Welcome to the Pandora A/S Investor Presentation For Q1 2018. Today, I am pleased to present Magnus Jensen, the Head of Investor Relations. 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. Magnus, please begin.
Good morning, everyone, and welcome to the Conference Call for Pandora's Results For Q1 2018, which we released this morning. I'm Magnus Jensen from Pandora's investor relations team, and with me, I have our CEO, Anders Colding Friis, and CFO, Peter Vekslund. I'll now hand over to Anders, who will give you an overview of our strategic progress and the performance for the quarter before Peter goes into more details on the numbers.
Finally, Anders will conclude the presentation, and then we will be happy to take your questions. Before handing over to Anders, I'd like you to point your attention to the disclaimer on page two. Now, please turn to slide three. Anders, please.
Good morning, everyone, and thank you for joining the call this morning. As expected, we started the year with moderate growth, and we are on track to meet our targets. At the same time, we've made good progress on our 2022 strategy, which we outlined at the Capital Markets Day. We have momentum on each of our four strategic pillars: innovating affordable jewelry, Agile Manufacturing, digitalizing the brand experience, and winning in omni-channel retail.
I'm especially happy to see that our new Spring Collection, including Pandora Shine, was received well by consumers in all our markets. This confirms our capacity to provide more newness, which is top on our agenda. Meanwhile, we saw an unexpected slowdown in China. We've already taken action to turn that around, and I will come back to this later. Please turn to slide number four.
Revenue for the first quarter was DKK 5.1 billion, and increased 6% in local currency compared to the first quarter of last year, or -1% in Danish kroner. As we have guided previously, the year has started with growth slightly below the full year expectations of 7%-10%. During the quarter, we launched several new products, which will be key drivers of our growth. We delivered an EBITDA margin of 32.6%. As in previous years, we expect the year to be back-end loaded in terms of profitability.
We continue to return cash to our shareholders, and in the first quarter, we returned DKK 1.2 billion. We paid out DKK 1 billion as dividend and used the rest to buy back shares. Now, please turn to slide number five. Now, let me give you an update on the progress that we've made against our strategic priorities. Starting with products, we launched the first collection created by our new design team, the Valentine's Collection in January and the Spring Collection in March. The Spring Collection contained the first products from our gold-plated concept, Pandora Shine.
The collection, and not least, the Pandora Shine concept, was well received across markets. In total, we launched more than 150 products. We renew the product assortment even more. For the rest of 2018, we'll launch an additional 500 new products, which will also include a new charms and bracelet concept. In terms of digitalizing the brand experience and improving the consumer journey, we successfully merged our two online platforms, the eSTORE and the pandora.net. We did this in March without affecting traffic to our site.
To increase the control of our network, we added 48 Pandora-owned concept stores to our retail network. Seventeen of these were acquired from franchisees. Combined with strong performance in our eSTORE, this resulted in growth of 41% in local currency. Revenue from our retail network now represent 51% of revenue, compared to 38% in the first quarter of last year. Our agile manufacturing track is also progressing. We've now installed plating lines in our casting facilities, and we are currently testing. As most of you know, we plate our products externally, but from fourth quarter, we will be able to do this in-house. Now, please turn to slide number six.
As mentioned earlier, we've seen a slowdown in China during the quarter, with revenue growth of 16% and negative like-for-like in the mid-teens. Valentine's Day and Chinese New Year occurred at the same period this year, and that had some impact. However, we have conducted extensive analysis to understand this trend in China, and we've identified two main issues. First, we've seen a notable increase in the gray market trading. Our analysis suggests that this has an impact of around 10%-15% on growth in China for the quarter.
The trading is mostly done on the larger online sites, where we do not currently sell our products. We are already working on reducing this, and we will proactively manage and limit unofficial sales channels. It seems that the parallel importing is coming from wholesale accounts across all Pandora regions. Secondly, our marketing activities has not been sufficient to drive traffic across China.
This means that awareness around our new products is too low, but also the general awareness could be stronger. We are increasing our marketing spend in the remaining part of the year.... With that, we believe we are addressing the issues, and we'll see a gradual improvement over the year. With that, I hand the word over to Peter.
Thank you, Anders. Now please turn to slide seven. We delivered a total revenue for Q1 of DKK 5.1 billion, an increase of 6% in local currency or a drop of 1% in Danish kroner. Growth mainly came from a strong performance by the eSTORE, as well as the acquisition of stores, which contributed with DKK 288 million. We increased revenue in Pandora-owned retail by 41% in local currency, and it now represents 51% of total revenue, compared to 38% in Q1 of last year.
Growth was driven by network expansion of 24% and the acquisition of stores, which added another 17%. Like-for-like for the quarter was flat, which was primarily a consequence of the negative like-for-like in China. Our eSTORE showed strong performance across all major markets and increased 53% in local currency. The eSTORE now represents 9% of group revenue and is on track to meet our target of 10%-15% of group revenue by 2022. Revenue from franchise concept stores decreased 10% in local currency.
The decrease was mainly due to our acquisition of franchise stores, as well as weak performance in some of our larger markets, as it will take some time before we see sufficient newness in the product assortment. Revenue from other point of sale in the wholesale channel decreased 18% in local currency. This was caused by a negative development in the U.S. as well as in Italy, where we have closed several multi-branded accounts. Also, like-for-like in other point of sales are generally underperforming our concept stores. Revenue from third-party distributors decreased 23% as we acquire distributors.
If we exclude Spain, Belgium, and South Africa, where we have taken over distribution, revenue from third-party distributors was only slightly down. Now please turn to the next slide, where I will talk you through the performance in each of the three regions.
Starting with Americas, the reported revenue of DKK 1.4 billion decreased 4% in local currency, primarily driven by development in the U.S. Revenue in the U.S. decreased 8% in local currency, primarily due to a negative development in the physical store network, including a drop in other point of sales, where around 100 store accounts were closed over the last 12 months. The eSTORE continues to perform extremely well and contributed to a positive like-for-like growth in the U.S. of 9% in the owned and operated network. Momentum in Latin America continued to be positive.
Revenue increased 24% in local currency, and we opened net 48 concept stores in the last 12 months. We have generated revenue of DKK 2.5 billion, corresponding to an increase of 16% in local currency. Revenue in Italy increased 14%, while revenue in France was up 11%, thanks to the positive concept store revenues, while revenue from other points of sale declined. Revenue in the U.K. was flat, with an underlying negative like-for-like in physical stores, offset by strong performance in the eSTORE, as well as acquisitions.
Germany continues to perform well with 19% growth. Revenue in Asia Pacific was DKK 1.2 billion, an increase of 1% in local currency. The lower growth in Asia Pacific was mainly due to the slowdown in growth in China, which Anders has covered, as well as a 4% point decline in Australia. Australia continues to be challenged by a lack of newness, but we also continue to see a decline in revenue from Chinese consumers. Now please turn to slide nine, which is an overview of our five product categories.
Revenue from charms was DKK 2.9 billion, an increase of 2% in local currency. Growth came mostly from the continued success of the Pandora Rose collection, as well as the launch of the Pandora Shine collection. Despite the new launches, charms continues to be impacted by lack of newness. Revenue from bracelets increased 10% in local currency, supported by the launch of several new bracelets, while revenue from rings increased 5%, impacted by lower in-store activity during the quarter compared to Q1 2017.
Demand for earrings and neckwear remained strong, and they delivered local currency growth of 16% and 28% respectively. Now please turn to slide 10. Gross margin for the quarter was 75.8%, compared to 73.3% last year. The increase was driven mostly by the share of revenue from Pandora-owned retail, which had a positive impact of around 3% point. This was partially offset by metal mix, mainly related to a higher share of revenue from Pandora Rose and Pandora Shine, with an impact of around 1 percentage point.
OpEx grew 7.6% points for the quarter, mainly driven by a significant increase in sales and distribution costs. Sales and distribution costs increased to 26.8% of revenue compared to 21% last year, driven mainly by the increase in share of revenue from owned retail, as well as 1% point impact from amortizations of acquired stores and distributors. Also, marketing saw a slight increase, which was due to the launch of Pandora Shine. Administrative expenses increased 8%, which was more or less all driven by one-off costs related to organizational changes.
Finally, our profitability was impacted by around 1% point from currency, which altogether resulted in an EBITDA margin of 32.6% compared to 36.4% in Q1 of 2017. Now please turn to slide 11. Free cash flow in the quarter was DKK 439 million, compared to DKK 1.1 billion in Q1 2017. The low cash flow was mainly due to lower EBITDA, as well as a negative impact of around DKK 300 million from tax payments, primarily related to taxes paid on earnings from Pandora Production Company in Thailand, which we announced at the full-year results in February.
The operating working capital for the quarter was 14.6% of revenue, an increase of 0.3% points compared to last year. The increase was mainly related to an increase in receivables, and days sales outstanding were at 66 compared to 42 days same quarter last year. The increase in days sales outstanding was mainly due to revenue in the first quarter being skewed towards the end of the quarter, one of the reasons being the success of the Spring Collection, which was delivered late in the quarter.
Furthermore, the acquisition of our Spanish distributor had an impact of around DKK 130 million on receivables. Before I hand it over to Anders, let me grab this opportunity to say thanks for the discussions over the last 16 quarters of financial reporting. As announced in January, I have resigned from my position, and from next quarter, Anders Boyer will take over as the CFO. With that, I'll hand over to Anders.
Thank you very much, Peter. Now please turn to slide number 12. As mentioned earlier, we maintain our full year guidance of 7%-10% revenue growth in local currency and an EBITDA margin of approximately 35%. Looking at the second quarter of 2018, we expect currency headwind of around 6% given today's foreign exchange rates. Regarding EBITDA for second quarter, we still expect the first half of 2018 to be significantly lower than the second half. Now please turn to slide number 13. To summarize the quarter, we grew revenue by 6% in local currency and delivered an EBITDA margin of 32.6%.
A moderate quarter is expected and on track to reach our full year targets. We see some challenges in China, but we believe we've identified the root causes and are taking steps to address them. We've made strong progress on our strategic strategy towards 2022, with improvements on all four strategic pillars, and our new products have been well received, which is one of the main drivers of growth as we look ahead. Thank you very much for listening, and we'll now take questions. Operator, please.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Our first question comes from the line of Michael Rasmussen of ABG Sundal Collier. Please go ahead. Your line is now open.
Thank you so much. I'd like to address my first question on China, please. So when exactly did you see things turn around to the more negative in China? And are you going to take Pandora's products on these platforms that you mentioned yourself? And finally, on the commercial plan, does that include price reductions, so you get prices down towards the level of Australia?
My second question goes to the momentum that you talk about at the end of the first quarter in relation to your net working capital comments. Has that momentum continued into the month of April? Is that why you so firmly reiterate your full year guidance? Thank you.
Let me do the first one. If you look at China, we saw in the quarter and in the early part of the quarter that our figures were getting a little bit weaker, so that was when we started doing it. So we've actually already done the plan, and we've also implemented the plan in China. If we look at the prices, clearly, we are always monitoring the prices in our markets, and this is one of the things that we are looking into, but whether this would mean that we would increase prices somewhere or look at decreases other way, is not something where we have any plans at this point.
As to the question on current trading in April, we will as such not comment on that. But from the beginning of the year, we have said that growth will accelerate throughout the years, and we are on track with the plans.
Thank you. So, Anders, on your comments, it basically means that you took action quite early in Q1, and this belief that you already have seen the positive impacts from your actions, is that why you are so positive on you being able to turn this China story around?
Well, I think we saw the indications, and of course, we took some time to do the analysis and make the plan, but it was already implemented in the end of the quarter. And what you should expect in terms of the development in China, looking at the remaining part of the year, is that gradually you should see our figures improve. That's what we have in the plan, and that's what we expect.
Thank you very much, guys. The best of luck, Peter.
You're welcome.
Thank you.
Thank you. Our next question comes from the line of Chiara Battistini of JP Morgan. Please go ahead. Your line is open.
Good morning, gentlemen. Thank you for taking my question. My first question, again, on China, you Anders, you commented that Shine and Spring was, and the Spring collections were well received in all regions. Can I just confirm that that includes China as well? And on China, also, on your comment, that your plan you started to already execute on your plan, does that mean that some of the stepped up marketing investments are already included in the Q1 figures, please?
And then the second question on e-commerce, you mentioned that you already did the merger of the two online platforms. When did you do this in the quarter? And can you comment on the impact you saw from this merger and the impact to growth? Also, can you remind us of how many eSTOREs you opened in the last 12 months and the impact to growth from that, please? Thank you.
Very happy to do so. If we look at China, also in China, the new products were well received, so we also saw a very positive reception in the Chinese market. There is no execution on the plan in terms of marketing for the first quarter. It is only happening in the second quarter of this year. If we look at e-commerce, we merged on the 13th of March, the two platforms, and we were actually positively surprised to see how little impact it had in terms of negative development in traffic.
So, I would say well done of our people who've been working on this for a long period of time. And now we are in a situation where we can actually strengthen our new single platform, which we are looking very much forward to do. And then on the last question, maybe Peter will take that.
On the, Chiara, on the eSTOREs, most recently we have opened in Singapore, Spain, and also South Africa. But this is not something that will have a major impact on our like-for-like numbers, which I guess is the underlying question.
Yes, so just to confirm, because from the merger of the two platforms, I would have actually expected a boost to growth rather than a headwind. So just to confirm, basically, the growth that we're looking at in e-commerce is quite organic. That's what I'm trying to get to.
Yeah. But maybe I should say, Chiara, when we merged the two platforms, we expected to see a loss of traffic based on the fact that when you put it all on one platform, you lose some of the organic growth, and we saw a lot less of that than we had expected. So actually, our own expectations were losing traffic in connection to the merge, and we haven't seen that, so that was a very positive one for us.
All right. Thank you very much.
You're very welcome. Thanks for the questions.
Thank you. Our next question comes from the line of Kristian Godiksen of SEB. Please go ahead. Your line is now open.
Thank you. So firstly, do you still expect a sequential increase rest of the year in both local currency growth and also in like-for-like, and is that already from Q2? That was my first question, and the second one, I guess the most important driver for acceleration in growth is all these new products. And hence, could you give us an indication of the magnitude in the improvement of the like-for-like since the launch of the new products compared to January, February, where you did not have the products? Thank you.
Thanks for your questions. If we look at the growth over the year, what you should expect, and I think we also said that at our Capital Markets Day, is that as we add more products into the assortment, we expect it to be gradual over the year. That's also the reason why we in our guidance communicated an expectation of a lower growth in the first quarter. If we look at the new products, we are encouraged with what we've seen.
I also think it's a little bit early because we only had two weeks of trading in the quarter on the new platform. Clearly, we put a lot of focus on the launch of the Pandora Shine new concept, and that was very well received. So we are encouraged with what we see, but it's too early to put out numbers.
Thank you, Anders, but I think you also, I guess you also have the numbers for April and mid-May here. So it's just to get a feel before, because, you know, obviously it's the innovation we've talked about a lot, and that was also the main reason why 2017 was not as impressive as we had hoped for. So I guess that's the main reason why we should expect this pickup from Q2 and rest of the year. So can you give us some kind of indication of the magnitude you've seen in the pickup?
I think what I can say is that we've seen a positive contribution to our assortment. We also see positive like-for-like numbers compared to previous launches. So, we are quite encouraged with what we are seeing at this time.
Okay. Now, now nothing about single digit, mid single digit, high single digit, double something?
No, as you noticed, you're not getting a number.
I noticed. Okay, thanks a lot.
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. I just wanted to come back on the slowdown in China and to better understand how you can keep your guidance with the China slowdown, not anticipated when you gave the guidance. Does that mean that you have already seen the slowdown early February? And my second question is regarding the marketing expenditure.
So given the support that you will have in China, does that mean that we should expect the marketing to sales ratio towards the higher end of the 9%-10% range that you mentioned before? Does that mean that it should be closer to 10% in full year 2018? Thank you.
First one, if we look at China, it was, as we also said, a surprise to us. But in business, there are positive and negative surprises. If we look at a couple of other areas where we've seen a positive development in the quarter, that would be Latin America, where we started our operations in 2017, and we've seen a very strong start of 2018 there.
Also, Germany, which used to be our market of trouble, has actually developed nicely, and we see the brand strengthening in the German market. So there's always a balance between different things. If we look at the marketing, we expect it to still be between 9% and 10%. If you want to put a closer range to that, it'll probably skew a little bit towards the higher end of that range.
Thank you.
Thank you.
Thank you very much.
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, yet another one on China. Given what's going on there at the moment, do you feel like you might have been too aggressive on the expansion there? And should we expect it to be maybe more cautious until you see some positive trends? That's my, my first question. And second one, on sales and distribution costs, they were obviously up almost 6% points in relation to sales versus Q1 last year. How much of that is explained by higher own Pandora-owned stores, and how much is due to more negative leverage from poor like-for-like in the brick and mortar store network?
Thank you, Fredrik, for your questions. I'll do the first one, and Peter will get back to the, to the second one. and, and the answer is very simple and very short to the first one. No, we do not believe that we've been too aggressive in, in our development in, in China. what we can see is that there's a couple of other root causes which, which we are addressing in the plan, both increasing marketing but also, looking at how we can limit the black market or gray market part of it.
Be aware of the fact that we can never close down the gray, the black market. The black market is clearly a reflection on the fact that we are the most well-known jewelry brand in the world, and we will see things like that. But we do believe that we have levers to use to reduce it.
Yes, thank you. And the question on sales and distribution cost, basically, it's the increases is all related to the increased share of owned and operated. Remember, it includes also one percentage point from amortization of rights when acquiring distributors. And finally, that when looking at this percentage of sales and distribution costs to revenue, then we will see leverage later in the year as revenue will pick up. So for the full year, still around 23%-25% of sales and distribution cost to revenue ratio, probably towards the 25%.
Thank you. A follow-up on the Chinese expansion then, should we expect you to keep on rolling out stores in the range of 40, 50 per year until 2022 then?
Yes, you should. We, I don't think we've given that to 2022, but at least for the next couple of years, we believe that that is the right, the right number of, of openings to have in China. And bear in mind that our stores are highly profitable in the Chinese market, so they are really, really good. So there's definitely no reason to change that.
Okay, that's very clear. Thanks.
Thank you very much.
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 questions on my side. One goes to the receivables. You commented a bit on it, Peter, in your presentation, but your non-retail revenue is down by DKK 671 million, your receivables are up by DKK 350 million, and relative to non-retail revenue, they're actually all-time high. And this, of course, reflects the new collections, but as Anders pointed out, they have just been selling for two weeks in the quarter. So this increase in receivable, does that basically illustrate that stores enter Q2 with higher inventories than normal, or what additional flavor can you put on that?
Increase in trade receivables? And then a question for you, Anders, because it's now roughly three months since you took over responsibility for the U.S. after Scott. So just wonder what your initial observations are, if there are things you're going to change?
I'm particularly interested to hear your view on what level of promotional activity you think you should keep, and maybe also comment on whether Spend More, Save More campaign should be repeated, because I understand the last couple of those didn't work that well. So any color on what you see in the U.S. and what you would like to change? Thank you.
Thank you very much for your questions, Lars. I'll do the second one, and then Peter will get back to the, to the first one. If I look at the LFLs, the observation, I must say it's been a pleasure to dig a little bit deeper into the US market, and there's clearly a lot of things which is, which is happening there. One of the things which is not happening, is that the retail market is still where it is. But if you look at our own performance, one of the things that we have a strong focus on doing now, and which we will reinforce further as we move forward and get our new President Americas on board, is our retail performance.
I have seen, and I'm happy to see that more efforts going into it, but also a positive result on it. We also are now eSTORE picking up and doing more, and we see positive results coming out of that. So, that's just a couple of the things. Clearly, the US market is probably the market in the world where the interest in newness is biggest, and thereby we also see gradually as we move through the product launches of 2018, that we expect that to have a positive impact, and so far, so good. The reception in the U.S. of the new products has also been good.
If we look at the promotional activities, that is an interesting subject and also something that we've spent some time looking into to try to understand what are the right ones. And as you point out, Lars, just repeating a promotion that you have done before, doesn't mean that you get the same or better results. Sometimes you actually get the opposite. So one of the learnings that we have, which is actually built into our trading plans for 2018 and further, is that we need to rethink our promotional plans at all times and try to mix and do different things.
And clearly, that will also mean that from time to time, we'll hit it right, and at other times, we'll not hit it so right. So that is one of the things that we will do. If we look at the promotional level, there are no changes to what we've talked about previously. We'll still continue focusing on having a bit less in the last part of the year.
Okay.
Yes, and Lars, the question on receivables. Receivables increased by DKK 350 million, of which DKK 130 million is related to Spain. Then revenue skewed towards the end of the quarter, and a couple of reasons. First of all, Mother's Day, which was launched in stores on the 12th of April, was shipped, of course, at the end of March. So all of that was shipped to franchise and wholesale partners. Furthermore, the Spring Collection of around 150 DVs launched in mid-March, was also shipped to partners so that we have a receivable at the end of the quarter. In general, you could say that our franchise-
It's a different timing for-
Partners, they have very much been anticipating and looking forward to our new collections, meaning that they have ordered the Spring Collection and also Mother's Day, and therefore, revenue came late in the quarter.
And the-
We do have more products this year than last year in both Mother's Day and also in the Spring Collection.
The shipping of Mother's Day, was that different compared to last year?
Yes, that was different to last year. Last year it was bigger in both March and April. This year it was all in March, simply to get the product in stores by the 12th of April.
That's fantastic. Thank you, and also good luck moving forward, Peter, and I have some more questions, but I'll jump into the queue again. Thank you.
Thank you.
Thank you very much, Lars.
Thank you. Our next question comes from the line of Hans Gregersen of Nordea. Please go ahead, your line is open.
Good morning. First of all, like-for-like, if we assume a 1% like-for-like growth in the quarter, what would that amount to in DKK? If you could give an indication, so we have a magnitude of what like-for-like means in Q1. Second question, moving to China, can you elaborate on how you mentioned that the gray market accounted for between 10%-15% of, of the market, how that has evolved during 2017, 2018, and what it will take for you to onboard JD and WeChat on top of of the platform you already have in China? Thank you.
Yeah. What we've seen is that we've seen quite a big growth in that, and we want to have a rough way. It's more or less doubled if you look at where we came from in terms of-
In Q1, or year-over-year?
Of the magnitude of it. So it's quite a bit that we've seen. And presently, we have an agreement with Tmall, an exclusive agreement, and that will run out in a few months, and then we'll evaluate and look at are there other platforms that we would want to engage with that at that time. But right now, we stay with Tmall. If you look at what we have of options of doing it, there is a supply side and demand side for this, and clearly what we can do is come down harder on it on the supply part into our Chinese market. And then the demand part is we are looking at what, where does the product come from?
We've actually made some acquisitions of product through these channels to find out where they are originating from. We see quite a bit coming out of India as one, and clearly, we also see that some of that has a wholesale background. So that gives us an opportunity to try to focus on that and stop as much as we can. But it will still be there. We can't take it all of it. And Peter will take the other question.
Yeah, on the question on the like-for-like and some sensitivity on that, you would say Pandora own retail DKK 2.6 billion, of which concept stores is around DKK 2.5 billion, including online. And of that, we have a base included in the like-for-like calculation of around DKK 1.8 billion. So with that, you can play with the numbers and do some sensitivity.
Just to confirm, so what you're saying, Peter, is that 1% like-for-like is roughly DKK 18 million?
In rough numbers.
And so, Anders, just to...
Just to give the magnitude of the numbers-
Yeah.
This is ballpark-wide thinking.
Yeah. And, just on the gray market, your comment about doubling, is that referring to Q1 year-over-year? I know it's difficult numbers.
It is.
Thank you.
I can confirm that, Hans.
Thank you. Very much.
Thank you. Our next question comes from the line of Thomas Chauvet of Citi. Please go ahead, your line is now open.
Thank you, and good morning. Two questions. Firstly, coming back to the parallel market, would you think the increase year-over-year of parallel market could have come from the stronger renminbi at the start of the year, leading to wider price gap? And Anders, when you said, if I understand correctly, that you're not planning to reduce the price gap with other regions, what is the rationale for that? Obviously, I guess you want to protect profitability.
Secondly, on rings, it's become an important part of your business. It had a pretty good momentum last year, particularly in the second half. The slowdown in Q1 is a bit abrupt. Could you share some thoughts on whether this category has become more competitive, or is it just a matter of you introducing more new products in coming quarters? Finally, can you confirm you still have no plan to enter the engagement rings business? Thank you.
I will be very happy to. If we look at the increase, I think what we what is very, very clear in China is that this gray market is a pretty well-organized market, and clearly, currency differences has in place an impact or price differences plays a role in how big those markets is going to be. But it is something that we have seen, and we will see in the future also. When I said we don't have plans at this time, I also said, and that's something that is important, that we are looking at prices across the different markets.
But whether we are going to increase some or decrease others or exactly what we're going to do, we haven't firmed up our plans on at this time, but it's clearly something that we are monitoring. We can see that the price index, as you might know, for China, is higher than other markets, and clearly, that also has an impact on this market. So it i s one of the things we are looking at, but it can be increasing prices in one market or decreasing it in other markets.
No plans at this time. If you look at rings, we have seen a development in the quarter, which is more or less in line with the development we have in Pandora, so 5% compared to the 6% overall growth. remember that rings is now around 14% of our total sales, so it's become a very big category in Pandora. What you should expect in terms of the different categories over time is that there will be differences from quarter to quarter, depending on the activities we have in individual quarters.
And in the first quarter of this year, we actually actively decided to have a little bit less activity on rings, and that meant that the growth of rings were a little bit weaker than the other categories. But it has already grown into a big part of the Pandora assortment. But do expect that over the years, we will see fluctuations in the growth of the different new categories, depending on our activities.
Thank you, and one last question.
We have no plans to go into engagement or wedding rings, but we do see consumers who are using our products both for engagement and weddings, and that's, of course, also encouraging.
Thank you, Anders.
You're welcome.
Thank you.
Thanks for the question.
Our next question comes from the line of Zuzanna Pusz of Berenberg. Please go ahead. Your line is now open.
Good morning. So I just have two questions. First of all, on China, well, I guess a follow-up. But I'm just trying to understand, why have you spotted the weakness just only now? I mean, I guess there have been some concerns about the slowdown in China for a while. And I understand that also pricing contributes to the gray market. But could it be that perhaps the weakness in the market has been underestimated, or is there any really anything specifically that led to this weakness coming only just now?
Or have you been seeing it and basically observing what's been happening in the market over the last couple of quarters already? And the second question, that's a follow-up, actually, from some of the comments you made at the CMD.
I think it was mentioned that you were looking at potentially launching some omni-channel services and that you were speaking to some of your franchise partners on how this could work. Is there any update you could give us on that? How this would exactly be executed, when any of that could be launched? Thank you.
Thank you very much. Yeah, I think you always wonder when you're sitting and running a business, could you have seen this prior? We have seen a spike in the gray market, and we've seen that in Q1, so that is one thing which, of course, has gotten our attention. If we look at the development, we've seen a strong growth, and we have also anticipated that the growth in percentage should go down, but we really see a steep decline in this quarter. So, I think that's very much what we can see. We can see that what we are doing now, we have initiated the plans, and we are also seeing plans are working in the market.
If I look at omni-channel services, we, it is one of the things where we feel that this is an area where we need to meet the consumers' demand. We've had the discussion with franchisees, and let me just focus on the market, which I'm spending most of my time right now, which is the U.S. And there you can see that it is planned to be something that we will do in 2018. We are discussing with our franchisees to find the right model still, but we have good progress in that. I don't want to go too far in that because it is still an ongoing discussion.
One more thing which is important to mention is that we have, in the quarter, also strengthened our e-commerce team. We've hired and established a position, Head of E-commerce in Pandora, and we've already seen some good ideas and also activities coming out of that. So we have Karl Walsh, who has joined us, and is leading our e-commerce activities across the group.
Okay, perfect. Thank you. Just one thing to clarify on China. So you've mentioned that the plans have been initiated and are already, let's say, working. But have you already seen any pickup in traffic, or is there anything, maybe any color you could give us to be a bit more reassured that that actually the full year outlook is not well, is something you can deliver on?
Clearly, we are then moving into the quarter we are in and not last quarter. But I'll say that we have initiated the plans, and we believe that we will see a progression during the year where we would slowly but surely see it working. And I can also say that we already see a little bit of positive implications at this time, but expect it to come during 2018.
Perfect. Thank you so much. That's really helpful.
Thank you very much.
Thank you. Our next question comes from the line of Frans Hoyer of Jyske Bank. Please go ahead. Your line is now open.
Thanks very much. I'm sorry, it's about China again and the gray trading. I understand that you've already implemented various actions to try and stop the supply into that market. Are you seeing actually any impact on the availability to consumers on these various websites yet?
No, we haven't been able to. Clearly, there are two things. The availability, we can't see a big difference at this time. There are a couple of different sources into China. One of them where we can do something is if it comes from wholesale customers around the world, that's an area where we can monitor and try to find out where it comes from, and we have seen a couple where we have identified that. The other part, which is Chinese residents in other markets, also buy Pandora products. They do that retail and then ship it into China, and that's the part which will be there and normally be there.
What we can do in China is if they use our assets, like the pictures that we have, we can actually address that, and that helps us address the issues. So we can do some to challenge it, but there's a limit to how much we can do. But we do believe that we can work quite a bit with this.
Okay. Also, given that novelty is such a key factor here, could you talk about the progression going forward in terms of the importance of the products that are not performing? And, I mean, the weighting of the two categories, those that perform and those that don't, when are we going to see a meaningful shift in that balance, please? Well, if you look at the plans for 2018, it is to introduce 650 new products, which is an absolute all-time high. So what you should expect is that that goes into the assortment. Then even in some of the 2016 and 2017 assortment, where we've seen the weaknesses, we have products which is performing pretty well, and clearly we'll keep that in the assortment, but we'll do a bigger shift of products during the year. But what you can expect is that it will be an ongoing process as we introduce the product during 2018.
Did you, how much did you do of the two, of the 650 in Q1?
We have around, you can say 500 products to go at this time.
Okay, got it.
We've done 170 products so far.
Is Q2 going to see increased momentum behind that effort?
Well, what we're going to do is we have it lined out for the year, so 170 is quite a bit. So, and you can say it's around a fourth of the products that we're going to put into the product. So see a continuous development over the year, that's what you should expect.
Okay. And finally, a question on the diversification away from charms and bracelets in the U.S. I believe that was a very slow process as in the beginning. I was just wondering if you could talk about that also, given that you've been looking deep into that business recently. Is that diversification happening now more actively, or is it still an issue to be addressed?
It is definitely happening now. I think it's not away from charms and bracelets, but it's on to also embracing the other categories. I think that's our, our mindset on the development of the new categories. But the Americas in general, and the U.S. specifically, have embraced the new categories in a much better way, so we've seen very, very nice progress on that over the past couple of years. So they have caught up to the average of Pandora.
So rings are now the, roughly the same as, share of US sales as for the group?
In rough figures, yes.
Okay. All right, thanks.
You're welcome. Thank you, Frank.
Thank you. Our next question comes from the line of Klaus Kehl of Nykredit Markets. Please go ahead, your line is open.
Yeah, hello, Klaus Kehl from Nykredit Markets. Two questions. First of all, if I look at the like-for-like, then you have your own store, then you have around 0% here in Q1. But as you have mentioned a couple of times, the online part is doing very well. So if I do the math and exclude online, is it then around correct that your like-for-like in the physical stores must be in the range of -5% here in the quarter? That would be my first question.
Can you take that, Soren? Yeah, and on the calculation, 0%, including online, of course, excluding then it's negative in that, and around 5%, I mean, it's ballpark wide.
It's ballpark, right. Okay. Yes, thank you. Second question would be your, your depreciations are up quite a lot here in, in Q1, and you have made a couple of acquisitions, in Spain, et cetera. So I was just wondering, this runway we're seeing here in Q1, is that also a fair estimate for the full year, meaning that your depreciations will go up to around DKK 1 billion for the full year? That would be second, my second question.
Yes, so, the level we see on depreciation and amortization in Q1 is expected to continue. We include Spain for the full year. The amortization of the rights of acquiring Spain will be included. And then, as you know, we have ongoing investments in IT that will start also having a meaningful impact on amortizations. So expect the level to continue for the year.
Okay, so it could actually go above DKK 1 billion?
This is the level for this year, and then, as we have invested heavily over the last couple of years, then it will most likely increase.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Kristian Godiksen of SEB. Please go ahead, your line is open.
Thank you, just two follow-ups from my side. So I was wondering which of your four largest markets that is the most worrying to you, as you have negative like-for-like for the physical stores in all of the four main markets, and I'm referring to U.S., U.K., Australia, and also now China. And also where you, I just see in the press that one should expect positive like-for-like for physical stores for the group in your strategy plan, so I guess when you expect that to materialize?
And then on the second question, if you could talk a bit about the positive impact on the gross margin, one should expect when you're being able to plate your own products yourself from fourth quarter this year. Thank you.
If you look at the four largest markets, you can say that we would expect that they would all be impacted by the new products that we are launching. And as you said, if you look at our ambition that we also talked about in connection to the Capital Markets Day, it is to have a positive Like-for-like number in our physical stores, absolutely. So we would expect also in those markets to see an improvement over the year. Remember now, you talked about the four largest markets, but Italy is actually bigger than the U.K. in this quarter, so that was very nice to see that picking up quite a bit.
If we look at our new plating lines, they are being installed. I've actually received the first product coming out of that, which is really nice to see, and it will be starting off for commercial production in the last quarter of the year. There will be a ramp-up curve, but we do expect to see some positive margin impact of that, but don't expect it to be humongously big.
Okay, so-
Comment on that, as Kristian, as you know, at the Capital Markets Day, we said that we would see over the period the strategy around 2% point impact from product innovation, and that is of us insourcing Pandora Shine and Pandora Rose. But some of that efficiency will be offset by increased complexity and details in our products. So guess what I'm saying is don't put in a lot of production efficiency in your model. Like we said at the Capital Markets Day, that still stands.
Okay. Okay, thanks a lot.
Thank you.
Thank you. Our next question comes from the line of Lars Topholm of Carnegie. Please go ahead, your line is now open.
Yes, just two follow-ups. Back to China, and you mentioned that year-on-year, you think parallel imports took 10%-15% off the growth. I wonder if you can comment on the difference between Q4 2017 and Q1 2018, because your growth was 62% in local currency in Q4 2017, and now down to 16. So, is parallel imports significantly different compared to Q4 2017? And then a housekeeping question: How many SKUs do you have in total right now, give and take? Thanks.
Well, we saw that there, there are a couple of things, Lars. I think that when we look at China, it's not just gray market. There's also other things which is affecting, and that's also why we talk as we did about marketing being one of them. But we did see quite a big pickup in the first quarter of 2018. So, and if we look at the number of SKUs, it's 1,565.
Okay, thanks, Anders. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Hans Gregersen of Nordea. Please go ahead. Your line is open.
Yes, two questions, please. In terms of guidance for Q2, can you give any direction in terms of the EBITDA versus Q1? And then, secondly, you mentioned there was some, as far as you understood from trying to buy the products on the Chinese gray market, that certain parts was supplied by wholesalers. How quickly can you close this wholesaling down? Thank you.
If we look at the EBITDA guidance first, what we've said, and that is still the case, that you should expect the second half to be significantly higher than the first half. So that would mean that you should expect something which is less than our guidance in the second quarter, guidance for the year also, as we did in the first quarter.
If we look at supplied by wholesalers, what is happening is that we are looking and finding some and closing them, but sometimes what happens is that then other supply areas will open up. So this is something that we are monitoring on a running basis, and we will look at it. So, to expect that we can get that fully under control is probably would be too naive on either side, but supplies we can find, and we do.
But what are your remedies? I mean, how quickly can you, let's say, cancel a wholesale agreement if you catch them in doing so? And then coming back to the EBITDA margin, can you be a little bit more precise? Will the EBITDA margin, how will that develop, sequentially, up or down or flattish? Thank you.
Well, if we see a breach on an agreement, we have in our agreements an opportunity to cancel those agreements. Clearly, what we normally start by doing is having a good conversation. I don't think we can get into more of the details here. And Peter has a comment on the EBITDA margin.
Yeah, on the EBITDA margin, just translating what has been said earlier, then an EBITDA margin in Q2 around the same level as in Q1, so more or less flattish. Don't expect a big pickup in Q2. With all you asking-
Thank you.
A 4% point difference between second half and first half, so that is also ballpark what is expected this year.
Thank you.
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. One more question from my side here. Back on the comments about the 9% like-for-like in the U.S., obviously driven by the eSTORE. Correct me if I'm wrong here, but I believe you said that the online share of your reported revenues was around 10% in the end of last year. I just wonder, can you confirm that? And can you also confirm that it's growing ahead of group average? Thank you.
I can confirm that. What you should expect is that there is a phasing over the year in terms of like-for-like numbers, so it's always highest in the last quarter of the year.
Yes, and on the eSTORE share of revenue, in the U.S., that is around group average, still.
Thank you.
Thank you. Welcome. Our last question comes from the line of Anne-Laure Bismuth of HSBC. Please go ahead, your line is open.
Yes, hi. I just wanted to come back on the gross margin expansion of the 350 basis point that you had in Q1. And should we expect the same contribution from the concept store conversion from wholesale to retail of 300 basis point for the year? And what could be the impact of FX on the gross margin development for full year 2018? And my other question is about the admin expenses and the organizational changes that you mentioned that impacted Q1 2018. Can you elaborate more about this organizational changes, please?
I'll do the last question, and then Peter will do the first one. When we look at the organizational changes, we've had quite some changes in the management board of the company, but we also had organizational changes in EMEA and in the Americas, broader sense. So all of that together has meant that we've had some extraordinary expenses that we have called out in the admin part in the quarter.
Yes, and as to the other questions, then on the gross margin, as you know, we do not guide as such on the gross margin, but we do give some indication. And there will be some impact also positively on the gross margin going forward. Total impact on EBITDA from more owned and operated, around 1% for the full year. And we did see an impact, negative impact from FX on the margin in Q1, but currently for the full year, we do not see any impact from FX.
Thank you.
Thank you very much, and thank you very much for listening in on the call today and for all your questions, and we would wish you a very, very nice day. Thank you.