Good day, ladies and gentlemen, and welcome to the Pandora A/S Q2 report 2017 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Magnus Jensen, Head of Investor Relations. Please go ahead, sir.
Thank you very much, and good morning, and welcome to the teleconference for Pandora's Q2 2017 results. My name is Magnus Jensen from the Pandora Investor Relations team, and with me, I have our CEO, Anders Colding Friis, and CFO, Peter Vekslund. As per the agenda outlined on slide two, Anders will present the highlights for the quarter before Peter will talk you through the Q2 numbers in more detail. Following the presentation, we'll be happy to take any questions you may have. Before I hand over to Anders, I'd like to point your attention to the disclaimer on page three. Anders, please.
Thank you very much, Magnus. Good morning to everyone, and thank you for listening in on the call this morning. We are pleased to have produced results in line with our expectations, delivering double-digit top-line growth and continued healthy profitability. In some markets, the business environment had been more challenging than anticipated. However, in other geographies, including China, Italy, and Australia, we've seen a solid and strong performance throughout the first half of the year. Now, turning to the highlights. Revenue for the quarter was DKK 4.8 billion, which is an increase of 12% compared to Q2 last year in both Danish kroner and in local currency. The growth was driven primarily by a solid performance in our own retail business, including 10% like-for-like growth, and supported by a very strong performance in Asia Pacific.
The retail environment in the U.S. remains challenging, which was reflected in our performance in the U.S. for the quarter. However, we saw a significant improvement in the performance of our U.S. concept store network, which our own retail network generated like-for-like growth of 8%. Reported revenue growth in the U.S. was flat, also excluding one-offs, which included a positive impact from a reversal of a return provision of around DKK 200 million. All five product categories recorded growth for the quarter. Bracelets in particular improved compared to the latest quarters, with reported growth of 19%. The profitability of our business continues to be solid, however, as flagged in February, the EBITDA margin in the first half came in lower than last year, and the EBITDA margin for the second quarter was 33.4%, compared to 37.2% last year.
The reduction was mainly related to the lower gross margin, as well as an uptick in administrative expenses. Free cash flow for the quarter was DKK 556 million and is unchanged compared to last year. Cash flow came in as expected, and we will pay out a quarterly dividend of DKK 9 per share later this month. In total, Pandora will return DKK 36 per share through dividend in 2017, or around DKK 4 billion, and an additional DKK 1.8 billion in share buyback. Turning to slide five, we remain confident in our full year guidance for 2017, which is maintained. It is worth highlighting that we now expect a currency headwind for the full year of around 2 percentage points on revenue.
the contrary, we expected a tailwind of 1 percentage point when we gave our initial guidance in connection with the full year results. Looking at actual numbers, this amounts to a negative currency impact on revenue when comparing to our expectations back in February of around DKK 700 million. Having delivered according to plan in the first half of the year, we expect an acceleration in the second half, which is driven by a tailwind of around DKK 450 million related to store acquisitions, as well as an easier comp and more newness in the product portfolio, including Disney in EMEA. The EBITDA margin expectation is maintained at around 38%. This obviously indicates a strong improvement in the second half of the year compared to the first six months. But as highlighted both in February and May, this is just as planned.
The main driver behind the increase in the margin is largely attributed to the expected higher revenue in the second half of 2017. Guidance on CapEx and tax is also maintained, while we upgrade the expected number of concept store openings to more than 300. Moving on to the next slide. In addition to delivering on the numbers for the second quarter, we also made good progress on a number of our key strategic initiatives to support the development of the company. We continue to develop our product offering with a focus on moving into other product categories while maintaining our market-leading position within charms and bracelets. We have put in place a number of initiatives to drive development across categories, which I'll return to later in this presentation.
We continue to strengthen our global store footprint with a primary focus on concept stores, with a strategic intent to mainly open Pandora-owned concept stores. Furthermore, to increase the control with our brand, we continue to take over distributors and franchisees across the regions. During the summer, we've taken over distribution in Belgium and in South Africa, and as announced this morning, we'll also take over the distribution in Spain later this year. The integration of Spain will give us full control of one of the larger markets in Europe and add around 50 Pandora-owned concept stores to the network. The price for Spain is just below 5x EBITDA, on par with both Belgium and South Africa. We are also broadening our geographic footprint and reducing our dependency on individual countries.
Worth highlighting is our development in China, where we increased our revenue by almost 100% and grown our store base to 134 concept stores. We now expect to open around 60 concept stores in China in 2017, compared to previous expectations of around 50. Furthermore, we are also building our presence in Latin America following the establishment of an office in Panama earlier this year, and we expect to open around four stores in 2017. Finally, in terms of strategic initiatives, we are currently focusing on improving performance in our largest market, the U.S. Initial results are positive, and despite a continued challenging retail environment, with mall traffic down 5%, we have significantly improved our like-for-like sales performance in Pandora-owned stores.
For the quarter, we recorded like-for-like of 8% in the U.S., up from -3% in the first quarter. Now please turn to the next slide, where I'm going to focus a bit more on the performance in the U.S. and some of the initiatives we have implemented to improve performance. The improvement we saw in the U.S. was driven by a number of actions, which focused primarily on products and our use of promotions. As we mentioned back in May, it has become evident that we could do more to improve the newness and excitement in our product range in the U.S. market. To address this, we launched a number of products in late May, which was not initially planned. The products were all well received and contributed positively to the end of the quarter.
Regarding the promotions, we continued to aim at being more relevant and timely in how we position our promotions in the quarter. We ran two new campaigns, including our first clearance sale at the end of the quarter, as well as a Memorial Day promotion. Both were successful campaigns and helped to improve performance for the quarter. It is the first time that we've offered a promotion related to Memorial Day, and it is a good example of how we aim to leverage global and national holidays, as well as cultural events. As another example, we also ran a campaign in the quarter focusing on graduation season, which further supported the positive sales figures we recorded in the period. The new graduation charms turned out to be one of the best-selling products in both the U.S. and in Canada.
The combination of new products and promotions also benefited the performance of our eSTORE, which, again, had a strong quarter. Also, in the second half of the year, we've taken action to strengthen the performance in the U.S. In addition to the planned autumn/winter collection, which already includes more newness than was introduced in our spring/summer collection, we'll launch around 20 additional products to further drive traffic to the stores. To further strengthen our campaign calendar, we plan to celebrate two new occasions in the U.S. in the third quarter of 2017, being Back to School and Labor Day. Looking further ahead, we have identified up to 100 potential Concept Store locations across high street, community centers, power centers, and selected A malls, which could further enhance the U.S. network in a three to five-year time frame. The opportunities are balanced across the U.S.
Now, please turn to slide number 8. Product is everything, and newness in our product ranges is becoming increasingly important to drive our top line. Around 50% of our group revenue is typically generated by products launched in the preceding 12 months. For example, when we launched Rose and Disney in the U.S., the collections accounted for roughly 75% of growth in new consumers in the charms and bracelets categories. In the last 12 months, we've launched several initiatives to strengthen our product portfolio going forward. Most importantly, we've reduced our product development process from 14 to 11 months, and we intend to reduce it further to around nine months. This allows us to adjust our designs closer to launch to better meet the end consumer's taste.
Additionally, we've streamlined our production and improved our reaction time, which allows us, if necessary, to react to new market trends within a much shorter time frame. A great example of this was the 5 products we launched in May based on an opportunity which occurred during February. So basically, a reaction time of less than 12 weeks. We'll also include around 20 new products in the second half of the year, which was not planned in the beginning of the year, to further strengthen the newness of the upcoming product releases. In terms of new collections, we've already announced the launch of the Disney collection in EMEA in October. We also plan to launch a new concept as part of the spring/summer collection in 2018.
The frequency of concepts like Rose, Essence, and Disney will also be accelerated going forward, and we plan to launch a total of four new concepts in the coming three years. The higher frequency of new concept is something which has become possible with the establishment of a concept design team, with a primary focus on developing new concepts and ideas. Additionally, we are expanding our innovation capabilities in our state-of-the-art crafting facility in Thailand, in the form of a new innovation center to be operational in 2018. With this, we are well-equipped to react and respond to trends and ensure that we always provide products that our consumers want. With this, I'll hand over to Peter for a more detailed review on the numbers.
Thank you, Anders, and good morning, everyone. Turning to the next slide, we'll take a look at our three channels. Revenue growth was, for the quarter, mainly driven by Pandora Owned Retail, which increased revenue by 37%. Growth in retail was driven by a healthy like-for-like development of 10%, as well as an increase in our owned and operated store network through both new stores and acquisitions. Part of the revenue increase was driven by our eSTORE, which increased by 59%. The eSTORE represented 6% of total revenue for the quarter, driven by an improvement and expansion in our digital presence, which has led to increased eSTORE traffic and a higher conversion rate. Franchise concept store revenue increased by 6% compared to the same quarter last year, and was driven mainly by the expansion of the network.
Willingness of franchisees to open new store, concept stores remains high across markets, and in the last 12 months, franchisees opened net 97 concept stores. We continue to improve the quality of our network and as a consequence, closed around 20% of other point of sales globally during the last 12 months. As a result, revenue from this part of our wholesale channel decreased by 15%. The wholesale revenue decreased by 3%. Revenue from third-party distributors increased 17%, driven by several markets in EMEA and Asia. Now please turn to the next slide, where I'll talk you through the performance in each of the three regions. Starting with EMEA, the region generated revenue of DKK 2.1 billion, corresponding to an increase in local currency of 13%.
Growth was driven by double-digit local currency growth in all main markets, including the U.K., Italy, France, and Germany. The U.K. increased 12% for the quarter in local currency and was mainly driven by the increase in our store base, as well as a good performance from the eSTORE. Italy generated a growth of 22%, which was a result of a good performance in the concept stores. Half of the revenue in Italy is generated in other points of sale, which show a slightly negative development for the quarter, mainly down to the closure of around 120 other points of sale as part of strengthening the store network. Revenue in France increased by 10%. The slowdown in growth compared to the earlier quarters was mainly driven by a weak performance in other points of sale.
However, France in general experienced a difficult quarter, which was impacted by an unsuccessful promotion. Our business in Germany continues to improve, with revenue up 12% for the quarter, driven by a good performance in our strengthened German concept store network. Please turn to slide 11. Americas reported revenue of DKK 1.7 billion, a decrease of 1% in local currency. Revenue in the U.S. decreased 2% in local currency. And as Anders has mentioned, the retail environment remains challenging. Nevertheless, we saw a significant sequential improvement in our Pandora owned concept store network, with like-for-like up 8% compared to -3% in Q1 2017. For the quarter, reported numbers in the U.S. were impacted by a number of one-offs.
Revenue was positively impacted by a reversal of a return provision of around DKK 200 million, due to a change in return policies in the U.S. The change was announced in Q4 of last year to franchisees, with effect as of January 2017. As we plan to use clearance sales in the U.S. as a way of clearing out discontinued products, franchisees are now allowed to return a lower share of products returned, purchased than before. We are now seeing the initial effect of the new return policy, and we have adjusted the provisions for sales returns accordingly. The positive impact from the adjustment was more or less offset by earlier flagged one-offs of around DKK 190 million. These related to closures of other point of sale, selling to Jared in Q2 2016, and timing of shipments.
Looking ahead, we expect a tailwind of around DKK 200 million on the reported growth rate in the U.S. in Q4, due to easy comps as a consequence of the product returns we took in Q4 of last year. Now turning to slide 12. We continue to see a strong performance in Asia Pacific. Revenue in the region was DKK 1.1 billion, up by 34% in local currency. Revenue in Australia increased 12% compared to Q2 last year, and was driven by continued good momentum, supported by the addition of 10 new concept stores in the last 12 months. China, which represents 8% of revenue for the quarter, continues to be an exceptional growth market, and revenue for the quarter increased 91% compared to Q2 last year.
The increase was driven by the continued strong development of the brand, supported by the addition of net 67 Pandora owned concept stores in the last 12 months. We are now in 38 cities in China, of which 13 were added in the first half of 2017. Now please turn to slide 13, which looks at our five product categories. Following a difficult Q1 with a flat performance in charms and a negative performance in bracelets, we are pleased to report growth for all five of our product categories. Revenue from charm increased 5% in local currency, with EMEA and the Asia Pacific region being the main drivers of growth. Compared to Q1, we saw an improvement in the reception of our new collections, with both Mother's Day and the High Summer collection being better received than the Valentine's Day collection launched in January.
Revenue from bracelets increased 19% and was supported by the two fast track bracelets, which contributed to more than 5% of revenue from bracelets in terms of sales out in June in both the U.S. and the U.K. Revenue from rings increased 7% on top of a growth of 49% in the same quarter last year, and was impacted by lower promotional activities around rings for the quarter. Earrings, necklaces, and pendants continued to perform well, with an increase of 42% and 56%, respectively. The increase continues to be driven by enhanced focus on the two categories, both in terms of marketing as well as in-store focus. Now please turn to slide 14. Gross margin for the quarter was 73.9%, compared to 75.3% last year.
The decrease was mainly driven by a headwind from foreign exchange of around 1 percentage point, as well as a negative impact of around 1 percentage point driven by product mix. The latter related primarily to the take up of the Pandora Rose collection following the global launch last year. I would like to stress, though, that gross margin varies by metal mix and individual designs, but not across the five product categories. They all deliver more or less the same gross margin. The decrease was partially offset by the increased share of revenue from the retail channel, which had a positive impact of around 1.5 percentage point. Finally, Q2 last year was positively impacted by around 1 percentage point related to reclaimed duties in Americas.
The EBITDA margin for the quarter was 33.4%, compared to 37.2% in Q2 of last year. The development was driven by the decrease in gross margin, as well as higher costs related to the sales and distribution, as well as admin. The increase in sales and distribution was driven by the increasing share of revenue from Pandora-owned stores. The higher admin costs were driven by increase in IT costs, specifically related to our rollout of our new global ERP platform, a new CRM system, and improvement in our online capabilities. Please turn to slide 15.
The operating working capital for the quarter was 13.7% of the preceding twelve-month revenue, a decrease of 2.1 percentage points compared to the same time last year, and a decrease by 0.5 percentage points compared to the end of Q1 2017. The decrease was mainly related to a decrease in receivables, due to a higher share of revenue from Pandora-owned stores, which carries less receivables than wholesale revenue. Compared to Q2 last year's, days sales outstanding were unchanged at 39 days. Q2 CapEx was DKK 296 million, compared to DKK 352 million in the same quarter last year. The decrease was mainly due to phasing of investments in Thailand, and the total CapEx related to Thailand is still expected to be around DKK 500 million in 2017.
Our net interest bearing debt to EBITDA was 0.5, which is in line with our overall capital structure policy, and unchanged compared to the same quarter last year. With this, I will hand it back to Anders.
Thank you very much, Peter. So to summarize, we are pleased with the second quarter's results. We have delivered double-digit sales growth, mainly driven by a strong contribution from our own retail business. Revenue from all major market, in markets in Europe increased, Australia continues to impress, and China has again proven to have been an exceptional growth market. We do see challenges in the U.S., but as highlighted, we have seen an improvement in the quarter, and we are rolling out a number of initiatives to strengthen our U.S. business. We are strengthening our own retail network further by taking over distribution in Belgium and South Africa, and for the fourth quarter, we are taking over the distribution in Spain. Finally, we remain on track to meet our guidance for the full year.
Before taking your questions, let me just remind you that we have invited you all to participate in our Capital Markets Day, which will be held on the thirteenth of December, 2017, for an update on a number of key priorities. Thank you very much for listening, and now we'll take questions. Operator, please.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by the digit one on your telephone. Please ensure that the mute function on your phone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. We shall take our first question from Anne-Laure Bismuth from HSBC. Your line is open, please go ahead.
Yes, good morning. It's Anne-Laure Bismuth from HSBC. So I have three questions. The first one is, what is giving you confidence in achieving the 38% EBITDA margin guidance in full year 2017, given the increase in OpEx seen in Q2? My second question related to the first one is regarding the marketing to sales ratio, which increased to 9.9% in Q2. With the 20 new product launches planned by end full year 2017, do you plan to increase the marketing to sales ratio from 9%-10% in full year 2017? And should we continue to expect further increase in admin OpEx in the upcoming quarters related to the rollout of the global ERP and new CRM? And my third question is about the cost associated to the improvement of Pandora online capability that you are referring to.
Can you give us more details about that, please? Thank you.
Anne, thank you very much for your question. I think we missed your last question, was difficult to hear. Could you repeat that, please?
It's about the cost associated to the improvement of Pandora online capability that you are referring to in the press release, if you can give us more details about that, or?
Yes. Thank you very much. I think I'll do the marketing sales ratio and actually the ratios in general. And then Peter, he will take the other two. We expect to have the ratio that we talked about before, so marketing is fixed around 9%-10%, as we previously said, and that grows, which is, you can say around 9%. And then we have the other cost ratios, as we talked about before, are unchanged. So admin, 9%-10%, and the sales and distribution cost, 20%-22%.
Yes, and overall, the EBITDA margin for the quarter, we started the year guiding that the second half would be significantly higher than the first half, and this is how the numbers now also play out in our reporting. In terms of the admin expenses, there's an impact from IT in this, and as Anders said, we still expect that it ends up in the 9%-10% range. Please remember that Q2 is our lowest revenue quarter in general, and therefore, the ratios are somewhat higher on admin in that quarter.
Maybe then the last question. One of the things that we are focusing on presently is very much to merge our two platforms. We have a .net platform and a separate eSTORE, and we will merge those two. We've been trying to find the right time to do that, because we don't want to do that just before we have our big Christmas sales. So that's going to happen in March of next year.
Thank you.
You're welcome. Thank you for your question.
We shall take our next question from Chiara Battistini from JP Morgan. Your line is open, please go ahead.
Good morning, hello. Thank you for taking my questions. I have a few. The first one on your promotional activity in quarter two, I was wondering if you confirm that, or talk about how promotional activity changed the year-on-year, if you did more promotions in Q2 2017 versus Q2 2016? And how we should think about promotional activity going forward for this year. The second question would be, can you please confirm that the reversal of the provision on the DKK 200 million had no effect on the 8% like-for-like in the U.S., given that that should be just on retail? And also, this reversal of the provision, does that impact the all wholesale, or is it just wholesale multi-branded or also wholesale concept stores?
Then finally, can you quantify, please, the drag from the 800 multi-branded closures in Europe, or how many multi-branded stores did you have in Q2 2017, 2016, and how many do you have now? Thank you.
I'll do the first question, and on the promotional activities. If we look, and I think this is a question which is probably mostly related towards the U.S. If we look at the number of promotional days in the U.S. for this quarter compared to the same quarter last year, it's actually two days less. But the promotions are, you can say, better received by the consumers, and that is the focus. There's a couple of things we are doing. First and foremost, the techniques of the promotions have to work. They've done that this quarter. The other thing is we also try to aim our promotions at times where we have consumers in the stores, and that has also played out very well. If you look at the remaining part of the year, we have a strong promotional calendar.
We are not expecting to have a much bigger number of promotional days. It's at the same level as we had in last year. And then I think Peter, he will comment on the-
Yes, and thank you, Chiara. On the like-for-like number, the return provision change had absolutely no impact on the like-for-like number of 8% in the U.S. The return provision and the change in our return policies impact only our wholesale channel, but both across franchise concept stores as well as other points of sale in the U.S.
Thank you. And about the closures in Europe of the multi-branded stores, the 800 closures, could you quantify what kind of impact that has had on the revenue, or at least how many doors you have now multi-branded in Europe versus a year ago?
We can say we've closed 1,500 multi-branded stores over the past year. So we have that list. I think it's difficult to quantify exactly the numbers based on that, but of course it has an impact.
Yeah, and around half of the 1,500 are in EMEA.
But you talk about 800 closures in Europe on your slide 10. But you wouldn't quantify the impact on top line?
We will leave it with just referring to the number of stores going to 3,200.
Okay. Thank you.
You are very welcome.
We shall take our next question from Elena Mariani, from Morgan Stanley. Your line is open. Please go ahead.
Hi, good morning, and thanks very much for taking my questions. The first one is, again, on your guidance. I was trying to better understand a little bit the phasing of Q3 versus Q4, because at the moment, I think what you're implying by your guidance is that you're gonna grow organically around 20% in H2, and you're gonna have an EBITDA margin in excess of 40%. How should we expect Q3 to look like versus Q4? Is growth gonna be much more skewed towards the fourth quarter, or should we see a little bit more of a balanced organic growth across the two quarters?
Still on the guidance, I think in the past you said that you were expecting to deliver growth in 2017, around 50% coming from existing stores, so like-for-like, and 50% from network expansion and upgrade. Is this still the case? Because I'm trying to understand how much of this growth is coming purely from store conversions, you know, store expansion, and how much is instead pure underlying. Second question is around your product launches. Could you help us understand exactly in which regions you are planning these product launches? Is it mainly the more mature markets, so U.K., U.S., or across other geographies as well?
And with regards to Disney, how much do you expect that will contribute to your growth in the second half? And which target customer you have in mind in particular? Because I remember that in the past you were a little bit reluctant in launching Disney in EMEA because you couldn't see a perfect fit in the customer base in here. And then one very last question, which is about the U.K. market in particular. Could you help us understand the like-for-like development in that market? Because you've seen an acceleration in organic growth, and I was wondering how much that was driven by, you know, stores, and how much instead was pure like-for-like, and in particular, any improvement versus Q1. Thank you.
Thank you very much for your questions, Elena. We'll try to get through them. And, if we start by the guidance, I think the 50/50 is an old number. We don't really use that anymore, also because it got skewed and didn't really work. If we look at the phasing over the last two quarters of the year, we see, and we always do that, that the fourth quarter is going to be very, very strong. So... And, remember, we had tailwind from acquisitions, which will be in the area of DKK 450 million, and they will hit us with 70% in Q4 and 30% in Q3.
Then in Q4, we also had the one-off in the US of DKK 200 million, that we won't face this year, so that means that we have an easier comp. In general, if you look at the comps for the remaining part of the year, they will be easier, around 10% lower. So all in all, we feel very comfortable with the guidance that we have. But you're right, acceleration over the year. If you look at the EBITDA margin for the second half of the year, it will be stronger. Again, it will be particularly strong in the fourth quarter. So that's where you will see quite a pick-up, and clearly that's where we get the leverage.
Also, the fact that we have more owned and operated stores is also supporting a stronger fourth quarter. If you look at Disney, we do not give any indications of the revenue there, but as you rightly say, we have previously said that we were monitoring very, very closely whether it would be a good idea to launch Disney in Europe. We've actually done quite some extensive research to try to understand how Disney is seen across Europe, and it is different. If you look at a market like Italy, they are pretty crazy with Disney, and probably the most reluctant market when it comes to Disney and Pandora is U.K. But even in the U.K., it's seen positively by consumers, so that's the reason why we have chosen to launch it.
Then I think Peter wanted to answer? No. He didn't want to answer. So where did we get in the list here? Yeah.
It was more about-
The like-for-like-
It was the U.K. market.
Oh, so we don't comment on the like-for-like numbers in other countries. We have the two numbers that we give, our global number and also the number for the U.S. If there is one question that we didn't answer, please repeat it, because I'm not sure we got all of it.
Just a couple of follow-ups. So what you said about the guidance and then the split between like-for-like and network expansion, does that imply that you're expecting organic growth to be mostly for the vast majority, driven by network expansion and upgrades? And then a second follow-up on Disney. Do you think that this is what customers really want? Aren't you afraid of lowering a little bit your target customer age?
A good question. Let me start with the Disney question. The simple answer is no, we are really not. We've looked into this. Actually, what we've seen in the period where we had Disney in the Americas and in Asia, but not in Europe, we've actually seen a lot of people coming to our stores and asking for Disney in Europe. So we think that we are giving the consumers an even better choice than we had, previously. I'm not sure we can give you any more flavor on the split between the different things, but you will see that we have around DKK 600 million from acquisitions, and we also have upgraded the number of store openings to 300 this year.
One last point, still coming back to the product launches. In which region are you planning them? Is it mostly in the U.K. and in the U.S.?
That is correct. That was your last question. The product launches we are doing, we are doing across all geographies. So whenever we put something into the assortment of Pandora in the future, even Disney, it would be a launch across the world. So that's also what we're doing here.
Thank you.
Thank you very much.
We shall take our next question from Thomas Chauvet from Citi. Your line is open. Please go ahead.
Good morning. Thanks for taking my question. Three questions, please. First, on the U.S., I understand your LFL improved significantly. I'm a bit confused by some of the numbers. Sorry, I'm relatively new to the company, so apologies if it's a silly question. In Q1, you had -3 LFL. In the U.S., you had +5 underlying growth ex one-off. In Q2, you had +8 LFL, but -2 underlying growth. So can you explain how you got to -2, what happened in the wholesale channel, exactly? Second, if we take your guidance, let's say DKK 23.5 billion of sales, the midpoint of the full year guidance and similar gross margin headwinds in H2, to get to 38% EBITDA margin, I think you need to grow total OpEx, obviously, below sales growth.
That was the opposite in the first half. You had deleverage. Can you come back to the previous question on how you see OpEx development in H2, and is it fair to assume OpEx leverage? And finally, you commented that the rings had lower growth in the period as you didn't do promotion. Would you say it's more difficult to boost sales of traditional jewelry like rings or earrings without promotion than it is for charms? Because maybe brand awareness on those traditional categories is still low at Pandora, and sales associates maybe are still learning on how to sell those categories. Thank you.
Thank you very much for your questions. We, when we see the like-for-like numbers in the U.S., clearly, we are very happy with the fact that we have a strong number for this quarter. And if we look at what happened in the wholesale channels, we partly opened a lot of stores, and we also saw the wholesale channel being a bit more challenging. And if we look at the franchise part of it, we also, with the development in the market, have seen some destocking. So those are reasons why the sales into the franchise deal have been a bit weaker.
I'll also do the last one, and then Peter will do the if we look at the rings growth, we can see that the rings are becoming a bit more of a developed category. If we look at our last 12 months sales, it's around 15%, which would actually correspond to the market level of sales of rings, if you disregard the wedding and the engagement rings. Having said that, the base development of our ring sales is pretty good. We had a 7% growth for the quarter, and clearly it is also important whether we have any promotions or not. It's not that we are depending on it. We saw growth.
We didn't see any decline in rings, but if we don't have promotions as we had before in the quarter, clearly that has an impact on the sales. Do remember, when we look at our promotions, we are still very focused on making sure that our core categories develop. A lot of our promotional efforts are also centered around the charms and bracelet category. Then Peter will answer the last one.
Yes, and on the question on guidance and leverage on our OpEx base, to meet our guidance on revenue, we will deliver a pickup in revenue in the second half, especially in Q4, and that will drive leverage into the cost line percentages. Then overall, cost, we expect full year admin cost to be between 9% and 10% of revenue.
Thank you.
Thank you very much.
We shall take our next question from Kristian Godiksen from SEB. Your line is open. Please go ahead.
Yeah, I have a couple of questions from my side as well. Firstly, the U.S. declined 2% in local currency, despite concept store network expansion, and that your like-for-like was 8%. My question is, can you comment on the performance by the physical franchise stores and also the multi-branded channel? My second question is, I was wondering whether you could give us some building blocks for why we should still be comfortable with your revenue per franchise stores declining 8% year-over-year when taking the average number of concept stores. And then thirdly, if you could just confirm that your EBIT and EBITDA margin came out in line with your own budget expectations? Thanks.
Yeah. I will take the first one, and then Peter will take the second question. If we look at the concept stores in the U.S., you have to look at and say we had a weaker development for those than we of course had with the like-for-like number that we saw for our own stores, and the same goes for the multi-brand stores.
Yes, in terms of the calculation you do with trying to do productivity per store and so on in the franchise net overall, then, of course, that is impacted by the market mix in that number, and we have had some store openings in markets with lower revenue per store. Plus, when we open new stores, we take them as owned and operated, and when we acquire stores from franchisees, we also acquire the good and high-revenue stores. So that is driving the number down a bit. And finally, on the EBITDA, that is in line with what we have communicated the beginning of the year, significantly stronger in the second half than in the first half, so that is in line also with internal plans.
So also, I know the directional is in line with what you said, but is it also the headline number, is that also the same as you had expected in your budget? And then just coming back to the question number two, so if we adjust for the market mix of the countries and also the mix of that you're acquiring the fully up-and-running stores, is that then an increase we should, yeah, there should be?
Well, let me start with the... We made a plan when we started the year, and we are trading exactly on that plan. So the first and the second quarter come in exactly as we expected it, and we are happy with the 12% growth for this quarter.
In terms of the revenue per franchise store, if you do that as a flat average on the global numbers, then, I mean, as we take the better stores, the high-revenue stores ourselves, and convert also the better stores to own and operate, that number, that number will be impacted and, and most likely, decline. That is, a natural consequence of the strategy that we are pursuing, and not a sign of the franchise store doing it, badly. In general, in most markets, you know, franchise and own-and-operate will perform at the same level.
Okay, thank you. Maybe just one last question. I was wondering, could you comment on the phasing of promotions versus general marketing in the second half, compared to the Q2? And my question is, in order to gain comfort on your like-for-like performance in Q2, especially for the U.S., but also the group. Thank you.
Well, I'm not sure I understand your question, K ristian. Could you-
Yeah, yeah. So, what I'm trying to figure out is that, the mix in your total marketing spend, how much of that is promotional and how much is that more general marketing, where you don't do discounting but just promote the Pandora brand? So whether is that, that phasing between those two categories, is that the same in the second half compared to what you've done in Q2, given the strong performance in your like-for-like in both the U.S. and also the group, and also gain comfort on that?
Yes, I can confirm that there is no change in that.
Second half will be the same as the one we saw in Q2?
Yeah, you can say Q1, we had a bit more of general marketing linked to the launch of a new campaign. The rest of the year is in line with what we normally do.
Okay. Thanks. Thanks a lot.
We shall take our next question from Michael Rasmussen from ABG. Your line is open. Please go ahead.
Thank you very much. First of all, can you add a little bit more flavor on the situation in France? Can you talk a little bit about the sales out momentum and what actions you exactly are taking on that market right now? Secondly, I think you mentioned that there had been some destocking among your U.S. franchisees. Why did this happen? Are inventories or were inventories too high, or should we see some stocking up impacting the third quarter? Finally, on the U.S., can you add a little bit comments on charms and bracelet sales? Are they going up or are they going down? And if they are going down, is this a worry to you? Thank you.
Michael, thank you very much for your questions. France, if we look at that, we have to say that, the revenue in the quarter and the performance in the quarter, was not to our satisfaction, with the 10% growth that we saw there. Clearly, the French market is impacted by the fact that, we've seen terror in the market, and that is a challenge for us, as well as everybody else. Apart from that, we can also see that, we mentioned the promotion. I talked about that in connection to the U.S. as well. And in the U.S., we are targeting the right promotional base, where there are actually people in the stores.
We had a promotion in France, where we actually moved it to a wrong time, where there was less consumers in the stores. Then, in France, we've had a bit of a focus trying to be too aspirational, so we had too much gold in the front end of our stores, and we've taken that back. So just a few things. We do believe that France can and should be stronger also in the future. If we look at the U.S., we can see that there's two things which is affecting our numbers in the concept stores.
One, franchise concept stores, one is that clearly we have seen a weaker performance in the beginning of 2017, and that, of course, also means that our franchisees do a little bit less of replenishment. The other thing is that the change of the return policy that has we talked about in this quarter, where we make sure that we don't have wrong behavior, saying too much overbuying and then returning to us for remelt, is also one of the things which is affecting the stock in the franchise stores in the U.S. And, if you ask about the charms and bracelets in the U.S., it is slightly negative for the quarter.
Okay. So just to follow up, first of all, on the stocking, that means that the destocking, I mean, and the new return policy, you are where you want to be in the U.S. right now, or should we see this also in the third quarter? Coming back to your answer, sorry, on my first question here on the charms and bracelets, it's not a worry to you, or can you add a little bit more, please?
If we look at, we've actually implemented a number of things in the U.S. franchise stores. One of the things is we've given them an inventory system, which helps them make sure that we have the right inventory in the stores. And I think over time, the important thing is not to have too much stock in the stores. We want to have the relevant stock in the stores, and that is the support for that, which has been implemented in connection with this change in the system. If we look at the charms and bracelet development, clearly, we're building our new categories in the U.S., and that also has an impact on the total development of the business. So it's not something that we're really worried about, to be honest.
Okay. Thank you so much.
You're welcome.
We shall take our next question from Lars Topholm from Carnegie. Your line is open. Please go ahead.
Thank you very much. A couple of questions from me. First, on the reversals of DKK 200 million in the U.S., assuming a normal gross margin applies, can you just confirm that the EBIT contribution from this is DKK 150 million? And then related, I wonder that if your provision levels are lower, how does that affect growth from U.S. sales going forward? Shouldn't it become a couple of percentage points stronger when you provision less?
Then, another question goes on the mix between owned and operated stores and franchise stores when you expand going forward, maybe not so much for just this year, but if you increase focus on owned and operated stores, does your own ability to execute a certain number of store openings mean we should see a lower store expansion pace going forward, or how should we think about that? That's it for now.
Thank you very much for your questions, Lars. I'll do the second one, and then Peter will get back to the first one. Yeah, as we have mentioned, we have now a preference to open owned and operated stores, and that is a compelling and very good potential part of our business strategy. You should not expect that to have an impact on the number of openings that we can do. We are in a number of markets already opening exclusively, like China, owned and operated stores, and we can also do that in other countries. And remember that no matter whether it's a franchise store or an owned and operated store, it is still us who have to design and deliver the store for the individual market.
So, we have the capability of doing that.
Do you know anything about the mix between owned and operated and franchise stores going forward, if we look at openings?
I think that what we can say is that this year we've said around 50/50. You should expect that to move even more into the level of owned and operated stores in the future.
Okay.
Hi, Lars, it's Peter, with on your comment or question on the EBITDA contribution of the change in the provision. You're right, if you take out the DKK 200 million out of the top line and then use average cost, then EBITDA impact would be around DKK 150 million.
Then a follow-up on that, because if you then look at EBITDA margins in the Americas, and I adjust both revenue and EBITDA for this reversal, then you have an EBITDA margin of 27%. And of course, there are some other one-offs in this, but I wonder how you see that going forward. And I also wanted to see this as a margin consequence of a U.S. market that is increasingly promotional, or how should I think about this? Thanks.
Yeah, let me do some of the numbers first. In Americas, you're right, there is a couple of one-offs in the quarter. First of all, on the gross margin being impacted by -2% acquired stores, then there was duties in Q2 of last year of a 2.5 percentage point, and then our expansion in Latin America of around 1%. So that is impacting the overall EBITDA margin. So going forward, we of course looking at the EBITDA margin and maintaining the high profitability of the company, and that also goes for the Americas. In the period where we build up the Latin American organization, there will be a negative impact on the margin.
Okay, and then one brief kind of questions. On these provisions, can you foresee any other provision changes going forward? Are we going to see more reversals or the opposite, or is the DKK 200 million it, and now it's done and dealt with?
For the provision is actually doing what's right for the business. On the return provision, we wanted to reduce the returns and get the right purchasing behavior from our partners in the U.S. Therefore, we did this change in the return policy. Then the consequence of that business decision is also some change in, in accounting.
But that wasn't my question. My question was if you were going to do other changes, something, I mean, this one you saw in Q4, but didn't tell us about. Is there anything else you didn't tell us about relating to provisions, or is it now done, DKK 200 million, that's it, and then we can assume the provision levels will stay where we are now?
You can all rest assured that we will continue to develop the business, and then that will, you know, impact provisions also going forward. But in the near term, we don't have any numbers like that. But again, we will continue to make the right business decisions. On,
I think what is important to know is that you can say, why do we take this provision in now? Why and not earlier? We did the changes. We worked through the franchise stores over the first two quarters to see that we actually see the policy implementation, but also the new inventory system working for the franchisees, and we see that, and that's why we realize it now.
So one thing is implementing or, you know, announcing in a policy. Next thing is to get it implemented and actually get the results that you were planning for. That happened, but it took a bit of time.
Okay. Thank you very much, gentlemen.
Thank you very much, Lars.
We shall take our next question from Hans Gregersen from Nordea. Your line is open. Please go ahead.
Yes, thank you. Good morning. Going back to the return provision and how are they distributed across the five product categories? The first question. Secondly, you mentioned rising A&P investments in the quarter. It's only, let's say, 0.5 percentage point; it is not that significant. But if we, when we see your O&O rising as a total share of your revenue base, I would imagine that doing the brand building, it does not become more expensive just because you own the stores. So are the underlying a stronger increase in the A&P investment in brand building than the 50 basis points sort of suggest? Next question. Despite of you investing more in the store network, we can still see your return on invested capital holding up quite solid.
How should we look at that going forward? And then finally, IT investments. I of course listened to you and your comments on your margin outlook, but the specific rise in IT investments in Q3, sorry, Q2 here, was this just a bundle of a lot of cost, or will there be further significant costs in Q3, and then a total regression on quarter four? Thank you.
Very much for your questions, Hans. I'll talk about the marketing, and then Peter, I think, will take the other questions. If we look at the marketing, we do believe that over time, as we get more owned and operated, clearly as a percentage of sales, we would see an opportunity, if we choose to take that, to actually bring the marketing level a bit down. So how it's distributed between the quarters, you know, within a percentage or so, is not that important, but we do not expect it to move very much higher than it is today. We have said about 9% for this year, and that is the number that we stick to.
But as you know, as we take the full revenue from the retail side, it could actually mean that a little bit less would mean the same impact for the consumers. We do not see that there's big further need for marketing around stores.
But Anders, if I may just interrupt here. I mean, if we, if we say you sell to a wholesale, this is done at index 100, while O&O is 240. If we believe the brand building you're doing is efficient, it costs the same, to do the brand building in itself, wouldn't that logically imply that over time, that A&P should be going down? So in other words, you could actually spend more underlying in terms of activity on brand building in, in, in 2017 compared to 2016.
You're absolutely right. So that is the dynamic of it, and, but I think for a single quarter, it's difficult to say. But if you look at it over a longer period of time, it would have a positive, if you want to say it like, implication for our marketing spend.
Agreed.
On the sales return reserve, that is split just like the category split of revenue for the quarter. In terms of re-
Sorry, Peter, but we cannot see the split in the U.S.?
But it, it's the same as the global, more or less. So, you, if you use the global distribution, then, you're approximately right. In terms of return on invested capital, we do decisions on investing in our own and operating stores. But again, it's still limited the CapEx, DKK 1.5 million, to open an own ed and operated store. And also, as you can see, the Spain acquisition, which we bought back at a healthy level of EBITDA, so less than 5x the multiple on EBITDA. So that we believe is a sound capital decision. In terms of the IT spend, the IT is actually a bit in CapEx and a bit in OpEx, and we do that to drive our digital.
We don't see an acceleration into the second half of this. Overall, admin still expected between 9%-10% for the year.
And then, Peter, sorry, final, I just got a question from an investor. When do you actually start shipping, products for Christmas?
The product for Christmas is just around the turn of Q3, Q4, so a bit will be shipping late Q3 and some in early Q4.
Thank you.
You're welcome.
We shall now take our next question from Piral Dadhania from RBC Capital Markets. Your line is open. Please go ahead.
Yeah, thank you. Most of my questions have been answered, but if I could just follow up on the EBITDA margin guidance for the full year. Of course, that implies a sequential or a significant improvement in the second half profitability. But if we just think about the Pandora Disney launch in Europe in October, I'm just curious as to why you wouldn't accelerate your marketing spend in the third or fourth quarter to support that launch and perhaps end up with an outcome above 9% of sales for the full year to try and really drive the product into the fourth quarter? So just want to understand the dynamics around how marketing might evolve in the second half, again.
Secondly, just a slightly bigger picture: Just thinking about the maturity profile of your, of your new store openings, I think you opened something like 70 new concept stores in the quarter. Are you seeing any change in the ramp-up or maturity profile of the new stores you're opening today versus a year or two years ago? Are these stores taking longer to reach maturity, and is the level of maturity they're reaching and the productivity higher or lower than the existing store network? Just trying to understand how the second quarter margin being below where expectations were, whether that's a function of your, of your retail productivity or a function of your central costs being higher than expected. Thank you.
Thank you very much for your questions. If we look at how we're going to support the launch of Disney, we are going to support it. And what you have to remember is last year, at the same time, we launched Rose, which we also supported, so you wouldn't see any change based on that. And if we look at ... We have not really seen any significant change in the maturity curve. It, of course, takes a bit of time to ramp up the stores, but one thing that I find is really important, but also nice, is that the ramp-up of our stores in general are very fast.
When we enter into a totally new market, sometimes it takes a little bit longer, but as we add stores in existing markets, the ramp-up is pretty steep and good. So we haven't seen any change.
Great. Thank you.
Thank you.
We shall take our next question from Omar Saad, apologies, from Klaus Kehl from Nykredit Markets. Your line is open. Please go ahead.
Yeah, hello, Klaus Kehl from Nykredit Markets. I have two questions. First of all, at least compared to my estimates, then your own retail revenues were more or less spot on, yeah, compared to my estimates. But how would you characterize the wholesale business overall here in Q2? Would you say it was in line with your expectations? And if there were any deviations, where would you see these deviations? Second question would be growth. You have a decent uptick in growth in the quarter, but could you comment on the growth rates throughout the quarter?
Did it accelerate towards the end, for instance, and any comments that you might have, in this relation, if you include the effects from the new product launches in the quarter? That would be my questions.
Thank you very much for your questions. If we look at our wholesale business and retail business, it is good in general and in line with our expectations. As we pointed out previously, France was a bit disappointing, and also the U.S., as you see, it is a difficult market, so we also see that being weak. But the numbers in the second quarter was clearly improved compared to the first quarter.
We did see an improvement throughout the quarter.
The improvement that you saw, was that driven by the new products?
Yeah, some of it. They were well received, and we launched them in the last part of the quarter, so that was definitely part of it.
Okay, and then just a follow-up question. I guess the U.S. is to a very large extent a wholesale business. Is that correct?
Yes, that is, that's correct. Around a quarter of the revenue in the U.S. is from the multi-branded accounts, and then on top of that, the franchise.
Okay, thank you very much.
We shall take our next question from Omar Saad from Evercore ISI. Your line is open. Please go ahead.
Thanks for taking my question. I have two questions, if it's okay. The first one, I was wondering if you could give us some more color on, the new product introductions that you've talked a lot about coming later this year and into the future. Maybe give us some more details. Are we talking about new categories or new charm collections? And then my second question is, the performance of the franchise stores versus the owned operated stores. It seems like the owned stores are performing much better than the franchise stores, globally, but certainly in the U.S. as well. Maybe you could talk a little bit about why you think your own store performance is so much better than the franchisees. Is it execution, or are there other factors driving that? Thank you.
Well, I think it was very difficult to hear your questions. I think we have a very bad line. We've got, and now we'll try to at least respond to the first, the second question, and the first was a little bit lost on us. But if you ask us how our owned and operated is doing compared to our franchise stores, well, clearly, we get the total pick-up of the fact that we do 2 -2.5x the revenue. And I would say in general, we do at least as well in our owned and operated stores, in some areas, a little bit better, but otherwise, they are very comparable in the individual markets.
If you look at the differences on a global level, it's more a difference which is mirroring the fact where we have owned and operated stores. The first question, we didn't really understand. So what-
The new product introductions that you've talked about, maybe you can give us some more color. Is it new categories? Is it new charm collections? You know, help us understand some of the innovations you have coming in, if you can give us more color around what the new lines are gonna look like. Thank you.
Got it. Thank you very much for repeating. Well, we have, and you're talking about the 20 new products that we said that we are going to introduce, and if you look at that, it's a new bracelet, a mesh bracelet, which we actually expect consumers to not only enjoy, but also love. Then we have 12 charms, which is coming in. We have six rings and one pendant, which is the total assortment that we're going to launch, and it will come in with Drop 5, which means that it will be launched on the 31st of August of this year.
Thank you.
You're very welcome.
We shall take our next question from Francesca Di Pasquantonio from Deutsche Bank. Your line is open. Please go ahead.
Yes, hi, good morning. I have two remaining questions, please. The first one is, I'm hearing a lot of talk about promotions, which is a bit worrying, I have to say. How are you looking at your ASP evolution? How are you looking at pricing strategies going forward? Second question, going back to your EBITDA and OpEx guidance for the second half. This question has been asked already, but maybe I haven't fully understood. Was the G&A costs peaking in Q2 linked to the cycle of IT investments, and are you expecting the costs associated with this to phase out gradually over the following quarters? Thank you.
Thank you very much for your questions. I'll do the first, and then Peter will get back to the second question. We totally align with you and agree that you should be very careful with your promotions and make sure that you do not overdo it. I think that we are very, we don't have a lot of promotions, and let's use the U.S. as an example. In the U.S., we actually had 16 promotional days in the second quarter of this year, compared to 18 promotional days last year. So we haven't added promotional days, but we've added more relevant promotions. I think it is important to have promotions, and we can see that gaining new consumers, but also developing the new categories is done very well by the promotions.
If you look at our pricing strategy, we don't have any plans to increase our prices. If you look at our pricing strategy, we want to have products which is starting at a level where everybody can participate, which means around EUR 19 as an entry price, and then we go up and, of course, have aspirational products, which is a lot more expensive. You should think of this as you also do in apparel, like a pricing diamond that we have, but we want to make sure that that we are affordable for consumers to get into. And then we have the EBITDA question.
On the EBITDA guidance, again, this is just-
Yes, sorry, sorry. Can I, can I just interrupt? Going back to the first question, I have a follow-up. So if you look at your sales mix, would you say that the percentage of full price sales has been stable, up or down this quarter? Thank you.
Well, it depends a little bit on what you compare to, as our promotion in the first quarter didn't work very well. The promotional part of our sales was up in this quarter, but if you compare it year-over-year, it's the same.
Okay. Thank you.
Good against it? Yeah, that's what it permitting. Yeah, that's what it was. But it seems like I saw the store now.
We shall take our next question from Kristian Godiksen from SEB. Your line is open. Please go ahead.
Yeah. Hello, Kristian from SEB. Just a couple of follow-ups. So you plan to launch four new concepts towards 2020. Has this been accelerated due to the weak Q1, and will these concept be additional to the existing themes, or will you phase out some of the existing concepts, such as Essence, which I guess has not been the performer you had expected? And then my second question is, you mentioned that you have identified up to 100 new concept store locations in the U.S., which you intend to open over the next three to five years. Have you also identified concept stores that needs to close due to the weak retail environment and the store closings we see in general in the U.S.? Yeah, I guess I'll stop here. Thanks.
Thank you, Kristian. If we look at the new concepts, it's actually a part, and I talked a little bit about that in the general introduction we had. We can see that that is generating a lot of interest with our consumers, and we have reached kind of... We've changed our product organization, so we actually have a group of people who are focusing on this, and that is what is coming out of it. Clearly, when we talk about new products update, it takes some time to get it to the market. When we talk about bigger changes like concepts, it takes a bit longer. So they've been working for a while, and we are very happy that we can launch the first one in the beginning of 2018. We're looking really forward to that.
It is something which is making sure that we can have a good outcome for our consumers. If you look at the stores, Essence is doing well, so we'll continue with that. But of course, it's smaller than Moments. If you look at the new concept stores in the U.S., we've done a deep dive into the U.S. market to understand where we are, but also where we are not, and we've spent quite some time on that to make sure that we have the right retail footprint. Can there be a few stores that we will reallocate? Absolutely, in the U.S., but in general, we have a very, very strong and profitable network.
So, I think that, or the way you should think of this is the 100 stores will be an addition.
Okay. Thank you. Just to follow up on the themes. So, this will increase the total number of SKUs or the DVs when these four new concepts are launched. Is that correct?
Yeah. You should look at us increasing a little bit on the number of SKUs, not so much because of the concepts, as because of the fact that we are embracing the new categories as we move along.
Okay, thanks a lot.
We shall take our final question from Hans Gregersen from Nordea. Your line is open. Please go ahead.
Yes, just going back to the U.S., how big is the O&O revenue share of the total business? And could you also explain to me, when you calculate the like-for-like growth, what was the revenue base in 2016 Q2 for the two matrices you supply us with? Thank you.
I think that if you look at the number of store, the bases, it's at. If I remember right, it's up here as a number, 15%, yeah, of, of-
No, but I said it's not stores, it's revenue.
Yeah, then, yeah. It will be the same. Yeah, it will be the same. It is the same.
Okay.
Okay.
As there are no further questions in the queue, that will conclude today's question and answer session. I should now like to turn back the call over to the moderator for any closing remarks.
Ladies and gentlemen, thank you very much for listening to the call today and for your questions. We have delivered according to our plan for the first six months of the year and, with an acceleration to the second quarter, and we look very much forward to providing you with further update on our progress, we'll announce our Q3 results in November. Have a great day.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.