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Edited Transcript of PNDORA.CO earnings conference call or presentation 4-Feb-20 10:00am GMT

Q4 2019 Pandora A/S Earnings Call

Copenhagen Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Pandora A/S earnings conference call or presentation Tuesday, February 4, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Lacik

Pandora A/S - President & CEO

* Anders Boyer-Søgaard

Pandora A/S - Executive VP & CFO

* Michael Bjergby

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

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Conference Call Participants

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* Elena Mariani

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

* Frans Hoyer

Handelsbanken Capital Markets AB, Research Division - Analyst

* Fredrik Ivarsson

ABG Sundal Collier Holding ASA, Research Division - Research 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 and Financial Analyst

* Magnus Thorstholm Jensen

SEB, Research Division - Senior Equities Analyst

* Piral Dadhania

RBC Capital Markets, Research Division - Director of Premium Brands

* Silky Agarwal

Citigroup Inc, Research Division - Assistant VP & Senior Associate

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Presentation

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Operator [1]

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Hello, and welcome to the Pandora Group Annual Report for 2019. (Operator Instructions) Today, I am pleased to present Alexander Lacik, President and CEO; Anders Boyer, Executive Vice President and CFO; and Michael Bjergby, Vice President, Investor Relations, Treasury and Tax. So please begin.

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

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Thank you, operator, and good morning, everyone, and welcome to the conference call for Pandora's Q4 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 Mikkel Johansen from the IR team. There will be a Q&A session at the end of the call. (Operator Instructions)

I will quickly ask you to pay notice to the disclaimer on Slide 2. And then finally, let me hand over to Alexander and Slide #3.

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Alexander Lacik, Pandora A/S - President & CEO [3]

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Thank you, Michael. Let me start out by taking a step back and look at 2019 as a whole. 2019 was the first year of our turnaround. And we've been executing as planned at a very high pace. Preferably, I would have liked to have much more time for these changes. But Pandora's situation required the highest sense of urgency.

Across the board, we see that our actions have improved the health of the business. It is encouraging that we have brought mature markets back to growth in Q4. This is a clear indication that our group decline can be reversed. Performance improved in Q4 and we delivered on our financial guidance. With this, it's fair to say that Programme NOW is firmly on track.

Moving to Slide 4. With that being said, we are not out of the woods yet. On this slide, we have outlined the financial headlines of '19. Revenue was DKK 22 billion and we delivered an industry-leading EBIT margin of 26.8% before restructuring costs. Like-for-like was, however, minus 8%, which clearly shows that we are still in a turnaround. Our turnaround objective remains unchanged. We will stabilize like-for-like and protect our industry-leading margins.

With this, let me move to the next slide to review Programme NOW in 2019. On Slide 6, you'll see the most important initiatives of the year. As you can see, it has been a very, very busy year. I'm especially pleased with our Commercial Reset initiatives. As a listed company under quarterly scrutiny, it's not easy to absorb short-term pain for long-term health. Inventories are at a much better level, promotion dependency is lower and we have pruned the product assortment to make it more productive.

But our success all comes down to the relevance of brand, that we stay exciting and relevant for consumers. In the last quarter, we saw good early results from our commercial actions. In particular, I will point to our media and marketing investments and the positive effects on traffic. Consumers are responding. Our thesis from earlier in the year has proven right. Pandora has not invested enough in marketing.

On the next slide, I will discuss the data and details behind this. We conducted brand tracker surveys in our markets. This gives us solid data to track if our marketing investments yield the desired returns. The first metric measures whether we are loud enough and if consumers take notice. This is confirmed with a more than 30% increase in unaided ad recall. Secondly, we want to make sure that our investments strengthen top-of-mind awareness. This is confirmed, too. Unaided brand awareness increased 9 points following our investments.

The last piece of the funnel is that we want our media push to lead to an increased engagement in the brand. One way to measure this is through Google searches. Here, we also see an increase of more than 15% since the brand relaunch. In summary, data clearly confirms that consumers have noticed our marketing investments, we have strengthened top-of-mind awareness and consumers engage more with us as a brand.

Next slide, please. Another key engagement metric is obviously traffic into physical stores. As you can see on the right-hand side, this is also improving. I'm obviously not satisfied with the minus 7% traffic. But I am satisfied with the development since Q3. In the last quarter, we spent around DKK 0.25 billion in media investments. And we still see roughly a return of 2 on that investment, varying across markets, of course. Our media investments have mostly been TV campaigns and digital across our key markets.

On Slide 9, we have provided an overview of the results of our turnaround in key markets. There is a consistent improvement trend, except for China. I want to emphasize the performance in Italy, France and Germany. They all delivered positive like-for-like, which is obviously a huge swing compared to performance earlier in the year. Just as a reminder, France and Italy had minus 23% and minus 22% like-for-like in Q1 of '19. Now there are really no special circumstances for these markets. They are mature. When we can change the trajectory here, it gives confidence for the group's potential to grow. I'm also satisfied with the clear improvement in the U.S. and U.K., although they ended just short of positive growth.

The odd one out is China. This should be no surprise to any of you. We have spent significant time assessing our brand position and organizational setup in China. The brand has not been established in line with the global position and has not been able to build sufficient awareness. We have grown very fast, but based on trend and fashion-driven consumers. Going forward, we will invest more in China and we'll be very clear on our desired position. As you know, China is currently also challenged by the coronavirus that had left streets empty and forced store closures. Anders will come back to that later.

Next slide, please. In the fourth quarter, we focused on the core proposition of Pandora, amplifying affordability and collectibility. It has worked really well and drove the improved performance. Besides significant media investments, we had some solid product launches that created excitement and traffic into stores. But it's worth noticing that this is still our base product, i.e., products launched more than 12 months ago, that perform the best. We have some strong bread-and-butter products, like the Moments bracelet with the heart clips, that will always perform when we get traffic into the stores. The resilience of the base business shows that we have a solid foundation, and we will drive this even harder going forward. Worth to mention is also the performance of Charms improving materially in the quarter.

I will go quickly through Slide 11 and our efforts to reduce discounting dependency. As in previous quarters, we have executed according to our plan. We are reducing number of discounting days, but we will continue to promote the brand. We'll play to win in big retail moments like Black Friday, Christmas, Valentine's Day and Mother's Day. We have taken a big step in the right direction in 2019. But we're not yet at the right long-term sustainable level, and we'll reduce the number of promotions another notch in 2020.

Now I'm handing over to Anders and Slide 12.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [4]

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Thank you, Alexander. As you have probably noted, we have increased our cost saving target once again. And we are now targeting DKK 1.4 billion, up from DKK 1.3 billion before and DKK 1.2 billion when we launched the Programme NOW. So the target is now around 6% of our total revenue.

The momentum across the cost initiatives are quite strong. The additional savings, which enable us to increase the target today, are found in the buckets that we call cost of sales on the top of the slide and other at the bottom of the slide. We are moving into more complex cost levers in the Programme NOW because all of the low-hanging fruits are gone and have been implemented already. And that means that we will start to drive, for example, cost savings through cross-value chain initiatives and complexity reduction.

And that -- with that, I'll hand back to Alexander and Programme NOW in 2020.

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Alexander Lacik, Pandora A/S - President & CEO [5]

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Thanks, Anders. Let me jump to Slide 14. We have executed on many important commercial initiatives in '19, such as the brand relaunch and brand activation events with the Pandora Me Charm Academy. Our initiatives have very strong momentum with consumers. And it's important that we now build on that momentum.

In 2020, we will continue to make collaborations, partnerships, activation events and much more to keep our brand exciting and contemporary. We've already initiated the first small 2020 brand initiatives. We are celebrating 20th anniversary of the iconic Moments platform with 12 limited edition vintage charms launched at the 20th of each month. The first charm Pandora ever made, the strawberry charm, was relaunched on January 20 and instantly sold out online.

On the next slide, we have provided an overview of our road map and key initiatives in the year. Some of these will have short-term effects, but we're also planning initiatives that will have stronger and more sustainable long-term effects. This includes a new product strategy and a strengthening of the organization. Another example is our digital step change. It will support us in the short term but will become a powerful competitive advantage longer term.

I will move to Slide 16 for a deep dive on our digital efforts. In January, we announced that we are establishing a digital hub in Copenhagen. It will be a center of expertise. We're hiring more than 80 additional IT, digital and data scientists. Their efforts can be divided into 4 different work streams. These are not just words and PowerPoint slides. All 4 work streams have very clear revenue targets attached to them. They will be held accountable to deliver on these numbers.

The first work stream is to further improve pandora.net. Optimizing pandora.net is a very effective and simple way of creating additional revenue. We can increase conversion rate by making the site faster and easier to use. We also want to make pandora.net more inspirational for better integration to social media and more storytelling.

The second one is about personalization. It's absolutely vital for media effectiveness and conversion rates that Pandora delivers a personalized experience, much like we do in our physical stores. This is across all touch points. It is how our online store looks and what products are activated based on the consumer or gift they're visiting. Another example is retargeting our former customers with relevant marketing messages and complementary offers.

The third work stream is omni-channel, which we have discussed before. We are progressing well in the U.S. and China and will expand to the rest of our 7 key markets during the year. The fourth work stream is our loyalty program. This is a key opportunity for collecting brand -- to engage with consumers. It will strengthen our CRM system, create stronger engagement with the brand and open for targeted consumer communication.

Please turn to the next slide and some comments of our updated network strategy. I'll try to make this very simple. The network strategy that we're announcing today is not a revolution but rather a confirmation of our current direction. We'll grow more online and make the link between offline and online stronger with enhanced omni-channel capabilities, like we just discussed. We will optimize the physical network with openings in white space areas and a systematic approach to store closures. Let me come back to this in a couple of slides. Finally, in line with the general trend, we'll reduce the number of multi-brand doors. Within those -- within this though, we see opportunities to improve the presence in higher-quality doors because we see an opportunity to drive customer acquisition as well as improving brand awareness.

Slide 18. The starting point is really that we have a highly profitable network setup, full stop. We will open more stores in areas where there's still white space. This is unchanged. At the same time, we will now also take a systematic bottom-up approach to stores in catchment areas. This will probably lead to more store closures than we have seen in the past. To be very concrete, we're quite happy with the footprint. So now it's more about polishing what we already have. Store openings in some areas, store closures in other places, in total, probably a stable number of stores in coming years. From an ownership perspective, franchisees continue to be an important part of the Pandora business. We may continue to take over a few stores if there's a strong business rationale for doing so, for example, when a franchise contract expires.

With that, I will shift gears for my final slide today. You've probably all seen our announcement last week about our new ambitious climate targets. This is important for the company and important for me personally. We have a responsibility as the world's largest jewelry brand to reduce our greenhouse gas emissions and set climate standards for our industry.

In 2019, Pandora received the top rating of AAA in the Morgan Stanley ESG ratings assessment for the fourth consecutive year. Our 2 largest crafting facilities in Thailand are LEED Gold-certified and so are our headquarters here in Copenhagen. We have actually always been at the forefront of ESG development, but we have never set any public targets and we've probably not communicated enough about it. That's changing now.

Our new targets are, first of all, we will become carbon neutral by 2025. Secondly, our crafting facilities will be run by 100% renewable energy already by the end of this year. And finally, we have joined the Science Based Targets initiative. That's the leading corporate collaboration for ambitious action on climate change. With this, we will set a science-based targets to reduce emissions across our full value chain. This will obviously not be done overnight. But we are working at full speed to figure out what these numbers should be.

And on that note, I will hand over to Anders for the financials.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [6]

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Thank you, Alexander. On Slide 21, just a few comments on the Q4 results. Overall, the performance in the fourth quarter was satisfactory, and it was clearly a step in the right direction. And we can see impact of our turnaround program on many of the financial KPIs in the quarter. And that's a quite important milestone for us.

A general comment, which is not shown on the slide here, is about the absolute profit in Danish krone in the quarter. And because when we normally talk about profits in Pandora, we focus on the margin. But I think it's worth mentioning that or noting that the absolute profit level in the quarter -- the absolute EBIT krone level before restructuring cost, was 11% above last year.

Then on Slide 22 and the organic growth bridge. This waterfall actually looks a bit different than during the last few quarters because the size of the different boxes are smaller than what we've seen in the prior quarters and have fewer moving parts in general when we look at the year-over-year bridge. And that's a good thing.

And that's, first of all, a result of the Commercial Reset is getting behind us. So the heavy impact that we've seen from lowering inventories and reducing sell-in packs and changing payment terms in the wholesale channel is getting behind us. And equally important, like-for-like improved to minus 4% from minus 10% in the first 3 quarters of the year. And as Alexander already explained, in the 4% -- minus 4% like-for-like, you will see an improvement in momentum in all of the key markets with the exception of China. China dragged down the group like-for-like by around 1 percentage points in the quarter. And the decision to reduce promotions also had a small negative impact as well in the quarter.

The gray box to the right of the like-for-like box is the sum of a number of smaller effects that combined added around 2 percentage points to growth in the quarter. And the change of payment terms in Italy is the largest part of that box. And you'll probably remember that discussion back from the last quarter. And if you combine that together with a normalization of the sell-in, sell-out ratio in the wholesale channel, this results in an organic growth which is much better in the fourth quarter than what we saw back in Q1, 2 and 3 of '19.

And then please turn to Slide 23 and the EBIT margin bridge. As we had guided, the fourth quarter generated a strong EBIT margin. And the EBIT margin was actually above the level of Q4 in '18. In general, I think that the bridge is pretty self-explanatory, so I won't go through it in detail. But there's 2 things that are worth noting on this bridge.

First of all, we see a massive shift in our cost base. So we are reducing cost wherever we can do that. And that's the minus -- or the plus 4.5% of revenue you can see in the first gray box. And then we are using these to fund our top line investments, our Programme NOW investments. And that's mainly in marketing. And that's the first two steps in the bridge. Secondly, it's worth to notice the 2 light gray boxes to the right. And they are mainly a result of extraordinary costs back in 2018. That's the 2 percentage points box called gross margin and the 1 percentage box just to the right of that. What this means is that the EBIT margin seasonality that we see here in 2019 is a more clean picture than in back in '18. And the seasonality, with a relatively larger share of profit in Q4, should also be expected going forward.

Then please turn to Slide 24 and the cash generation. Both the Q4 cash conversion and the full year cash conversion for all of '19 were pretty strong. And that comes after also a pretty good cash conversion back in 2018. As you will see on the slide here, we have focused our commenting around the KPIs, excluding the impact of IFRS 16, as we think this gives a more fair view of the real cash generation in the company. The operating working capital level ended at a very low level by the end of '19. And that's driven by both lower inventories and higher trade payables.

The inventory level ended nothing less than DKK 1 billion lower than last year. And that's almost 1/3 down. And most of this is good and result of us driving focus on inventory. But the inventory levels ended too low by the end of '19, and we will see a higher level going into 2020. Trade payables ended at a very high level and are elevated by the restructuring costs. So the 14.2% of revenue from trade payables by the end of '19 is not a long-term sustainable level. So net-net, we still see a sustainable working capital level to be around 10% of revenue, maybe high single digit. So the very low working capital going out of '19 will be a drag on cash generation in 2020.

With that, I think we should go to the guidance for 2020 at Slide 26. In short, organic growth between minus 3% and minus 6% and EBIT margin excluding restructuring costs above 23%. We know that open-ended guidance ranges are not that usual. But at this stage of the turnaround, we believe that this is the best way to represent our thinking and expectations for 2020. And it clearly reflects that our #1 objective is to stabilize like-for-like. Because we are willing to invest what it needs to create a sound and long-term sustainable business.

Digging into the organic growth bridge on Slide 27. Here, we have provided the building blocks for the organic growth. And there are fewer building blocks than last year. And we are happy -- actually we can say happy about that. And it reflects that we are putting most of the Commercial Reset behind us. The 3 pink boxes combined represent our guidance on a negative mid-single-digit like-for-like. And there's actually an important story behind these 3 pink boxes. And it tells a somewhat different story than when we just look at the overall like-for-like guidance of mid-single-digit negative.

And so the first building block, the first pink box impacting like-for-like in 2020 is our deliberate decision to further reduce the number of promotional days in 2020. Secondly, we see a continued unsatisfactory performance in China in 2020, even when excluding the potential impact from the coronavirus. And then the residual, the third pink box, is the underlying like-for-like in all other markets. And the main message on the bridge is actually in that last pink box because it means that we believe that we will be approaching stabilization of like-for-like for some markets in 2020 and as the year passes by.

And we should emphasize that the guidance that we show here does not include any impact from the coronavirus. In the last couple of weeks, we have had quite a number of store closures. And we've seen empty streets in China. And it is quite dramatic impact on our business there in both China and Hong Kong. The situation is highly unpredictable, of course. And we can make no meaningful estimate on the impact on the guidance on 2020 for now. And we will continuously evaluate when the full year impact can be estimated in any reasonable way.

Then on the next slide, on the EBIT margin guidance. I think the EBIT margin bridge here is relatively self-explanatory. I'm now on Slide 28. We will reinvest all or most of our cost reductions in driving the top line. Exactly how much we need to reinvest and how that plays out, we will see as the year progresses. And that's why some of the boxes here are made shaded in this bridge. But it's important for us to retain the flexibility to invest in driving the top line in order to exit 2020 with a like-for-like which is approaching stabilization in the key markets.

We can fund the investments in the top line through our cost reduction initiatives. But the deleverage in the business will lead to 1.5, 2.5 percentage points drag on the margin. And then on top of that, we will have headwind by the increase in silver prices and the strengthening of the Thai baht in 2020. And then restructuring costs are estimated to amount to around DKK 1.1 billion in 2020.

Then my final slide on the guidance, Slide 29, is about the cash distribution. We will distribute around DKK 3 billion to the shareholders in 2020. And that's around 9% of our current market cap. We have decided to skew our distribution from dividends and towards share buybacks in 2020. And that's because we think that Pandora is in a unique situation. We are in the middle of a large turnaround. We have high margins. We have strong cash flows.

But when we look and measure it on traditional capital market multiples, the valuation of the stock could appear low. And we see that as an opportunity for us to reduce the number of shares outstanding and thereby build the capacity for higher dividends per share in the future and thereby rewarding long-term shareholders. This should not be taken as a signal that the dividends will be kept at DKK 9 per share in the future because we will, of course, evaluate the split between dividends and share buybacks every year.

And with that, I will hand back to Alexander for a few closing remarks.

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Alexander Lacik, Pandora A/S - President & CEO [7]

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Thank you, Anders. I'll conclude the presentation where I started it. Programme NOW is on track and we are executing as planned. That's important. With '19 in the books, we're only halfway in our turnaround. Early results are encouraging, but there's still a lot of work to do. As we move through the year, there will be ups and downs on the way. But at the end of our turnaround, we will have stabilization of like-for-like in sight.

With these remarks, we'll now open for the Q&A session. Operator, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is over the line of Elena 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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I know I have to keep my list of questions to two. And my first one is related to your like-for-like, both the guidance and the exit rate from Q4. Can you help us understand why your exit rate from the fourth quarter is actually not a good proxy for your like-for-like guidance in fiscal year '20? I mean I've noticed that you've mentioned that you have reduced promotions in October and November, but you haven't done so in December. So is it reasonable to assume that the reason why your like-for-like has improved through the end of the quarter is because you have run promotions in line with the past? This is, in my opinion, a very important point because it helps us understand how the moving parts are coming together and what we should expect next year. So maybe you can tell us what exactly you were planning in terms of further cutting promotions through the course of the year in which markets because you've done quite a lot already in 2019. So that's question number one.

And question number two is on your EBIT margin guidance of above 23%. What is the underlying marketing expense assumptions here as a percentage of sales? I would like to understand what you think would be a sustainable level of marketing expenses needed for you to sustain a reasonable like-for-like or to achieve stabilization of sales and whether you think the new EBIT margin that you're going to achieve in 2020 could be considered to be the new recurring EBIT margin for the future or whether you do not exclude that you could have a further step-down in the following years.

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Alexander Lacik, Pandora A/S - President & CEO [3]

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Okay. Maybe I'll try to dissect your first question. It was a complex question, let me start by that. I think the starting point is, and we can get into the technicalities, is in order to establish a trend, you need more than one observation. So in order to kind of say, "We now have a clarity on the travel of direction," I'd want to look at least 3 quarters of some performance in order to then say, "Yes, now I know where the underlying base sits." Q4 is one observation, okay? So that's kind of one thing.

Then I think it's very difficult to compare what we did in the Q4, let's say, of 2019 with 2018. There are quite a number of moving parts. But I think the big differences are we have a significantly different media investment coming into Q4 of '19 versus '18. You have a significantly better advertising package hitting the market. We believe that the focus on the core business, paired with some stronger initiatives in Q4 of '19, was better than '18. And then you can kind of see that there are also some markets which have gone from having a relatively low investment level, if we now go one step deeper, getting it to a better level in '19.

So I think on that basis, there are so many moving parts. I can only look at the totality of it and say, "We see that we have more consumers coming to the brand in the Q4 of '19 versus '18." And that's a good first sign. But that's also why we are hesitant to then just draw out the line and say, "This is now a slam dunk for the year of 2020." We know that there will be quarters which are going to go up and down, so it's a little bit difficult to predict.

Then on your questions on promotions, I'd say, as you correctly point out, October and November was a pull-down versus the prior year, whereas probably from Black Friday and onwards was more or less similar, maybe with the exception of China, which had a 30% reduction on days. So that's -- so days is one metric. The other one is obviously the type of offers that you put in place. And again, I think we've wizened up a little bit the type of offers that we put in the marketplace from Black Friday and onwards.

So I know it's not a perfect answer to your question, but I think it's -- we're being cautious of just taking one observation and then drawing out the trend line on that basis. That's maybe why you see us not being overly bullish at this stage of the game, but rather come with sensible numbers with sensible assumptions and to make sure we deliver on those, just like we did in the last year. Maybe I'll hand over the EBIT question to Anders.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [4]

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Yes. Thank you, Elena, for the questions. On the marketing investment level, I think you can also say the -- as a starting point, marketing investments in 2020 will be higher than in 2019. That's a given. And I think by looking at the level that we have invested in the second half of '19 is a good starting point to say what could 2020 look like. But this is exactly why we have made some of the boxes on Slide 28 shaded in the guidance because we want to see where -- we cannot conclude yet exactly how much do we need to invest in driving the top line. It could be a little bit higher, it could be a little bit lower. And that's exactly why we have designed the margin guidance for 2020 as we have. But having said that, we will invest more in absolute krone in 2020 than in 2019. That's a given. And then we'll have to track initiative-by-initiative and then look at the return that we're getting from those additional investments and then find what is the right and sustainable level going forward.

On the long-term sustainable EBIT margin, the short answer is that it's too early to say. We are in the middle of the turnaround still and we need to see how it all plays out. The little bit longer answer could be, let's say, when like-for-like stabilizes, we will also be able to stabilize the margins. So the one big mover is when is like-for-like stabilizing, what's the path towards that? And then the second part of that equation is exactly how much do we need to invest in the top line in order to stabilize the top line? And net-net equation is too early to conclude on yet. But we have in the announcements today repeated the statement saying that there's nothing that prevents us from being a company with very high margins still going forward, exactly the same statement as we had in the annual report for last year.

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Operator [5]

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So we are now over to the line of Lars Topholm at Carnegie.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [6]

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Congrats with a good finish to the year. I'll also limit myself to just a couple of questions. So Alexander, on store closures, you said that we should assume, give and take, a stable concept store count going forward. But you also mentioned that you would shrink the multi-brand channel, which stands at some 3,800 outlets right now. Can you comment a bit on how much that should be reduced and maybe also comment on the phasing? And likewise, on the promotional activity, as discussed just before, can you comment a little bit on the phasing in 2020? So will this have a more significant impact on like-for-like in Q1, Q2? And when do you see this reduction of promotional activity being fully in the comps?

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Alexander Lacik, Pandora A/S - President & CEO [7]

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On the multi-brand, the work we've done during the last few months, we've kind of painted a picture 3, 4 years out, let's say. And in that time horizon, we see that probably stepping down the multi-brand by a couple of hundred stores. This is obviously a very fluid discussion. So that's kind of one answer to your question. The other one is, we -- as we've gone through this properly, because there hasn't been an awful lot of attention to multi-brand stores, as you very well know, over the last few years, where the push has been towards O&O and franchise, in favor of that, we've actually identified that there are some opportunities which we have foregone by reducing the multi-brand presence so much. We see that a lot of new customers and new category entrants, they typically would come through a multi-brand rather than necessarily a concept store.

So it's an opportunity for us to actually get hold of -- acquiring new customers through that channel and, of course, reaching a broader brand awareness by being present there. So part of the thinking that we've done is to review essentially country-by-country in the main markets whether there's an opportunity to increase the quality of presence. So it might be that the overall number is going to shrink in line with multi-brands essentially shrinking. But what we're also trying to look at, and we've identified a couple of ideas, is where we're currently not present, then could kind of offer some opportunities for the brand, as I mentioned. So I think that's, that.

On the promotional one -- do we actually have that detail on the quarterly impact? The overall impact, what we have guided for, is roughly 1 point, right? And a large portion of that comes out of the sequential takedown of the sales tab in the U.S. e-commerce site. But actually, top of head, I don't have exact impact. Maybe you guys can help me out?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [8]

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It won't have a big impact on the seasonality and stocks between the quarters. Also given that the impact is far less than in 2019, I think it -- but it could be a slightly higher impact in the first half than in the second half. But it's in the decimals that we are accounting it. And I think you also asked, Lars, about whether this is now it, that reduction that we're seeing in 2020. And I can say I think that our philosophy has been that the -- we should get out of the Programme NOW turnaround having done what needs to be done. And I'm looking at Alexander here, whether he say he agrees to that. Of course, I don't think we want to lay down and say, "This is it forever." But of course, that's our philosophy that we need to do the Commercial Reset fully before we exit Programme NOW.

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Alexander Lacik, Pandora A/S - President & CEO [9]

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I mean as I mentioned, in the big retail moments, we still have to be there and play because we're -- to a large degree, we're in the gifting business, as you all know. So things like Black Friday, Christmas, Valentines, Mother's Day, of course, there, we will be promoting the brand. And we'll have end-of-season sales twice a year as we currently do. And then there might be some local specifics, where it's just meaningful to be part. It doesn't necessarily have to mean that every activation of the brand has to breed a price promotion so that we can probably wizen up as time goes by. And there are other ways to kind of entice consumers. And especially as we get into loyalty programs and CRM mechanics, then we can kind of be more targeted with our offers across the various trading channels. But I would say, generally speaking, we should kind of have a decent baseline coming out of 2020 for the future.

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

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So just a very quick follow-up on the store closures, you mentioned your [gross] openings will be in emerging markets. Can you comment on which countries you expect to close concept stores? And then I'll jump back into the queue after that.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [11]

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I think the majority of the store closures that you will see will be in the more -- in some of the European markets like actually what we saw back in '19. It's not sort of one single country. But there are a number of countries, especially in the more mature European markets, where we will -- there will be a relatively bigger share of store closures.

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Operator [12]

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Our next question is over the line of Silky Agarwal at Citigroup.

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Silky Agarwal, Citigroup Inc, Research Division - Assistant VP & Senior Associate [13]

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I have two questions, please. The first question is on your overall assessment of the situation. I mean looking back, what has been the key learnings? And any initiatives and measures that you think needs to be tweaked or which under- or over-delivered? And my second question is relating to China. I mean what are you planning to combat this structural weakness that you're seeing in this market? I mean I'm talking beyond the outbreak of coronavirus. Have you planned any measures to improve the brand desirability? And if so, when do you expect these measures to kick in?

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Alexander Lacik, Pandora A/S - President & CEO [14]

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Okay. So on your first question is, as we said, I think, overall, they were like 8 or 10, depends on how you count major topics under Programme NOW. And I would say, by and large, we are very pleased with all of them. I think the one which still kind of is in the hopper is the new store concept. So we have -- I mean it's been in the market for quite a short period of time. But I think in all fairness, we probably have more work to do on that before we push the button and make what could be a multibillion Danish krone investment in refurbishing that aspect. So there are some positives in there and there are some kind of question marks and some negatives. So we're working through that. But we probably have a few more months ahead of us before we close on that particular topic. I think most of the other ones, we are very pleased with. And that's also why we say we're going to continue with those activities into 2020.

On your second question on China, as we've alluded to before, we have some underlying issues in China. And I think that the starting point is really the way the brand was established from a positioning standpoint is not what we have done in any other market. And I think we have a very vanilla type of positioning currently going in China, which in my book is the main reason why we are seeing those issues. Unfortunately, that's the one that takes the longest time to fix. It's not a mechanical issue per se. We've done a lot of analysis in the last few months. And my expectation is that by the end of this quarter, we will conclude on the analytics and have an action plan to go forward. My expectation is for the 2020, disregard the coronavirus for 2 seconds, is that we'll be in negative territory in China and this is going to take us a little bit longer to fix.

Unfortunately, one of the things which we found in the analytics was our media model, and we had planned to do a media test in the weeks to come. But of course, with the current situation, that will have to be postponed. So that might be a [leg] that comes onstream a little bit later. But it's a day-by-day situation. But generally speaking, by end of the quarter, we will be in a position to say, "This is what we think is wrong, this is what the go-forward plan looks like." And from thereon, we will need to assess how quickly we can turn this back to growth. Because I think it's very important to say that China is the biggest jewelry market in the world, and we're not going to walk away from this. So this is fixable, but it's just going to take a bit of time for us.

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Silky Agarwal, Citigroup Inc, Research Division - Assistant VP & Senior Associate [15]

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Just coming back to your point about these new concept stores probably lagging behind a bit. I remember, in the third quarter call, you said that these stores were kind of having positive retail like-for-like momentum? Are you kind of suggesting that the like-for-like momentum in these new stores have not probably picked up to the same extent as you would have thought and that's the reason why your plan -- you want to go slow with the new store rollout in 2020?

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Alexander Lacik, Pandora A/S - President & CEO [16]

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No, there's actually much more to it than just like-for-like. We are looking at the cost of servicing those stores. We're looking at conversion rates, et cetera. So it's -- and the picture is mixed. We've launched them across the 3 regions, let's say. And we have a mixed picture also from the 3 regions. So it's not a conclusive picture that says, "Yes, we've nailed it, let's go." It's more, "Hmm, why is it working here? And why isn't it working there?" And because arguably, the starting point was similar. So these are kind of some operational issues that we're working through. And it could be that in 2 months' time, we are in a different position. Remember that some of these stores, they've been in the market for, what, 10 weeks or something, which is super early in the curve.

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Operator [17]

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We now go to the line of Magnus Jensen at SEB.

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Magnus Thorstholm Jensen, SEB, Research Division - Senior Equities Analyst [18]

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This is Magnus from SEB. I have two questions as well. First of all, back in November, you were so kind to give us the like-for-like for October. Is there any chance that you could give us some sort of flavor on how January has progressed? And maybe in relation to that, obviously the coronavirus has a significant impact on your Chinese business. But could -- do you have any sense of what kind of impact it could have outside of China? Maybe if you have any insights into how large a share of your tourism sales is from Chinese people traveling, which will be traveling less obviously.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [19]

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Magnus, it's Anders here. I can start with the first question on January. I think we will be -- what we can say is that the year has started out in line with the expectations and in line with the guidance that we've given for the full year. Obviously, come late January, we started seeing some impact from the coronavirus. But having said that, yes, we started out the year as in line with the expectations. I think Alexander will answer the last question.

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Alexander Lacik, Pandora A/S - President & CEO [20]

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Yes. I mean I wish I had a crystal ball to say where this is going to go. I mean if you go back to SARS, that was -- it was in the market for many, many months. So I think it's too early to say. I'll just provide some context though, which I think is useful to bear in mind. So if I take Greater China, which is Mainland China, Hong Kong, Macau, Taiwan and the -- what we estimate the travel retail from Chinese tourism specifically to be, that would represent somewhere between 10% and 12% of our global revenue, okay? So if you want to do math, I mean you can say that, that thing goes to 0 and then with the P&L that flows, that will be kind of a worst-case scenario from a financial standpoint, let alone other issues with people's safety, et cetera. So that's kind of the simple math you could do. And as I said, I mean we are watching this on a day-by-day basis. It's very difficult to model out. But that's the number we have at hand. I think it's important to also mention that we have a full-court press on avoiding at least to contribute to any issues, which means that we have a strict no-travel in or out of China policy in effect as we speak. And we're also limiting travel within the wider Asia region.

And of course, we are concerned if this would spread to Bangkok, as we have a big facility in Bangkok, so we have -- we're checking people, temperature, we're asking people not to turn up to work if they have any symptoms of cough or sneeze or anything alike. So we try to kind of do whatever we can. I mean we have masks, et cetera. So we're kind of following all the guidelines that governments in the various countries are helping us to understand what's going on. But as I said, for us, if I have 10% to 12% in jeopardy, I still have 90%, which today I feel a little bit better about than maybe we did a year ago. So that's kind of how we would see our exposure to China is, in fact, a little bit lower than what we see other companies have. But let's all hope that for safety of people that this goes away sooner rather than later.

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Magnus Thorstholm Jensen, SEB, Research Division - Senior Equities Analyst [21]

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Just a short follow-up. So China and Hong Kong makes up around 10% of revenue, right? And you say that -- so it was only 0% to 2% of your revenue that come from Chinese people shopping outside of China?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [22]

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It's 10% plus 2%. You're right, Magnus. 10% from China, Hong Kong, Macau and then 2% of revenue coming from Chinese travelers in the rest of the world. So 12% in total, 10% plus 2%.

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Operator [23]

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Our next question is over the line of Klaus Kehl at Nykredit Markets.

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Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [24]

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Two questions from my side as well. We talked a little bit about the exit rate of a -- on a like-for-like basis in 2019. So could you help me a little bit here with some math because you said that you started Q4 with a negative like-for-like of minus 7% and you ended at minus 5%. So you must have ended the quarter higher than minus 5%. And if I do the math, I end up in the range of minus 3% [full way] for December. Is there something wrong with my math in this perspective? And secondly, Germany, Italy and France, they performed very strongly in Q4. And you've seen a major improvement compared to Q3. Could you elaborate a bit on what actually happened here in Q4 and what you have done in these specific markets?

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [25]

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Yes. I can give a couple of comments on -- thank you for the questions, Klaus. Obviously, it goes by math that November and December together had to be better than October like-for-like. And that was actually also as we had planned from the outset. I think if you go back probably a year, we used an expression at a point in time that we wanted to make Q4 and the Christmas, Black Friday trading bigger and better than ever. And then the entire guidance for Q4 and the implicit guidance for Q4 was built around that trading from week 48 to 52 would be what will be driving like-for-like. And that's also what happened. I think in general, what we have seen is that trading about the key events comes a little bit later than what we've seen in prior year, that comes even closer to the event that [starts.] And that means that the Q4 starts even more -- becomes even more back-end loaded than what we have seen in prior years.

I think looking at December isolated, we have to be quite careful because Black Friday from a like-for-like perspective shifted from November '18 to December '19. And given that Black Friday is also a massive event, it makes December look, on an isolated basis, good. But that's also the general, I think, caution that we will give -- that we have to look at -- be careful looking at individual month and individual weeks even because there are trading differences, differences when we launch new products when exactly which week does it -- is it put into the market. But having said that, yes, November and December together was obviously better than October.

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Alexander Lacik, Pandora A/S - President & CEO [26]

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Now on your second question, so the generic template for Q4 was the same. So it's not like we said, "Okay, let's put the hammer down in those 3 markets more than somewhere else. So the promotional schedules, et cetera, was exactly the same. The initiatives from a newness standpoint were exactly the same. So actually, I think there are different possible explanations by market. I mean I think France and Italy, in my book, were probably under-invested versus the base. And then we're kind of just rightsizing the media investments in those markets. And then it's bound to work because we've seen that our media efforts have yielded very well.

I think in Germany, I think the awareness of the brand, generally speaking, is a little bit lower. So when we put the media there, and we saw this already in the back half of Q3, that Germany reacted very strongly to the media impact. So I think that there is no one simple answer to that question. Each country had different starting points somehow, which drove those numbers.

And even if you look on a 2-year basis, you go back in the prior year, you could say, "Well, Italy and France had a slightly easier comp, Germany didn't." So again, it's like -- yes, because we've been kind of scratching our head as well. So I just think we have to accept that the brand has different starting points in different markets and responds in a way slightly differently depending on the investments we do. But from an activity standpoint, it was the same basic program that we executed everywhere.

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Operator [27]

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The next question is from the line of Frans Hoyer at Handelsbanken.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [28]

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You commented recently around the -- how the like-for-like performance was structured across different categories or price points. And I was wondering what you saw in Q4 in this respect. And also, you did a lot of clearing of inventories at dealers in the fourth quarter. And have you done enough? Have you -- and what is the situation in your own stores regarding the need or otherwise for cleaning or clearing out some slow-moving items? And then finally, a more broader question about your thoughts on the assortment on different categories, charms and bracelets, rings, earrings, necklaces and so on, whether -- what are your thoughts on that now that you have experienced some several quarters with the company?

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Alexander Lacik, Pandora A/S - President & CEO [29]

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So let's try to knock them off. So your first question is on the like-for-like by pricing decile. I'm not sure I have that number at hand. The one thing I can say, but it's a slightly different twist on your question, is that what we regard as the base versus new items. So the base performance in Q4 was actually flat, whereas new was obviously a little bit lower than that, of course, to get to the minus 5%. I will actually have to come back to you on that question. I don't have that data point top of my head. Sorry, what was the second one?

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [30]

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It was regarding the need or otherwise to do more cleaning up of the inventory with dealers or indeed in your own outlets.

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Alexander Lacik, Pandora A/S - President & CEO [31]

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I think it's -- from an inventory position, it might actually be the opposite. Because of the back order situation we've had in the last few months, we're probably on the light side. And I think Anders also alluded to that we should probably expect that our inventory position is going to go up in the year in order to make sure that we can fulfill customer service at a better rate than what we've done. So I don't foresee -- there is one last cleaning exercise going on in the U.S. now after the winter sale as we have communicated before. But other than that, we don't see a need, at least not structurally, that needs to be done anything else. And assortment, could you just remind me on assortment on different categories?

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [32]

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Well, you mentioned at an earlier stage that you thought there was a need to go back and focus more intensively on charms and bracelets, the core, the base of the company. And I was just wondering, you see this broader lineup of jewelry categories in your stores. And are you basically comfortable with that effort behind these other product categories perhaps at a time when you need to focus on charms and bracelets?

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Alexander Lacik, Pandora A/S - President & CEO [33]

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No, I think it's -- the first port of call, if you look at my P&L, which I'm sure you've done even more times than I have, you will know that charms and bracelets represent the vast majority of our business still. It's what -- depending on country, but it's like 70%. If I don't have that 70% kind of humming and really firing on all cylinders, it doesn't really matter what I with rings or pendants and the rest of it. So the first decision we made was to drive the core. And that's kind of working for us.

Now the second point is I still have, what, DKK 6 billion worth of revenue in those adjacent segments, which we need to take care of. So that's going to be like, let's call it, Phase 2. And we have -- in some of these, we're doing a little bit better than others. We just launched the rings now -- sorry, the birthstone rings or color rings. So there will be small initiatives here and there. But I think we need to take a broader look on all these other ones. I mean if you think about charms and bracelets, it's all kind of neatly tied under the Moments platform, which consumers understand and appreciate.

I think when you look at the rest of our assortment, it's more a collection of products rather than underpinned by any particular concept that we can build out. So it's still done reasonably well, I would say. But there's more work that needs to happen in the future. But for now, I think for -- that's probably something that we'll see in '21 and the out-years. We have some nice initiatives in this year to kind of hold up the business, let's say. But my clear focus is charms and bracelets. That's the key focus of what they're trying to drive here.

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Operator [34]

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Next question is from the line of Fredrik Ivarsson at ABG.

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Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [35]

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On the new store concept, I think you mentioned that this could be a multibillion investment, if I heard you correctly. And I'm just wondering how we should think about '21 CapEx. If you would sort of nail a concept, will you invest heavily across all regions over a single year maybe? Or will you rather phase it out over a number of years? That's my first question. And the second one is on store traffic. You mentioned minus 7% in Q4. And I'm curious to hear what you sort of used for assumptions for the full year 2020.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [36]

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Fredrik, it's Anders here. On the first question, on the concept of -- I think the important starting point is that the new concept per store is not more expensive than the old one. There will be what a run-up phase while we get used to build and produce the new concept. But the price per store is the same as the current format, and that's around DKK 2 million in CapEx per store. So as that -- the run rate CapEx doesn't change as a consequence of us moving to a new concept. And then on what that actually then would mean for CapEx next year, it all depends on the retail metrics that we see as part of the new concept. You can see a couple of scenarios.

One is that it's a little bit better than the current format but not massive. And then we will probably just refurbish the stores when they would have been refurbished anyways. So that would be as of no incremental change of CapEx. And then you have the other scenario, where we end up with a format that drives traffic, conversion, basket size, units per transaction, drives that up, to an extent where it makes sense to accelerate store refurbishments, even though we might technically not need to do it ahead of time. You could decide to do that if we believe it drives incremental like-for-like that justifies an accelerated investment. And how that plays out, we can only comment on once we have nailed down the concept.

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Alexander Lacik, Pandora A/S - President & CEO [37]

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Yes. I mean just to add a little bit of perspective, we have capacity to refurb roughly 500 stores annually. So if we would think about us owning, what is it, 1,700-something, that would take us 2 to 3 years if we really accelerate and put some additional money on the table and equally then for the franchise partners. So the ideal time line, if we really put all the hands on deck, you're looking at a 3-year time line. I think the current store concept took 8 years to roll out globally. So I don't know whether the truth is going to be somewhere in between. But if we kind of crack it, then we will -- you make it as a business case. And then you look at whether it's worthwhile accelerating the investment, yes or no. But I think we have some work to do before we get there.

And on your other question on modeling the global assumption, I'm not really sure that we have that pinned down to the exact science. But you could take the like-for-like view as a general proxy for traffic. And I'll tell you why it's a little bit difficult to pin it down more precisely because when you have the channel shift, people moving online, you have many more views online, which we count as a traffic as it were versus the physical retail, so -- and then we can combine the two and that drives into the like-for-like assumption that we've guided on mid-single-negative digit. So from a modeling standpoint, that's probably the best proxy I could give you today.

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Operator [38]

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Our next question is from the line of Piral Dadhania at RBC.

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Piral Dadhania, RBC Capital Markets, Research Division - Director of Premium Brands [39]

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So I was wondering if we could just talk a bit more around the online part of the business. You saw a nice acceleration in 4Q in terms of revenue trajectory there. Could you maybe help us understand which markets contributed to that mid-20s revenue growth in the online and sort of how much of your marketing spend you're allocating to online versus offline? And what are the other drivers? Is the new website a contributing factor there? And any KPIs you could perhaps talk to in terms of traffic, units per transaction, conversion, et cetera? That was my first question.

And I guess maybe related to that, do you have a view on the customer profile and how that's evolving in the last few quarters? Obviously, Charms has seen a nice improvement. But the newness categories are still showing signs of weakness. So is it really old customers coming back to Pandora? Or is this the recruitment of new customers you're seeing? Any visibility on that would be helpful.

And then secondly, I think you touched on this in your prepared remarks, the possibility to extend wholesale distribution to higher-quality and new partners. Could you perhaps just help us understand what type of wholesale doors that you're referring to? Is this online multi-brand? Is it higher-end department stores? Could you just maybe help us understand a bit more about what your thoughts are around that?

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Alexander Lacik, Pandora A/S - President & CEO [40]

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So on your first question, if I look at kind of just purely from an impact standpoint, my online business in U.S. and U.K. is kind of where the action is in terms of driving the overall corporate number. And that's where we've seen growth rates in plus 20% to 30% range from a like-for-like standpoint. So it's really kind of where it matters. Then of course, we have good growth rates across all the other markets. But if you look at it from a total impact standpoint, that's where the game is played. I'm excluding China from this conversation. So that's kind of where it sits.

Customer profile, old [indiscernible] new. The only robust data I have is from the U.S., where we've seen quite a shift in managing to drive new people into the brand. Maybe next time around, we can share some more detail on that. But that's the only place where we have a structured way of actually capturing this data point. So we can see that in the funnel, you have obviously new people, you have your existing ones and then you have people that kind of are falling out of your funnel. But we see that we've been quite good at attracting new coming into the funnel, specifically for the U.S. So that's, that. And then on the final question, I think this one is a little bit sensitive to talk about publicly. So I will for now defer from answering that question.

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

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Okay. Great. And then maybe just coming back to the marketing spend allocation, online versus offline?

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Alexander Lacik, Pandora A/S - President & CEO [42]

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From a ratio standpoint, if you think about the digital investments we do from a marketing standpoint, that kind of is peanut-buttered across all channels. So there is no elevated spend against that particular trading channel. So what you see there is the fruits of the general spend on the brand as it were. The only odd one out, if you would want to conclude that picture would be China, of course. Because in China, we don't have a lot of broad scale spend as we do everywhere else. So there, we have a dedicated spend against Tmall. But on a ratio basis, this is not higher than any other trading channel.

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Operator [43]

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The final question for today is from the line of -- back to the line of Frans Hoyer at Handelsbanken.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [44]

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Well, you just mentioned some nice new products. Or if it's coming up during the year in 2020, I was wondering if there is something more specific you could mention around that.

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Alexander Lacik, Pandora A/S - President & CEO [45]

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From the news -- I mean nothing specific like that. I mean we have these kind of vintage charms that I mentioned that are going to come up, but that's a small piece. I think the big focus is to drive the core. So we're bringing out more initiatives on the sub-40 euro, pound, dollar type of products, specifically in Charms. We're going to bring out more [DVs] for the Pandora ME collection because that's obviously been doing really well. We're looking at doing more on Harry Potter. Initially, we only launched 12 [DVs.] And there's a huge interest for doing more in that space.

And then I have a few things, which I'll just keep up my sleeve for now. But I think that's kind of -- yes. And of course, we have the 20-year anniversary coming up, which there's going to be some very interesting news in Q3. And then there's a few other small, I would say, technical innovations on the bracelets, which is going to come to market, just to give a better consumer experience actually. But I think that's probably what I have for now.

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Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [46]

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That's what we want to say for now. And then obviously, we will do a lot of partnerships, collaborations and activate, what we have done before. then I think a big change otherwise, more from a go-to-market perspective, is that we move away from drops and then rather have quarterly themes, which will give a much more consistent expression of our marketing efforts and our brand position.

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Operator [47]

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Okay. May I please pass the call back to you for any closing comments at this stage?

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Alexander Lacik, Pandora A/S - President & CEO [48]

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No. As I said, I think we know we have a long path ahead of us. Q4 was strong. We're convinced that Programme NOW is the right medicine for now. There might be some additions as we go with the new product strategy. But we feel we're in a reasonably good place to continue the turnaround program. And I think on that note, I might see some or all of you in the coming days. So until then, safe travels, and thank you for joining us.

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Operator [49]

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This does now concludes today's call. So thank you all very much for attending, and you can now disconnect your lines.