U.S. markets open in 39 minutes

Edited Transcript of PNDORA.CO earnings conference call or presentation 5-May-20 9:00am GMT

Q1 2020 Pandora A/S Earnings Call

Copenhagen May 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Pandora A/S earnings conference call or presentation Tuesday, May 5, 2020 at 9:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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

================================================================================

Conference Call Participants

================================================================================

* Antoine Belge

HSBC, Research Division - Global of Consumer and Retail Research

* Chiara Battistini

JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail

* Elena Mariani

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

* 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

* Louise Susan Singlehurst

Goldman Sachs Group Inc., Research Division - MD

* Magnus Thorstholm Jensen

SEB, Research Division - Senior Equities Analyst

* Omar Regis Saad

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team

* Piral Dadhania

RBC Capital Markets, Research Division - Director of Premium Brands

* Poul Ernst Jessen

Danske Bank A/S, Research Division - Senior Analyst

* Silky Agarwal

Citigroup Inc, Research Division - Assistant VP & Senior Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to Pandora interim financial report for the first quarter of 2020. (Operator Instructions) Today, I am pleased to present Michael Bjergby, Vice President, Investor Relations, Treasury and Tax. Please begin your meeting.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. Good morning, everyone, and welcome to the conference call for Pandora's Q1 results. Even though it's special times, when I am, as usually, sitting in the head office at Havneholmen in Copenhagen. There are not many employees at the office today. Most of them are sitting in this room. And with me, I have our CEO, Alexander Lacik; CFO, Anders Boyer; and Christian and Mikkel from the IR team. There will be a Q&A session at the end of the call. (Operator Instructions)

Please, you may notice to the disclaimer on Slide #2, and let me then hand over to Alexander and let's get this show started with Slide #3.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Michael. It is indeed quite peculiar situation. Pandora is impacted, like all businesses, and our leadership agenda is very different from what I think we all had expected going into the year. When COVID-19 broke out in China, we immediately established a global crisis team to mitigate the impact and prepare scenarios for the times ahead. We were, therefore, quite well prepared when C-19 spread to the rest of the world. First and foremost, we have protected our employees, and we've fortunately seen very few cases in the company. We have also protected our consumers, and we have supported government actions across markets.

From a financial perspective, we've taken a number of actions to strengthen our financial flexibility, both to sustain worst-case scenarios, but also and importantly, to have muscle to navigate and adapt to potentially new reality on the other side of this situation. Short term, we've focused on managing cost and protecting cash. We have taken such actions without compromising the long-term health of our company. At the same time, we're preparing for a strong commercial comeback when demand returns. COVID-19 may have a lasting impact on the face of retail. We're monitoring this closely. Where there's change, there's more certainly opportunity.

Please move to Slide 4. COVID-19 came at a time where we were seriously harvesting the fruits of our hard labor from 2019. Our brand momentum continued to strengthen on the back of the brand relaunch in August, and the performance in January and February was better than what we had expected. Organic growth was positive and Charms and Bracelets had positive revenue growth. These are key milestones for our turnaround and tell us that Programme NOW is working. Most of our stores around the globe have been closed over the past months. So our revenue today is, needless to say, seriously impacted. At the same time, the online business is firing on all cylinders, and this is a resilient channel that we can continue to push very hard.

Please jump to Slide 6. On the chart to the left, you can see the positive organic growth of 1%. Notice that this was in a period where China was significantly down. We provide organic growth numbers due to the definition issues with like-for-like, but the picture is exactly the same when you look at sell-outs. In Jan and Feb, Group like-for-like was flat, excluding China.

We're supporting government actions around the globe and have closed more than 80% of our stores during the month of March. We've guaranteed 8 weeks of base pay for our store staff. And yesterday, we announced that this will be extended by 2 weeks to 1st of June. At the same time, we have decided that the top leaders, executive management and the Board take a temporary salary cut of 20%.

Production has remained unaffected. Business continuity plans are in place, if a curfew should occur. Our franchise partners are important for us, and we strive to stay in close contact with them. We're trying to consult and help them during this crisis to the best of our ability, but we're generally not providing any financial support.

I'll now hand over to Anders for some comments on stress test financials on Slide 7.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Alexander, and good morning, everyone. This Slide #7 and the following slide are two, somewhat unusual slides, but it's also two slides which are very important in a situation like this. So let me start out by saying that Pandora's financial starting point is strong and a simple stress test will show that Pandora can absorb around, let's say, 50% revenue decline before reaching breakeven on profits and before we start to burn cash. And that's a pretty privileged situation to be in for me and for the company, and that's what we have tried to illustrate in a simplistic way to the left of Slide #7.

Despite this strong starting point, we are, of course, taking serious action on cost and cash because we want to be prepared for the worst. So we have immediately reduced the media spending as stores started to close in markets around the world. And we are, with success, renegotiating rent agreement on offices and stores with many of our landlords. And we're also applying for government relief programs in many markets.

And on the cash side, we have suspended our share buyback. We have reduced our CapEx by about 40% and we are managing working capital tightly, just to mention a few of our cash actions. And these are all necessary actions to protect the financials and the health of the company, but these are also actions which strengthen our position when demand returns.

So then let's go to the next slide with a few more details on the funding and how we have prepared ourselves for a stress test scenario on Slide #8. We are in a highly uncertain environment, and therefore, we have decided to arrange funding our cash for a stress test scenario. So we have decided that we want to pay that insurance premium to be ready if a worst-case or a stress test as we reported on this slide should happen. Because in an environment like we are in right now, we need to work with different scenarios and different scenarios requires different amount of cash and different amounts of liquidity. And with the funding package we are announcing today, we have enough cash, even if all stores remain closed for the rest of the year. And that's what we have illustrated to the right on this Slide 8, and I'll get back to that in a bit more detail in just a minute. But first, I would like to walk you through our thinking about the different scenarios.

So in a base case, that's what we call scenario a, in the pink box to the left here, we see a gradual opening of stores, just like what we saw in Germany back in late April. And in this scenario, trading is improving slowly in the second quarter and further in the third quarter and leads to something that more or less is a normal fourth quarter. And in that scenario, despite being heavily hit in the second quarter and also in the third quarter, we would actually not need additional funding.

However, if we are in a scenario b where store openings are dragging out, some markets may need to close down again for a second time later on and the fourth quarter is significantly impacted, either by some markets being closed down or simply because consumer demand is lower, then additional bank funding was required. And in -- to cover that scenario b, we've done 3 things. First of all, we have negotiated a waiver of our loan covenants, and that covenant, which is, by the way, is our only bank funding covenant that has been raised to 4.25 net interest-bearing debt to EBITDA. Secondly, we have extended one of our credit facilities by approximately a year to May '22. And then thirdly, we have established a DKK 3 billion clock deal with our core relationship banks, and that is guaranteed partially by the Danish state's investment fund, this one.

But in an absolute worst-case scenario, and that's scenario c, where there's a significant second virus outbreaks in the third quarter and the fourth quarter, and the majority of stores are closing again, like what we have seen during April, then the DKK 3 billion in additional bank funding will not be sufficient. And to cover that scenario and to strengthen the capital structure during these challenging times, we decided to sell 8 million treasury shares, as you saw announced this morning.

So to summarize, when the sale of the treasury shares has been completed, then we have secured enough liquidity, even for the worst-case scenario, scenario c, and thereby, we also have the flexibility and the muscle to focus on a strong commercial comeback.

So going back to the illustration, on the right here, we have tried to illustrate the liquidity situation in the worst-case scenario in a somewhat different way. So assuming that closing the majority of the stores will lead to a 70% revenue drop, then we will be burning about DKK 1 billion in cash per quarter, or DKK 3 billion for the last 3 quarters of the year, plus restructuring cost and plus a bit additional funds being tied up in working capital because our working capital is still at a quite low level. And that would take us too close to the available committed facilities after the repayment of the DKK 3.4 billion loan facilities that expires by year-end. But with the sale of the treasury shares, there's sufficient funding also in the worst-case scenario, and we will also have funding to sustain a continued material negative impact from the virus going into next year, 2021.

And with that, I'll hand back to Alexander and update on Programme NOW.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Anders. I'll now turn focus to the underlying business and our long term initiatives. The execution of Programme NOW has definitely not stopped during the outbreak. We continue to progress and execute while obviously, adapting to a new reality.

When we entered the year, it was important for us to continue to build on the strong brand momentum since the brand relaunched in August. This was a key driver behind the positive performance in January and February. But I'd also like to highlight that both new and base products were doing well. And even more importantly, Charms and Bracelets were the best-performing product categories. This is critically important as this is the core of Pandora, and it's the core of Programme NOW.

We continue to drive the cost program to secure both fundamental sustainable savings and additional short-term savings to protect the business during this period. We considered a Commercial Reset track, in the bottom, to be more or less completed, inventory levels are healthy, promotional dependency is significantly reduced, and the product assortment is simpler and more productive.

Please turn to the next page. This is one of the most important slides in the deck as it talks to the brand health, which is actually at the heart of the whole turnaround program. The underlying brand momentum is clearly improving. That's evident from our traffic and like-for-like numbers, both in Q4 as well as January and February of this year. In the first quarter, we increased our media efforts with national TV campaigns running in most key markets. The marketing message was consistent, insight-driven and properly tested. We redirected spend to digital to drive traffic and conversion in our online stores. And the key brand metrics paint the same picture, unaided brand awareness, unaided ad recall and Google searches are all pointing in the right direction. The development is significant, solid and something we will continue to nurture.

Please turn to the next slide. The new online store was launched in August and has been key to our strong online growth. We have also increased our media spend on digital marketing, and consumers are responding positively. It should be noted that our online performance is predominantly driven by conversion rate in Q1. We see this as a result of, first, that our marketing content is much stronger, and consumers are therefore browsing and engaging significantly more with the site; secondly, that we have improved the back end of the online site, which leads to faster load times and higher-quality product pictures. Faster load time is a key factor that has a clear correlation with conversion.

In March, quality of traffic was likely impacted by loyal consumers shifting offline to online. But it should be noted that neither growth nor conversion was significantly better in March than in the first 2 months of the year. Our online business has first, really started to fire in April with triple-digit growth rates.

Now please turn to Slide 13 for a couple of words on China. As you already know, Pandora has built a quite large business in China in a very short time period. However, the brand has not been clearly positioned and has not been nurtured in the right way. Now we're taking necessary steps to prepare for a proper turnaround in China. We've been able to appoint a gentleman by the name of Jacques Roizen as the new General Manager in China. He joined in late March, has a very strong retail background, in-depth knowledge of the Chinese market and an expert in data-driven growth.

The strategy and time line for the rest of the year can be split into 3 major milestones. The first one is to stabilize the Chinese business. There are low-hanging fruits to support the concept store performance and elevate the online business. The next milestone is to qualify our relaunch plan in China, and this has to be data-driven and well tested. Finally, a relaunch of our plan by the end of the year.

On the back of COVID-19, trading in China has been quite slow to recover. Most of our stores are open, and we are starting to see like-for-like moving towards the level pre-COVID-19. In April, our Tmall business, which is essentially our e-commerce business in China, back to flat numbers.

Please turn to Slide 14. As you are aware, we announced a strategic reorg on March 4. This is the foundation for our ambition to strengthen the organizational capability. Global headquarters come closer to local markets and consumers. This ensures that feedback from consumers can quickly fuel new concept creations. The reorganization will also reduce complexity and enable Pandora to execute with more speed and agility.

As I've spoken about before, Pandora is moving into its 3.0 phase, where the objective is to become a world-class brand builder and a world-class omni-channel retailer. During these turbulent times, we've also gained critical competencies in key positions. Carla Liuni, as Chief Marketing Officer; and Martino Pessina, as Chief Commercial Officer, to name a few. I'm personally extremely excited about the potential of the new structure and the new executive team. It's important for me to say that the reorganization was planned long before COVID-19, and it's clearly not a cost exercise. This is a key investment in the long-term success of Pandora.

That was my part of Programme NOW. I'll now hand it back to Anders.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Alexander. Then, please go to Slide 15. In the light of COVID-19, it's clear that the cost focus has changed from structural and long-term cost reductions to also focus more on short-term savings here and now. The Cost Reset program under the Programme NOW is still on track, with run rate saving target of DKK 1.4 billion by the end of this year. We continue to progress well on all parameters and not least the efficiency gains on the production sites in Thailand and achievement on our large IT transformation. So in the quarter, the Programme NOW savings amounted to DKK 125 million, and that comes on top of the savings that were generated in Q1 of last year. And just to avoid any misunderstandings, the numbers on this slide and the DKK 125 million number for the quarter does not include short-term savings that are being achieved as part of the COVID-19 situation.

So then, please turn to Slide 17 for a brief update on the Q1 performance. As already mentioned by Alexander a couple of times, that the performance was strong in Jan and Feb with 1% -- plus 1% organic growth, even with the virus outbreak in China already happening at that point in time. And plus 1% might not sound impressive, but it is a major step considering where we are coming from with negative organic growth and declining like-for-like for quite a long time. And then impacted by COVID-19, we had 42% organic growth decline in March. And for the quarter, organic growth, therefore, ended at minus 14%, and the EBIT margin was just above 15%.

So let's turn to the next slide for a bit more detail first on the revenue. And here, on Slide 18, you have the usual revenue bridge. And the like-for-like including stores, which are temporarily closed due to the virus, was minus 17%. And that's clearly the lead driver of the revenue development compared to last year.

The KPI that we're showing here is the sell-out growth, including the stores that are temporarily closed. And that -- it's the same as our normal like-for-like KPI, except that it includes the negative impact from the stores that are temporarily closed. But I also want to highlight that the third pink box from the left, and that shows 2.5 percentage points impact from normalization of selling to wholesale. And it's quite an important number because it shows that the selling is normalizing and then our big efforts of cleaning up inventory during last year has come to an end.

And then please turn to Slide 19 on the EBIT margin bridge. The profitability in the first quarter was clearly not where we wanted it to be. But given the circumstances and the impact from the virus, it was okay, it wasn't solid, and shows how Pandora can absorb a pretty significant revenue decline and still generate profits. And the main story line is that our EBIT margin in the first quarter is heavily impacted by the large deleverage effect from the COVID-19 virus in the month of March. And if you look at the first 2 pink boxes to the left, the plus 2.5% and minus 2.5%, they show you that the cost reductions were essentially all reinvested in the business to drive the top line. And that's much -- very much in line with what we saw during the quarters of 2019 as well.

And then turn to Slide 20 and cash flow. I'm not going into too many details here, but high level, you can say that the cash flow numbers are not as attractive for the specific quarter as we normally show. But as expected, and as we communicated back in -- when we released the full year numbers in February, the free cash flow in the quarter was impacted by a cash outflow from trade payables and obviously also impacted by the COVID-19 impact on EBIT.

And I just wanted, again, to put our working capital level in this quarter into perspective. At the Capital Market Day, now almost 2 years ago, it was mentioned that our working capital should be around 15% of revenue. Today, we are at 4.2% -- or by the end of March, we were at 4.2%. And that is a very low level and not sustainable, but we can, long term, definitely do better than 15%. But we still expect to see working capital increase during 2020, among others, due to an increase of inventories.

And then, please turn to Slide 22, and that's the last slide for me today and just about the guidance or the lack of guidance because on March 16, we withdrew our guidance as we no longer felt that it was meaningful. At that point in time, the uncertainty was simply too high. And today, that's still the case, and we are not providing any update to the guidance for the year. Having said that, we are updating some of the building blocks to the guidance to reflect some of the cost and cash actions that we have taken. So restructuring costs have been lowered by 25%. CapEx has been lowered by 30% to 40% compared to the original guidance. And lastly, and that's probably the first time in the history of Pandora, the net concept stores are expected to decrease a bit this year, going down by between 25 and 50 stores in 2020.

As expected, the second quarter of this year has started out with revenues being down significantly in April, as the majority of the stores were temporarily closed. Online has accelerated as Alexander mentioned, delivering triple-digit growth in the month, but obviously not enough to offset the loss coming from the physical stores being closed. We don't want to guide specifically for the quarter, but you should expect that revenue will be down significantly in the second quarter and much more than in the first quarter. And you should also expect to see that the bottom line for the second quarter will be negative.

And with that, I will hand over to Alexander, again.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Anders. So if you move to Slide 23. I'm 1 year in the job, and this slide is a perfect reflection of the reasons I came to Pandora, maybe with the exception of the Programme NOW point, which I think was part of my job description to try to drive the business. But it's good to put this slide up there to remind ourselves of the underlying strong foundations of Pandora. We have a business model with a very clear competitive advantage, and we're focusing on driving those, even as we're kind of facing this crisis.

So if we now move to the next page, which is #24. So I'll conclude the presentation where we started it. Programme NOW is on track. I think the performance in January and February is a testimony to the commercial initiatives bearing fruit. The underlying brand momentum is solid as reflected in the brand metrics. We see improved traffic and online channel to really be on fire. We're financially resilient, and the strength of our balance sheet is key. And finally and very importantly, we've been preparing for a strong commercial comeback. We've already established a financial muscle and the flexibility to focus on life after C-19.

So with those remarks, we'll now open for the Q&A session. Operator, please.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Magnus Jensen from SEB.

--------------------------------------------------------------------------------

Magnus Thorstholm Jensen, SEB, Research Division - Senior Equities Analyst [2]

--------------------------------------------------------------------------------

It's Magnus from SEB. First of all, on the COVID-19 and the impact on your business, it's clearly pretty big. But how much is it a setback in terms of what you've already done? I mean, how much are you set back in terms of your -- of the marketing efforts you've been doing and the nice numbers you've been getting in terms of awareness and the likes, how large is the setback? And do you need to start all over on the other side?

The second question goes to your store network. Independent jewelers are clearly under pressure due to COVID-19. Is there a risk that when the market starts to open up that you lose a significant numbers of multibranded retailers? And the same for concept store franchises, do you have a sense of how well they're getting through this crisis? That was my 2 questions for now.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So on your first question on how large the setback is. If we take Europe, we've been in this for 6 weeks. We normally get monthly trackers. So we have one dipstick in March, and that's actually before COVID happened. So from that metric, we won't see anything. I've seen some data from consumer sentiment in China, which actually wasn't too bad. Of course, it came down a little bit in the midst of February, but then it seemed to have bumped back.

I think the answer to the question is going to be dependent on how long the societies are in a lockdown mode because the longer we are locked down, of course, the less we invest in the communication and the less people walk by our stores. So then you would get some kind of impact. But so far, I would say it's way too early to make any strong statements.

I think what's encouraging is if we look at Germany, which reopened just 8 days ago, traffic there rebounded at a much faster clip than what we saw in China, for instance. So I think it's very difficult right now to say that we've seen any material impact. If markets reopen now during the month of May, which is kind of what we are expecting, then we'll come very strong out of the gates in order to capitalize on the momentum we built towards the last couple of months before COVID hit us.

And maybe on the independent retailers, I think it's fair to assume that many retailers with low margins are going to suffer a lot through this. The situation is going to vary country by country, depending also on what the local governments are doing to support them. We've had, I would say, in particular, if I then turn to the latter part of your question, on the franchisees where U.K. is big in our portfolio as well as U.S., I think the governments there have provided quite strong support packages. And then we don't expect that the franchise partners have big overhead costs like we do. So frankly speaking, if this crisis blows over -- at least this first wave blows over reasonably soon then, we have not yet seen any massive issues come our way. But of course, the longer this thing carries on, the more we are all exposed, I think, is the long and short of that answer. But nothing that we've experienced so far.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

And our next question is from Lars Topholm from Carnegie.

--------------------------------------------------------------------------------

Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [5]

--------------------------------------------------------------------------------

Congrats with a good and encouraging look in Q1. I have just 2 questions also. So clearly, numbers are going to be blurred because of coronavirus. Maybe a tricky question to answer, but how should we judge your Q2? Clearly, top line is going to be down, earnings are probably going to be negative, but how should we judge your relative success in that scenario? And what I am, of course, referring to is that in Q2 '19, there were some early positive signs in U.K. and Italy. And then Q3, those signs look reversed. So I'm just wondering, maybe from an internal perspective, how you would judge your own success?

Question #2. So your sort of constant product renewal might become somewhat challenged since many stores are closed. For example, I would assume some stores are going to lease out on Mother's Day. How do you manage innovation from that perspective? Are you going to hold back on certain product launches? Does that mean we will have a big splash of new products at the end of COVID-19? If stores subscribe to purchasing Mother's Day and have to stay closed, will you take it back? Or how do you manage that whole product situation?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [6]

--------------------------------------------------------------------------------

So on your first, maybe we will split this one between Anders and myself. In reality, the going-in scenario we had assumed was all physical stores closed throughout all of Q2 and essentially, only trading on e-commerce and trading in China. Now, of course, we learned a few weeks back that the Continental Europe, in particular, the governments want to start reopening the economies and therefore, those numbers are going to be a little bit better. I think Q2 is just one we want to put behind us, to be honest. I'm not sure performance metrics. There is -- making sure we don't bleed cash and holding on to kind of the wallet, in a sense, I think, is the success. The question is more how quickly we can get the markets to come back. And then I'm probably looking more into Q3, to be perfectly honest with you.

And I'll let Anders answer this. And then maybe I can take the innovation one, as well, while I'm at it.

So when this situation hit, we immediately cut back on the innovation pipe, not in terms of volume on the big bets, those we've kept intact. What we've done is we've cleaned up because, as always, you have some small stuff hanging around in your pipeline. So we just stopped those. So we'll probably have fewer, bigger and hopefully better. So that was one aspect. The other one was we essentially pivoted to a view that most of this volume is going to be online. So we haven't flooded the stores with too much inventory of the new. You remember, also, last year, we did a cleanup of the assortment. We went from 1,800 to 1,200 DVs, that's kind of coming through. And we have also rebalanced the focus between what we label as the core assortment versus the new. So now we have a better balance. Because if I am over inventory or overstocked on the core, it doesn't really matter too much because I will sell this at one point. If I have highly, highly seasonal type of assortment, yes, then that's more a challenge. So if I'm in the apparel industry and have summer T-shirt, then I'm going to probably needed to sell it in the summer because in the winter, nobody is going to be asking for it. We don't have that issue to a large extent, in our portfolio. So that's something which I think we have been managing quite well. But of course, it's a bit of a guesswork because you never know when the stores are going to reopen.

And from an inventory coverage standpoint, I think we have roughly 25, 26 weeks of coverage based on normal demand sitting out in the supply chain, which also takes care of one of the questions, which I'm sure is going to come later around what happens if if we have problems with production facilities in Thailand. So we can sustain sales for quite some time before we run out of inventory.

But maybe Anders has some views on Q2 success criteria.

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [7]

--------------------------------------------------------------------------------

Yes. Lars, it's Anders. It's a good question because, yes, there's no concept of business-as-usual in a situation like this. So as we speak, one of the things that we follow very closely is, and with even more interest than normal, is announcements coming out from other global brands, global retail companies. And see where -- how they are performing, what they are saying. And in fact, also what they're doing on cost, cash and other types of actions, we are following that very closely. That's kind of a step 1. So when a market opens up, how are other company -- other branded companies performing. Obviously, that's a piecemeal type of data. But I think that is one way to look at whether we are performing okay or not. Then hopefully, a step 2 would be that once markets have been open for a while, then you get back to something that's a little bit more normal, and you can hopefully compare to how we were trading before the virus broke out. Hopefully, we'll get to that point at a later time during the year, but we're definitely not there yet. For now, I think they are looking at other -- what other companies are announcing is a good starting point. And obviously, in a situation like this, you also would like to do some internal benchmarking when -- and see -- when we saw Germany opening up, I think, a couple of weeks ago and then when next market opens up, that kind of becomes a benchmark. But obviously, countries have been very differently hit, but still that can also provide a benchmark on, at least within the company, how we are individual markets are performing.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next question is from Silky Agarwal from Citi.

--------------------------------------------------------------------------------

Silky Agarwal, Citigroup Inc, Research Division - Assistant VP & Senior Associate [9]

--------------------------------------------------------------------------------

Silky Agarwal from Citi. I have 2 questions, please. The first one is on the marketing investments. How do you see marketing investment evolve in the next few quarters? How much are you allocating to digital versus traditional media, especially in the fourth quarter, what are your plans on marketing there?

And two, on gross margin evolution, you had a very strong increase in first quarter, and it seems that you are gaining manufacturing efficiencies as you had in last year. What are you doing in terms to sustain your gross margins? Do you think gross margin could take a temporary hit in the second half, as you probably might have to increase promotions to drive sales or maybe clear some of the excess inventories that Anders just mentioned?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [10]

--------------------------------------------------------------------------------

Silky, so on your first question, I mean, when the COVID started, we essentially removed most of our, what we would label as, traditional above-the-line media, our TV, print, out-of-home, et cetera, and we kept the portion that we somehow can attribute to the e-commerce sales. And that's -- for as long as we don't have a sufficient amount of stores reopened, I'm not going to be burning cash to close stores. So we will keep pushing the digital spend and social spend because we still want to remain top of mind in consumers. So we don't believe in a scenario where you go completely black. But we would not provide you specific splits because, in fact, they keep changing all the time. This is quite a kind of a flexible environment.

What we're considering as well, if and when we have a sufficient amount of stores reopened, buying media, TV media and those traditional medias. This is quite a lucrative opportunity to go and/or negotiate quite interesting media rates. So that's going to be part of our game plan because, again, as I said, we want to come strong out of the gates. And strong out of the gates means to be sharp at the point of sales, but also to invest in the brand equity messaging. So we're not just going to be reliant on promotions like I've seen a few other players doing, in particular, in China. That's not the game we're going to play.

--------------------------------------------------------------------------------

Silky Agarwal, Citigroup Inc, Research Division - Assistant VP & Senior Associate [11]

--------------------------------------------------------------------------------

So is there a level of promotion going on?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [12]

--------------------------------------------------------------------------------

And then -- no, you know that last year, we went through this big promo detox. I'm not going to throw that out the window. We might be sharp tactically here and there but fundamentally, we will stick to our guns and keep to our -- the base plan in terms of promotions that we had in store. That's, give or take, on what we're going to do.

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [13]

--------------------------------------------------------------------------------

And if I should give a quick comment on the gross margin. When you look at the scenarios a, b, c, that we outlined on Slide 8, I think, it was, the way to think about it, high, high level is flattish gross margins with most of our -- by far, the most of our COGS is variable. So there's not that much leverage -- deleverage affect us a little bit, but it's not material from that perspective. So when we look ahead, then we're thinking sort of flattish gross margins for the year. Of course, we continue seeing more and more cost reductions coming in on the initiatives that we're doing as part of the Cost Reset program, that helps a bit. Currently, you can also argue that there's a bit of tailwind from channel mix, given that most of the -- or all of the revenue that's coming in as we speak is from our own channels, has a little bit of support from that.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And our next question is from Chiara Battistini from Jpmorgan.

--------------------------------------------------------------------------------

Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [15]

--------------------------------------------------------------------------------

The first one would be on how to think about the sell-in versus the sell-out. And is it fair to assume that in Q2, as long as the stores are closed, then the sell-in will be effectively 0 and, therefore, we should not look at the sell-out progression as a leading indicator also in Q2 for the sell-in also? And the second question is on your cash and the excess liquidity. Would you consider redistribute the excess liquidity from the ABB, if the worst-case was not materialized and therefore, from here, we would just see a sequential openings of the stores and things progressing -- progressively returning to normal?

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [16]

--------------------------------------------------------------------------------

Chiara, it's Anders here. With the first question, sell-in, sell-out. Yes. I think the important starting point is that inventories with -- across partners were getting into 2020 and Q1 is quite healthy. So from that starting point, there's, of course, there are some inventories among the partners they can eat off during the second quarter, but there's a limit to it. But I think to your point, I think it's safe to assume that in an environment like this, you are extra careful on cash and thereby, our sell-in could be lower than sell-out during the second quarter. I think that that's a reasonable assumption and also what we have seen during the month of April.

Then, on the proceeds from the ABB. Yes, I hope both for the world and society from a bigger perspective and for Pandora's sake, that we're not getting into scenario c, meaning a scenario where there'll be second and third maybe lockdowns of major markets and a major additional virus outbreaks. And if that does not happen, then step #1 is that we wouldn't need the proceeds from the ABB. And secondly, what we would then do, we'll sit down and look at our capital structure policy, where are we within that. And if we are within the range of 0.5 to 1.5x leverage, then we would distribute whatever is excess of that. And obviously, it would mean, as a starting point, that we'll be, give and take, DKK 1.5 billion, DKK 1.6-something billion more to distribute from than there would not have been. But let's cross that road -- cross that bridge once we get there. And if it ended up that we didn't need that additional funding.

--------------------------------------------------------------------------------

Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [17]

--------------------------------------------------------------------------------

Great. And just if I can follow-up on the sell-in question. Is it fair to assume right now that the sell-in to the stores that are closed is actually 0 right now?

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [18]

--------------------------------------------------------------------------------

Yes. That's the case, yes.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And our next question is from Elena Mariani from Morgan Stanley.

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [20]

--------------------------------------------------------------------------------

Alexander and Anders, a couple of questions from me as well. The first one, I just wanted to go back to your trends in January. You've experienced positive like-for-like across the several countries, excluding China, probably. What do you think was the key driver there? And how was traffic versus conversion tracking versus last year? Was there any specific promotions? So any additional details you could provide? I know you've disclosed already quite a lot about it, but if you could help us understand whether that start of the year, perhaps, would have been sustainable excluding COVID-19, question number one.

And question number two, it's more like a general question on your view on the shape of recovery given that you've run several scenarios. I mean, I'm not asking about guidance, but perhaps your view, in general, about how quickly things could recover, assuming that your base case scenario plays out. So in your view, do you think that it would be feasible in 2021 to go back to the same sales and margins of 2019? Or do you feel, as a management team, that given the global situation and a potential global recession, it might take a little bit longer for consumers to regain sentiment? I know it's difficult to answer, but based on your base case scenario, do you think this would be feasible?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [21]

--------------------------------------------------------------------------------

Okay. Let's take the first one. So the key drivers in Jan, Feb, I think you can summarize in a simple sentence is that, that's the core of Programme NOW at work. So it's not just one isolated aspect. I think it's -- the whole program is starting to work. And the reason I can say that is because we get those good results across the board. So it's not just one country. And of course, the brand has different maturity and different starting points in various places around the globe. And that's actually the comforting thing about it.

From a promotional standpoint, we had a similar promo schedule as prior year. So there was no more than last year. So we didn't buy volume in Jan, Feb to promote this. There was a tad more media investments. I think over Jan and Feb, we spent DKK 100 million more than we did in the same period last year. But that was kind of to carry the momentum from Q4 that is kind of starting to build. You don't turn a brand that's kind of been out of fashion, let's say, for a while on a dime. This is something that you need to consistently communicate and consistently be top of mind of people and at one point the penny drops. And I think that's kind of what we saw happening, to a large degree, in Jan, Feb. And so in essence, it's the componentry inside Programme NOW that's working hard. And that's -- the good thing about that is we know what those things are, and we can repeat it. Of course, it's up to us to prove that we can repeat it and unfortunately, COVID came a little bit in the middle. But we're very confident that we know what the right levers are.

Then, on your second question, I just wish I had a strong insight on that because I wouldn't be doing this job, then I would be trading in the stock market and probably make a fortune, but I'm not. I don't know. This is an impossible question to ask. What we can talk about is what we've seen in China, and what we can talk about is what we've seen in Germany because those are the 2 only yardsticks, which somehow could give us a sense of direction. China has been quite slow to recover, in particular, when we talk about the physical traffic. Online has recovered quicker. So if you look at Tmall, total Tmall traffic, I think, was already at par with last year, a month ago. For us, it took a little bit longer, and our business in March was down 30-odd percent on Tmall, and now we're back to flat, whereas in the stores, this is still slow going. So I think we're still down 30% or thereabouts in terms of traffic versus prior year. And that's now, what, 8, 9 weeks post, let's say, the reopening of the economy. Germany has been opened for 8 days, and traffic has already rebounded. We're down, what, 60%, 40% on average. So we're throwing numbers around here. But what's happened in Germany is that they are rebounding much, much quicker than China. So now pick your swim lane. And I don't think any of those necessarily is going to be true for when U.S. reopens or when Italy and Spain and France, for that matter, or even U.K. I think each country will have a different trajectory on how fast it comes back. But I think those 2 might be, I stress, the outliers. So really fast recovery and a really slow recovery and then, probably, we'll have a couple of countries in the middle.

So in our A scenario, which we Anders spoke to, the view was sequential recovery over the months to come and Q4 kind of being similar to last year. That's in our kind of base scenario. Now you could also have an argument that, well, that's nice and up until Q3, and then we get a rebound of COVID, which is not unusual in these type of pandemics, if we go back into the history books. And therefore, we could argue that Q4 is actually going to be similar to the previous quarters. And that's our B scenario, if you may. And then the C scenario is that this thing continues into '21. So on the basis of those, that's kind of how we built our financial plan, but also our commercial plan. So I know it's not answering your question, but unfortunately, I don't have any better answer than that. I mean the question speaks...

--------------------------------------------------------------------------------

Elena Mariani, Morgan Stanley, Research Division - Executive Director of Luxury Goods and Brands [22]

--------------------------------------------------------------------------------

No, this is great. Thank you. It's one of the bests I've had so far.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

And our next question is from Fredrik Ivarsson from ABG.

--------------------------------------------------------------------------------

Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Most of my questions already been asked. But one on China, the turnaround there. You mentioned a few low-hanging fruits when it comes to the improving concept store performance, I guess. Just wondering if you can elaborate a little bit on that, what are those low-hanging fruits?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [25]

--------------------------------------------------------------------------------

Think of it like this, the Chinese business has actually not been well performing, if you look at it from a like-for-like standpoint for quite a long period of time, in fact. It's been kind of on a declining trend. And then last year, I believe it was in August when the Chinese Valentine's day happened, and the team had forecasted a very different outcome, in general, which they didn't deliver. I think what happened then is there was a fair few people in that organization that lost a little bit of faith in -- that we can actually turn this ship around. Now we put new management in there and of course, somebody comes in with a fresh view, the couple of other key people that have just entered the business, and of course, they will see some -- we refer to them as low-hanging fruit, but they're more operational in nature. So if you, kind of, look at the look at the China case, and you say I have 30% of my opportunities, operational issues and 70% is kind of these structural issues that we've been speaking about for a while. So I think his initial view was, well, on the operational side, there's plenty of things which we can do to -- things like incentive programs, things like what we sell, how we sell, the merchandising, similar to what we've done in the rest of the world where we've rebalanced the focus from just focusing on new items to core items, that rebalance has not yet taken place in China. So that's what we're fixing there. That's yielded very strong results outside of China, the refocus on making sure that the opening price points are clear so that we really drive home the idea of this being affordable and desirable jewelry to sell. And that's kind of one tangible, which we've learned elsewhere that it works. And I can go on for a while. So there's lots of operational mechanics that are found specifically in China, but also what we found and learned outside of China. And it's quite normal when a new leader comes in that they view the world slightly differently in, particularly, the business that's been in troubled water. They will put their mark on it from day 1, which is what Jacques is doing.

--------------------------------------------------------------------------------

Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

And then a short follow-up on Germany because I didn't really catch what you said there. Can you just repeat what have you seen in terms of improved store traffic since you opened up in Germany? And also, if you can confirm that 100% of your stores in that country is currently open?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [27]

--------------------------------------------------------------------------------

Not 100%. I think there's still a few, but I think 80% or 90% of them are -- I'm just trying to look at the most recent...

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [28]

--------------------------------------------------------------------------------

25 out of a 140.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

25 out of the 140, yes. So most stores are reopened. So what you see is -- and there's a bit of context, which one needs to bear in mind, is there are specific regulations in various countries on the social distancing. So you can only have a certain amount of customers per square meter, or there needs to be a particular distance between the people in a store. So what you see is that the people that are then -- because it ends up with having quite a few customers inside the stores and people waiting outside, which means that what we see is whilst the traffic is, let's say, 50%, we see that conversion rate is much, much higher because the people that are, in fact, queuing up to come in are very committed to do a purchase act. So we see that our conversion rates are skyrocketing, and then all the other metrics are actually in a very good place in terms of average order size, basket size, units per transactions, et cetera.

So traffic from memory -- and it any changes by the day. But essentially, traffic was, in the first week, was down something like 50%, from memory. It depends a little bit on first few days, there was a delta between rural or, let's say, city stores and mall stores, but that's now converged in the last 2 or 3 days. So that seems to kind of be more or less the same.

--------------------------------------------------------------------------------

Fredrik Ivarsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [30]

--------------------------------------------------------------------------------

But it's price higher quality traffic so the economy is...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, absolutely. Yes. So -- and then we've seen that. So -- and we see the online as well. In fact, our volume of traffic is going up, but we see less browsers and more committed users. So, in fact, on online, I have had weeks when my conversion rate in -- I think it was in U.K., was almost double digit, 8%, 9% conversion rate. And in the past was 2 to 3 percentage points in U.K. So conversion rate has definitely moved up, and we see this across the globe. So there's more committed buyers coming to Pandora, which I would attribute to all the efforts we have done behind Programme NOW. We're getting a more committed shoppers to come our way.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

And our next question is from Klaus Kehl from Nykredit.

--------------------------------------------------------------------------------

Klaus Kehl, Nykredit Realkredit A/S, Research Division - Chief Analyst [33]

--------------------------------------------------------------------------------

Yes. 2 questions from my side as well. Maybe I missed some of it because I was in another conference call, so sorry about that. But you've had an organic growth of 1% in January and February. And just to be clear, is that including China? And also could you translate that into a like-for-like in January and February?

And secondly, you haven't really talked about the short-term cost initiatives. So could you try to talk a little bit about what you're doing in order to keep your costs down on, yes, at least, for the coming quarters? That will be my 2 questions.

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [34]

--------------------------------------------------------------------------------

Yes. Thank you, Klaus. It's Anders here. On the organic growth of plus 1%, yes, that's the full group's, of the total reported revenue as it would be sitting sitting in the books. And for the first 2 months of the year, like-for-like was also positive, when you take out China. China was down 60%, something like that, like-for-like for the first 2 months with -- and some 80% down in the month of February, specifically. But excluding China, like-for-like was also positive for Jan and Feb with all the markets that we are reporting on externally being in positive, except for China and also Australia just being below 0, but the other markets actually being in plus. So it was a quite uniform and broad-based, good start of the year that made us smile a bit until the virus hit Europe and then Americas.

And on the other piece, on the cost side. When the virus actually already -- before it came to Europe, while it was only in Asia, we immediately decided to set down a crisis committee meeting every morning and organized ourselves around the number of work streams, where one of them was cost and cash, obviously. And on the cost side, we have been taking a broad-based view across all cost categories to see how much we could take without jeopardizing our ability to participate in a -- when demand returns. So as you will see, we have -- when we get and report on the second quarter numbers, that will be visible that we're taking quite tough stand on the cost side.

If you look at the rule of thumb that we have previously talked about and when business is more normal, business as usual, we have normally said, well, think about the Pandora business in a way that when revenue drops by 1 percentage point, then it hits the EBIT margin by 40 basis points. And indirectly, when we say that, then it means that there will be -- if revenue goes down by $100 or a NOK 100, then there's an OpEx reduction of 10. So 10% of the revenue change. Obviously, when you have a hit, like what we see right now, you can do more than that and you more think about the level of cost that we can take out is around let's say, 20-ish percent of the revenue change. So if revenue was down by DKK 1 billion compared to last year, we will be able to take out costs with short-term measures of around DKK 200 million. That's very broad terms -- OpEx costs by around DKK 200 million. That's very roughly how to think about it.

And the bigger buckets in that OpEx reductions are rental relieves. Temporary rental relieves is one big bucket. And a second big bucket is media spending where we -- when market got into a lockdown, we just suspended all media spending, at least, media spending driving traffic to off-line stores. And fortunately, we can do that with actually quite very short notice. Traveling, needless to say, is very, very close to 0, as we speak. So that's also helped. And then I think a fourth bucket worth to mention is government support programs around the world. There are also very, very different programs being in place in different markets. But obviously also something that supports our ability to reduce costs during a difficult time like this.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Okay. But just to clarify, does that mean that you will have a drop-through margin of 30% now, meaning that if your revenue go down by DKK 100, then your EBIT will only go down by DKK 30?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So in the old -- sorry, the rule of thumb that we have normally given where we say 1% change on the top line hits the EBIT margin by 40 basis points. There, the fall-through EBIT margin is implicitly 65, 70, something like that. When we are saying that now we can -- if revenue is down by 1 percentage point, we can take out OpEx by 20% of the absolute change in revenue, then the fall-through to the bottom line is more like 50, 55.

But we can go through the numbers, Michael or myself, and just show how it fits together.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

And our next question is from Piral Dadhania from RBC.

--------------------------------------------------------------------------------

Piral Dadhania, RBC Capital Markets, Research Division - Director of Premium Brands [38]

--------------------------------------------------------------------------------

If I can maybe just ask a question on the e-commerce growth rate that you're enjoying in April. Could you perhaps just help us to explain if there's any specific factors driving that triple-digit growth? How much of that do you believe will be sustainable versus temporary? Within that, is there any anything you'd want to call out with respect to the potential demographic mix in terms of new versus existing customers? Are you recruiting new customers during this period of lockdown, which would be very encouraging?

And then just maybe following on from that. I think you mentioned that the concept store count is expected to decrease this year for the first time in Pandora's history. Given the lockdown and the strength in e-commerce, is there a case to be made that you may evaluate the overall store network on a more sort of longer-term structural basis, if you're able to capture incremental demand online and serve of your customers from that channel, which I imagine is margin accretive, were you thinking about the longer time store network strategy as well?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [39]

--------------------------------------------------------------------------------

So on e-com. So I think the first thing to say is that post the brand relaunch, we have seen increasing growth rate on the e-commerce business. So I think we're doing a lot of things right on the back end of this from a tech stack standpoint, as well as the consumer-facing touch points. So we know, because we track this, that consumers are much more satisfied with the experience that we are providing. Page loads are much quicker, which we know drive conversion, but also the kind of narrative and the type of products that we sell there. So all of that would go into the first bucket, which was the 30% growth rate which we were enjoying in the first 3 months. Then, as shops closed, that 30% became 300%. And I think that's purely a shift of people that would normally go into shop. Shop is closed. Can I find it somewhere else? Yes, I go online. How much of that is going to remain once stores reopen, we can only guess. I have no idea, to be honest with you.

The interesting factoid, but it's like based on 7 days of trading, is that in Germany, the growth rate on e-com didn't slow down when the stores reopened, but I'm not sure that that's going to sustain itself. It's probably fair to say that a portion of those consumers will find that it was a quite decent experience, and they'll stay online. So we're ready to take them wherever they want to shop, that being an omni retail channel -- omni-channel retailer, that's kind of the nature of the game.

From an accretion standpoint, whether they buy online or buy in our stores, there is no difference. If you would do a vertical P&L and look at the very bottom line when you kind of allocated costs out. So that actually doesn't matter. Of course, there is some margin accretion in our end when people would not buy through a third-party and buy through our own channel, that goes without saying. So there were no funnies. There were no funny activities to drive those type of growth rates. This is good business. We see this from the engagement rate. We see that this is propelled both by traffic and conversion rate. I think we are getting an equal split of new versus existing. So that doesn't really -- the only data point I had was from Jan, Feb where we saw quite a lot of influx of new -- overall to Pandora, but that was kind of split more or less even between on and off-line. So no major shift there yet.

Then, on your question on concept stores. So first of all, the reason we are now guiding for a decline is you need to decompose that. So on one hand, we already had in our base plan that we would shut a few stores. But on top of that, to balance out to a flat, which I think we were guiding towards, more or less, a flat store fleet or space this year, was because we anticipated actually building more stores in Lat Am and in China. Those 2, we have postponed, which is probably not going to happen in this year, given the kind of uncertainties around COVID. So that's why you get that net negative on the square meters, let's say. So it's not that we have decided to close more stores because of COVID. We haven't gotten to that place yet.

And then the speculation of, will we be shutting stores because we have moved that traffic to e-com, is way too early to say. We can make some models, but frankly speaking, if thing -- it's kind of -- if things go back to normal as it were in the next month or 2, then I don't anticipate any change of the structure. If this lockdown continues for another couple of months and even in our worst-case comes back in Q4, yes, of course, we'll have to look at it. But then we know more. Let's not forget that we're, what, 6 weeks into the European and U.S. lockdown as it were, whereas in China, we're a little bit past that point. So I'm sure we'll come back on this point when we have a better view. That would be my thinking today.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

And our next question is from Magnus Jensen from SEB.

--------------------------------------------------------------------------------

Magnus Thorstholm Jensen, SEB, Research Division - Senior Equities Analyst [41]

--------------------------------------------------------------------------------

This is Magnus, again. Just 2 very quick questions from my side. You reduced restructuring costs around DKK 300 million. Are they postponed to next year then? Or are they just not going to happen?

And the second one is, could you tell what the like-for-like on Charms was in January and February?

That's my question.

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [42]

--------------------------------------------------------------------------------

Magnus, it's Anders here. On the first question on the restructuring costs. I think you should see that change as a permanent change. So we don't see for any sort of big practical purposes Programme NOW extending into next year. So it's a real reduction.

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [43]

--------------------------------------------------------------------------------

Yes, Magnus. And on your second question, for Jan Feb, we were slightly positive on Charms and Bracelets. So I'll leave it at that.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

And our next question is from Antoine Belge from HSBC.

--------------------------------------------------------------------------------

Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [45]

--------------------------------------------------------------------------------

It's Antoine Belge, HSBC. 2 questions. Actually, one is the follow-up on the previous one. So on the DKK 1 billion restructuring now, what's the split between gross margin and OpEx?

And second question relates to the improvement that you saw in the first 2 months of the year. Can you name maybe a few brand attributes that, in your view, improved? And those improvements, which ones do you think are we going to stick when store do reopen?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

On the -- Antoine, it's Anders. On the first question, the -- for the quarter, DKK 86 million of the DKK 435 million restructuring costs were sitting in gross profit and the remaining in OpEx. So DKK 86 million of DKK 435 million was COGS.

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [47]

--------------------------------------------------------------------------------

Yes. On your second question, I mean, as I mentioned in the presentation, the things we keep a close eye on is traffic, conversion rate, which are kind of outcome measures. But then, we also look at kind of the unaided brand and ad recall and also then Google Search. So those are the kind of, let's say, 5 metrics that we keep a close eye on, and that's also the type of stuff that we share with you in those calls because -- since the brand relaunch, these metrics have all been moving in the right direction. So it seems like what we are showing to consumers stick, and we are able to repeat that over time since September of last year. So that would be how I would view that question.

--------------------------------------------------------------------------------

Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [48]

--------------------------------------------------------------------------------

Yes. Maybe just on this. In terms of the price positioning of the brand and also the ability of the brand to sell new products beyond Charms, I mean, are you noticing anything interesting there?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [49]

--------------------------------------------------------------------------------

What I've said is in order to stabilize Pandora, we needed to get the focus squarely back on Charms and Bracelets because that is 70% of our model. If I don't have this under wraps, then frankly, it doesn't matter if I sell a couple of rings left, right and canter. So the focus has been very, very pointed on Charms and Bracelets, so far. And that seems to be yielding. So when we have put a couple of more quarters under the belt, we ensure that this is a sustainable track, then we are looking into -- of course, we're already looking into the other ones, but I'm not allowing them on the table yet because that will just distract us. So I need to have the coal firing very hard before we enter into other adventures.

--------------------------------------------------------------------------------

Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [50]

--------------------------------------------------------------------------------

I'm sorry to come back on the split between COGS and OpEx. I mean, that was actually for the DKK 1 billion for the year rather than for the first quarter?

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [51]

--------------------------------------------------------------------------------

For the full year, the split will still be that, OpEx is by far the majority of the DKK 1 billion and probably even more skewed towards OpEx for the remaining part of the year, even smaller COGS part for the second, third and fourth quarter.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Our next question is from Louise Singlehurst from Goldman Sachs.

--------------------------------------------------------------------------------

Louise Susan Singlehurst, Goldman Sachs Group Inc., Research Division - MD [53]

--------------------------------------------------------------------------------

Just a quick one from me in terms of going back again, about the inventory and how the dialogue between, obviously, your teams and the third party retailers, how that's changing in the current circumstances. And just in terms of additional help that you'll need to provide to the retailers about new payables, any slow-moving stock to take back. I know you've done a lot of work over the past kind of 12, 18 months to remove some of the slow-moving stock out of the channel. So that should be a lot cleaner. But just tell us a little bit more flavor about the current environment and those dialogues that you're having with the third parties to reduce the risk of further discounting?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [54]

--------------------------------------------------------------------------------

Well, I mean I think we did clean up a lot of inventory last year, to say, the least, and we spent, what, DKK 600 million, DKK 700 million on that. So not just the quantity but also the quality of their inventory. As I mentioned earlier on the call, we try to rebalance not only focusing on new, but actually trying to drive our top sellers harder, which means that you get an inventory which is fresher and can sustain itself a little bit longer. And that is very important as you go into this. Of course, they're not placing any orders as we speak. So we don't think that neither our own stores or our franchise partners at a global view are overstocked at this point in time.

I think where the question mark will come up is as we kind of eventually get out of this crisis, there's no doubt that a lot of people out there are going to be a little bit cash strapped. That's the expectation we have. And of course, then that's going to manifest itself into conversations around them being able to buy the new innovation or new products that we're going to bring on the market. Before we open up our wallet, we're going to ensure that they exhaust all the funding facilities that they have available to themselves because, of course, we are not a banking facility, as you very well know. We are interested in protecting the joint business that we have with them. But we will have to make sure that they have exhausted all opportunities before we entertain a conversation on the terms or things like that. They are a freestanding business. That's the whole idea of having a franchise partnership. But that's probably where we get to that.

Those conversations aren't very sharp at this point in time because we're all kind of still in a lockdown mode. So I'm sure that over the next quarter, as things start to reopen, that we will engage in those conversations.

Now we've been having some dialogue with a few of our partners in terms of how we prepare ourselves for the comeback and ideas on how we can kind of drive this engine commercially, so those are kind of more, let's call it, leaning in type of conversations versus just having the financial conversation. But that one will come. There's no doubt in my mind.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

And our next question is from Chiara Battistini from JPMorgan.

--------------------------------------------------------------------------------

Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [56]

--------------------------------------------------------------------------------

Sorry, a very quick one, follow-up. I saw you noted in the press release that you have not applied for government subsidies that will lead to any restriction on the cash returns. But on the presentation, you actually mentioned that you applied for support on your government stimulus strategy. So I was just wondering if you could clarify the difference between the 2 statements, please.

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [57]

--------------------------------------------------------------------------------

We have definitely applied for government subsidies around the world. But the comment was about that where the restriction comes up would be if we apply on -- for the government support programs in Denmark being a company based in Denmark or listed in Denmark and there, we have not yet applied for government support. And there was a dividend restrictions on the Danish government support schemes, only applies if you are getting support above a certain level of your cost.

--------------------------------------------------------------------------------

Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [58]

--------------------------------------------------------------------------------

So that's basically a regional difference. So the only country where you haven't applied is Denmark. So you've applied, for example, in France and Germany?

--------------------------------------------------------------------------------

Anders Boyer-Søgaard, Pandora A/S - Executive VP & CFO [59]

--------------------------------------------------------------------------------

Yes, I think France and Germany, I know. And I think we have applied in most countries around the world. I know of quite many of them. But obviously, at least from a retail perspective, our activity in Denmark is very, very minimal.

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [60]

--------------------------------------------------------------------------------

Just recall that we have 8 shops or stores in Denmark. So the government support that we can apply for is still relevant.

--------------------------------------------------------------------------------

Operator [61]

--------------------------------------------------------------------------------

And our next question is from Poul Jessen from Danske Bank.

--------------------------------------------------------------------------------

Poul Ernst Jessen, Danske Bank A/S, Research Division - Senior Analyst [62]

--------------------------------------------------------------------------------

Just a follow-up on the social distancing. If we look into the fourth quarter, where a large part of revenue is coming from December, and then you have rather small shops, do you believe that there will be some kind of a capacity limitation on your Christmas sales, if we assume that we will continue to have about 1 or 2 meters between each other in stock -- or in the store?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [63]

--------------------------------------------------------------------------------

This is a brilliant question because you do the math. Average store size, put some furniture in there, and you fill up these stores very quickly and would kind of be in breach of either social distancing rules. So we actually have a task force that's already working on finding solutions, which could be technology-based, which could be retail-based, and a mixture of the 2. And hopefully, we have what we call an MVP, to use agile language, minimal viable product, in the next 30 days that we can actually test. So that's one aspect. The other one is to try to think through the trading lineup and see if one can kind of sequence things differently from when this was not a restriction. So yes, this is a topic that is occupying our minds a lot.

We already see a capacity conversation happening on e-commerce because right now, we went into the year saying, we were internally arguing with ourselves and the countries on, should it be 10% growth in the budget or 30% growth, which David, our global leader in e-commerce was kind of touting. And the country was saying, no impossible. So then we kind of settled for somewhere in the middle. But now we're talking something that's 10x that. So you can imagine what that means for the supply chain and for the people at the packing lines, et cetera, et cetera. So that's part of the scenario planning for, not only for Mother's Day, where we have a temporary solving place, but importantly also for Q4. Because already, last year, we saw big spikes on putting pressure on the supply chain from Black Friday and onwards. So definitely, this is where retail is going to be challenged. And this is not just for Pandora. I think it's true for for many people.

In U.S., we are playing with things like you have this click and collect facility. But actually there, we've gone one step further and you do curbside delivery. So you place your order and you turn up with your car and somebody delivers it to you in the car. So we are playing with lots and lots of interesting things in this space.

--------------------------------------------------------------------------------

Poul Ernst Jessen, Danske Bank A/S, Research Division - Senior Analyst [64]

--------------------------------------------------------------------------------

But do you believe that if you get a normal quarter, and that means not a second wave -- phase in infections, that a normal quarter would be lower than last year because you don't have the capacity in store?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [65]

--------------------------------------------------------------------------------

I can't answer the question, now. But I need to see what type of solutions we can bring. If I don't have any -- if I don't change any of my behavior from last year, yes, there will be an impact. But I'm obviously not taking that as a solution. So that's why we're working through this.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

And our next question is from Omar Saad from Evercore ISI.

--------------------------------------------------------------------------------

Omar Regis Saad, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Softlines, Luxury & Department Stores Team [67]

--------------------------------------------------------------------------------

I have 3 questions. First one, do you have any insight you can share in terms of the store opening cadence? We know China and Germany is open, but any thoughts in terms of the rest of Europe, North America. Do you expect the rest of the -- your stores and partner stores generally to mostly be opened by the end of the second quarter? That's my first question.

Second question, obviously, inventory remains very clean. I'm curious how you're managing your factories and your production, how you're managing those fixed costs with volumes down?

And then the last question, any specific comments around some of your new product lines, Pandora Me and I know Harry Potter was big, Pandora, Oh, Valentine's Day. Any kind of comments pre-COVID comments on those trends?

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [68]

--------------------------------------------------------------------------------

So on the store cadence, we followed a very simple rule from the beginning of this crisis, and that is that we follow the guidance from the local authorities. We don't jump the gun because that somehow would suggest that we know more than the authorities do, and we clearly don't. I mean, we sell jewelry. That's what we're good at. So I mean you can read the news to figure out how retail, in general, is viewed by the governments. I'd say Continental Europe, what we know so far is that we should expect that this is going to be a staggered opening approach throughout, I think, May and June. U.S., depends on which tweet I read from Mr. Trump, I don't know what to believe. So I would say that -- and they seem to be entering this situation a little bit later than Continental Europe. If, again, we're to believe what's been reported. So I would say that U.S. probably is one step behind. U.K., we just heard this morning that they are looking to start to reopen the market. That was a surprise to me. I thought they would have been waiting a little bit longer because they will also late out of the gates in terms of this.

So if I had to make a broad statement, I'd say Q2, you'd see a staggered reopening. And as we get into Q3, probably most of retail should be opened. But ask me in a week's time, I might have had a different opinion because authorities have changed their minds. So that was your first question.

In terms of managing inventory in the factory, so when the crisis hit, I mean, our main concern was what if Thailand shuts because all of our production comes out of Thailand. So we actually cranked up the output from our factories in Thailand and then shipped it straight out of Thailand. So we weren't kind of having any finished goods inventory in Thailand. I wanted to get that away from Thailand and into the DCs and into the stores around the globe. So in case we would be facing some kind of disturbance there, we wouldn't be affected. And we hold, as I mentioned earlier on the call, something like 25 weeks of coverage in a normal demand curve. Right now, demand is lower than that. So likely, our weeks of coverage is a little bit higher there.

In terms of capacity management, of course, we've put a forecast in place, and we are adjusting our capacity based on that forecast.

And then you asked on some of the new product lines. So we had a very strong start of both Pandora Me and Harry Potter. They've continued very strongly into Jan, Feb. We then launched birthstone rings -- and, in particular, in U.S. and U.K., where this concept is strong in the mind of the consumer. They've done really well. What else? And then the collection on Valentine's Day was also very, very strong. Now bear in mind that last year, I think, was a car crash, that was terrible. So I'm not sure that the baseline is totally representative. But in terms of the sell-through rates that we had, it did meet the objectives.

So actually, I have my core doing really well based on the insights we kind of leaned last year, and now we also have a couple of strong initiatives on top. And this becomes a really nice mix when you run a business that your core is healthy and then you put new on top. And that's how actually how growth model should look like, whereas in the past, we unfortunately misfired on both. So that's probably what I have for you today.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

And as there are no further questions, I will hand the word back to the speakers for any final comments.

--------------------------------------------------------------------------------

Alexander Lacik, Pandora A/S - President & CEO [70]

--------------------------------------------------------------------------------

So yes, I think I'll just end where I ended the presentation, I think. We are -- I shouldn't say that we are bullish but I think we're very comfortable with that Programme NOW is delivering. I think we have found the right levers. We're investing in the product innovation, which we'll see more of, I think, in a 12- to 18-month window. We've stood up this new organization, which is there to ensure that project NOW wasn't just a project, but we actually can crank out these type of results on a continuous basis. And we're recruiting in world-class talent left, right center. So we're making Pandora a top player. Now there's still work ahead of us. Don't get me wrong. COVID-19 is in the middle. So we have to kind of just motor through this. But I stay very positive on the prospects of the company. I think we'll end on that note.

--------------------------------------------------------------------------------

Operator [71]

--------------------------------------------------------------------------------

That now concludes our conference call. Thank you all for attending. You may now disconnect your lines.