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Edited Transcript of PNDORA.CO earnings conference call or presentation 20-Aug-19 9:00am GMT

Q2 2019 Pandora A/S Earnings Call

Copenhagen Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Pandora A/S earnings conference call or presentation Tuesday, August 20, 2019 at 9:00:00am 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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* Georgina Sarah Johanan

JP Morgan Chase & Co, 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 Jensen;SEB;Senior Equity Analyst

* Morten Raunholt Eismark

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Piral Dadhania

RBC Capital Markets, LLC, Research Division - Director of Premium Brands

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Presentation

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Operator [1]

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Welcome to the Pandora Interim Report for the Second Quarter and First 6 Months of 2019. (Operator Instructions) Today, I'm pleased to present Michael Bjergby, Vice President of Investor Relations, Treasury and Tax. Please begin your meeting.

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

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Yes. Good morning, everyone, and welcome to the conference call for Pandora's Q2 results just released this morning. 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 my IR colleagues, Brian and Christian.

There will be a Q&A session at the end of the call. I would like you to limit your questions to 2 at a time and please get back into the queue if you have additional questions.

First of all, and please pay attention to the disclaimer on Slide 2. And then let me hand over to our CEO, Alexander, who will start with the highlights of Q2 on Slide #3. Alexander?

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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. I joined Pandora during Q2, and it's been an important quarter in shaping the last details of the brand relaunch. We've prepared ourselves to effectively execute on a new journey for the brand and for the company.

In Q2, we delivered financial results in line with our plans, although, the numbers were not great, like-for-like was minus 10%, and EBIT margin was 22.9%. Some of the more encouraging highlights of the quarter are; first, that we start to see visible signs from the financial effects of Programme NOW; secondly, we saw a substantial uptick of the growth in the online stores compared to Q1. The performance in the online stores was driven by acceleration at the Tmall in China, continued strong growth in the U.S., and a pickup in the important U.K. online store, driven by increased marketing spend.

This brings me to the third positive highlight of the quarter, our marketing pilots in Italy and U.K. The pilots have driven improvement in traffic and like-for-like, and it does give confidence. As a company, we do have the financial firepower to scale up our investments significantly if needed. We are maintaining our financial guidance. It clearly assumes a pickup in performance in Q4.

On the right side of this slide, we have outlined the key initiatives, which we will roll out in 2019 as part of the brand relaunch. This is only the start of our journey to improve our brand relevance and more will come in 2020. There is no quick fix in improving brand relevance, it's something that we'll build over time.

Okay. Enough of the highlights, let's move to Slide 5 and a deep dive on Programme NOW and the brand relaunch.

On Slide 5, I've created a slightly new way of looking at Programme NOW. It is more explicitly focused on the core aspects of our turnaround actions. Programme NOW consists of many work streams. This way, we ensure to channel them towards fewer and more focused end goals. The key to stabilizing like-for-like and protecting our industry-leading margins is to step change brand relevance. This is the single most important objective. The initiatives of Programme NOW are unchanged, but now I'll go into 3 overall objectives. Number one, Brand Relevance, making sure that consumers are interested in our brand; two, Brand Access, how we make sure to close the deal; and thirdly, Cost Reset, how we operate efficiently as a company.

At a future stage, we'll move on from a turnaround mindset and think in more transformational terms. The initiatives in the bottom of the slide, the Commercial Reset, are instrumental to implement short-term in order to secure the long-term health of our business. I want to highlight 2 important work streams that have recently been added to this framework. First one being product development; and secondly, network assessment. These are fundamental strategic work streams, and we intend to shed more light on these in connection with our full year results of 2019.

Now let's turn to the Brand Relaunch. On the next 2 Slides 6 and 7, I will focus on the new brand positioning, after this, I will give a review of what we're doing as part of making this come alive for our consumers. Moving on to Slide 6. Since the launch of the Moments platform in year 2000, Pandora has built the most well-known jewelry brand in the world by allowing consumers to emotionally connect with their jewelry through co-creation and self-expression. The diagnosis of Programme NOW pointed at 4 key executional issues, including blurred brand experience and weak initiatives on charms collecting. These 4 issues have caused Pandora's main proposition to drift over time. Therefore, the brand relevance has suffered. However, all data clearly suggests that buying bracelets as well as collecting is still in demand. The model is not broken. We just need to deliver better on today's consumer preferences.

Our new company purpose, we give a voice to people's loves. We'll guide our journey towards improved brand relevance. Pandora gives the consumer a unique proposition to emotionally connect with their purchases and self-expressions of loves, not necessarily only the romantic love, but love for people, places, passions and more. This is very different from most other jewelry brands that are more prestige and trend-driven.

Please move to the next slide. Our significant consumer research has confirmed that the core concern of Pandora is not characterized necessarily by age, income brackets or other generic metrics. Instead, what is significant is that the Pandora consumer is characterized by a desire to emotionally connect with their jewelry. The Pandora propositions are key emotional needs where we stand out in the market, and which, we address with our brand relaunch, things like craftsmanship, playfulness and self-expression. We are managing our increased brand relevance with initiatives that ensure we both cater for our core consumer and make us relevant and interesting for new consumers, preferably coming from the younger age groups. While the initiatives should not be divided strictly into purpose, the early initiatives of the brand relaunch, including the new company purpose, launch of the Autumn collection, use of our global influencers of all ages, change of store concept and our charms collecting innovations cater for our core consumers. The October initiatives that follow hereafter, including collaboration with Millie Bobby Brown is expected to be more exciting for potential new consumers. I'll clarify this further in the slides to come.

Now let's dig into the details and actions. The brand relaunch will commence on August 29, reaching our consumers at all touchpoints. The initiatives are many but put into these categories on the slide. A new visual identity, new concept store design, refreshed look and feel of our online stores and marketplaces, new global influencer program with 7 highly relevant brand ambassadors with a broad reach, new product launches and collaborations. These are all part of the brand relaunch, which will come together supported by a significant increase in media investments across key markets.

Moving to the next slide. August has already been an eventful month. In the first week, we announced a partnership with Millie Bobby Brown, she was featured in Times top 100 influential list and is a strong ambassador for new collections to capture younger new consumers. Last week, we announced a partnership with Warner Brothers to introduce a collection of Harry Potter theme jewelry. There is no doubt that this is going to be a big launch for Pandora users as well as Harry Potter fans around the globe.

Moving to the actual brand relaunch. Here, you should notice the new Pandora logo, the monogram and the introduction of pink as a market color, all of it part of a refresh of Pandora's visual identity, indeed, recognizable, but more modern and contemporary and with a clear story behind the details. Also part of the brand relaunch is a redesigned online store, which we will improve the shopping experience. This small picture clearly doesn't justify the significant changes we are making, and therefore, I can only encourage you to visit our online stores at the end of August, and please do place an order.

Our Autumn collection, we'll also launch at late August, and it is the largest launch of the year. The launch includes the O carrier, which is a charms carrying pendent for necklaces and focuses on collecting, and therefore, fits well into the new company purpose, catering to our core consumers. For marketing pilots and changed focus in Italy, we have also observed good results from reactivation of base products instead of focusing of newness. We are going to balance our future efforts back to both based products and newness instead of primarily on the latter, which has been the strategy in recent years. All of this will be kicked off by Global PR event in L.A. with more than 400 guests from across the globe, including the press. I'll be there myself, and it's going to be an exciting and creative event, which will create a lot of attention amongst consumers. Among others, our PR team is going to paint the street and 5 buildings pink in the middle of L.A., and yes, you heard me right.

Moving on, the first store with the new concept has already gone live in U.K. in Leicester, and more will follow in the coming months in U.K., China and Italy. I still see this as a test and trial. I'd like to have data and objective assessments before we make the significant investments that are required to refurbish the global store network.

With that said, we will have impactful visual merchandising in other stores that are not refurbished to signal positive change for our shoppers. The design principle has been to optimize the store layout to make an intuitive consumer flow, allowing for self-discovery and collecting. Early feedback from consumer testing of the new concept store design suggests a more welcoming and enjoyable experience that fits better into today's retail environment.

In October, our Drop 8 will see the launch of Pandora ME, the focus is on new charms and bracelet concept aimed at a younger consumer. Millie Bobby Brown will front this launch and help us reaching our target audience. Before the Christmas season kicks in, Pandora will launch the Harry Potter products. And finally, in the right bottom corner, we are also going to launch another partnership that we have signed but decided not to disclose just yet.

Summing up, we're running into some very hectic months with a lot of commercial activities playing out. It's going to be exciting and create many interesting learnings for our future journey. We've worked hard on qualifying the many different aspects of the program, yet, as always, surprises will happen. Our focus is on execution and being quick to learn and adapt as we go.

This concludes my review of the upcoming brand relaunch. I'll now turn to focus on Q2 and our progress on Programme NOW in the quarter.

In Q2, we worked on assessing how an increased investment in media could support a stronger traffic flow to our stores. We basically doubled media in U.K. and Italy with encouraging results. The most significant impact was on increased traffic, which was converted into strong like-for-like improvement. We saw a return on ad spend of around 2x, which implies that the investments are profitable and even EBIT margin neutral. The pure math of this confirms one element of our Programme NOW diagnosis, Pandora is under-investing in media. With these results, it is clear that media investments are strengthening the business short and long-term. We have immediately decided to significantly increase investments in a number of key markets, in the second half of this year.

Please turn to the next slide, where I'll talk about another important priority, not only for Pandora, but for me personally. Our franchise partners have been instrumental in building the Pandora business as we know it today, and they are clearly still important drivers of the business. Pandora has been criticized for not catering enough for the relationship with our franchisees and maybe rightfully so. However, as outlined on this slide, we've taken a number of important initiatives to strengthen this. We have agreed on the omnichannel approach. We are collaborating on the brand relaunch, changed incentive programs to align objectives, and finally, we are helping the franchisees to improve quality and quantity of their inventory. I personally met with a franchise counsel in connection with the JCK Conference in the U.S., our Board of Directors and leadership team of Pandora also discussed current business with Alan Zimmer, the Chairman of the U.S. Franchise Council in June in Baltimore. Alan Zimmer is indeed positive and he has approved use of some statements he made in connection with our business discussions. The statement in the bottom of that slide proves that we're continuing to build on the relationship and it's being noticed.

Next slide, please. I will make this quick. We are on track in lowering our promotional dependence, and we saw roughly 32% fewer promotion days in Q2 compared to last year. We still do large promotions, and these can be both deep and broad. But it is important for us that consumers do not see Pandora on sale all the time. This is what creates the perception of the discounting pattern. As we are also cleaning up in product assortment and inventory, the need to clear products can constitute an operational dilemma for our promotional strategy in 2019. But we are finding pragmatic solutions, and we are satisfied with the direction, improving inventory, slimming product assortment, while at the same time, reducing our promotional dependence substantially. Next slide, please.

Since 2015, we have continuously added more designs to our global assortment than we have discontinued. This process has led to 2 broad assortment with a long tail of product with very low productivity. It is evident that we have not been able to increase revenue by adding complexity and breadth to the assortment. Therefore, we have tested a hypothesis that a simplified products assortment could lead to improved sales. It turned out to indeed be the case in many of the stores. So we have decided to simplify our global assortment significantly, with an ambition to have a lower assortment breadth and less duplication. We'll spend the next 2 years to get back to a strong and productive core. The assortment simplification entails restructuring costs, primarily noncash and impacting COGS.

This was all for me for now, let me hand over to Anders and last part of the Commercial Reset on Slide 15. 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. We have now initiated the inventory buyback programs from our wholesale partners and that the programs have been very well received, and both we and our partners are looking forward to this cleanup and the expected improvement in sell-out. We've chosen to expand the program about what we have guided previously. And there's 2 reasons for this. First of all, and as you know, it's an important premise for the Commercial Reset initiative in Programme NOW that we exit '19 with healthier inventory levels in the channel and a much better balance between sell-in and sell-out going into 2020, that's the important starting point for the expansion. And secondly, our data simply shows that a higher amount of slow-moving units, and thereby, a need to expand the program in order to deliver on that important starting point. And the expanded program will result in additional restructuring costs, and I'll come back to that later on, and then please turn to Slide 16, on cost reductions.

We are quite happy with the progress on the cost reductions, and we are very well on track to meet a total run rate savings of DKK 1.2 billion by the end of next year, by the end of 2020. And if you compare the Harvey balls, the circles shown here on the slide, we -- what we showed back in May, there's been fast progress across the 5 categories. And you can also see that if you read the more detailed bullet points on the slide. And in essence that the message from us is that nothing is left untouched. We are on a constant hunt for cost savings to protect the margin and reinvest in driving our top line. And with that, we will leave the update on Programme NOW. And -- but there's no doubt that the impact of Programme NOW will be increasingly visible for you in the months and quarters to come.

So now let's go to Slide 18 and an update on our Q2 performance. And this Slide 18 outlines the -- gives an overview of the performance, and I'll dig into a couple of details on the following slides in just a second. But the financial results in Q2 were weak. There's no other way to look at it, like-for-like of minus 10% and organic growth of minus 7%. But the results were as expected. The EBIT margin ended at 22.9%, and that's a small sequential improvement to the first quarter, despite slightly lower revenue and the additional marketing investment in U.K. and Italy.

So let's dig into a couple of details. First, on Slide 19 and the organic growth. The primary driver of the negative organic growth in the quarter was that minus 10% like-for-like. And that's quite clear when you look at the chart on here on Slide 19. The other important driver was the network expansion that added 5 percentage points coming from another 183 concept stores that we had by the end of the second quarter. The organic growth improved sequentially to minus 7% compared with minus 12% in the first quarter despite that -- a similar like-for-like level. And that improvement comes from the pink box that you see just to the left of the black organic growth bar on the slide here. In the first quarter, we saw a significant reduction of inventory in the wholesale channel, driven among others by the reductions of the sell impacts and that led to a total negative impact of 8 percentage points in the first quarter. And in the second quarter, it's minus 2%, as you can see on the slide here. And this means that in the second quarter, organic growth is higher or less negative, if you like, than like-for-like, and that's also expected to be the case for the second half of '19.

And then please turn to Slide 20 and the EBIT margin, which the EBIT margin declined 3.4 percentage points compared to the second quarter last year. And in the first quarter of this year, the decline was 5.7%. We see a significant positive effect from the cost reductions, and that's a plus of 5 -- sorry, 4 percentage points on the margin, and that's the first pink bar on the bridge here, the waterfall. But this is offset by additional investment in driving the top line and not lease the deleverage, which is quite significant, given that like-for-like is minus 10%. And the decrease in the EBIT margin has a couple of positive stories. And one of them is the increasing gross margin and the gross margin ended at the highest level ever in the second quarter. And we actually see an opportunity to take it even higher going forward through -- among others -- further cost reductions and lower discount levels and other levers. So all in all, we are happy with the progress, although, the second quarter numbers are weak.

Then please turn to Slide 21 and a brief comment on cash conversion. This continues to be quite a good story. The cash conversion in the second quarter was very high, as you can see, and we saw the net working capital actually even going below the 10% threshold, and it ended at 9.4% of revenue in the second quarter, and that is the lowest level that we've ever seen. There is a little bit of technicality helping us in this number in the second quarter because the restructuring costs are incurred in the quarter, but payments happen later on. And hence, if we are adjusting for the restructuring costs, the underlying business would have had a bit higher level of working capital. So we don't think that a single-digit net working capital level below 10% is sustainable in the long term. But on the other hand, we do see that we can clearly operate well below the 15% mark, which we communicated as the benchmark back at the Capital Markets Day in January '18.

So let's move to the final section of the agenda, and that's the full year guidance, starting on Slide 23. The main parameters of the financial guidance for '19 are unchanged. Organic growth of between minus 3% and minus 7%, and an EBIT margin before restructuring costs between 26% and 28%. It's a broad range, with only 4.5 months left of the year, but we should recall that we still have the important brand relaunch and all the activities following that ahead of us. The guidance continues to assume that the brand relaunch will have a positive impact on like-for-like. And the guidance also continues to assume that like-for-like could be down to high single-digit negative in 2019. And below this headline parameters, there are a couple of changes that I just wanted to highlight to the guidance assumptions. As we mentioned back in the Q1 announcement, we have identified 50 stores to be closed, and some of these will be closed in '19, and therefore, we now expect net 50 concept store openings versus previously 75. And as we just mentioned, we are taking a couple of further important restructuring actions to take Pandora to a healthier level. That's 2 things; one, we're expanding the inventory buyback program; and two, we are significantly simplifying the product assortment, and restructuring costs are, therefore, expected to increase by DKK 0.5 billion to now up to DKK 2.0 billion. Approximately half of the increase relates to the product assortment, simplification, and that's a noncash item. And of the total DKK 2 billion in restructuring costs, around DKK 0.5 billion, 25% are expected to be noncash.

At the same time, we are adjusting the CapEx guidance down as we are expecting less investment required to conduct the brand relaunch, opening fewer stores and less IT CapEx. And consequently, the CapEx guidance is adjusted down by DKK 200 million to DKK 300 million to between DKK 1.0 billion and DKK 1.2 billion. And the implied expectation on free cash flow from this is, thereby, roughly unchanged because the cash part of the additional restructuring costs is offset by the lower CapEx level.

So turning to the last slide, 24, before we get to the Q&A session. This slide is meant as a visual aid on how to bridge the second half of the year to our full year guidance. And on like-for-like, the math and logic is quite simple, we had minus 10% like-for-like in the first half, and therefore, we need to deliver between minus 8% and minus 3% like-for-like in the second half in order to deliver on the highest or the lowest end of our guidance, respectively. And this improvement of like-for-like is all about the brand relaunch and the activities that follows after the brand relaunch later this month, and including the marketing investments that we are doing. But at the same time, it should be recalled that the like-for-like comparison base in the third and fourth quarter becomes a bit easier than it was in the -- here in the second quarter of this year. But it should also be clear that if we reach the better end of the implied like-for-like guidance range for the second half, our brand relaunch must be considered quite successful.

On the EBIT margin, the margin uplift required in the second half of '19 is very much about understanding Q4, and so let me just put a few words on understanding the bridge for Q4. We always see a margin uplift in the fourth quarter, that's kind of inherent in the business. And in the Q4 of last year, Q4 of '18, the margin uplift was 6 percentage points compared to the first 3 quarters of the year. In the fourth quarter, the uplift of this year, the uplift will be higher, that's implicit in our margin. And there's 3 main building blocks to understand that uplift. First of all, in '18, we saw a sequential decline in growth during the year, and the reverse is guided for this year for 2019. Secondly, our gross margin was depressed, you can call it a decline throughout the second half of '18 due to the increased product complexity and the negative impact from the acquisitions that we did last year. But in '18 -- I'm sorry 2018, the gross margin declined by 240 basis points in the second half of the year. In the second half of '19, you should expect an increase of the gross margin. And third, of -- Q4 of last year was negatively impacted by additional provisions and consultancy expenses that cranked up the admin expenses last year, and that is not expected to be the case this year. But whether we end up in the highest end or lowest end of the EBIT margin guidance is a direct function of revenue development following the brand relaunch. And we hope this explains our guidance and what we need to deliver in the remainder part of the year.

We are excited, and we hope that you are too, the brand relaunch is in just 9 days, and we are counting down. This concludes our presentation, and we can now start the Q&A session. Operator, thank you.

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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 Magnus Jensen of SEB.

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Magnus Jensen;SEB;Senior Equity Analyst, [2]

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This is Magnus here. I have 2 questions. The first one goes to the 2 new initiatives that you launched or that you're going to launch during the second half of the year, Harry Potter and Millie Bobby Brown. I think both could be seen as targeting a much younger consumer than what we've seen you target before. So could you elaborate a bit on the decision to do these partnerships? And then secondly to that, I understand that you expect the halo effect to the older consumer, at least, for the Millie Bobby Brown initiative, is this something that you've seen other brands do successfully? My second question is regarding the like-for-like development. So can you comment on how it has been developing through the quarter? And also, if you wouldn't do that, it would be interesting to hear how the first 6 weeks of Q3 has been delivering.

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

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So maybe I address your first question. I think if we speak about Pandora ME that is clearly targeted at a younger audience, and it's been designed for that, it's been qualified like that. And it also suggest in the research that those are the people that are responding really well, at least at a conceptual stage to this initiative. And in order to kind of speak to that audience, we're using Millie Bobby Brown as a social influencer, if you may.

Harry Potter, actually, there are many different audiences when you think about Harry Potter. So the first generations that were there when the Harry Potter books came are now a little bit older. So they're probably in their mid-30s and above. So as we've done quite extensive research in fact, on this initiative we see that this spans not just the younger audiences but in fact, it's also very positively received in the concept testing amongst, let's say, our core audience. So that probably addresses those. In terms of halo effect, I'm not sure that the Millie Bobby Brown necessarily has a huge halo effect, she's going to be used mostly on digital type of mediums, where we're trying to target a little bit younger audience. So I don't think that it's going to be a massive overlap there. But we'll learn as we go, I suppose, is the right way to think about it. And I should also mention that in addition to Millie Bobby Brown because that's kind of been in the press recently, we have another 6 strong global influences that is being part of, let's say, a revamped key influencer program in the company. And they probably cater more to the core audience that we have for Pandora.

And maybe I'll hand the like-for-like to you, Anders.

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

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Yes. Thanks for the question, Magnus. On like-for-like. I think we are throughout the year, so until date, we have been trading at plus minus, this 10% minus level. And we hadn't really expected to see any structural changes, bigger changes until sometime following that the brand relaunch and all the activities that follows during the year. But we should recall that the brand relaunched, this only starts, it's sort of 2/3 into the third quarter, so for all retrospective purposes, I think the uplift that we are looking for is something going into the later part of the year. But it's clear, we are looking very much forward to talk about the specifics and the details and the reaction from consumers when we meet in 3 months' time.

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Operator [5]

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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 [6]

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Yes, I have a couple of questions. But I'll start with 2. So, Alexander, you highlighted strong Tmall sales in China in Q2. I wonder what is happening in Q3. Because my understanding is, you are now stepping up or have stepped up the marketing spend in China. But you -- August Tmall revenues down by 31% to date, even though, you were super brand of the data. So first question is if you can add some comments on the fact that the Chinese growth slowed from Q1 to Q2 and looks as if it's going to do the same in Q3? And then the second question goes to the U.S., where you also saw a deterioration from Q1 to Q2. And I think it's a public secret, it continued into Q3. So here, the question is you made a replacement of your U.S. management earlier this quarter, do you see any quick fixes you can make to turn the tide in the U.S.? Or how should we -- what are your sort of expectations to see from a new U.S. management?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [7]

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I think it's way too early to give comments on the recent 10 or 20 days of trading in China. So I'll have to come back on that. And in terms of the brand relaunch, it hasn't really started from that sense in China yet. So this is all ahead of us to be honest with you. And there will be on online, there will be swings from one week to the other, depending on what goes on. So I think you have to look a bit more in the longitudinal trends. And that's why we made the comment in the release on that throughout the year, we've seen positive indicators in terms of traffic, conversion rates and those metrics, which are important to us.

Now your second question on the management changes. I mean, first of all, management changes happen. [Laurie] she's been there with the business for 15 years. So these things happen every now and then that's changing. I don't think there's any quick fix to this business, to begin with, whether that's changing personnel to -- so I would not write too much into that. I think the program we have in place, generally speaking, that we've mentioned in this call, is the real program that we should be expecting to delivering some movements in the U.S. And currently, Sid is heading up the U.S. business. So if you're kind of looking at it from a risk mitigation standpoint, there's no problems there.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark & Financial Analyst [8]

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In the presentation, this is regarding U.S., just a quick follow-up. You mentioned a significant reduction in promotional activity. And I think Alexander, you even said, Pandora shouldn't be on sale every day. But in your U.S. e-store, today, around 1/3 of your entire collection is for sale at a discount. How does that fit into your strategy of becoming less promotional, it's basically close to an all-time high discount level? How do you see that?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [9]

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I mean, first of all, this year is a transitional year. Okay. So we come from some bad practices from the past that I think it's important to say. Secondly, we have reduced the number of days in the U.S. overall by I think it's 36% in Q2. It is -- we had a sale -- the summer sale that wasn't doing very well. We -- I think we had an inventory there, which was probably not very attractive if we compare to other places in the world where we've had sales. So I think as we kind of go forward, the strategy is unchanged. We should move the brand to be less dependent, significantly less dependent on promotional impacts. There is also a business reality when I have inventory that I tried to clear it as and when it -- that's pertinent. But that's also why we're trying to reset the business this year by making a huge investment in taking back inventory that's not good. With reducing the assortment to get out of unproductive aspects. But this is a journey, Lars. I mean, it's not just flicking on a switch and moving from one place. Trust me, if I could, I would. So and we will be very transparent with kind of how we are progressing in this space. So there should be nothing surprising in this space.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark & Financial Analyst [10]

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I have some more questions, but I'll jump back into the Q&A queue.

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Operator [11]

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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 [12]

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First question is you have quite clearly built a retail position in the past couple of years, perhaps losing some focus on Pandora core in the process. Have you discussed returning O&O stores to high-quality franchisees, existing or new? And is it your impression that they are ready to step in? That's my first question. The second question is that from the top line here as far as I remember there's -- you mentioned that you only saw 20 concept stores being unprofitable globally, has that picture changed after the first half performance? Those were my 2 questions for now.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [13]

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Okay. So on your first question on returning O&O. I think there's a much bigger question on the table is, who do we want to be as a retailer, and what type of footprint should we have on offline and omni as it were. What we have communicated, I believe, in conjunction with the May meetings was that we are starting a network assessment, which we plan to share with shareholders and capital markets alike in the Q4 results, which will probably be early February. So as part of that, we are looking at all sorts of options on what the future could look like. So I think that's the answer for now. Then in terms of your second question on have we seen further profitability, deterioration in our store network and in our own and operated, we have not seen that. So that picture still holds.

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Morten Raunholt Eismark, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [14]

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Okay, perfect. I'll jump back to the queue as well.

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Operator [15]

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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 [16]

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Surprisingly short Q&A queue it seems. I had a question on your investments, and there are actually 2 questions. So regarding the global store upgrade, you mentioned significant investments. So I wonder how much your share is going to be to adjust in bold figures. And then how we should see the phasing of that? And then regarding the lower CapEx guidance for this year, is that changed in CapEx guidance? Or is it simply a different phasing? So the lower CapEx this year means investments are just moved into 2020?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [17]

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Lars. This is Anders here. I can take those 3 questions. On the CapEx related to the new store concept. There's a couple of building blocks there. One is that the cost per store on the new concept versus the old is, give and take, the same. It usually starts in the first store by nature, it's more expensive, and you test and learn and get smarter. But we expect the cost per store to be the same once we are over the -- sort of the learning curve. But then exactly what that means in terms of how fast we will do the refurbishment, you can -- that's 2 sort of extremes. One is that we will just do it as and when the stores should be refurbished anyways. That will mean that it will take us, let's say, 5 years in order to get it rolled out globally. The other is what we see a very nice impact on retail KPIs, both the traffic conversion in the stores that we have refurbished, then we'll do it faster. And where we end up in between there. We will have to wait and see in the quarters -- in the quarters to come. And then on CapEx, I think you should expect that this is mostly a question of phasing between the years. But obviously, as the number of concept store openings has slowed down, that does give us a structurally lower level, but the level that we are guiding now for 2019 shouldn't be considered sort of a new lower level.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [18]

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Let me just add some flavor on the first question. We, as an organization, have a capacity of refurbing roughly 500 stores per annum. So without them, you can accelerate that by kind of bringing in more reasons from the outside, but that's kind of -- so then you can do your own math on -- when it comes to our own network, how quickly we could do if we chose to go all in.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark & Financial Analyst [19]

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But compared to the CapEx level we are seeing this year, looking at 2020, 2021, 2022, should we expect a step change in CapEx? Or will it stay around the current level with the knowledge you have today?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [20]

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That is still too early to say how fast we -- and I think the big (inaudible) in that equation is the new concept store roll out, the new -- the CapEx related to that, and how fast we will do that. I think we'll have to wait a bit before we comment on that. But if we do it and accelerate it that's a reason for it. And that reason should be good retail metrics in the stores that we have refurbished.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark & Financial Analyst [21]

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Okay. And then one final question, if I may. The accelerated marketing investments for the second half of the year. Can you say something about which markets will be affected from [when] just so I can get my model right?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [22]

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It's our top 11 markets. And it's going to start from September roughly and kind of spread throughout the remaining 4 months because it varies a little bit by market. But it's the usual suspects, if you may. So you have U.S., Canada, we have U.K., Italy, Germany, France, Spain, then we had Hong Kong, but given the kind of unrest that's kind of waiting and seeing a little bit on that. Obviously, Australia is part of the pack. China is actually not part as a significant investment yet because the media model in China is somewhat different from, let's call it, the more traditional markets. So there we're still qualifying some additional aspects. So that is a decision which we may or may not take later during the second half. I'm not sure I made 11 there, I didn't keep a count, but those would be the main markets. We can come back separately to detail out those 11.

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Operator [23]

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Our next question comes from the line of Georgina Johanan of JP Morgan.

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Georgina Sarah Johanan, JP Morgan Chase & Co, Research Division - Analyst [24]

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It's just a follow-up really, and apologies, if I haven't quite understood. But the incremental marketing investment that you're calling out today. May I just clarify that this is incremental to the uplift that you'd already disclosed. So if previously, you were talking about roughly DKK 500 million more year-on-year. What sort of quantity year-on-year are we talking about now? And how is that being funded? Where is the offset? Because, of course, you haven't changed your full year guidance in anyway.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [25]

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Very Relevant question. Thank you for that. It is an incremental uplift compared to the original guidance. Originally, we said that we expected to spend another DKK 0.5 billion, DKK 500 million in the different kind of marketing, top line initiatives, and that number is now DKK 800 million. And then, obviously, I'd say you're keeping the revenue guidance unchanged, and you're keeping the EBIT margin guidance unchanged. So where is that coming from, and it is -- the offset is gross margin. We do see a bit better gross margin as we speak also here in Q2, but also for the remaining part of year. And it's not directly related to the cost reset of the NOW program. But in terms of general efficiencies in our factories in Thailand. So the bigger part of the offset is gross margin.

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Operator [26]

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

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Magnus Jensen;SEB;Senior Equity Analyst, [27]

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Yes, just one more question from my side. Charms were only down 2% for the quarter as seen in the reported numbers. But is there any chance you will share how the underlying like-for-like was in charms to shed that on earlier quarters?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP, CFO & Member of the Management Board [28]

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Magnus, it's Anders here. It's a good catch. But the underlying -- it is a reported revenue. It's a fairly big swing in charms revenue growth in the quarter. But like-for-like is pretty much the same as we saw in Q1. So this is due to all the other impacts that we have from change of inventories in the channel. And that doesn't go down for store openings, that doesn't go directly into like-for-like here.

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Operator [29]

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Our next question comes from the line of [Sukhi Agerwal] of Citi.

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Unidentified Analyst, [30]

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I have 2 questions, please. The first one, coming back on charms. Happy to see that charms and bracelets are kind of improving quarter-on-quarter. But if I look at other categories, they seem to have deteriorated. Do you think that because of your additional marketing investments are now focusing on revival of your core products, the other categories would continue to suffer in the medium term? And secondly, coming back on China, I understand that you're trying to now adopt the weight in the approach for China marketing investments, whereas earlier, you guided that you would put in additional marketing investments in China as early as Q2. So what is the reason behind curtailing China investments apart from this media -- the premedia model that you have cited, do you think that you need to focus more on online in that market rather than additional stores, what's exactly is the reason for poor China performance?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [31]

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Okay. I mean, it is clear that the focus back on charms and bracelet does, I shouldn't say hinder, but it puts a little bit less attention to the other segments. So we're kind of working through that, but let's not forget that what 70-odd percent of the total business sits in bracelets and charms. So I need to have that part of the portfolio humming. And if it comes at the expense of some or the other adjacents in the meantime, I think that's kind of a priority call, we just have to live with whilst we're figuring that part out. I should also mention, as we did in the presentation that we are reducing the assortment quite dramatically, which means that we're trying to also get to a more productive entire assortment, not just charms and bracelets. So that should probably help us going forward.

I think on China, we've announced that we're going to continue going into cities where we have pure white space so that might still be relevant. We're trying a couple of different retailing models actually in those places. So that's probably one area. I do think we have to remember that the brand is actually at a very different place in China from a maturity standpoint compared to pretty much most of our other markets. So if you look at our unaided awareness as it were. It's relatively low still. So that would suggest that we have to continue marketing this brand hard in order to drive general awareness. So that's probably the right answer in China. To keep building this brand. We cannot really compare -- if you take a mature market like Australia or U.K. or even U.S. for that matter. They just -- they're in a very different stage. So I think that that's some work, which we're concluding on. Online is on fire, clearly. So we will keep developing that even more so there are a couple of different pilots that we have been doing over the last six months, which, sequentially, we are rolling out. So I think China is just a lot more work, generally speaking, to keep building the business.

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Unidentified Analyst, [32]

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Just a quick follow-up. So if I think of your space growth reduction, net 50 concept stores, you still have the plans -- China plans intact, in terms of new openings, in terms of the number of stores?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [33]

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I think what we have said and which still holds is that we have plenty of white space, as I mentioned, in China as well as in South America. So where we have obvious business cases, we will keep opening stores. There's no reason not to. I mean, we have -- our network is very profitable. So -- and I keep saying this brand access is important when you play the mass market game like we do. So -- but that you should expect from your standpoint that China and LatAm are probably the focus areas for us, not elsewhere at this point in time.

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Operator [34]

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

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [35]

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A question related to Italy and the U.K. You've highlighted a couple of times that you have seen improved like-for-likes as you have increased your marketing. But could you talk a little bit about the monthly trends in the quarter? And yes, what I'm actually is looking for is whether you've seen any kind of improvement throughout the quarter? And related to Italy and the U.K. And then my second question is, again, we talked a lot about marketing, but what is it exactly that you are changing? Is it your online marketing? Is it TV ads? Yes. What is it that you're doing differently apart from spending more money? That would be my questions.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [36]

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Good question. So what we did, if I start there, was everything else equal, you just doubled the media investment. Okay. And we went for a media choices, which were kind of, what we call a high funnel choices, i.e., media choices, which drive broad scale reach because the objective was to see whether we could actually positively influence the traffic into the stores. Just for perspective, the online business in Italy is minuscule. So the game in Italy is really about foot traffic, full stop. So that's kind of what we try there, of course, in U.K., which is at the very other end of the spectrum when it comes to e-com, you've got a much, much stronger uplift on the e-com business. So -- and we could see, because we track this literally on a day-by-day basis. And you saw that on e-com, I mean, that responds literally immediately as you start kind of cranking up the volume on your media. So there was a very clear line, let's say, crack in the line in both Italy and U.K. as we started dialing up the media. And then that media investment ran for roughly 4 weeks, give or take.

The other aspect, we also saw that by investing at this high level, you also got an ad stock effect, so it cannot keep -- kept on carrying for a few more weeks, even when the media was kind of back to a much lower level. So our ROI calculation focuses strictly on those 4 weeks. But in fact, the impact could be seen beyond that. I think that's as much detail as I'd like to share when it comes to kind of in quarter trading in a particular market because, of course, there are other factors influencing it. So it's not strictly science to tease it out, but that was also the reason why we made such a big increase in media investment in order to really make sure that that was the discretionary item.

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Operator [37]

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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 [38]

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And just a quick question on the Harry Potter deal. Warner Brothers has quite a number of brands under their umbrella, does the deal cover only Harry Potter? Or do you have discussed -- or have you discussed expanding into other brands? Secondly, you start off with some 12 DVs, what are the DV ramp-up plans here? And just thirdly, can you confirm that the deal is global from the beginning?

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

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So it is only Harry Potter for now. We only have those 12 DVs at this stage of the game, and we'll obviously have to assess whether this performs or not. So I think you might see us in the future, not ramping in hundreds of DVs, when we do various initiatives. So we're going to be a bit more guarded, so we don't end up with an assortment issue again. And yes, as I said, it is a global deal from the beginning.

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Operator [40]

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Our next question comes from the line of Piral Dadhania of RBC.

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Piral Dadhania, RBC Capital Markets, LLC, Research Division - Director of Premium Brands [41]

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So if I could just start maybe on the reduced option counts that you guys are planning by the end of 2020. Will there be any change to the price architecture of the overall assortment or offer? To what extent will you build out the entry price points? Or should we expect any material sort of change in the composition from a pricing perspective there? And secondly, just coming back to the marketing pilots you've ran in both the U.K. and in Italy, could you perhaps give us some indication around the customer composition of the uplift in traffic that you're seeing both online and offline? Do you have any visibility on the extent to which those customers are buying or coming into your stores on new versus existing? And are you in a better place now to be able to track that from a CRM perspective, given all the things we've heard in terms of building up the IT and CRM databases in the last 12 months?

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [42]

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So on your first question on the reduced assortment. It's not going to take until 2020 to rearrange the architecture. This is something actually we're trying to address in the back half of this year already. We have, for some reason, left the opening price points. And here, I'm talking about anything from 19 to 39 in whatever currency you pick. We have kind of lost that space largely, you can actually look -- when we look at our internal metrics, this is where a big portion of our like-for-like issues stem from, it's the kind of vacating those opening price points. So that's something which we are trying to address as we speak. And of course, that's partly with what we have in front of us. But then as we go forward, this is obviously going to be part of the product strategy to make sure we develop products against that. Pandora ME would be another example where we've consciously gone after designing something, which kind of can hit opening price points for a particular target audience.

On your second question, we -- and in Italy, specifically, we do not have that CRM data. I think Italy is relatively far behind. In U.K., I have not seen any data which would suggest whether this is more new people coming in or not, I think, is a very good point. But I don't have that data point to share with you here.

Just on that, the important one, though, was that it did drive traffic because it could have also been that conversion rates changed or UPTs or any average order values, but the discretionary item here was traffic. So that was the killer KPI here, which delivered.

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Operator [43]

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And there are no further questions at this time. Please go ahead, speakers.

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Alexander Lacik, Pandora A/S - CEO, President & Member of Management Board [44]

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Okay. And then on that note, I thank you for your interest in Pandora, we hope to be bringing interesting news to all of you in the future quarterly reports. Thank you, and goodbye.