Pandora A/S
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Welcome to the PANDORA A/S interim report for the second quarter first 6 months 2018. [Operator Instructions] I will now hand over to Magnus Jensen, Head of Investor Relations. Please begin.
Good morning, and welcome to the conference call for PANDORA's results for the second quarter of 2018, which we released this morning. My name is Magnus Jensen from PANDORA's Investor Relations team. And with me, I have our CEO, Anders Colding Friis; our new CFO, Anders Boyer; as well as the Chairman of the Board, Peder Tuborgh. Before I hand over to Mr. Friis and Mr. Boyer, Peder Tuborgh will share a couple of words on the release sent out this morning regarding management changes.
Thank you, Magnus, and good morning to everyone. I've asked for the word this morning to share some light on the fact that we have decided to change our top management. Anders Colding Friis has been with the company for 3.5 years now, and he has been instrumental in building the strong organization we have today. Furthermore, Anders has been an important part of developing our new strategy, ensuring the future success of PANDORA. That said, we have today decided that it is time for a new set of eyes on the business and to strengthen the execution capability on the strategy. The development in the first 6 months following the Capital Markets Day has been disappointing, and has of course, been one of the reasons for the change. Anders Colding Friis will leave the company on the 31st of August, at which point, we will appoint Jeremy Schwartz in a new COO role. Jeremy and CFO Anders Boyer will jointly serve as Interim CEO until we have made a new appointment on the CEO level. Jeremy has a strong retail background, including several years as COO of the Body Shop. Before handing the word back to Magnus, allow me to welcome Anders Boyer to the management team of PANDORA. I know Anders very well from his time at our board and I'm confident that he would be a strong addition to the daily management of PANDORA. Thank you very much to everybody. I'll be handing back to Magnus now.
Thank you, Peder. I'll now hand the word to Anders Colding Friis. But before I do, I'd like to point your attention to the disclaimer on Page 2. Now please turn to Slide 3. Anders, please?
Good morning, everyone, and thank you for joining the call this morning. The second quarter came in below our expectations. Revenue growth was 4% in local currency and 8% adjusted for the one-off last year of DKK 200 million related to the change in return policy in the U.S. Growth was supported by our new launches. However, for both new and older collections, the Charms category is not increasing to the level we had expected. I'll come back to that later in this presentation. Our eSTORE continued the strong development from the first quarter, while revenue from wholesale declined due to reduction of inventory, acquisition of stores and the one-off in the U.S. We'll show later that the impact of the inventory reduction is significant. Looking across the regions. We saw good improvement in our Chinese business as a result of our targeted initiatives. Italy on the contrary had a weak quarter on the back of a strong performance through many years. The drop in Italy was caused by negative like-for-like figures as well as inventory reductions in the wholesale network. Finally, the U.S. had a strong underlying performance for the quarter. The EBITDA margin was 31.1% and was impacted by the lower-than-anticipated growth in the quarter. Please turn to Slide #4. As you saw Monday, we have decided to adjust our full year guidance for 2018. We adjusted the expected revenue growth for 2018 to 4% to 7% in local currency from previously 7% to 10%. This mainly reflects a weaker-than-anticipated development in Charms, which we expect to continue. We also expect further impact from changes in inventory levels across our wholesale channel, and we've seen a weaker-than-anticipated development in July. We've also adjusted our guidance for EBITDA. This is a consequence of the lower growth, a higher share of revenue from PANDORA Rose and PANDORA Shine and longer production time for our new more advanced products. We now expect the EBITDA margin to be approximately 32% instead of the previously guided approximately 35%. CapEx is still expected to represent approximately 5% of revenue. The number of store openings is now expected to be around 250, and we anticipate a tailwind from acquisition of around DKK 1.4 billion. Looking at the second half of the year. We expect Q3 to be the weaker of the 2 quarters. Growth for third quarter is expected to be below the guided range for the year. The main reason is that the tailwind from acquisitions will be heavily skewed towards Q4, and that we expect an impact from changes in inventory levels across our wholesale channel, which we also saw in the second quarter. Finally, the EBITDA margin in the third quarter is expected to be below the full year expectations. This is due to the lower revenue and because Q3 will be impacted by one-off cost of around DKK 50 million related to the organizational changes we announced earlier this week. Now please turn to Slide #5. One of the reasons for the change in guidance is that we've been too optimistic about the impact of new products in our Charms revenue. Although the new collections have been well received, we do not see a change in the momentum for our Charms category. Charms launched as part of our new collections are performing on par with our base collection of charms. Additionally, we are seeing a change in consumer demand pattern for our retail charm concept PANDORA Moments. Bracelets continue to be in high demand and developing well, but we are seeing a gradual shift where consumers prefer a simpler look with fewer charms on the bracelets. Where they used to wear 6 or 7 charms on the bracelet, they now typically wear 5. This is reflected in our results for the first half of 2018, where we see a continued strong development for bracelets, but a slowdown in Charms. Now please turn to Slide #6. At the Capital Markets Day in January, we talked about the development of a broader range of Charms and Bracelets platforms to support the development of the category and attract new consumers to our brand. Further, we also highlighted the importance of developing the new jewelry categories. In October, we launched the first new platform. We've named it PANDORA Reflexions. The new concept would initially consist of around 20 design variations, and we will add around 40 more during the rest of the year. Reflexions will be launched in all regions, in all concept stores and the eSTORE. We're growing rings, earrings and necklaces, and we'll continue to strengthen the development of these categories, with more products and marketing support. It is worth noting that we have increased the share of revenue from these 3 categories from 21% in Q2 of '16 to 23% last year, and now, 27% in this quarter. This is a testimony to our ability to expand our business outside of Charms and Bracelets, leveraging the brand and our infrastructure. In the second half of the year, we'll launch around 100 new products in these categories. That's up from 75 last year. Now please turn to Slide #7. Due to the more advanced and innovative nature of our new collection, production of new designs is expected to be more time-consuming than planned. To put this into context, the new products have an average production time of around 50% more. This will have a negative impact on our gross margin when we look ahead. Furthermore, we see a high demand for our favorite products, Shine and Rose. This supports our top line and earnings in kroner, but also has a consequence for our gross margin as these collections are less profitable percentage-wise. To keep our industry-leading profitability, we're implementing a number of cost initiatives. Please turn to Slide 8. The DKK 300 million procurement program, which we announced in connection with the Capital Markets Day is progressing well, and we now aim to realize additional savings around DKK 200 million with effect from 2019. Some of the areas where we've identified cost savings are travel, IT and packaging. We're also taking steps to make our organization more efficient by optimizing global processes and freeing up resources. This would include around 400 redundancies, which we announced Tuesday. All of the positions are white-collar. This will provide cost savings of around DKK 150 million from 2019 and onwards. The associated severance cost will be booked in the third quarter, with an estimated impact of around DKK 50 million. Now please turn to Slide #9. Before we move on to the quarter, let me just emphasize that our long-term strategy presented in January remains intact, as are the ambitions presented at the Capital Markets Day. We maintain a strong focus on innovating the product portfolio, strengthening the brand, gaining control of the retail channel and improving our manufacturing capabilities. This is providing a strong foundation for the future. Please turn to Slide 10. Before we start commenting on the financial for the quarter, let me highlight an addition to our financial reporting. To increase the transparency in our reporting and to meet a strong wish from investors, we have decided to include more like-for-like numbers. Starting today, we'll disclose total like-for-like sales outgrowth for the group and for our 7 largest markets. The total like-for-like includes PANDORA-owned concept stores, eSTOREs as well as franchise and third-party distributor concept stores. We will continue to report a retail like-for-like number for the PANDORA-owned concept stores plus the eSTORE, but we'll stop reporting like-for-like for the U.S. as we now report a total number for the U.S. We hope that you will find this information valuable. The total like-for-like number covers approximately 75% of our reported revenue. Now please turn to Slide #11. Revenue from the second quarter was DKK 4.8 billion and increased 4% in local currency compared to the second quarter of last year. Adjusting for the one-off last year related to returns in the U.S., group revenue increased 8% in local currency. As mentioned in the introduction, revenue growth in the quarter was also impacted by a reduction of inventories in the wholesale channel. As you can probably triangulate by looking at our numbers, the reduction is around DKK 200 million in franchise stores. It's a healthy thing for the business, although it obviously impacts growth negatively in the quarter when it happens. Growth was mainly driven by the eSTORE, concept store openings and acquisitions, leading to an increase in revenue from PANDORA-owned retail of 43%. Revenue from wholesale was down 27%. Total like-for-like improved sequentially to minus 1% compared to minus 5% in the first quarter. Retail like-for-like was 3%, flat compared to the first quarter. The EBITDA margin was 31.1% and was impacted by lower-than-expected growth in the quarter. The free cash flow improved to DKK 1.1 billion, and we returned a similar amount to our shareholders in the quarter through our ongoing share buyback program. Please turn to Slide 12. Across most categories, our new product collections performed well. This supports our view that a renewed and more innovative product assortment remains a cornerstone for the development of our business. However, as mentioned earlier, the new Charms have not been sufficient to change the momentum in that category. Bracelets and products in other categories are performing very well, with like-for-like of 30% and 17%, respectively, compared to the same collections last year. Charms like-for-like was minus 10% and total like-for-like growth for the new collections was 2%. As mentioned earlier, the PANDORA Shine and the PANDORA Rose collections are strong drivers of the growth. Together, they now represent around 20% of sales out. PANDORA Shine is already 5% of sales out, while Rose continues its strong growth and now represents 15% of sales out. Please turn to Slide 13. Revenue from Charms was DKK 2.6 billion, a decrease of 7% in local currency. Adjusted for the one-off last year, charms decreased 3%. The category was impacted by the earlier mentioned challenges we see with Charms. Revenue from bracelets increased 10% in local currency, supported by the launch of several new bracelets, and growth in bracelets have, in fact, been in double-digit figures the last several quarters. The other product categories all delivered solid performance in the quarter and increased to 27% of revenue, up 4 percentage points since last year. Rings has improved and demand for Earrings and neckwear remains strong. The 3 categories delivered local currency growth of 14%, 21% and 56%, respectively. Now please turn to Slide #14. Looking at the strong development in the eSTORE, we find it meaningful to increase our ambitions for the eSTORE and we now see revenue from online, representing more than 15% of revenue in 2022 compared to 10% to 15% as represented at the Capital Markets Day. Even though we see better-than-expected performance in the eSTORE, we still also see many opportunities to improve and expand our physical store network. As mentioned, we now expect to open 250 concept stores in 2018. Looking at the period from '18 to '22, we see a potential of up to 1,000 store openings. As illustrated on the slide, around 550 of the 1,000 stores are planned to be opened in wide-spaced areas where are no or very few current PANDORA stores. This includes stores in, for example, China, Mexico and Turkey. Around 250 stores are planned to be opened in semi-penetrated areas, where we see pockets of white space. Spain, Italy and France are good examples of countries in this category. Finally, around 200 stores are planned to be opened in penetrated areas, like the U.S. and Germany. We'll always monitor and reassess closely as we progress to ensure that demand is not already covered by eSTORE or some other concept stores. The same goes for acquisitions of stores, where we continuously evaluate if any given acquisition makes financial sense. Now please turn to Slide #15. Looking across the different channels. We increased revenue in PANDORA-owned retail by 43% in local currency. Retail now represents 57% of our total revenue compared to 42% in the second quarter of last year. Growth was driven by network expansion of 23% and the acquisition of stores, which added another 18%. Retail like-for-like for the quarter was 3%, up from 0 in Q1. Revenue from franchise concept stores decreased 30% in local currency. Adjusting for the one-off last year related to sales return and the acquisition of stores, revenue to concept stores increased 16%. The negative development was driven by a reduction of inventory in the channel and negative like-for-like. Revenue from other points of sale in the wholesale channel decreased 23% in local currency. This was caused by a negative development in the U.S. and in Italy, where we have seen some destocking in the quarter. This channel only represented 16% of sales in the quarter. Revenue from third-party distributors increased 1% in local currency. If we exclude Spain, Belgium and South Africa, where we've taken over distribution, revenue from third-party distributors actually increased by 22%. This was mainly thanks to an improvement in some of our Southeast Asian markets as well as in Russia. Now please turn to the next slide, where I'll talk you through the geographic performance, starting with Italy and China. Following a strong development in Italy, revenue decreased 7% in the quarter. Our brand remains strong in Italy, but a couple of factors impacted our business. Revenue from our concept store network increased 26%, but underlying, we saw a 7% decline in total like-for-like numbers due to the development in Charms. The growth in the concept store network was offset by a weak development in our other point of sales, where revenue declined 39%. This was mainly due to a reduction of the wholesale inventory, lower sales out and store closings. 33 other points of sales have been closed in the last 12 months. To support the development in Italy, we are opening stores in the territories with limited PANDORA presence while also strengthening our growing online channel. However, short term, we expect like-for-like to remain negative due to the negative charm development. This is also the trend so far in the third quarter. Now please turn to Slide 17. Following a weak start to the year in China, we improved our Chinese business in the second quarter. Revenue increased 29% in local currency for the quarter, with total like-for-like improving sequentially from minus 14% to plus 1%. The improved performance comes from a combination of an improved physical network and a strong online performance. We've done a number of things to restore growth in China. We have increased our marketing spend with a focus on building awareness. We have improved our in-store execution with more training, better staff incentives and more product activations. And finally, we are working to reduce the grey market trading. The most important step was taken in July, where we reduced our prices in China to align them with the prices in the near region and reduce the gap to other regions. We're not through the woods in China, but we are encouraged by the progress we've seen throughout the quarter. So far in the third quarter, we've seen a mix development. However, most of the sales in China will be generated in August and September with Chinese Valentines and the launch of the Autumn collection coming up. Please turn to Slide #18. Looking at the 3 regions, revenue from America decreased 6% in local currency to DKK 1.5 billion, primarily due to the U.S, which was impacted by the one-off that we mentioned earlier. Adjusted that, America was up 6% in local currency. The U.S. remains a challenging market, but we are generally happy with the development and the progress we are making. Revenue in the U.S. decreased 12% in local currency, corresponding to an increase of 4% adjusted for the one-off last year. The positive underlying development was driven by our branded network. The total like-for-like growth in the U.S. was 3%. The improved performance was a result of an increase in in-store traffic driven by relevant in-store activities and new products. Other points of sales in the U.S. continues to be challenged. Our business in Latin America continues to be a priority area, and in the quarter, we opened our first store in Argentina. Revenue from the region increased 31%, and now -- and it is now representing 80% of revenues from Americas. EMEA generated revenue of DKK 2.2 billion, corresponding to an increase of 8% in local currency. The increase was mainly driven by store acquisitions, which added DKK 210 million to revenue in EMEA, of which DKK 100 million was related to Spain. Revenue in Asia Pacific was DKK 1.1 billion, an increase of 11% in local currency. This was driven by improved development in China as revenue from Australia declined 15% in local currency for the quarter. Australia was impacted by declining revenue from Charms and a continued decline in revenue from Chinese consumers and tourists in general. With this, I hand over to Anders Boyer, who will take you through the P&L and the balance sheet.
Thank you, Anders, but just before we go on to the next slide, I would like to say that this is obviously, a very difficult quarter for PANDORA. And a much more turbulent start as CFO than I had envisaged. But I just want to say 2 things before going into a couple of more details on the second quarter. I said yes to become the CFO of PANDORA because I do see great opportunities for the company to generate value. And I don't say that as a complete outsider, because as you know, I've been on the board of PANDORA since 2012. The last year has been a difficult period for our investors, and this quarter is no exception. But for whatever it's worth in a turbulent week like this, I want to say that PANDORA is here to stay. PANDORA is not a fad. I know it's a strong statement, but we do or I do -- don't see anything to the contrary when we look into the numbers. Absolutely, yes, we have our share of struggles and we need to execute faster and execute more effectively on our strategy, but when we look behind all the numbers, our total like-for-like was minus 1% in the second quarter and minus 3% in the first half. That's a negative number, but things are not falling apart. We have a strong brand, we have strong manufacturing capabilities, we have strong innovation capabilities and we have a strong global network. And that strong platform should come back on a track where we create shareholder value, including increasing the revenue that we have in the other categories. And secondly, and much more concretely, I hope that you appreciate that we, today, also give you the total like-for-like numbers, not just on a group level, but also on the 7 major markets. And we hope, as Anders said, that this will help you better understand the development in our business. But we also see that we will give you some additional insights to the DSO development and hopefully that also mitigate or explain some of the concerns that you have understandably had on that KPI. If you then go to Slide 19 on the EBITDA margin. We are building the EBITDA down margin bridge in a different way than in the prior quarters because we are trying to reflect the impact of the actions that we actually take rather than just summarizing what happens in the P&L line by line. And again, we hope this gives you better insight into the dynamics of the transformation that we're going through the dynamics of our business. I think the bridge is pretty self-explanatory and several of the components you already know from what we talked about at the Capital Markets Day and what we talked about at the last quarter, such as the metal mix and the higher O&O share. But as you can see, officially, I would like to say the DKK 200 million one-off in the second quarter last year obviously not just impacts the top line, but also the EBITDA margin year-over-year. Those result in some impact in the quarter for the longer production time on the new products. But it's in the quarter, as such, it's not a large number. The impact will be higher and more visible as we get into the gross margin in the second half of the year. I also would just like to highlight that the second quarter EBITDA margin includes a negative impact of close to 1 percentage point related to the ongoing acquisitions and the inventories that we're taking over at wholesale prices. And the size of that impact is obviously directly linked to the level of forward integration that we're doing in any given year. And therefore, it will be a relatively high number in 2018. Another thing I would like to mention while we are on this slide is that we, obviously, between the board and the management regularly look at the KPIs that we use to drive the business. And one of the key KPIs is, obviously, the EBITDA margin. And we are looking into whether that's the right metrics to use to measure profitability. We are considering whether EBIT might be a better metric as it better captures value creation, not least considering that we do have quite some CapEx levels in the business. And EBIT, when we come to 2019 going onwards, will also be subject to less accounting noise, if you like, because next -- next year, as you know, IFRS 16 comes into force. We haven't concluded anything yet, but I just want to say this, so it does not come as too much of a surprise, if we decide to change EBIT as the key -- use EBIT as the key profitability measure next year. If you then go to Slide 20, you can see the free cash flow in the quarter was around DKK 1.1 billion, up from DKK 0.6 billion in the second quarter of last year. And the increase was mainly due to more favorable movements in our working capital compared to last year. And that gives us a cash conversion in the quarter of 91% and 59% year-to-date. As you can see, the trade receivables was around -- roughly unchanged at 5.9% of revenue, but if you look at the days sales outstanding instead, we do see an increase from 39 days last year to 59 days this year. And I think it's worth spending just a minute on that development on the next slide, Slide 21. As you can see here on this bridge, there's a number of building blocks in understanding the 20-day increase from last year. DSO did increase -- decrease from 66 days in Q1 of this year down to 59, but that doesn't change that year over year we have a 20-day increase. First of all, if we look at the DSO calculation, the DSO calculation, as the way that we do it, is supposed to show the DSO development in the wholesale channel. But the fact is that some of our retail revenue actually carries on receivables, not least related to the eSTORE. And this overstates, if you like, the DSO as the retail receivables are included in the numerator in the KPI, but not in the revenue in the denominator. And when you look at it year-over-year, that's 3 days of the increase, and when you look at the 59 days as such, it's 7 of those days is due to this abnormality, if you like, in the way that the KPI is calculated. Secondly, and I think you know that already, the acquisition of our Spanish distributor had an impact of around 4 days. Thirdly, we did see an increase in our overdue trade receivables, and that amounts to around 8 days year-over-year. It's not an issue from a bad debt perspective. We don't see a risk. But it's surely an issue from an operational point of view, and we will increase our focus on reducing overdue receivables. And I would say that, at the 8 days increase year-over-year, that do include an impact from the U.S. value. Some of you probably know that we implemented a new ERP system over the summer, and a couple of days, 3 to 4 days of those 8 days impact is related to that transition to a new ERP platform. And with that, I will hand it over to Anders for some closing remarks.
Thank you very much, Anders, and please turn to Slide #22. So if we summarize the quarter, revenue grew by 4% in local currency and delivered an EBITDA margin of 31.1%. We see improvement in the business in China and the U.S. However, we've seen Italy slowing down in the quarter. And looking ahead, we will launch a new Charms bracelet concept in the second half, the PANDORA Reflexions, while we increase the focus on rings, earrings and necklaces. At the same time, we do maintain our focus on cost to protect our profitability. So thank you very much for listening, and we will now take questions. Operator, please.
[Operator Instructions] Our first question comes from the line of Michael Rasmussen of ABG.
So my first question goes on your Charms. What makes you so certain that this category will recover growth-wise? I mean, looking beyond the launch of Reflexions, are you considering also maybe changing the prices? Or do you need to go back and look at some of the designs potentially? Then my second question goes to Anders Boyer directly. Anders, welcome on board. Now you have a deep dive into the business. What surprised you more -- or most both kind of from a positive and a negative side? And potentially, what do you think working capital as a percentage of revenue should be longer term in PANDORA, please?
Thank you very much for your questions, Michael. I'll do the first one and most obviously, Anders will do the second one. If you look at Charms, I think that the prerequisite to see a positive development in Charms is that we see a development in the sales of Bracelets. So Bracelets is the carrier, and then we add Charms. I actually think it's encouraging to see the development in the bracelets. And clearly, we've seen this and you've also seen this that over the years, we have seen it slowly decrease if you look at the ratio of charms per bracelet. We've actually done some work over the past few months to understand this development better. And what we see is that, where consumers they used to have a preference to have more charms. Let's just take some numbers and say, 6 or 7 charms on the bracelet, it's probably more around 5 now. So simplicity is something that consumers are looking for. So the reason why we feel comfortable and confident on our development in Charms is that we see a positive development in Bracelets, which is a prerequisite for the charms. But we just have to accept and adapt to a point where we see less charms on the bracelet. I think that when we look at the new products that we are launching, the new Reflexion -- PANDORA Reflexion concept that we are putting into the market in October, it's also about broadening our spend. We talked about that at Capital Markets Day, but we see an opportunity of also capturing new consumers into the brand, and that is something that we expect to do through that. And then to Anders.
Thank you for the questions, Michael. I'll start off sort of in the end about sort of the working capital. So I think it's a day -- working day 6 in the company at least in the operational role and I think it's too early for me to comment specifically on the net working capital target. I think the 15% target that we've laid out at the Capital Markets Day a long time ago is a good yardstick to think about -- when we look ahead. I think another angle to -- if you think about cash, I think we will obviously have to all the time revisit and think about how we use cash in the company. Both to open new concept stores and forward integration. And that we will do very carefully and we're already doing that. We will continue obviously to do that, whether that spend of cash makes sense. On the sort of pluses and minuses, I will say, in general, of course, I've been on the board since 2012, so I have -- obviously did have quite some insight into the business already. So I wouldn't say I have been either very positively surprised or very negatively surprised because actually I did listen in the 6 years I was on the board if that answer kind of makes sense to you.
And how many charms should one expect -- or do you expect consumers to put on each Reflexions bracelet, please?
That's a very good question. And then the obvious answer is as many as possible. But I think that what we look at is something which would be similar to what we see in this study we did. So less, it can be down to 2 for some consumers. Others, more. We also still see consumers who are buying a full bracelet of charms, so it's not like we're seeing everything moving in one direction, but we see the trend going in the direction of less charms per bracelets.
Our next question comes from Zuzanna Pusz of Berenberg.
I have 2 questions, please. First of all, on the comments regarding the inventory level in wholesale. I was just wondering, what has changed since Q1 when it comes to the inventory levels? Because I think I remember in Q1 when we were discussing the wholesale channel and potentially the fact that maybe the inventories were too high, which is why some of the product was ending up in the grey market in China. If I remember correctly, we were reassured that there were no issues with inventory. I was wondering what has changed? I mean -- and also, what is the situation by region, I mean is there 1 specific region where the inventory level is the highest? And also, what kind of measures you may take to address this. I mean, shall we expect an inventory buyback? Or any color would be really helpful. And also, secondly, on the midterm targets that were announced at the Capital Markets Day. So there was a 35% EBITDA target, which if I remember correctly was meant to be the kind of average profitability we could see over the next 5 years. So how should we think of it right now? Is that the target you will try to return to in the next 5 years? Or -- I mean, is it even still, I mean, sustainable level of profitability? Any additional comment on that would be also really helpful.
Thank you, Zuzanna, very much for your question. If we look at the development of inventory, you can say, we have seen a reduction -- I think you can also, now with the like-for-like number, triangulate that and see this is just a reflection on where we are. If you look at why we see this, I think there's a couple of things that you -- that is driving it. One is clearly the fact that we have a negative like-for-like number in the channel and you would understand that. The other thing, which is important is, as we've also stated in the announcement today, we've actually cut our lead time from the manufacturing facilities already now down to the 4 weeks that we actually expect it to reach at a later stage. So that, of course, gives our partners confidence that they can get inventory when they need it. And you can say, we want our partners to have as much inventory as they need to make sure that they don't have out of stock situations, but not more than that. What we are seeing, we just say with the guidance change we made on Monday of this week, behind that is also an expectation that this will continue during this year. And then I think the EBITDA, maybe Mr. Boyer will take that.
Thank you for the questions, Zuzanna. On the -- I think the future profitability, looking at '19 onwards, this is supported by a number of factors. And we do see a way back to an EBITDA margin of around 35%. But of course, it goes hand-in-hand with returning to 7% to 10% growth and not least getting to a flat to positive like-for-like. But let me just take you through some of our thinking on the margin from 2019 onwards and how we get from 32% this year versus the 35%. And it's -- and I apologize for maybe a little bit long explanation, but there's no sort of single big movements in it, but a number of smaller components. So number one, as you saw we announced earlier this week, that we're reducing the number of open white-collar positions in the company with 400 people. And that gives DKK 150 million or 60 basis points or so marketing support getting into next year. The procurement program that Anders talked about just early on, that's another point, 8 percentage points or so as a run rate when we get into '19. Then number three, obviously, the destocking, the inventory impact hits quite hard in the margin in 2018 because it just flows through with the gross margin directly to the bottom line. And that will have a sort of kind of one-off impact, I don't know if that's the right terminology. But it hits the margin and it won't hit the margin next year. Then you should expect that we will have less headwind, maybe to the tune of 50 basis points from less inventory impact following acquisitions of franchisees going into 2019. The DKK 1.4 billion forward integration impact is quite a high number. And I think we should expect that, that number should -- it will be lower next year. And then we will obviously have -- we will have a negative run rate impact from the higher production time on the new drops in 2019, given that we will see a bigger impact in the second half of '18 and that obviously has a run rate negative impact year-over-year getting into 2019. But we do have a number of actions in place to offset that run-rate impact getting into next year. So that's the 5 sort of components of it. But then number six obviously is leverage. And leverage is an important thing, and we do see that we have the infrastructure in place to grow. And the way to think about it is, at full leverage, then at 1 percentage point of top line growth gives us 0.4 percentage points or so on the EBITDA margin. And then again, I apologize for the longer explanation, but I think this is important to all of us, we do see a few other opportunities that we look at, not least on the cost side. And it's nothing dramatic and single big buckets on the cost side, but we do see a number of things that could help us support the margin onwards and that could also include further opportunities on the IT side. That's a rather long explanation, but again, I think we have to underline that obviously the risk in the long-term guidance has increased. But when we look at all the things that we are doing, we do see a way back on the margin to the territory that we have guided back at the Capital Markets Day.
Okay, that's very helpful. So just to clarify one thing, because I'm not sure I understood it correctly. So can we -- do you expect to return to a 35% EBITDA margin next year? Or is this something that we should see as a target out in 5 years? I just want to clarify because I thought that the initial plan was to keep on average the profitability at 35%? I want to make sure whether right now it's to return to 35% in 5 years basically?
Yes, 2019. That's the answer -- that we see a way back into that around 35% EBITDA margin in 2019.
Our next question comes from the line of Lars Topholm of Carnegie.
There's a couple of questions on my side. So you mentioned in the report that you have seen a weak July. I just wonder if you can put any additional color on that? Is that along the same trends you have observed for Q2? Or are there any specific markets that have changed the direction -- or how do you see that? And a second question goes to the increased production complexity because our impression is that a number of the best-selling SKUs are in order backlog. So I wonder if you can comment on that situation? I mean, not only the margin impact, which obviously is from products taking longer time to produce, but also the whole supply chain? To what extent do you believe a lack of being able to supply these products have hurt your top line? And what the supply situation is today?
Thank you very much for your questions, Lars. When we say July, it's of course, and the reason why we do that is because that's also part of what we have evaluated when we look at the full year here. So when we say that, it is slightly slower than what we saw in the first half of the year. At the same time, we also have to say July is one of the smaller months in the year for PANDORA, and we get into more activities and also bigger month in August and September. So it's just telling you also that's what we see, but also that has been taken into account when we have looked at our expectations for the full year. And when we then look at our -- it's correct that we always have a big -- a bit of backlog issues in PANDORA, but we have had some extraordinary issues. And we had some of, as you also say, which is correct, a couple of the bestsellers, which has been out of stock for a period of time. I think it's important to say, when we look at now, but actually from the mid of June, we've got -- we've gotten to a point where we have solved that. We are in a very, very good state when it comes to supplying, and then securing -- to securing the orders. So that has been -- that is a lot stronger than what it was there. If we take one of the products which has been doing very well, the dream catcher, personally, I must say I had big hopes for that and so did a lot of people. There were some of the regions who actually ordered too little at the beginning, so that's been part of the challenge we have seen.
I have some more questions, but I'll just jump back into the line. And Anders, good luck going forward.
Our next question comes from the line of Henry Yu of Morgan Stanley.
A couple of questions from me as well. First of all, on the increased production time. We understand that it has increased quite a bit because of your new products. But do you expect the production times for these new products to come down over time? And if so, what is the time horizon for that? And just the second question on your eSTORE as well. And so yet another very strong quarter for eSTORE, but in terms of the markets where you recently launched the eSTORE, can you give us a better indication of what kind of impact that it has had on your performance for your physical store network?
So we'll try to do that. If we look at the increased production time, what is behind it, to give you a little bit of flavor, is look at the dream catcher, if you follow our assortment, that's a good example of a product where there are more parts. So it's not more complicated. There are just more parts that need to be assembled. And honestly, we have underestimated how much time that will take. There's a learning curve and that's also why it's taking us a while to find out what is exact production time of those products. In the assumptions that Anders also -- Anders Boyer, now there's a lot of Anders in the room. Anders Boyer alluded to, we have taken the assumption that also in the coming years, we expect to have a higher production time on the new products. We need to stay relevant for the consumers, and we believe this is one of the ways to do that. And then we have our efficiency programs, which is to offset that and Anders also talked about that. If we look at the eSTORE, actually, what we see in general is that the eSTORE and the physical stores work very well together. So in markets where we open a new eSTORE, we see a good ramp up. It is very different from markets. We have markets with a high double-digit eSTORE rates and we have markets, as we've talked about before, like Italy, where it's relatively low. So there's a very big difference depending on how big the penetration in eSTORE generally is. What we see is -- and I think that's important, we've seen that in the U.S. We've also seen that in China. When we have areas where we don't have stores and we open a physical store, we actually increase our eSTORE revenue. So I think the important thing for me to say is that eSTORE and physical stores work very well together.
Our next question comes from the line of Hans Gregersen of Nordea.
If we look on Charms, it's a little bit difficult to gauge this from your report, but is it fair to assume that the new charms is actually underperforming on the like-for-like basis the existing platform? And what sort of changes or expectations can we have to or when that the charm trend can be stabilized? That's the first question. Second question goes related to the first one. Financial engineering, in terms of buying out stores, to what degree can that compensate for, let's say, a revenue pressure in the charms category?
Thank you, Hans, for your questions. When we look at our Charms and how it's developed, the assumption in our strategy -- or not in the strategy because that's actions but in the objectives we've set for our strategy was that we should see an uplift in Charms based on the launch of new products. And we haven't seen that. So if you look at the numbers, it is actually the same development we had on the new charms as the existing, and we had expected more. And then if we look at the acquisitions. When we look at acquisitions, what we do is that we look at them one by one, and that's something that we do Anders and I together, to evaluate whether we think that, that's a good process and if it becomes a bigger acquisition, we always, always have the board onboard on that. So I think we won't accelerate anything. We'll look at the opportunities which are there and do the ones which are really supporting of our financial development.
So Anders, just going back to your first answer. My question was rather than what the strategy plan was saying. What do you see now? And going back to my second question is, I understand your process or how you evaluate the acquisitions. But do you think that, that -- how much revenue decline can we -- is a likely scenario in Charms and to what degree can you compensate that by financial engineering? That is essentially the question.
Financial engineering is not something we do. We run a business and the important thing is that everything we do to run the business is supporting it. What I said about the charms is that the development we have seen on the new charms is the same as the existing. So we haven't seen the new charms do better. They're just doing as much as the existing charms. So that's the answer, at least I tried to convey. And that -- and we will continue looking at franchise acquisitions, but only do the ones, which are the right ones. And so we are not going to accelerate that to compensate for something. We look at this and we can see we have a lot of interest from franchisees and we take the best ones. But we will also get to a point where it will probably slow down, because we've taken the best ones. So that would be my answer to that. I hope it helps.
I have a quick follow up on that, Anders. Do you see the price you're paying for stores coming down given, let's say, the weakened market outlook?
The answer is yes. But clearly, the -- any acquisition is based on the expected like-for-like development in the country and in the store. And when you see a downturn, clearly, that has an influence in the price.
Our next question comes from the line of Chiara Battistini from JPMorgan.
I have a couple, please. First question on -- going back to your medium-term guidance and you mentioned to reach the 35% EBITDA margin, you need to also the top line to go back to 7% and 10% and now you're saying actually the new charms are not showing a positive inflection versus the existing portfolio. So what is giving you confidence that you can reaccelerate your top line next year to 7% to 10% also in the context of lower contribution from store openings and also lower contribution from acquisitions? The second question is on your marketing spend. And I was wondering, how come was marketing down in Q2 given that Q2 was the big quarter for the launch of Shine? And how should we be thinking about marketing spend for this year and next year, please?
If we start with your first question on the long-term guidance and what is the drivers behind that. I'd say there are 3 -- 3 main drivers of our top line in PANDORA. One is the network expansions. The other one is acquisitions. And then of course, as I think Anders alluded to before, a prerequisite for us meeting the long-term guidance or medium term, whatever you want to call it, is clearly that we see an improvement in the total like-for-like numbers. I actually find it, even though we didn't get to the number we had hoped for, it is encouraging to see the development we had from Q1 to Q2. But we've seen an improvement, and that is clearly driven also by the fact that we've launched the new products. But we do need to see a stronger development in Charms. Now of course, we have so far innovated very much on the Moments platform. But in October, we launched a new platform, the PANDORA Reflexions. And that is also part of driving forward the development on Charms. When we look at marketing, we have spent the money behind the launch of Shine and a lot of that was actually already in the first quarter of this year. So if you remember, we had a slightly higher spend in the first quarter. We are still keeping the same level of marketing spend, 9% to 10% as we've said before. As you know, over the next 5 years, according to our strategy, we expect that number to come down a little bit, but that's because we transform from wholesale to retail revenue, so the absolute number will still increase.
Maybe just 1 follow up on the marketing spend this year, a 9% to 10% reiterated, but on the top line that is much lower than what we were planning at the beginning of the year. So there's no change there in terms of percentage?
No. Actually, I can say that we've been running as part of our procurement program, and I think we have that in one of the slides for today, we've had a consolidation of media agencies and that means we become more efficient in the marketing spend, so it means that we'll get more activities for the same money. And thereby, we also -- or even a little bit less money so that means we'll keep ourselves within that framework.
Our next question comes from Anne-Laure Bismuth of HSBC.
I have 2 questions, please. Just coming back on the marketing expenditures. So given the weakness in the charm category and the focus or so on the other product categories, will this -- do you think that it will not require more investment to raise the awareness on the other product categories that you will need to invest more money in marketing in order to raise the awareness on these other product categories given the weakness of the charm category? And my other question is about the gross margin. What was the split between the positive impact from channel mix and the negative impact from metal and product mix in Q2? And how should we think about the gross margin evolution for the full year?
I'll do the first one and I think Anders, he will do the second one. If we look at our marketing expenditures, you're actually touching upon a very important part, which is, of course we look at how we deploy our marketing. I think that, at least our evaluation is, that we have the right funds. And as I mentioned before, we are also becoming more efficient in the ways -- in that way, we actually can see we can increase the level of marketing without increasing the spend. And we are deploying more on the new categories. I think what is important to also understand is that we are driving the brand PANDORA. The awareness on Charms and Bracelets for PANDORA is super high. We actually are known for those categories, so we do deploy relatively too earlier a larger part of our marketing spend towards the new categories to drive that also in the future. And then I'll leave the other question for Anders.
Yes. Thank you for the question, Anne-Laure. On the gross margin, I think the first part of the question was related to specifically the second quarter and the bridge that we had in the investor presentation. And in -- I know we have lumped it together in the bridge but the bigger part specifically in Q2 was related to the sort of metal mix and product mix and the smaller part on the production time as such specifically in the second quarter. I think you should expect to see gross margin declining a bit in the -- compared to the first half in the second half of the year due to the higher production time. But obviously, O&O, on the other hand, fills up more in the second hand, given the nature of the seasonality of O&O. But still, you should expect gross margin to go down a bit in the second half.
Maybe look at the metal mix and the difference between the Rose and the PANDORA Shine. We had anticipated with the launch of PANDORA Shine where we're very happy with the results, that we would see a little bit of trail off in PANDORA Rose. It's actually very encouraging to see that, that has not happened. So we've actually seen that strengthened, so the fact that we have now more metals and more color in the stores seems to support each other.
And our next question comes from Poul Jessen of Danske Bank.
Just the first question if Peder Tuborgh is still around?
Yes, he is.
And then my question about the search for a new CEO, but also new board members about the strategy, which was announced in January. Is that written in rock? Or will that, given new board members and a new COO and a new CEO, will that then be up for revision within the next year? Or should we look at the current strategy as the one which will also be present in 2 or 3 years from now? That's more or less the question.
Well, the short answer to that is that we, as a board, believe strongly in the strategy and the direction that we have set out, as I also explained at the Capital Markets Day. What we need to see is probably on some areas a different approach or balancing of some of the strategic components. And then it's very much about execution and understanding the transition period that the strategy actually is imposing on us. But the strategy, we are behind the strategy, and we can see also that underlying, you can see that even in the Q2 report, that underlying the strategy is working; we just need to have more speed on it and probably have slight adjustments in how we execute some of the components.
And then the second question that's more on the operation. So the guidance on the second half, you said that the forward integration will be skewed towards the fourth quarter. Is that distributors that will come in or is it more forward integration of buying franchisees?
The short answer is it's a forward integration buying franchisees. And clearly, when it comes to distributors, that's bigger chunks and that's a little bit difficult for us to predict as closely time-wise. But we see when it runs out, but this is forward integration of franchise stores.
Our next question comes from the line of [ Moser Spencer ] from [ WWT ].
I had a quick question about the efforts that you're making to reduce the problems with the grey market in China. If you could just give us a little more color on that. You mentioned lowering prices and increasing marketing. Also, I was wondering if you're present on any multi-brand e-commerce platforms in that country? And very quickly on your -- the decrease in the number of charms on the bracelets. You mentioned that you've conducted a study. Did your study turn up any information like perhaps that other brands are selling charms that people are adding to your bracelets?
Thank you very much for your questions. If we start with the grey market in China. Marketing is more an opportunity we saw in China to support the development. And we've actually seen that working well. So it has not really anything to do with the grey market. It supports the brand overall. What we've done in -- and we've done that methodically over a longer period of time but also in the quarter is that we have closed down and clamped down on infringing online listings and closed thousands of those. And that is something we'll continue to do. I think the most important activity or action we've taken in terms of capping, we'll never remove it, but capping the grey market in China is that we've lowered the prices. That's not seen in this quarter, that will be seen in Q3, because that was implemented in the month of July. And then we have -- when we look at the multi-brand e-commerce, we don't have any multi-brand e-commerce unless you see Tmall as multi-branded, and it is not. So we don't have that in China. If you say then, are there multi-brand or any other sites, that's exactly the challenge we have with the grey market, that PANDORA is sold across a lot of different platforms. We only sell, at this time, on Tmall and through our own eSTORE in China. And then finally, on the study where you asked, whether there were competing platforms or competing charms, which were ending up on PANDORA jewelry, and the answer is very simply, no, we haven't seen that.
And our next question comes from Klaus Kehl of Nykredit markets.
A question towards the guidance for the full year. And you say you expect a 4% to 7% growth in local currencies for '18. But if I do the math, then at least forward integration will be around 6%. And new stores ought to be around 3%. Then we have an impact from the like-for-like growth on group level and then there will also be some inventory reductions. So just to get a feeling for what you're thinking is, would it be fair to say that the new guidance is based on a negative like-for-like? Or yes, what's your comments around that?
Yes. We're looking at each other, but you're welcome to answer.
Anders will answer it in any case. No matter who -- I can -- this is Anders Boyer and thank you for the question, Klaus. Obviously, it depends on the answer whether you look at the high end or the low end of the guidance range. But if you look at the sort of the 4% in it, then you -- in that scenario, if we end up at 4%, you should probably assume that the forward integration will be a little bit less than the DKK 1.4 billion guidance. Obviously, there's always uncertainty to that net number as well. But then if you, in that calculation, also you build in the DKK 200 million one-off in this quarter that you know about and some destocking. You should probably assume that in the second half, you would have a somewhat low mid-single digit negative like-for-like in that scenario. So we came out with an average in the first half of minus 3% total like-for-like. And then in that lower end scenario of the range, it will probably be to the tune of minus 5%, and then if we do the same math on the 7% range, you'll probably get closer to that the -- that implicitly means a like-for-like in the second half -- total like-for-like in the second half of -- to the tune of 0.
And then just a follow-up. This forward integration so it means the DKK 1.4 billion, it's not a done deal? It's -- you need to do more acquisitions in order to reach the DKK 1.4 billion, is that correctly understood?
The bigger chunks is done. I think given that we are in month 8 that the bigger part of the uncertainty is also about exact timing. When do you actually do the closing? And take -- is that month A, B or C. But the bigger part, we are obviously in dialogue already, et cetera, it's just a question of when do you sort of get to putting pen to paper and make the closing account.
And our last question comes from the line of Hans Gregersen of Nordea.
In terms of the trade overdues, can you say those 8 days in terms of credit risk, how big is the amount? And then going back to the previous questions of out of stock, do you have any out of stock issues in Q3 as of now?
If we do the second one, and then Anders can go back to the first. The answer is yes, we always have a bit of out of stock. But what I said before was that, actually, when we look at our inventory situation and our ability to deliver, we are in a very, very good state right now. I think, I talked to Thomas Touborg, who's head of that part of the operation, the other day, and he was very happy and he said that it's the best he's seen for quite a while. But it doesn't mean that we don't have out of stock situation in individual stores and it can be 1 item, which is a little bit delayed here and there. But in total, we are a very good situation.
So the example you gave about another product being out of stock, dream catcher or whatever you call it, those are general out of stock issues, you don't see anymore?
No. You can say, that specific issue has been solved. But we had a little bit of a backlog and that's absolutely true. I think the market, which was most affected by it, was the U.S., where we have seen a number of reasons. Also, a little bit low forecasting on the some of the products because that's also part of it where we saw they have been affected more than anybody else. If you then ask how's much has that affected the business, I would say, not a lot, because I think it's actually something that we are happy with in the quarter. We saw a 3% positive like-for-like number totally in the U.S. market. So we've generated a lot of traffic to our stores through the new product, and the good thing is that our store staff have been able to convert people and convert them in other products. And hopefully, then, they'll come back as we now have the new products in stock.
And the other question, Hans. From a credit risk perspective, we don't see a risk on the overdues. That's the short answer. So historically, also we've had as I understand and I'm looking at my Investor Relations colleagues here, very lower, very, very low bad debt expenses and that doesn't change.
But the question was, I mean you mentioned there was 8 days, or you said 3 to 4 days related to the new IT implementation so let's take 4. My only -- the simple question is, how big is the amount of those 4 days? How big is the amount equal to?
I'd say that's -- I'm just doing the math on why we think -- if that's 7% of the sort of the total days, if you like, and if I remember right, we have a DKK 1.1 billion in trade receivables in the balance sheet and I can look that up while I speak, so that will translate into, let's say, DKK 75 million.
And I'll now hand back to our speakers for the closing comments.
Thank you very much operator, and thank you to everybody for listening to the call today and for your questions. Have a great day.