Pandora A/S

Good morning, everyone, and welcome to the extended conference call for Pandora’s Q1 results and the announcement of our new strategy. I am John Backman from the Investor Relations team.

I’m here with our CEO, Alexander Lacik and our CFO, Anders Boyer; and the rest of the Investor Relations team, Kristoffer Malmgren and Mikkel Johansen. Slide 2 please.

Please pay notice to the disclaimer on Slide 2. Alexander, please go ahead.

Thank you, John and welcome, everyone for joining us in this extended call today. Today's call will be split in two parts.

First, we'll go through the Q1 results and there will be a 30 minute Q&A session for that part. So please limit yourself to one question at a time and get back into the queue, if you have additional questions.

Then in the second part, we will present our new strategy and there will be a Q&A session following that as well. Next slide, please.

Go through the following slide. Today is a big day for us, as we release our new strategy, Phoenix, a new chapter of sustainable and profitable growth for Pandora.

The turnaround has been successfully completed, the top line has been stabilized and we have a much stronger organization. We're now ready to share the highlights of our new strategy, which will lead Pandora into a chapter of sustainable and profitable growth but more on that later.

Let's first start with the Q1 numbers. As already announced in the March trading update, we've had a strong start to ’21 with the continued strong momentum.

Our strong online growth continued and was up over 200% versus 2019. The US growth was very strong, up more than 50% versus 2019.

Overall sell-out growth in the quarter was only down 5% versus ’19, despite that 30% of the stores were closed in the quarter. We are pleased with the start of the year.

Next slide please. On top of announcing the new strategy today, we have three other important announcements to make.

First of all, based on the strong performance so far and our expectations for the rest of the year, we upgrade our guidance for the year to now expect organic growth above 12% and EBIT margin above 22%. Secondly, we also re-initiate cash distributions to the shareholders by doing a combination of extraordinary dividends and share buybacks.

And finally, today our new sustainability report is also released, where we disclose strong results achieved so far, and our ambitious goals for the future. Slide seven please.

Our underlying performance is best viewed versus 2019 when there was no impact from COVID-19. Using Q1 ’19 as the comparison, in Q1 ’21, we saw solid performance across most key markets despite lockdowns.

UK, which is our second largest market, was only down 16% versus 2019, despite all the stores being closed in the quarter. Our stores in the UK are now fully opened again.

The performance in our largest market US really stands out with sell-out growth 52% higher than the same quarter in 2019. Australia which was almost fully open also delivered positive growth versus ’19.

As expected, China is still underperforming in the quarter, we're now getting ready to take the first and significant steps in the China transformation and increase our investments to strengthen and reposition our brand and reduce promotions during the second half of the year. Next slide please.

As said already, we think our underlying performance is best viewed versus 19. The seller growth of minus 5% versus ’19 is impacted by opposing factors.

We talked about these in Q4 as well and they are still all very relevant; first, lost revenue from closed stores which is partly offset by revenue picked up online instead; secondly, as we have talked about before, a shift in general consumer demand away from traveling and services for instance and towards among others gifting and jewelry. In the US, this has been fueled further by the stimulus packages.

Net-net, and trying to cut through all of this noise, our assessment is that the underlying Q1 performance confirms that this top line is stabilizing. Next slide please.

It's clear that we maintaining our industry-leading brand position. However, with lockdowns and closed stores, we have adjusted the spend pattern more towards digital, especially in markets where physical retail has been closed, so a little bit less of top funnel spending, which impacts the unaided brand awareness.

More than one-third of all Google searches for branded jewelry globally was for Pandora in the quarter, while the two closest competitors had around 10% share of searches. On global unaided brand awareness, we were number one in five out of seven key markets in the quarter and ranked second highest in the US.

Next slide, please. Let's have a look at our digital results in Q1.

Online growth continued and revenue more than doubled versus 2020 and was up over 200% versus 2019. Our online conversion rate was up over 80% year-on-year.

And the conversion improved for most of the steps during the consumer acquisition funnel, from traffic to sales. The click and collect concept in the US continued to strong traction and made up around 10% of online sales in US in the quarter.

Digital plays a key role in our new strategy that we will cover later in this call, both as a foundation for the strategy and as a growth driver. Next slide, please.

Today, we launched our new sustainability report with increased disclosure. Sustainability is close to our heart and we're working towards becoming a low carbon circular and inclusive business.

In 2020, we lowered our co2 footprint and switched to 100% renewable energy in our manufacturing facilities in Thailand. We're supporting a circular economy and have established a roadmap towards achieving our target of using only recycled silver and gold by 2025.

Our recent refinancing also links part of our borrowing costs to our sustainability goals to be carbon neutral and use recycled metals only by ’25. It integrates sustainability into our capital structure and creates a transparent further incentive for us to reach our goals.

I will now hand over to Anders to take us through the financial performance. Anders, please go ahead.

Thank you, Alexander. Let's go to slide 13 and where we can have a short look at the financial performance in the first quarter.

As Alexander already said, the first quarter performance was strong given that 30% of the stores were closed. The EBIT margin was up five percentage points compared to last year and mainly driven by the robust operating leverage that we see in our business.

In the Q4 announcement from back in February this year, we said that the cash conversion in the quarter would be affected by both a larger reduction in in-payable as well as a deliberate increase in our inventories, and as you can see on the cash conversion here that, that is quite visible in that KPI in the quarter. But despite this negative cash conversion, the net working capital continues to be low and was still negative by the end of the first quarter.

And then I would also just mention that the significant increase in earnings per share that you can see in the in the last row of the table here. And just noting that earnings per share is obviously also supported by the fact that we have no restructuring costs now; that program now is behind us.

Now go to the next slide, 14 please. On the revenue development here on slide 14, we have provided both a bridge versus ’19 and verses ’20.

And I know it's quite a lot of data, but we hope it's useful for you. I think the bridges are mostly self explanatory, so I won't go through them.

But that is one unusual building block in the bridge versus 2020 in the lower part of the slide, and that's the negative -- 6% negative impact from calendar shift as we've called it, and it's somewhat technical, but it relates to the fact that different calendars are used for sell-out growth and organic growth. And the organic growth is calculated on the calendar month, obviously, I would say but the sell-out is based on weeks and the so called 4-4-5 retail calendar and sell out in Q1 therefore covers weeks one to 13, which is January 4 to April 4 of ’21 and that means that the sell-out KPI includes four trading days in April, where we are comping very limited revenue in 2020 and therefore, sell-out ends up being higher than organic growth.

And it's pure timing, of course, and we will see the reverse effect here in the second quarter. So next slide, please.

The only thing I want to say about the EBIT margin is that we are pleased with the performance and that we are pleased to see the positive operating leverage in the quarter when revenue goes up and the rest should be quite self explanatory. So in order to move us forward to the Q&A, I suggest that you go to slide 17 and the guidance.

Based on the strong start to the year, combined with our updated expectations for the rest of the year, we have upgraded our guidance for both organic growth and the EBIT margin, as Alexander said. So last two comments, I would like to give to the guidance first.

And obviously, the guidance is associated with significantly higher uncertainty than normal due to the pandemic. And secondly, the guidance still provides a floor for what we expect and we deliberately leave the guidance open-ended and based on certain specific COVID-19 assumptions.

And I'll comment a bit more on this on the next slide 18. On slide 18, I have three comments to the organic growth guidance that we're showing here.

First of all, we have still included 6 percentage points impact of the pandemic on the full year revenue and that's the same as in the original guidance. The only difference is that we now expect it to be spread across all four quarters of the year and not just the first two quarters, as in the original guidance.

Secondly, I will call out that this 6% revenue impact from the pandemic only includes the net impact of closed stores, and online picked up from those closed stores. It doesn't include the tailwind from the stimulus packages in the US, which also needs to be taken into account if you want to reflect on the implicit underlying performance in the guidance.

And finally, the guidance corresponds to a sell-out growth versus ’19 of around, let's say, minus two. And given that we have delivered minus 5% sell-out growth in the first quarter versus ’19, then the implicit rest of year sell-out growth guidance or the guidance floor is therefore around minus one versus ’19.

We just wanted to give you that data point as well. So around minus one for the rest of the year on sell-out growth and when we look at the current trading for the second quarters, that’s April, we're doing better than that, implicit guidance for the rest of the year.

As you've probably seen in the company announcement already, we will expect April to end with a sell-out gross being mid-single digit positive versus ’19 and it continues to be driven by the US where performance in April is actually even stronger than in the first quarter. And as you heard just before, sell-out growth in the US in the first quarter was plus 52 but April is above that level.

And you'll see the details when we send out a trading update for April in just a few days. On that note, I would like to stress that we hope and expect to stop sending out monthly trading updates soon.

When the number of closed stores due to the pandemic gets below, let's say, 15%, then we plan to revert to normal quarterly reporting. So on the next slide, the EBIT margin guidance; we have upgraded the EBIT margin guidance by one percentage point.

And on the one hand, that's supported by the operating leverage and we've also -- it's also supported by a bit higher cost reductions than what we had guided previously. On the other hand, we will be investing in supporting the strengthening of our brand in China.

Initially, this will be a drag on the bottom line both in absolute terms and not least in terms of the margin as well. Then going to slide 20.

During the last year, we've taken a quite a prudent approach to our cast distribution due to the pandemic but now based on another quarter of good performance, our low leverage and our strong liquidity, we are re-initiating cash distribution. And as an extraordinary measure, due to the pandemic, the cash distribution will follow what we have been calling, pay as you go approach, so initially paying out 1 billion kronor during the second quarter of the year.

And assuming that the pandemic situation improves, then we will expect to continue the quarterly distribution in the third and fourth quarter of the year. And with that, I'll hand it back to Alexander.

Thank you, Anders. So, our performance in Q1 shows strong underlying performance in most key markets.

As Anders mentioned, US and online are the key drivers of our growth. And based on the strong performance and our expectations for the rest of you, we, as Anders just went through, will upgrade the financial guidance as well as reinitiate distributions to our shareholders.

So good today all around I would say. And with those remarks, we are ready for the Q&A session regarding our results.

And as a reminder, please limit your questions to one at a time since we only have 30 minutes. When we're done with this we will get into the Phoenix session and we'll also be joined by our Chief Marketing Officer, Carla Liuni, but before that, let's get into the Q&A.

Operator, please go ahead.

Hi, good morning, everybody. So I will stick to one question, of course.

So maybe just on the guidance, so my question is more about how conservative that is? I know you've put a floor and so anything could happen but can I try to better understand what the assumption of your floor base is?

Because you've of course delivered a better performance in Q1, your April trends are very encouraging. So why are you so conservative in giving the floor?

What is it assuming? Is it assuming that that are further locked down?

But the question is more about if things progressing the way we believe and so the re-openings will be progressively happening through the rest of the year, what could be a sort of range that we should expect? I hope you understood my question.

Thank you.

Thank you, Elena. It is Anders here.

We obviously provide the guidance, because we think it's a good reflection on how we think about how the year could play out. But had we been in a more normal year, if that will ever exist, then we'll probably have put in a more concrete range in and not leaving it open ended.

But we are leaving it open ended because we see a wider range than normal during this year. So -- but we are expecting that we will continue to see some kind of impact from the pandemic during the rest of the year, so we have in the guidance, we implicitly assume that 5% to 10% of the stores will be closed during the second half, so much less than what we have seen in Q1, but still lockdown impacting our performance here and there.

So that's one important assumption. And then I think another thing to call out will be that we obviously also expect that the impact from the stimulus package that we've seen in the US will fade out as the year goes by, and they will be in a more normal states there in the second half of the year and thereby have much less of tailwind on a group level from the US growth.

And sorry, well, just to clarify on this point, because in your slide, you're talking about the US stimulus package, both when you're moving from your guidance from above 8% to above 12% and also as a compensating factor versus the store closures. So it's not very clear to me what exactly you're factoring in for the US because you include that effect in both the two bars?

I'm talking about slide 18.

It's actually -- the explanation that we're having on slide. I'm just go through that one on the implicit guidance on slide 8, what we're trying to say that if you're thinking about the underlying performance in Q1, what would the minus 5% sell out growth versus ’19 had been, had we not been for the pandemic and the stimulus packs.

That's what we're trying to call out on that slide. And in that context, obviously, there is some extraordinary support from the stimulus package in the US.

How much, I think that we can only guess about, but we just want to make the call that out on that slide. So we are expecting that in the back part of ’21 that the growth in the US will be a much lower number than what we've seen in Q1.

And in that -- on that note, you should remember that we were just about 20% growth in Q3 and Q4 in the US last year. So we will be comping a much tougher base in the US when we get into the second half of ’21.

Okay, understood, thank you very much.

Yeah, thank you very much. And well done, guys.

It's great to see Pandora back in great shape, so well done on that. I'll ask into to China.

I don't know if the timing is right or if I should wait by doing that later. But this implemented it in the presentation, I'll put down the question right now.

So on the issues that you have in China right now, is there anywhere where you can utilize on some of the previous learnings in terms of some of the problematic markets that you've had at Pandora in the in the past? Is there any way where you can say, okay, this is the same that happens in terms of consumers’ behavior, the brand positioning or anything.

So will that speed up perhaps the restructuring of the Chinese marketplace.

I mean, we will actually cover that in the next section at a little bit more in depth. But as I've been saying in the past, the way the brand was launched into China is different from the way it was launched anywhere else.

So the job is essentially, if I dumb it down, is to think of it as a re-launching the brand in China. Then there are many things that are similar, the store network, the density, the kind of behaviors we see on and offline, a lot of these things are kind of similar, but the starting point in China is just different for the brand.

It doesn't have that clarity in consumers’ minds what's unique and different and interesting about Pandora that we see elsewhere. So that's the brief answer I'll give you today.

That makes sense. And it certainly doesn't seem like a quick match -- quick fix but I'm sure you guys are on top of it.

Thank you.

Yes, I will also start by congratulating you for a very strong quarter. I also have a couple of questions regarding the -- one question of course, regarding the US.

So, I wonder if you can shed some color on a, the impact from stopping with Jared. I just wonder if there's any inventory you have taken back and if you have offset that against revenue?

And if you have, how would it affect your margins? And then in the presentation you likewise mentioned that based on credit card data you grew faster than the overall US market, so I wonder what growth you refer to more specifically in the credit card data.

Thank you.

Hi, Lars. Here I can start out on the soft question number one on the US about the Jared, we actually -- the revenue impact is very limited, even though it's quite a number of point of sales that have been officially closed down now the revenue impact is miniscule because it was already at a low point in 2020 but we did do something on the inventory back in.

I can't actually even recall whether that was late ’19 or early ’20.

Not this year.

Not this year, definitely not this year but it might even have been all the way back in ’19, as part of knowing that we were closing down that that channel, making sure that we manage the inventory as well but there is no impact in the Q1 ’21 numbers.

Okay. That is very clear.

And then on the credit card data, what growth they show?

Yeah, the credit card data, this is a Bank of America that releases data on that, and we picked up -- anticipated the only data point that we have in print on the market growth and this is sort of the entire jewelry market was in the high 30s, if I remember right, in growth. So still we have ours, our growth that we've seen is well above that in the US.

So I should compare to what number in your report on this just to make sure it's completely right. I should compared to the 64% local currency growth over last year’s 81% sell-out growth?

Because I guess it is the Bank of America data that must be sell-out growth data, that will be my logic, because the nature of the underlying data, so that's –

So you are basically growing more than twice as fast as the underlying markets based on the data.

Yeah, on the assumption that the Bank of America covers 100% or a large proportion of and that we don't know. So I think that's why we are being a bit careful of making two big conclusions on that.

We can just see that we're significantly ahead of that data point. But I don't think that necessarily they're apples-to-apples comparisons, I would be a bit careful with drawing that conclusion.

Fair enough. Thanks for taking my question.

Hi, good morning. Coming back to the US, could you just describe what is really brand specific that is driving that stellar growth in the US apart from the things that you've outlined?

You mentioned something during the last call that you had launched email marketing in that market. So have we seen any further improvement in terms of all those CRM data capture that you are now leveraging in the US?

Thank you.

Yeah, I mean, yes, we have seen a very strong improvement on the impact of email marketing, but you need to put that in context versus the totality of the business. This is still not the major driver.

Actually the performance in the US started after the summer, last year. So if you look from August and onwards, we've had a continued improvement in the momentum in the US.

So it's not like something just happened on January one. So it's been ongoing.

And this has come behind, as we've been speaking about in the past, good basics. So we are investing more in media.

I think we're making smarter media choices. We're doing better job on merchandising on product availability.

So, it's core basics that are at play.

Thank you.

Yes. Hi, good morning.

It's Antoine at Exane BNP Paribas. My question relates online and more importantly, how online goes when you are reopening stores.

I know it's a bit early but maybe taking the UK market as sort of a showcase. Yeah, how -- I mean do you see -- what kind of moderation do you see when physical store are reopening.

Thank you.

So that question has many facets because it really depends, in which geography we are and let's say the adoption of ecommerce as a channel, not Pandora specific. So what we saw, for instance, in Australia, where generally speaking ecommerce, as a percent of trade, is a little bit lower than maybe what we experienced in, let's call it, Northern Europe.

When the stores reopened, we actually saw a big kind of traffic movement back into the stores. So the high levels of share of business that we saw on ecommerce came down quite a lot similar to what we've seen in the Mediterranean countries.

So in Italy, for instance, we had the same type of, of behavior, then you take a country like UK, now, I only have the last two weeks of stores being reopened, so it's very early in the curve, but there we've seen a strong influx of traffic to the stores, whilst the ecommerce actually has continued to be very strong. So there is not one generic answer to that question.

It really depends in which geography we are so. Sorry maybe just to put some more color on it because I think part of your underlying question might be, what do we expect when we get back to, let's call it, more of a steady state or normal, if that any such thing exists.

So versus 2019, I think we can safely say that the share of business transacted on online is going to stay at a higher level. There is no doubt, but I don't think it's going to stay at the current high level.

Today, we have roughly one-third of our global revenue done through online. I think that is going to come down but to what level, I don't know.

And 2019, if my memory serves me right, was more like 13%. So, maybe it's going to end up settling somewhere in the middle but we shall see.

Okay. You preempted my follow up, so thank you very much.

Thank you guys for take my questions. Yeah, one goes to the second half of the year.

So Signet is out saying that they're planning for guiding for negative growth in the second half of the year, of course, they are mainly exposed to the US, so we cannot make a complete comparison to you guys. But could you give some thoughts on what you think about the second half, especially for the US?

Do you also sort of expect negative growth in the second half? That is my question.

Thank you.

Yeah, I think, Magnus, Anders here. I think maybe that's a stupid way to start the answer but it would definitely be at growth rates that are below what we're seeing currently, both for two reasons.

One being the assumed less impact, much less impact from stimulus packs that we are seeing in Q1 and also here in April, but secondly that we are facing, if we look at the year-over-year, at a 20% sell-out growth in Q3 and Q4, roughly last year, so the comp base will be much tougher when we get into to the second half of the year. So we are assuming that the sources of growth, if you like, compared to what we've seen here in the Q1 will be quite different when we get into the latter part of the year from having a Q1 very much driven by the US and dragged down by China and not the least but also Europe due to the pandemic.

Then assuming much less pandemic impact in the latter part of the year, we will see the Europe going back and properly being part of driving growth, but a much less, hopefully also less drag from China and less tailwind from the US. So, quite an unusual big shift in the sources of growth during the year due to the pandemic, not least when you look at it year-over-year.

Okay, thank you.

Thank you very much. One question from me, Alexander, you mentioned the conversion rate, up 80% that I believe it was 30% in Q4, if I remember correctly and maybe two questions related to that.

Firstly, what have you done to drive that conversion rate? Is it marketing, imaging payments, etc?

And secondly, if you would be open to give us a ballpark number of your current conversion rates and whether you see upside to the current levels? Thank you.

I mean, we haven't done anything materially different in this quarter versus the previous quarters to be perfectly honest with you. We're continuing -- maybe what we've done is, since there has been more stores closed now, we have shifted a bit, let's say, the media mix and we've spent a little bit less on the top funnel spend and spend it more towards the digital but it's not materially different from what we've done in the past.

So, there's really no big magic. I think, in.

In some places, we've introduced Klarna and Afterpay, which obviously drives a little bit, but again, doesn't explain, let's say, the macro-movements on conversion rates. The thing with ecommerce, the way we're running it now, it's a continuum of improvements in terms of features and site speeds.

And so this is not like it used to be when I grew up, at least, where you kind of made one change, and then you sat and watched it. Every two to three weeks, we have a new release of some kind that keeps improving the experience online, so that's it.

So you can't attribute it to any major change, maybe, as I said, unless we talk about Klarna and Afterpay. But then, again, that's not been rolled out globally, that's been in some geographies only.

I think UK has done some good stuff there and parts of the US has also gone into this type of mechanism. But that's probably the only major change that I that I've foreseen, it is a continuous improvement effort.

That's kind of how these teams are organized. They work on two to three week sprints and then they release new things.

Thanks. And on the level of the conversion rate, any ballpark figure?

I think we'll keep those numbers relatively close to our chest, you can say that an ambition would be to get -- going to somewhere north of three, and we still have some way to go there from a sustainable standpoint. There will be peaks when we go above that and I'm talking about a global number.

I have geographies which are lower than that, I have geographies which are quite a bit higher, but the average is there. So, first part of the things that we're going to talk about in the second session today, conversion rate is one of the keys on how we're going to drive more growth.

Check on the slide 10 in the investor deck, we actually show that the conversion rate in the quarter was 3% but it tends to be sort of positively impacted when stores are closed, but 3% in the quarter.

I missed that. Thanks, this is excellent.

Thank you.

Good morning. Thank you very much.

I'm a question about the online revenues. Could you give us an idea of the breakdown, just the top few most important markets?

How important are they as a percentage of your total online sales? And also, what was the roughly percentage increase in those markets in online, year-on-year, please?

Okay, I mean, it is quite detailed question. So, to no surprise, the US and UK are the big ones, as you can imagine.

And the UK the growth was, this is versus ’19, for the quarter, was over 400% and the US versus ’19 was over 200%. The average was 200%.

So then, most markets are kind of in -- you can do the math yourself. But the two big ones to watch for us always is US and UK.

That is.

How big is the US, as a percentage of Q1 online sales, roughly speaking, and the UK?

Roughly, what, 25% give or take.

Both of them or was that the US?

US is roughly a quarter.

And the UK?

You’re stretching my math here.

A third of the online revenue in Q1.

And 25% for the US.

Yeah, give or take.

Okay, thank you very much.

Yes. Hello.

I was just thinking about something else. Sorry.

The question was that we have seen some major movements in the inventories among the franchisees. It was quite a negative movement in March and then we've seen quite a positive movement here in April.

So what is driving these changes? And is there any specific markets that are affecting this?

Maybe Klaus, it is Anders here, I can start on that one. So the shipments, so the timing of those is purely driven by sort of commercial and logistical circumstances.

So the shifts that we see between March and April is purely what makes sense from an operational and commercial point of views, so we are much more focused on the sell-out growth, but I agree that it has been when you look at March and April, there has been quite big shifts between those two months. But I would say that it's one of the -- it's always been there, it's not new.

The new thing is that we are disclosing monthly numbers, so suddenly it becomes visible for the outsiders, as well, that there are these swings between months, which then becomes less visible on a quarterly level.

Okay. But has it anything to do with your production capabilities in finance or anything?

No, no, absolutely not. We have, I think, actually quite fine on inventories.

We do think that inventories were too low when we entered Q1, so as you can also see the inventories are about, what is that, 350, 400 million [ph] kronor during the quarter. So we would like to operate with a bit higher inventory levels, but that was not definitely not the reason for the timing between whether we should ship in March and April, that was purely due to both on sort of the receiving end on the partners when they thought that made commercial sense for them to get the shipments.

Merchandising, logistical point of view, we are now in a fairly good shape.

Great, thank you.

Hello. I'm trying to work through my EBIT margin expectation and given that reminder that second half of 2021 in the US will be a slower one going forward for the reasons that have been given.

And then I look at the hedging policy in the way that you work and think about a little bit more exposure maybe 20% to 30% more exposure on your hedging as this stage for the second half. So I am trying to understand the process and where we think EBIT margin will be weighted to the quarters.

Thank you.

I had a little bit difficulty in hearing the questioner Deborah here, but let me see if I answer it right. But I think, as usual, the Q4 is by far the biggest quarter on the top line and on the bottom line, both in absolute terms but also in terms of margin.

So, typically, we see a significant EBIT margin pick up in the fourth quarter. This year it might be -- you can argue it will be a little bit less than what we will see in a standard year for two reasons, one being that the -- we will have more silver price headwind in the quarters to come, in Q3 and Q4, based on the silver price increase that we have seen, so that as hitches, lapses that will be a bigger drag on silver prices in the second half of the year.

And then we will be investing -- started investing in the back part of the year in the repositioning of the brand in China as well. But of course, we have guided above 22% EBIT margin and we were only at 20 in Q1, so that will be -- and that pick up is something that -- that margin pick up from Q1 to the full year guidance or the floor of the full year guidance is a Q4 thing.

Okay. Thank you.

But that is completely normal seasonality.

Yeah, I was just wondering whether -- as you said, whether the US would cancel some of that. The other thing is just to try to understand whether we saw the exit costs from the end of Programme NOW.

Whether there'll be on any onboarding costs for the new strategy?

There will be costs associated with the new strategy, but it's -- if you're talking about US specifically, it's not margin diluting, it adds to the bottom line from day one.

And that's across the whole group.

Sorry, could you repeat that? We couldn’t hear that.

Sorry. The question there, sorry, was related to the group.

So we wouldn't expect any margin dilution across the groups from the onboarding of the new strategy this year.

Apart from China, that's -- otherwise, it adds to the bottom line from day one.

And we have time for one more question.

Hi, guys. Hi.

Thank you for taking my question. Maybe just a follow up actually on the margin for the year.

Your statement distribution costs in Q1 came in much lower than I was expecting them. I was just wondering in terms of sales and distribution costs as percentage of sales for the year, what did you embed in your full year guidance, please?

Thank you.

We are not sort of guiding on specific on the individual OpEx lines but I think two comments there on that that might be helpful. One is that we had 82 million kronor in government support that we received in the markets that were closed down in Q1, and all of that, and I think is all of that, but at least close to 100% of that 82 million kronor goes into as a negative OpEx in sales and distribution in Q1 because it's compensation for store colleagues that we have onboard.

So that's one of the reasons you probably see that sales and distribution cost looks lower in Q1. The other comment I would give is that we have upped the -- increase the expectations for the cost reduction program, up it half a percentage points of revenue, 100 million kronor in lower cost this year and a big chunk of that is sales and distribution costs where we do see further upsides, not least on the level of store lease or store cost, rental costs that will help keeping sales and distribution costs down as well.

Sorry, and just following up on these two points, then, in terms of the government support, what is mainly the UK so this is going away in Q2 or should we factor in some also for the coming quarters for the year?

You're absolutely right, that is mainly the UK, both given the magnitude of stores being closed out for all of Q1 basically, all of Q1, and the and the nature of the program in place in the UK, but also a bit in Germany and Italy but UK, in absolute terms, being the biggest piece. And then we do assume that we will get up a bit as well of support that is included in the guidance here in Q2 and April specifically, but then we assume that at some point in time, it will disappear.

So even though we have assumed some store closures and lock downs in the second half of the year, they're not assuming that government support programs will continue forever, which I think is a prudent approach to it.

And on rent reduction, to what extent that what you've seen is we can consider as structural versus something that is also going to normalize in the coming quarter.

It's a -- if I heard -- the sound is a little bit bad but if I heard the question, right, this is structural reduction is not temporary reductions due to the pandemic, the half a percentage points. So margin support from lower cost is permanent lower cost reductions that we're looking at.

Perfect. Thank you very much.

And that concludes the first Q&A session on our Q1 results.