Pandora A/S

Good morning, everyone, and welcome to the conference call for Pandora's Q3 results. I am John Backman from the Investor Relations team.

I'm here with our CEO, Alexander Lacik; and our CFO, Anders Boyer; and the IR team, Kristoffer Malmgren; and our new member, [Adam Fogelson]. There will be a Q&A session at the end of the call.

As usual, please limit your questions to 2 at a time and get back into the queue if you have additional questions. Slide 2, please.

Please pay notice to the disclaimer on Slide 2 and then turn to Slide 3. Alexander, Please go ahead.

Thanks, John, and welcome, everyone, on joining the call with us this morning. I wanted to open this by saying that we are very pleased with not just the strong numbers per se, but importantly, that they have come through with high quality.

And let me highlight a few facts to support this right up front. Like we have done in the last few quarters, we are comparing our performance versus 2019 as this represents a cleaner base without COVID implications.

First of all, we delivered strong 9% sell-out growth versus '19. This pulled through an EBIT margin above 20%, clearly demonstrating our operating leverage.

Moments, our biggest platform and the core of Pandora grew by 11%. This is particularly pleasing, as we have said all along that this platform continues to be vital and offers good growth prospects.

From a geographical standpoint, we really have 3 quite different pictures. First, the U.S.

jewelry market continued to grow at an unusually high rate, supported by stimulus programs. Importantly though, Pandora continues to grow at an even higher clip, like we have done for the last couple of quarters.

On that basis, we continue to believe that we are gaining market share. Secondly, Asia Pacific has been strongly affected by COVID related issues, in particular, China and Australia has dampened our group results in the quarter.

Thirdly, we have recorded a very strong rebound in our European markets, delivering 11 -- in our key European markets, I should say, delivering an 11% sell-out growth in the quarter. This is particularly pleasing and it's been done with significantly less price promotions, i.e., driving full price sale, a true quality mark.

Looking around us, we can definitely note that the competitive activity is picking up as market conditions stabilize. Despite this, we delivered strong growth.

Our model is working. Now let's move to Slide 4, please.

As a consequence of the strong results and an updated forecast for the rest of the year, we upgraded our financial guidance for both organic growth and EBIT margin in '21 on the 1st of November. Organic growth is now expected to be in the 18% to 20% range, driven by better performance.

This equals a 5% to 7% organic growth rate versus 2019. Anders will give more detailed perspective on our assumptions in just a minute.

EBIT margin is now expected to be in the range of 24% to 24.5%. This is driven by the higher expected growth rates turning into higher operating leverage.

We are also continuing the distribution to our shareholders through both the ongoing share buyback program running to February and a third extraordinary dividend for 2021. Slide 6, please.

Before we dive into quarter 3, I would like to take a step back and repeat our longer-term view. At our Capital Markets Day in September, we unfolded Pandora's new growth strategy called Phoenix.

I would like to recap 4 key messages underpinning the direction towards '26. First, the new strategy is an evolution rather than a revolution.

Our model is working. Therefore, we'll keep on developing this rather than venturing into new and risky territory.

Secondly, our objective is to drive a balanced top and bottom line growth. We want our valuation to develop in a more predictable and balanced fashion.

Thirdly, we will seek to leverage our core assets, namely our strong global brand awareness, our widespread global distribution network and our industry-leading manufacturing capabilities. Finally, we see a strong growth potential within our core, both in terms of staying focused on the jewelry market as well as in countries where we are already established.

Next page, please. Here, we are illustrating the investment case in more detail.

There's a few key messages I'd like to pull out. First of all, to the far left.

The strategy is, as I just mentioned, built on our existing core assets. That's important because we're building on a strong foundation, and it drives operating leverage and EBIT margin expansion.

In the middle, we list the drivers for value creation from Phoenix and our 2023 targets. The gross list of growth opportunities is rich, and we don't necessarily need to land all of them in order to reach our goals.

On the right part of the slide, we list more growth avenues beyond Phoenix. When we developed the strategy, it quickly became quite clear that we see more growth opportunities than what we can handle during the next few years, even though some of these opportunities are quite obvious, like getting a stronger foothold in India or Japan.

It's simply a question of prioritization. That's, of course, a pretty good situation to be in.

Slide 8, please. When it comes to sustainability, we continue to invest in and future-proof our business.

In September, we announced the ambition to reduce carbon emissions across the entire value chain by 50% by 2030. This target has been approved by the science-based target initiative.

It places us as far as we can tell, among the most climate ambitious companies in our industry. As the meeting in Glasgow is so clearly underlining these days, our society needs to show real action faster.

We are determined to do our part and lead in our industry. We have a full strategic sustainability agenda as part of Phoenix to become low carbon, circular and inclusive.

It's not only the right thing to do. It will also future-proof our business and build a position that we believe will be appreciated by consumers, employees, financial community and other important stakeholders.

Next slide, please. To drive the core is a key pillar in our strategy and our #1 priority.

The Moment platform is our core, representing roughly 70% of our business. In the third quarter, we launched Moments Wearing occasions, a collection of key rings and bag holders.

The collection did 2 things for us. First, it helped reengage existing customers with the brand by showing new innovative ways to engage with our charms.

Secondly, it drove an incremental 2% revenue in quarter 3 and supported the strong Moments performance. It's very clear that we can continue to activate the platform and generate solid outcomes.

The Moments platform saw sell-out growth of 11% in quarter 3, as I just said. Next slide, please.

The second strategic priority is to fuel the Pandora brand with more concept platforms next to Moments. Pandora Brilliance is our first lab created diamond collection.

We launched Brilliance in U.K. back in May.

Part of the reason for a test instead of an immediate global rollout was to learn and sharpen our go-to-market toolbox. It's a new segment for Pandora for many aspects, and we needed to verify as well as glean important insights before considering a further geographical expansion.

Based on the learnings to date, we are confident that we have generated sufficient insights for a successful rollout. I'm therefore happy to announce today that we will initiate a further sequential global rollout starting next year.

This is an important milestone for the brand as it opens up for a larger addressable market. We will not rush into this, but successfully build a proposition to serve this segment with exciting offerings.

For competitive reasons, country details will only be shared closer to the launch date. So please stay tuned.

Our aim is to establish Brilliance as a new platform to democratize diamonds. Diamonds are not just forever.

They are also for everyone. Next slide, please.

Our largest market, U.S. continued its outstanding performance.

This was the third quarter in a row with sell-out growth above 50% compared to 2019. While this growth has been fueled by stimulus packs, it's important to note that the external data suggests that we are growing more than the market.

Furthermore, 98% of revenue in U.S. was full price sales in quarter 3 as we continued to decrease promotional activity.

And across our key markets, we continue to have a lower promotional level. And in Q3, you had less promo days in both physical stores and online versus '19, as illustrated to the right on the chart.

Next slide, please. We continue to see our performance being impacted by COVID-19.

China saw sequential deterioration. As we told you already in Q2, this is mainly due to COVID-19.

Stores were formally opened, but traffic was down 70% versus '19, and around 80% of our stores in China were somehow impacted by COVID-19. Therefore, as we told you about at the CMD, we delayed the planned investment in repositioning the brand in China.

The good news is that Pandora was the #1 brand on Tmall in fashion jewelry, a recent development. Australia was also severely impacted by COVID-19, with roughly half of the stores temporarily closed during the quarter.

Stores in Australia are now back to being almost fully open again, and I'm happy to say that, that has led into a positive territory after the reopening. Next slide, please.

Our key European markets saw a strong rebound as stores opened up in Q3 and delivered a sell-out growth of 11% versus 2019. U.K., Italy and Germany all returned to positive growth, where Italy and Germany also delivered positive sell-out growth versus '19 physical stores.

France was impacted both by promo detox and COVID-19 restrictions. Overall for the group, sell-out growth versus 2019 was 9% in the quarter, driven by the strong rebound in Europe and continued strong growth in the U.S., while as mentioned, dragged down by China, Australia and other Asian markets that were heavily impacted by external factors, i.e., COVID-19.

Next slide, please. We've kept investing in marketing and more holistic communication.

This is paying off. Our brand momentum is strong.

This continues to be the driving force of revenue growth, which obviously then drives EBIT margin. In terms of unaided awareness, we note 3 points.

There seems to be an industry decline during the COVID period. We can only speculate about the reasons for this, but the restrictions around physical retail and the consequent traffic declines, paired with lower advertising spend are likely drivers.

Secondly, there is a certain short-term volatility in the quarterly metrics. However, we note a stable annual trend for Pandora, was 36.6% in '19, 36.4% in 2020.

Obviously, '21 full year is not yet available. Last point, while we note the decline in the quarter, it's in line with the general trend.

Therefore, relative and leading performance remains intact. In Q3, we maintained a leading position in 5 of 7 key markets.

In terms of our global share of search, more than 30% of the Google searches for branded jewelry is for Pandora. We note a slight decline in the quarter, which likely is driven by lower promotional pressure leading to less search.

Net, we continue to stay top of mind as well as engaging with our consumer base. It's clear that as conditions have started to normalize, we see more competitive activity.

There is no doubt that the investments we made during the pandemic will continue to cement our leading position. Next slide, please.

Our investments into digital continued to generate strong results in the quarter. Digital plays a key role in our new strategy, both as a foundation as well as a distinct growth pillar.

Our online revenue almost doubled versus 2019. In most countries, our e-store is the largest portal to the brand.

So the investment in e-commerce also drives [Halo] onto the brand. Our new digital organization delivers constant improvements to the customer experience.

Tangibly, we note that online conversion continues to improve and was up by 50% versus 2019. We continue to expand our omnichannel features where and when it makes sense due to COVID-19.

There's a very strong consumer interest in, for instance, click-and-collect in the U.S. That made up 15% of our U.S.

online sales in quarter 3. Recently, we rolled out click-and-collect in France, Italy, Germany and Australia.

We now have click-and-collect in 95% of our concept stores in our key markets. Next slide, please.

Before I hand over to Anders, I want to give an update on the situation for our staff and production in Thailand. The COVID-19 outbreaks, they are escalated during late summer and the situation became more challenging and required significant mitigating actions.

First of all, the health and safety of our employees comes first, always. To protect our employees and to mitigate the risk of disruptions in the supply chain, we have taken a broad range of precautionary measures.

You may recall that we hired additional staff already in Q2 as well as increasing our inventory position. We continued to increase stock levels in Q3 as well as hiring of additional temporary staff to offset the people stuck in quarantine and other issues around COVID.

We're in close dialogue in cooperation with the Thai authorities, and we are also closely monitoring and supporting our suppliers. Our production was affected, but we managed to keep the disruption such that it did not have any significant impact on our ability to meet demand.

This is a major achievement given the circumstances. I'd like to sincerely thank our colleagues in Thailand for their tremendous effort and personal contributions to mitigate the risks during very challenging times.

Now I'll hand it over to Anders to take us a bit more through the numbers.

Thank you, Alexander. I will go to Slide 18 then.

And as you have heard already from Alexander, the solid revenue growth continued in the third quarter, and this is also visible in a strong EBIT margin in the third quarter. So I'll just give a cover of other financial highlights here.

First of all, on the gross margin. The gross margin is down 260 basis points versus third quarter of last year.

But it's important to know that the underlying gross margin is, in fact, unchanged and remains strong. The decline that we see versus last year is driven by higher silver prices and driven by one-off costs related to fighting the pandemic in Thailand as well as we do have a bit of one-off costs related to expensing inventory taking over in connection with forward integration, and we didn't have any of that in the third quarter of 2020.

Secondly, it's worth noting that our net working capital continues to be around 0, despite that we are building up inventory for the peak season here in the fourth quarter. And it's also worth highlighting that our leverage is still in the very low end of the capital structure range 0.5, despite the cash returns we have made so far.

The leverage is expected to tick up a little bit in the months to come due to the relatively high level of share buyback that we are running at the moment. But the level still leaves room for continued future cash distribution to our shareholders.

Finally, I'll just -- on this slide, I just wanted to highlight the 48% return on invested capital, ROIC. And this is significantly above the levels that we saw both in 2020 and 2019 and partly due to higher top line and bottom line growth, but also partly due to the -- that the program now, restructuring costs are now history.

So next slide, please, Slide 19. Here, we'll have a look at the revenue development.

In -- there's 2 bridges here. And in the top bridge, we are comparing to a clean base in '19 without COVID-19 impact.

And it is quite clear that the company is growing and sell-out and growth and organic growth are both 9% here in the third quarter. The bucket that we are calling normalization of sell-in, that includes the impact of the so-called commercial reset that we were running back in 2019, where we deliberately reduced inventories in the franchise partner channel.

In the bridge below where we compare to last year 2020, then the some quite clear impact from COVID-19 that may require a little bit of explanation, just as -- just like back in the second quarter announcement. First of all, sell-out growth is lower than organic growth, just like we saw in the second quarter of this year as well.

So the 6% bucket that we are calling normalization of sell-in and Q4 stock build, that illustrates the effect that pandemic had last year because last year, it lowered sell-in as uncertainty was obviously quite high, and our partners were more cautious with building inventory ahead of the Q4 peak season. This year is back to normal behavior, and it drives up organic growth above sell-out by 6 point when we compare on a year-over-year basis.

And in the same way, other points of sale were very hard hit in the third quarter of last year, but have recovered strongly this year in the third quarter of this year. And this has happened partly by moving revenue from our online business and into other point of sales.

And the performances in other points of sales is not included in the sell-out KPI. And therefore, that also adds 4 points of difference between sell-out and organic growth in the third quarter.

And it's exactly the same effect as we saw back in the last quarter in Q2. So next slide, please, 20 -- Slide 20 on the EBIT margin.

Our EBIT margin in the third quarter was 20.2%, up 3 points versus last year. And the main driver of this continue to be operating leverage, as Alexander also mentioned.

And this margin expansion was delivered despite that we received significantly less government support and less rent concessions this year. And despite that we also incurred actually quite some extraordinary cost to mitigate the pandemic in Thailand.

And that's the first 2 pink boxes in the waterfall on this slide. On the other hand, there's also some positive impact from phasing of operating expenses and some temporary savings from -- on actually quite unusual high store vacancies here in the third quarter.

And a part of this is expected to reverse in the fourth quarter. Then I'll go to Slide 22 and the upgraded guidance.

And first here, we are bridging from the 2020 revenue on to the new guidance of 18% to 20% organic growth and then onwards to the '21 revenue in absolute numbers. Where we will be landing in this 18% to 20% range is not least depending on the level of U.S.

revenue here in Q4. And as usual, it should also be recall that even though we have only 9 weeks left of the year, it is 9 big weeks.

And those 9 weeks that we have left of the year are not far from 1/3 of the sell-out for the full year. So we are, as usual, moving into peak season.

I'd also like just to repeat our 3 COVID-19 assumptions for the guidance. First of all, we still assume that around 5% of the stores will be temporarily closed or severely impacted by COVID-19 in Q4.

And secondly, the guidance assumes that there will be no new COVID-19 restrictions implemented, which impact consumer behavior significantly in one way or the other. And finally, the assumption is that there will be no major disruptions in the supply chain.

And then finally, I just want to highlight that the new guidance of 18% to 20% growth versus last year corresponds to 5% to 7% organic growth on a 2-year stack. Then next slide, please, Slide 23 on the EBIT margin.

And in this EBIT margin, we are building all the way back from the EBIT margin last year through the old guidance and then on to the new guidance. And as you can see in the right part of the bridge, the increased EBIT margin guidance is driven by operating leverage, a bit lower investments in China this year and then partly offset by the cost of mitigating the pandemic in Thailand.

And I would assume that this is quite straightforward. So on this slide, I will just mention the 2 other changes to the guidance parameters that we made the day before yesterday.

And that includes a slightly lower CapEx and that the net store closures end in the low end of the previous guidance range. And just to avoid misunderstandings, and let me be very clear that the lower CapEx is not a reflection of any kind of uncertainty about the strategy or similar.

It's mainly a reflection of the pandemic and the natural postponement of certain investments as a consequence of that, including in Thailand. And then we also want to repeat that the store closures that we are doing this year is just sort of normal ongoing optimization of the network and it includes the deliberate delay in new store openings in China.

And just repeating what we communicated at the CMD, we do see ample white space around the world and ample opportunity to expand the network in the years to come. On Slide 24, we'll have a look at what the full year guidance implies for the fourth quarter in terms of revenue growth on a 2-year stack versus '19.

And the guidance versus 2020 of 18% to 20% growth corresponds to 5% to 7% on a 2-year stack. And that's the number you can see in the last black box to the right.

And then the implied organic growth for -- specifically for Q4 is 2% to 7% organic growth, and that's the box in the middle. So with our guidance, we confirm that we see that Pandora is back on a growth track in Q4.

This -- and that is despite that we have a stronger comparison base in Q4 of '19, where the impact from program now started becoming more visible. And as you may remember then in the third quarter of '19, organic growth was minus 14%.

And then in Q4 of '19, it improved -- the organic growth improved sequentially to almost flat or minus 1% to be precise. So the comparison base on a 2-year stack actually becomes quite much tougher and the 2% to 7% implied guidance should be seen in that context.

And then you may say that the implied 5-point range in Q4 is quite wide for a quarter where we are already almost in the middle of it, at least well into the Q4. But we are giving this range due both to the uncertainty related to pandemic as well as an elevated range of possible outcomes for the U.S.

performance in this quarter. And then Slide 25, last slide from me.

As Alexander mentioned upfront, we are continuing the cash distribution. We have ample liquidity.

We have a low leverage, and we will distribute another DKK 500 million in dividends in roughly 2 weeks from now. So -- and that will be the third extraordinary dividend for this year.

This takes the total distribution to shareholders from both dividends and buybacks to DKK 5.5 billion between May '21 and early February next year. And that's close to 7% of our market cap.

And with that, I'll hand it back to Alexander and Slide 27, please.

Thank you, Anders. A quick summary.

Our performance in Q3 was strong on both top line and EBIT, as I said, driven by Moments, continued strong U.S. performance as well as a very strong rebound back to growth in Europe.

We are well prepared for the upcoming Q4 trading period. As noted, the performance to date and our view on Q4 led to an upgraded guidance, which Anders just touched upon.

Finally, we'll continue cash distribution to our shareholders, both by the announced share buybacks as well as the extra dividend. All in all, as always eventful, but clearly showing the strength of our operating model.

And with those remarks, we're ready for the Q&A session. Operator, please get us going.

First, a question on the implied margin guidance for the Q4. We spoke about the implied growth, but I'm curious to hear about the margin guidance.

I think it indicates some 28%, but a 7% contraction from Q3 '19. So just trying to understand the bridge here.

So what kind of raw material headwinds and marketing levels do you assume for Q4, for instance, maybe start there?

Thank you, Fredrik. I think that was a question for me.

It’s Anders here. It's -- yes, it is about 6.5 points lower EBIT margin compared on a 2-year stack.

And as you point to, the majority of this is driven by external factors of being the foreign exchange and commodities or silver prices. And it -- the external factors amounts to almost 4 to 5 points of that drag on the EBIT margin versus Q4 of '19.

So we've seen the both silver prices going in the wrong directions in terms of off margin and FX as well. So in total, that's 2.5.

Let me just -- 2.5 points versus at Q4 of '19. So that's the first building block.

Then we will continue having COVID-19 cost in Thailand to fight the pandemic in the Q4 of this year and that we expect that to amount to pretty much the same as in Q3. So that's another point.

And then we will be in -- compared to Q4 of '19, investing in China in turning around the brand. Let's see how the pandemic develops, but that's the plan.

And that could be up to another -- almost 1 point of drag, specifically on the Q4 for margin. So if you had that up, Thailand, China, silver prices and foreign exchange, you get to 4 to 5 points of the drag compared to Q4 of '19.

And the remaining couple of points are more, I should say, permanent or structural factors and not least that we have increased marketing spending quite significantly compared to Q4 of '19. And from memory, I'm just trying to look in my notes here.

I think we spent just about 12% of revenue in marketing in Q4 of '19. We're not specifically disclosing what we plan to spend in Q4 of this year.

But if you look at the numbers so far this year, we are closer to 15. So almost 3 points up compared to -- on a 2-year stack.

Some of that, a pretty nice chunk of that we are -- have been funded by the cost program that we have been running, but the investments in marketing and strengthening the organization is a slight drag on the margin versus Q4 of '19 as well. So hope that clarifies.

Yes. That's very clear.

Second question from me on the key European markets. Would you mind sharing what you saw in terms of timing throughout the quarter?

Did you see peak somewhere during the quarter and then a softer expedite that was the momentum equally strong as you entered the fourth quarter?

Yes. We will not be commenting specifically on the timing within the quarter.

And it's not because there's something we don't want to say. But I think just as a principle, we don't want to comment on go into that level of granularity.

Two questions for now. So one thing that surprised me in the quarter was that Brilliance was just 2% of sales in the U.K.

And of course, I know it's a test launch possibly with limits on volumes. But I wonder in that context, if you can explain why it's only 2%?

And if you can maybe comment on how you source from Element 6 are the long delivery times? Can you ramp up volumes quickly and will Brilliance be available in the U.K.

in larger volumes for Q4? That was for the first question.

The second question goes to the U.S. And I understand that your assumption for Q4 is a normalization of growth, which I think is very prudent.

However, I think it's equally clear that the total U.S. jewelry market remained exceptionally strong in October.

So I wonder if you have any specific observation suggesting that it should normalize? And then related to that, Anders, you mentioned in your comments that when U.S.

grows strongly, it's margin accretive. So if we had a scenario where U.S.

continues to grow at the same pace as in the previous quarters, the top line effect, I can easily calculate. But can you maybe comment on what that would do to your Q4 and your full year margin?

Lars, I can talk about your first question here, at least. So yes, as you point out, the U.K.

Brilliance was a test market. So the primary objective was not to chase revenue, then we would have ended up with probably a slightly different number.

So what we were looking for and just to kind of recap, we said, the most important point for us was to figure out are people going to be willing to spend GBP 400, GBP 500 on a transaction with us in this category or not. And I think that's the basis for the decision to expand Brilliance outside.

And to a specific point on the 2%. In fact, it's -- we tried different things during the quarter.

One of the things, we were trying to figure out was, can we run this platform with a lot less products available in-store and then direct people online instead. And this was particularly relevant for the smaller shops.

And I think what we are finding so far is that, that's probably not something we can do from the get-go at least. We can see a stark contrast in shops, which we have the entire assortment versus where we only had -- I think we only had 41 stores in U.K., where we had all 36 DVs present.

There, we record anywhere between 3% and 5% share of our business depending on the store and the type of audience that we serve versus a much lower number in the, let's say, the numeric bulk of our stores, where we only had 6 DVs available. So therefore, you can say that the total number there is not really representative of what we need to be doing going forward.

So these are just some of the learnings that we have kind of learned in the test launch. So I do think it's important to point out that it was a test, and we did try many different things, which is maybe different from, let's say, Pandora Me, which we launched and where we know what levers to pull and how to go about it with a global rollout.

So I think that just provides a little bit of context on that. And you can rest assured, if it didn't have legs, I would not have been announcing today that we are going forward.

So we feel very good about the insights that we've generated so far.

Yes. Then on the other question, last, on the U.S.

level of growth and potential margin impact. I think what you are indicating or asking about is right.

If we end up with continued as high growth in the U.S., as we've seen in -- so far this year and also in the third quarter, that would lead to a margin upside for Q4 and the full year. And I think the way to think about it is the -- so the different rules of thumb that we also talked about in the past that if additional revenue comes in, obviously, we get, let's use round numbers, 75% gross margin.

And then the EBIT margin impact on a sort of pure incremental basis on a short time rising, like within a quarter is an EBIT margin from, let's say, between 50% and 60%, depending on whether that additional revenue comes by us putting more marketing spending behind it or whether it just -- we just generate higher revenue on the marketing spending that we are having any ways. So -- and that leads to the sort of the incremental EBIT on, let's say, 50%, 60%, depending on which the scenarios that we are in and thereby, somewhere between 25 and 40 basis points of EBIT margin pickup for every additional 1 point of growth.

That's -- these are the range. So let's see.

And how the U.S. plays out.

We still have the big weeks ahead of us, even though we are 1/3 into calendar wise into Q4. We still have some 85% of trading in the quarter ahead of us.

That's very clear. Just the second part of the question was, when you guide for a normalization, is that based on a specific observation in October?

Or is it just being prudent?

We -- I think we have -- as you have probably also seen in different market days, the U.S. is still holding up.

But given, yes, that we still -- the big -- all the big trading weeks are still ahead of us starting in week 47 onwards through Christmas, then it -- the -- yes, as I said, 85% of sell-out is still ahead of us.

And then the only addition…

So you haven't seen any slowdown?

Sorry, yes. And then the only other addition is obviously, the stimulus checks are now gone.

So at one point, we expect this to come through somehow. But when is a question mark really.

And October somehow still holds up, as you noted. So yes.

Could you maybe just share a few thoughts on Black Friday and Christmas sales kind of overall? If -- could you guys benefit if other categories perhaps are out of stock, given the global supply chain issues that we have right now?

Is that part of the upper end of your guidance that you actually take share from other product categories in Black Friday or Christmas sales? My second question is, if you could just add a few more words on the relaunch of Pandora Me.

What kind of age group are you seeing? What kind of ASPs are you seeing?

Are you getting in new clients as expected? And just if you could add a little bit on some of your early indications on some of this case.

So on your first question on, will we benefit from other people having supply chain problems. It is not currently baked into our forecast because it's purely speculative.

So which categories and where those flows go, who the hell knows, excuse the language. So -- but of course, there could be an upside on that if that's the way it plays out.

We've had the conversation with the respective countries. But the feedback from the general managers are is like how am I supposed to forecast this.

So we've kind of stayed clear from that. We try to forecast things that we kind of see, obviously, more than others.

But it may happen. And in that case, we will take it if it doesn't, well, it shouldn't impact our forecast.

Then on your second question, Pandora Me was launched on the very last day of the quarter. So by that nature, I would not comment on that because it sits in the Q4 information, which we'll talk about in February.

So I'll stay away from that for now.

Two questions from me as well. The first one is on China.

So you've been talking about postponing some of the investments into fiscal year '22. Maybe can you give us an update on the plan here?

And how much do you plan to invest into the next fiscal year? I think that from your press release, I understood that you're going to half your planned investments between now and year-end.

So how should we think about fiscal year '22? And then, Alexander, I think you've been quoted by the press saying that the plan to triple revenues in China over the next 5 years looks ambitious.

Is this like something new, maybe more cautiousness on the future growth plan of Pandora in the region? So is there anything incremental versus what you have shared during the Capital Markets Day that you would like to share with us as well?

And then my second question is on your EBIT margin. So basically, if I take into account your new fiscal year guidance, you're already approaching a 25% EBIT margin.

So if I put this into the context of your 2023 guidance, which is to reach an EBIT margin of 25% to 27%, should we expect the upper end of this range to be more realistic, given that potentially into next year, you're going to see FX reversing? You're not going to see this COVID related costs in Thailand anymore.

So in essence, what could make you stay stable at a 25% EBIT margin between now and 2023 because that range looks a little bit conservative to me?

Elena, China. I wish I had a crystal ball.

I mean we came out of June and the 6 -- I mean [indiscernible] activity, quite confident. I mean we had a very good execution.

We had lined up this quite hefty extra investment for the second half, and then typhoons and COVID and what have you have completely kind of changed the picture out there. So Q3 from that standpoint became something very different from what we had initially planned, as you can imagine.

And the problem is, of course, that 70% lower traffic into the physical stores, it's not a particularly viable place then to start overinvesting in the marketing because we don't get the traffic coming through the doors. So whilst we still hold on to some of the money we indicated we would spend, this is entirely dependent on whether China goes back into some kind of stable state where people return into the stores.

As I'm sure you're familiar with, the government runs this 0 the tolerance policy, which means if there's one case in the city, they shut the whole city, which obviously then impairs our ability to trade. So I wish it normalizes, not for our business sake, but for people's health and safety sake, first and foremost.

If that happens this year, we'll spend some of the money. If this current situation drags on, we'll probably -- well, we will not spend the money very clearly.

Then how it impacts next year, I mean, we are kind of in flight right now trying to figure out how to do this. But the idea still remains that we are keen on turning the Chinese business around.

So I probably will have to come back when we are a little bit clear ourselves on how the plans for next year might pan out. Then in terms of your question on the ambitions, I think it's important to mark that word.

That 3x idea is an ambition. It's a reflection of the potential that we see.

Can we realize this in the next 5 years? Well, with the current trends, it's looking a bit more challenging than it looked yesterday.

But I don't think you should kind of get too hung up on the 3x number, at least not in the short to medium-term span. Our views on U.S., if you recall from the Capital Markets Day, was a bit more pointed.

And I think we are kind of on our way towards delivering those type of ambitions. China, I think, is a bit further out to be perfectly honest.

And I think that's all I have to say on China right now. I mean there is some silver lining on this cloud as well as I mentioned in the presentation that we see on Tmall, for instance, we are now the #1 jewelry brands.

And that's something pretty good, at least in the current environment. And now we are into double 11, the presale of that activity or actually in-flight mode on that activity, which early days looks very promising, but more on that in February, I suppose.

And then maybe, Anders, you can comment on the second question.

Yes. Elena, on the other question on the EBIT margin.

I think as a concept, you are absolutely right that to the extent that 2021 EBIT margin ends higher, then it will have an impact on the -- how to think about the Capital Market Day target of the 25% to 27% range. At least if it's sort of structural underlying improvements in the EBIT margin.

And when I say that, I think we should remember that the upgrade of the '21 guidance is not least due to the very high U.S. growth that we are seeing this year.

And when we have a market that's for -- on fire like that, not least driven by -- also driven by the stimulus packs. I think we should be careful saying whether that just translates into a higher base that we are then building our targets on top of.

I think there might be an element of that. The higher growth that we are seeing this year is not -- doesn't just create a base that you then apply the Capital Markets Days on top of.

And having said that, the '21 is an unusual year in many aspects, both due to the COVID-19 impact and closed stores on the one hand and then the unusual high U.S. growth on the order, and we'll have to wait a bit and see how all of that plays out.

But we will -- I think next data point is early fit when we announced the guidance for '22, and then we will see whether that leads to any comments on the Capital Market Day target.

Yes. I have 2 questions as well.

The first one, yes, you have commented on the performance in the U.S., which is holding up so far in the start of Q4. Any comment about the performance in the key European markets at the start of Q4?

And also regarding the performance in France, which was still negative. So you flagged that it was impacted by still COVID restriction and also that it talks of promotion.

But regarding the restriction, it's only linked to the malls and the fact that you have to show your health pass. So is it more linked on to a detox or promotional activity rather than restructuring of COVID?

And have you seen an improvement so far at the start of Q4?

We will not comment on Q4 as a matter of principle. So I'll just skip that question.

The French result is from what we can understand. And first of all, there's a big reduction of promotions, which obviously has an impact on traffic.

But we also see that these restrictions where you have to show these passes to get into the malls is also having a dampening effect. We saw the same thing in China last year where they did temperature checks to let you come in through the mall, so, which, of course, some people then said, well, then I'm not going.

So those are the 2 main factors as far as we can see.

So could I just come back to Brilliance, please? My question around that is the timing of the midterm revenue targets that you set, which were earlier this year, at the time when you are targeting plus 5% to 7% organic revenue growth through to 2023, did that include the contribution of Brilliance, which only today you've confirmed you're going to be rolling out in 2022?

Or is the incremental Brilliance revenues that may be coming from next year, potentially on top of those midterm targets? That's my first question.

And then secondly, just still sticking with Brilliance. As we think about a broader rollout, could you just help us understand the potential resource requirements from a marketing spend perspective to increase visibility of the product?

And then secondly, in terms of working capital, obviously, a very tight working capital ratio at the moment. But should we expect some expansion to reflect product availability in stores as you roll that out?

Piral, it's Anders here. On the Capital Market Day target, the 5% to 7% growth and Brilliance.

Yes and no. The way to think about the 5% to 7% growth is that we have a portfolio of strategic levers that can help -- each can help us deliver on that 5% to 7% growth.

But whether it's our -- it's Brilliance that's going to contribute to that, whether it's to what extent it's Me, to what extent, it's the -- our core platform and variables, as an example, Moment. China, U.S., that remains to be seen.

But so to speak, there's many ways to Rome. One of the ways to Rome and the 5% to 7% target is Brilliance, but we are not depending on Brilliance succeeding in order to deliver on that 5% to 7% growth.

So that's, I think, what we try to communicate at the Capital Market Day. But that obviously also means that if we succeed on Brilliance, on Me, in China, in U.S.

with our core Moments platforms, there's also firepower to deliver more than that 5% to 7% growth target. On Brilliance, I -- the -- and the net working capital piece, the -- of course, the net working capital impact is -- will be directly related to what kind of a piece of our revenue it will be.

If we end up that it becomes a substantial part of our revenue, I think incrementally, the net working capital in that sort of Brilliance business model will be higher than the -- about 0 than that we are at in the rest of the business. So you can kind of say, I kind of hope it will be a impact on net working capital in a negative way, meaning that a higher percent of revenue because that means that Brilliance is becoming a notable part of our business.

But exactly how that plays out. So with -- I can't be more specific about, yet we are still sort of fine-tuning the business model.

But it's -- I don't think we can operate it at about 0% of revenue net working capital.

Okay. Maybe if I could just follow-up.

So do you have any indication of what the maturity profile would look like when you're launching a new market based on what you've learned in the U.K.? I think you said in your press release that you are targeting potentially up to 5% of group revenues coming from that platform.

What sort of time frame would you be working on to get to that type of number?

I mean again, we are kind of speculating. I would say that I don't expect it to happen on month 1.

On the other hand, I'm not going to wait 3 years for us to get there either. If U.K.

is any indication, we got to, let's call it, 3 to 4 percentage points in the top stores in the first couple of months. So I would say, give it a year or so, that's probably what I would guess looking at kind of the history here.

And I think that the kind of, let's say, the difficulty to estimate this has been around. When we launched other items, they all kind of sit in the same price range.

They sit in the kind of known collections so that customers are used to. This is a very different animal.

And that's why we're being a bit more careful about how we go about this so that we can adjust as we go. And then sorry, I just realized I forgot to answer a question from Lars early on when it comes to the supply situation on Brilliance.

I'm getting old, so apologies for that. We have sufficient supply available.

We haven't disclosed who we are working with, but we have enough supply to go for the Q4 trading. That's not a concern of ours.

On the other hand, preparing a major country rollout or a couple of countries rollout does require a bit of time because you actually have to grow the rough and then go through the normal kind of polishing and cutting and selling process. And so that's a process in and out itself.

But for Q4 trading in U.K., we are good.

It's Antoine Belge, Exane BNP Paribas. So 2 questions.

Still on Brilliance. So is it possible to understand which sort of qualitative data you looked at to take that decision to roll it over?

Because since it's not really based just on sales because it's still relatively low amount of your sales or any sort of other metrics that you considered. I understood.

Just actually 1 clarification on the rollout. And so my understanding was that, yes, of course, it would still remain as third party in terms of sourcing the stones themselves.

But I was -- my understanding was that the cap on polish would be initially done externally, but then potentially be internalized like the setting. So is that decision already taken?

And will that require maybe a certain amount of volumes or to take the decision to also internalize the -- that we got on polish? And my second question is on online.

I think online was actually positive versus the last quarter, which seems to be a maybe a bit ahead of what you were guiding for. So was it a surprise for you?

And also, do you expect that in Q4, we could also have the positive year-on-year increase from online? And also specifically on online, it seems that really in China, when stores are closed or traffic is down, there is absolutely no mitigation from online.

So maybe can you explain why that's the case, specifically for China?

Okay. On your first question, let's -- because there were a couple of questions in there.

The first one is on, have we decided to change the supply chain set up on Brilliance to take some parts in-house. Not yet.

So there is no decision to change that. So that's point one.

The second -- or the question you had there, what qual data. So we were looking at who is this customer that's buying, and we see that the going in position was that we are trying to leverage people that are already in our store.

So we are speaking to, let's call them Pandora customers, and that's coming through. So we see 60% to 70%.

It depends a little bit by store, but thereabout seems to be the existing Pandora customer age profile, not unexpected, a little bit higher than the average. But I think the key question was around the -- what type of conversations we are having with our customers?

What are the kind of main topics of discussion? And of course, one which we were concerned about was the price point.

Is this a price point that's going to go down with these customers? This based on the kind of exit interviews that we have done, both from customers that have just been in or customers that have actually purchased, this does not feature as a key barrier, which again confirmed what we learned in our concept testing ahead of the launch.

Those are probably some of the main criteria. Then there's been some very important learnings around the assortment and the distribution of the assortment, as I mentioned, where we see different kind of uptakes depending on what we show and where we show.

Yes, I think those will probably be the top couple of call points that we've been looking at. And then I think what's the…

China and online pick up in China during the lockdown.

Yes. So your first question was, do we expect Q4?

And I don't think we will comment on channel mix for Q4 ahead of Q4. So what happens, happens.

And I think the point here to mention is that we are quite agnostic to where the sale happens, as we've discussed a couple of times before because if you do a channel P&L, it doesn't really matter that much whether this transaction happens online or in our physical store necessarily. And then to your question on -- you're right in saying that when traffic in the physical stores goes down in China, we don't seem to get the same transfer of or migration of traffic online that we have seen pretty much everywhere else in the world.

I honest to God, don't have a good answer why that is. Yes, I could only speculate, but I don't have any facts on why this is happening.

Just 2 quick ones from me. The first one on Pandora Me.

It takes a pretty good pickup in Q3 to 12% of revenue. Is that just because you're selling in through stores ahead of the launch?

And the second question is on the full price sales and at full price in Q3 in U.S., where you say it's 98%. Can you comment on what level this comes from in Q3 '19?

Magnus, it's Anders here. At least on the first question on the sell-in.

Yes, that's the case. And if you could see the breakdown of the 4% of revenue coming from Me in Q -- or in Q3, you will also see that it's -- I think something, 70%, 80% of that is into the franchise channel because they are buying, obviously, ahead of launch.

And then sell-out is -- there isn't a lot of sell-out on Me in Q4 -- Q3 because we launched it on the very last day of the quarter.

Should I take the second one?

Yes.

Magnus, this is John. Just on your second question on the stronger basket.

You're right, that the 98% of the business was at full price in the U.S. in Q3, that's up 35% versus 2020.

So it's healthy growth. So lower promotional days in both physical stores and online.

Okay. So what was full price sales in Q3 2020?

I think you comment on the number of promotion days.

Yes. 35% higher this year.

I have a question, which actually relates around your Slide 38. And I'm looking at your raw material as part of production costs.

Just thinking about the type of products that you're making of Pandora Me. And then also the Brilliance charge for next year and into 2023.

Are we fair to assume that your production would replicate similar to 2019 in terms of your breakdown? Or is there something significantly changing there, especially given gold, which a couple of years ago was as far back as 10% is the mix?

And I'm just trying to get a feel ahead of how you're managing that and where you are in your hedging for gold and then also for silver and what we can expect for silver pricing? And then separate to that, how much of this rise inflationary cost behind your precious metals?

Are we going to be able to see pass-through with some of your new design? So that's the first question, please.

Second question is to get a little bit more of a feel of the circa 35% of revenue by country outside of your key countries. If you could just give us an idea of some positive pointers there and any positive sell-out for some of those other countries, that would be great.

Deborah, it's Anders here. I maybe start on at least on the first one, on the 1 or 2 questions.

On the COGS breakdown, the production cost break down, the -- I think the way I would answer it whether the breakdown that we have on Slide 38 in the investor presentation, whether that changes, it's a direct link to what kind of share of business that not least Brilliance will end up being. So again, like what I said earlier on when the question from Piral from RBC.

I hope the picture of this breakdown that we have on Slide 38 will change because that will mean that Brilliance have become a bigger part of or a notable part of our business. So -- but let's see.

On the hedging part, we are sort of roughly from a P&L point of view hedged 1 year out on silver and gold. So we're hedging 70% of the next 1 year of production.

But then if you include the lag -- time lag that comes from production and you put products into inventory, and it hits the P&L, then we sort of roughly covered 1 year out on silver and gold. We are not hedging diamonds yet.

But that -- I think that if and when we get to a global rollout, it will get into becoming part of our normal hedging machine once we get there. And then on silver, we are -- with the current spot price, just it's going sort of plus/minus USD 24.

Then -- and on a run rate basis compared to today, I think we'll have to be very precise, a 90 basis points headwind as a run rate on the silver prices compared to what we saw in the third quarter of this year. In the third quarter of this year, we roughly had -- or for the full year, right around USD 21 silver -- average silver price in the P&L.

And if we are around USD 24 today, it's roughly 90 basis points. They're both off step-by-step hit our P&L during the next year or so.

And then I didn't get the last question.

Anders, sorry, just on the back of that, do you expect given we're expecting yourselves and everyone in the industry to have really some pressure on cost? And some of that will be absorbed, but there are some one-offs to counter that.

Are we expecting to get some price and mix positive element within 2022 from the relaunch from some of the new products coming through to partly absorb those costs?

Price mix.

No. I mean first of all, we are not looking to pass on any of these cost, as we have said repeatedly in the past.

We play in the mass market, and we need to be very cautious with the elasticity. And we'd rather kind of get the more people coming to us than necessarily jacking up the prices to that effect.

And then, and, of course, we drive efficiencies in the plant. But from a mix standpoint, I don't think we are ready to comment on next year today.

So that, I think, is a little bit premature.

And then my other question is just on the -- those are major countries or countries that stand out for you and whether there's potential, where we're starting to see a return to positive sell-through outside of those that you don't list. Whether you could highlight some of those just, please?

And on the markets -- outside of the key markets, there has been quite some that has been quite hard hit by the pandemic. All of the Asian markets also outside of Australia and China has been probably hardest hit and some have been in basically full lockdown for if not all of Q3, then a very big chunk of Q3 and still quite under a lot of restrictions.

Latin America is still also fighting a bit on the -- with the pandemic. But we do see that as restrictions are eased in those markets, we can see that very fast in the numbers.

So -- and obviously, when we have our business reviews every month, we do say, okay, this is the performance in that market in that country. What's the COVID-19 impact?

And then we make our own back of the envelope assessment of all. Had it not been for the pandemic impact, would that market being plus or not?

And I think as a general note, I think we feel that's -- quite comfortable that the majority of our markets would be trading on the right side of growth in positive, had not been for the pandemic. There will always be exceptions when we have a market when we are operating in 100 markets.

But as an average in all the smaller markets, I think once the pandemic is out of the equation at a point in time, then we -- I think we will see that they are contributing to the top line growth in the company.

And one last one. Is it fair to assume a return to or to Board?

I guess, organic sales growth in Pandora owned concept stores in Q4 because I saw they made a very good shift again from Q2 to Q3. Do you have plan for Q4 or Q1 recovery there?

Again, is that partly linked to closures? Or is it you're assuming 5% going towards the end of the year?

Then no different change in situation, would we see positive concept store in Q4?

I think it's still -- we assume that there will still be a change in behavior because the pandemic is still sort of not gone. Now in Europe, we have been in sort of a fairly unrestrictive for a while, but it's getting into the dark part of the year and COVID cases are going up again.

So I think at least from a preparedness point of view, we still assume that we'll have to be able to absorb quite some level of transactions online. We are also sort of getting ready for that as a kind of insurance premium, if in some parts of some market should go into lockdown again, that we have some capacity to transact more online.

So I think it will -- we don't expect, as a whole, the physical stores to be back in plus. Not yet.

And congrats to the solid quarter. I'll just start out with 2 questions related to [implicit] Q4 guidance.

Before going into the quarter, we were discussing that there might be a risk of spending going from physical goods to services in the second half of the year, doesn't really seem to have happened in Q3 yet. So what's the assumptions for Q4 on that behalf?

And also on the implicit guidance, did I understand you correctly saying that Pandora Me relaunch is not embedded to -- through the guidance of U.S.?

Martin, maybe I can take both of those questions. I think for Q4, we are assuming that the kind of behavior that we've seen so far in the third quarter, which is, i.e., not a significant shift back to services or a very big change of behavior, and that continues into Q4.

So the business as usual compared to where we are as of today, that's the thinking. So implied in the guidance is not a big shift one or the other way around.

Pandora Me is in Q4 guidance, and thereby, the full year guidance. So with a certain set of assumptions because it's -- we already had Pandora Me revenue also in the third quarter.

And before that, on the old platform, but it's definitely in the guidance.

Thank you very much for such a clear and comprehensive call so far. I just have a quick follow-up, if you don't mind.

Thanks for the context earlier that the majority of Pandora Me sales in the quarter was due to sell-in. I just have a quick question on the sell-out data.

I think in the appendix, it says that the 2-year stack of sell-out was up 275%. Just given the timing of the launch, is there anything that we should bear in mind in terms of launch differences between the 2019 launch and 2021 launch that can just help us contextualize that figure?

I think -- I mean you shouldn't read too much into Pandora Me for Q3, to be honest. The launch only have really started the last day of the quarter.

So that, I think we will talk about Panorama Me in February when we have a full trading quarter under the belt. I think what you see there is probably more sell-in to partners that you were discussing or what?

Yes, it was a sell-out versus -- I was just thinking back on Q4 of '19, when exactly we launched that there. But at least from a -- you can see on a year-over-year basis versus Q4 of 2020, we are at minus 41%.

But that's obviously a reflection of that partners and customers are waiting for the new thing to hit the stores, which it only did on September 30. So we have not been pushing Pandora Me up on the old platform ahead of the launch.

Okay. I mean we'll make the process short.

Thank you very much for joining us. As I said, we consider this as a high-quality growth quarter, well prepared going into Q4.

And well, unless we hear from you before then, Merry Christmas, and see you on the other side of the year. Thank you very much.