Pandora A/S Ord

Welcome to the conference call for Pandora's Q3 results. I am Michael Bjabri from the Investor Relations team and I am sitting in the Copenhagen head office with the usual team, strictly at least one meter apart. Our CEO, Alexander Latsik, our CFO, Anders Boyer, and the IR team, Christian Müller and Mikkel Hansen. There will be a Q&A session at the end of the call. As usual, please limit your questions to two at a time and get back into the queue if you have more questions. Pay notice to the disclaimer on slide two, and we can jump directly to slide number three. Alexander, please go ahead.

Thank you, Michael, and good morning, everyone, and thank you for joining the call today. It was an eventful last week where COVID-19 escalation led to new significant restrictions on our store network. Most important for us, Belgium, France, and the UK ordered our stores to temporarily close. We will come back to this, but I want to start somewhere very different. The key takeaway should be that Pandora is turning around. We have not yet fully turned around, but the progress is undeniable despite the current trading conditions. We are focused on building and investing in our brand momentum while at the same time, obviously navigating the pandemic. Five out of our seven key markets generated positive sell-out growth in Q3. The only exceptions were France, which was flat, and China. Our online business almost doubled and accounted for more than 20% of sales in the quarter. Very strong numbers compared to historic performance. On top of this, we saw that the trends from second half of Q3 continued into October, where we achieved plus 8% sell-out growth. This gives us confidence in the brand development, but we are also realistic. The recent increase in C19 infections and new lockdowns create new challenges, which we have to manage carefully. Next slide, please. When I joined Pandora, we structured program now around three pillars, brand relevance, brand access and costs. Today, we yet again increase our cost reduction ambitions, increasing the annual run rate target with 200 million kronor to 1.6 billion. This is a significant achievement and it showcases the right mindset and culture in our company. With increased cost targets also comes increased restructuring costs. But I'm very pleased that we can confirm today that the restructuring part of Program Now will be finalized in 2020, despite the disruptions from C19. There will consequently be no restructuring costs in 2021. Our reorganization is showing great results from faster decision making, best practice sharing and closer collaboration. Amongst other things, it's improving conversion rate both on and offline. This is both about operational efficiencies, improving simple things like efficient merchandising, smart media choices, optimizing stock availability, but it's also about securing sufficient growth initiatives for the future. In the last quarter, we saw gradual recovery from C19 and we ended the quarter with only 5% of stores being temporarily closed. However, the recent surges of C19 has changed the trajectory. The latest government guidelines entails that we will have 18% of our stores temporarily closed on Thursday. This is clearly a violation of our financial guidance assumption of less than 10% of physical stores to be temporarily closed for the rest of the year. Anders will come back with more comments on the financial guidance. But it should be clear to everybody that this escalation makes trading in November and December more unpredictable. The important thing to keep in mind during these unusual times are the following. In Jan and Feb before the first wave of C19 and in August through October before the second wave, we saw a very positive sales development. C19 will create noise for a while, but it doesn't change that we're turning around and that the underlying business is improving. Please turn to the next slide. When COVID-19 escalated in March, we focused on ensuring cash, cost and balance sheet. This work became the foundation for commercial comeback, leveraging our scale and financial health. This has been key to our performance in Q3. We showed agility and readiness in the reopening phase, motivated store staff, fresh product assortment, healthy inventory management, and a consistent media push. With these deliberate efforts, we have enjoyed a stronger share of voice in media as well as in mall traffic. But Q3 is already history. We are going into the peak months of Q4 where the store operations are a big question mark and the pressure on the open stores will be at a very different level. This is when our long preparations will come to the test. More comments on this on the next slide. Black Friday is close and kicks off the peak trading season. At this time of the year, our stores are normally completely full of customers and we typically have queues outside the stores. These are the conditions that we have to combine with social distancing and an escalation of COVID-19. We have the liquidity and balance sheets firmly in place for long and sustained period of lockdowns, and we have the financial firepower to execute when commercial opportunities arise, just like we did in the first half of the year. We have introduced 11 new initiatives to ensure a safe and efficient customer experience. These initiatives can be divided into four different objectives. The first one is reducing the transaction time. Average transaction time in December is normally shorter than other periods throughout the year, but we need to cut this even more. Increasing selling space, moving traffic from off to online, and finally flatten the peak trading periods. One example is the implementation of video-based selling. The customer connects with a live Pandorian in one of our dark stores through a new chat and virtual selling platform. It's a technology that allows customers to get the needed advice as well as closing the deal. A great example of how digital tools can support both safety and revenue. We are prepared for Q4 with pragmatic initiatives but the uncertainty is still significant. This is why we also have to be agile and flexible as the trading unfolds. Please turn to the program now section starting on page 10. The slide shows the quick overview of program now. The initiatives were rescoped earlier in the year. We have seen significant results from better use of data and personalization. I'll come back to this in a minute. In China, during Q3, we concluded a revamping of our management. I see the turnaround in China happening in three major steps. The first is to get a new leadership team in place. Secondly, to secure the daily operations including getting a robust infrastructure in place. And finally, to develop a strategic roadmap on how we address the underlying issues. We are in a significantly better place for point one and two. The work on phase three has to a degree been done in parallel. Specifically, we have concluded on the brand position. We are now developing execution to make this come alive. As I've said before, this will be a multi-year journey, but so far we are progressing at a very good pace. Please flip to the next slide. A few words on the retail metrics, as this is important to understand the C19 dynamics and the drivers of our performance. Generally speaking, the basket has not changed much compared to pre-COVID. Average selling price and units per transactions remain fairly stable, but we see large changes in the traffic and conversion. Traffic is almost down 50% in the physical stores, With some variations across markets, the traffic is not surprisingly of much higher quality as there are fewer casual browsers. At the same time, the organization is doing a great job converting this traffic. In some markets, the higher conversion rate is in fact fully offsetting the lower traffic. In the US, sell-out growth was positive in the physical stores. Online traffic is up almost 30% and the conversion rate is similarly strong, creating the significant growth. Some markets, like UK, where the consumer is used to shop online, the channel grows at triple digit rates. At the other end of the spectrum, we have Italy, where online growth appears more normal and consumers are showing a preference for physical shopping despite COVID. One final comment is that the online performance has improved towards the end of October as the physical stores were increasingly impacted by restrictions. Moving on. This is an important slide for me because it gives you concrete data regarding the health of the brand momentum. We're all trying to separate underlying performance from COVID-19 effects. The sellout growth per key market shows a picture that cannot be argued. Something has clearly happened to the brand as you see its broad based growth. Three of our largest markets, US, UK and Germany generate very solid double digit growth. This is delivered in an environment where we face various restrictions in terms of physical stores. With France showing 0% sell-out growth, six of the seven key markets are either flat or in positive territory. China is clearly underperforming, though this is in line with our original expectations pre-C19. It may look strange that the group is declining by 2% when these seven markets are performing so well. This is partly explained by LATAM, where most stores have been closed throughout Q3. LATAM dragged the growth down by 3 points, and we also saw other large markets outside of the top 7, such as Spain and Canada, being severely impacted by C19. The combined sellout growth for the top 7 key markets alone was plus 7%. Finally, it should be noted again that the performance has continued throughout October, which was plus eight. This is clearly strong performance, and we are encouraged about it. We are aware that it does come on top of a relatively soft comparison base from last year, and there's clearly more work ahead to ensure solid and consecutive performance before we finally declare that program now is finished. Next slide, please. A clear driver behind the performance in Q3 is our organizational effectiveness following the reorg we started in April earlier this year. A very good example is the digital hub that has been instrumental in developing and implementing new initiatives to manage COVID-19. By establishing the hub, we have invested in significantly stronger capability as well as expanding capacity. The first tangible evidence can be seen in the new omnichannel features, which we've developed at record pace as part of our Q4 fast response efforts. Another important change is the new global business units sitting under our CMO, Carla. They will be instrumental in both defining a new innovation strategy as well as developing a 360 marketing program to go along with that. Finally, they own the end-to-end view for the various platforms to secure growth both in the base and in the new products. I think we have made strong progress quickly in this space. Next slide, please. Slide 14 outlines our launch tactic in Q3 called launch and leverage. So what do we mean by this? It's a fundamental decision on how we manage product launches. In the past, Pandora's approach was inspired by fast fashion, launching new products every month, giving them four weeks of attention before turning to something new. But Pandora is not fast fashion. Our average customer visits us twice per year. We need to make our proposition and collections consistent and recognizable, ultimately to build long-lasting iconic platforms like Moments. Which, by the way, is a very good example of a platform that we've built and invested in for over 20 years. It is still recognizable and highly relevant amongst our customers. In Q3, we have leveraged and extended the success of Pandora Me and Harry Potter with good success. Both collections were launched last year. We launch and leverage instead of launch and leave. Our product launches and campaigns in September also had more focus on base products under one consistent theme. This makes us less exposed to the success of our new launches because we're campaigning new products alongside base products that we know are performing. The base business represents almost 80% of our sales. Please turn to my last slide before handing over to Anders. I'd like to mention some of the work we're doing with the work stream that we call data-driven growth. First of all, we stepped our efforts up to capture more data. as this will be the bedrock for driving data-driven growth. Today, we capture close to 70% of all buying customers' emails in the US. This is a breakthrough statistic, if viewed in a historic perspective. One way we're using this is to drive our email marketing. Historically, this has not been a source of revenue growth for Pandora. But while email marketing only contributes to roughly 100 million Danish kroner, it's improving rapidly. The growth this year is over 150% built on more personalized emails. This is clearly a step in the right direction and is an indication of the future potential from improved CRM data. Admittedly, this is an area where Pandora can clearly improve further. Now, I'll leave the word to Anders, please.

Thank you, Alexander, and good morning, everyone. And please turn to slide 16. I'm very pleased with how things are progressing in our cost reset program. When we started out the journey back in early 19, we set a cost-saving target of 1.2 billion kroner, and early on we upgraded that to 1.4 billion and now we're upgrading it to 1.6 billion and that's a pretty big achievement by the organization. The higher savings have been identified pretty much across all cost types but with the largest savings we're finding in cost of sales or production costs where we continue to improve efficiencies and simplify processes on the back of the reduction of the product assortment that we did last year. Another improvement is in the other bucket at the lower part of the slide here where we have identified further cost improvements in media as an example where we leverage our global scale and are running several tenders. You should recall that the cost targets only include permanent cost reductions so that the 1.6 billion kroner target does not include the short-term cost measures we have done as part of C-19. And please turn to slide 18 and a short review of the financial performance in the third quarter. As announced in early October, our financial performance in Q3 was better than initially expected. And that goes both for the top line, the bottom line, and cash flow as well. And I'll quickly go into each of these on the following slides. So starting with slide 19 and revenue breakdown. The organic growth was minus five for the third quarter and better than expected due to a better sellout performance. And the organic growth includes a roughly minus 1% negative impact from network changes, as you can see to the far left of the chart here. And that's a result of a permanent closure of 32 concept stores compared to last year. Another building block in the quarter is the lower sell-in versus sell-out as illustrated in the pink box just to the left of the organic growth column, the dark gray column in the middle of the chart here. And that represents the effect from franchisees who... I'll say understandably manage inventory more tightly in these uncertain times. And this part of the revenue bridge should of course give a similar positive effect here in the fourth quarter. And as you can see, there's no impact from forward integration during the quarter. Then please turn to slide 20 and the margin. We generated an EBIT margin of 17.2% in the quarter. And that's a quarter that was impacted by C-19, obviously. And I think it's worth noting that the EBIT margin was only 150 basis points below last year when we filtered out the impact from foreign exchange and commodity prices, despite the the C19 impact in the quarter. Having said that, obviously the margin was down compared to last year and net-net that was entirely due to the deleverage effect that we see as a consequence of the 5% organic revenue decline on the top line. In the 150 basis points impact from commodity and foreign exchange, the major part actually comes from foreign exchange in the quarter. The increase in the silver prices that we saw during the second half of 2019 is still not hitting fully through the P&L due to the hedging combined with the few months of time lag from production until costs hit the P&L. In the prior quarters, you have seen that the cost reductions we are achieving are more or less reinvested into the business and driving the top line. And that's also the case here in the third quarter. We continue to invest, and this includes, for example, strengthening of global functions, establishment of the digital hub, establishment of the global business unit teams, as well as investing in several digital and online initiatives. Then please turn to the next slide, the cash flow. In the third quarter, we continued to generate quite a strong free cash flow and a high cash conversion. The operating working capital remained at a low mid single digit level in percent of the last 12 months of revenue, and we saw quite a nice reduction in trade receivables. But I would also like to highlight what we're writing in the lower right hand corner of the slide here, that our net working capital remained at just around zero in the third quarter. And then I should also mention that our leverage ratio was 1.1 and that is well within our capital structure policy and far below the covenant threshold that we have in our loan facilities. So that completes the third quarter financial review and then I'll go to slide 23 and a couple of comments on the guidance. In the trading statement that we made back in early October, we updated the financial guidance for 2020. And the guidance was based on very clear and tangible assumptions about C19. And the most important assumptions were that, first of all, that there will be no material lockdowns. And secondly, that less than 10% of the physical stores will be temporarily closed for the rest of 2020. And with the recently announced lockdowns, both assumptions no longer hold true. There have been material lockdowns and approximately 18% of the store network will be closed in November. So that's obviously well above the 10% threshold included in the guidance. Nobody knows how the pandemic will spread during the coming days, the coming weeks, and what this means in terms of potential further lockdowns. And under such uncontrollable and external factors, you could say that it would be quite natural to suspend the guidance But as some of you know, most of you know, we are obliged by the Danish FSA to provide a financial guidance, and this is part of the reason why we are not suspending the guidance. Due to the unpredictable development, we have also decided that we will not try to guess or speculate in the C-19 development with regards to geographical expansion and duration, because we will not be right anyway. So we have decided not to change our financial guidance. And the fact is that we will probably be able to deliver on the guidance if there will be no new restrictions or the one has been communicated or announced already. and assuming that the current restrictions are fully lifted when they are supposed to end. And that would mean around December 1 for both France and UK, for example. And the fact that we see that we can deliver on the guidance within these assumptions is based on the strong performance in October and our ability to take consumers online when stores close down in key markets such as the UK. And then you can ask, do we think that is realistic that there would be no other lockdowns and what has been announced so far? No, probably not. But we cannot outline a better or more realistic scenario. And we're just guiding based on the fact as of this morning when we released the announcement. So additional or longer lockdowns clearly represent a significant downside risk to our guidance. And it's not unlikely that we'll have to suspend our guidance if more lockdowns will be announced in the near future and also there's more clarity about the external environment. Please turn to the next slide, 24. As we've said a couple of times already, October has started out well and continuing the path that we saw from September. But, and that is an important but, We will see weakening already from this week, obviously, as lockdowns take effect. Secondly, you should recall that October is a small month compared with November and December and just above 20% of the quarterly revenue. And thirdly, the peak trading season has not yet started and we do not yet see the full implications from social distancing yet. So the implicit fourth quarter guidance on top line is ranging between minus 4 and minus 13% organic growth and between 25 and 29% EBIT margin. And these ranges are obviously wide with less than two months of the trading left. However, this clearly signals the level of uncertainty that we are facing. Given that we've just announced that October sellout growth was plus eight and organic growth in the same ballpark, then the implicit guidance range for November and December is an organic growth of between minus eight and minus 19% roughly. As Alexander mentioned, we are changing our restructuring cost guidance to 1.2 billion kroner. And to understand that change, it should be noted or recalled that the 2020 guidance for restructuring cost before C-19 broke out was 1.3 billion kroner. Then we reduced it to 1 billion when C-19 broke out as we deliberately slowed down certain cash-heavy Program Now initiatives. So the change in restructuring costs up to 1.2 billion is mainly related to two factors, and the bigger part relates to reinitiation of projects that were put on hold due to C-19, and then there's a part related to execution of the higher cost target that we've just announced. All other building blocks to our guidance are confirmed compared to the guidance provided in the second quarter report. So that concludes my part of the presentation. I will now leave the word to Alexander.

Thank you, Anders. Before heading to the closing remarks, I wanted to share some highlights of our new products. As you know, we launched the Star Wars collaboration collection in October, bringing some iconic and really beloved characters to the market. And we have seen some very good early results, particularly in the U.S. Now we are about to launch the annual Christmas collection. This will be a refresh of our base offering and keeping the assortment fresh and interesting. The Christmas collection fits very well with our current assortment and will be supported by our collaborations such as Disney and Star Wars. Lastly, I'd like to highlight that we're launching a colors collection in January next year. This is another step how to personalize and express yourself through jewelry. It's a collection that will have a broad range as all product categories will be available in colors. Now go to the next slide for my closing remarks. Q3 was a good quarter and we are pleased with the sellout performance and the EBIT margin given the circumstances. We've had a good start to Q4, but as Anders mentioned, the uncertainty related to lockdowns remains high. We will continue to stay agile and flexible as the quarter evolves and we'll navigate through new challenges imposed by C19, just like we did earlier this year. At the same time, we continue to improve the fundamentals of Pandora. The cost savings and brand results of Program Now are encouraging and important. Those remarks will now open for the Q&A session.

Thank you. If you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Our first question is from Sulphia Garbol from Citi. Please go ahead. Your line is open. Hi.

Morning, everyone. So I have two questions, please. One on October. Could you share some color on how many stores were roughly closed in October and also a bit of color on the markets? So which markets? I believe the top seven markets are still outperforming. But importantly, I was looking for some color on China. Did you see any month-on-month improvement in China? And also what was selling well? I believe the performance was led by charms, but just wanted to confirm there. And two, I have on silver prices. They have developed favorably over the past two months. So I was looking to see if you are planning to update or provide more color on the 21 and 22 gross margin impact. I think your original guidance was around 400 pips impact based on silver prices around $26. Thank you.

Before the lockdowns, I mean, I think in early August, we were kind of cruising towards 10%. And then that kind of came down. So I think the quarter ended roughly at 5% closed. It should also be remarked that roughly I think it's 25-30% of the store network also operates with limited opening hours. And that's in various parts of the world. Then your second question was on China. The way I would characterize China is before COVID happened, I think we spoke and had the expectation for the year that China would be down 20 to 25%, kind of given the run rate trends over there. Then we've had this COVID in the middle, and now we're kind of back to roughly that level. So it's in the 2025 region, let's say. And then I think I'll hand it to Anders on the silver price topic.

Yeah. Hi, Silke. It's Anders here on the gross margin impact. There's a number of factors impacting the gross margin if you look at it on a run rate perspective going forward. The bigger one obviously being commodity prices, silver being the biggest part of that. And as we write in the announcement, everything else equal. If silver prices stays where they are, there will be a roughly 300 basis points negative impact from higher silver prices from sort of mid next year onwards. But there's a couple of other factors going the other way, one of them being the cost reduction program. There will still be some tailwind from the cost program, now cost reduction program going into next year. There will be a bit of tailwind from the tight bet. as well, which we are not seeing actually in the numbers yet here in the third quarter, but there will be some tailwind from that from Q4 onwards. So, I don't think you should expect that we can offset a 300 basis point headwind from higher commodity prices, but we can offset a decent chunk of it, but not all of it on a runway basis.

I just want to make sure that we answered the first question right. So in October, it has been approximately 5% that were closed.

Thank you.

Our next question is from Lars Topham of Carnegie. Please go ahead.

Yes, congrats with an excellent quarter. A couple of questions for me. I just wonder the 8% like-for-like growth you recorded in October, that's roughly 10 percentage point better than Q3. If I want to have a feel for where that improvement comes from, should I just roughly add 10 percentage points to the Q3 like-for-like growth for each of your key markets, or are there some picking up more and others picking up less? That was the first question. The second question goes more to how you handle this temporary store closure situation when you have to sell in your Christmas collection. How do you decide whether to ship inventory to stores, to e-stores or physical stores? And if stores are closed, is there a risk that if they open again in early December, they won't have the right inventory? How do you manage this? Thanks.

Last, this is Michael speaking. I think I'll start with the next question, the first question, because we do not want to provide too many comments on the current trading. But what I have to say is important here is that actually the top seven key markets were already around this plus eight. They were plus seven actually in Q3. So I would say that the best way to give an indication of this is that the top seven key markets are performing in line with Q3. And then what we've seen is actually the rest that are performing better. For example, Latin America opening up in October compared to Q3. So Latin America was a significant drag on Q3 and not to the same extent in October. So you should more look at the rest than some of the top seven key markets. And on your...

second question Lars I mean this is obviously a quondrum right because you're kind of trying to second guess where where the next shop is going to close so we've been doing all sorts of scenario planning here but I think there are a couple of things which which we've done first of all we have taken our inventory position up in general so that that's that's one and we've tried to hold a larger portion of that increase back in our DCs, which then allows us to float it to where it needs to go. So that's one point. As you know, we've also added extra e-commerce DCs, particularly in the US, but also here in Europe. So then you have another point of inventory, essentially, to manage. And then what we've done with this increased inventory, we focused that on the top 500 DVs. So it's a lot less seasonal dependent. So even if the stores would be closed for a period of time, I can still sell this inventory. This is the best performing part of our inventory. And, of course, then the biggest unknown is the new items. But, actually, we don't have that many new items. I mean, Star Wars collection was already launched. The other collection that's being launched in Christmas is kind of more a refresh of the base. So, it's not a high-risk inventory from that standpoint. And then we just have to be very agile. There's actually a daily... conference call with all the countries and RDCs and the supply chain to manage the situation and move stuff around. But of course, when you get very short notice and shut stores, then of course there's very little you can do with inventory that sits in those stores.

But it's something we... In that context, Alexander, I mean... typical franchise store would, I guess, have negative cash flow from Mother's Day, more or less, until Black Friday. So if you either are unable to give them the right inventory, or for that matter, if they're not allowed to open in December, would that put some of your franchises into more severe financial trouble? And do you have a plan ready for that?

I don't think we have anything in the drawer. So far, what we experienced in the second quarter was that the franchisees were very quick on their feet to kind of manage their cost situation. What we've understood from the UK now is that the government is going to put up a similar type of support to business operations as they did in Q2. So on that basis, probably less so but I mean there is it's true that given kind of the where the volume sits distributed in a year this is the most important part of the year for not just for the franchisees but also for us so if we're into severe lockdowns in this period of course it's going to put strain strain on the system But so far, if you look at it from a kind of country by country place, I think it would be UK is probably the one which is in a higher risk profile. Because the US, they've had a good run in Q3. The franchise partners had a very good performance. And then there, the stores aren't necessarily closed. France is, as you know, predominantly an O&O market for us. So then you're left with UK that, you know, let's see if they can reopen after four weeks or not. But it's clearly something we keep on our radar.

Perfect. Thank you very good. And again, congratulations.

Our next question is from Anne-Laura Bismuth of HSBC. Please go ahead.

Yes, hi, good morning. I have two questions and actually these questions are about China. So you mentioned a comprehensive mid-term growth plan to rebuild the brand positioning in China. I just wanted to know if you can give some example of concrete action that you have been – that you will be taking or you have already taken in order to rebrand the brand momentum in China. And even your comment about the performance in October, so it seems that China has also improved in line with the performance of the – of the sell-out growth that you mentioned for the 70 markets. I'm just wondering, in terms of online performance, what is the exposure of the Chinese market to online peace? Thank you very much.

So, as I mentioned, I see China as a three-step rocket. And what tangible outcomes so far is that we have a new management team in place. And the last people came aboard in the quarter. So that, you know, they need to kind of gel and get their act together. Then the second piece, which, I mean, Jacques has been working on since he joined, is to improve just our operating discipline, let's say, and start to untangle some of the... the infrastructure there and getting that in shape. So far I would not think that we have done anything that you could put under the third pillar which is more about the kind of relaunch of the brand if you may. That's work that's still to come. I think we've done the base work on analyzing what's wrong. I think we have a good grip on what's wrong and I think we have a pretty good idea on how to fix it and now this new team needs to get together and start working on that execution. But I wouldn't expect that to have any material impact until into next year, to be honest with you. So now it's more about just doing good operational basics, which is also not insignificant given kind of the starting point we had in China. And then from memory, last year Q4 was also starting to become quite soft in China. So I think that the baseline to which we're trading against is quite soft. So I wouldn't write too much to the October performance. Of course, it's good that it's not deteriorating more, but you should not look at that number and say, now the guys have sorted out China. This is going to take some time.

Thank you. And what is the exposure to online in China, please?

Roughly 20% across, essentially, it's through Tmall. We have a tiny bit DTC, but, you know, frankly, it's insignificant. It's a couple of orders a day. It's not meaningful. So it's a Tmall 20% is kind of the way to think about it currently.

Thank you very much.

Our next question is from Magnus Jensen from SEB. Please go ahead. Your line is open.

Thank you very much. Yes, two questions from me as well. First, on your online business, which clearly is doing really well these days, and you say that you are prepared for, you said that earlier at least, that you're prepared for around 100% growth online. Given that we are looking at lockdowns now, both in UK and France, but potentially maybe also other places, growth could easily go over 100% again, as you saw earlier in the year under the lockdown period. What would happen if you ended up with more than 100% growth? How will you be able to deliver on that? That's my first question. The second question is in terms of your marketing spend compared to competition, because one of the things you say that has been driving your improvement is clearly marketing, but also that you over the COVID-19 period have been able to spend more than your competition because of your very good cash position. Is there any way that you can sort of illustrate for us how much more you have spent on marketing compared to competition and how much that means for your improvement? That's my two questions. Thank you.

I can give you a solid answer on the first one. The second one is a bit more difficult. Let's see if we can figure something out. So we actually have a little bit more capacity than the 100%. I think it's to the tune of 130%, whatever. But what that actually means is it's 100% capacity to deliver on the customer promise. So I can deliver more, significantly more, but it's just going to take a little bit longer time for me to ship it to you. Because the kind of bottleneck we have is in the picking and packing. the bottleneck is not the inventory the bottleneck is not logistics the bottleneck is how many people physically can pick and pack and that's kind of where we ramped up we have more packing space we have more people trained to run all the systems are running so that's all kind of done so the only thing is they can pack and I'm just making up a number here let's say that that unit can pack a thousand orders per day If that goes to 4,000 orders, well, they can still pack them, but it's just going to take longer time. And therefore, today, if you order from us, you should expect to get it in two to three days, generally speaking, across the world. That two to three days may go to five and six days, and it may go to two weeks. So the more the volume shifts online, the longer time it will be before we can actually deliver it. And of course, the sensitivity here is around Christmas. Because if I ordered a Christmas gift, it's no good for that to turn up two days after Christmas. So I think that's what it's all about. So we can absorb more than 100%, but it's just going to then start encroaching on the customer promise. Then your second question is an incredibly complicated question because there is not even a proper report today that says what my share of voice is in terms of media. I have it for a few markets. It's not standardized. The agencies are not providing this, so it becomes a bespoke report that we order. But anecdotally, what we've seen in the quarter is that our share of voices significantly improved versus the same period prior year. But more than that is not really meaningful to get into because it's not just robust enough. But again, we can just see the outcomes in terms of the like-for-like performance, which has been very, very strong. So that's as much as I can say.

That's okay, Alex. Thank you. Our next question is from Frederick Everson from ABG.

Please go ahead.

Thank you very much. A few from me as well. Following up on Magna's question there on online, Alexander, when you talk about online capacity, how are you considering click and collect in there? I mean, hopefully stores can open up by, by the Christmas or holiday season, but Black Friday could obviously be more difficult in terms of click and collect. I'm just curious about that. That's my first one.

I'm not sure how to answer I mean we have Click and Collect up and running in essentially in all of US and I think now is also in all of UK but of course there's no if the store is closed and it doesn't really help I'm not sure how to answer your question in a different way

It's right. Maybe if you could just share some light on the share of click and collect versus straight deliveries in those two countries.

So, well, UK just started, so that's a little bit early. But in US, we've had it up and running. And in the stores where it's been up and running for a while, click and collect typically ends up being somewhere around 4% or 5% of the business. That's kind of where it gets to. But of course, now that might. And the only other thing I would say in the U.S. is also we have curbside delivery. So people call to the store and then they come to the parking lot and then we conclude the transaction on the parking lot. But that's a U.S. phenomenon. We don't see that anywhere else in the world.

Excellent. That's clear. Thanks for that. And second question on performance per market. You obviously report very strong growth in in most of the key markets. But if my math is correct here, it looks like all other markets were down around 25% in the quarter. And then I think Michael said that those markets have now improved. And I'm curious to hear whether those improvements is on the back of just markets reopening or if you also sort of redirected your marketing efforts to get those markets going.

I can share the answer between me and Michael. I mean, I think we mentioned that Latam was obviously closed to a large degree during the quarter, which pulled it down. Spain, because of, you know, tourists are staying at home, which is also maybe part of the explanation why Germany is on fire. Germans are staying at home. They're not vacationing down there. And of course, not the entire store network is kind of skewed towards tourism in Spain. I think it's roughly a third of the stores are more tourists. So, of course, the volume has gone down and they've had to revert more back into the local customer. What else? And then we have, I think that those are kind of the major points, right?

Yeah, and then we have rest of Asia outside of China, which has also improved, also opened up like Philippines. But, yeah, if you look at just merely the number of stores closed, then they were a bit higher than 10% in Q3, and they were, let's say, around 5% in October. So that alone is also a contributor.

Thank you. Our next question is from Klaus Keel of Nick Reddit.

Please go ahead.

Yeah, hello. Two questions from my side as well. First of all, if I look at the cost program, you have now raised the target to $1.6 billion. And as far as I understand, around $1.25 billion are included in the numbers for both 2019 and 2020. So could you just confirm that there will be an extra delta in next year of around 350 million, or maybe not a delta, but at least a cost saving of 350 million next year? That would be my first question.

Hi, Klaus. It's Anders here. Your math is right. So just around 350 million incremental cost savings next year on top of 2020.

Okay. And then my second question goes for your implicit guidance for Q4. And what strikes me is that last year in Q4, you had an EBIT margin of around 35%. Your implicit guidance is 25% to 29%. So that's a drop of 6% to 10% each point. And you dropped 3% in Q3. So if we just exclude all the lockdowns that we have seen recently, then it seems to me that you must have included a lot of execution cost or something in your guidance for Q4, or alternatively you have a buffer at least on the earnings side. Could you comment on that?

And you are right, I think we spoke a bit about that at the second quarter release as well, that we do see that we need to spend more money to drive the same revenue in the fourth quarter due to the... the C-19 situation we need to have basically full store staff even though that we expect the revenue to be down compared to last year because simply it will be more cumbersome to do the transactions in the stores, outside of the stores we'll have. If I remember right, it's 120, 150 additional pieces of selling space around the world, additional space that we have rented to be nearby existing stores, but we've been able to expand the selling space so that that comes with a... comes with a cost as well. So that is, so we don't, I think another way to answer it is we don't see a structural decline in the margin, but we do in these unusual times see that we have, it will cost us more OPEX to drive the revenue here in Q4. So, that's why we see that 25 to 29% EBIT margin in the fourth quarter.

Okay, excellent. Thank you very much. Our next question is from from Goldman Sachs.

Please go ahead. Hi everyone, thank you for taking my questions. So the first one is on online, which has clearly been accelerated due to COVID. And you mentioned some interesting online initiatives on the call, like virtual selling through dark stores. Are you thinking differently about distribution longer term, or is it still too early to say? My second question is on product category performance. It looks like charms was the worst performing category in Q3. while necklaces and earrings showed positive organic growth in the quarter. Should we expect a return to core category outperformance in Q4, helped by the new Star Wars and Christmas collection? Thank you.

On your first question, I think it's way too early to see any kind of significant changes. You can also look at when we reopened stores after the second quarter that in most countries we saw consumers flooding back to the stores. So this whole notion that people are saying, you know, the retail is dead and everything is going to go online, I just don't subscribe to that, at least not based on the facts that we have experienced so far. But they have to live together in a good symbiotic way, I should say. So if you have a poor e-commerce presence and only a store environment, then we'll suffer. That's what we're experiencing in Latam, for instance, where we didn't have a proper e-commerce trading platform, for instance, and maybe the consumer behavior is different. is lagging a little bit behind more developed countries and therefore you see a much bigger hit to the top line when we only have stores and then they're closed and kind of is difficult and then on the other side of the spectrum you have UK which shifts much quicker to online but still it's roughly a third of the total revenue so even in the most developed let's say Pandora geography, it's kind of hovering around that 30%. And then on your second question, how much of that performance we have is on the organic versus the like for like?

You cannot see the like-for-like, but it is correct also from a like-for-like perspective that charms were performing year-over-year slightly worse, but this is mainly a focus area. We did focus on the beige products, and especially in the campaigns in August and September, this was focused on necklaces and rings.

Great. Thank you. Our next question is from Hans Hoyer of Handelsbanken. Please go ahead. Hello. Can you hear me?

Can you hear you? Yes. I'm sorry. Just a question on the dynamic in terms of the share of voice and how you're going tactically to adapt once peers do return and increase their spending on advertising. Will you keep the distance? Will you keep your higher share voice or i.e. spend even more than you do now? Or is that gap going to disappear? Secondly, you mentioned the possibility or the plans to do some video-based selling in the stores. And I was wondering if that's a concept that could also be used online. Is that on your radar? And then finally, if I may, a third question regarding franchisees pulling out. It looks like there is a little bit of that going on. And what's on your radar? What can you see? How are the franchisees doing? plans in terms of closing further stores.

On your first question on share of voice, I mean, this is highly speculative, but one would probably assume that when competition kind of gets into a more stabilized position, the ones that survive, I should say, because there will be casualties in this, of course, we should expect that they will put up a tougher fight. There is no doubt in my mind. But I do think it's not just about the money you spend. It's also what you do with the money, how you kind of target people, where we're getting much more clever on our spending. We're targeting the right customers. So coming back to this idea of data-driven growth, that's one area where we're getting much, much more targeted in our advertising spend and so on. And the other one, which we shouldn't forget, is about brand momentum. Once the train is moving, it's not as expensive. to keep it moving versus when you have to restart it. I hope that we can maintain a gap, but it will not be as big as it is today. That would be almost naive to make that statement. In terms of video-based selling in stores, I think we had like 140 different ideas on how to offset the social distancing. This one didn't make it to the final list. So I think out of the 11 that finally went to market, I mean, this was one of them that kind of didn't cut it for various reasons because we also had to make choices. And this was a quite slow execution because you need to kind of then line up all your systems. You need to get screens in all stores. You know, we've equipped the staff around the world with, what is it, a 1500 iPads in order to improve the kind of cash transaction that in and of itself was a challenge so then you can imagine if you want to install things so we had to be very pragmatic on what can we actually execute because the point was we need to get this stuff tested and in the stores before October and when this exercise started we were in June so your question is a very good one but we just said this is a great idea but we will not be able to execute this fully so we dropped it it might come back in the future then on the franchisees pulling out

Maybe you are getting that sort of impression by looking at the stores that are closing, both the 25 stores that have been closed from second quarter to the third quarter and the 32 stores that's closed year over year. And if you look at it that way around, it is true that the stores that are closed are either franchise operated or distributors operated. But if you look at specifically the third quarter here, then where the stores are, the two biggest bucket of stores that are closed among franchisees is nine in Russia from memory. I was just trying to look in the appendix that we have uploaded, nine from Russia. And in Russia, that's four. 4% of the stores in Russia, something like that. And we do have a tale of stores in Russia that our partner had decided to close down. And then there's a chunk in Latin America where I think two things. One is that Latin America was much harder hit by the pandemic for a long period compared to many other parts of the world. And there are some markets in Latin America where the The margin is lower than what we see in other parts of the world. That also goes for our own business in Brazil, the margins. And I think that is not just for Pandora, but that's for many businesses. They have a lower margin operating in Brazil than elsewhere in the world. So I don't think that's two points. There's no sort of signal or trend in it. And secondly, we should also recall this is just around 1% of the total number of stores that we have net closed down over the last one year, just around 1%.

So no change in that momentum. on the radar in the next couple of quarters.

As Alexander said earlier on, our partners see the same thing as we do, that there's some temporary noise, pretty hefty noise from C-19, but underlying things are clearly improving.

Okay, thank you very much.

Our next question is from Omar Saad from Evercore ISI. Please go ahead. Your line is open.

Thank you for taking my questions. Very nice quarter. Congratulations, given the backdrop especially. You know, I wanted to ask a little bit about the underlying dynamic behind the strong sales you're experiencing. Can you tell if it's new customers coming to the brand or existing ones returning and spending more? Is it more older consumers, younger consumers? people buying for fashion, or is it more the collector types? And then also on gifting versus self-purchase, is there a dynamic going on there? And then also would love more details on China, the state of the brand there, and updated thoughts on how to approach the market. Thanks.

brilliant question and in fact this time around we can actually to a degree answer it because in the US we have now actually we're collecting enough data to give us a solid view and I think the encouraging thing in the US is on one hand we are not dropping out the existing customer base at the pace that we used to and we are managing to attract plenty of new customers as well And the new customer that we're attracting, it's kind of driven typically behind the type of initiatives that you drive. So in the quarter, Pandora Me was a big topic, which obviously then drives to a slightly younger audience than what we would have on average. So I think that's a good dynamic. Then on your other questions on self-purchasing and this, I don't have enough data yet to be able to answer that. It's a very specific question. Normally the way we gather this data is once a year you make a survey. This is not a fluid data capture that we have in terms of who's a new and who's an existing. As we mature into using this data lake that we've created, then we might be able to give a better answer on that. But I think the important thing is we are holding on to the existing customer or lapsed users that are coming back as well as new customers. And those are two very important aspects. Then your question on China. I think the answer on China is this is unfortunately a market entry back in, I think it's 2016, which was positioned wrongly. And we've spoken about this in a couple of previous calls. So with that in mind, we went back to the Chinese consumers and asked them, you know, would the positioning that we have applied everywhere else in the world, would that be relevant and interesting for you? And the clear answer both in qualitative research as well as in quant research confirm that, yes, it's distinctive, it's relevant and it's interesting. Bring it on. So, once you've kind of confirmed the strategic intent in China, now we're kind of discussing and working on, okay, how do we execute on that? And that's what I keep coming back to. That's going to take a little bit of time. just before I can slap on a piece of advertising, is not going to turn the trajectory immediately. This is going to have to be consistent. The way we show up in our stores, the type of assortment we sell, how we merchandise it, the windows we're showing, the advertising, where and to what degree we're showing. So there's a number of aspects to this program. But we will come back in, I think, a quarter or two. We will detail out a bit more specifics on the China plan.

Great. Thank you. Best wishes for the holidays.

Our next question is from Peter Tester from One Investments. Please go ahead.

Hi. Thanks very much for taking the question. I have a couple of questions, please, on online. When you talk about 100% or 130% increase in capacity, is that basically Q4 on Q4, so peak on peak? To what extent is the pick and pack de-risk for COVID given density constraints that may arrive? Then on the click and collect initiatives going forward, can you just talk a bit about what might be driven by IT needs, spending on IT that might drive introduction of service and deepening the online experience? And then just one question on the wholesale. You talked about wholesale timing shifting from Q3 into Q4. Was that already ordered in October or is that still to come? Thank you.

So on your first question, the 100% to 130% capacity increase is versus prior year. So prior year, we were already improving the performance on the e-commerce business as a share of the business, let's say. So that's in relation to this. Within this, of course, what we experienced in the first rounds was that the way you actually execute the picking and packing in terms of the space, the way you organize the teams is very different from the way you could have done it in the past. So now it's organized in cells, so you belong to a team. You can only move in certain spaces in the warehouse, so we don't get cross-contamination. We have protocols for when there is an incident on how quickly we clean, because now it's a matter of hours to sort this out, to keep the operation running. We have more sites now as well. so if one site shuts down like take North America for instance there is one down in Texas there's one in Canada and one in Maryland they're all connected so if one would go down then we can continue ordering you can still place the order in you know in the gate so to speak and then we will manage to service you from different warehouses across the continent so there's a lot of work that's gone on just to get the operation running On the click and collect rollout, this is partly dependent on the MPOS system that sits in the stores. So the unfortunate thing is we have, because of the very decentralized way of running Pandora in the past, we've ended up with different tech platforms around the world. So I think we have, I don't know, four or five different MPOS systems around. So once we've concluded a rollout in one country, we can't just lift that experience and drop it in on another country. We need to go in and then becomes a little bit bespoke. This is partly also why we're looking at, you know, streamlining all those systems so we can move much, much quicker. I see Anders is dying to say something here as well. So there is a global rollout plan, but it is a little bit slow because of the different systems. So we unfortunately cannot scale, but over time we're looking to move to at least one or two platforms only when it comes to MPOS in order to then also enhance speed or enable, I should say, upgrades, new features, et cetera, because every time now it's still quite cumbersome. And on the wholesale point,

I can confirm that. So the lowest sell-in than sell-out that we saw in Q3, that's already reversing here in the first part of Q4. So that means also that the organic growth was a bit better than sell-out, the 8% sell-out in the month of October.

That's great. Thanks for the answer.

Our next question is from Lars Topham of Carnegie.

Please go ahead.

Yes, a follow-up question for me, Alexander. In your opening remarks, you said program now is now in place and there'll be no restructuring costs in 2021. So I just wonder if that is now done, what comes next? Are you thinking at some stage launching a completely new strategy? When would that be? What would focus be? Would you go from turnaround to growth or how should we think about it? Thank you.

It's a very good question. So in the background we've been actually working on what comes at the program now as we obviously should because we've also said that program now we thought would be roughly a two year exercise and we're coming to the end of that. And I think with the results we are getting, we're getting more and more comfortable that we can hopefully soon kind of raise the flag and say program now is done. We are halfway through having agreed the kind of new platform, let's say with the board. So it is a little bit premature for me to detail out anything today. But I think a reasonable expectation should be that somewhere in the first half of next year we would invite for a capital markets day where we are going to share our thoughts on where to take the company next. But I think you should probably not expect a major revolution. I think the company has been promising that in the past and that's probably not what we're going to repeat. We have a solid base. We know how to operate this business. There's still plenty of room to grow as we're showing now. So there's still lots and lots of opportunities within the existing business. But I'll probably stop there and then... We need a little bit more time to finish that work. Of course, it's been a bit cumbersome during COVID to, on one hand, manage a crisis and then on the other, thinking about what happens in a few years from now. But I think we're progressing well in that space, but we still need a little bit of time before it's finished.

Thank you, Alexander.

There are no further questions at this time. Please go ahead, speakers.

So before closing the call, I would actually like to take the opportunity to thank Michael. This is his last quarter with us. He will be moving on to another company, which we're sad for, but on the other hand, we're happy. He's a great guy. You've been a major component in helping Pandora in the turnaround. It's been working to rebuild the trust for Pandora. It comes through being honest, no-nonsense, transparent. And I think everybody on the call, which are your working colleagues to a degree, would agree with me. We wish you all the best, and thank you very much for the contribution to Pandora. And on that note, we'll close the call for today.