Welcome to the Pandora Annual Report for 2018. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Speakers, please begin.
Thank you. Good morning, everyone, and welcome to this conference call for Pandora's full year results for 2018. My name is Michael Bjergbye, I'm heading up the Pandora Investor Relations team, and with me here today in Copenhagen at the Pandora office, I have our COO, Jeremy Schwartz, I have our CFO, Anders Boyer, and my two colleagues, Brian and Christian. Anders, before leaving the floor for you, please, everybody, flip through the disclaimer on slide 2. Anders, all yours.
Thank you, Michael, and good morning to everyone. This is Anders Boyer. On slide three, you can see the short agenda for today, starting out with the full year 2018 results, highlights, then moving on to Programme NOW , and this is where we will spend the most of the call today before moving on to the full year guidance and a couple of comments to that. So please move on to slide number 4. I think the key highlight for today is that we are announcing the next steps in the Programme NOW as you know, we launched Programme NOW back in 2018, in November, with a change of the network expansion strategy as the first big step, where we radically reduced the number of store openings and franchise acquisitions.
Today, we are announcing the next four important steps, and they are a Commercial Reset. It's about Reigniting a Passion for Pandora, it's significant cost reductions, and it's about new ways of Programme NOW is all about setting up the company to drive sustainable growth. It's a two-year comprehensive roadmap that we have ahead of us, and that's where we will be spending the majority of the time today. Another key highlight, of course, today is that we did deliver on the full year guidance for 2018, with a 3% revenue growth in local currency and an EBITDA margin of 32.5%. On slide 5, you will find a few numbers for the full year of 2018, and our financial performance in 2018 was clearly not satisfactory.
We did deliver on our latest guidance, and we did deliver substantial profits, and we also did generate a lot of cash, and that's obviously good. But we also made two downgrades of our guidance during 2018, which you are all acutely aware of, and that's why we call it, unsatisfactory or, or disappointing results. But the revenue growth of 3%, as you can see in the top left, corner of the slide, as well as the EBITDA margin of 32.5 in 2018, was within the, the guidance that we made back in November. The important like-for-like, KPI ended at -4% for 2018, and that compares to a flat total like-for-like in 2017.
We did see that the most bigger markets decline in like-for-like in 2018, but we also saw that the large, important U.S. market improving from -2% in 2017 to +1% in 2018. We also saw China improving throughout the year. After having had a very difficult Q1 last year, we ended 2018 with +4% like-for-like in China in Q4, after we have also just been slightly positive in the second and Q3. I'd also just like to highlight the good cash conversion that we saw in 2018. As you can see, almost at the bottom to the left, 86% cash conversion in 2018, and that's the highest that we've had since 2014.
And we do keep generating quite some cash, and we returned DKK 6 billion to the shareholders last year, as you probably know. But we will also see later on in the presentation that we will keep transferring a lot of cash back to shareholders during 2019. A few comments on slide 6 to the Q4 numbers. Essentially, just three quick key messages around like-for-like, EBITDA, and cash as well. Total like-for-like was down 7% in the Q4, and we also saw a low level of -5% back in Q1 of 2018. But like-for-like in the Q4 was the lowest level that we had seen so during 2018.
We had expected that the that like-for-like in Q4 would be low, and we had included that in the guidance from that we made back in November. But it emphasizes the need for Programme NOW , and it emphasizes the need to change. The EBITDA margin ended up better than what we had expected in Q4, and especially considering that we are in the low to mid end of the revenue guidance for the year, and the EBITDA margin ended above the midpoint of the full year guidance, and that means that Q4 specifically was almost 36% EBITDA margin. And it is, among others, the initial impact of Programme NOW cost reductions, which are visible in the Q4 margin.
When you dig into the cash flow numbers for Q4, specifically, we also see that the effect of the change of network expansion strategy that we announced back in November is visible, and the cash flow related to M&A in the Q4 was only DKK 83 million, compared to DKK 1.1 billion for the full year. Moving on to slide 7 and the revenue bridge for Q4, year-over-year. You will note on this slide and on slide 8, the next chart, that we have put numbers on the waterfall charts. We hope and believe that that should be helpful for you in understanding how the business develops and what the drivers are, between the last year and this year.
It is, I should say, rounded numbers that we put on the chart, and therefore, it doesn't add fully up if you try to make the math across the chart. Forward integration still contributed quite a lot in the Q4 to revenue growth, even though we didn't sign any new deals during the Q4. But we will obviously see a run rate impact of all the acquisitions that we've already made for some quarters still, but it will sort of go down quarter by quarter, as we go through 2019. And as you will see later on, for 2019, we guide with an impact for the full year of 2% percentage points revenue growth from forward integration.
You'll probably also note that the bucket here in the chart that we call timing of shipments and other, it's smaller than in the last quarter, Q3, and there are indeed less one-off-like elements in the Q4 compared to prior quarters. And that bucket, timing of shipments and other, that also includes so the net impact of various other items like continued destocking in the wholesale channel and some impact from closing multi-branded point of sales. On slide eight, we have an equivalent EBITDA margin bridge. And as I just said, the EBITDA margin did end stronger in Q4 than expected, but the margin was obviously quite heavily impacted by deleverage that we see in the business as a consequence of the negative like-for-like.
With the gross margins that we have, it hits pretty hard on the EBITDA margin, and that's the -3 percentage points bucket that you can see on the chart here. The forward integration impact will sort of gradually disappear. The technical forward integration impact will gradually disappear during 2019, as we gear down on forward integration. But in Q4, it still had a negative impact of around -1 percentage points, minus 1 percentage points, compared to the Q4 of 2017, and that's the first building block that you can see in the chart here. As you can also see, we have been able to offset some of the negative leverage impact through cost reductions, but it is only partially.
Cost reductions support the margin by around 150 basis points in the quarter. And all in all, we are pleased with that and pleased to see the almost 36% EBITDA margin in the quarter. Last, small, nice story on cash conversion and cash generation in the year and the quarter. And as I just said, the cash conversion that's on slide 9. Our cash conversion in 2018 was the highest since 2014, as you can see to the upper left, part of the chart. And that goes hand in hand with the reduction of working capital by around 2% of revenue, which you can see to the lower left-hand part of the chart.
The biggest drivers in that was an increase in trade payables, and that follows the decision that we made back in August last year to tighten the payment terms with suppliers. So in 2018, we have actually had a positive cash flow from trade payables of DKK 762 million due to the intensified focus on this area. I'm actually quite happy with that. And we also had a lot of focus on DSOs, both in Q4 and Q3, and we saw the days outstanding, DSO, decreasing down to 50 days in the Q4, and that's more or less flat compared to the 47 days back in Q4 of 2017.
We're actually not fully where we want yet, but getting to a flat DSO year-over-year, I think, after having had some quarters with a significant increase, is a good step forward. But now it's time to dig into Programme NOW , and Jeremy, please.
Thank you, Anders. So let's have a closer look at Programme NOW please turn to slide 11. I want to first remind you that at Pandora's Q3 results, as Anders has said, we announced the launch Programme NOW, the immediate decision to stop the buyback of franchisees, and the scaling back of store opening plans. We also said that we would share our situation diagnosis and next steps at this investor call, and that is where I shall start. The diagnosis involved consumer studies and focus groups surveying around 28,000 people worldwide to understand consumer needs and behaviors, Pandora's brand health, and the appeal of the product design and shopping experience. We've also done a rigorous deep dive into Pandora's business to find any consistent patterns across countries, channels, products, and retail metrics that are significant.
All of our cost lines have been scrutinized, and significant opportunities to improve the cost base have been found. Finally, our company-wide processes, structures, capabilities, and the way we make decisions have been reviewed. As a result, we've implemented significant changes and created the next major steps on Programme NOW what we believe as a management team is that Pandora has the potential to restore long-term sustainable growth and shareholder value. Please turn to slide 12 to share the diagnosis, which identified four key interconnected causes of our like-for-like decline. I will go through each of these, starting on the left. We found the brand has what we've called a blurred brand experience.
Because though Pandora has the highest industry-prompted brand awareness, the brand positioning, promise, and storytelling needs to be sharper and more culturally exciting, with more impact across all touch points digitally, socially, on e-commerce and in stores, in order to recruit new consumers around the world today. Our next item, weak initiatives on charm collecting. Though Pandora sells more than 900,000 charms per week, bracelet sales are increasing and good progress has been made on innovation. The whole company needs to pursue a stronger initiatives to drive buyers and non-consumers to buy, and then return to buy more bracelets and more charms to grow their collections. Next is what we've called Over-push.
The brand's expansion in countries and stores and e-com has made the brand more available to more consumers worldwide, but the recent intensity of the promotional activity, as well as an immature merchandising and assortment process, may be changed and must be changed to protect and enrich the brand equity. Executional inconsistency. We have strong competencies, but the global direction and executional speed and impact has been compromised by the way we go to market locally, and this is changing as we speak. These four issues are being forcibly and forcibly addressed to build on the strong Pandora foundation and DNA. Please turn to page 13.
As you know, Pandora is the most well-known jewelry brand in the world, not simply because it sells charms, but because Pandora's magic product DNA, its manufacturing, craftsmanship, and value for money, created an idea that has had universal and timeless relevance to people, and of course, generates shareholder value. So it's worth restating Pandora's magic product DNA. We create precious, miniaturized little jewels that, frankly, others struggle to match. Each piece contains a meaningful human story and what every brand is seeking today, personalization. The whole Pandora concept is personalizable with stories that every woman can apply. Now, you know this about our charms, but the Pandora magic DNA applies to all our categories. For example, our three Wishbone rings can represent three children or three friends.
The feather earrings are precious, with 99 stones set in them, and more and more necklaces are being worn in layers and are being personalized, so we will grow all our other categories. But to arrest our decline, we have to focus on reinvigorating the charms business. So let me talk you through our specific charms initiatives on the next slide, 14. Our research shows that charms are in demand. In fact, 73% of all charm owners of Pandora say they will buy new bracelets and new charms once they finish building their current bracelet. A third of all Pandora owners have several bracelets, which they interchange for different styles and when they have different moods. And yet, 74% of the non-owners who actually would consider buying Pandora know very little about Pandora charms.
Now, this is where it gets interesting, because our research shows that we have strong assets to leverage. Pandora actually answers a significant underexploited global consumer jewelry market need space. It is to help women express their individuality, and that is exactly what our charms help women do. In addition, we are a cross-generational brand. In fact, I have been pleasantly surprised on arrival here to see how we, as a brand, right now are recruiting Gen Z customers and even younger than that, and millennials right through to baby boomers, which we all know many brands would like to say they do, too. On the right, you can see that to respond to this, we're building a charm collecting system.
First of all, we need to attract new customers by innovating new bracelets, charms, having new collaborations and limited editions, and using all of the best marketing resources that we can rally to hand. Leading the way women wear and style their multi-charm bracelets in our advertising with influencers and social media, online and in store, is a key objective of ours. And then driving multiple charm collecting, not least by inventing a digital-first reward system to drive loyalty and capture rich data, something that Pandora is so lacking today. But none of this is business as usual. It requires disruption. Please turn to the next slide, 15. In a world where consumers are overwhelmed by marketing messages and choice, we need to create a disruption to the Pandora brand. Disruption in a positive sense.
Our vision is this: first, to make the brand come alive by expressing the brand in a culturally relevant and sharp way across all our touchpoints to re-excite customers to actively re-engage with us. We need to step change the habit of collecting by attracting new and lapsed consumers to buy, to wear, to collect charms, complemented, of course, by our other categories. We will act with commercial responsibility, creating a healthier promotional activity, controlled range of products, and becoming more agile in the wholesale channel. We will pursue executional excellence with the global leadership, setting the plans that the countries will execute excellently on e-commerce, in stores, and with franchise partners. And finally, this will be underpinned as we push with pace to capture data and drive personalization across social, e-com, and omnichannel. All of this is captured Programme NOW please turn to the next slide.
And it's in what we're calling Reigniting a Passion for Pandora. This is Programme NOW transformation of the consumer experience across all touchpoints. Please turn to chart 17. Reigniting a Passion for Pandora is the cornerstone Programme NOW there are four major steps Programme NOW, which we'll go through one by one in the next slides. Excuse me. A Commercial Reset, Reigniting a Passion for Pandora, reducing costs, and implementing new ways of working. Let's turn to page, slide 18 to see how these are implemented over time. Along the top, you can see time, and you can see then the four work streams. The Commercial Reset has already started in Q1 and will continue all year as we adjust our promotional plans and adapt our inventory levels.
The work streams of reducing costs and implementing new ways of working have started and will continue for the two-year transformation period as we remove costs, build capabilities, and improve processes. Now, 2020 is an important year for Pandora. It is the twentieth anniversary of the launch of the Moments, charms, and bracelets platform . Now, a celebration like this gives us the perfect springboard to reengage new and existing consumers with our brand, and therefore, 2020 is the year to reignite a passion for Pandora. However, with Q4, Singles Day, and Christmas being such a critical moment to attract new customers and drive sales, we see this as actually the true start of the initiative, Reigniting a Passion for Pandora, and aim, therefore, to make Q4 bigger and better than ever before.
Until that time, the teams are working on the content that can be brought to market at that time. Now, let's look at the concrete actions in each of the work streams in more detail. Please turn to slide 19. I'm going to start with the Commercial Reset and on the left. The Commercial Reset is the right thing to do for the brand and the business, but it will have a negative short-term impact. Firstly, we are reducing our promotional intensity outside of the key gifting retail promotional periods to both protect our brand equity and allow us to amplify the product launches between promotional periods.
At the same time, of course, as the next point, we will continue to amplify specific promotional periods, such as Mother's Day, Chinese New Year, Black Friday, and the sale, and we will continue to develop new brand building as well as price promotional mechanics. At this stage, we estimate the net impact to be around negative 2 to 4 percentage points on like-for-like and organic growth. But of course, we are seeking to amplify our non-promotional activities to neutralize this at the same time. On the right, we will optimize our wholesale inventories, and we've reduced the size of our NPI sell-in packs , that's our new product sell-in packs , because this will reduce the initial stock purchase, but will allow our customers to accelerate the reordering of faster-selling products and reduce the stock build-up of potentially slower-moving products that we've launched.
We estimate this will have an organic growth impact of around -1 percentage point. We are also initiating an inventory program to take back some of our slow-moving, residual old stock in selected markets, and this will have a -2 percentage points impact on EBIT. Now, these are tough decisions to make because of the short-term negative impact, which, of course, we don't take lightly. But it's absolutely vital for the long-term health of our brand to create a strong foundation for Reigniting a Passion for Pandora and to attract new and lapsed consumers. Please turn to slide 20. We've already started working on 5 key areas to reignite the passion for Pandora, and on the left is where we are today, and on the right is how we see each work stream unfolding towards customers. Let's start with the brand, where we have a new promise.
We're working on a new visual identity, digital assets, and communication is being developed. We aim to launch a new brand communicational and, and social engagement that will be both strategic but also disruptive from the end of 2019. On new products, we are developing new products and do this while we're rationalizing the assortment so that the new products match the new brand promise. And in 2019 through 2020, we will launch new products, including a new Charms bracelet platform, new collaborations that we've never done before, limited editions, and many other exciting products that I can see are in development. And we're going to do this at different price points with specific entry price ones, too, to recruit those new consumers who are slightly more price sensitive.
In media, we're testing econometric modeling and personalization to validate elasticities in what we call the upper and lower funnel of recruitment, i.e., new consumers versus existing consumers. In Q4 2019, we've allocated an increased media budget to our base investment, which together will amplify our new content with progressive targeting of new and lapsed consumers. Coming to e-commerce, something I think you know that I'm passionate about since joining Pandora has been to transform our e-commerce, omnichannel data, and loyalty reward offer. With the current retail environment continuing its rapid change, of course, e-commerce is absolutely key for us and an area where I know Pandora has not been on the forefront of development. Right now, we're continuing improving what we can call the basics of product landing page, with more consumer relevant and inspirational content and storytelling.
Of course, we're continuing to accelerate our omnichannel rollout in the U.S., while at the same time, we've kicked off and are starting our loyalty reward program scoping and development. The more material changes and investments are being conducted to step change our position in e-commerce and omnichannel, and they will become progressively more evident in Q4 and, of course, through 2020. At the same time, we do hope to start piloting our new loyalty scheme and accelerate data capture to underpin our personalization and clienteling strategy. Finally, on stores, we've started to design a new store concept. It's focused on the merchandising and the product navigation first and foremost, as well as creating a more inspiring and engaging environment. We have an ambitious goal.
It is to pilot stores at the end of this year and then take some of the inspirational elements and put them across the prime areas of our estate so that we can signal change. Just for clarity, from a store CapEx point of view, we're working within the existing spend per store, though we will now grade the investments by store format and turnover potential, so that we can flex the investments, which we don't do now. In addition, the rollout program is targeting end-of-lease refits and new store openings, though we have allocated some of the DKK 200 million of CapEx that you know about for some of our prime locations, which we may need to bring forward the refit in case from the end-of-lease date. Please turn to slide 21 for a review of the next work stream of Programme NOW.
To better act as one global company, we're starting a journey to change the way we operate as an organization. In order to create that sharp, compelling brand, we're making our Chief Creative Officer, Stephen Fairchild, fully responsible for our global brand execution, as alongside his role, leading product development. We've created and are operating now a single global to local trading calendar, and this has been implemented with up to 14 trading periods by country to allow us to amplify product launches separate to the promotional activation. To build world-class leadership competencies, we're creating a new global merchandising function, which to date has not existed in the company, and I'm very pleased to announce that we've recruited a senior vice president for global merchandising, effective immediately.
Thirdly, we're in much closer dialogue with the franchise and multi-brand partners to rebuild a sense of partnership, and I'm personally involving myself by participating in annual meetings and events. Finally, we're creating a stronger performance culture, one where we are changing and aligning the incentive programs with shareholder value creation, one where we will have one set of numbers, and one where we'll have, and do have now, a monthly performance review and common set of KPIs. Now, I've been through three of the four work streams Programme NOW, and I'll hand over now to Anders to the final piece.
Thank you, Jeremy. On slide 22, we have some details on the cost reduction opportunity, and the cost reduction opportunity is quite big, and also bigger than we thought when we started our diagnosis some time back. And it should be recalled that the DKK 1.2 billion opportunity comes on top of the DKK 350 million we announced back in connection with the Q2 announcement in August last year. So in total, those two buckets together is something like 7% of our revenue.
I guess when you see such a big number, you may wonder whether we are moving into dangerous territory or whether we are too aggressive, and we don't think so, because most of the cost reduction levers that you can see on this slide are more of a, I guess you can call it, tactical nature than some fundamentally changing the structure of the company. So we have divided the cost reduction opportunity in five categories, and we will follow up on progress on these throughout the duration Programme NOW for each of these categories, we have shown to the right on the chart here, a cost reduction range.
As you can calculate, it would sum to between DKK 1.0 billion and DKK 1.4 billion, if you take either the low end or the high end of the range, respectively. On average, as we have stated here, we expect to land at around DKK 1.2 billion in further cost reductions. As you can also see on the slide here, there's no one big silver bullet cost reduction bucket which count for a majority of the cost out, but it's several smaller components which then add up to the DKK 1.2 billion. We are, in fact, in full execution modes on several of the levers here already, and that includes, among others, travel expenses, point of sales material, and several of the levers within cost of sales.
And I should also mention that earlier today, it was announced that we have had to reduce our workforce in Thailand by around 700 employees as part of that program. Of the DKK 1.2 billion, we expect to realize DKK 600 million already here in the calendar year 2019. As you can see on slide 23, Programme NOW is obviously a core part of what we will be doing and working on during 2019 and 2020, and therefore, we will obviously follow up on it quarter by quarter until the program ends. And when we meet next time in May, we will update you on the progress on the cost reductions, the Commercial Reset, but not least, dig further into the initiatives within Reignite a Passion for Pandora.
Then before we get to the Q&A, we'll just spend a couple of minutes on the guidance on starting on slide 25. I think many of you had already guessed that we would be changing our guidance metrics in 2019. We have discussed that with several of you, and we also mentioned it in connection with both the Q2 and Q3 announcements in 2018. So, going forward, we will be guiding on organic growth and on EBIT margin, and we believe that both metrics better reflect where shareholder value is created in a company like ours. And then, obviously, the implementation of IFRS 16 makes the EBITDA margin a somewhat off KPI going forward, and we hope you agree and that it makes sense to you as well.
But when we guide, change guidance metrics, and then, and then at the same time, we go through a significant transformation, we understand and realize that it can be difficult to, to track the numbers. So therefore, we have decided to provide quite some specific assumptions and building blocks in for 2019, and hopefully, that helps you understand the big drivers of the financial performance in 2019. On slide 26, we have shown a waterfall for the revenue growth in 2019, and we have separated it into two buckets, one being the normal business, I guess you can call it, and that's what we have labeled before Commercial Reset, if you look at the upper left-hand part of the chart. And thereafter, after those two building blocks, we have the impact of the Commercial Reset.
The reason we do that, obviously, is that the Commercial Reset is of a one-off like nature, and it's a deliberate decision that we have made, and it will impact the revenue in 2019. In 2019, we expect to add around 75 concept stores to the network, down from the 250, 259 that we have opened net in 2018. So that's a 70% reduction in the net openings going into this year. And as you can see on the chart, the expansion of the network is expected to add around 4 percentage points to organic growth this year. Total like-for-like, it's expected to be negative, down to high single digit, and that's what you can see in the gray text box above the waterfall.
That high single digit up to high single digit negative like-for-like includes the impact from the Commercial Reset. Excluding the impact from the Commercial Reset, total like-for-like is expected to be mid-single digit negative. That then will take us to an organic growth between 0 and -2, excluding the impact from the Commercial Reset, and that's the second gray black bar that you can see on the chart here. The sell-in packages then is expected to reduce organic growth by 1 percentage point, as Jeremy mentioned early on, while the reduction of promotions will impact like-for-like and organic growth equally by around -2 to -4 percentage points. Consequently, the organic growth guidance that we are putting out today is between -3 and -7% in 2019.
When we look at the total, reported revenue growth, forward integration obviously has an impact as well. That's not included in organic growth, but forward integration will positively impact total revenue growth by around 2 percentage points in 2019, and that includes all the forward integration deals that has already been completed in 2018, including the acquisition of the distributor in Taiwan. And that then means that total revenue growth in local currency is expected to be between minus 1 and minus 5% in 2019. On the EBIT margin guidance on slide 27, the starting point to the left, obviously, is the actual number for 2018, the 20%, 28% EBIT margin. The first building block is then the margin-enhancing elements that we mentioned back in connection with the Q2 2018 announcement.
As you may recall, then back then, we mentioned the opportunity to improve the margin by 3 percentage points due to, among others, less forward integration, lapping wholesale, destocking, cost reductions, et cetera. And that's still the case, except that the wholesale inventories are still expected to destock further in 2019, and thus the margin improvement in 2019 from these elements is 2 percentage points. And then after that, we have the net impact between the DKK 600 million NOW cost reductions and the DKK 500 million NOW reinvestments in, into the business that we are making. That's the +2.5% building block and -2% building block.
Then going a little, little bit further to the right, you have the, an other bucket, of minus 0.5 percentage points, and that includes, a couple of different things, higher production time on new, products, but also the, the small upside from converting to IFRS 16, and that is around, a +30 basis point impact or so. That takes us to the EBIT margin guidance of 26%-28% before restructuring costs. And the other upper end, and this means that the upper end of the guidance for 2019 is in line with the actual EBIT margin in 2018 of, 28.2%.
The restructuring costs Programme NOW and in 2019 are quite, quite large, and that shows both the size of the transformation that we are going through, but it also shows something about the size of the cost reductions that we are pursuing. In 2019, the restructuring costs are expected to amount to around 6 percentage points of revenue or up to DKK 1.5 billion. And that consists of the cost of the inventory buyback program, that's around, let's say, DKK 500 million, and that's sort of the single biggest element of the restructuring cost. And then the remaining 4 percentage points is about the program execution as such, and that includes three main buckets.
The first one being costs related to reducing costs, terminating contracts, severance payments, et cetera. It's about costs related to consultancy support, and I should mention that part of that is partly success fee-based, and it includes, thirdly, one-off costs related to defining the new brand and the new store concept, and including some potential write-downs of capitalized store fixtures and point of sale material. Last on the guidance on slide 28, just starting out with a more accounting technical comment, and that is that we are changing the target for the capital structure policy to reflect IFRS 16. It's a pure accounting matter, and that means that our capital structure policy will be changed from currently between 0 and 1 times net interest-bearing debt to EBITDA to between 0.5 and 1.5 times EBITDA.
For 2019, the board of directors and management proposes a total cash return to shareholders amounting to DKK 4 billion, and that's around 13%-14% of the company's market cap as of today. In line with our cash distribution policy that we announced together with the annual report back in 2016, we propose a dividend of DKK 18 per share and a share buyback program of DKK 2.2 billion. As we're stating here in the first bullet on this slide, we will obviously also look at the leverage ratio, excluding restructuring costs when we consider the amount of cash returns to shareholders, and consequently, it might be that the reported leverage ratio, including restructuring costs, temporarily exceeds the upper end of the new capital structure interval during 2019.
Before we get to the Q&A, on slide 29, we have clearly have had our challenges during 2018, but it's also clear to us that Pandora has some very strong assets to build on: a cross-generational brand, a magic product DNA, a large global network across touchpoints, and not least, state-of-the-art crafting facilities. Based on these assets, we do see a way back to sustainable growth, and that means positive like-for-like, and we do see a way back to maintain continued industry-leading margins. We say that because we have laid out a comprehensive two-year roadmap as part Programme NOW based on the diagnosis that we have made, and we say it because we have identified significant cost opportunities, which will both allows us to invest significantly in growth initiatives, while at the same time supporting our margins.
And that's why we call our equity story a turnaround opportunity... and not a turnaround in a classical sense, but a turnaround in the sense of the belief in the future of Pandora, and thereby a turnaround of the multiples that our company is trading at. That concludes our presentation, the prepared presentations. Now we are ready to move on to the Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. Our first question comes from the line of Chiara Battistini of J.P. Morgan. Please go ahead. Your line is open.
Good morning. Thank you for taking my questions, and thank you for the extensive presentation. The first one would be if we can go back to the product and the strategy on the product. Can you talk more about the initiative, the tangible initiatives you are planning to implement, how you're planning to prioritize the charms and the bracelets over the other categories, and how you see the balance between the core, so the charm bracelets and the categories and the other categories? And also, how you think about the product cycle and the product innovation, given that that was a very big focus at the beginning of last year. And the second question would be on the CEO.
If you could give us an update on the CEO appointment, what and where you stand on that, if you're still actually actively looking for one, as there was no mention in the press release this morning. Also, can you remind us what kind of profile you're looking for for a new CEO, and what kind of company you're trying to hire him from, please? Thank you.
Thank you very much for these questions. I think as I will start with the number two, that the CEO is still... The search for a new CEO is still progressing, and there is no news on this so far. And then handing over to, I think, Jeremy, for the question on the product strategy.
Yeah. Thank you. Thank you for your question. I think the first point I want to make is, and the reason for talking about the magic product DNA, is for us all to realize that Pandora has an idea that applies equally to all categories. So to remove or reduce the thought of either/or or one or the other, we are able to increase all the categories. However, as I've stated, we have to focus and prioritize when you have four or five categories that you're seeking to grow, not least for our efforts, and not least for our store staff, and therefore, we're going to return our efforts and our thinking and our time to growing the collectibility of charms and bracelets, while at the same time, bringing this idea of collecting to the other categories. But I will express the priority.
So the priority is charms and bracelets and the collecting of those. Next will be necklaces, because we see that we are performing well there, and we have a headroom, and the collectibility and the style of wearing multiple necklaces is growing. We will continue to focus on rings, because again, interestingly, from a stylistic point of view, the multiple wearing of rings is hot, and that will be the priorities that we will take. You've talked about product life cycle. I think there are two elements there. I come from a school of thought that fundamentally believes that brands and businesses have what I would call core icons.
It is those things that are growing year after year, that make up the core business, that have something about them that is timeless, and one needs to nurture and grow those at the same time as you think about innovation. And we will do that and are focusing back on the core icons alongside innovation. In terms of product life cycle, you know, we are seeking new icons with the launches, and we will succeed with some, where something just hits the money. An example of that, on the ring, for example, is the Wishbone ring, which I mentioned, and I only mention that because, again, it's got a sort of timeless capability to represent the product DNA, and new generations can understand that and connect. But other things, we need to create what we're calling engineering scarcity.
The reason we've mentioned here, specifically collaborations and limited edition, is that marketing now is not just about advertising or promoting something new. It is leveraging scarcity to create demand, and therefore, the product life cycle with some products will be extremely short, so that we can create that excitement and those queues that Pandora is so famous for outside our store and online. Thank you.
Very much. So net, net in terms of the product and then the number of SKUs, we should be expecting fewer SKUs versus what we had in the past and maybe more focus on these shorter-term collaborations, or?
So the answer is yes to your question, and I will give the why. The why is because in order for us to cut through all of the marketing noise in the world that I expressed, we need to be clear to the consumer, which are the key products that we personally believe are what I would call showstoppers, things that they, we want millions of people to buy. And to do that, we will have to reduce the numbers of products we're launching and tighten the existing assortment to improve our navigation and shopability, both in-store and online.
Thank you very much. Thanks.
Thank you. Our next question comes from the line of Elena Mariani of Morgan Stanley. Please go ahead. Your line is now open.
... Hi, good morning, everybody, and thanks very much for the extremely detailed plan. Two questions from me. The first one is a bit more on the medium-term plan. 2019 seems to be like the start of your journey. How should we think about 2020 and the following years? So in essence, how long do you think it will take to fully implement this extremely comprehensive plan? Do you expect in 2020 to go back already to positive like-for-like and to profitable growth? And what do you expect could be your sustainable EBIT margin in the medium term? You're talking about a like-for-like growth that could be low- to mid-single-digit as a midterm financial aspiration. How about your EBIT margin target?
Question number two would be on your distribution network. You don't seem to believe that your network is too big, and you don't seem to be over-distributed. Do you expect to perhaps consider some store closures as well, given that at the end of the day, you're growing very well in your e-commerce platform, and perhaps in some of the markets, you might have opened too many stores? I can see from your 2019 guidance, that 4% of your organic growth is gonna be driven still by store openings. How should we expect this to evolve in the future? And I know I'm allowed to ask only two questions, but one small follow-up from the CEO one .
Jeremy, would you be open to consider the CEO role, just in the remote case you were asked by the board? Thank you.
Thank you, Elena. I think I'll just start out to say that we are not guiding in 2020, and we do not have a guidance for the midterm, but maybe, Anders, you can provide some comments on the cost programs and the investments that you see required.
Yeah. Thanks— Hi, Elena, it's Anders here. And thank you for that introduction, Michael, because, yeah, it is too early to be specific about 2020 yet. But it... I guess a couple of things and then points that we can give. And obviously, I think 2019 is expected to be the biggest transition year, if you like, and as always, in transitions like this, you get the cost before you get the benefit. And that, that's typically how it works out. So looking and a couple of sort of data points, I think, yeah, I can give you. You can call that.
Obviously, 2019 will be impacted by the Commercial Reset, both on the top line and on the bottom line. And that with the numbers that we've just gone through, and obviously, those are of a one-off impact. And then going into 2020, we should obviously, you will see the run rate impact and additional impact of the cost reduction opportunities. We'll not get all the way to DKK 1.2 billion in the calendar year 2020, but as a run rate, we—That's where we will get by the end of 2020.
But exactly how that plays out on the bottom line, depends on decisions are still to be made on, on how much I'll be reinvesting in the business to drive the top line. But at least we know that there will be more cost reduction opportunities flowing into the P&L come 2020.
Thank you. I will take the next question. I think the first point is that, as we've noted, we will have a net opening of 75 stores, and as we've indicated, those will focus on Latin America and China. And we can see great opportunity in places like Colombia, like Mexico, that we're actively developing, and of course, China, as we've said. The second point is, within that net number, there are the natural closings that we're doing, as we are finding some malls in certain areas are becoming less popular, and we've come to end of lease, and that makes good business sense. We are looking at other markets where we can see opportunities, the likes of U.K. and Italy.
But unlike other, some other retailers, we have a margin structure, which means that from a prioritization point of view and reigniting the brand, the priority areas for us to put our energy is on the things we've expressed before and ahead of a significant network redesign. That's not to say it's not being worked on, but it's not a key message to say in terms of our transformation project. Thank you. Next one.
Maybe the CEO question?
I don't think it's appropriate to make a comment like that, but thank you for the question.
Thank you. Thanks very much.
Thank you. Our next question comes from the line of Lars Topholm of Carnegie. Please go ahead, your line is now open.
Thank you, and congrats for reaching your Q4 guidance. I have 2 questions for this round. So, to begin with, your new plan includes, I understand it has 14 events instead of 10 drops. It includes smaller sell-in packages, which means that franchisees have to rely more on replenishment orders, which presumably will go up, and also a new concept to be launched in Q4 2019. And my question is: Doesn't this add more complexity that could potentially put stress both on your supply chain and your production? How do you see that? Maybe specifically in the light that... Our understanding is there are still problems with delivering certain sizes of the Reflexions bracelet, for example. So the question is, how are you sure your organization is ready to handle increased complexity?
And then a question number 2, if I may, because you provide the building blocks for your guidance, but 16% of your 2018 revenue came from wholesale multi-brand dealers. How do you expect that to perform in 2019? Thank you.
Perhaps I will answer a couple of those, and we'll share. So I think, you know, the first point is one of those aha moments when this company, as we've stated, has been through a pioneering phase of opening countries and stores to create this great global network. But in so being focused in the pioneering phase, it was not necessarily working as a global company, and that's why we've made that point. What we actually discovered in the first weeks was that most retailers operate a trading event plan with between 10 and 14 separate activity events. That's the nature of, in a country, having holidays, having launches, having promotions, having weekends and paydays. But actually, at the global level, the company was running a cadence around drops. That was the language of, the center, and that was focusing really simply on new products.
Well, as you know, a business in retail does not just operate on new products, and as I've expressed, it's about driving the core. And therefore, there was a disalignment between the way the business was thinking, such that by simply saying, we will operate as a great retailer, both e-com retailer and store retailer, and have one view of the world in which the products have to complement and the promotions have to work beside and with, and the holidays have to be amplified, we will have coherence and less complexity, and that's what we're achieving. Second point... So hopefully that's a clear answer, and absolutely, it's about less complexity and more clarity across the whole business.
On the small sell-in packages, you know, as you know, Lars, because I've just been with the 900 franchisees of the US, Canada, and South America last weekend, talking to them, and actually, we all believe in a sell-out, just-in-time model for efficiency. So the smaller sell-in pack will ensure that within that NPI launch, if there happen to be some items that are slower selling, that the franchisee or the wholesaler will not then have a large number, because the pack would have been large, of an item that doesn't sell so well, and therefore, have to deal with the complexity of then clearing that through some lower price or sale or holding on the stocks till another time, but rather can now, as sales become evident, order the things they want more quickly and have less of the things that aren't selling so well.
In terms of a new concept, you know, of course, our job, and that's why we're creating a new global merchandising function, is to balance the need for all, frankly, consumer companies to stimulate demand through innovation and driving the core with managing complexity of that very fact. And one of the things that we've not been great at planning is, as the first question, life cycle management, which is the ability to actively remove items which are not moving fast and ensure that the range does not expand because of that lack of active discontinuity. So our job is to work out, and we'll work out how to do that. In terms of the last point, you know, we haven't really had a supply issue on the Reflexions bracelet, funnily enough.
We've had just an issue with the sizing, and that issue has now been addressed, so we're in a good stage there, and hopefully, that sort of mistake won't be repeated. Thank you.
Just to follow up, Jeremy, on your comments regarding the smaller sell-in packages, I clearly see the value proposition from the franchisee's perspective that they can run smaller inventories. But my question was more if your supply chain and production can handle a situation where you have more replenishment orders, or if you move towards what you call a more just-in-time principle in supply, does this mean that you just move the inventory from the franchisee to Pandora itself?
Lars, I fundamentally believe we have absolutely the capability of doing that, and I think the best proof is that we run an e-com business, which is about just in time of delivery of small packages. It is true, and that in the U.S., we've had some issues in the last quarter, but, as we've indicated, we are on the case and sorting those out. And that was more to do with, as you know, a new system being put in place that had some hiccups, if we just say it as it is, but that's been sorted, and I'm confident we will work that through.
Thanks. And then on the multi-brand revenue assumptions for 2019.
Hi, Lars, it's Anders, yeah. I think on that, yeah, multi-brand was quite significantly down, or other point of sale, quite significantly down in 2018. And well, we do expect that channel to reduce, you know, decline in revenue still in 2019. And I guess one way to look at it is that that's three components of the development in the multi-brand channel. It's like-for-like, it's a net opening or rather closing, in this case, of multi-brand stores, and then it's about changes in inventories, destocking. And among those elements, I think you should still expect some closing of multi-brand stores, but that probably less so than in 2018.
I can't even remember, was it 325 points of sale that we closed in 2019? It will probably be a bit less than that, but overall, that channel is still expected to decline in 2019.
By the same pace as in 2018, or more, or less?
It's quite significant in, I would say, in 2009, sorry, 2018, in that channel. Obviously, also heavily impacted by the forward integration. Also, as the... Not forward integration, that one, but the destocking was quite significant in 2019, sorry, 2018.
So, still down, but not as much as in 2018.
That could be a good modeling starting point, yeah.
Perfect. Thank you, guys, for taking my questions.
Thank you. Our next question comes from the line of Michael Rasmussen of ABG. Please go ahead. Your line is open.
Thank you very much. First of all, I would like to talk a little bit about 2019 and the quarters. Could you add a little bit more clarity on how we should expect the quarters, in particular, the Q1? I mean, obviously, you do have a bit more difficult comp on the group organic growth, while when we look at China specifically, you will obviously get some benefits from the timing of Chinese New Year and Valentine's. And as I understand it, also, the inventory reductions program is probably not gonna hit, at least a lot in the Q1. So can you add a couple of building blocks just to set the scene here for Q1?
My second question is focused on the slide that you present in the appendix on slide number 34 in the slide pack. What I particularly notice here is that the gift-giving category is the one that declined the most when you ask consumers from 2016 to 2018. How exactly are you going to address this specific issue here? And maybe if you can also just give us an update on what you see gift-giving as a percentage of sales, or what you estimate that is in the Q4. Thank you.
It's Anders. I can start off the first question on the quarters. In general, I'm a little bit hesitant to say too much about how to expect the top line, bottom line to be between the quarters. I think that's how we think in general, but it's even more so going through a transformation like we are with some bigger than normal moving parts. Having said that, there's a couple of things that we can say, and one is that the Q1 and the first half is likely to be lower than the second half of the year.
It's not surprising in a transformation like this, you will obviously get the costs before you get the upside. I think that that's one sort of statement to put out there, but you should also expect that the top line initiatives that we are implementing will mainly have a positive impact in the second half. As one of the slides that Jeremy went through, you can see that the marketing investments as an example, mainly comes all the way back to the Q4 of the year. Not all of it, but it's back end loaded. And that means that you should expect the first half of the year to be slow.
I will now answer the second question. I think the first thing is, you know, we are a brand, as you can see, that is bought not only as a gift, but also for oneself, and one also needs to understand that these are gifts that are given not between just a man and a woman, but between women friends, an important shift. This is the reason that we've stated that the brand and the way it communicates need to have a role in today's culture, as I mentioned. And the reason is that within the brand tracker, we can see that our brand awareness continues to grow, but the brand heat is perhaps softening, and that is down to relevance. So first of all, we believe that the activity we're planning will recapture that connection, not just to the receiver, but to a giver.
So that's point one. Point two, the reason that we're saying that Q4 needs to be bigger and better, and the start of the reignition, is exactly for the reason that you've identified that gifting is critical, and within that, the gifting range we have for Christmas is being reviewed and refreshed. And I think we can say probably around 60% of our sales are, in some format, self-noted as gifting, but as I say, that can be, grandmother to daughter or, or, or granddaughter, as well as husband to wife, which this is normally referring to, or man to woman, sorry. Thank you.
Great. Thank you so much.
Thank you. Our next question comes from the line of Hans Gregersen of Nordea. Please go ahead. Your line is open.
Good morning. Turning to the DKK 1.2 billion cost savings programs, as you alluded to previously, Anders, you mentioned that there would be some reinvestment.
... But can you give across the entire cost-cutting program an indication of the partly facing, but also how much of the DKK 1.2 will be reinvested, and how much will go to profitability? That's the first question. Secondly, on the like-for-like outlook, you have not shared too much information about this in this report. I don't know if more is going to come later. But could you, without going into number guidance, give us sort of a layout for how you see the like-for-like recovery occurring over the next three years? Thank you.
I answer, I can start on the first question on the cost reduction. We can't be specific yet on how much we will reinvest of the DKK 1.2 billion. This year, we're starting with reinvesting half a billion, five hundred million kroner, in the business. That's quite skewed towards the latter part of the year. And then what that looks like going into 2020, that depends on several things, obviously. So we'll have to, can't be more specific. But what is certain, obviously, is that we will get a further upside, margin upside in 2020 from the cost reductions, if you look at things in an isolated basis, and then a bit more going into 2021.
We have set DKK 600 million in cost reductions this year, and then DKK 1.2 billion as a run rate going out of next year. And then you, we can do a little bit of math on what that means for the the calendar year 2020, but you probably get to a number that is sort of, in very, very round numbers, around DKK 1 billion for the calendar year 2020.
I will take the second question. As we indicated, both-
Anders, Anders, just to understand your question, am I right to... I mean, you mentioned DKK 600 in reinvestments this year. I assume that, these investments are ongoing reinvestments, so, it is not like one-off, it's more like recurring reinvestments.
It's DKK 500 million in reinvestments, but you're absolutely right. It's here to stay, if you like, five hundred, the DKK 500 million or another number, higher number. Let's say, well, if we find out that we, it might be that we put even more money behind marketing and our brand machine, given that what we invest this year is mainly in the latter part of the year, it might be a different number going into 2020. But it's, yeah, the starting point is that it's recurring, it's not a one-off.
So the conclusion is that less of the DKK 1.2 billion, I should assume, hitting the profit line?
That's correct. Yeah, it will not... That would be a, it would be a net impact, but what that net impact is, it's DKK 100 million net OpEx in 2019. What exactly that number looks like going forward, that's too early to say.
Okay. Thank you.
In regards to your like-for-like, as we shared in November, and we're doing now, we see that, 2019 is going to be negative like-for-like. Really, I think in this environment, it's too early to make, promises or statements on, the future outlook, but we are only two months into a 24-month program. But I think as we've articulated, the modeling we're doing is showing that we can get back to a positive like-for-like. Of course, the purpose of our next calls and so on will be to update you in as much transparency as we feel comfortable to do.
Jeremy, would it be fair to argue that the return to positive growth numbers would be a multi-year exercise based on your past retailing experience?
Yes. I think it is still a bit too early to make a statement, but let's take that as a good assumption. I think one thing that is worth noting, of course, is that we are prioritizing our countries so that we can give ourselves and yourselves a proof of concept. And, you know, we're taking the big countries of the U.S. and China as our priorities. And we believe that that will allow us to see positive momentum, which we can then copy and roll out to other countries as a proof of concept approach. And I think that's an exciting way of skinning the cat.
Thank you very much.
Thank you. Our next question comes from the line of Anne-Laure Bismuth of HSBC. Please go ahead, your line is now open.
Yes, hi, it's Anne-Laure Bismuth from HSBC. So I have two question on my side. I just wanted to come back on the product positioning and the. I know that you did this extensive presentation, and you plan to redefine the clear brand positioning for Pandora. But you're also planning to launch a new platform, bracelet, as of Q4 2019. But what do you think, what do you plan to do differently now to make this launch successful? That's my first question regarding the product side of the equation. And the second one is about the fact that you flagged that the organization is mainly decentralized.
So what are the key action that you are now taking to make it more centralized? And also, have your regional manager reporting directly to you, and/or do you plan to or this local manager, regional manager will be incentivized regarding the performance that they have to deliver on? Thank you.
... So I think, to answer your first question, obviously, just one point, you know, we've launched the Reflexions bracelet, and we are, you know, very happy with the initial start. And remember that these sorts of platforms or these sorts of innovations are not about an instant hit. This is about building a base from an idea, making people continuously aware, and getting recruitment and trial, and then, of course, the collecting. I think the thing I want you to think about most is that we are going to be having a marketing model and a business model that is coming back to the idea of collecting. So yes, things are about a new product, but it's in the context of getting more people to buy that and collect it as part of a behavior. So I'm going to leave that.
That's the important consideration I want you to walk away with in terms of the way we're going to approach building consumption of the new products that we launch. And as I mentioned earlier, it's about dramatizing the really key products worldwide, and I'll just spend one minute on that because it relates to your second point. So what we've observed from an execution point of view, country by country, as we visited, is there is an inconsistency in the way that we dramatize the innovation we have and make it visibly discoverable by our consumer. And the reason is twofold. First of all, we have a completely decentralized merchandising and management approach, which has been successful in the past, but has led to what I call a pick-and-mix approach. And, you know, the global consumer or the consumer across the globe is more similar than it's different.
And when we find a big idea that may have taken us two years to develop, we need to get behind it and amplify it worldwide. So that's the approach. So from a—I've half answered your question, so the second half, therefore, is the reason that we are empowering our, Stephen Fairchild, our Chief Creative Officer, to not only be now with a broader remit of creative and brand, and therefore, control all touch points, but giving him the authority to determine worldwide what are the priorities and what will be executed so that we get amplification worldwide. Your last point, yes, the regional vice presidents do report in to me directly. Thank you.
Thank you.
Thank you. Our next question comes from the line of Thomas Chauvet of Citi. Please go ahead. Your line is now open.
Thank you. Good morning. Two questions, please. The first one, your plan to reduce promotional activity, will hit LFL by 2.4-4 points in 2019. Are you expecting this pressure to totally disappear in FY 2020? It feels we're still in an environment where consumers are expecting ongoing promotions, even from established brands. More generally, have you been thinking of reducing your price architecture with lower price points, perhaps for charms? What are your most recent consumer insight surveys saying on the ideal price points for those products? Secondly, on the inventory buyback, how confident are you that DKK 500 million is enough? Would you revisit the need to do more buybacks, say, in six months' time?
Just practically, will this merchandise be totally destroyed, and are you issuing refunds to retailers or credit notes or swapping products? Thank you.
Ladies and gentlemen, if I have to achieve one thing in this communication, it is to make sure that it's absolutely clear what I'm about to say. We are going to maintain the promotions on all the large retail, global trading, gifting events. We are focusing on those promotions in between those events, which either have demonstrated little elasticity or have meant that the amount of retail time that we've allocated to dramatizing our new products has been so squashed that they have only had sometimes two weeks. So you could call it the surround sound promotions, the noisy little things that are contributing not so much, but are impacting both the brand equity perception of the consumer, i.e., that we're promoting all the time, or, and stopping consumers seeing and really finding the new products that we want to launch.
It is highly important that this message cuts through to you, and I hope that has got extremely clear. The second point is... Actually, I will hand you over to you for the inventory buyback.
Okay. Thank you, Jeremy, and Thomas. It's Anders here. On the inventory buyback program, we will do what is right, and we think that what is right is amounting to around DKK 500 million, two percentage points of revenue in 2019. If we come or should we come to the conclusion that another number is right, we'll still do what's right and then pursue that number. I think that's what we have to do when we go through a transformation like this or as always.
But having said that, we've made quite some analysis already during the last 4, 5, 6 months on this issue, and the number has been circulating around this 2 percentage points of revenue, DKK 500 million for some time. But I should note that the visibility in parts of the channel is not really good. But having said that, I think DKK 500 million is a good estimate of what it takes to get to a reasonable level. But there's no one-size-fits-all. We will do this on a... Because I'm afraid, as a finance guy, that if you try to go with one-size-fits-all, you end up paying a too big part of the bill.
We have to do this in a clever way, on a selected basis, with selected partners, and not as a broad-based model, but only where and when needed.
So I didn't answer your second question, so I'll quickly come back to that on pricing. So first of all, we actually have a very sophisticated pricing architecture. Not only do we now have strong global pricing corridors, and that was reinforced by the reduction of prices in China by 15% and the increase in price in Australia by 5, but actually, our products are all pre-tested on a price value curve and are positioned with their quality versus their price. However, even though we've been launching more new products at the lower price point, their visibility to consumers for whom price is important is not where it needs to be. And therefore, we are working, with nothing confirmed to yourselves, on both visibility of entry-level pricing and products, and also launching additional products that have a greater entry price point.
We don't believe that we have to do any wholesale price reduction, but it is about discoverability and visibility of particularly those lower price points within our range to those consumers for whom that's important.
Thank you, Jeremy. Just to follow up to Anders, maybe on the buyback. When you say it hits, it's 2% of your revenues, are you issuing credit notes or swapping products with retailers? In other words, in your organic revenue guidance, does this imply a 2 points positive impact from the utilization of credit notes by retailers?
Thank you for actually asking that question, Thomas, because that's a very important clarification. With the way that we intend to structure it, it will not hit revenue, but go directly into cost of sales. And that, in many aspects, also makes it easier to identify and control, looking at it with the CFO eyes. But that's it, it will not hit organic growth. That's not the intention.
Thank you.
Thank you. Our next question comes from the line of Magnus Jensen of SEB. Please go ahead. Your line is open. Correction, our next question actually comes from the line of Piral Dadhania of RBC Capital Markets. Please go ahead. Your line is now open.
Yeah, thanks a lot. I just have one follow-up, if I may, on your store estate and how you plan on— You know, why, where there isn't more of a focus on evolving or potentially downsizing the store estate as you try and reignite the brand in other aspects of your strategy? Could you perhaps maybe just talk around what your evaluation criteria are for any leases that come up for expiry from an IRR perspective? Because just because they, these stores are profitable or cash generative today, doesn't mean they necessarily will be in the next three to five years. And then just following on from that, what's your implicit footfall assumption for the like-for-like guidance that you've given for 2019?
Are you expecting footfall into physical stores to remain broadly stable year-on-year, or is there an implicit, ongoing, deterioration of footfall into stores? Thank you.
Perhaps I'll answer a couple of those, and Anders and I will split. So, again, I guess, it's important just to be cautious with the emphasis that we've placed in this presentation to not imply that this is not important to us. But we wanted to prioritize our messaging to you, and therefore, of course, we are, at all the time, revisiting our network. And for example, therefore, when we first of all have any store that's coming up for lease renewal, we are creating a five-year view of that, profitability, depending if it's a five-year lease or a three-year lease in Asia. And so without a doubt, we're looking at that economics over time and would not make any decision that was not, sensible in that regard. So that's point one.
Point two, in terms of traffic development, in essence, we are assuming that traffic will continue to decline, but we are developing rapidly or as rapidly as we can, tools that at a store level or through our e-com, can slow down that rate. Examples will be things such as Click & Collect, which is obviously one tool of drive to store, and looking at other drive to store CRM tools. We're also developing clienteling tools, which will enable and empower our store staff to proactively call their best consumers. So there are tactics that are being developed, some of them because they're IT linked, take time, but we are without a doubt working on that.
With regard to the network, so just to be specific, we are, by country, looking at our network and looking at tactics where we believe we've got over display or over availability within a town, as opposed to pure country, and where we need to close a store to create this sense, which we're naming engineering scarcity. So without a doubt, that's being worked on, but it's not being worked on in this way I've done in other jobs, where it's been a wholesale number one priority. It is a business as usual priority as opposed to Programme NOW initiative.
Yeah, I think Jeremy has answered, basically all of it. But maybe what I can add, which is of slightly different words, is that when we look at a new store or potential renewal of a lease agreement, we use some pretty tight criteria. The standard assumption is that we'll have the case will have to make sense based on a declining like-for-like, negative like-for-like. That's not what we plan for in the longer run, but that's what we say it has to be solid based on a certain negative like-for-like. But then obviously, we look at how we address that catchment area, that geographical area already among our own stores, among other point of sales, wholesale distributors, online.
And then we reconsider what was the best way to address that catchment area for the next number of years. And then that leads to a decision on whether to close the store, relocate it, or extend it for a bit longer time or shorter time, depending on how we feel about the exact sort of business environment and business case for that area.
Great. Thank you.
Thank you. Our next question comes from the line of Magnus Jensen of SEB. Please go ahead. Your line is now open.
Thank you for taking my question. Firstly, on promotions, could you tell us how much you actually plan to reduce promotion in 2019 in terms of days? And further to that, how large a share of sales was generated on promotions in 2018? Secondly, in terms of your network and capital, you mentioned at the capital market day and a level at around 15% or so, and you're actually already now at 11%. And given that, you also mentioned that you can possibly reduce inventories further. Could you give some flavor to what kind of level we should expect when we look ahead? Thank you.
We are targeting by country, and it does vary by country, a reduction of 50% in the numbers of days, approximately, that we will have promotions. Obviously, again, to reinforce, we are not touching any of the major promotional event periods, which are where the majority of actually our promotional sales are executed. So that's the approach we're taking. You know, we're looking at probably around a third of our sales by country, because it varies by country, were in 2018 on promotion of some sort.
Yeah. Hi, Magnus. Good to hear your voice again.
Thanks.
Yeah, you mentioned that, 15% in working capital, that we mentioned it, it might almost have been, been you who mentioned it, one year ago. But, it's true that we are at a lower level, at this point in time, ending 2018 at around, eleven percent of revenue. And there may be a bit further upside, but I think in the biggest scheme of things, I think we have sort of taken the, so the biggest upsides already, with what we have already done in 2018.
Thank you very much, guys.
Thank you. Our next question comes from the line of Zuzanna Pusz of Berenberg. Please go ahead. Your line is open.
Hi, I have two questions, please. So first of all, on your marketing strategy. So as you mentioned, you're planning to make some changes to how the brand is marketed, but can you discuss these changes in a little bit more detail? Because I think historically, if I remember correctly, Pandora was quite reluctant to collaborate with any celebrities or influencers. So is this something you're planning to change? And also related to that, I understand that the strategic plan from last year has been abandoned, but I think back then it was discussed that you were targeting around 8% of sales in terms of your marketing spend. So but if you actually compare to other jewelry brands or, let's say, branded goods players, that level tends to be higher, above 10%.
So do you have any thoughts around the sustainable level of marketing to make sure that the brand, you invest in the brand enough? Second question is on the inventory buyback. So I understand that if it's necessary, you may decide to do a little bit more. But how did we find ourselves in the... I mean, how did you find yourself as a brand there in the first place? Because I think there were some, obviously, issues with the inventory levels before. There was a buyback in the past, and generally, that was meant to be pretty well monitored across the organization. So, can you just give us a bit more color?
Are you planning to change the way you monitor the inventory levels in the channel, just to make sure that actually you don't end up with having too much inventory in the channel? And just a very quick follow-up. It's not a first question, actually. On the question around weight, in terms of what we could expect throughout the year, I understand that it makes sense you have initially more costs up front, so the outlook is likely to be back and loaded. But it shows that over the past two, three years, that was the case. So I think it would be just quite useful to have an idea of really to what extent H1 could be weaker versus H2, just for us to know what the expectations should be. Thank you very much.
Hi. Okay, well, I'll take the first point. So the first thing is that we have stated that we need to create an environment of positive disruption. In making that statement, it implicitly means that sacred cows, for example, need to be challenged, and that we have to therefore be much more connected to today's culture and the relevance to that. So I think what we can see, what I have seen in this, is that we have been. I would use the word conservative... in the way that we have expressed and connected and represented consumers, and in the way that we have embraced tools such as celebrities and collaborations that other brands have seen have been a very effective tool nowadays to connect with people. So I think it's a combination of a new set of eyes.
It's a combination of having a call to action and a reference point that, we have to reignite this brand. We've got to be disruptive, and no stone can remain unturned to get there. So I think those will be the main reasons why we will do things differently against that context of being part of having a greater role in today's culture to excite and engage consumers. In terms of your marketing spend question, to be honest, where the teams have been very effective, frankly, before I arrived, is to reduce the number of media agencies, for example, that we use from seven down to two, and through not only that, but a strong focus that we're now doing on performance management, including econometric modeling. We are extracting greater value and return from every Danish kroner or dollar or pound or euro that we're spending.
So, we're looking more at productivity than necessarily exclusively in the amount we're spending, though, of course, we have allocated and planned, allocated more investment for Q4, and as we've indicated, we can imagine through our econometric modeling that we will spend again more potentially in 2020, if that's what it shows is a good investment decision.
And on the, Zuzanna, on the buyback program, it's clearly something that we have on the agenda. We, even though the revenue that we have from our franchise partners is a less, a smaller percent of total revenue than in prior years, it's still a very big part of Pandora. And we would like it to sort of be as a standard part of our agenda, that we always are quite close to knowing and understanding what kind of inventory sits with the partners. But we also should see the change that we're doing with the sell-in packages and the new product introduction, sell-in packages, that is, that's a way to structure ourselves to systematically avoid having too high inventories in the channels.
So that has been one of the results of the diagnosis that we have made. And then, it is true that we've made a... If that was the question, we have made a sort of a structured buyback program in the past as well, but this dates all the way back to 2012. So it is quite some time back. And then on the seasonality, I would love to sort of be, try to be more specific and help you out more, but it is just sort of by nature, more bumpy when you go through a transformation than we do. So I would be hesitant to say more than what I did on the call earlier today.
Okay, perfect. Thank you very much.
Thank you. Our next question comes from the line of Chiara Battistini of J.P. Morgan. Please go ahead. Your line is open.
Hi, thank you. Sorry, just a couple of follow-up questions, very small. First, on the cost savings, you gave a very helpful split of the cost savings between COGS and OpEx on page 22, on slide 22, by 2020. Is it fair to assume a similar split also in 2019, so roughly 30% of savings coming from COGS in 2019? And the second question, the second small follow-up question, the 75 net openings, would you be able to split it between gross openings and closures, please? Thank you.
Hi, Chiara, I can start on the cost savings. I would actually expect the cost of sales being a somewhat higher relative share of the cost savings in 2019 than in 2020. We are sort of a bit ahead of the curve, I guess you can call it, within cost of sales. Also stemming from the fact that our organization in Thailand has been more like used to always work with a sort of continuous cost improvement mindset, and therefore, we are the relative share of cost reductions from cost of sales is higher, a bit higher in 2019.
I think on the second question, I actually, to be honest, at this moment, we just like to keep it at the 75 net openings. You know, it's a number from an opening and closing that will move. So we will update you further in the year on a more precise view as we get clearer. Thank you.
Thank you. And just, sorry, a couple of follow-ups on those. On the cost of goods sold, then the savings, is it more like 50%-60% of savings of 2019 coming from cost of goods sold?
I wouldn't go that high, but it's higher than what you would be able to calculate from slide 22.
Okay, perfect. On the number of stores, can we confirm that the net in countries like the U.K. or the U.S. in 2019, we're actually going to see net closures, without being precise on the numbers?
You could assume that as a good opening position, yes.
Okay, perfect. Thank you very much.
Thank you. Our next question comes from the line of Fredrik Ivarsson of Kepler Cheuvreux. Please go ahead. Your line is now open.
...Thank you. Hi, guys. First one on the redesigning of the e-com. I guess you mentioned a new some new features and services, and I'm just curious if you could elaborate a little bit on that. I guess you mentioned Click & Collect as one for instance. That is my first question. The second one, I guess another follow-up on the timing, we're looking into 2019, but focusing more at the cost savings as well as the restructuring costs. How should we think around the phasing throughout the year? Will it be clearly visible already in Q1 or more sort of accelerate throughout the year? Thank you.
As you know, e-com is a combination of two things, thousands of incremental improvements and big, substantial changes. So when you look at our site now, actually it requires a combination of the two, and the first ones are the simple thing of the product landing page. It is the place where every brand makes or breaks its sales and the product performance. So we're step changing the way that every single product appears under a gold, silver, bronze sort of structure, so that we can dramatize and bring inspiration to the products. And then we are developing more helpful services from recommendation engines and other services that you'll progressively see to help our consumers sort and find the products that they really want in a more frictionless way amongst our assortment.
Second thing, on omnichannel, as we've explained, we are rolling out all elements of omnichannel, which is go in store, send to home, Click & Collect, and Endless Aisle, and online inventory, view of inventory. So all of those elements are being progressively rolled out in the US, and when we feel that they are faultless or working to the level we want, we're going to roll those out in other countries against the plan that we have. Thank you.
And then two short questions, oh, sorry, answers on the cost savings and restructuring costs. On the cost savings, it will be building up over the year, but there will also already be some impact, a little impact in Q1, given that we've started already back in late 2018. On the restructuring costs, seasonality, you should expect sort of the opposite impact, that it starts a little bit lower, but then the cost will be higher, sort of, after Q1.
That's very clear. Thank you.
Thank you. Our next question comes from the line of Lars Topholm of Carnegie. Please go ahead. Your line is open.
Yes, two additional questions from me. Anders, I think in your presentation, you mentioned a new incentive program aligned better with shareholder value creation. I wonder if you can comment a bit on that. What are the elements? What are the changes? Who is it valid for? And then a second question goes to your e-e-store revenue growth of 25%. That's a market slowdown compared to previous quarters. I wonder if you have any explanations to that, and should it bother us going forward? Thank you.
Hi, Lars. I can start out with the incentive program and maybe starting out with the short-term incentive program so far. The range of participants and of associates is not changing, but what we are changing is the elements that we ourselves and the organization is measured on. And that means that it's pretty simple. There are three elements. It's like-for-like, total like-for-like, that we are measured on its EBIT margin, and it's the impact of Programme NOW, specifically on the cost reductions. That's the three elements that we have, or the board have, and management have chosen that should be driving the short-term incentive program.
And then we've also said in the annual report that the KPIs for the long-term incentive program is also being revisited along the same lines, and there will be more communication about that following the AGM.
Okay. So thank you for your question about the e-store. Obviously, our objective is to continue to drive and secure strong growth on our e-com sites around the world, because it's a key component, and obviously, we want it to outpace the growth or the decline in stores to give us a net growth, and that's our strategy. We are, in EMEA, in particular, going to be slowing down the immediate rate of growth because there is a sales tab that is visible to the consumer all year round, as opposed to just during sales, and we're going to progressively pulse and turn that off. So I think this fits into, again, that bucket that we said at the very beginning. We're going to do the right things for the brand and the business and the brand equity.
If that means some short-term pain, it's the right thing to do to give us long-term sustainable value and shareholder value. Thank you.
So, should we expect a further slowdown in e-commerce growth going into 2019?
I think that would be a good assumption, Lars.
Thank you.
Thank you. Our next question comes from the line of Omar Saad of Evercore ISI. Please go ahead. Your line is open.
Thanks for taking my question. We wanted to ask about the shift you've been talking about to the concept of collectibility. Can you talk about how you've arrived at this strategic direction for the brand? What were the key factors or data that gave you the confidence in this new direction?
... and synchronize. Second, will this shift also change the nature of the products? In other words, are you moving away from gifts and emotional, the emotional value of charms, the personal meaning, you know, they signify to a couple? And also, maybe talk about the timing of when these product changes are going to show up in the product line. Thank you.
Okay, you know, the concept of collectability is at the very core of why Pandora is the largest and most well-known jewelry brand in the world. It is the fact that we have, for example, 15% of our consumers who own 20 or more charms. It is the fact that we have a, an average consumption, for example, of a ring that may be 2 times per year for a customer, but when it comes to charms, it's 4-6. So it's fundamental to why we are where we are, and that's why we're going to drive it again, but with more deliberation and a greater forensic approach.
In terms of when the activities will start, they're going to progressively start, and I will give myself permission to be vague, if I may, because this is also dependent on a loyalty reward program, which will take some time to pilot and then rolled out. Not dependent on that, but connected to that. In terms of the emotional charms, we will absolutely not be moving away from emotional charms, because it's that element that connects to the element I explained to you of expressing one's individuality, and individuality is expressed through the emotions and the experience that people are having. So rather, we're going to be looking at more occasions and different moments that people want to express their emotions through our charms, rings, necklaces, and all of those components. And you will see it progressively happening.
Obviously, most of the first half of this year has been put to bed over a year ago, so this is a refocus and development that will progressively hit our business. Thank you.
Thanks, Jeremy.
Thank you. Our next question comes from the line of Hans Gregersen of Nordea. Please go ahead. Your line is open.
Yeah, thank you for the follow-up. Jeremy, in the NOW analysis phase you've been through, if we look on product development, what conclusions have you arrived at? Because that must also be a part of the like-for-like problems. Second question goes to the franchise operators. What will happen to... What are you doing to help them, and how do they see the benefit from the actions you're doing, both short and medium term? Thank you.
Okay. So obviously, product is key, and we are, first of all, going to ensure that we continue to create products in all of the categories that are a combination of disruption and relevance. And that's why, for example, we're going to look for collaboration, because that creates the relevance and the disruption that we need to have, for example. The second thing is all about standout and visibility, and I've explained that our execution at a country or online level has been blurred and not as sharp as we need, and therefore, it's as much about the way we dramatize what we're launching, the relevance and the cultural fit with what we show, as simply just changing the product in itself.
And that's why we've expanded what we're saying is required in Reigniting a Passion for Pandora for more than just a product story, because it's the way we execute as much as the product itself. Thank you.
Jeremy, could I just-
In terms of-
Come back to this one you said? Sorry. You mentioned collaboration, if I understood it correctly. Would that be more as Disney? And secondly to that, you mentioned that there will be fewer SKU launches. If I look on your slide 35, that's not really what the numbers are showing to a large degree.
So first of all, Disney is a good example of a collaboration, and one which has proven to be highly effective, and we will continue with that, but that is the sort of collaboration we're talking about. In terms of the reduction in DVs, it is a progressive approach that we're going to take, because the question I was asked was about the future as opposed to this year per se, where, as I mentioned already, the majority of the first 3 quarters have already been secured before I arrived.
Thank you.
Thank you. Our next question comes from the line of Elena Mariani of Morgan Stanley. Please go ahead. Your line is open.
Thanks very much. I also have two small follow-ups. The first one is on e-commerce and on the omnichannel capabilities that you might continue to implement. I remember that this has been a critical point in the past because not all the franchisees were supportive of omnichannel experiences. So I was wondering how you plan to tackle this and whether you found a solution that could work for all, so that this could be implemented across your entire distribution network. And second small question is on gross margin guidance for full year 2019.
I understand you don't want to go into too much detail, but is it fair to assume that the current EBIT margin guidance, coupled with the cost savings, and cutting promotions, would imply a gross margin to be under substantial pressure in 2019, given that the cost savings you have identified are mostly related to OpEx? If you could give us any sort of broad indication, that would be very helpful. Thank you.
On omnichannel, first of all, I think, you know, it would be very fair to say that Pandora is behind the curve, but we're going as quickly as we can to catch up. Therefore, the approach we're taking, as I've earlier mentioned, is to focus on America as what I'm calling a beacon country, so that we can focus our efforts. Secondly, as I mentioned, I was with the Franchise Advisory Council last weekend or the weekend before last, and I've had very constructive conversations with them, and I believe we can see a joint way forward, which we are both and all excited about. Do you want to take this one?
Thank you very much.
Thank you. Our next question comes from the line of Michael Rasmussen of ABG. Please go ahead. Your line is open.
Yeah, thank you. Two quick follow-up questions. First of all, on slide number 22, if I calculate the high end and the low end, that could be indicating that you are actually targeting cost savings of between DKK 1 billion and DKK 1.4 billion, or is that simply due to rounding? And then my second question, on the new store design, so that you have obviously flagged here, is the cost sharing split between the franchisees and yourself changed? And when we look into 2020, should we assume CapEx as a percentage of sales to go above the 5%, maybe due to this? Thank you.
I think, well, first of all, we are not envisaging, or at this stage, planning any cost-sharing split changing, per se. As we indicated, in principle, the approach is to take our existing CapEx approach and to flex it to be more discerning between different formats, but fundamentally not to change the approach. Anders, do you want to add to that?
Yeah. And then, Michael, on the first question on the cost reductions, it is true that it adds to DKK 1.0 billion if you take all the numbers to the left, and DKK 1.4 billion if you take all the numbers to the right on slide 22, and that is deliberate. And, as I guess, as expected, when you go into a program of this size and so big cost opportunities, there is a range. But what we feel comfortable is saying that it sort of nets out to around DKK 1.2 billion when it's all done and dusted by the end of next year.
Thank you. Thank you very much, guys.
Thank you. Our last question comes from the line of Zuzanna Pusz of Berenberg. Please go ahead. Your line is now open.
Thank you for taking my last question. It's just a follow-up. Now, I understand that obviously there's no kind of long-term margin guidance in place, but just to understand sort of the margin trajectory in the coming years. I mean, there has been a couple of questions around inventory buybacks, marketing, and I think you made it clear that if it's necessary, you would be willing to maybe do some additional buybacks, invest a bit more if it's needed for the brand. So when we think of the outlook you've given for this year, I think it's 26%-28% adjusted EBIT margin. Is this sort of the bottom of profitability we should expect? Or if, let's say, in coming years, it turns out that you need more investment, you'll be willing to do this, or is this...
Basically, do you have any thoughts on what should be a sustainable business and margin of a business like Pandora? Thank you.
I think the upfront answer that it's too early to say and be specific, but what we can clearly confirm is that we will keep being a company that has very high profit margins. We also have that in 2018, 2019, and 2018, for that matter, and that's clearly where we see that the company will keep operating. But exactly what that number or range of number will be, that remains to be seen.
Okay, perfect. Thank you very much.
Thank you. There are no further questions at this time. Please go ahead, speakers.
I would just like to take this opportunity on behalf of Anders and myself to thank you for your attention and your questions. We look forward to meeting many of you and continue to appreciate the support that you're giving us and look forward to working with you in the future. So have a good rest of the day, and see you all shortly over the next week.