada and Brazil. And in early Q2, so in April, we launched a dedicated China collection, the one that we call the Peach Blossom. And that's the first time that Pandora is launching a collection specifically for 1 country.It's early results, but we are excited by the early results that we see and the tests and these initiatives. And we also plan to spend more on digital and celebrity collaborations going forward.Then please move onto the next Slide 13. We are doubling our spending and investments in our online presence in '19. So we're taking a significant part of the cost reductions that we're doing as part of Programme NOW and reinvesting that online.Initially, we continue to improve the product landing pages with more inspirational storytelling. But there will be more material changes during the year, including a brand new eSTORE which is being developed and tested with rollout in the third quarter. And we've already initiated some new omnichannel features in the US. And we strive to soon finalize the business model with our partners in the US.And then please turn to Slide 14, where we have an update on the cost reduction initiative. As you know, the cost reduction opportunity is quite big. And we target a run rate saving DKK 1.2 billion by the end of next year, by the end of 2020.And for '19 specifically, we expect to realize cost reductions of around DKK 600 million. And that comes, as you know, on top of the DKK 350 million cost reductions that was announced back in August last year and in connection with the Q2 announcement.And the progress has been strong and in line with plan. And in the quarter, we have realized around DKK 100 million in cost reductions on the Programme NOW initiatives and around DKK 75 million from the other Q2 '18 initiatives, as we have called them.The way that you should read this slide, the Harvey balls to the right of this slide, the savings indicator, is that it reflects how much run rate saving that has actually been realized in the quarter. And therefore, as an example, even though there's no reported progress on IT, it doesn't mean that we are not progressing on IT because we are indeed. And it's simply that the effects of all the preparations and analysis that we're doing right now hasn't led to realized cost reductions yet, but they will come.A few other highlights on admin costs, administrative costs. We are progressing quite fast. But this is also where the low-hanging fruits are. The tightened travel policy has an immediate effect basically. And the same goes for training costs and a number of other employee benefits that we have been looking into.And I'd also like to highlight that the redundancy of the craftsmen in Thailand is a part of the cost mindset and that we are instilling across the company. We have secured quite significant productivity improvements. And we're able to reduce the workforce in Thailand with around 1,200 additional employees on top of the changes that we made, the 700 that were laid off back in February of this year.And to further reduce production costs and deal with annual sales out and production, seasonality, we will also be introducing additional shutdown periods in the months to come. So this basically concludes the update on Programme NOW as such. And I would just again reiterate that we are on the right track. That's what we firmly believe. But we're still at the bottom of a huge mountain to climb.Let's quickly go through some of the financial -- you can skip Slide 15 and go to Slide 16, where we have the revenue growth bridge. And as already mentioned, the weak like-for-like development is the largest building block in this waterfall. And you can see that as the second purple building block in the chart here. And I'll just come back in a second, speaking a little bit more about the drivers behind the like-for-like development.Organic growth was minus 12% in the quarter. And in addition to being obviously impacted by the negative like-for-like, it was also impacted by destocking, lower sizes of sell-in packs. And finally, we've also seen a quite significant decline of our sales to the multibranded customers.And I want to highlight that a number of the organic growth drivers are nonrecurring of nature and not least, the sell-in packs. And Q1 is expected to be the only quarter for the year where organic growth is actually lower than like-for-like.Then please move onto Slide 17, where we have -- are showing you a breakdown of the drivers behind the like-for-like development. And our underlying challenge is to get traffic into the physical stores. And that's the red arrow to the lower left part of this slide pointing downwards. That's the main challenge. And traffic into the physical stores is significantly down, while the other KPIs that are driving like-for-like are broadly speaking relatively stable. And the core Programme NOW is, as you know, exactly to address the traffic challenge through among others significant marketing investments and the upcoming brand relaunch.And please turn onto the next slide, Slide 18. The EBIT margin was 22.5%, excluding restructuring costs, in Q1. And that's the black bar to the right, being -- so the third last column in the waterfall. And as you can see on the waterfall, the main reason for the lower margin compared to last year is deleverage. And it's deleverage from the negative like-for-like combined with lower sell-in packages and lower inventories from our -- with our wholesale partners. And the latter is partly nonrecurring in nature.And the cost reduction supported the margin by 4 percentage points, as planned. And in line with prior years, the EBIT margin is going to be skewed towards the fourth quarter. And we also expect that both the second quarter and the third quarter EBIT margin will be below our full year guidance.Then please move to Slide 19. We improved the cash conversion in the quarter, mainly due to better working capital. But I should say that the development that you can see in the numbers here, the reported cash conversion is better than it is because the reported number shows that we went from a cash conversion of 30% last year to 70% this year. And that's what you can see in the upper left part of the slide.But obviously, the new accounting regulation IFRS 16 technically improved the cash conversion with around 27 percentage points. So the underlying and comparable number to the 30% last year is a cash conversion of 43% this year. So it's still a decent improvement, even taking out the accounting noise.And just as with the cash conversion, the leverage ratio is also impacted by IFRS 16. So the net debt-to-EBITDA ratio roughly increases by half, 0.5, due to the new accounting regulation. So the underlying leverage ratio is still up versus last year, but only around 0.2 or so. And that's impacted by the lower profitability, but also the fact that we have made significant cash returns to shareholders during the last year over -- excuse me -- over and above the free cash flow generation.And therefore, we're getting to the final point on the prepared part of the agenda. And you can go directly to Slide #21 with the financial guidance. So in short, the guidance is unchanged. We continue to expect between minus 3% and minus 7% organic growth for the year and 26% to 28% EBIT margin, excluding restructuring cost.So we still believe that total like-for-like can be down to negative high single digits for the full year. And the guidance still assumes a material and positive effect on like-for-like from the initiatives in Programme NOW in late '19.There will, of course, be some impact on the 75 net concept store openings this year due to the additional store closings that we just talked about. But we don't expect the number to be significant already in '19.And finally, I will just say that the cash returns to our shareholders is also on plan. And looking at the final -- the full year '19, we will pay out around 7% of the market cap in dividends. And we will be buying back shares equivalent to around 9% of the company. So that's a total return to shareholders of around 15%, 16% of market cap in '19.And with that, that concludes the prepared part of the presentation, and I think we can go to Q&A.

[Operator]

[Operator Instructions] And our first question comes from the line of Thomas Chauvet from Citi.

[Thomas Vincent Chauvet]

I have 2. The first one on the selling/distribution, marketing expenses, they were up 10% in the quarter. It was well above expectations I think. How do you expect both items, S&D and marketing to evolve in the coming quarter? The press release suggest marketing costs will be stepped up in Q2 in Italy, UK, China. Could you comment on that and in relation to your profit guidance for the full year? Secondly, on the press release, there's quite a few incremental items announced today, 1,200 additional headcount reduction in Thailand, the implementation of part-time work in May and June in Thailand, the closure of additional 50 unprofitable concept stores. However, you reconfirmed the DKK 1.5 billion restructuring charge this year and the DKK 1.2 billion cost savings by 2020. Could you elaborate on that? So are these incremental announcement, were they already in the pipeline when you struck your guidance, or are they just in aggregate relatively materials? Thank you.

[Anders Boyer-Søgaard]

Thomas, I can start out here. On the sales and distribution and marketing expenses, it's true that the sales and distribution expenses are up year-over-year, despite all the efforts that we're doing on the cost program. You should recall that we are -- if I just remember rightly, we have 342 more owner-operated stores in our network in Q1 of '19 compared to last year. And they obviously come with a cost. So beneath that number, there's actually so a like-for-like, if we can call it that, decline in the sales and distribution expenses. But going forward, we're not guiding specifically on the cost lines. But just to give you some insight, the year-over-year growth will -- when we move into Q2, 3 and 4 of '19, will be impacted by a couple of different factors. One is that the year-over-year increase in new stores will decline as we progress through the year. We had a 6% revenue uplift from -- what you call -- concept store openings network in the -- in Q1. And for the full year, we have guided around 4%. So that in itself will sort of stop the -- or decrease the year-over-year growth as we move through the year. But it doesn't mean that the numbers will be -- spending will be lower than in Q1. But that's one I think important building block. Then we are -- in Q1, as you can see in our EBIT margin bridge, we haven't invested -- reinvested a lot yet in Programme NOW. That's -- that building block in the diagram is basically 0. And as we move into the later part of year, we will start be -- increasing our marketing spending especially significantly. We're starting now and testing out basically as we speak in a couple of selected markets. And that will, everything else equal, increase our marketing spend in going into the latter part of the year. So there's some offsetting forces when we look at those cost lines going into the later part of the year. On the announcements that we made this morning on concept stores and further cost reductions, they have been on our agenda for a while. But obviously, with things like this, you can't announce it until you actually know that you are doing it. You have to be ready. And I think, on the changes that we have been making in Thailand and announced in Thailand early this morning Bangkok time, we had to see the productivity increases being there for some months. As you recall last year, we had a dip in the gross margin in Q3 and Q4 year-over-year of around 200 basis points because we saw a significant increase in the average production time per product. And we are dealing with that and actually have had a very decent improvement in productivity during the last couple of months. And that was -- led us to conclude that we could make the changes in Thailand this morning. So that's -- we are keeping the DKK 1.5 billion -- up to DKK 1.5 billion in restructuring cost unchanged for that same reason. And yes, hope that answered this question.

[Operator]

And our next question comes from the line of Michael Rasmussen from ABG Sundal Collier.

[Michael K. Vitfell-Rasmussen]

And first, a question for Alexander and then a question for Anders. So, Alexander, I appreciate it. It's obviously early days for you at Pandora. But could you add a little bit more details about some of the turnarounds that you've been part of in the past? For example, have they mainly been a cost reduction exercise, or has this been cases of fixing a brand or fixing any kind of top line issues? So any details on your past would be appreciated. And then secondly, for Anders, I hear what you're saying on the inventory reduction potential. Can you first comment a bit on the timing on that and also on the magnitude of this potential? Because obviously, we wouldn't risk you moving into any out-of-stock issues when or if like-for-like starts to improve. Thank you very much.

[Alexander Lacik, CEO, President & Member of Management Board]

Okay. So I have a couple of experience which are I think relevant for this situation. But I think what's kind of common across all of them is that cost squeeze wherever it may come from has always been there to underpin so that you can invest the forward drive of the business, which I think is very much similar to the case we're discussing on Pandora. So you would have things like -- when I first took over Greece was a very subpar performing country in the Reckitt Benckiser portfolio. Three years on, 50% growth, and was the strongest growing entity in the RB portfolio. Moving from there, I went to the US, which was also a kind of subpar performer, was growing 2 to 3 points a year, pretty much in line with market growth. A few years on, I think we were between 2x to 3x market growth performance. And again, this came from finding pockets of cost which we could reinvest back into growing the business. And then a very specific one was on Head & Shoulders, which is a specific brand. Again, in a 3-year period, I doubled that top line. And that came more from profound insight work, communication work, slightly repositioning the brand and again fueled by pretty healthy structural P&L. So we allowed that growth to come along. So you have both small markets, big markets, specific brands that we turned around. There are a few more in the bag. If we have time in another setting, we can talk about them. But I think the important thing, it's always started with a profound understanding of where we went wrong with the consumer. And then we've underpinned those efforts with spend that we kind of squeezed out of the business from different aspects of the portfolio or companies that I worked for. I hope that answers your question.

[Anders Boyer-Søgaard]

Michael. Anders here. I -- there's 2 angles to the question. And I heard your question being about the owner and operated, our own inventories. So that's why I'm starting out. And I fully agree that we have to be cautious with the gross margin like we have in Pandora. It's very expensive to be out of stock. So we're doing it cautiously. So there's, of course, a reason that we write why we see some further potential in reducing inventories. And I think we can say that it -- that that should be an opportunity to reduce it by more than 10% compared to where we are. But it's not a structural change where the net working capital would be at an entirely different level than where we are today. That's not where we're heading. But it's a decent upside that we have to pursue. That would be -- I think we'll see some already in '19 and then more to come in 2020. And it goes hand in hand with the merchandizing process, getting that a strong global merchandizing process in place. And I think we've talked about that at the last couple of quarterly releases. And that takes some time to get in place.

[Operator]

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

[Chiara Battistini, Co]

I also have 2, please. The first one is on product more generally. The charm bracelets both remain under pressure in Q1. So I was wondering. Can you please talk about a little bit more about the initiatives you are thinking about and implementing on the product side and how you're seeing those 2 categories, the charms and bracelets, accelerating through the year? And around that also, I was wondering -- also, marketing activities are being stepped up at the moment. Those are still on the -- on a product offering that hasn't been refreshed. Is that correct? And then on the promotional activity, can you please quantify the current percentage of sales on a discount or a full price? And also, do you see the need to go further in terms of cleaning up your discounting activities in the coming quarters, please? Thank you.

[Anders Boyer-Søgaard]

Yes, I'll just see what I catched all of the questions. On charms and bracelets there, it's correct that the Q1 numbers is an extension of the prior quarters, with the charms category being the one where we have the biggest challenge. And that's exactly down the alley of our diagnosis and the structure of Programme NOW to deal with that in general, of course, across our product category, but not least the charms and bracelet category. So we are -- some of the things that we have put out there to address exactly this is both on how we are marketing campaigns, how we run them and structure them. We've talked about a loyalty program at a later point in time.There's also an element of how we structure or design our stores, actually how you navigate as a consumer in our stores. So all feeding into the charms category is the one where we are challenging -- challenged the most. But I would say that there's -- I repeat what we have said both in Q4 announcement and Q3 of '18 is that there's nothing in what we see that points in any way towards that we're facing something that is a structural issue. We are facing issues that are within our own control and that we can deal with. It doesn't mean that it's easy to fix. This is Q1 of a 2-year journey. But there's nothing that tells us or shows us that we can't get back to a positive like-for-like on the other side of Programme NOW.But on top of this, I think you should look at -- when you look at the performance of the charms and bracelet category, you should also look at all of the other elements of Programme NOW, including our collaborations with celebrities, use of influencers, a significant increase in our marketing spend and also the new charms and bracelet concept that we are launching in the second half of 2019. Then let me see if I'm missing something here. But there was a question on promotions and whether we see a need to further dial back on promotions compared to what we've done already. Of course, there's a bit of test and try in what we're doing. That's clear. But I think we seem to be pretty much on track with what we have been doing in the first quarter. And then did I miss something?

[Chiara Battistini, Co]

No, that's great. So you don't see any need to further push on the cleanup of discounting. You're happy with the current levels post the -- well, at the end of March I guess.

[Anders Boyer-Søgaard]

I think what we have done during the Q1 with a pretty significant reduction of the number of promotion days by 30%, that's what we have seen and the impact that we've seen. And speaking to our organizations around the world, that's probably a reasonably good starting point. But of course, there will be a year-over-year impact throughout '19. So that like-for-like impact will -- and organic growth impact will be filled throughout the year until we analyze it next year.

[Chiara Battistini, Co]

But not sequentially quarter-on-quarter.

[Anders Boyer-Søgaard]

I don't think you should expect that, no.

[Chiara Battistini, Co]

Yes, okay. Great. Thank you very much.

[Operator]

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

[Lars Topholm, Co]

Thank you very much. Alexander, welcome to Pandora. Two questions on my side also, which is about store closures. So and 50 of your own stores you are now announcing you're going to close. Can you give a little bit of a flavor on which markets you're talking about? And then the second question is on the franchise store network because, clearly, franchise-operated stores, everything else equal, have lower margins than your own stores. So I wonder if you have some insight into the general health of that franchise store network, giving the pressure on your like-for-likes. And also, on the risk of the multibrand jewelers cutting back on selling Pandora going forward, is that a risk we should factor in when we look at your numbers? Thank you.

[Anders Boyer-Søgaard]

Lars, it's Anders here. On the store closures, I can't speak about the markets yet. We haven't announced it internally, so market by market yet. But obviously, there will be some that are more hit than others. But it's not just one place. It is spread across the globe. But for now, I will have to keep it internally until we announce it. And then on the franchise stores, yes, it's clear. If we are hit, then our partners are hit as well. That goes without saying. And we have different starting points on average with the profitability in the stores. And so obviously, the -- on average, the earnings among our partners have come down as well during the last number of quarters or couple of years. That's pretty clear. And the -- I think one way to look at it, if we continued like what we're doing, then of course, we will at some point in time head into a serious problem across the network. If like-for-like was negative to this tune for a couple of years, then that goes without saying. But that's not the plan. That's also clear. But we are -- I think it's also important to recall that, even though one of our franchise partners, just as an example, might come to -- in the situation where there's no or little earnings left. It doesn't mean that the total profit pool, so with partner and Pandora together, is not attractive. I think that's important to keep in mind. Then on the multibranded partner of our business, other points of sale, yes, they are clearly hit harder than the rest of our business and that -- in the first quarter. And I think without of being too detailed, there are some of our larger partners that have been particularly hard hit, and that is visible in the numbers.

[Lars Topholm, Co]

Anders, sorry I interrupted you before, but I simply didn't understand you. You said, even if the franchise store is not making money, the total profit pool is still attractive. But would that mean you would then go in and sponsor the franchise store if he doesn't make money? And also, to be specific, do you in your plans expect any franchise concept stores to close in 2019? And have you embedded in your guidance any of your larger multibrand franchisees abandoning Pandora during the year, just to be perfectly clear?

[Anders Boyer-Søgaard]

Taking the first question first, on the situation where a franchisee is not earning money and the total profit pool is still attractive, then obviously, it would be just to say plainly stupid not to continue operating that store. And then you'll have to figure out how to then do it. And then there's obviously a range of different options how you run that store. I would have to stress that that's -- this is not where we are. But of course, having 2,700-plus concept stores, there will always be someone who are struggling, including our own stores. But in that example, Lars, then -- obviously, then we will have to look at, say, well, do we then -- do we continue running the store, or do we split the profit pool in a different way? That could be some of the solutions to look into. And yes, we have -- in the -- when we announced in February that we are opening up net 75 stores for '19, that in that number is also included a number of closing of franchise stores. And the last question, that was on the multibranded business. Yes, we -- in our guidance, we had assumed that the multibranded business would be declining more in revenue than Pandora in general.

[Operator]

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

[Fredrik Ivarsson, Equity Research Analyst]

Couple of ones from me as well. First one is on the store network going forward. Obviously, the share of retail revenue or sort of retail stores is up more than 20 percentage points. And my question is would you ever consider increasing the share of wholesale stores again? And I guess are you divesting some Pandora-owned stores to franchisees? That is my first question. And the second one is on the gross margin. I assume that you have quite significant tailwind from FX and raw materials in the quarter as well. Could you confirm that and maybe quantify that a little bit?

[Anders Boyer-Søgaard]

Thank you, Fredrik, for the questions here. And I would just start out apologizing for the 2-minute blackout. We just had some technical issues. On the store network, I think as a responsible company and a responsible management, you always have to look at all options and always question the status quo. And that would include across markets and across our network whether -- should this market be operated -- which types of stores? Should they be owned by us or be owned by someone else? And so we will always be reflecting on how we are structured. So having said that, the -- repeating this morning that we will be reviewing our general network strategy during the second half or at a later point in time, we said that also in the Q4 announcement in February this year. It's on the agenda. But we have deliberately put it a bit -- a couple of quarters out to focus on. So the most important issues first. So we'll revert to you and talk more about that at a later point in time.And then on the gross margin, yes, on the commodity, you're absolutely right. We have around 40 basis points of tailwind plus on the gross margin from commodity prices in the first quarter. But on the FX piece, it's pretty limited, the type that has been going up a bit. But in the quarter as such, it's quite limited impact on the gross margin. And then I think you asked about also whether there's a -- the channel mix impact. And that's clear that there's an impact on the gross margin from having a higher retail share of revenue in Q1 compared to prior quarters and compared to prior year. But I think the most important is that, if you look at the year-over-year gross margin development during the last number of quarters, then if I just remember right on top of my head, then in Q3 '18, we were done 190 basis points. In Q4, we were down 200 basis points. And now we turned that around to have a 10 -- not a lot, but still a 10% -- 10 basis points uplift compared to Q1 of last year.

[Operator]

And our next question comes from the line of Hans Gregersen of Nordea.

[Hans Gregersen]

Alex, first, a question to you. You mentioned a little bit about your experience in what could deem as need-to-have products like shampoo. One could argue that jewelry is more nice-to-have product. Could you really argue that there's direct comparisons in the turnaround actions you're looking at between those categories is the first question. And then to Anders, we've now had a strategy plan last year that was being revoked with by the announcement project NOW. You previously argued or indicated that there was a quite weak data visibility into the previous strategy plan. In the whole analysis you've done, what new data have you discovered, and where have the changes been? And then just if you could clarify, with the new staff reductions in Thailand, is that incremental cost savings or part of the original target? Thank you.

[Alexander Lacik, CEO, President & Member of Management Board]

Hans, is -- well, they're quite different categories, you're right. However, you can see it's -- jewelry is a discretionary category for sure. You could also argue shampoo in general is obviously -- for most people that have hair is not discretionary, but a particular brand can be seen as a discretionary. So then you go back into, okay, what are we actually trying to do here? We're looking at the positioning of Pandora. We're going through proper insights work. We're trying to sharpen who actually we want to target. And that all leads into kind of understanding better what type of products we should be serving them with, what type of communication will work with them, and finally how you merchandize this at the point of sale. So I think all those things are very similar, even though, to your point, shampoo and jewelry obviously is a little bit different in nature.

[Anders Boyer-Søgaard]

And then I can take your 2.5 other questions I think I counted, Hans, but that's okay. On the data visibility, a couple of angles to it. First of all, I'll also say that the data visibility and transparency also goes for basic financial data, just having one set of data and one way to look at pure basic financial numbers. How do you look at a store, store P&L as an example? So one set of numbers across the -- and there, we've gotten I think quite far pretty fast because we had a good ERP IT infrastructure in place. But then on more of the more consumer-facing data, we are -- I think we're building much better and much deeper consumer insights. We are having so focus groups, which is hundreds of consumers with quantitative analysis and surveys. And we're also getting some digital data from social media and structuring and building that in a different way than what -- a more detailed way than what we have done in the past.And then we have also broadened our approach to data and focusing mainly on products to also think about data in terms of brand and consumer experience. And then you can also say we're simply just becoming -- yes, we're 1 year further down the road compared to when we announced the strategy at the Capital Market Day in January last year. And we are 1 year wiser in terms of what worked and what doesn't work. And then on the cost saving in Thailand, that's part of the plan. That's part of the DKK 300 million to DKK 400 million in total cost of sales reductions that we announced as part of the DKK 1.2 billion cost reductions. And it flows directly into that.

[Operator]

And our next question comes from the line of Piral Dadhania of Royal Bank of Canada.

[Piral Dadhania, Director of Premium Brands]

If I could just come back to the charms category, which is minus 17% in Q1, could you just give us an indication of what that growth rate would have been if we strip out the effects of wholesale inventory destocking and lower NPI sell in? And just coming back to a previous question, is the strategy still to double down on the charm category going forward, or should we expect to see a change in the merchandise mix towards some of the other categories if you expect charms to remain negative in the mid-term? I'm just thinking, in terms of the Q1 performance, there were some new product launches which have clearly not had the impact that you were expecting them to have. So just really want to understand how important charms is to your mid-term strategy. And then secondly, just in terms of the store network, I appreciate there's a more detailed analysis due to take place later in the year. But if we take the like-for-like to remain negative for the next few years, what proportion of your stores would end up being dilutive to group EBIT margins or potentially even turn loss making? I'm just curious as to why there isn't more of a focus on store closures at this point if we extrapolate these types of like-for-like declines which would be detrimental to your margin in the mid-term. Thank you.

[Anders Boyer-Søgaard]

Thanks, Piral, for those questions. Just starting out with the charms revenue, it's right that the charms total local currency growth was minus 17% in the first quarter and thereby so more down than what you saw in the quarters in 2018. And we don't disclose like-for-like on product category. At least we don't put them in the announcement. But the like-for-like on charms is actually not that very different between Q4 of last year and Q1 of 2019. So -- but what I would say is that there's nothing in the Q1 data that changes the -- what we announced as part of Programme NOW a couple of months back with more focus back on the charms category. I think the numbers -- if anything, they just confirm what we said as part of Programme NOW that there's a potential to regrow in the charms category again. Then yes, you asked about the future store closings. You can make a lot of scenarios about what the profit level on store by store would be in different like-for-like scenarios. And it's clear, if we had minus 10% like-for-like for the next 8 quarters, yes, and then that's a very different situation. But again, that's not the plan.And we -- what we have announced today, we have addressed both closing own stores that are loss making, and then we are taking all stores that are sort of diluting to our margin over and above a certain level, and where we don't see that we can cut costs in that store or do other things to improve revenue in that store in the very short term. So we're taking -- so what we see and with the situation that we are in and with the guidance that we have put out, then that addresses the margin-diluting stores that we have across the network. Having said that, there are some choices in some markets where margins are below group average. We have a couple -- a market for -- as an example in Latin America, Brazil, where margins are lower in general. And there, there's decisions that what we want to keep operating in Brazil, even though margins there are and probably are likely to remain below group average. But of course, if we're sitting in a year's time and like-for-like remained at where it is and prospects in -- for 2020 was the same, then it's a very different situation. But again, that's not the plan.

[Piral Dadhania, Director of Premium Brands]

Okay. Thanks, Anders. So if I come back to the charms point, is that to suggest that the like-for-like in charms was around negative low to mid-single-digit level in Q1?

[Anders Boyer-Søgaard]

No, it's actually -- that's actually not the case. Like-for-like in the -- on charms specifically in Q1 was actually the same as the reported local currency growth, around minus 17%.

[Piral Dadhania, Director of Premium Brands]

Sorry, I thought you said it was in line with the fourth quarter of '18. Sorry, okay.

[Anders Boyer-Søgaard]

Good to get that clarified.

[Operator]

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

[Klaus Kehl, Chief Analyst]

And 2 questions from my side as well. First of all, you had a negative like-for-like growth of 10% here in Q1. Could you -- and that's obviously a pretty tough start. So could you give us any insight into the beginning of Q2 and April? And also, in this context, you've mentioned these new commercial initiatives with Shakira, etc. But were they in full speed here in Q1? And then finally, just to get back to these store closures, and obviously, you need to pick further into it. But could we end up in a situation where network expansion will be 0 or even negative on a net number in 2020? That would be my questions.

[Anders Boyer-Søgaard]

Thank you, Klaus. It's Anders here. On the Q1 and the start of April, we're still seeing a like-for-like in April being below the -- what we have guided for the full year, so in line with what we saw in the first quarter. But again, yes, we -- yes, little impact still of all the top line initiatives that we are taking as part of Programme NOW. Then on the commercial testing and initiatives that we are doing, no, they are in no way near a full speed in Q1. It's selected testing in a number of markets that we are -- have been doing on celebrities and influencer collaborations. So it has no -- there's no impact really in the markets yet. And on the marketing initiatives, that hasn't even started in Q1. That's basically starting, yes, we'll say this week plus or minus in the 3 countries China, Italy -- so it's Italy and UK, China only being a bit later in the quarter, but China and -- sorry, again, Italy and UK starting as we speak. So we're basically just scratching the surface in the first quarter.On the store closures, I -- obviously, that would depend on exactly what does like-for-like look like when we get into and guiding for 2020. I think what we can say is that it's likely there will still be room for profitable and attractive store openings in China and Latin America also in 2020. But exactly how that plays out net-net, I think that that's too early to say. But it's -- I think one thing we can say, we will not be getting back to the 200, 300 store openings net that we saw in '17 and '18. That's maybe the yardstick we can put out there.

[Operator]

And our next question comes from the line of [ Patty Wong, Infusin ].

[Unknown Analyst]

Thank you. Could you please talk about the market expansion plan in China, so for example, the digital [indiscernible] like Tmall and [indiscernible].

[Anders Boyer-Søgaard]

Sorry, we didn't catch that. Can you please repeat?

[Unknown Analyst]

Yes, so I asked about the market expansion plan in China. So you know the online platforms named Tmall and [indiscernible], so you try to sell any product on such platforms to increase sales?

[Anders Boyer-Søgaard]

We remain exclusive on Tmall in China. But obviously, China is very much on our agenda in -- as part of Programme NOW. But we're actually already doing more on WeChat. And we've done that in connection with the launch of the Peach Blossom just a month ago or 4 weeks ago. And then obviously, we are looking into whether that would be other channels that would be interesting for us in China, such as JD. But for now, we're exclusive on Tmall.

[Operator]

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

[Anne-Laure Bismuth]

Yes, Anne-Laure Bismuth from HSBC. So 2 questions on my side as well. So regarding -- I just wanted to come back on this additional marketing investment that you are flagging in the press release of this morning. Can you give us a bit more color of what are these initiatives? And the second question is about what it means when it comes to marketing-to-sales ratio for full year '19. It was at 10% at the end of Q1, but what should we expect for the full year? And I assume that it was embedded in the commercial plan reset. Thank you very much.

[Anders Boyer-Søgaard]

The marketing initiatives that we are launching here as we speak in UK, Italy and again a little bit later in the quarter also in China is to the tune of DKK 50 million to DKK 100 million in additional marketing spending per quarter. Then we have also I think somewhere said that we're seeing a decent return on those investments. And if you do a little bit of math and say, well, DKK 50 million to DKK 100 million in investments per quarter times a decent multiple and then look at the revenue that we have in those 3 markets, you can also see that it's -- if it has the intended impact, it will be visible in the like-for-like in Q2 and going into Q3. So it's -- there's nothing -- so [indiscernible] specifically, what we're doing, we're coming from a very low level, especially in -- I would say in Italy from a very, very low level of marketing spending. So we're doing -- so using so the usual tools. And so it's focused on traffic-generating activities. This is not branding. It's a working marketing that we are focusing on. And the main handles or tools that we are using is TV commercials. It's paid search. It's paid social, where we believe that we can generate good traffic. And we're doing also that based on the learnings that we've seen in the US, where we are spending, as I mentioned, more money on marketing than in the rest of the world, and where traffic and like-for-like is clearly better than in the rest of the organization. Then on the marketing ratio, I would be hesitant to guide that specifically on a line in the P&L by quarter, but it's clear. It's part of the Programme NOW diagnosis that we should spend more. And we are doing that. And with these initiatives, it is likely that the marketing spending as a percent of revenue will be higher going forward.

[Operator]

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

[Thomas Vincent Chauvet]

I have 2 additional questions. One is on -- that was related to the -- hello. Sorry. Can you hear me? I was on mute I think. Just a follow up on the crafting facilities in Thailand, you're one of the largest private employer in the country. Nearly 2,000 people have left the company this year. That's about 15% of your workforce in Thailand. Two quick question on that. One, have you held discussions with local authorities or the government on these measures and reiterated your commitment to Thailand? I think you have still a tax exemption status in the country. Could you remind us where you stand on that tax exemption status? And two, could you try, Anders, to explain the nature of these layoffs between what is a risk of overcapacity that literally the order book is weak and you have too many people in the factory, craftsmen, and to the introduction of more technology-related production methods, like AAA, and how this impacts longer term the need for big labor-intensive workforce in Thailand? Thank you.

[Anders Boyer-Søgaard]

Thank you for those questions, Thomas. We are fully committed to our setup in Thailand. And it works really well. And we are very happy with our setup and the cooperation that we have with the Thai authorities. And we are, given our size, as you also indicated, Thomas, we are in a very frequent dialogue with the authorities in Thailand. Ad we should be, obviously. So we have, as you say, a tax-exempt agreement with the Thai authorities. And it runs for a number of more years. And obviously, when we get to the expiry of that in a number of years, where the Thai authorities will have to sit down and discuss with what does that then -- what next, but again, we are very happy on our setup in Thailand. And we're doing all these changes in close cooperation with the local authorities. Then on the other question on the going forward, if I understood the question correctly, then I would say that, if we -- when we are -- we simply have too many people in the -- at the factory in Thailand. That is why we are offering voluntary resignations to the 1,200 people today. And that's also why we are introducing a few more days and weeks in the months to come where we are closing down production because, otherwise, we would risk producing to inventory. And that obviously also comes with a risk. And behind all of this is an increase in simply in how many pieces of jewelry do we produce per hour. And that's the number that is improving quite nicely, despite the fact that our products, our standard time, as you'll recall it in engineering language, is up compared to prior years. As you recall, back in -- was it Q1 last year or Q2 last year? We talked about that the average production time on some of the new collections was 50% up compared to the old days. But despite that fact, we're actually producing more units per hour -- per man hour. And that's a pretty strong result. And then that -- and for that same reason, we are adjusting capacity in Thailand this morning. And to the extent that we need to flex further, we also always had the opportunity with -- to do overtime. And at the same time, we have good cooperations with a couple of external OEMs that also can serve as a flex and a cost obviously. But that is a handle that we have as well.

[Operator]

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

[Hans Gregersen]

Thank you. In terms of the outlook for second half, you've sent quite confident signals on growth improving due to I would assume new product launches and your route-to-market initiatives.

[Operator]

His line has disconnected. I will move to our next question, which is from the line of Lars Topholm of Carnegie. Lars from Carnegie, if you have your phone on mute, you'll need to unmute. Okay. There's no response from this line. I'll move to the line of Fredrik Ivarsson of Kepler Cheuvreux.

[Fredrik Ivarsson, Equity Research Analyst]

Short follow up on the 75 net openings. I think you said there's going to be a split between owned and operated and franchise stores. Can you give a ballpark figure on that?

[Anders Boyer-Søgaard]

On -- for the 75 openings this year?

[Fredrik Ivarsson, Equity Research Analyst]

Yes, correct.

[Anders Boyer-Søgaard]

Yes, I think we have -- we said back in -- two-thirds, roughly two-thirds is our own stores, and the remaining being franchise stores.

[Operator]

Our next question comes from the line of Magnus Jensen of SEB.

[Magnus Jensen]

I guess most of them have been answered already. But I just have one little follow up in the terms of the promotions. You say that you did a reduction of 30% for the first quarter, but you also started the year by saying that you would reduce it by 50% for the year. Could you give us some flavor to the reduction you expect to see in the remaining quarters of the year? Thank you.

[Anders Boyer-Søgaard]

I think the way that we have approached it is that we are looking at it market by market and seeing what are the promotions that we -- sort of nonvalue adding and doesn't drive enough of revenue. And the 30% reductions that we have seen are implemented in Q1 is in line with the plan that we made as part of the budget and Programme NOW. But in general, the first quarter is actually a small quarter under -- on promotions with more of a focus on the -- what you call it -- the clearance sale in January. So going downward roughly 50% is still the plan. But there's some, to be honest, amount of some testing and learning in this. But again, yes, Q1 generally lower on average on promotions.

[Magnus Jensen]

Thank you. And one final question from me. So you haven't talked very much about Reflections, which I guess has been in the market now for 6 months or so. Could you give some flavor on how this concept is performing?

[Michael Bjergby]

So I think -- this is Michael speaking. We don't disclose numbers exactly for Reflections. And that's why we have not provided any information for this. I would say that what we've seen in Q1 is that we've seen that there've been sold more bracelets per -- sorry, more charms per bracelet in Q1 than we saw in Q4. So this seems to be that it is a carrier and that it does help charm sales. So that's positive. But obviously, we can all see that what is important is not what product category they would drive, but really the total like-for-like. And obviously, we still have some improvement to do there. But generally, we are happy with the performance of Reflections, even though it could not turnaround the like-for-like as we already diagnosed with NOW.

[Anders Boyer-Søgaard]

Yes, and I think that, Michael, that's the important point. I think we are -- on isolated base, we are okay with the performance. But it's -- yes, I think it's very clear that it hasn't been part -- haven't been enough to drive around the -- or turnaround the overall like-for-like trajectory.

[Operator]

And we're going to try again with Lars Topholm from Carnegie.

[Lars Topholm, Co]

Yes, I think that was an example of fat finger before I was trying to unmute. Anyway, my question is -- part of Programme NOW is to take back channel inventory. I just wonder if you have an update there as to how much channel inventory you expect to buyback and when you expect to implement this part of the program.

[Anders Boyer-Søgaard]

Yes, maybe I should have touched upon that, Lars, in the prepared remarks. The -- we are having a lot of preparation, preparatory work internally so far on this topic. So we've not started implementing the program yet. I think there will be -- we will start back executing on it later in the second quarter. But the majority of the impact would be probably in the third quarter would be my best guess. I've been sort of all the way afraid of taking a one-size-fits-all approach to this. And therefore, we're doing it sort of case by case, channel by channel, market by market, partner by partner. And that takes a bit of time. But I think it gives a bit of end result. But I think it's still up to the DKK 500 million, the number that we put out there that hasn't changed.

[Lars Topholm, Co]

And just remind me, Anders, are you going to offset this against revenue, or will it be offset against provisions, or how will you treat it accounting wise?

[Anders Boyer-Søgaard]

I think one model can simply be that we buy back inventory from a partner at a discount. And then when the product comes back on our distribution center, then it will likely be fully or partly written down net-net of the silver value, obviously. And then that net cost would go into cost of goods sold in the reported numbers. And then we will call it out as a restructuring cost and include it in the 1. -- up to DKK 1.5 billion restructuring cost. And then I think, as you maybe indicated, then well, there has to be something in it. There has to be a revenue impact at some point of time. And yes, that's the idea. But the 2 won't be linked. But obviously, we're doing this hoping that we can clean up the inventories among our partners so they can start selling out better than what they have been doing in the past.

[Operator]

And as there are no further questions, I'll hand back to our speakers for the closing comments.

[Michael Bjergby]

All right. Thank you very much for this time. I'm looking forward to seeing you on the roadshow in the coming days. Thank you.