Pandora A/S

Thank you, and welcome to PANDORA's conference call following the release of our Q2 '15 results announced earlier today. This presentation for the call as well as the full version of the Q2 release is available on pandoragroup.com/investor.

My name is Morten Eismark from PANDORA Investor Relations, and with me here today is CEO, Anders Colding Friis; and CFO, Peter Vekslund.

In accordance with the agenda on Slide 2, Anders will go through a few Q2 highlights, followed by Peter, who will talk you through the Q2 numbers in more detail. Finally, Anders will conclude the presentation, and we'll be happy to take your questions.

Before handing over to Anders, I kindly ask you to pay close attention to the disclaimer on Page 3.

Anders, please.

Thank you, Morten. Good morning, everyone.

Please turn to Slide #4. Following a strong first quarter, the momentum in the business has continued into Q2.

Second quarter revenue was DKK 3.6 billion, with an increase of 41% or 26% in local currency.

Revenue growth for the quarter was driven by all geographies supported by strong growth across all product categories. In particular, we're encouraged to see that our core category, the Charms Bracelets, increased by around 40% compared to last year.

The new collections launched during the quarter were again received well by our consumers, and the Disney Collection launched in November in North America continued to support growth in that region.

We continue to expand our branded network with progress on the concept stores and during the quarter, we added net 107 new concept stores to the network. Revenue from concept stores increased 55% for the quarter and now contributes 59% of group revenue.

Sales-out growth continues to be positive, and we've now been able to generate positive like-for-like sales in all 4 reported markets for 10 consecutive quarters. EBITDA for the quarter was DKK 1.311 billion, an increase of 47% compared to Q2 last year and EBITDA margin was 36.4% compared to 35.1% in Q2 of 2014.

The marked increase was driven by an improvement in both gross margin and the OpEx ratio.

In the quarter, we made the first payment to the Danish tax authorities of DKK 642 million related to settlement in May and consequently, free cash flow for the quarter was negative at minus DKK 268 million.

Based on the strong performance in the quarter, we've updated our full year revenue guidance to more than DKK 16 billion. Included in this upgrade is additional currency tailwind of 2% compared to what was expected in Q1.

So we now expect 12% tailwind from currency for the full year.

Finally, we continued to return cash to our shareholders and during the first half of 2015, we have bought back shares for DKK 1.5 billion. Please turn to Slide #5.

All geographic regions generated double-digit growth for the quarter, also excluding the positive tailwind from currency. Americas was up 44% for the quarter on 19% in local currency.

Revenue in the U.S. increased 14% in local currency to DKK 1.2 billion.

The increase was driven by network expansion as well as like-for-like growth. The latter was driven in particular by the Rings category as well as the continued high demand for the Disney collection.

Revenue from Other Americas increased 39% in local currency and Canada, which is the largest country in the region, increased by 20% in local currency, driven by continued positive like-for-like development.

Furthermore, the development in Brazil continues, driven by double-digit like-for-like growth and the addition of 29 new concept stores in the past 12 months.

Revenue from Europe was up 38% for the quarter and -- or 32% present in local currency, driven primarily by the U.K., Italy and France. U.K.

continues to perform well and although it is a highly-penetrated market, revenue grew 31.2% in local currency for the quarter. The growth was driven by positive like-for-like growth supported by the recent introduction of the PANDORA Rose collection as well as continued success of the eSTORE and expansion of the store network.

Finally, we took over 4 very successful U.K. concept stores in April and the conversion of wholesale revenue to retail revenue has given us a couple of percentage points of additional growth.

Revenue from Germany was DKK 110 million, an increase of 3%. However, this includes a provision for returned goods of DKK 53 million related to the closure of a number of multi-brand accounts involving the closing of around 275 stores in the next 12 months.

Excluding the provision, revenue in Germany increased 53%. The strong growth was driven by a combination of positive like-for-like figures and expansion and improvement of the store network in Germany.

The improvement of the network is, as you know, ongoing and during the quarter, we opened 32 new concept stores of which 25 is related to the 77 store leases secured earlier in the year.

Momentum in France and Italy has continued and revenue from 2 countries increased by more than 50% for the quarter, driven by an improved network and healthy like-for-like growth. For the quarter, Italy was 30% and France 15% of the revenue from Other Europe.

Revenue in Russia, which by the way represents less than 2% of group revenue in the first half of the year, was down 40% for the quarter. The decrease was driven by low double-digit negative like-for-like growth and a more cautious purchasing behavior from our local distributor in Russia.

The retail environment is becoming increasingly challenging, and we expect the like-for-like figures for Russia for 2015 to end up slightly negative. This, combined with the more cautious spending from the distributor, means that our growth in Russia for the full year probably will be in the region of minus 25% to minus 50%.

Regarding Russia, there's been some speculation in the media regarding the long-term ownership of our distributor, PanClub. And we are obviously following the situation closely.

It is important to say that the uncertainty concerning the long-term ownership is not related to the performance of PanClub

Revenue from Asia Pacific increased 44% for the quarter or 27% in local currency. In the highly penetrated Australian market, sales increased 29% in local currency.

Other Asia Pacific increased 25% in local currency, driven primarily by Hong Kong and China. Revenues from Hong Kong increased around 50% in local currency despite the current difficult retail environment, which has had limited impact on the business so far.

China has the strongest quarter-to-date and revenue more than doubled compared to second quarter of last year. We've initiated a new and improved partnership with Oracle in China from the first of July and already, during the second quarter, we helped with some improvement of the stores in China, particularly in terms of inventory.

Regarding Japan, the new partnership with Bluebell is developing according to plan and we expect to add a couple of stores in the second half of 2015.

Finally, as you saw this morning, we have agreed to take over the distribution network in Singapore and Macau, where the current distributor contracts expire. This will happen by the end of this year.

As part of the agreement, we will also require -- reacquire the distribution rights in the Philippines. The agreement follows similar deals with other local distributors and is in line with our strategy to increase the control of our brand.

Now please turn to Slide #6. The positive like-for-like rates have continued across all 4 reported markets.

Like-for-like growth in the U.S. was 8.1%, driven in particular by Rings as well as the Disney collection.

The process of refreshing the network in the Northeast continues and as of today, 10 of the stores acquired from Hannoush have been refitted to the new Evolution concept. The Northeast region is improving, but still like-for-like for the quarter was slightly negative.

All other major U.S. regions grew with single – high-single digit like-for-like rates or more.

Like-for-like growth in Australia was 35.7% and probably our best quarter ever in terms of like-for-like. Like-for-like in the U.K.

was 11.4%. The U.K.

continues to perform very well, but as previously said, high double-digit growth rates becomes increasingly difficult to achieve.

Like-for-like in Germany was 9%, and as we mentioned on the last call, we had anticipated negative like-for-like growth in Germany as a consequence of the many concept store openings. This has not materialized, as we've seen limited cannibalization, and the stores have performed better than expected.

Now please turn to Slide #7. Our new products continue to perform well and roughly half of our revenue continues to be created by products launched within the last 12 months.

During the quarter, we launched the High Summer and the Mother's Day collection, which were both received well in all markets. However, as the Mother's Day collection had roughly 25 less design variations compared to the same collection last year, it did not outperform last year's collection.

As mentioned, PANDORA Rose was launched in the U.K. stores in June.

The introduction follows the successful launch of the collection in Americas in October last year and has been very well received by the British consumer. Our Disney collection continues to perform well.

And from the beginning of the quarter, we started selling the products in shop-in-shops, gold stores. So all branded stores now have the Disney in their shops.

Please turn to Slide #8. As a consequence of the strong quarter 2 numbers, we upgraded our full year revenue guidance to more than DKK 16 billion compared to previously expected more than DKK 15 billion.

Included in the guidance is also an upgrade in the number of new concept stores from 325 to 375. This also means that our network expansion is now expected to contribute slightly more to growth compared to growth of our existing stores.

We previously expected the 2 growth factors to contribute equally. As mentioned earlier, the new guidance also includes slightly more tailwind from currency and assuming unchanged exchange rates, we now expect a tailwind from currency of about 12% compared to the 10%, which was highlighted in connection with the quarter 1 results.

Our expectations regarding EBITDA margin, CapEx and tax rate is unchanged.

With this, I now hand over to Peter, who will give you some more details on our financials.

Yes, thank you, Anders. Please turn to Slide 9.

Revenue for the quarter was almost DKK 3.6 billion, an increase of 41.4% or 25.8% in local currency. Like-for-like growth contributed roughly 40% of the growth, driven by more or less, all markets.

Our network expansion, including the acquisitions of distributors and concept stores, contributed the remaining 60%. The additional revenue from converting the wholesale revenue to retail value of acquired stores added around DKK 80 million to revenue for the quarter, when we compare to Q2 last year.

Volume increased by 15.8% and average share price increased 22%.

The increase in the ASP was primarily due to higher exchange rates, which represent 60% of the increase. The remaining is mainly related to the increase in the share of retail revenue in our books.

On a product-by-product basis, prices in local currency have been kept virtually unchanged.

Revenue from owned and operated stores increased 131% to DKK 891 million and is now 25% of group revenue compared to 15% in Q2 last year. The strong increase in retail revenue is driven by like-for-like growth as well as the addition of 219 new owned and operated stores within the last 12 months.

Furthermore, we continue to roll out our eSTORE into more markets and during the quarter, the e-commerce platform was launched in the U.S. and Sweden.

Now please turn to Slide 10. We continue to focus on the branded part of our network and in the last 12 months, we have closed a total of 1,130 unbranded distributors, while opening net 646 branded doors.

During the quarter, we added 107 new concept stores, of which 65 are owned and operated. 71 of the stores were open in Europe, with Germany being the largest contributor as part of the mentioned effort to improve the network in the country.

23 new concept stores were opened in Americas, mainly in Brazil and the U.S., while 13 stores were added in Asia Pacific.

Please turn to Slide 11. All product categories contributed to the growth for the quarter, driven by newness in the assortment as well as the continued demand for product launched within -- more than 12 months ago.

Revenue from Charms increased by 44%, while revenue from silver and gold Charms Bracelet was up 37.4%. We're encouraged to see a continued high demand of our core product across all markets.

Growth for the quarter was supported in particular by the recently launched High Summer and Spring collection as well as the introduction of PANDORA Rose and the Disney collection in certain markets. The focus on the Rings category continues, and revenue from Rings increased by 39.9% for the quarter, corresponding to 10.6% of total revenue, on par with Q2 last year.

The category was primarily driven by a strong development in Asia and Americas, whereas, the U.K. and Australia, which for the last many quarters has been driving the Rings revenue, are starting to reach the level with tough comparisons.

Other Jewelry increased by 31.6%, driven by revenue from Earrings and Necklaces, which increased 70% and 80%, respectively.

Please turn to Slide #12. Gross profit was DKK 2,573,000,000 corresponding to a gross margin of 71.5% compared to 70.7% last year.

The increase was mainly driven by tailwind from more favorable raw material prices as well as market and channel mix. The increase was partially offset by unfavorable currency rates.

Based on our spot prices, our gross margin for Q2 would have been approximately 73%.

Please turn to Slide 13. Operating expenses for the quarter were DKK 1,338,000,000, representing 37.2% of revenue versus 37.6% in Q2 of last year.

Sales and distribution expenses were DKK 662 million, corresponding to 18.4% of revenue compared to 18% last year. The relative increase was mainly driven by the increasing share of revenue from owned and operated stores, which has an impact of around 2 percentage points on the ratio.

However, in general, we are seeing improved cost efficiency across all store types. Marketing expenses increased to DKK 319 million, corresponding to 8.9% of revenue, which is a bit below the level of 10% which we're expecting for the full year.

Administrative expenses for the quarter increased 27% to DKK 357 million. This represents 9.9% of revenue compared with 11% of Q2 last year revenue.

The nominal increase was primarily due to more employees.

Please turn to Slide 14. EBITDA for the quarter increased by 46.8% to DKK 1,311,000,000, resulting in an EBITDA margin of 36.4% compared with 35.1% in Q2 '14.

The EBITDA margin for Americas for the quarter was 44.4% and down 2 percentage points compared with the same quarter last year, despite the positive gross margin impact. The decrease was due to an increase in number of employees, primarily related to the increase in owned and operated stores in the region.

The EBITDA margin for Europe decreased by -- from 39.3% in Q2 of last year to 38.6% for the current quarter. The decrease was primarily due to the revenue provision we took in Germany of DKK 53 million as well as ongoing rollout of concept stores in the country.

The EBITDA margin for the Asia Pacific region was 51.3% compared to 46.7%. The improvement was driven by increase in revenue in the region as well as the improved gross margin.

As mentioned on the last call, we had anticipated some pressure on the margin in this region due to investments in China and Japan but due to timing of costs, the decrease in margin in Asia Pacific is not expected to materialize before second half of this year.

Please turn to Slide 15. Net financial income for the quarter amounted to a loss of DKK 69 million, of which 44 is the next exchange rate gain, mainly related to unrealized gain on intercompany loans in U.S.

dollars. Net interest expenses and other costs were DKK 113 million, including a loss from commodity and foreign exchange rate contracts.

The tax rate for the quarter was 22%, up from 20% last year, as a consequence of the settlement with the Danish Tax Authorities last quarter. Finally, net profit increased 37% to DKK 910 million.

Please turn to Slide 16. Operating working capital at the end of the quarter corresponded to 15.7% of the preceding 12-month revenue and decreased as a percentage of revenue compared to the same quarter last year.

The decrease was mainly due to a relative decrease in inventory, impacted by lower raw material prices as well as better cash collection from our retailers, improving our trade receivables.

Inventory in absolute terms increased with DKK 236 million compared to Q1 '15, primarily due to a buildup of inventory ahead of our Q3 launches. The Q2 CapEx was DKK 239 million, an increase of DKK 163 million compared to the same quarter last year.

The increase was primarily due to opening of 65 owned and operated stores in the quarter as well as increasing investments in the production in Thailand.

Free cash flow for the quarter was minus DKK 268 million, and as Anders mentioned, impacted by the payment to the tax authorities. But also compared to the same quarter last year, negatively impacted by higher CapEx spend and a proportionately higher increase in inventory.

Finally, we ended the quarter with a net debt position of DKK 1,030,000,000 and you'll notice that we had a cash position of DKK 611 million at the end of the quarter. This is mainly to make room for payment around DKK 100 million related to our partnership with Oracle starting on 1st of July as well as ongoing payments related to the openings of store in Germany.

With this, I'll hand the word back to Anders for some closing remarks.

Thank you very much, Peter. So in summary, for the second quarter, our revenue increased by 41.4%.

We continue rollout of stores with the addition of 107 new concept stores during the quarter, gross margin 71.5%, EBITDA margin 36.4%, a free cash flow of minus DKK 268 million and a full year revenue guidance upgraded to more than DKK 16 billion.

All in all, a good quarter, which was the result of great and [indiscernible] products as well as our more than 14,000 dedicated employees around the world.

This concludes our presentation. Peter and I would like to open for any questions that you might have.

Three questions for me, please. First on Australia like-for-like, that continues to be exceptionally strong.

If you could elaborate more on the drivers behind this like-for-like. And especially, if you're seeing new customers coming to the brand or it keeps being pushed by repeat purchase.

Then the second question on the product innovations. One on PANDORA Rose.

I was wondering if this will be rolled out over to other regions. And on Earrings and Necklaces, up 70% and 80%, respectively, which regions are you focusing mainly?

And have you started to dedicate more marketing to these categories as well like you do for Rings? Finally, on the Germany provision, if we should expect anything more coming in the next few quarters, please?

Okay, let me start by taking the 2 first questions and then Peter will answer the last one. As you point out, the Australian like-for-like numbers are very strong and that is very encouraging.

I think that you cannot expect to continue on these numbers over time. But clearly, the quarter came out very well.

A question on maybe give us a little bit of a sense of what is happening also in Australia, but in general, in some of our more developed markets is that as we have had more focus on our Rings, what we see is a slightly younger group of consumers having interest in the brand and they actually come back and look at other product categories, among those are our Bracelets and Charms. So in general, it's very supportive to the business also in Australia.

When you look at the product innovation you ask to PANDORA Rose now, we've had that in the U.S. for a period of time and we wanted to see how that would work out in Europe.

And therefore, we took one of our more developed markets, the U.K., and launched PANDORA Rose in that market. It seems to be working well, but we are still in the early days.

So we do not at this time have any plans to further develop the distribution of PANDORA Rose. Earrings and then also pendants are definitely growing.

And it's nice to see but at the same time we also have to say we haven't really started focusing on those areas yet. We have still a strong focus on developing our Rings, and we will continue doing that for some time.

And when we find that we are ready and we have the right penetration in Rings, we'll take the next categories. But we still have a good product offering in those areas and it's nice to see that our consumers are responding well to that.

And I think Peter will answer the last question.

Yes, on Germany, we made a quantum leap in the beginning of the year with the Biba acquisition. We have now opened 33 out of the 60 net store openings and it's very well on track with that plan.

In order to accelerate it, we have decided to close 275 points of the day within the next 12 months, and I made a provision of DKK 53 million for that. So that said, we'd be -- we believe that we have a solid platform for growth in Germany.

And, of course, will continue to optimize our operations also in Germany.

But we shouldn't be expecting any further provisions in the coming quarters? It's done?

We believe we have covered one -- our current plans but ruling out any further provisions, I cannot promise that.

Three questions, please, mainly on the market more specifically. Starting off with the U.K.

You did report 10 percentage points lower growth in local currencies in the second quarter versus the first quarter. Could you talk a little bit about the categories?

I just see you state that Rings, Earrings and Necklaces drive growth. Is the Charms and the Bracelets category slowing down a lot in the U.K.?

Or what's going on here? Secondly, I'd like to hear a little bit more about Other Asia, where the local currency growth only is 25% versus a run rate of 90% in the past 4 quarters.

I'm a little surprised because I see that you've opened 11 branded stores in the region since the first quarter so what is the underlying like-for-like in Other Asia, please? And then finally, on the U.S., I want to understand the 14% local currency growth a little bit better.

If you add 9% -- sorry, 9 concept stores in the quarter, that's about 1%, then Hannoush, you state the impact is DKK 30 million, i.e., about 4%. Then like-for-like is 8% and then if we add a few percent for online, that actually takes you above 14%.

So what are the parts I'm missing here in that bridge? Is it the closed stores that is taking revenues out of the U.S.

or what's going on, please?

I'll take the 2 first quarters, and then -- sorry, questions and then Peter will take the last one. Let's start with the U.K.

And in the U.K., we have seen, I would say, a very nice development also this quarter. I think that we have stated many, many times that in these well-developed markets, we cannot expect to have growth rates, which is exceeding 20%.

So we are actually very encouraged with the development in the U.K. for the quarter.

If we look at the different products that we've sold during the quarter, I think one of the things that for me is very encouraging is that we've had a very nice development in our Charms and Bracelets. That also goes for the U.K.

But at the same time, we also have a nice penetration of the Other product categories. So we can't relate this to the different product categories.

What we do is we make sure that we have a relevant and a good offering in our products in general. And we can see that was well received in the U.K., with a good like-for-like growth that we were encouraged by.

Then your second question was around the Asia. Yes, the Other Asia, which had a good growth and also a nice growth compared to what we would have been expecting.

I don't think that we have any disclosure when it comes to like-for-like numbers in those areas. And then I'll hand over to Peter for the last...

But Anders, I mean, growth is 25%. Of course, it's good level but you mentioned very, very high like-for-like growth rates in Hong Kong and I see you’re opening stores.

So I'm just puzzled with growth only being 25% with all the positive underlying moving parts in that region?

Yes, but we have -- I think that if we're looking at that part of the region, we have a slightly lower number of new stores and then you have to be aware of the fact that in Hong Kong, we don't have a high development in our like-for-like growth. Actually, we have high development in our total business, which is very encouraging but actually, the like-for-like development is depressed by the fact that we have doubled the number of stores, the reason for that being that we were running out of capacity in the present stores.

On your question on the U.S., first of all, the like-for-like figures we disclose is, of course, different from our reported revenue, that inventory and so on. And you are right, you are missing the store closing in the U.S.

We continue to close unbranded doors, white and silver dealers and then open our concept stores. And finally, then our like-for-like in the U.S.

is 8.1% and that is really the indicator of the strength of our U.S. business.

And we believe that's a very good number.

So Peter, how large is the impact from store closures in the quarter? And is that going to accelerate in the quarters to come, please?

Across all markets also in the U.S., we continue to close the unbranded doors and we closed 125 unbranded doors in, primarily in the U.S. in the quarter.

So expect us to continue closing unbranded doors and opening concept stores, that's really our focus.

A couple of questions from my side. So the number of store openings now raised to at least 375 for this year, and I know when I ask you about long-term numbers, you always say you focus on quality and not quantity.

But if you have to comment on quantity going forward, is this the new norm? What level of store openings should we expect in the coming years?

So is 2015 going to be exceptionally high? Then a second question goes to the acquisition of stores from distributors.

So you're now due with effect 1st of January 2016. Is it fair to assume that these acquisitions happens at single-digit EBITDA multiples?

Or are these deals materially different from, for instance, the chain of ownership clauses you have in your franchise contracts? And just a third question, which is a household question.

The earnings impact from the DKK 53 million provision you made in Germany, how large is that?

Let me start with the first question and then I'll leave the 2 second questions -- 2 other questions for Peter. And actually, it was an easy question because you also answered the question, Lars.

The 375 store openings are the store openings where we can see that we can get quality locations for 2015, and that's why we guide that number. I think what you have to be aware of also when you look at the number, which we will not give you any guidance on going into the future by the way.

But when you look at the number for 2015, you have to be aware of the fact that we have the special project in Germany, which is adding to the number of stores in general. So I think you at least have the take that into the account, but we will not give any guidance when we go into the future on this.

But will you roll on the floor laughing if we assume 300 is normal run rate, i.e., we deduct what's going on in Germany?

I think that we are very happy with the number that we have disclosed for 2015 and for 2015, we have no number at this time.

Regarding the distribution in Singapore, Macau and the Philippines, we are taking over that as of 1st of January next year. We are paying around DKK 150 million for that, including furniture and inventory.

And as we stated in the announcement, there's a retail revenue of 340%. So your approximation on multiple is ballpark correct.

And then on the DKK 53 million German provision, what is the EBIT impact from that?

Yes, in terms of the provision in -- I don't know if we can say it. It's around what we would say.

It's very limited on the group. The EBITDA impact, the DKK 53 million that is on revenue.

Then you have to deduct a bit of cost of goods sold and that's the EBITDA impact.

So -- but basically, I can take DKK 53 million, multiply with the gross margin and then I have a ball figure for the EBITDA impact.

Yes, and then we have the Europe EBITDA in the release and then you have the impact.

I just wanted to know how many stores in the U.K. do you plan to open for H2?

And -- or do you see the penetration of, in terms of new store openings, new concept store opening in the U.K.? Regarding Germany, the reset of the store network, I just wanted to confirm that the reset of the store network should be completed by year-end.

And finally, regarding Russia, where do you see the situation evolving? And what do you plan with your local partner?

Okay. Thank you very much for the questions.

On the U.K., I think that we can say that if you'd asked us how many stores we would have -- be able to open in the U.K. 3 years ago, it would be a different number than we see today.

I think that's the closest we can say. We will not guide a specific number of stores in the U.K., but we continue the development and we also this year have opened new stores.

In Germany, it's a very short answer. Yes, the reset will be completed when it comes to the stores by the end of the year.

What we also have to acknowledge is the fact that we have over a number of years hurt our brand by an over distribution in the German market and the brand has taken damage. We need to rectify that so it will take some time to get the brand health back where it was.

Then in Russia, your question was -- could you just repeat that?

The situation is evolving and what do you plan with your local partner? Is it a network that you can take back in the future?

Or what do you plan to do in Russia?

Well, I think that what we can say about Russia is that Russia is in a very difficult situation and that we can also see in our numbers. I think that when we look at our numbers compared to what other retailers or businesses experienced in Russia, we actually are doing pretty well.

And we are encouraged by that. When it comes to PanClub, they're doing a very good job in a very difficult market and we have our distributor there and there has been some, as we've also said previously, discussion about the change of that and presently it is in ownership of a Russian Bank called Sberbank.

And we're very happy with the cooperation with them as well.

Yes. All right, but just to come back on the penetration of the U.K.

or do you see the penetration of the U.K. with PANDORA concept store, do you still see room to open many new concept stores?

I can say that we still see room for opening concept stores in the U.K., in general.

You mentioned the strong growth in Charms and Bracelets, which is very impressive. And you commented that the newness of assortment is a key driver here.

Could you explain a little more? Are there some performance indicators you could quote in that respect?

Also in Charms and Bracelets, whether you can comment on the performance of the ESSENCE COLLECTION, which was a big deal when you presented it first a year or 2 ago? How is that developing?

And finally, on the upgrade of the guidance, you mentioned that 2% is due to more FX tailwind and could you comment on other operational factors? What are the key factors that are causing you to upgrade that guidance, please?

Absolutely. We -- yes, we have a strong, and I think that's very encouraging, quarter in our Charms and Bracelets and really what we can say that it’s a strong quarter across all the different product categories, which was definitely encouraging.

And newness is an important part of it. I think that what we also told you in the -- what do you call it?

The announcement was that we have, in connection to our Mother's Day collection, actually cut a little bit in the newness and blended in existing products in the assortment. And that was actually also a very important and encouraging experience because what we could see was that there were some of our existing products being put into the collection together with the new products for the Mother's Day collection, which actually sold better in the second time we had in the collection compared to the first time in the collection.

So we're moving on this. We want to have a good balance between new products and existing products.

We don't want to go too far into new products because we do believe that would give us more risk. So we are very happy with the balance we have between the 2 at this time.

The ESSENCE COLLECTION is doing well, and we are very happy with the development in ESSENCE. Like any other product, there's a big difference between the different geographies.

So there are some markets and some consumer types, which enjoy ESSENCE more than others. And just anecdotally, I can mention that in Germany, we have a higher share of ESSENCE than we have in general.

And it is well suited in that market. On an indication level, we will not give you the total number, but we have a number of markets where the ESSENCE COLLECTION is contributing more than 5% of our revenue.

If you then look at our upgrade on guidance, it is correct, 2% come from currency. And I think that what we are very encouraged with after the second quarter is that the basic business is doing very well.

So actually, what we've seen is a strong quarter, which was also a nice development and an enjoyable thing for us. And based on that, we have upgraded our guidance for the full year.

So it's because we've seen a strong business in the second quarter and we can see the spillover to the remaining part of the year and because of that, of the business doing well, we have upgraded. And then on the final part, which is worth mentioning, which is the concept stores.

As we've seen that we can open another 50 concept stores, we also have that included in our guidance.

I have 2 questions. One is on Germany and the growth you have down there.

I think it was in June that the management of Germany was out saying that you have the same potential in Germany you have in the U.K. And then I was wondering if you could put a little more flavor on it.

That means that you want to triple the German sales to be on par with the U.K., or its relative? And secondly, you reduced the provisions for returns from 8% to 7%.

And in this quarter, could you say something about what that means in million DKK on the revenue line?

Thank you for your questions. I'll take the first question, and Peter will take the second one.

I think that you are referring to an article in a Danish newspaper where asked about the potential in Germany, our General Manager in Germany smiled and then the journalist, he kind of took that to the point where he thought that we could have the same potential in Germany, as in the U.K. I think when we talk about Germany, we are very encouraged with the 8% like-for-like, and as you might remember from last quarter, we actually had an expectation of seeing some negative like-for-like because of the development of the store network.

So an 8% like-for-like development in Germany after the first quarter is something, which we find encouraging. I think that we have to look at the German market.

We are in a process where we are opening new concept stores. The German organization is doing a brilliant job in that, and with good German efficiency, have put that into a structured system.

So by the end of this year, we believe that our store network is refreshed and good and then we'll take it from there. Clearly, with what we're doing in Germany and the amount of effort and also money we're putting into it, we do believe in the future of the German market.

Yes, and in terms of the question on the return provisions. It is 7% in Q2 and you're right, it was 8% in Q1.

It does fluctuate over the quarters. So if you compare to same quarter last year, it is actually unchanged because it was also 7% in Q2 of last year.

This is Kristian Godiksen from SEB. A number of questions.

Firstly, can you maybe comment a bit on the progress of Hannoush and the outlook of this turning positive? You've now opened 10 out of the 22 new upgrade then to the Evolution store design.

Have you seen a pickup in sales growth from these 10 stores? That was the first question.

And secondly, maybe if you could comment a bit on what was the trigger that made you take over the distribution in Singapore, Macau and the Philippines? And yes, and thirdly, just more of a household question.

You mentioned that the 25% fewer product variations on the Mother's Day collection in the quarter impacted growth. I would assume that this was just equal higher volumes of the remaining product variations in the coming quarters or so we should see more refill of inventories?

Or how should we think about this?

Okay. I think that when we look at the Hannoush stores and generally, I think that we should relate that more to the northeastern part of the U.S.

We have seen over the years quite some negative like-for-like development. I think that on a slightly encouraging level, we can say that we now see small negative like-for-like numbers in the region.

And I think that when we look at our Hannoush stores, they're doing pretty well in the region. The trigger for Singapore, Macau, the Philippines is actually just in line with what we've been doing over the years when we've seen our distributors doing well and actually we're getting to a position where we're well established in the market and it comes up for renewal of our agreements.

We have a look at it and if we find that it would be beneficial for us to take over, we do that and that's exactly what we're doing in Singapore, Macau and the Philippines. And yes, you can say just in line with our strategy in that area.

And then the last question was regarding the...

The product variations, the 25% to your product variations for the Mother's Day?

Yes, good question. Yes, what you have to be aware of is that when we kind of put a new collection into the market, we -- what happens is that our concept stores but also the gold and silver dealers that we have, they kind of stock up of new products and that, of course, is supporting a broader collection in terms of direct sales.

But you're absolutely right. When it comes to mixing it with existing products, then the total sales will also stay strong even though it will not be related to the collection that we are planning at that position or that period of time.

Just 2 quick follow-ups. So on the Hannoush side, the 10 stores that are now upgraded to the new Evolution store, have you seen an impact from that?

I don't think we'll comment on the individual stores. But what we can say is that if we look at the area in general, we are doing good and we are progressing, and that's very encouraging.

Okay. And then just on the distribution side, on the Singapore, Macau, Philippines, so what is the difference compared to -- for this distribution agreement to the one with Russia?

And when does the distribution agreement with PanClub expire?

I think that every market is special and every market has its own kind of determinants, which is something that we look at. What we have looked at is the development in Singapore, Macau and the Philippines and we were at a time where we thought it was a good idea to take over the distribution there.

It doesn't have any implication of other markets.

Okay. But can you just comment when does the distribution agreement expires in Russia with PanClub?

No, I cannot.

Klaus Kehl from Nykredit Markets. Two questions, please.

First of all, could you give us some comments about e-commerce in the U.S. and what kind of impact it has had here in Q2?

And secondly, a question about the EBITDA margin. And could you try to elaborate a bit on how it is affected by store openings here in the first half of the year versus second half the year?

And what I'm thinking about is that when you open a store, upfront, you have all the costs and hopefully, let's say, a couple of months after an opening, you will start to see the revenues. So in other words, it must have some kind of a negative margin impact short-term.

I'll take the first question and then Peter will relate to the second question. And it is correct that we have opened in -- our eSTORE in the U.S.

We are very happy with the fact that everything is working. We've also seen meaningful revenue coming through that store.

We are not going to give you any figures on how this is developing at this time, but at least -- and what we can say is that it's going to be very interesting to follow this over the year because what we've seen in other markets is that when we get into the gifting season by the end of the year, men like me and you tend to be more interested in e-commerce with the guidance we get from our wives and girlfriends, probably only one sort by the way. But we -- and there we can see a pickup of the traffic in the eSTORE.

So we're going to follow it. It's working, and we are encouraged with the development so far.

Yes, in terms of the impact of store openings, be aware that some of the openings are owned and operated stores and others are franchised. Give you an idea of the impact of the owned and operated stores that has a negative impact on EBITDA of 1 percentage point in Q2, the store openings in Q2.

And when we open a franchise store, we typically across all markets have a sell-in of around EUR 250,000. So those are the building blocks for that.

And it's all rough numbers, of course.

So you said it had a negative impact of 1 percentage point in Q2 from your owned and operated stores. Was that correctly understood?

Of course, that's -- why is that a negative impact? But be aware that the stores we're opening in Q2 that -- in connection with a turnaround in Germany as well as the turnaround in the Northeast, that obviously has to be somewhat lower EBITDA margin than other stores.

Okay. And should we then expect a similar negative impact in second half of '15?

Or will that start to improve?

Obviously, we are working to improve these stores in Germany as well as the Northeast.

Two questions, please. The first question is regarding Disney.

It is obviously making a difference for you in the U.S. market.

I'm just wondering, when is there a need for you to launch the next collection in order to keep up the momentum? And my second question is regarding this upgrade on the store or the number of store -- or concept stores you will open in 2015.

Is there any particular markets, which are driving this upgrade? Or is it going to be divided fairly equal to the number of store openings we have seen over the past couple of quarters in terms of geographical mix?

Thank you very much. First question, I'll take both of them.

The first question about Disney is making a difference. We do believe that there is a good kind of match between the Disney brand and our brand, and we've also seen interest from our consumers in America on the Disney collection.

We do launch collections all the time. So as we refresh our assortment in general, we'll also refresh the Disney assortment.

So we have put that into our general upgrade of assortment. So that's actually happening continuously, as we are doing with our other products.

So that is happening in the same way. And then when it comes to the concept stores, it is -- sorry, divided over our different regions equally.

So you can expect that as something as we also have done before. So equally distributed as expected.

Just 2 quick follow-up questions. First on the management change that was announced last week, the head of Australia moving to be the head of Europe.

If you could give us more color on the reasons for that? And then finally, on the margin guidance, you confirm the 37%.

When I look at the numbers for H2, I would expect gross margin to expand more than in H1 and also there should be more leverage coming through also because you will have then a repeat of some of the provisions that took place in quarter 3. So I calculate a bit better than 37%.

So I was wondering if there's going to be any investment in particular that we should be aware of in H2, please?

I'll take the first question and Peter, he's going to take the second question. The management change that we have announced is that we have our present President of Australia and New Zealand who's going to kind of reallocate to Copenhagen and be the head of our European business.

We do believe that we see some potential in aligning the organization in Europe, also making sure that we actually take the learnings from different markets and bring them around. That's one part of it.

The other part is we have announced also a new management board in the company, where we will have representatives from the Americas, from Asia, and also David Allen from Europe in the future, who will be the voice of Europe in that -- and in that way we would be able to run a more efficient company and have a much more -- and have a stronger structure to kind of support the development of the company. So that's the reason behind it.

Yes, and in terms of the margin for the second half, be aware that we are taking over China as of 1st of July. And as said, we'll start spending money in China.

Also Germany, we still have quite some stores to open in the second half and also need to put more marketing efforts behind the brand in Germany.

Perfect. And maybe one more thing on Disney.

Will you -- within the contract that you have with Disney, is that limited to the Charms or that could be expanded also to Rings, please?

It is already. We also have Disney rings in our stores.

Yes. Just a quick follow-up question on channel inventories and order backlog.

When we speak to dealers, we hear that a lot of the best-selling SKUs were out of stock or replenishing of orders was particularly slow in Q2. I wonder how you look at that, if it's deliberate strategy.

And if you think channel inventories are normal or maybe a bit below normal.

We do believe our channel inventory is good. We...

Good means lower?

No, it doesn't mean low. It means it's on a sufficient level.

I would say, in general, I have been very encouraged to see how well our Thailand production copes with the development in demand, and actually upgrades our manufacturing capabilities. So we are very good on that.

I think that what you might see from time-to-time is that if our kind of, say, prognosis on individual products is a little off, then you would see single products, which is less in supply than others, but that's more a household issue and really which is related to the fact that sometimes there's a very, very strong demand for individual SKUs.

And maybe just to add, when you have 10,000-point of sales with 7 drop and adding 50% new DVs a year, there will always be some dealers that are not getting what they would like and then they start complaining. That's a part of doing business.

But we're very happy with our inventory's levels and our capacity is strong and good and supports the business.

Okay, thank you very much for the discussion and the good questions today, enjoyable, and thank you very much for joining us this morning. Have a great day.