Pandora A/S Ord

Good morning, everyone. Welcome to the conference call for Pandora's Q1 2022 results. I'm John Beckman from the Investor Relations team. I'm joined here in Copenhagen by our CEO, Alexander Lacek, and our CFO, Anders Boyer, and the rest of the IR team, Christoffer Malmgren and Adam Fugelsang. 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 kindly get back into the queue if you have additional questions. Slide two, please. Please pay notice to the disclaimer on slide two and then turn to slide three. Alexander, please go ahead.

Thanks, John, and welcome everyone joining this call today. I'm happy to say that we've had an outstanding start to 2022 with record revenue in the first quarter. Just like we've done in the past, we also assess our underlying performance versus the last clean year, which was 2019. In this perspective, our first quarter of this year shows an 18% growth. Whichever way we look at the quarter, it's a very good result. We consider the growth to be of high quality as it's broad-based. All product platforms contributed, as did most of our core markets. Furthermore, the revenue came behind a lower discounting level, or said in another way, with a higher degree of full price revenue. Again, demonstrating the strength of our brand. The execution of our growth strategy, Phoenix, is progressing very well. The investment in our growth pillars, as well as the foundations, continue to yield strong results, visible also in the financial performance. Our business model continues to deliver an impressive profitability. In the quarter, EBIT margin landed at 23%, which is up almost 3 percentage points from 2021, equal to an EBIT growth of 45%. In spite of inflation and increasing interest rates, consumer demand generally remained healthy throughout April. It is, however, prudent to be mindful of the world around us being plagued by yet another macroevent due to the ongoing conflict in Ukraine. Furthermore, we are well aware that our comps do get tougher in the balance to go. In the first part of last year, a large part of our network was closed, as well as the strong positive impact on the U.S. category due to the stimulus checks. Nevertheless, we'll continue to invest in our business, just like we have done in the last few years, with good outcomes. We just need to ensure we are even sharper in everything we do going forward. Now, let's move to slide four, please. We have updated our guidance slightly. This is based on both the strong Q1 results as well as our updated view for the rest of the year. For the full year of 2022, organic growth is now expected to be in the 4% to 6% range, up from 3% to 6%, while EBIT margin is still expected to be in the range of 25% to 25.5%. Anders will give a more detailed perspective on our assumptions behind this. Slide 6, please. Before we dive into Q1 results, I want to give a brief update on the four main building blocks in our growth strategy, Phoenix. As I mentioned, our strategy execution is off to a strong start, which confirms the potential ahead of us. First, in the design pillar, the focus is on driving the core while also fueling the brand with more. But our moments continue to deliver strong growth, showcasing the vitality of the platform. Fueling the brand with more is well represented by, for instance, the successful new collaboration with Marvel. Second growth pillar is about growing our core markets. In US, our largest market, we completed the acquisition of 32 concept stores, mainly located on the West Coast. China remains weak, as you would probably expect, and we have decided to postpone the planned investments to reposition the brand until market conditions stabilize. We are delivering very strong growth in our other core markets, so the focused approach is working well for us. The third growth pillar is driving higher brand desire. In our most recent brand tracker study, we continue to lead in brand equity. We are number one in five out of the top seven countries. Our position among Gen Z has strengthened, which bodes well for the future. Unaided awareness remains a competitive edge. These scores are the result of our marketing as well as sales efforts across all consumer touchpoints. The fourth growth pillar is personalization. Here we are improving the omnichannel experience to offer consumers more personalized path to purchase journeys. Our online channel performance continues to be solid, so the starting point is very strong. We are investing a fair amount of effort in building a solid tech foundation on which we can implement and accelerate many of the experiences we want to offer our customers. The most recent activity is the launch of a new customer loyalty program in France, which is being rolled out nationally as we speak. Slide seven, please. Our largest platform, Moments, is and was our key driver of growth in the quarter, delivering 17% sell-out growth versus 2021. The strong result was driven both by the base portfolio and supported by new products such as the Padlock, another innovation within the Moments platform. This helped drive a very strong performance during Valentine's Day in Feb. The padlock follows the other initiatives we've told you about in previous quarters, such as key rings, bag holders, and engraving, all designed to keep moments relevant in the minds of consumers. Our collaborations delivered very strong growth of 41% in Q1. This segment was supported by a successful Marvel launch in February. The Marvel collaboration is building on Pandora's strong relationship with Disney and proved an imminent success. Marvel alone accounted for 3% share of business in the quarter and 6% since launch. So far, it has been outperforming the initial launch of both Star Wars and Harry Potter and has performed very well across key markets. Among the product heroes is the Infinity Ring, which sold out in the first two weeks. So we have over 17,000 customers now that have signed up on a waiting list, and that's a first for Pandora. Collaborations with other big brands is a way to build awareness and drive brand desirability. Marvel is designed to engage and introduce existing and new customers into the Pandora brand. Next slide, please. Besides driving the core, we also want to fuel the brand with more. Therefore, we're launching new platforms with a launch and leverage mindset. This means we're putting more support behind new initiatives than we used to do. Our relaunched Pandora ME grew 132% versus Q1 of 21 and continues to do well across key markets. There was no major marketing push specifically on Pandora ME in the quarter, though we have given it an ongoing support plan. We'll bring further innovation and products into the platform later this year. For Pandora Brilliance, we're currently gearing up to expand the geographical footprint. This is planned for later this year. We've continued to play around with the model in UK, in particular focusing on visual merchandising, distribution and assortment variations. The learnings are very valuable as we get ready for further market entries. Next slide, please. Now, let's have a look at our core markets. I'll cover US and China separately in a minute. Let's first have a look at our key European markets. They've had a phenomenal performance in Q1. UK, Italy, France, and Germany all delivered double-digit growth, both versus 2021 and 2019. You always ask me what the magic is, and the answer is always the same. Strong execution of unknown business drivers, such as clear merchandising choices, strong sales execution in our stores, great communication programs across a multitude of platforms, heavy media support, and finally, consumer-relevant initiatives. Our more established markets, UK and Italy, both delivered more than 30% organic growth versus 2019, cementing our strong brand position in these markets. Australia was flat versus 21 and 19. However, there was a negative impact from COVID-19 as travel and quarantine restrictions impacted traffic significantly. Online did well, supported by successful click and collect performance. As conditions more recently are stabilizing, we note a return to growth. Now let's have a look at our largest market on the next slide, please. U.S. continued growing in Q1 with organic growth of 7% versus 2021 and equal to 62% versus 2019. The growth in Q1 was in line with the expectations we laid out in the guidance for the year. And as we've said before, we're expecting a slowdown of the U.S. market during 2022. Looking at our market share data, this represents a 2.3 market share compared to 2.0 in 2019. So the growth is coming through in market shares. Our guidance assumption for Pandora US is unchanged. As I mentioned, we acquired 32 stores in U.S. in Q1 and five in Canada. Twenty of the stores are on the West Coast, strengthening our foothold there and enabling for further network expansion. Next slide, please. Our business in China remains challenged, and the growth continued to be significantly negative. The traffic continued to be impacted by COVID-19 restrictions, which escalated in the end of the quarter as hard lockdowns were put in place, not least in Shanghai. In Q1, we changed management in China. Irving Holmes Wong has joined us. He brings extensive experience of general management in the region, both mainland and Hong Kong. He has a proven track record of turnaround and transformation from Bacardi and Avon in mainland China, as well as L'Oreal in Hong Kong. I just wanted to reiterate that we still see significant opportunities for Pandora to grow in China. But given the difficult trading conditions, we have postponed the planned brand relaunch until market conditions stabilize, which could very well be next year. In the meantime, we continue to fine-tune our plans. Next slide, please. I wanted to address a point in relation to how many companies those days offset the inflationary pressures on the P&L by passing on the costs to the consumers. First of all, we are positioned as an affordable yet desirable jewelry brand. We serve the many rather than the few, and we take pride in offering a sharp value proposition. This is the foundation on which Pandora has been built and attracted many millions of customers over the years, and keep doing so. Going back a few years, the brand failed to offer the right value equation and had to resort to heavy discounting and frequent promotions to try and sustain the customer interest. We know all too well that this formula wasn't working. So in the last three years, we have done quite the opposite, namely made the brand more relevant through marketing, innovation, good salesmanship, efficient merchandising and strong digital presence. During this period, we have also literally halved the promotional intensity, reduced the deep discounting, thus effectively increased the full price revenue, while at the same time increased our volumes. This is clear evidence that we have a great value equation and that the brand holds meaningful pricing power. We will be very careful with maintaining our value equation. This might, however, imply that some select and careful pricing adjustments could come into play as a way to offset some of the cost price pressure. But I would like to stress that this will not come at the expense of our affordability position as seen by our customers. Net. We're not immune to inflation, but we're very clear on the perimeter in which we want to play. Next slide, please. The engagement for our brand was strong in the quarter, amongst other things supported by our new heroes from the Marvel collection. Through relevant brand content, we established ourselves as the go-to brand hub for Marvel fans. We saw record-breaking reach with 40 million impressions across social platforms, 16 million engagements in the first month after launch. Marvel alone drove twice the web and email traffic as Star Wars during the pre-launch and reached more than 1 million views on TikTok in the first 24 hours. The biggest question we're receiving from our customers is why or when Spider-Man will show up in our assortment. So I say, with great power comes great responsibility. Next slide, please. Before I hand over to Anders, I want to comment on our personalization journey, one of the key growth pillars in our strategy. Our online performance continued to be solid in Q1, more than doubling versus 19. We are hard at work to build a strong digital foundation, which is key for the omnichannel experience. In France, we test-launched our new loyalty program online and in 20 stores. In the first four weeks, 50,000 consumers signed up, We can already note an increased basket value of 8% in-store and 18% on e-com. Furthermore, we see an increased unit per transaction as well as conversion rate. Bearing in mind, though, that this data is from the last couple of weeks. Either way, it's a very inspiring start. As you know, we are a direct-to-consumer brand. More than 75% of our transactions are done direct with our customers. Owning first-party data will be the bedrock on which we will build our unique and personalized path to purchase. Given that our brand promise is built on self-expression and collectability, offering a personalized journey fits the brand particularly well. On that note, I hand over to Anders for a closer look at the numbers.

Thank you, Alexander. And then we go, please, to slide 17. I'll talk about revenue and EBIT on the following slide. So on this one, I'll just give a couple of comments on some of the other financial highlights. On the gross margin, it remained strong in Q1 of this year and almost at the same level as last year. And that's despite headwinds from commodity prices and the and a temporary drag from the forward integration that we have been doing here in the first quarter. Networking capital increased around four points versus last year as we continue building inventory to mitigate the risk of supply chain disruptions. And we do expect to increase inventories further during the rest of this year, during the rest of 2022. And this will, of course, have a temporary negative impact on cash conversion. It's also worth noting the significant increase in both return on invested capital and EPS, as you can see on the slide here. And that's driven by the combination of revenue growth and EBIT margin expansion in the quarter. Then we go to the next slide, please. The revenue performance in the quarter. Before I give a few comments to the bridge, I wanted to start out with a comment on the different revenue growth KPIs. In the past, we have usually showed both sell-out growth and organic growth in most tables and slides because each of them serve a specific purpose and they're both sort of important KPIs. But now, as you know, we are guiding on organic growth, not sell-out growth, and combining that with the fact that network expansion is a core part in our Phoenix strategy and that is not captured in sell-out. Then, in order also to simplify the communication, we now focus on organic growth in most tables and slides. But just to be clear, all the usual data are still made public, it's still available in our disclosure, so no change from that perspective. On the bridge on this slide, it's clear that Pandora keeps growing. That's quite visible in the bridge here. Sellout growth was plus 17 versus last year and the main driver of the organic growth in the quarter. Network expansion is also becoming more visible in the numbers. And as you can see in the first couple of building blocks in the bridge network expansion and takeovers of franchise stores added around three points of growth on top of the sellout and helped lift organic growth to 21%. Forward integration also supported revenue growth by just around one point, and this is in the quarter. This is mainly in the US. And then finally, to get to the total reported revenue growth of 26%, we had foreign exchange tailwind of around four points, and that's mainly from a stronger US dollar. And then we go to the next slide. This is the EBIT margin bridge. And the key message on this slide is that what we have shown in the dotted box in the middle part of the bridge illustrating the improvement in the underlying EBIT margin from Q1 last year to Q1 of this year. And first of all, our operating leverage was quite strong, as you can see within the dotted box here, contributing over five points to the EBIT margin. And then there was a further two points coming from efficiency gains at gross margin level, as we had lower promotions, as Alexander said, but also lower production costs per unit and a favorable channel mix. And then to the left of the dotted box and to the right of the dotted box, we have isolated various temporary effects. And if you look at the elements to the right, so the temporary effects this year, there were three things pulling down the EBIT margin in Q1. First of all, that's the precautionary measures in Thailand that we continue to take due to COVID-19. Secondly, we made a provision for the full trade receivables towards the Russian distributor. And as you know, we suspended all business with Russia and Belarus on February 24. And we have instructed our suppliers that we will not accept any type of direct or indirect sourcing from Russia or Belarus. And on top of the last, the third point dragging down the EBIT margin in Q1 was a temporary drag from forward integration as we are buying back inventory at wholesale value. And then let's go two slides down to slide 21 and the guidance. As Alexander already mentioned, we have updated our organic growth guidance to four to six from three to six before. And on the surface, that's obviously a smaller adjustment, but underneath there are some changes in the assumptions compared to the original guidance back from February. First of all, our Q1 performance was good, and another data point that Pandora is back on a sustainable growth track. And that would, all things equal, have led us to upgrade the guidance for 2022. But as you know, during the quarter, the business environment changed quite considerably and increasing the risk for 22 compared to the original guidance. There's negative impacts from the war, cost inflation, potential impact on consumer demand due to inflation and higher interest rates and as well as some COVID-19 impact and all of that adding up. pressure to the rest of 22. But net-net, and despite these sources of uncertainty, we have lifted the bottom of the growth guidance. And in a business environment like this, you either need to guide with a wide range, a very wide range, or alternatively, you make certain assumptions about the business environment and then you guide within that. And we've done the latter and made a number of assumptions about the business environment. And you can see these assumptions here in the table on the bottom right. And I want you to stress that you should see these assumptions as directional and indicative only. And then we go to the next slide, please, the EBIT margin guidance. And even though the EBIT margin guidance is unchanged, there's a few underlying movements. As you can see in the bridge, we expect inflationary cost pressure combined with the cost of the war and the pandemic to add incremental cost of around. 80 basis points or 200 million kroner compared to the original guidance. But we expect to offset this by a number of mitigating actions as well as some foreign exchange tailwind and therefore we can keep the EBIT margin guidance unchanged. And then on the next slide, 23, we know there's a wish from many of you to understand how inflation impacts our P&L. So we've added a table here which will give you a flavor of where we are. And as mentioned, we expect inflationary pressure and other costs to add around 200 million kroner to the original guidance, and that's the number in the last row on the table here. Around half of that comes from higher costs for energy, raw materials that are not hedged, and transportation costs. That's the first 100 million kroner and then we have the Russian trade receivable provision and the cost related to the COVID-19 measures in Thailand. And needless to say, the situation is changing by the day, and I'm sure that this picture might look different later this year. And then we go to the next slide, please. Before handing back to Alexander, then we'll just have what we're showing on this slide is the implied growth for the rest of the year. The 4 to 6% organic growth guidance for the full year implies between 0 and 2% growth for the rest of the year. And sequentially, the 0 to 2% is obviously quite a change from plus 21 in Q1. But that's among others where the COVID-19 lockdowns in Q1 of last year gave some noise. And we are facing some tougher comps in the quarters to go for the rest of the year. And for that reason, it might be easier to look at the growth compared to 2019. And that was what we're showing in the lower part of the slide. And then you can see that the implied growth for the rest of the year corresponds to between 12 and 15 growth versus 19. And that's at some points lower than the 18% growth that we saw in Q1. And that change is driven by, among others, the uncertainty related to inflation and consumer demand and the pandemic as well. And with that, I'll hand it back to Alexander and slide 26.

Thanks, Anders. So to summarize, execution on Phoenix continues now with more and more visible results. And we took further steps in all growth pillars in the quarter. The Q1 delivered record revenue for first quarter for us, and the growth was driven by all product platforms and most of our core markets. We updated the organic growth guidance, as Anders just showed, for the full year, despite the worsening business environment. We saw profitable growth in Q1 and expect this to continue going forward as well. And with that, we're ready for the Q&A session. Operator, please go ahead.

Ladies and gentlemen, If you have a question for the speakers, please press five star on the telephone keypad. To withdraw your question, please press five star again. You will have a brief pause while questions are being registered. The first question comes from the line of Martin Brenner from Nordea. Please go ahead. Your line will now be unmuted.

Hi, Alexander and Anders. Congrats with another strong quarter. Testimonies of the work that you have done in recent years. I have two questions as a starter. First of all, I think it's quite interesting that you now talk about price increases. When we spoke about it during Q4, I think that you said that price increases were not a part of the guidance. Do you now embed price increases to the updated guidance or how should you think about that? And then to you, Alexander, I appreciate that there's a huge upside when we look at China, but the road to getting traction in China seems quite long right now. On the contrary, you seem to have quite strong momentum in Latin America. Would it make sense perhaps to to change resources and strategic focus at least for the next couple of years to Latin America. How should we think about that? Thank you.

Martin, it's Anas here. Maybe I can start on the first question. There's some bits and pieces of ASP changes, price, list price changes embedded in the guidance, but that was already the case already back from February, not big things. It's pretty much, I think, the same story as we've done in prior years where we have indirectly increased prices in 19, 20, 21 as we decreased the promotion level. So we do... But I would say it's important to stress that the guidance is not dependent on ASP changes, list price changes. That's not the signal that we want to send.

And then on China, I mean, first of all, we have a business in China. We have over 200 stores. We have an organization. We cannot just walk away from that. That's probably also not the smartest thing to do. Having said that, of course, with the current conditions, There is really no point at least in over-investing in China. So now it's more we're holding the fort and we'll just have to sit and wait for a little while. Let's see how that develops and we may come to different conclusions later in the year. But certainly at this point in time, I have no reason to change that. As it comes to Latin America, I think we have sufficient resources to actually drive the business in Latam at this point in time. So the kind of core market focus that we've launched in Phoenix, I don't see a reason to change that. But I acknowledge your point on, you know, if China continues like this for a prolonged period of time, then we'll probably have to take a step back and rethink our approach. But for now, as I said in the presentation, we still see that there's a big, big opportunity for Pandora to grab a nice piece of that market in the future.

Thank you. I'll jump back into queue.

The next question comes from the line of Claus Kiel from Nykredit. Please go ahead, your line will be unmuted.

Yes, hello, two questions from my side. First of all, you have a lot of headwinds on the margin here in the quarter, but still, yeah, the margin is much better than I had expected, and I guess it's the same for consensus. So could you just elaborate a bit on underlying operational leverage? Is there anything that has changed or you've done anything differently? That's my first question. And then secondly, you write somewhere in the report that April is off to a good start. I can't remember the exact wording. But could you just comment a little bit on what you're seeing here in April? That would be very helpful. Thank you.

Klaus, maybe I can start on the leverage piece. Obviously, the reason that the bridge that we are showing on EBIT Martin, that it shows a big 5.3 percentage point of operating leverage is obviously linked to that leverage. revenue growth is substantial. But the logic in how we're getting to the 5.3% operating leverage is roughly 25 basis points of leverage per point of growth. So mathematically, this is 21 points of organic growth times 25 basis points. And that basically means that as we grow, then Of course, the gross margin flows through to the P&L, but then there's a bit of variable expenses. And then marketing increases roughly in line with revenue around these 13%, 14%, 15% of revenue growth. And that means that sort of give and take, the incremental EBIT margin on the growth is around 50%, 50% EBIT margin, incremental EBIT. And that's how we get to that. So there's no change of the underlying structure of the business. I think what helped us a bit, I think the gross margin did come out a bit better than what we had expected in the quarter, keeping it flattish despite the different headwinds that we're seeing, among others because, as Alexander said in the introduction, it is high-quality business. growth. Discounts is even lower than in the first quarter of last year. And that also is visible in the gross margin and thereby the EBIT margin.

On the second point, of course, this is a quarter one announcement, so we don't want to elaborate too much on ongoing business. But we thought it was useful to at least give a comment, you know, since the macro environment is quite fluid, as we all know. And I think the comment is more around that we don't see the wheels coming off in April, which, you know, one could fear, let's say, given all the inflationary pressures and war and what have you. So see that as a kind of macro comment that we see structurally, you know, April being healthy.

Okay. Thank you very much.

The next question is from Elena Mariani from Morgan Stanley. Please go ahead. You'll now be unmuted.

Hi. Good morning, everybody. Thanks for taking my two questions. My first one is, sorry, I'm just going back to the most recent trends, not because I want a number for April, but perhaps you could give us some more color with regards to any changes in consumer behaviors that you might have perceived in the recent weeks. So anything that is a sort of early indicator of some potential deterioration in consumer sentiment, which is exactly what the market is expecting. And we don't know when that's going to happen and whether it's going to happen. But have you seen anything at all changing in any of the geographies or are trends still completely intact? You know, excluding China, of course, and COVID related situations. So that's question number one. And my question number two is more on the second half of the year overall. So clearly you need only around 0 to 2% growth year on year to get to the guidance and it was very helpful to get also the bridge versus 2019. But what's your embedded macro assumption for the second half? So do you expect a deterioration, material deterioration in consumer sentiment in Europe and in the US or is your current guidance assuming that you're just going to see some normalization of growth given the high companies in the us market and the progressively difficult companies in europe so i just want to understand what your internal management assumption is in terms of what's going to happen in h2 and i perfectly know that nobody knows the answer but i would like to know what's the embedded macro assumption in your guidance thank you

I can take your first question on the consumer sentiment. I mean, if I look at the retail metrics without getting into too much science here, but, you know, we could pick up things on traffic, we can see on units per transaction, on basket size. And frankly, we are not seeing anything. Now, is that going to be the case as we go into the future? I have no idea. But so far, we haven't seen anything that would ring any alarm bells, to be perfectly honest with you. And as you said, China and COVID-19 is an entirely separate topic. So the simple answer is so far, it seems okay.

is of course the impact that we do see on growth numbers is the one that follows from the COP base is changing. And that's of course visible in the US where the stimulus checks started late. Late March, no, mid-March, I think it was mid-March last year, and now we are also moving into the point of time last year where step-by-step Europe was opening up again. So, of course, that by default is visible in the growth numbers, but otherwise what we see and hear is mostly negative. anecdotal. One of the things that I think the IR team mentioned to one of you earlier today is that we've seen that in some markets in the last couple of days of the month, then the demand is a little bit slower than what it is in the first part of the month, maybe indicating that people are waiting for the next paycheck, but it's not something that's visible in the total numbers. So But what we are assuming from a macro perspective for the rest of the year, and it's not, what I'm going to say, it's not very academic. I think that we can all guess about what... how the year plays out. But what we have assumed is that that will be a couple of points of low single-digit negative impact on consumer demand for the full year. And that means then a little bit more because this is mainly, we didn't see that in Q1, so mainly for the last three quarters. But where that happens in which markets and when it happens, I think we can all speculate on. But there is no single digit negative impact in the full year guidance because of impact on a bit from the pandemic, but then mainly from inflation and higher interest rates impact on consumer demand. And then the other assumption that we're making is that we assume that there will be no reported revenue in Russia and Belarus, and there won't be, and for Ukraine as well. So that's around one point of revenue lost for 2022.

Perfect. Thank you very much.

The next question is from the line of Grace Moley from JPMorgan. Please go ahead, Elan, and I'll be unmuted.

Hi. Hi. Good morning. Thank you. My first question would be on an environment where you do see inflation increasing and consumer wallets being squeezed, given Pandora's focus on your value proposition, would you expect Pandora to benefit from a trade down by the consumer? or how do you view that dynamic? And then my second question would be, just on Q2, I know the rest of your year, the guidance embeds, I think, flat to 2% organic revenue guidance. Would you be able to give any indication as to whether you would also expect Q2 to fit within that range, or how should we think about that? Thank you very much.

I can address the first question. First of all, if we look at the inflation, there are some different components of this. One is obviously the one hitting all of our wallets in terms of mortgage rates and interest rates going up, energy prices going up, so they might be a little bit less disposable. income at that level. On a macro level, though, we see that unemployment is probably at record low levels. There is also some report that maybe the, let's say, the savings ratio is a little bit higher, maybe due to the pandemic that people spent a little bit less money. So those two things may very well kind of be counteracting forces and which is going to win, I mean, we shall see. But There are even some economists out there which I read recently that suggest that it may not have such a huge impact as we expect. And the final point there from a personal wallet standpoint, I mean, we've clearly seen wage inflation happening across the globe as well. So there is already some compensation happening for people. So that's kind of at a macro level. Then if you look at the category, before we dive into Pandora, and looking through what happened after the financial crisis in 2008 and 2009, and now also most recently through the COVID pandemic, this category seemed to have fared relatively well. I think it declined by some five points or thereabouts back in 2010, but then it bounced back quite fast. So which speaks to that there is some resilience in this type of categories. Within the category as well, I mean, then we can just speculate how the shifts happen. But clearly the kind of value proposition that we represent means that we're still an attractive gifting idea for a lot of people. And we remain sharp on that. And that's also why I mentioned that we're very, very keen on holding on to the value proposition that we have. And then we keep investing in the brand. We keep investing in our stores. We keep investing in new initiatives. So being active and kind of leaning in is the best way forward. That's what we did during COVID. And we had a good outcome. And that's our intention going forward as well. And then let's see what happens. But that's probably as much as I can speculate on that topic.

And then Grace, to your other question about the shape of Q2, Q3 and Q4. I think while hesitating to guide on individual quarters, I think it's a fair question. And I think what we should say is that we expect the shape of the three quarters on the top line to grow. to be reasonably alike, so we're not looking into Q2, Q3, and Q4 where we start at a big plus and end at a minus, or the other way around for that matter, but shape-wise, the three quarters being more or less similar. And the reason for that, I think when I say that, you should recall that the toughest comp base in the U.S. is the second quarter. I think then also for the rest of the year, you should expect that you will still see... the world outside of the U.S. growing despite headwind from the war and the pandemic and possibly also from the inflation. and higher interest rates, while the U.S., we do implicitly in our guidance, if you do a little bit of math, you can see we expect to go from plus 7 organic growth in Q1 to a minus for the rest of the year due to the tough cops. Still very, very high double-digit growth versus 19 in the U.S. for the rest of the year, but year over year being in the minus in Q2, 3, and 4.

That's very helpful. Thank you very much.

The next question is from the line of Lars Topholm from Carnegie. Please go ahead, Eli, and I'll be unmuted.

First of all, congrats with an exceptionally strong quarter. A couple of questions from me. One is on your gross margins. There are a lot of swing factors affecting it, and you also mentioned many of them. if we sort of strip out all the noise, if we take current commodity price level, current input cost inflation, current foreign exchange rates, where do you see the gross margin next year, everything else equal, i.e. when your hedging runs out? That was the first question. The second question goes on... some of the markets outside the seven you report individually because here revenue is more or less unchanged versus q1 19 and you mentioned spain and mexico is growing extremely fast of course i understand russia is out of the equation but but i still wonder there must be some other markets dragging that number down i wonder if you can give some comments on that thanks

Questions for me, Lars. It's Anas here. On the first one, on the gross margin, and it's a good question, how to think about when it all runs out. And I think in that equation, I can't remember whether you mentioned, but the headwind from forward integration, the 80 basis points, temporary hit that we have in Q1, facing all of that out, we should see the gross margin actually being a bit higher than where we are currently. Because we have a little bit of tailwind from silver next year, given at the current prices. In the books this year, we have at silver price of around 25 US dollars with just around 23, I see a little bit below that now, so that would be, let's call that 50 basis points of tailwind on a run rate basis. and then taking out the forward integration headwind that will stop automatically, the 80 basis points that we have here in Q1. And then there will actually be an FX impact on a run rate basis that will go the other way around, if I'm not mistaken. I'm just looking at my colleagues here. And so net-net, I think you could look into a gross margin that's called a point up versus where we are right now. And here I'm not factoring in that the share of our own business is likely to increase a little bit year by year, excluding some channel mix impact. So there's more, another way to put it short, there's more tailwind to the gross margin than headwind when you look into next year.

So just to make sure I sum it up correctly, so if the starting point is 76%, which you made in this quarter, then everything else equal a sort of rough guess today is 77% for next year. I know it's not a guidance, but more to make sure I draw the right conclusion on your answer, Anders.

I think that's a net-net. I think that's a good way to think about the gross margin. And then on the other piece of what's dragging down the revenue growth, I think we're still in Q1 if we take some of the bigger markets in that direction. Let me see here which one I should call out. We have in Asia, we have a... a number of smaller markets that are still in the minus, dragging that down, that still has some COVID impact in the quarter in that. So, for example, India as one, Indonesia as others, is dragging down the organic growth in Q1. Let me just see whether I can give you a few more hints. Maybe if you go to the next question, I'll come back after that and give you a little bit more flavor of what sits in that number, Lars.

But it's basically COVID-related, is the message I hear.

Yeah, and then, of course, we have some of the Russia sits in that as well. Sure, that's possible.

Fantastic. Thanks. I'll jump back into the line. Thank you very much.

As a reminder, please press five star on your telephone keypad to ask a question. The next question is from the line of Karina Schitter from Goldman Sachs. Please go ahead. Your line will now be unmuted.

Hi, Alexander. Hi, Anders. Thank you very much for taking my two questions. Both of them are China related to some degree. So the first one is just whether you can give us some color on the situation in China at the moment. I realize China is a slightly smaller proportion of your revenue versus peers, but if we think about in your release, you're talking about gaining traction around Chinese New Year, but still getting organic growth decline of 18% in Q1. If you could help us think about the situation at the end of March and going into April, that would be very helpful. And if there's anything that's given you confidence around underlying demand, whether it be online trends or stores, metrics in areas less impacted by restrictions. And then secondly, just on your cost guidance for this year, and thank you very much for laying it out so clearly in the slide and what's changed versus your previous guidance. But I was just wondering how the postponement of the China brand relaunch plays into that and what effect that has on OPEX for this year and potentially next year. Thank you.

On your first question, I mean, It's as we've said all along, we have an underlying issue on the brand. And of course, now with with these covid related restrictions, it's not made life easier, to say the least. So, you know, with Shanghai being completely shut down, not only does it shut the shops down there, it also shuts our office down. So people are kind of locked up for I think it's the fifth or sixth week in a row now. But, you know, even then we have our e-commerce being shipped out of Shanghai, the Shanghai area, which means that's also being closed. So that didn't help the online sales particularly. What we did as a precautionary measure, we shared out some of those volumes to some of the stores that we have around China in order to try to offset a little bit. But, of course, you can't carry too much inventory in those places. They're not geared to that. So I think right now China, frankly, is totally plagued by not just the fact that in some places the stores are closed. People are also – this is kind of feedback from the market – people are also afraid of going out if they would then contract something. covid because then they're shipped off into you know these quarantine hotels so actually people are just sitting at home waiting waiting this whole thing out so from our end from a business standpoint it's like you know it's very quiet what we keep doing in the background is of course is kind of still working on on the relaunch program but That's been now postponed, as I mentioned, right now until things change. And who knows how fast that's going to happen. So it's not a lot of things happening, to be perfectly honest. So to your question, do we see any signs? No, because there's not much happening. So it's very difficult to decipher anything meaningful at this moment in time. And then maybe Anders, you can comment a bit on the second question.

Yeah, on the China marketing. In absolute terms, it could be. I think last year we spoke about up to 200 million kroner that we might incrementally put into a brand re-launch in China. That doesn't have a sort of one-to-one impact on the EBIT margin, obviously because it would drive some revenue. But from an absolute OPEX perspective, it could be up to a couple of hundred million kroner pushed into next year in China. And then just going back to Lars' question before, if you look at some of the markets that are dragging in the other group that's dragging down the organic growth in the quarter, it's markets like Hong Kong, obviously impacted by the pandemic and lack of traveling as well, Singapore, As well, New Zealand, like in Australia, is actually the same growth level, flat is zero percent organic growth year over year. And then there's a number of markets that are still in positive, but dragging down the average, like Poland, which actually is 10 points up still in Q1, despite all of the noise, but below the average of the group.

The next question is from the line of Fredrik Iverson from ABG. Please go ahead. Your line will now be unmuted.

Thank you. Hi, everybody. Just one question on the US, because obviously it was very, very strong, 62% above pre-pandemic levels, and that is up from 42 in Q4. And then you say that that was in line with your expectation, and I'm curious to hear whether you assume such a momentum in q1 was it because when you when you gave us the guidance last time in the beginning of February you saw very very strong January and then expected a deceleration or what did you see in the in the US time way

It's Anas. On the Q1, I think a couple of things. One is that Q1 is before the stimulus packages last year, which makes the headwind stronger. So when we came into the weeks in mid-March onwards this year, we could clearly see that in the year-over-year growth rates in the U.S. that now we were comping the growth. the stimulus pack from last year, so that's one. And then there's a bit of phasing in the sell-in between quarters, that also also why you can see that sell-out in the U.S. in Q1 was zero and organic growth plus seven. So the distance between those two KPIs were a bit bigger than what it would normally be. And that's because of timing on when new collections are launched and when we're selling that to the partner community in the U.S.

Okay, so we should understand it like the U.S. decelerated in March and in February. January, maybe it was well above 62% versus 2019.

On a monthly basis versus 2019, I can't remember that in my head, but clearly on a year-over-year basis, growth was slowing down, getting into the back half of the quarter.

Yeah, fair enough.

Thanks. That's my question. The next question is from the line of Hadran Belch from BNP. Please go ahead. And I will now be unmuted.

Yes, good morning. It's Antoine from BNP. Two questions. First of all, you don't seem to be talking much about brilliance in that call. So is it possible maybe to have a bit of an update of the performance in the quarter in the UK? And what's the latest thinking about the timing of the rollout and I don't know, maybe some change compared to the initial assumption for that product line. And second question relates to the store rollout. Is it possible to maybe give us an indication of the phasing in the four quarters of the year in terms of the store rollout that you have for 2022?

and maybe some new flavor in terms of the region thank you uh hi so on uh on brilliance uh i think the what we were focused on in this quarter was uh essentially preparing the global rollout so that schedule has not changed though we haven't published the schedule as i've been saying in the previous calls um and then we've been kind of playing around with with uh different distribution in the store network we've been playing around a little bit with the assortment so it's been more of continued kind of to learn in front of the rollout that we have ahead of us Then on terms of the Evoke store concept, which I think you're asking for, we have rolled out five stores so far. We are planning to roll out another seven to ten for memory in Q2. And then there's a bigger portion coming in Q3. Normally in Q4, we're a little bit quiet with these type of activities as we're focused more on the trading being such an important quarter for us. And from a geo standpoint, we have planned a few stores in China, but that's, of course, a question right now. We have three stores rolling out now, a couple of stores in UK, US, Germany planned. So it's a global spread, if you may.

Yeah, thanks a lot. But actually it was also not just on the new format, but even like just the store openings, you know, that are scheduled for the year and expected to account for one or two percent of your sales.

Antoine, I can maybe take that question. We do expect quite a net openings already from this quarter, the second quarter. I know we net closed still some concept stores in Q1, but already now here in the second quarter, we will be net-net opening up new stores.

Thank you very much.

The next question is from the line of Hildy Abibat from Citi. Please go ahead. The line will now be unmuted.

Hello.

Hi. Yeah.

Hi. Morning, everyone. So I have two questions. One on this, again, new store format, the e-book stores that we're talking about. Could you share any key metrics, you know, that has improved anything on the basket size, or the number of transactions, and how much are we talking about in terms of investment? What kind of investment do we need in opening these doors? And the second one is on more of a housekeeping question for you, Anders. In terms of this Thailand proposition, we are trying to save, we are trying to keep aside 45 million, right, for the full year. Of that, I think 30 million has already been done in Q1. So I believe another 15 million of provisions we should account in a model in in queue to write. Thank you.

Okay, so if I try to address the first one. In terms of retail metrics, the most important thing what we've picked up in the, let's say, the four or five stores that have been open a little longer, is that we see that customers have a higher dwelling time, which is a good thing. We have a better, how should you say, they read our collections easier so we can also see that for instance in the UK store we can see that brilliance for instance went from being let's say one of the lower performing stores in the network to be one of the better ones and that's purely based on the presentation so it's easier to find the collections in the store which is one of the key criteria for these stores. The other thing which is important is that they performed from an operational standpoint really well during the peak trading period, which was one of the issues with their previous attempt. That actually was a very nice store, but from an operational standpoint wasn't particularly efficient. So I think those are the key highlights. And then in terms of CapEx, I mean, it's natural. We have kind of refined the existing store layout for over 10 years. So it's very cost optimized. the ambition would be to come to a similar point with the new store concept but that's going to take us a little bit of time so in the first pilots that you run um there i mean it's all bespoke so you don't get any scale advantages so those are a bit more expensive but as time goes by we'd expect to be in the similar type of range probably with the exception of if we put in more digital elements in those stores versus the previous one that would probably be the the only exception to the rule but generally speaking we expect that the store capex would be in um in the similar range after a year or so so still around like 10 million per store No, our average capex globally, it's more like 250,000 euros, give or take. So it varies a little bit by country. U.S. is a little bit more expensive because we have slightly higher stores and just labor is a bit more expensive there. Of course, the furniture is pretty much the same across the globe, but that would probably be the only exception to the rule. Okay.

Silke, on your other questions about the COVID-19 impact, yeah, your math is right. We have sort of indicated, let's say, 45 million kroner for the full year, of which 30-ish has been spent in Q1.

Okay. Thank you. That's helpful.

The next question is a follow-up from Lars Tappel from Carnegie. Please go ahead. Your line will now be unmuted.

Just a quick question. I remember in the Q4 call, you mentioned that I think it was one-third of the customers buying Pandora Me were new to Pandora. I just wonder if you have some observations on that metric for Q1.

I think the one third was referred to that one third of the volume went to Gen Z. And so far, those trends seem to hold up. So we haven't seen any major change there.

Okay, fantastic. That was all.

Thank you.

As I know, further questions at this moment in time. I will now hand the word back to the speakers for any closing remarks.

Okay. I mean, thank you very much for attending the call. As we opened up the call, we're very happy with the record revenue that we had in Q1. There will be some tougher comps coming up, but I think the business is in really good shape, and we're looking forward to seeing you in the next quarterly call, if not earlier than that. Thank you very much for joining today.