Thank you, and welcome to Pandora's Conference Call following the release of our Q3 report, distributed through the wires this morning at 8:00 A.M. The presentation for this call is available on pandoragroup.com/investor. My name is Morten Eismark from Pandora Investor Relations, and with me here today is CEO Bjørn Gulden and CFO Henrik Holmark. In accordance with the agenda on slide two, Bjørn Gulden will go through a few Q3 highlights. After this update from Bjørn, Henrik will go through the numbers, after which Bjørn will conclude the presentation, and we'll take your questions. Before handing over to Bjørn, I kindly ask you to pay attention to the disclaimer on page three . Bjørn, please.
Thank you, Morten. Good morning, everybody. Please turn to slide four, where I will walk you through some of the important highlights in Q3. I'm happy to report that we continue to perform in line with our 18 months turnaround plan. Third quarter developed even a little better than we expected, and we have, based on the tailwind from the currency development, decided to slightly upgrade our revenue guides. One of our major initiatives, the Stock Balancing Campaign, was continued during Q3, mainly impacting the U.S. and third-party distribution. We have now largely concluded the campaign, and it will, as communicated early, be finished by end of 2012. The other major initiative in 2012 was the realignment of price and product architectures. We already reported that the product launched in Spring/Summer performed well based on sales into all channels and sales out from Concept Stores.
I can now report that this trend is continuing, and that the replenishment of these products was much higher in Q3 than comparable last year. During Q3, we also launched the autumn part of the Autumn/Winter 2012 collection, and it is encouraging to see that both sales in to all channels and sales out from Concept Store has been materially better than last year. Additionally, the Christmas Drop of Autumn/Winter 2012 collection has been very well received by our retailers. I am also happy to see, even in a difficult retail environment, that our major markets have all positive or improved like-for-like sales out in their Concept Stores. The year is not yet finished.
We have our most important quarter to come, but we feel confident that our improved product, our lower prices, and our other operational improvements will put us in the position of achieving our updated financial goals for the full year. In addition to this, we will continue to work on improving our operational performance, and that includes investments in IT system, warehouse consolidations, and management processes. Now, I would like you to turn to slide five and take you through the Q3 financial headline figures. Please turn to slide five. These numbers are, as you have been explained before, impacted by the Stock Balancing Campaign, and it is not possible to properly define how to make adjustments, especially not on quarterly numbers, where the phasing of returns and replacements will vary between the individual stores. Here are the numbers.
We had a revenue of DKK 1.794 billion. That was an increase of 14.3%. We had a gross margin of 64.1%, an EBITDA of DKK 503 million. That gives us an EBITDA margin of 28%. We had a net profit of DKK 380 million. We had a negative cash conversion of -23.2%, and we had a net interest-bearing debt of DKK 829 million. With the usual seasonal pattern in mind, we expect a material cash flow in Q4 2012. So given the importance of the Stock Balancing Campaign, I will quickly run through the development in this campaign. This time, only one slide instead of the four that we did last time. So please turn to slide six.
As you will see from the Q3 box on the slide, we received discontinued products worth DKK 86 million from our retailers. We shipped DKK 127 million worth of bestsellers back to our retailers in the quarter. The difference, DKK 10 million, gives you the deferred effect that we will ship in Q4. The reason for the difference is normal procedure. We need to receive and control before we issue orders and ship out the replacement. Then the campaign will be largely completed, and the worth will be approximately DKK 610 million in wholesale value. There will be no deferring into 2013.
Just to make it easy for you, the numbers for the first nine months of the year are that we have received DKK 609 million from our retailers, and we have shipped DKK 599 million of bestsellers back to them. The difference is the DKK 10 million to be replaced in Q4. Now, please turn to slide seven, where we look at the geographical development of revenue. As you can see, Americas was mostly impacted by the Stock Balancing Campaign in Q3. They received DKK 85 million of inventory and replaced DKK 80 million of bestsellers to the retailer in this period. This corresponds to 8.7% of revenue for Q3 in the region. The numbers for the U.S. are specified in the chart, with DKK 73 million received and DKK 68 million replaced, which corresponds to 9.6% of their revenue in Q3.
Other Americas, which is mainly Canada, received and replaced DKK 20 million of inventory, and this corresponds to 5.7% of their revenue. Other Europe replaced DKK 41 million of bestsellers, dominated by third-party distributors, which corresponds to 12.8% of their revenue. If we disregard the Stock Balancing Campaign and we look at reported revenue, we see that the U.S. reported an increase of 15.8%. This is 2.6% increase in local currency. As I will highlight in the following slides, we have in the U.S., positive like-for-like sales out of our Concept Stores. We know that our new products, both Spring/S ummer, and Autumn/Winter, are working well, and we are much more comfortable with the inventory levels than we were a year ago. This makes us feel comfortable in the U.S., our largest market.
Europe reported for the first time in six quarters, again, growth in revenue, 13.1% or 11% in local currency. This was driven by UK, with an increase of 12.2% or flat in local currency. We have the same situation here in the UK as in the U.S. We saw positive like-for-like sales out of the Concept Stores, and the inventory in UK has improved and the new products are working well. Germany posted a decrease of 24.9% in revenue. You know that we are in the process of consolidating our distribution in Germany and that we have closed down more than 500 accounts during this year. This, although Germany has positive like-for-like sellout in the Concept Store, has an impact with less sales into the different channels.
Positive also in Germany, is that the new product is working well and that the inventory at the retailers are improving. Growth in other Europe was 43.5%, and that was driven by positive developments in Italy, France, and Russia. Our third-party distributor markets, Greece, Portugal, Spain, and Ireland, still have a difficult time suffering from harsh economic trading conditions and are hence continuing to destock and optimize their inventory levels. Asia Pacific posted a decrease of 10.7% in revenue or 17.3% in local currency. Australia was down 13%, 24% in local currency. The consolidation in distribution is done. We will not close any more accounts. The trade has improved inventories, and the new product is selling well. Like-for-like sales out of Concept Stores, although still negative, are improving.
These are all positive factors that will eventually push Australia towards a positive development in revenue. Other Asia was down 5.2% in revenue, and as earlier communicated, we have initiated a business review of our situation in Asia. We are in the middle of this and have, in the meantime, decided to slow down the opening of stores, especially in China, until we have collected all the facts and agreed on a strategy. Until then, we focus on quality rather than quantity in our expansion of new stores. As already mentioned many times, sales out, meaning sales to our end consumer, is the most important thing and what we focus all our effort on. And because it is so important, I will ask you to turn to slide eight, where we again look at our sales out in our Concept Stores.
U.S., again, had positive like-for-like, this time 5%, and I think it was the seventh quarter in a row with this development. I'm very impressed by their performance. UK, for the first time in six quarters, again, in positive territory, although only 1%, very positive to see positive numbers. Germany, again, positive with 3%, 3%, and this confirms the trend. Australia, still in negative territory with minus 6%, and although we are not happy with negative numbers, we believe that in a very difficult retail environment, we see this to be in the right direction. The Concept Stores, totaling 823 stores, are about 50% of our revenue. These like-for-likes measure about 80% of them. And remember, a store have to be open more than 12 months to be measured as a like-for-like.
This is not a 100% measure for all our retail performance, but we believe that this 50% of the sales is a good indicator for the retail performance for other major markets. We feel that the current trend confirms that our new product and price is being well received by the end consumer, and that we, in the general difficult retail environment, are performing in the right direction. Product being the most important factor for our future success, we ask you to move to slide nine. The strategy of focusing on our core is paying out. The new collection with lower commercial price points are working well. Spring/Summer sold in well, it is selling out well, and we see a much higher replenishment rate of this collection now than we have seen before.
Important is also, also to see that we are, as, as expected, selling a lot more rings than before. This segment had a growth of 38% in Q3. The autumn part of the Autumn/Winter collection has sold very well and is also selling very well out of the Concept Stores. The initial reception of the Christmas Drop that is now arriving in the store has also been very positively received by the retailers. We will continue to work hard on our collections. We know that product is king, and we have a lot of new ideas and concepts in the pipelines... Please now turn to slide 10, where we update our financial guidance. Slide 10. Helped by foreign exchange, we have decided to upgrade our revenue guidance from above DKK 6 billion to now above DKK 6.3 billion. Gross margin stays at in the mid-60%s.
EBITDA margin upgraded from low 20%s to mid-20%s. CapEx lowered from around DKK 300 million to around DKK 250 million. Effective tax rate stays at 18%, and we still have an expectation of opening approximately 200 new Concept Stores. As you have probably noted, we have reduced our target of 135 new Concept Stores and Shop-in-Shops in new markets to approximately 100. The main reason for this deviation is a more selective rollout approach in other Asia as a consequence of our ongoing business review of this region. So with this, I would like to hand over to Henrik Holmark, our CFO.
Thank you, Bjørn. Please turn to slide 11. As Bjørn mentioned earlier, the overall revenue for Q3 2012 was slightly better than previously anticipated, mainly due to positive impact from foreign exchange developments. Q3 2012 was, as the previous two quarters, negatively impacted by our Stock Balancing Campaign. Revenue in Q3 2012 was impacted by replacement shipments of DKK 127 million. Total revenue was DKK 1,794 million, which is an increase of DKK 225 million, or 14.3% compared to the same quarter last year, of which 7.5% is due to currency. The remaining 6.8% is coming from an increase in volumes of 15.9%, and this is offset by mix effects and price reductions of -9.1%.
This movement in volume and prices is driven by our introduction of new products at significantly lower price points than last year. The branded distribution channels in our direct distribution markets generated more than 80% of our group revenue in Q3 2012. Concept Stores alone generated 50% of group revenue. Please turn to slide 12. This slide looks at the development by major geographies and markets, and, Bjørn has already talked about that. I will briefly go through it. In Q3 2012, we have 50% of our revenue in the Americas, 39% in Europe, and 10% in Asia Pacific, with our largest markets, as Bjørn spoke about, generally being positively impacted by currency. As previously illustrated by Bjørn, all regions are impacted by the ongoing Stock Balancing Campaign, with the highest share relative to revenue being in Americas.
However, the total impact on the group from the Stock Balancing Campaign is lower this quarter than in previous quarters. In the region, Americas, revenue increased by 21.9% to DKK 920 million in Q3 2012, excluding foreign exchange movements, revenue increased by 9.5%. The majority of revenue in other Americas is in Canada, where we have experienced a significant increase in Q3. In Europe, revenue increased by 13.1% versus Q3 last year, which is mainly coming from the other Europe region, driven by positive developments in new markets, Italy, Russia, and France. In Asia Pacific, revenue decreased 10.7% versus last year, excluding currency movements, revenue in the region decreased 17.3% YoY.
In Australia, recorded revenue was down 13% YoY, or 24% in local currency, which we believe is partly reflecting destocking at retailers, which could be impacted by the high purchasing volumes in prior quarters through the Stock Balancing Campaigns. As Bjørn mentioned, previously, we are seeing an improved trend in the sell-out development in Concept Stores in Australia. Please turn to slide 13, which shows the breakdown of our revenue and the impact on the Stock Balancing Campaign on the various distribution channels. We continue to receive positive feedback, feedback from our retailers on the Stock Balancing Campaign. The request for returns show an overall participation rate of approximately two-thirds among all our stores or among all the stores that we serve. For Concept Stores and Shop-in-Shops, the participation rate is approximately 80%.
Impact from the Stock Balancing Campaign, relative to revenue, is highest in the Gold Stores category and Shop-in-Shops. As shown on a previous slide, Concept Stores generated more than 50% or roughly 50% of revenue in Q3 2012. The revenue from Concept Stores increased significantly from Q3 2011 to Q3 2012, mainly driven by new stores added in between those two periods. For Shop-in-Shops and Gold Stores, we, in the third quarter, see some destocking with our retailers. Please turn to slide 14. This slide looks at development in our distribution network. In Q3 2012, we opened 57 new Concept Stores, out of which four stores were opened as owned and operated. Openings in new markets outside Asia continue with a positive momentum.
In Asia, we are, as Bjørn mentioned, applying a more conservative and selective rollout approach as a consequence of our ongoing review of our Asian business. Outside the branded category, we continue to close a significant number of mainly White Stores and mainly in Germany, resulting in a decline in the total number of stores for the group from 10,443 in Q2 to now 10,220 points of sale. Please turn to slide 15. The revenue between product categories is, as from previous quarters, affected by the Stock Balancing Campaign, although not to the same extent this quarter as in prior quarters of 2012. We have, in Q3, experienced an encouraging development in our core categories, charms and silver and gold charms bracelets, as well as rings.
In Q3 2012, revenue from charms increased by 28.8% compared to the same period last year, and revenue from silver and gold charms bracelets increased by 42.6%. These two categories together represented 87.5% of revenue in Q3, which is up from 76.6% in the same quarter last year. The increase in these two categories is, among other things, driven by our introduction of new charms at attractive price points, and also ready-made gift sets consisting of a bracelet and one or two clips or charms. Rings increased by 37.5% and represented 7.4% of total revenue in Q3, 2012. The development in rings reflects the success of our introduction of new rings at more attractive price points, designed through our Ring Upon Ring concept.
Rings and other jewelry together represented 12.5% of revenue, versus 23.4% in Q3 2011. Please turn to slide 16. Gross profit in third quarter was DKK 1,150 million, compared to DKK 1,155 million, same period last year. This resulted in a gross margin of 64.1% in Q3 2012, compared to 73.6% last year. The drop in gross margin of 9.5 percentage points is mainly driven by a negative impact from raw material prices of 7.4%. In addition to this, currency impacted gross margin negatively YoY by 1.1%, and price and mix effects impacted negatively by 1%.
The gross margin decline from Q2 2012 to Q3 2012 of 3.8 percentage points is roughly 50/50 explained by increasing raw material prices and price and mix effects. The price and mix change from Q2 to Q3 includes a roughly 1 percentage point negative impact on gross margin due to the reintroduction of duty in the U.S. on silver imports from Thailand. A suspension of this duty was put in place following the tsunami in Thailand some time back, and was subsequently extended several times, but it has now expired. We are fully hedged on our commodity exposure for the remainder of 2012, excluding our hedging and the time lag effect from our inventory, the underlying gross margin in Q3 2012 would have been approximately 67%, based on the average gold and silver market prices for the quarter.
Under the same assumptions, a 10% deviation in quarterly average gold and silver prices would impact our gross margin by approximately two percentage points. Please turn to slide 17. While revenue increased by 14.3%, our operating expenses only increased by 5.9% in Q3 2012. Distribution expenses increased to DKK 477 million, compared to DKK 452 million, same quarter last year, which is mainly driven by new markets. Marketing costs declined to DKK 190 million in Q3 2012, from DKK 220 million, same quarter last year. Administrative expenses amounted to DKK 210 million in Q3 2012, versus DKK 197 million last year, and are on par with both Q1 and Q2 of this year.
As in the two previous quarters, the increase from last year is mainly related to increased headcounts in new markets and head office, as well as IT infrastructure investments. We have, in Q3 2012, integrated two additional markets onto our global ERP platform. These markets are Australia and Eastern Europe. Please turn to slide 18. Our EBITDA for Q3 2012 decreased by 6.2% to DKK 503 million, resulting in an EBITDA margin of 28%, down from 34.2% in Q3 last year. The reduction in EBITDA margin is caused by a lower gross margin, which is partly offset by a reduction in operating expenses relative to revenue.
EBITDA margin in the Americas is impacted by the general decrease in gross margin, as well as the suspension of import duties that I previously mentioned. EBITDA margin improvement in Europe, despite a reduced gross margin, can be explained by improved top line and improved cost efficiency, partly driven by new markets, Italy, France, Russia. The EBITDA margin decline in Asia Pacific can be explained by the general gross margin decline, loss of revenue, and costs related to setting up the organization in Asia. Unallocated costs were 9.1% of revenue in Q3 2012, compared to 8.2% of revenue last year, same quarter. This is, among other things, due to costs related to investments in building up infrastructure being carried centrally.
Please turn to slide 19. Net financial income in Q3 2012 amounted to DKK 1 million, which is, which has limited impact from foreign exchange movements. In Q3 2011, net financial items were significantly impacted by an unrealized loss of DKK 93 million on foreign exchange movements. Income tax expenses were DKK 84 million in Q3 2012, implying an effective tax rate of 18.1% for Q3 2012, which is in line with our full year expectations. Net profit for Q3 2012 was DKK 380 million, compared to DKK 341 million in Q3 2011. Please turn to slide 20, which looks at the development in working capital.
Free cash flow, cash conversion, and the operating working capital ratio, also this quarter, is impacted by the Stock Balancing Campaign and is therefore difficult to compare to prior periods. We, in third quarter, generated a free cash flow of DKK -88 million, which reflects the seasonality in our cash flow that we also have experienced in prior years. The decrease is driven by a decrease in EBITDA and a negative impact from net working capital. If we look on this sequentially and YoY, the development from Q2 to Q3 of an increase of DKK 600 million in net working capital, this is driven by a significant increase in trade receivables due to an increased revenue in this quarter compared to the previous quarter. Yoy, the development is flat despite a higher revenue compared to Q3 last year.
In addition to that increase in trade receivables, the other element driving the net working capital from Q2 to Q3 is a VAT receivable of roughly DKK 100 million, which is related to the transfer of our inventory from our European markets to the Central European distribution center. YoY, so from Q3 last year to Q3 this year, the increase of about DKK 300 million in net working capital is driven by two main elements. It's the VAT receivables of DKK 100 million that I mentioned before, and then it's an increase of DKK 200 million in the value of our hedging contracts, which is going from a debt last year of DKK 139 million, to a receivable this year of DKK 61 million.
So this year, the contracts are in the money, end of Q3 2012, versus last year when they were out of the money, so to speak. If we look at operating working capital, this amounts to DKK 2,730 million, end of Q3 2012, which is a slight decrease from Q3 2011. The increase in operating working capital from Q2 2012 is driven by increased trade receivables, as I spoke about before, due to higher revenue. Inventory at the end of Q3 2012 reflects an improved inventory management, which, however, is offset by increased commodity prices, as well as a temporary increase in products returned under the Stock Balancing Campaign that will eventually be remelted.
Inventory at the end of Q3 is down versus Q3 last year, from DKK 1,964 million last year to DKK 1,922 million this year, despite an increase in commodity prices of 34% between the two quarter ends, and despite a temporary increase in inventory from products returned under the stock Balancing Campaign. These products that are waiting remelt are included in inventory with a value of DKK 135 million, end of Q3 2012. Inventory at the end of Q3 2012, compared to end of Q2 2012, decreased by DKK 3 million, corresponding to a decrease of 0.2%.
In the same period, gold and silver prices affected inventory with an increase of approximately 7%, whereas inventory related to the Stock Balancing Campaign was reduced by DKK 45 million between the two quarter ends. Finally, trade receivables end of Q3 was, as I mentioned before, flat YoY, despite a 14.3% higher revenue in this year's Q3. With this, I would like to hand back to Bjørn to conclude the presentation.
Thanks, Henrik. So in summary, our group revenue was DKK 1.794 billion . Our gross margin was 64.1%. Our EBITDA was DKK 503 million, a margin of 28%. I think we further can say that the quarter progressed slightly better than previously anticipated, and this principally due to a positive foreign exchange. Our Stock Balancing Campaign is largely completed. Our launch of Autumn/Winter 2012 collection is on track. Our full year guidance is updated, and our main focus continues to be on our consumer, on the products, and on sales out. So with this, we conclude the presentation, and Henrik and I would now like to open up for any questions you have. Thanks.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. To cancel that request, please press the hash key. Once again, that's star and one if you wish to ask a question. Your first question comes from the line of Michael Rasmussen from ABG Sundal Collier. Please go ahead.
Thank you very much. Hello, everybody, and very well done, guys. Three questions. First of all, I'd like to talk a little bit on the OpEx base, focusing on really what has happened to revenue. The second quarter, moving into the third quarter, you had about DKK 500 million in the reported revenue lines. Looking at your OpEx, they stay flat at about DKK 680 million-DKK 690 million. So, what I was just thinking is this really the cost base we should see going forward? And Bjørn, what are you thinking in terms of OpEx for 2013? Is this a sustainable level going forward? Second question being on your new guidance of DKK 6.3 billion in the top line.
It looks like, we're gonna see a negative YoY growth then in the fourth quarter, especially taking into consideration that you should get a little bit of gain from, currencies in the fourth quarter. And then finally, just, very briefly on the import duties, from Thailand to the U.S., that 1 percentage point of gross margin impact, is that impacting from, the full quarter, or are we going to see a, a little bit higher impact, going forward? Thank you.
Thank you, Michael. Well, the OpEx base, we have spoken about in previous quarters that we expect this year to see a more sort of stable development in the OpEx space. Generally, that is what you see reflected in the admin cost line, which is more or less in line with previous quarters. In terms of the other cost elements, the distribution expenses were in the other quarters, which I think we also spoke about, impacted by the last volumes that have gone through the stock balancing program without any, you say, revenue related to it. And then thirdly, marketing, basically, I think we also indicated previously that we expected to see some leverage or even more efficiency, basically on, on the marketing cost.
So it's basically reflecting that, that leverage that we've been talking about earlier, now becoming visible. In terms of looking ahead to 2013, that's a little bit early to talk about. So I think you will have to be patient on that until we report our Q4 numbers with our guidance for 2013.
So, Henrik, basically what you're saying is that, administration costs are where they are, should be, marketing costs are where they should be, and, there's actually a little bit downside in terms of the distribution costs as you are lacking at, this, this leverage right now.
Well, the marketing costs are as planned. Q4 marketing is usually higher than Q3 due to the Christmas campaigns that we see. So, but we are focusing on basically getting more efficiency generally in our cost base, and that's what you see reflected in the numbers.
Okay. Thank you.
Your quote on top line for the full year, yes, if we hit exactly DKK 6.3 billion, then we will be down in fourth quarter. That is correct. But as you know, I mean, Q4 is an important quarter for us. There is still three months to go. We have said that we will drop the product a little bit differently. If you remember now, in Autumn/Winter, we have three drops, an Autumn/Winter drop that was in August/September, a Christmas Drop, which was, you know, in October/November. And then we have a Valentine's Drop, which normally would be together with Christmas, which we are now dropping into first quarter of 2013. So, there's some revenue that is there moving from 2012 to 2013.
And, you know, with our history, I think we should be conservative and make sure that we give our best guess, and this is our guidance currently. When it gets to the duty, then the duty was impacted from the first of July. So of course, all products imported to the U.S. after first of July, then are now with that duty on it. The effect will then be increased, as all the products we're selling then also have duty on them when we sell them. So the full impact will be slightly higher, but as you can imagine, when you get the duty like that, we are working on plans, how we can balance the impact of it.
I think we'll get back to you on that, later.
Thank you very much. That's very helpful. And once again, very well done.
Thank you.
Thank you. And your next question comes from the line of Lars Topholm from Carnegie. Please go ahead.
Yes, congrats with a good quarter. Bjørn, you said you are upgrading guidance because of currencies, but if I compare your three most important currencies now and at Q2, then U.S. dollar is down, British pound is down, Australian dollar is down. I just wonder which currencies then make you more positive now than after Q2? A second question, if I may, and that basically goes on a little bit in connection with Michael's question from before, how you see the leverage on the operating costs going forward? I think that's it.
Well, I'll start with the last question. We said also last quarter that we're looking heavily into OpEx, and we're doing that currently to look at, you know, what OpEx level we will continue on. And I think that you see a stagnating absolute OpEx, and that we need a couple of more quarters to see where all the new infrastructure and the new systems will bring us... But I'm pretty confident that there is some leverage going forward, at least on the OpEx percentage. On the absolute level, I think I still need a little bit more time to be sure that I can say something.
But for modeling purposes, it would be fair to assume that if it's 38% of revenue now, it could edge a little bit lower, if one works in some revenue growth in 2013 and 2014?
You know, you don't get me to answer that. But I hope going forward, if you look further into the future, that is lower than 38%. That is correct.
Okay.
On your upgrading question and FX, you'd say, yes, FX goes up and down, and your observation is, I can't argue against that. We've when we say we upgrade based on more positive development in currency, it's compared to the original currency, original, you say, basis for our original guidance. And if you compare to that, I think you would find that it's basically the currency driving the upgrade.
So compared to what you guided after Q2, it's not currencies which made you more optimistic, it then must be underlying demand. Is that a fair conclusion? I mean, you can't upgrade because of currencies when currencies are down.
As I mentioned, currencies are up and down, and we...
Yeah, but now, now they were, they were down, Henrik, so.
We have currency gains in the first nine months that we have sort of big in the bank going into the fourth quarter. And based on our assessment of the expectations for fourth quarter, we then basically set this new guidance.
Okay. Thank you, guys. Well done.
Thanks.
Thank you. Your next question comes on the line of Klaus Madsen from Handelsbanken. Please go ahead.
Yes, hello, it's Klaus Madsen here with a few questions. My first question relates to the new collections or the second and the third drop in your Winter/Fall collection. Will that be priced or will price points be aligned with what we saw in spring/summer and the first drop? So we can assume that everything else being equal, the underlying gross margin we've seen in the sort of past two quarters would be a reasonable proxy going forward? That's my first question. Second question relates to your performance in other Europe excluding the third party distributors, if you could perhaps indicate a growth level in local currencies there.
And then finally, the performance in the rings category, could you add some geographic flavor to that trend? Thank you.
Well, I'll start with the rings. The rings are performing better everywhere, and it's pretty consistent. As we said, when we started talking about this, I think after Q1, it is a part of our strategy to launch commercial rings because we think it fits to our concept. It fits to our production, so it's high margin. And so far, that success has actually been materialized everywhere with slight differences. So there's no big difference from region to region. When it gets to your question about other Europe, which is Russia, Italy, and France, they are all performing well. Russia, extremely well, as we have talked about now a couple of quarters. We have a good setup there and are growing faster than we actually had planned.
The setup in Italy is also doing very well, and the same with France. And all these concepts are growing fast also in local currency. So very happy with the development there. And the first question was?
Pricing and margin.
Okay, the pricing of the Autumn/Winter is, yes, relatively on par with what we did in spring/summer, meaning that those collections are much lower priced than a year ago. But if you then blend it all together with the old product, and then take currency into effect, then you see that the average price for the quarter was actually on par with last year.
Right. And this price architecture, which you've used in the Fall/Winter collection, will that be indicative for your collections into 2013, i.e., the Spring/Summer 2013 collection? Or do you plan or see the need to do any adjustments to what you have done already?
Well, the pricing, first of all, the pricing for Spring/Summer will be in line with what we've done for Spring/Summer 2012, with some adjustments. Because, again, it's not about, you know, taking the average price down, it's making sure that each unit is balanced in the commercial price points. So we might even have a slight higher average price when you look at the mix. When it gets to Fall/Winter, you know, we are in the middle of selling out Fall/Winter, and we're using now the experience of what we see in the sellout to make the final touches on the Fall/Winter pricing, so that's too early to say. But there's no major changes in the way we look at price points in total going into 2013.
But again, being very focused on sellout, we will do those adjustments closer to when we actually launch the product. So, a little bit early to tell.
Right. Then just finally, could you comment on your relative competitiveness versus the other sort of high quality players in your category, and any sort of pricing trends or pricing pressure, if that's abating or stable or increasing?
Well, I think that's very difficult to copy. I mean, I think you've seen that some of the luxury brands have started taking their guidances down. We see in general, you know, in the nervous retail market. So we do see more discounts that we've seen before. We talked about UK for a long time, but we see blips of discounting also in other markets. But to make a quote, us relative to the others, I wouldn't be really qualified to say. We follow regionally, as good as we can, how prices are developing and are aware of that there could be price pressure.
But as you know, we are trying to stay away from the discounting and are trying then to do that with everyday pricing, like we do now, and make sure that we read the sellout data so that we can price the new products right, and that's what we're trying to do.
Right. Thank you very much.
Thank you. Your next question comes from the line of Dan Wejse from Nordea. Please go ahead.
Yes, hello, Dan Wejse. Also a number of questions. Firstly, on the stock rebalancing program, now you say 600, 610, you previously said 700-800. What has surprised you? Then secondly, I just want to make sure the Christmas collection, is it delivered later this year than last year? And then on lower marketing spending, is this low level that we're seeing here, is that also a trend, a lower level, which you see in Q4, or is it because you have postponed things from spending from Q3 into Q4? So please tell us a bit about, about that dynamic. And then lastly, on your external third-party distribution, a very, very weak development there despite the number of stores. So what are you thinking about this, these markets?
Are you going to close down a number of stores, or will it pick up again, revenue? So, so please give us a statement on that.
First of all, your first question on the Stock Balancing Campaign, where we now are around 610, and last time we said 700. What has happened is that the retailers, remember, could choose how much they wanted to return, based on those SKUs that were defined, and that started out with a number between 700 and 800. And then as we go through the process, that number has now landed around 610. So this is the choice of the retailers that then have selected to send back less, either because they sold some of it, or because they have made other choices. We haven't changed anything.
We have just followed it from a day to day and feel now that, you know, it will not be a lot more than 610. We had some issues with taking product out of some markets, the customs and stuff, which also impacted us, like we talked about last time. But we feel that it's now concluded. It has been good. The retailers has been happy, and it will end at that level. Your question about Christmas, I mean, Christmas is actually in the store worldwide as we speak. It's been launched the last couple of weeks into the stores.
In general, it's not much later than last year, but we did ship bigger drops earlier last year, and some of the Christmas product was part of that, but I can't quantify that to you when it gets to Christmas. What I can tell you is that Valentine's was also part of Christmas last time, and that was shipped earlier than it will be this year, so that's a definite. The lower marketing spend, we said last time that we have reviewed marketing from what is productive marketing, meaning media spend, and what is hidden marketing or indirect marketing, which the customer don't see, and we are working and have worked very hard, making sure that what we spend should be more focused on media, and that's the savings that you've seen.
You should continue to see some of those savings, until we then make our plans for 2013, which we are on the mid-low, where again, we will probably not be on a lower level of marketing, but we will try to make those marketing money more productive. That's, that's our goal. And the last question was?
Third-party distributors and the-
Okay.
Performance there.
Well, as you know, we have in those markets, partners that we sell product to, and they open the stores for us. None of them have plans of closing down the stores, but we are aware of the situation where their retail has gone down heavily, and therefore, their buys, meaning our revenue, has gone down. And that's where we have planned also their revenue down and making sure that we get to a level where they can start to buy more again. But there is no plans of closing down any of the stores in any of those markets.
Also, you will note that the impact from replacement shipments made to third-party distributors in Q3 is significant compared to the revenue that we have with those markets. So that is also, we made an exception for the third-party markets, where we actually allowed them to take new products instead of the top 500 products when doing the stock balancing, because they had significant inventory already.
Okay, then just to follow up on that. So, so what is the status on the inventories? You said that last year, we saw that they actually destocked quite heavily, and now they are destocking even further. So, so how far are you in this process of reaching what should be a more fair level of inventories in these markets?
Well, well, I mean, the decisive factor there is how their retailer developed, you know? I mean, you know that retail in markets like Spain and Portugal has been down heavy, heavy double digits. We think that the inventory level are much more healthy, but they need to grow their sell-out again before they can start to buy more. So now it has been about making sure that they have a balance in their inventory, but also new products, you know, because they were over-inventoried in older products and even in best sellers, and therefore they couldn't afford to buy new products. So what we did there is in the Stock Balancing Campaign, as Henrik said, we gave them new product instead of more of the best sellers.
So I can't tell you exactly how low they are in the inventory. I can just tell you that they are positive to what we have done with them. And as they say, all markets must have a bottom, you know, and hopefully we are starting to reach that in those markets.
Great. Thanks for your replies.
You're welcome.
Thank you. And your next question comes from the line of Niels Leth from SEB. Please go ahead.
Hello, can you hear me?
Yes.
Okay. My first question would be on the sellout data that you are providing from your top four markets. Could you briefly talk about how they have developed throughout the third quarter? Have they improved throughout the quarter, or how has the development been? My second question would be on your working capital development. Would you expect to see the same relative improvement in your working capital in fourth quarter as you did in fourth quarter last year? Thank you.
The sellout data Q3. Are you, I mean, that-
You're looking to, you're basically asking whether we've seen an improved trend in sellout, developments during, from start to end of third quarter?
Yes, correct.
Oh, in the quarter itself?
Yes.
Ah, okay. Actually, yes, we have seen an improved trend over the last three months. Yes.
Okay, thank you.
In terms of the working capital development, I mean, yes, we do expect an improvement in Q4. So a reduction in our, I mean, as the normal season analysis, you could say, in our business, so a reduction in the inventory, a reduction in receivables in Q4. So we, as Bjørn mentioned in his very introduction, we expect a significant cash generation in Q4.
Have you offered any changes to payment terms to any of your customers around the world?
We have a few, and as we previously mentioned, we continue to provide extended terms, in some cases, to franchisees opening stores, and we've had a few other exceptions. But as you see, we have an improved performance on trade receivables from last year, with trade receivables being basically in absolute terms, in line with last year, despite a 14% higher revenue. So it has less of an impact this year compared to previous years in Q3.
Okay, thank you.
We do not expect extended terms to any significant extent in Q4.
Thank you.
Thank you. Your next question comes from the line of Kenneth Leiling from Danske Bank Markets. Please go ahead.
Yes. Thank you, Kenneth Leiling here. First of all, I was a little bit curious as to, would you say that your fixed cost level in the third quarter is impacted by your inventory program? I.e., do you have higher fixed costs because of this? And secondly, I was a little bit uncertain what you said about marketing spending. Did you say that you expected to spend the same level in Q4 as you did last year? You would just spend it more wisely. Was that the answer that you gave to that question? And then, just perhaps I'm a little bit uncertain, perhaps it relates a lot to the UK. It's a very, very strong sales development here in the third quarter.
For the UK market, do you think that the third quarter has sort of taken some of the Q4 sales, or is there any other explanation for the very strong performance in that market here in the third quarter? Thanks.
When it gets to the UK, as you see, we're coming in the sell out from heavy negative numbers to now, slightly positive. So there is a trend there, which is positive. I would say that there's nothing unusual with the revenue that we had in the UK, Q3. We haven't pulled anything forward or done anything substantial, so I wouldn't say that we have taken any Q4 revenue in Q3, no. The UK market is difficult. I mean, it has been for a long time, very, very promotionally driven and discount driven, and I think we have done the right thing by not going that way.
And as you know, when you've been down for a while, then things turn around, and I think the new product, the new prices, have relatively improved our package in the stores, and hopefully we will start to see that stabilizing. So we are slightly optimistic on UK, and I think that's all I can say about it. But when it gets to the marketing spend, then what we have said, and it's not by quarter by quarter, but in general, we should try to shift more of the marketing spend into media, meaning doing things that the consumers see and doing less indirectly, meaning, you know, spending on agencies and creatives. And that started in Q3, and it will continue in Q4.
In total, I've said that I think that the absolute spend that we're having will not go down. I think that, you know, that's, that's a fair level, but with increased revenue, then the percentage in marketing will probably go down. But that should not be visible for the consumers, because we should spend more on what we have in our budget on the media and less on getting it to the media. Let's put it this way.
If I may just follow up on that, I mean, it does make sense, I mean, that would mean that you would have to spend at least twice as much in Q4 as you did in Q3. Is that a normal thing to do for Christmas or sort of a Q4 period?
Well, I do think that when I talk, I don't talk about the spend from one quarter to another, because it's very difficult to build a marketing strategy that is based on three months. So my answer is, on general, you know, that we should spend more on the campaigns, meaning that it's visible, and spend less on agency and creatives, which no one sees. And that goes for all the quarters. How that's then divided on the quarters is then depending on what kind of campaigns we do. But of course, there's nothing unusual that you're spending more on media in Christmas, which is a high sell-out period for gifting than in third quarter. So, I think that's all I can say to you. If it's double, I can't comment on.
In terms of the fixed, your question around fixed cost level in third quarter, how that is impacted by the Stock Balancing Campaign. Fixed cost as such is not significantly impacted by Stock Balancing Campaign. Generally, what is impacted by the Stock Balancing Campaign is more the variable components in our distribution costs. And what I said before was that the large volumes going through the Stock Balancing Campaign in the first quarters generated costs that didn't have, you say, any revenue attached to it. The impact from the Stock Balancing Campaign this year to revenue, and relative to revenue, is lower than in previous quarters, which also means that sort of the share of cost that has no revenue to it is also lower this quarter than in previous quarters.
So I don't know if that makes sense to you, but that, that's how you should look at it.
Okay. I was just thinking when I interpreted sort of Q4 versus Q3, whether all else being equal, I'm fully aware that there would be a lower cost base because of that, but okay. Actually, I have one last question. I mean, Henrik, you mentioned that you'd seen some... I think you said you'd seen some destocking in the Shop-in-Shops and the Gold Stores. Is that an effect from the weaker macro environment, and can that hit your Concept Store sales sort of a quarter later? Or if you could sort of elaborate on that comment.
It's generally true that we have seen some of our retailers working with lower inventory compared to prior years. That's just basically a matter of them managing their inventory. In some markets, and I mentioned that for Australia, you cannot exclude—I mean, it is a possibility that inventories were filled up in previous quarters, and that's some of the effect that we have been talking about, how the Stock Balancing Campaign can shift, you could say, purchasing volumes between periods. So it could be a combination of those factors, but generally, we are seeing retailers being more lean on inventory and running more efficiently with the inventories.
Which actually is a positive thing, because also for us, if we think that we will have seven drops per year instead of two, you know, we would like the retailers to carry less inventory and be fresher. So I think both the retailers are also working on the same strategy, and that should take the risk out of having bad inventory down, and it should put our merchandise closer to the events where they should sell. So I see that, on a bigger scale, as a positive sign, to be honest.
But we're obviously monitoring this closely with the retailers because they shouldn't be going too low on stock.
When it comes to the Concept Stores, if I understand, is it correct that you work with order suggestions, so you ship stuff to them, and then you might see a reaction to that later on? I mean, is there anything to worry about here?
No, to be honest, what we do is that for the Concept Stores, is that we present the drops, and then we make, according to the profile of the store, different suggestions, and then in the end, the store orders. But when you have more drops, you will have to make more buying decisions more often. The good thing about that is that you have more data when you're actually ordering. So I wouldn't see that as a negative, to be honest. I wouldn't worry about that. I would see that as a positive because it takes the risk out of having to go through a Stock Balancing Campaign again, to be honest.
So, I see that the inventory levels now in certain markets are maybe a little bit too low in some of the channels, and that's a good sign, that because that will increase business again. But overall, I think the fact that retailers are thinking more about managing their inventory and getting their turns up, are very positive.
Okay, great. Thanks a lot, guys.
Thank you. We seem to have no further questions. I'd like now to hand the conference back for any closing comments. Thank you.
Well, thank you very much, guys. I'm sure we will see each other very soon, so I wish you a nice day. Bye.