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Edited Transcript of PNDORA.CO earnings conference call or presentation 5-Nov-19 10:00am GMT

Q3 2019 Pandora A/S Earnings Call

Copenhagen Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Pandora A/S earnings conference call or presentation Tuesday, November 5, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Lacik

Pandora A/S - CEO, President & Member of Management Board

* Anders Boyer-Søgaard

Pandora A/S - Executive VP, CFO & Member of the Management Board

* Michael Bjergby

Pandora A/S - VP of IR, Treasury & Tax

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Conference Call Participants

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* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Elena Mariani

Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands

* Frans Hoyer

Handelsbanken Capital Markets AB, Research Division - Analyst

* Klaus Kehl

Nykredit Realkredit A/S, Research Division - Chief Analyst

* Lars Topholm

Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark & Financial Analyst

* Magnus Thorstholm Jensen

SEB, Research Division - Senior Equities Analyst

* Morten Raunholt Eismark

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Piral Dadhania

RBC Capital Markets, Research Division - Director of Premium Brands

* Silky Agarwal

Citigroup Inc, Research Division - Research Analyst

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Presentation

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Operator [1]

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Welcome to the Pandora Interim Report for the Third Quarter First 9 Months 2019. (Operator Instructions) Today, I am pleased to present Michael Bjergby, Vice President, Investor Relations, Treasury and Tax. Please begin.

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Michael Bjergby, Pandora A/S - VP of IR, Treasury & Tax [2]

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Thank you, and good morning, everyone, and welcome to the conference call for Pandora's Q3 results. My name is Michael Bjergby from the Investor Relations team and with me today, here at the head office in Copenhagen, I have our CEO, Alexander Lacik; CFO, Anders Boyer; and Christian Møller from the IR team. There'll be a Q&A session at the end of the call. (Operator Instructions)

First of all, please pay attention to disclaimer on Slide 2. With that done, then let me now hand over to our CEO, Alexander, in Slide #3. Go ahead.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [3]

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Thank you, Michael, and good morning, everyone. It's less than 80 days since we presented our Q2 results. At the time, we outlined our plans and actions for the brand relaunch. We have, indeed, executed exactly as communicated and we have seen the first early results.

Performance in September and October shows early signs of traffic improvement in most markets. This gives us confidence that we will see a continued improvement into Q4 and that we're pulling the right levers for long-term success. So in our view, Programme NOW is on track. We're confident and a direction and the long-term direction of this business. Pandora is becoming more cost efficient, our business platform is strengthening and we're developing our brand at a completely different speed than in the past.

Before getting into the details, let me start with a brief review of the Q3 performance on Slide 4. We launched many commercial initiatives in the quarter. To say that we're busy is an understatement. Notice that it all started roughly 8 weeks ago. So it's still very early days by any standard. The initiatives, therefore, also had limited effect in Q3, and I'll come back to this.

Q3 financials were impacted by some of our deliberate actions to improve the fundamentals of this business, that's what we call the Commercial Reset. Promotional reductions hit our like-for-like severely but also helped gross margins, as you will see in the P&L.

We also improved inventory at our partners, which, again, has a negative short-term impact.

Lastly, we have updated our financial guidance. We'd like to exit 2019 with balanced inventory levels, and this is the primary driver of the downward adjustment of the organic growth. The new guidance for organic growth is partly outside of the original range. We still expect like-for-like to be negative high single-digit and that's unchanged. And the EBIT margin is narrowed within the previously guided range.

The last bullet on the right-hand side is important for me. We continue to find new pockets of savings opportunities. So as a consequence, we're upgrading our cost reduction targets as we see a lot of potential for efficiencies and we push very hard to become fitter during our turnaround. The next step for us to move from just cost projects to a cost culture, so we secure this for the long term. I'll leave Q3 with this and go more into Programme NOW.

Moving to Slide 6. We are executing on a very high speed on Programme NOW. Enhancing the brand relevance of Pandora is the #1 priority in our turnaround. With the brand relaunch, we have established the foundation for the future direction. We create small successes in different markets and we're heading in the right direction. Of course, changing the brand perception is not a quick fix.

During the quarter, we've initiated a new product development strategy, which we will share more details with you early next year. The implications of the strategy are expected to come alive in late 2020 and in 2021 given the 12-month development time lines we have.

On Brand Access, Cost Reset and Commercial Reset, we are progressing very well and results are showing. The deliberate actions of the Commercial Reset hurt our short-term financial performance, but is unquestionably the right thing to do. We will exit 2019 in much better shape on key areas with less dependence on promotions, more balanced inventory levels and a more efficient product assortment.

With this, let's move on to Slide 7, please. The brand relaunch was kicked off with a global PR event in L.A. We created new energy around the brand with good media coverage and a high online engagement. We have also conducted a number of other activities to improve brand perception. Most of these initiatives are aimed at the longer term.

Turning to the right-hand side of the slide. In Q2, we have tested increased media investments in Italy and U.K., which were discussed before. Based on the results, we've expanded this to all major markets except China where the media market is different, the investment focus on brand building and the newest product launches. The sole objective of the media investment is to generate more traffic. This makes it very simple to evaluate, and I will come back with a deep dive review further on.

I have no doubt that short-term and long-term investments in the brand are required and will pay off. It's a pleasure to see how our events are creating excitement as we're investing more than ever before.

Now let's move to the early learnings from the new store concept. We're rolling out per plan. So far, we have opened 4 fully refurbished stores in the U.K. and Italy, there's also a pop-up store in the new turn style of New York, and finally, our first experience store in Shanghai.

Together, fair assessment of performance of the new stores, we should look at Leicester and Birmingham where we have reasonable time horizon and I say reasonable because it's roughly 8 to 10 weeks. Results in those 2 stores to look encouraging. Both traffic and sales have improved.

Importantly though, consumers are providing us with very good feedback. They tell us that the expression of the store is more welcoming and they like the new high-impact elements such as the charm bar.

We continue to optimize the concept, and over the next 3 months, we're looking to open another 6 stores. When we have sufficient data, we will evaluate the global rollout. We expect to be in a position to do that somewhere in the beginning of 2020.

Please turn to Slide 9 for a few comments on products. One learning from the Programme NOW diagnosis was that Pandora has not done enough to drive charms collecting. We're a category leaders in charms, which represent 50% of our revenue, and in fact, is part spite of the DNA of Pandora. I find it absolutely necessary to direct even more efforts toward this category than we have done in the recent years.

The O-carrier, which you see depicted on the slide, was part of the Autumn collection and is performing really well. This innovation proves to us the charms can be worn in different ways and can be expanded to other categories than bracelets. The first customer transaction is typically one O-carrier, a necklace and 2 charms. This makes units per transaction of O-carrier on par with snake bracelets. The O-carrier is one of the top sellers of the autumn launch.

In October, we launched Pandora ME. The idea was to offer the charms bracelet concept at an attractive price point. This initiative has been primarily driven through digital channels, faced by Millie Bobby Brown. Early results are very encouraging and drive Charms sales at a significantly higher ratio than for, instance, ESSENCE and Reflexions in the past. Those 2 things tell me that when Pandora brings relevant innovation to the market, we get a very positive reaction from the consumers. So again, emphasizing the need for upgrading our product strategy.

Finally, we believe we have a solid Q4 lineup that will change and support the like-for-like trajectory. Frozen II and UNICEF products have already been launched last week and we will further amplify collaborations with the Harry Potter collection coming soon. The Christmas drop has also received good focus group feedback. So all in all, a better lineup for this important trading period than we've had for a long time.

On the next slide, I'll have a look at the results of our media investment. This is maybe the most important slide in the entire presentation. What we'd like to do is to provide you with an understanding of the issues we are facing when we reduce promotional activities. It also illustrates the core reason for why we expect an improvement in Q4 and beyond.

As a reminder, decline in store traffic has been the major driver of our like-for-like decline since 2018.

Looking at the charts for the 3 key markets, there is a very consistent pattern. In the weeks where we are not cycling promotional activity, there is a clear improvement in traffic development since the brand relaunch. In the 3 key markets on the chart, we basically have stable traffic development in our concept stores when the trading weeks are comparable.

Look at the U.K. in the middle of the chart as an example. In week 36, immediately after our brand relaunch, we saw traffic into stores improving. From week 37 to 39, the traffic declined by some 20% as we cycled the late-season sale that we conducted in 2018. This year, we ran a 3-for-2 sale in week 39 and 40, which gave a more fair comparison. Getting into week 41 and 42, we saw a clear improvement with clean comparisons. So -- and you see the same pattern for these 3 markets, and of course, for the other markets that we're not sharing here today.

I'm now turning to the next slide to focus on China. We have doubled our revenue since buying back the distribution in 2015. We'll continue to open stores at a high pace to build a strong distribution alongside a strong e-comm business through Tmall. China's performance in Q3 was disappointing, there is no other way around that. This was fundamentally driven by weak trading during Chinese Valentine's Day in August.

During the last year, we've experienced strong growth on Tmall. On the other hand, we had weak traffic development into our store network, minus 30% less than prior year. To some degree, we have offset this with significantly improved conversion rates limiting the like-for-like impact. But clearly, we have a more structural challenge in China. We believe there are few areas that need more attention.

The consumer research we have done shows that our brand position is unclear if we compare to other successful Pandora markets. Our media model, both the amount and execution, has not delivered the type of brand awareness built nor traffic into the stores as required. We're also evaluating the quality of our retail network as part of the larger corporate assessment, which we'll discuss and will be shared in Q1.

We have initiated a comprehensive plan to rejuvenate the brand and our go-to-market strategy. There is no quick fix to these challenges. It requires more embedded commercial engine and possibly a different investment approach. We will work our way through this and find the right approach for growing in China like we've done in other markets.

Before handing over to Anders, I will provide a few comments on the Commercial Reset on Slide 12. The commercial reset is an important initiative. It does hurt us short term, but we are doing what is right for our business in the long run. Q3 was the quarter where we reduced promotions the most. We reduced the number of promotion days by around 41%. As an example, U.S. went from 27 days to 9 days of promotions, so it's a very different environment for the Pandora consumer in the U.S.

As you know, we've also initiated inventory buyback program in North America. The broader program will be completed in early 2020.

This covers my part today. I will now hand over to Anders. Anders, please?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [4]

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Thank you, Alexander. Please turn to Slide 13 for just a few words on the cost program.

We continue to progress well on the cost initiative on the Programme NOW, and as you've seen, we have increased our targets this morning, both for the calendar year '19 and for the 2020 run rate and the new 2020 target of DKK 1.3 billion is equal to 6% of revenues. So it is a large cost program that we are running.

I would like to highlight the second cost category on the slide, the retail expenses where we had progress better than expected by standardized and marketing materials and managing hours available -- labor hours in the stores and also taking the first step in renegotiating selected lease agreements. And we will continue to leave no stones unturned as we hunt for more cost savings to protect our margins and reinvest in the business. That concludes the review of Programme NOW.

And on Slide 15, I'll just give a couple of highlights on the Q3 financials. You probably know these numbers by now, so I'll just leave you with 2 comments on this slide. And the first one of those being that the cost structure of Pandora is transforming and the gross margin is increasing, as you can see in the numbers today, as we are becoming more efficient. Administration costs and our sales and distribution costs are flattening out or even decreasing. And we are pushing costs towards the line that really drive top line and the brand. And you can also see that marketing is up 60% year-over-year in this quarter.

Secondly, the cash flow continues to be strong and also being a testimony to the efforts that we're doing in Programme NOW and the underlying strength of the business.

So let's go into little bit more details on the revenue for the third quarter on Slide 16. The largest driver for the decline in organic growth is the Commercial Reset. And as you know, these are all measures that we are deliberately choosing to do and which are of, you can say, a one-off nature. So the promotional reduction impacted revenue by around minus 4% in the quarter, the change of the payment terms in Italy about minus 3% and then the decline of sell-in to wholesale around minus 2%. So in total, around 9-ish percentage points impact from the Commercial Reset in the quarter. And the decline of sell-in to the wholesale was mainly driven by North America and this continued inventory decrease was, in fact, larger than what we had expected.

You may have noted that I say minus 2% for the sell-in decline but the pink box here just to the left of the middle of the waterfall -- to the left of the organic growth, shows minus 3%. And that difference of 1 percentage point is related to Hong Kong, which impacted organic growth by 1 percentage point, but it's not included in the like-for-like number of minus 10% in this waterfall.

So like-for-like, excluding Hong Kong, was minus 10%, which overall was quite close to our expectations except for China, where the performance is disappointing, as Alexander has already explained.

I'll just give a few words on the change of payment terms in Italy. This has a very large impact in the quarter and it's another measure that we are taking to clean up the business and ensure that sell-in and sell-out is matching better going forward. It's pure timing and the revenue will come back in this quarter that we're sitting in now in Q4. But obviously, it hurts both revenue and the margin in the third quarter.

Moving on to Slide 17 and the EBIT margin bridge versus last year. The EBIT margin excluding restructuring costs was down just below 4 percentage points compared to Q3 of '18 and that's mostly driven by the deleverage resulting from the lower revenue. We have reduced costs by just around DKK 300 million in the quarter or 6% of revenue. And as you can see in the waterfall here, we have basically reinvested everything in the business to drive both the long-term health of the business and also revenue on the bit shorter-term horizon.

I would also just like to highlight that restructuring costs in the quarter, which amounted to DKK 1.1 billion, which led to a negative reported EBIT. This is, obviously, a massive number. And the largest part of the restructuring cost is in cost of sales, COGS, due to the inventory buyback program and the write-downs related to the product as sold and simplification. Our expectations for the restructuring costs in the full year '19 are unchanged up to around DKK 2 billion.

Then on Slide 18, just a brief comment on cash flow. The cash flow generation was strong again in the quarter despite the negative reported EBIT. Free cash flow was DKK 1.1 billion, and adjusted for IFRS 16, it was just around DKK 0.8 billion. And as you can see, the operating working capital continued to be below the 10% mark and ended at 8.6% of revenue and is probably the lowest that we've ever seen in the company and only half of the level we were at last year. There's a little bit of technicality supporting the low working capital number also in this quarter because the trade payables are high -- or higher than normal due to the one-off restructuring costs.

We still see that the business can be managed with an operating working capital at a low double-digit percent of revenue and thereby below the 50% target that was mentioned at the Capital Market Day in early '18.

And you should also notice that the inventory buyback program had a large P&L effect in Q3, but little or basically no cash effect in the third quarter.

So the final point on the agenda is the full year guidance, starting on Slide 20. And on Slide 20, you can see that our updated organic growth guidance, and the dotted boxes on the slide here represent changes to the original guidance. Organic growth is now expected to be between minus 7% and minus 9% for the year compared to previously between minus 3% and minus 7%. And as you can see with these dotted boxes, the change is driven by larger impact from inventory reductions in the wholesale channel combined with fewer store openings and a different phasing of the openings than we had initially expected. And thirdly, it should also be noted that the turmoil in Hong Kong drags down the organic growth a bit on the full year compared to the expectations.

So you know there's only 2 months left of the year. The range of outcomes for '19 remains somewhat wide, both due to the fact that November and December are very large trading periods, but elevated further due to the fact that we are in the middle of a turnaround.

It's obviously, never fun to downgrade the organic growth guidance but the drivers of the downgrade are, to some extent, nonrecurring. Taking down inventory and thereby having lower sell-in than sell-out is a consequence that we are managing the business for the long run, and in a somewhat ironic way, you can actually say it represents an upside to 2020 revenue once sell-in and sell-out converge again.

And we would also like to say that we could easily take off the pressure on sell-in and push less hard to reduce inventories in the wholesale channel and thereby support the organic growth in '19, but it's not the way we want to manage Pandora.

We're confirming our like-for-like guidance despite the challenges that we are seeing in China. And we have said repeatedly that performance is very much about Q4, and Q4 is very much about a couple of key weeks from late November and through December.

So we are, indeed, heading toward some very exciting weeks where we expect to see improved performance based on, among others, the improvement in traffic into the store, which we have seen since the brand relaunch.

And then, finally, let's turn to Slide 21 and the EBIT margin guidance. The full year EBIT margin guidance has been narrowed to the lower half of the original guidance and is now between 26% and 27%. And you can kind of see this as a mechanical consequence of the lower organic growth, which, obviously, has a diluted effect on the margin. And then that's partly offset by the additional DKK 50 million in cost savings.

And besides the EBIT margin, we have also updated the CapEx guidance to around DKK 1 billion from previously between DKK 1 billion and DKK 1.2 billion.

And lastly, we have updated the effective tax rate to between 23% and 24% and that change at the tax rate guidance is actually a result of our restructuring efforts and the significant decline in our own inventories, which has a technical impact on our tax asset values. It's pure timing and it doesn't affect our future expected effective tax rate for the company.

That's all from me on the financial guidance, and I'll now hand it back to Alexander and Slide 22.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [5]

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Thank you, Anders. I wanted to close this presentation by summarizing where I think we are. So we have started the journey to turn this business around, and this is clearly in the very beginning of that. So if you think of it as a book, we've turned to a new blank page and we're writing the first few sentences. What's really important now is that consumers actually take notice of our efforts. So this is and remains our key focus. Programme NOW as such, with all the elements we just reviewed, is on track. We are seeing some early positive signs of the efforts, and in particular, the change in traffic trajectory is a clear positive vote by consumers. This is manifesting itself in improved like-for-like performance. Since the brand relaunch, we are experiencing better like-for-likes. If we exclude China, the like-for-like comparison would have moved from minus 10 to minus 5 in October. So clearly, very early signs. There's a few weeks of trading, but it's important that we're actually getting a positive response. Q4, in particular Christmas trading, will remain a challenge to overcome.

While uncertainty remains, we're at least starting off from an improved position versus prior years: better products, better marketing and we have strong investments in media. So net-net, I think this will be a bumpy ride, for sure. But taking hold of positive drivers remain our focus to turn this thing around.

And with those words, I'd like to open up the Q&A session. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Elena Marini (sic) [Mariani] of Morgan Stanley.

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Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [2]

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This is Elena Mariani from Morgan Stanley. Two questions from me, please. The first one, I would like to go back to what you said was the most important slide of your presentation about the improvement in traffic because one thing that is not clear to me is how could you say that the tests that you've done in terms of marketing, changes in approach and incremental investments in Italy and in the U.K. have been successful because your like-for-like has deteriorated sequentially in Q3. And even if you exclude the impact from the lower -- from like the reduced number of promotional days, it feels that from an underlying perspective, things haven't improved. What gives you confidence that what you're doing in terms of key marketing initiatives is the right thing to do? And this also is linked to China. I think originally you had said that you wanted to improve the marketing investments there, but what has changed there? And why now suddenly you're seeing more structural issues in the market? How long do you think it's going to take to fix that? And what's your overall assessment of what it takes for the brand to be competitive in the market?

And then the second question is a little bit broader and is about the medium term. Now you've been quite a few months into the restructuring of the brand and perhaps you have a little bit more visibility or at least you have a better idea of how long it's going to take to turn the brand around. I think we're all having a hard time in understanding what could be the medium-term trajectory of the brand. I think your full year '19 guidance is fully understood. My question is what do you think could be a realistic trajectory for the top line, the like-for-like recovery? And also what would be your early assessment of a sustainable margin for this brand excluding all the restructuring and all the initiatives on promotions that you've been taking so far? This would be very helpful to understand, at least to have a broad idea of what you think could look like -- 2020 could look like, or let's say, 2022, could look like.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [3]

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Okay. We'll try to answer as much as we can. The first thing I'd just like to remind you of is it's 6 to 8 weeks. So if you're trying to plot a course on the basis of one observation point, it is highly likely you end up in the wrong place. So that -- I just would like to remind ourselves of that. So what we're looking here on the charts is we were trying to kind of line up clean weeks as it were, so where there is no promotional distortion, because promotions do distort the picture quite dramatically as we've demonstrated. And what you see across these 3 here another 10, which sit underneath is we see the same pattern everywhere. Where there is a clean week comparison, we can see that the traffic trajectory is very different, in a positive direction. And that gives us the confidence that there's something driving that, and that would then be believed, at least initially, be mostly pushed by the increased investment in media. All these other things are more kind of hitting you once you enter the store. So that's probably what gives us that confidence as we kind of dive into the kind of absolute traffic numbers, which we're not sharing here today, but you're just seeing the outcomes here.

Then I think your second question is on China. I think China is -- there are a couple of different things. The underlying structural like-for-like development in China is not on fire, let's put it like that. We have seen a declining or a weak traffic into the physical store network since last year and I think the number is something like minus 30%. We are contracting that with conversion rates, which are up 15%. So essentially, you're taking out half of that impact.

And then the other piece, which is driving, is our Tmall business is really strong. Year-to-date, that's up 24% like-for-like, and in fact in September, was up almost 50%. So that business is kind of pulling in a lot of our consumer base.

So I do think that there is some structural softness in China. We've done quite a lot of consumer research, which should also kind of suggest that the positioning of the Pandora brand in China is somewhat weaker than in our kind of other big markets and we're working through exactly how to address that.

And clearly then, the media landscape in China, which I've touched on before, is different from, let's call it, the western markets where TV is not such a factor. And if you look back over the -- let's say, you go back 2, 3 years in time and you look at things like unaided awareness, that has somehow flattened out, which then would suggest to me that it's not generating the type of response we're looking for. And again, we would have to deep dive on understanding that.

And I think the third piece is, I think in general in China, we're seeing a little bit of a softer category development. We have some few data points, but they're more anecdotal than anything, from competition, which would also suggest that China has been quite a rough ride in the last few months. And within that, I think we've said that we have to take a look at our store network, whether we are placed in the exact correct places. That market is more dynamic, I find, than maybe in some other of the western world countries.

And then on your final question, what is the kind of game plan coming to a positive? I think in February, Anders spoke about that we expect '19 and '20 to most likely be in the negative territory in terms of like-for-like. If, lets say, that on the assumption that some of these things that we have now experienced are going to continue yielding, then we should be in a positive territory in the out years. Whether that's going to be in '22 or not, that I don't have enough data to give you a very strong point of view at this stage of the game.

Then looking at the earnings model question, which you raised, is our gross margins are actually increasing as you see. So there's nothing there that suggests that part of the equation is weakening. And if we can kind of get hold of like-for-like development, and I mean you can do the math yourself, we should be in a very strong position to kind of deliver EBIT margins somewhere around the current territory would be my view. But again, we're not making any hard statements of that just as yet. I don't know, Anders, if you have anything to add?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [4]

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No.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [5]

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Okay.

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Operator [6]

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Our next question comes from the line of Magnus Jensen of SEB.

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Magnus Thorstholm Jensen, SEB, Research Division - Senior Equities Analyst [7]

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Magnus here from SEB. I have 2 questions for you. The first one is the one I always ask you guys, it's on the Charms like-for-like. So you report that Charms are down 14% in reported growth. What were the underlying like-for-like in the category if you'd like to share that as you've done before?

And then my second question goes to the reduction of the inventory at franchisee levels. I mean even this quarter, you bought back a lot of old inventory from your franchisees and yet they continued to reduce their inventories even further and this is in a period where you're relaunching the brand and using a lot of interesting new products including, for instance, Pandora ME. Could you share your view on this? And aren't worried that you're going to end up with too low inventories at your franchisee levels? And finally, could this be a sign that some of your multi-brand retailers are maybe phasing out your products?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [8]

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So on the first question, I think the Charms like-for-like is in a similar territory as the organic growth number, if I'm not mistaken.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [9]

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We don't provide the organic growth number either. But in essence, what you should, it was in line with what we've seen Q1 and Q2, so negative mid-single digit -- or negative mid-teens. So that has not changed and the pattern is the same.

And then, Magnus, on the inventories, I think there's a couple of things at play here. I think just exactly like that the entire discipline of managing inventory is much higher on the agenda for Pandora as part of the turnaround, I think exactly the same is happening for our partners than -- when you have been in a period of time where revenue has been declining a bit. If you're still operating a store or a few stores, then you get into -- naturally focusing more on also managing your balance sheet because it has a direct cash impact. So I think what we're seeing is, compared to the outset of the year when we made the guidance back in February, is that the level of weeks of cover, the level of inventories at store, can be operated which is probably a bit lower than what we -- was our assumption at the outset when we made the guidance, what is that, 8 months back, 9 months back.

And then on the multi-brand. Yes, the -- as you know, the data on multi-brand is less sharp than probably we do have for concept stores. But we do expect that the like-for-like, if you had such a measure from multi-brand, is a little bit worse than for the group average. But we're not seeing a delisting, I think that was the word you used as a general thing at all among multi-branded partners.

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Magnus Thorstholm Jensen, SEB, Research Division - Senior Equities Analyst [10]

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Okay. Just a short follow-up. So I'm not really sure, is this your decision or is it the franchisee's decision that they're reducing inventories even further?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [11]

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I'd have to say it's both. We've decided that we don't want to push -- we want someone -- we want the partners to pull inventories from us when they need it and meaning that they -- we want to make sure that our sell-in to the partners is guided by not something we decide to sell in to them, but it's guided by the sell-out from their stores.

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Operator [12]

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Our next question comes from the line of Antoine Belge of HSBC.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [13]

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It's Antoine Belge at HSBC. Two questions. First of all, I think you mentioned the lack of local relevance for certain products. Is this something that a product like the O-carrier is already addressing? Or is it something that you will address at a later stage. I don't know if you could give sort of an example where you have products, which are different in a specific country.

My second question relates to China and then I fully understand that it's too early to talk about 2020, but whatever your level of margins or profit you had I would say initially or at least 2 months ago regarding 2020, is it fair to say that with the work that needs to be done in China, I think you mentioned retail adjustment, et cetera, that there will be a cost or that we should adjust our estimates for the fact that, China, there is -- there are specific issues on top of the, I would say, the overall repositioning of Pandora?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [14]

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Okay. When it comes to the product strategy, I think the O-carrier is a great example of how we can expand the usage of charms outside of the bracelet.

But specifically on your question on the new product strategy, I mean, we're working through that as we speak. And when we have kind of bolted that one, then the actual development works takes place. And from concept through to ready product, in our world, we're looking at roughly a 12-month cycle and we can fast-forward some things, but on average, that's the kind of time line we are looking at. So I would not be expecting any kind of major changes until maybe late 2020 that could be -- you could derive out of this different way of thinking about it.

Then, on China, I am not entirely sure what your question is. Or are you asking if we're going to expend more money based on the comment around the store network? Is that your question, just so I'm clear?

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [15]

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Yes, I mean. I guess, I mean you mentioned the October developments, which, obviously, were quite negative and I would -- I mean, my view or maybe I'm wrong is that they are below your expectations so maybe -- I mean, that specific issue in China is coming on top of what you had planned in terms of investment on OpEx. So basically, that we -- again, I understand that it's way too early for you to give an overall 2020 guidance, but compared to our previous estimates, is it fair to say that we will have to, and it's our job to do estimates, but in other words, I mean there is a downgrade to EBIT to be made for 2020 on the back of what is likely to happen in China that you will probably announce at a later stage, but it is already clear that the situation needs some adjustment?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [16]

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Maybe I try to give you some flavor on that question. As we're keeping our guidance for 2019 on like-for-like and EBIT margin unchanged, I think that's the starting point. And as always, there's pluses and minuses, but specifically we are, on the EBIT margin, we are within the guidance that we said from the outset of 2019. Obviously, on an isolated basis, we are not where we want to be in China, but the group margin, we are still tracking within the range for 2019. So I think you should think more on China as more about working differently and spending the money that we're already spending in a different way rather than a big group margin impact.

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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [17]

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Okay. And maybe just a follow-up on the cost savings, that would seem that you found new areas of for cost savings. I mean could you give maybe a few specific examples on where you're going to gain this DKK 50 million this year and even more in 2020?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [18]

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Yes. If you have the presentation in front of you on Slide 13, the Q3 presentation. In that, we have indicated where we are, with the [heavy bold] to the right, and where we are pre the progress, like in admin expenses. So if you look at sort of the incremental impact next year from a money perspective, it's a cost -- it's the cost in the stores and IT, that as well. You will see the bigger incremental impact in 2020 compared to 2019. So that's the first one.

The second one where we have upgraded the guidance a bit compared to previously is on the retail expenses, [retain] the target up there from previously. And then on admin expenses, that's the true focus where we have opted a bit. And specifically on retail, I think we've actually made better progress and faster progress than what we had expected. And you can also see that in the numbers in Q3, that our sales and distribution expenses is actually down compared to last year despite the fact that we have 113 more owned and operated concept stores this year. And that's -- I think that's a good data point in looking at where we've made pretty decent progress in the cost program.

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Operator [19]

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Our next question comes from the line of Silky Agarwal of Citi.

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Silky Agarwal, Citigroup Inc, Research Division - Research Analyst [20]

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I have 2 questions, please. One is on the performance of the new products. I saw on the press release, you mentioned that the Autumn collection, which was launched on the 29th of August, is still flat. I mean do you think this is in line with your internal projections given it's the new collection and you should probably have had positive like-for-like development on that collection at least?

And secondly, it's related to this in terms of your performance in new pilot stores. I mean do you have any additional data which you could possibly share in terms of how these new stores have performed or the online growth, both the relaunch on the website?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [21]

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So when you look at the Drop 7, as we call it, you are correct in saying that's flat versus prior year. I think you put that in the context of, I think the previous 6 or 7 drops have been double-digit negative versus kind of the prior comparative base. So for us, this is a step in the right direction. And obviously, going into the future, our growth will, to a degree, be dependent on managing to actually to grow behind the drops. But versus their, let's say, their most recent 12 months back drops, this was a step in the right direction.

And I think in terms of the new stores, I just like to caution this. I mean we have some data points, but again, it's 6 to 8 weeks. I mean I think Birmingham has been up for -- it's 6 weeks, is a very short time frame to be perfectly honest with you. We see like-for-like is up, traffic us up. We see dwell time is up, so people spend more quality time in the stores, et cetera. But again, we need a few more months to kind of come back with a more conclusive picture.

When it comes to the like-for-like performance on online, I think up until the relaunch, we were trading at roughly, from memory, 20-odd percent growth globally. In the month of September, this was only 12% or so, from memory. And this is 100% correlated with the reduction of -- or the severe reduction of promotions. So again, looking at the performance of that, you would have to go to clean weeks as we look and there, we can see a better performance. We know that -- what we call the PDP rates, so product views, which is eventually when you're looking on a site, you need to get people to the product site because from there, essentially, you click to purchase. And we see that there's a quite a significant shift in people that are getting to the PDP, which is largely driven by the fact that the sites load much quicker than in the past. So we know that conversion rate is very closely linked to the load rate.

So again as I said, early days, but the signals we have or the indications we have is that literally every single aspect of program now has generated some positive indication for us. And I think that's the important one to take hold of. Is this perfect? Is this at an end state? No. As I said, first chapter, first paragraph, but it's a positive one.

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Silky Agarwal, Citigroup Inc, Research Division - Research Analyst [22]

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Just a quick follow-up. So is it fair to say that the performance, the improvement that you've seen in October is largely led by these new products and also these new stores and online revamp?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [23]

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It's 4 weeks of trading we are discussing. I think the key driver is that we see improved traffic. And that's really the key point because as we, I think, said somewhere in the material, the reason for the like-for-like decline for Pandora is traced back to traffic, not conversion rates, not UPT or average or the values or any of that, those metrics. It's purely driven by less people coming through the door. And what we're experiencing post the relaunch and especially in the clean weeks, as we talked about, then we have more people coming through our door than we used to have, and that is the most important diagnostic KPI at this point in time. So to answer your question, yes, that is the driver.

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Operator [24]

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And our next question comes from the line of Klaus Kehl of Nykredit Markets.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [25]

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Yes. Two questions from my side as well. First of all, your capital structure is still rather strong. So all else being equal, would it be reasonable to expect a new share buyback in 2020? Or should we expect increased CapEx in new stores next year? That's my first question. And secondly, we have talked a little bit about or quite a lot about this improvement you've seen in October. But just to clarify, is there any particular markets that has seen this improvement? Or is it across-the-board? That would be my questions.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [26]

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Klaus, it's Anders here. I can start out with the first question. On the capital structure, yes, it is clear that we are generating a lot of cash still from that perspective. Nothing has really changed. And even though we're not guiding on 2020 yet, I would be very surprised if there's not a decent amount of dividend and share buyback in 2020 as well.

And on the CapEx in new stores, it's actually a good question. The way to think about it is that long term, it does not change our CapEx level because once we're up and running at full speed and gone practicing on the new building, the new stores, the cost is the same as for the existing stores. So that's around DKK 2 million per new store that we are opening. Initially, it will be more expensive, and that was also the case when we developed the current concept some years back. But then it takes a little bit of practicing before we take the cost down. But long term, the cost is the same.

Then specifically for the transition period, the level of CapEx actually depends on how strong a pickup do we see in traffic into the stores, conversion and like-for-like in the stores that we refurbished.

So on the one hand, you can say about the materials refurbished the new stores, when we will do it anyways, then it doesn't have an impact in big numbers on CapEx. And then on the other hand, if we see a strong pickup in the retail metrics in the stores that we refurbished, they won't -- they want to accelerate the refurbishment even ahead of where you need it from physically. And where we end up within those ranges, we'll have to see -- get in some months of -- or quarters of data. And as we said, I think it's put into the company announcement that sometimes during the first half of 2020, we will conclude on how the -- how fast we want to roll out the new concept.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [27]

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Okay. And your second question on which markets are driving the improved October performance, so there are a couple of points I'd like to share. First of all, I mean, it's a broad improvement across numerous markets. If you look at the 4 out of our top 7 are in flat to negative low single-digit territory. And in particular, the large European markets are performing really well. China and Australia would probably be on the kind of other side of that spectrum, but that's kind of the perspective we can provide.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [28]

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So did you say that a couple of large European countries are in a very positive territory?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [29]

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No, they're performing better in the flat to negative low single-digits territory.

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Operator [30]

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And our next question comes from the line of Frans Hoyer of Handelsbanken.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [31]

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Coming back to the inventory levels at franchisees. Wondered if you could tell us how much visibility do you actually have of franchisees' inventories and their sellout. And how can you make the distinction between inventory reductions with franchisees that are of the healthy inventory cleanup variety that you mentioned? And how much is, in fact, franchisees losing faith?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [32]

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Thank you, Frans. It's Anders here. At least I can start out on the visibility. On the concept stores, the franchise concept stores, we have very good visibility on their sellout and also on their inventories. We get data for all of the franchise and distributor-operated concept stores every week. So every Thursday afternoon, the global management team sits together looking at the like-for-like data across channels and markets, including the concept stores operated by partners. So there we have very, very high visibility. But then when you move into shop-in-shops and multibranded, it's less structured. Obviously, also it is a smaller percent of revenue and spread across many, many points of sale. But for the majority of the revenue, we have reasonably good -- on like-for-like, very good insights.

And then on the healthy versus nonhealthy, we, again, we have quite good insights on the level of inventories in the franchise-operated concept stores, what's slow moving and what's fast moving and the weeks of cover. And obviously, also the individual countries and managers have a very frequent dialogue with the partners. And there's no doubt that they, obviously, have felt like-for-like and revenue decreasing during the last couple of years and thereby, earnings, as an average, being less than what has been in the past and that obviously makes you -- as a businessman is you're focusing also more on the balance sheet and cash flow and thereby, inventories. And that is one I think this is taking the weeks of cover, not just in our own stores but also among partners down to a much lower level than what it's been in the past.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [33]

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And so you can see that it needs further reduction and this is the reason for your downward adjustment. You basically decided that inventories need to come down further and you can still service the shops even from your own inventories or directly from production. Is that how we should think about this? It's really that you can make do with much lower inventories than you have assumed so far?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [34]

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We've seen countries and markets where the -- so the weeks of inventories that you have sitting in the store or in your small warehouse had been in the 30, 40 weeks, which is absolutely not necessary to run a shop. The best practice for companies like us is probably mid-teens weeks of cover. If you have good systems, good replenishment algorithms, you can run a store like this and that goes for our own stores as well, let's say, mid/high teens weeks of cover. And historically, we, as in Pandora, have been way far away from that and that goes as an average also for our partners.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [35]

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So this week's to cover is going to come down further during Q4?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [36]

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Yes, I think it will get down a bit further. And then because our aim from the outset has been that as a broad stroke, broad average when we exit '19, then we are where we should be in terms of inventories in the wholesale channel. So we can, like, stop talking about this because we'll be looking forward to that point in time as well.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [37]

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Just some perspective. It is a bit of a mathematical answer to your question actually because the way it's calculated is on forecasted future sales. So as you get into period like Christmas where we do a significantly higher proportion of sales, then technically, you will have to load up inventory. And as you're getting out, you will have a slightly higher starting point. So this fluctuates throughout the year. So when we say that you can run a store in 12 weeks, that's an average. That would not be sufficient to service the Christmas period, for instance, and you would run out of stock. So it's a bit of a dynamic.

If you had a completely flat line consumption pattern, then yes, you can make that statement. But because we have such a backloaded year, so if you look at these numbers, you wouldn't find the number we're quoting.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [38]

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But there was a runoff in inventories in Q3 and you would probably need to replenish those inventories with franchisees during Q4 in order not to run out of product for Christmas?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [39]

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The other point, which we're not really talking -- we are now only talking about the quantity of inventory position. The other aspect of this is also the quality of the inventory position. So a large portion of what we've kind of taken back has been inventory which is not really sellable. It's been there. It's been discarded for quite some time back and it's not moving. So that's part of the equation as well.

So I think the starting point this year in the U.S. was we sat on, what, 50 weeks of cover. And we will hope that next year, the same point in time, we would be down to like 25 or even less, which we will be much more of a healthy position. And that whole journey means I'm selling in significantly less versus what's actually being sold out even when like-for-likes are in slightly negative position, like the U.S.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [40]

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Yes, okay. And the transition then from inventory runoff to stable inventories would be -- I mean, that would look different in your P&L, I suppose. Just one more question on the promotional. The reduction in your promotional activity, how much of a drag what was that on like-for-like in Q3?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [41]

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I think -- first of all, it's not perfect science. I wish it was, but let's call it educated views on this would be that roughly 4 points could be attributed to this. But again, it's -- again, if you're in a steady-state business, it's easier to be more precise on that question. When it's a little bit of a sliding slope, then it's always the question, what is the incremental knot. But roughly 4 points at a global average. I think if you look specifically in U.S., it would probably be a higher number given the severity of the pullback, and maybe even U.K. would be a slightly higher number. But on average globally, we gather, it's roughly 4 points.

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Operator [42]

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And our next question comes from the line of Morten Eismark of ABG Sundal Collier.

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Morten Raunholt Eismark, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [43]

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Just a quick question here. Can you remind us, do you have in place or do you plan to reintroduce some permanent stock balancing with the franchisees where they can return unsold inventory minus, of course, a handling fee to regulate buying behavior? The point of my question is, of course, we don't end up in these big cleaning operations and of course, assuming that general Pandora sell-in versus sell-out culture is more healthy going forward than we have seen in the past year or years. That's the first question.

The second question, just circling back to the promotional effect. So if ballpark figures, would it be fair to say that the reduction in promotional activities cancel out the extraordinary marketing efforts you did in those key markets, again, ballpark figures, or how should view this?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [44]

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Martin, it's Anders here. On the inventory, the -- one of the aims of the commercial reset is that we should avoid having the need for a structured permanent program where inventories are being returned to Pandora. And in fact, as of now, the only markets where we have a structured program in place is North America. We don't have that in the rest of the world. So with the reduction of the sell-in packs that we started doing early this year and with the measurement being focused on like-for-like also for the concept -- the partner stores not sell in, we are trying to put ourselves in a position where we are not structured in a way or operating in a way where we consistently build up too high inventories that have to be taken back every now and then. That's the aim.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [45]

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On your second question, I mean, it's really a crystal ball question. I wish it was as easy that we could decouple those things and say, isolated effects. Broadly, maybe you are correct. But if you kind of push me hard and say, show me the numbers, I don't see then those numbers. It's very -- I could extrapolate what we experienced behind the media uptake in the U.K. and Italy, then I can say that this is what I -- an average promotion should deliver, but then we have promotion fatigue. We have a like-for-like plagued by fewer customers coming in general into the stores. The assortment might be different. So there's so many different components here. So it's really difficult to put a very definitive answer. But broadly, you're probably right. Somewhere in that ballpark is probably right.

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Morten Raunholt Eismark, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [46]

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That's very clear. And of course, respect to this is not an absolute science, of course. And just circling back to your answer, the point is, as you highlighted earlier, if you can sit and watch sell -- sell-out and I guess, you sell -- you also monitor your sell-in on a SKU level in your concept starts and you can manage the sell-out on SKU level each and every Thursday. Nevertheless, we still ended up in this situation. And again, I know the past is past, but you will probably never get 100% correct the product mix in both in terms of volumes and geographical mix. So there will be excess inventory or slow movers going forward, and I understand this is a permanent thing in the North American business. Particularly also, it would be interesting to see if it's something that should be introduced globally outside than just using alternative channels for flushing out. Is that something you would plan to look into?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [47]

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It's actually more the other way around. I mean looking at that, the ideal operating model is more like what we have in outside of the Americas. What we're seeing, the way we're operating in the countries in EMEA and APAC, where we have bigger partner networks, that we are setting ourselves there as a structured need -- we don't have a need for return programs. And we're actually been operating pretty much like that in EMEA and APAC for long. And now we're doing this onetime exercise. But then the entire aim has been set up in a way that it's not something where we need to do as sort of structured programs that is -- will be anywhere visible in the numbers going forward. But you're absolutely right because you don't have 100% precise forecasting accuracy. But the ones where you're not hitting right, hopefully, you can get rid of most of that on -- through your buy and your sales.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [48]

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And additional comment. The fact that we're going to reduce the SKU assortment from, what, 1,800 DVs down to 1,300 also means that we're focusing more on the productive aspects. So of course, the wider assortment you have, the longer the tail is, I mean, that's just arithmetic. So that, in and of itself, should help curtail that kind of unproductive part of the assortment.

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Operator [49]

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Our next question comes from Piral Dadhania of RBC Capital Markets.

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Piral Dadhania, RBC Capital Markets, Research Division - Director of Premium Brands [50]

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So firstly, if I can just confirm what you said around the U.S. like-for-like in October. I don't think you said it in your initial comments, but did you confirm it was slightly negative in the October month? That would be helpful.

And then secondly, just around the traffic slide that you presented on Page 10. Is it fair to assume that the like-for-like evolution broadly follows the traffic evolution for the clean weeks that don't have promotional noise in the base period? Or is there any deviations that you could flag at this early stage of the turnaround?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [51]

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So I'll probably start with the #2 question because you're right. We have not seen -- if you go back in, let's say, the last 1 or 2 years, there's a quite good correlation between like-for-like performance and traffic because our conversion rates are relatively stable. The average order value and the units per transaction are also very stable. So that correlation factor is very high. So in clean weeks, that's probably a good proxy, I would say.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [52]

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On the -- Anders here. On the October like-for-like in the U.S., Alexander commented on it before. He said that 4 out of the 7 markets were at flat like-for-like or low single-digit negative. The U.S. is more like mid-single-digit negative but better than in Q3. But if you look at Slide 10 in the deck with the weekly numbers, you can also see that in the U.S., we also still, in October, which is week 40 to 43, if I remember right, 40 to 43, we're, in quite a number of those weeks, comping a promotion last year. So with that -- that still hurts the U.S. in the month of October.

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Piral Dadhania, RBC Capital Markets, Research Division - Director of Premium Brands [53]

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Yes. That makes sense, Anders. Okay. So just coming back to the other point around the relationship between traffic and like-for-like. If we then take those clean weeks perhaps and coming back to a question that was asked, I think one of the first questions, is it fair then to assume that sort of the sustainable clean run rate for the like-for-like in the business with a small injection of new product is a low to mid-single-digit sort of trajectory? Is that sort of the way we should think about the medium term?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [54]

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Yes, that's probably the best proxy we have sitting here today. As I also mentioned, if you're navigating and you take 1 degree wrong course today, in only 3 weeks, you'll end up in the wrong continent. So I would just be cautioning you a little bit. But with the data set we have in front of us, that's probably not a crazy assumption. That's probably the way I would think about it.

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Piral Dadhania, RBC Capital Markets, Research Division - Director of Premium Brands [55]

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Okay. Brilliant. And sorry, sorry, just one more thing, it just occurred to me. I think you flagged Pandora ME as being a good example of a successful launch. I just wanted to sort of take a step back and get your views on whether you believe that is a function of a better marketing strategy or whether it's a function of a lower price points, which are resonating better with consumers. Do you have a view as to what's driving the more successful response in that collection?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [56]

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This is a loaded question, when you're asking a marketer whether the product guys have done a good job or have I done a good job in marketing campaign. But nevertheless, I think the driver of this is -- was also confirmed with the research before we actually did this. It's hitting that price point which sits sub 100, pick your currency pretty much. That's what's driving it. And I think that, in and of itself, manifests the fact that we do have a price elasticity on this brand, which we need to be conscious about. I don't know if you've participated in our previous discussions where I've spoken about the fact that kind of part of our issue, I think, as a brand is that we drifted away from being in these opening price points and being affordable. That's what consumers will kind of tell us that, "Well, it's not as affordable as it used to be and therefore I kind of sit on the fence for a while." So I think Pandora ME is a great example when you hit kind of the right value equation, that actually we see a strong following into the brand. And that's important to me because it does tell something about this whole debate on whether the Pandora brand is broken, nobody's interested, that this would kind of somehow suggest something differently.

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Piral Dadhania, RBC Capital Markets, Research Division - Director of Premium Brands [57]

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Okay. Yes, I mean, we have heard this before. So just -- if you, for example, expand the entry price point offer, is it -- how does that affect the gross margin? Are those lower price point products gross margin-neutral? Or is there a slight dilution implied?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [58]

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So on this specific one, it is not dilutive. And if you actually look through our Charms portfolio, the lower-priced charms actually operated higher gross margin because they're much easier for us to manufacture. So if you have a charm which is purely molded silver versus something where you have to set a lot of stones and maybe paint enamel and all of those things, they typically could be a little bit of a drag on the GM. But we're now talking in small increments. But generally speaking, no. The answer is Pandora ME is not decretive to the -- or dilutive to our gross margin profile.

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Operator [59]

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Our next question comes from the line of Magnus Jensen of SEB.

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Magnus Thorstholm Jensen, SEB, Research Division - Senior Equities Analyst [60]

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Just one small question for me. You said there was sort of a one-off effect on your free cash flow from Programme NOW to some of the -- due to some of the restructuring costs. How much is that?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [61]

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On the operating net working capital, it's actually not that much. There is something but the majority of the one-off restructuring cost is booked on order payables and not trade payables. But in total, of the DKK 1 billion in one-offs in the quarter, DKK 750 million, DKK 800 million of that is noncash in the quarter. Most of it is -- of the DKK 1 billion does not have any cash impact in the quarter. Some of that will then have cash impact growing into Q4, mainly the inventory program. Does that answer your question, Magnus?

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Magnus Thorstholm Jensen, SEB, Research Division - Senior Equities Analyst [62]

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Yes, it's fine.

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Operator [63]

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Our next question comes from the line of Lars Topholm of Carnegie.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark & Financial Analyst [64]

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A couple of questions on my side. The first up on the October like-for-like of minus 7. Just to compare apples-to-apples, is it fair to assume China was also a 2% drag in Q3 given it's just north of 10% of sales in like-for-like, it was minus 16%? And isn't it also true that comps in Q4 are 4 percentage point easier than in Q3, at least if I look at the like-for-like run rate last year? Then finally, is this Hong Kong out of the 7%? Because if that is the case, you could actually argue that in fact, when in Hong Kong, you go from minus 11% to minus 8% on a comp, which is 4 percentage point easier. So how confident are you, you have a real underlying improvement in momentum?

And then question number two goes to the fact you are reducing sell-in packages. I know you had some issues with producing the plated products. So wonder what is the status on that and what is the risk that in managing sell-in more tightly, you're going to experience more order backlogs than you have currently? Those were my questions.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [65]

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All right. Lars, it's Anders here. I'll try to start out on the first part of the question with the October like-for-like, the minus 7%. The way that the impact from China in October is bigger than in Q3 and you can of course do the numbers in different ways, but the way that I look at the minus 16% like-for-like in Q3, the minus 16% that China had, then that's a 6 percentage points worse than the group average. And then if we assume that China like-for-like weight is 10 percentage, which is probably as plus, minus, okay, then it drags down that group like-for-like in Q3 by the tune of 60 basis points or so. So the drag from China is clearly bigger in October than we saw in Q3, but it was also a drag in Q3.

Then on the Q4 comp, you're absolutely right. We went -- the like-for-like last year went from minus 3% in Q3 to minus 7% in Q4. So we have an easier comp getting into Q4. And that's, obviously -- it's not the eternal truth to look at 2-year comps, but it's a factor and that's probably -- that's clearly also part of why we do expect a better like-for-like here in the fourth quarter than what we've seen in the first 3 quarters of the year. And then there was probably something else that I have missed, I haven't answered, on the...

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [66]

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(inaudible)

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [67]

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Sorry, what was that question?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [68]

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(inaudible)

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [69]

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Yes. In October, that minus 7%, however, Hong Kong is still out because we see that the level of turmoil is at a level where, yes, like-for-like gets into ridiculous numbers, like in Q3, where it was minus 53%. So that's still adjusted in that number.

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Operator [70]

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Our next question comes from the line of Klaus Kehl of Nykredit Markets.

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Michael Bjergby, Pandora A/S - VP of IR, Treasury & Tax [71]

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No, sorry, we just need to finalize the last question, the order backlog. So it is correct that we have our larger order backlog currently that we have in the past, and this goes mainly for the plated products but also for some of the silver products that has been high runners. So that is correct. We expect it to be soft later this year, sort of towards the end of the year. But hopefully, with no impact on [like] and sell-in.

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Operator [72]

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So our next question comes from the line of Klaus Kehl of Nykredit Markets.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [73]

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Yes, just a question about Italy. You say that the sell-in in Italy has been affected quite a lot by these declining credit days in Q3. But have you seen that sales -- sell-in the Italian market has started to normalize in Q4? Was it something that you hope for in, let's say, the latter part of the quarter?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [74]

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That's a fair question, Klaus. But the sell-in, our hope was -- tendency is they have to happen because otherwise, the Christmas products are not in the stores. So it is -- we're very confident when we say that this is a timing issue between Q3 and Q4 directly related to a change of payment terms. It's simply essentially saying, rather than selling what's going to be sold out in -- during Christmas rather than selling that in September, we do that when it's -- makes commercial sense. That's in Q4.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [75]

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So in other words, it has taken place already?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [76]

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Some has. But we're still in only early November, so not everything has been shipped. But that's -- yes, that we are -- that will happen in the weeks to come.

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Operator [77]

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And we have one further question in queue. That's a follow-up from Lars Topholm of Carnegie.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark & Financial Analyst [78]

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Yes, I hope this time, the moderator won't interrupt me before have we ended the discussion, but my question on the order backlog was also -- what can you -- from management's perspective do to [advise] a situation where order backlog problems increased when you reduce the sell-in package size?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [79]

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On our -- so from within our own stores, merchandising is a very important piece of that puzzle until, I think, it was 1st of March this year or spring this year. We didn't have a global merchandising function, and that is a very important piece of getting that up and running. So the -- and everything that goes into the forecasting -- sorry, the merchandising function, like also building up proper and stronger forecast. And then we also -- the simplification of the product assortment that we're doing, there will also be -- should also help our forecasting. We're having 600 fewer SKUs to divide the sale across once we have been going through that reduction. Then we, obviously, all the time have to make sure that we have -- don't go too far in our inventory reductions. Inventories have come down very significantly year-over-year, and we have to make sure that at least if we don't reduce inventory faster than the -- our internal merchandising and forecasting processes can handle that. And that is something that we have to be quite aware of. And then the...

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [80]

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(inaudible)

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [81]

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We can probably also be and make sure we have a bit more production buffer between the first half and the second half of the year where we do have quite a skewed production level and then making sure that we have the, sort of, the right level of OEM suppliers that can handle in production amounts if they end up being bigger than what we have forecasted. We are sort of between first half and second half, the production level is something historically been 45-55. It's actually little bit more skewed this year and that is sort of inherently difficult to plan and where you do need a certain level of [O&M] suppliers to balance that out.

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Operator [82]

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Thank you. And as there are no further questions, I'll hand back to our speakers for the closing comments.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [83]

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Okay. Thank you for taking the time with us today. As we said, this is the first chapter in a long journey. Quarter 3 has been extremely busy with lots of ins and outs. I can appreciate that there are many, many movements in the P&L and those things. So I think as we get into the future, hopefully, we have less of those kind of one-off items recurring and we have slightly more stable baseline to operate from.

But on that note, I probably wish you Merry Christmas for those of you that I won't see before then. Thank you very much.