Pandora's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.18.14 | About: Pandora A/S (PNDZF)

Pandora Company A/S (OTCPK:PNDZF) Q4 2013 Earnings Conference Call February 18, 2014 4:00 AM ET


Morten Eismark – Head of Investor Relations

Allan Leighton – CEO

Henrik Holmark – CFO


Niels Leth – SEB

Chiara Battistini – J.P. Morgan Cazenove

Lars Topholm – Carnegie

Michael Rasmussen – ABG Sundal Collier

Antoine Belge – HSBC

Dan Wejse – Nordea

William Hutchings – Goldman Sachs

Frans Høyer – Jyske Bank

Fasial Kalim Ahmad – Handelsbanken Capital Markets

Christine Jensen – Citi


Thank you for standing by and welcome to Pandora Annual Report 2013 Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this conference is being recorded today on Tuesday the 18th of February, 2014 at 9 ‘o clock UK time. I would now like to hand the conference over to your speaker today, Morten Eismark, Head of Investor Relations. Please go ahead sir.

Morten Eismark

Thank you and welcome to Pandora’s conference call following the release of our Q4 and 2013 full year results distributed the wires this morning at 8 AM. The presentation for this call as well as the full version of Pandora’s Annual Report is available on

My name is Morten Eismark from Pandora Investor Relations and with me here today is CEO Allan Leighton and CFO, Henrik Holmark. In accordance with the agenda on slide two, Allan will go through a few Q4 and full year highlights as well as guidance for 2014 followed by Henrik who will talk you through the Q4 numbers in more detail.

Finally, Allan will conclude the presentation and we will be happy to take your questions. Before handing over to Allan, I currently ask you to pay close attention to the disclaimer on page three. Allan, please.

Allan Leighton

Thank you, Morten and good morning. If you could turn to Slide number 4, the important events in 2013, well, we booked record revenue of DKK9 billion in 2013, a top-line growth of 35% compared to 2012.

During 2013, we continued to implement a number of core initiatives. We delivered seven product launches during the year instead what then the traditional two, and that ensure that customers saw fresh products in the store on a continuous basis.

This resulted in strong sales growth of our newly launched products. We also continue our focus on branded sales, that’s what we do and opened 205 new Concept stores and now generate more than 80% of our revenue through brand new channels.

In the process, of course we closed part of the unbranded store network and we’ll continue to do so in order to max distribution to local purchasing patterns.

As we’ve mentioned throughout the quarters, please remember that the stock balancing campaign, even though difficult to quantify have new paths on the numbers and also that last year’s Q4 saw a change in provisions for sales returns.

All the regions contributed to the positive growth and our four core markets, the U.S., the UK, Germany and Australia all showed positive development in 2013 and I think we are especially pleased with the fact that in all four quarters, in each market, we experienced positive like-for-like sales growth.

Our EBITDA improved materially compared to last year, supported by continued strong performance in the Americas and a strong revenue development in the Europe and Asia regions, which then saw that leverage effect coming through the positively FX margins.

Our free cash flow was a record almost DKK 2 billion, and that just underlies the cash generative nature of our business model.

And finally, in 2013, we also launched our first ever share buyback of DKK 700 million, and we will continue to return cash to our shareholders and I’ll return to this slide during the presentation.

If you go to slide 5, which talks about the regional developments. As we mentioned, we continue to see solid growth across all the regions. Despite being negatively impacted by unfavorable currency moves when comparing to last year.

Revenue from the America was just over DKK 1 billion for the quarter, up 20% in local currency with U.S. revenues up 19.5% also in local currency.

Outside the U.S. the America’s revenue is driven by Canada, which is becoming one of our larger markets.

Revenue in Europe was DKK 1.381 million, the region grew 45% in local currency in Q4. The UK continues to show that solid growth and actually almost reached a quarter of a billion Danish kroner revenue in Q4.

Germany, I keep saying this looks pleasantly with a huge divergence in the performance of owner-operated stores compared to franchise and multi-family stores. And this market, as we’ve outlined previously will continue to be volatile.

Italy, France and Russia, all continue to progress well. As mentioned in the Q4 release, these three emerging markets are now jointing more than 50% of the revenue in other Europe. And revenue from other Europe was up more than 60% for the quarter and now almost generated 25% of revenue for the growth. So, important slug of what we do.

In Asia-Pacific, revenue increased by almost 60% in local currency compared to Q4, growth in Danish kroner was 40% and that was heavily impacted by an unfavorable development in the Australian dollar. The positive revenue development was again largely driven by a strong performance in Australia, as well in a number of the smaller markets in the region.

Those small in size, the markets like Hong Kong, Malaysia, Singapore and Taiwan are starting to make a fair share of the revenues for that region.

And finally just remember that revenue in Asia-Pacific last year was negatively impacted by an extraordinary provision in Japan that was related to the termination of the agreement with Varity of DKK 38 million.

If you turn to slide 6, which is really the like-for-like, as you know, this is about 80% of our Concept stores in the four countries and remember those stores got to be open in more than 12 months to be included in the like-for-like sales.

As mentioned, our four major markets continue to show a positive development in the like-for-like sales out and as you can see from the slide, all markets have now been in positive territories for around five quarters or more in a row.

We still believe that newness in our stores, this targeted marketing effort – particularly focusing the marketing effort on marketing spend on the consumer-related things and our new seven rock structure and better in-store execution have just resulted in consumers buy more in our Concept stores.

In the fourth quarter, we launched our Christmas collection which has been a key growth driver, as has the silver bangle and the launch of the Pandora ESSENCE collection, none of which were available a year ago.

I’m not taking through all the numbers on the slide as the numbers speaks for themselves, but we just remind you that as we enter an year of controlled growth and we will talk more about this later on. We define like-for-like sales growth in the 3% to 5% range in our core markets to be very acceptable.

If you turn to Slide 7, which is really all about our newly launched products, the commercial success of the products continues to be evident across all the markets. As has been the case throughout 2013, roughly a third of our sales out of our stores in the fourth quarter was generated by products launched within the last 12 months.

The success of the new products is a result of really designing in what’s in demand by the end-consumer and changing our product launch structure to provide more newness and more freshness as well as keeping focus on that light commercial price points for affordable luxury that’s where we sit and that’s where we stay.

Old drops in the new drops structure sold in and sold out well. However, as we mentioned on the last quarter call, which is actually of equal importance and most encouraging for us is, that our older core products are still selling out well and that’s all as a result of more traffic at our stores.

If you turn to Slide 8, this really talks about what we do with the cash that we generate about the dividend and share buyback program. As you all are aware our business model is there to generate significant amount of cash and in line with our capital structure policy, we endeavor to return any net cash to our shareholders.

For the financial year in 2012, we paid out a healthy dividend of DKK 5.5 per share and in 2013, we initiated our first ever share buyback DKK 700 million. At the upcoming AGM, the Board of Directors intends to propose to our shareholders that the company’s share capital should be reduced by counting the shares that we purchased under the program excluding the shares that we need to hold to cover our option programs.

Following our strong 2013, we are pleased to be able to significantly increase expected payout to shareholders. Firstly, the Board has decided to propose again to the AGM that a dividend of DKK 6.5 is to be paid up for 2012 and that’s an increase of 18% versus last year and corresponds to a payout ratio of 37%.

Secondly, the Board has decided to initiate a share buyback program of up to DKK2.4 billion. It will be launched today and finalized before the end of 2014. This program is almost 3.5 times size of last year’s program.

The mechanics of the share buyback program will be basically the same as last year. It will run as a Safe Harbor program, major shareholders will participate pro rata in order to maintain the current free float and on a weekly basis we will issue an announcement in respect to the transactions made to keep everybody posted on the progress of the program.

Slide 9 is really our financial expectations guidance for 2014. Now, we’ve all talked before about this concept of controlled growth and we are now entering this period of controlled growth. And our 2014 expectations and guidance reflect this.

In 2014, revenue is expected to increase to more than DKK10 billion, driven by like-for-like sales growth in existing stores expansion of the global store network and further expansion into our new markets.

The EBITDA margin is expected to be approximately 35% in 2014. This increase includes an expected gain from lower hedged commodity prices compared to 2013. However tempered by investments in our infrastructure including IT. It’s very important that we get our infrastructure to catch-up with the growth of the company.

CapEx is expected to be approximately DKK 550 million, which includes an expansion of the production facilities in Thailand. We’ve basically switched it from one year to the next in order to prepare for future demand.

And finally, we expect to open approximately 175 new Concept stores in 2014 and pay a tax rate of approximately 20%.

So with that I will hand over to Henrik who will give you some more details on the financials.

Henrik Holmark

Thank you, Allan. Please turn to Slide 10 which looks at the revenue development in Q4 2013. The total revenue for Q4 increased by 29.8% to DKK2.822 billion. In local currency, revenue increased by 36.2% and includes a volume increase of 23.9%.

On our prices, we have made no changes to sales prices in Q4 2013 to Q4 the year before. Our provision for returns at the end of Q4 2013 were as we indicated in Q3, corresponding to approximately 8% of 12 months rolling revenue. In Q4, 83% of our revenue came from vendor distribution.

Please turn to Slide 11. This slide looks at the development in our distribution network. Total number of points of sales decreased by 66 in Q4 2013, compared to Q3 2013, now at a total of 10,279 points of sales globally.

In Q4 2013, we added 89 new Concept stores and a net total of 86 branded points of sales. The majority of the new Concept store openings in the quarter were in the Americas and in Europe, in Europe with Russia and UK as the largest contributors.

Please turn to Slide 12. Generally, our products launched in 2013 are selling well. As Allan mentioned, both in sales in and sales out. Our best seller list continued to be dominated by products released within the past 12 months.

In Q4 2013, revenue from charms increased by 26.3% compared to the same period last year, while revenue from silver and gold charm bracelets was up 45.9%. These categories together represent 83.6% of our revenue in Q4 2013. This is virtually unchanged from the year before and note that the – our new ESSENCE COLLECTION is included in these categories.

Rings increased by 23.7% and represented 5.9% of our total revenues in Q4 2013. The growth in other jewelry categories, 39.2% and is supported by most sub-categories, however particularly – by continued success of our silver bangle.

Please turn to Slide 13, looking at the gross margin development. The gross profit for Q4 2013 was DKK 1,918 million compared to DKK 1, 403 million in the same period last year resulting in a gross margin of 68% in Q4 2013 versus 64.5% last year. The increase in gross margin for the quarter compared to Q4 2012 was primarily driven by lower commodity hedge prices as well as a plus two percentage points effect from a one-off impact by a reversal of accruals made in prior periods related to the European region.

This is actually related to our ecommerce platform where we in prior periods accrued expected cost which turned out to be lower. So this is then reversed in Q4 and has a one-off impact in that quarter.

Excluding our hedging and the time that could take from our inventory, the in underlying gross margin in Q4 2013 would have been approximately 72% based on average gold and silver market prices for the quarter. Under the same assumptions, a 10% deviation in quarterly average gold and silver prices would impact our gross margin by one to two percentage points.

Please turn to Slide 14. The OpEx ratio for the quarter was 36.4% compared to 42.1% for Q4 2012. The decrease was primarily driven by higher revenue compared to last year. Sales and distribution expenses increased to DKK 491 million compared to DKK 393 million in Q4 2012, an increase which was driven by higher revenue as well as the higher share of one-off stocks.

Marketing costs decreased to DKK 273 million compared to DKK 293 million in the quarter, the year before. Marketing remained traditionally high in the fourth quarter and includes increasing media spend related to the ESSENCE launch and our Christmas collection and also includes our first national TV campaign in the U.S. Marketing spend was as a consequence quite high in the Americas whereas the Europe and Asia regions spent less marketing than originally anticipated.

Administrative expenses were DKK263 million compared to DKK 231 million last year, the absolute increase in administrative cost was primarily due to cost-related to the acquisition of the distribution in Brazil as well as cost related to upcoming relocations of our offices in Australia and Italy.

Please turn to Slide 15, looking at the EBITDA development. EBITDA for Q4 2013 increased by 77.2% to DKK 946 million resulting in an EBITDA margin of 33.5% compared to 24.6% in Q4 last year. The improvement in EBITDA margin is mainly due to an improved gross margin and leverage, particularly in our new markets.

EBITDA margin in the Americas increased slightly compared to Q4 2012 despite a relatively high marketing spend in the U.S. The EBITDA margin for Europe increased to 40.4%, up 13.6 percentage points compared to Q4 2012 driven by three main factors.

Firstly, the increase in gross margin including the aforementioned positive one-off reverse accrual impact. Secondly, a channel mix impact and thirdly, leverage on the cost base from increase in revenue, particularly in Europe and our new markets Russia, Italy and France.

EBITDA margin for Asia Pacific improved 7.5 percentage points compared to 38.7% for the quarter. The improvement was primarily driven by gross margin, lower impact from provision for returns and a higher revenue in the region.

Please turn to Slide 16, for the quarter, net financial income amounted to DKK 23 million which is primarily related to exchange rate gains. Income tax expenses were DKK 175 million in Q4 2013 which implies an effective tax rate of 19.1% in Q4 2013 compared to 20% the year before.

Reported net profit increased by 75.5% to DKK 739 million compared to a net profit of DKK 421 million in Q4 2012.

Please turn to Slide 17, looking at the working capital development. Our operating working capital at the end of Q4 2013 was 20.5% of last 12 months revenue, significantly improved from last year where this was 30.7% and at the end of Q3, the same number was 25.6%.

In Q4, 2013 we generated a free cash flow of DKK 1,085 million, corresponding to a cash conversion of 146.8%. Inventory increased to DKK 1,490 million at the end of Q4 2013 from DKK 1,318 million at the end of Q4 2012 which is primarily driven by the general growth in the business.

Trade receivables decreased to DKK 895 million at the end of Q4 2013, corresponding to 9.9% of preceding 12 months revenue compared to 14.1% at the end of Q1 2012. This decrease primarily is due to improved cash collection in the quarter and I have to say a performance that was extraordinarily strong in Q4 2013.

Trade payables at the end of the quarter was DKK 539 compared to DKK 219 million at the end of Q4 2012 and DKK 481 million at the end of Q3 2013. The increase from Q4 2012 is primarily due to a reclassification of other payables, a reclassification that was – a change that was made in Q3 2012 which we talked about on our Q3 call.

For the quarter, CapEx was DKK19 million and finally, end of the quarter, we had a net cash positive position of DKK 637 million corresponding minus 0.2 net interest paying debt-to-EBITDA compared to minus 0.1 at the end of Q4 2012.

With this, I will hand back to Allan to complete the presentation.

Allan Leighton

Thank you, Henrik. So in summary, which is Slide 18, revenue up more than 35%. Strong performance from the newly launched products. We continue to execute on branded store strategy, opened 205 new Concept stores during the year. Gross margin 66.6%, EBITDA margin of 32%, free cash flow almost DKK 2 billion.

The Board will propose a dividend of DKK 6.5 per share and the company today has launched a share buyback of up to DKK 2.4 billion. And finally, our guidance is that revenue above DKK 10 billion, with an EBITDA margin of around 35%.

So that concludes the sort of presentation piece and we’ll just open it up for questions.

Question-and-Answer Session


(Operator Instructions) Sir, your first question comes from the line of Niels Leth from SEB. Please go ask your question.

Niels Leth – SEB

Yes, good morning gentlemen and congrats for the good quarter. Firstly, I wanted to get a better understanding of the contribution from the ESSENCE COLLECTION in the fourth quarter. Could you just talk about how ESSENCE impacted the revenue in the charms and in the bracelet categories? And is it fair to assume that the extra growth that you saw in the bracelet category relative to the charms category is basically driven by the ESSENCE bracelet?

Secondly, you are talking about additional investments in infrastructure in 2014. Could you be a little bit more specific in terms of how much you expect to invest in infrastructure?

And thirdly, could you talk about your marketing expenses for 2014? Now marketing expenses came up slightly lower than you expected last year, but would you expect marketing to increase this year given that you have initiated TV campaigning. Thank you.

Allan Leighton

Thank, Neil and thanks for the nice words. I’ll do them in reverse order. In marketing clearly don’t give a number. I think the thing to really look at – our marketing spend in Q4 was bit of a curate egg and in essence we actually spent more money on face-to-face with the consumer and less money on all of the other things.

And so, I think, if you think about marketing the way we all talked about the share of business is probably going to be around the same, but we are shifting as much money as we can into that face-to-face piece. And probably in Q4 the face-to-face piece of our marketing probably increased by up to 10%.

So, we think the sufficient in the overall budget we’re just getting much more efficient that the way in which we are using. In terms of infrastructure, the real changes in infrastructure will be in a couple of areas. Number one thing is those emerging markets, Italy, Russia, France and Asia.

In many ways, the sales ran way ahead of themselves and therefore it’s very important in sort of – in that we put the infrastructure to support that both in terms of people but also in terms of office, I mean, we got quality office move that are going to – share because our office is basically too small now for what we are endeavoring to do.

The second piece of the infrastructure release is in IT and essentially before, relative to our business spend on IT is low. We need to increase that and this will be the second year, because we really – through the end of this year. This will be the first full year where you start to see some real investment into IT.

The third point which is on ESSENCE and without being specific about the ESSECE numbers because, we don’t want to, I mean, it’s a still very early days and I think we are very pleased with the progress. Remember, it’s only in Concept stores, in some of the major markets.

The buying habit is that cannibalization is liked. So we actually, that’s very good. It’s slightly younger which also we think is very good and it’s slightly easier for men to purchase. So it sort of ticks those three boxes. Its own target for where it needs to be.

And love has now become the number one charm. Love has now taken over from Wisden and Passion is number three. So early days, pleased with the progress, some good signs and you would be wrongly in thinking that it was responsible for all of that growth in charms and bracelets in Q4.

Niels Leth – SEB

Okay, thank you. But, just to understand your comments around marketing expenses, are you saying that marketing expenses as a percentage of sales should remain the same in 2014?

Allan Leighton

We don’t guide, but I think you know where we’d be on average for the last 12 months, that’s a pretty good place to be.

Niels Leth – SEB

Okay, thank you.

Allan Leighton

And you have to remember, just by this year size of which the business is growing, the cash amount that we invest does increase.

Niels Leth – SEB

Yes, okay, thank you.


Your next question comes from the line from Chiara Battistini – J.P. Morgan Cazenove. Please ask your question.

Chiara Battistini – J.P. Morgan Cazenove

Good morning, hi. A few questions from me please, first of all on the U.S. We have seen a moderation of the like-for-like in quarter four in the U.S. and also the commentary from the retailers both at the end of 2013 and at the beginning of 2014 has been quite mixed and overall negative about the retail environment in the U.S.

So could you please tell us what you are seeing now in the U.S. and whether you are concerned about the structural slowdown in the region? That would be my first question. And then on the online, if you could update us on your plans on online and the rollout in other countries besides UK and also in Germany if I am correct, especially when are planning about going online in the U.S. ?

And finally, just a housekeeping question on the tax rate, you are now guiding to 20% tax rate for 2014 which is a bit a higher than what we had in the last few years. So is it something that we should assume as sustainable now? And what we should assume going forward please? Thank you.

Allan Leighton

Chiara, thank you. I’ll – Henrik will deal with the tax, I’ll talk about the U.S. and talk a little about online. We are actually very pleased with our U.S. performance in Q4 20% growth in local currency even if you – there will be some adjustments for the provisions of last year, but you are still going to be strong double digit sales and growth.

And in a market of that size, that’s pretty strong performance. And secondly, you are right, the like-for-like moderated, but it moderated to 5% and the double-digit sales in and 5% like-for-like in the U.S. market is a pretty exceptional performance.

I think we’ve said in the past on the U.S., it’s such a big market that percentage suddenly start to mean very little and I think I said on the last call, if the U.S. is growing top-line growth, sales in 8% to 10% and that is like-for-like sales north of 3%, that would be very, very acceptable in the business and be outperforming most of the retailers in the U.S.

In the U.S. generally, that’s the problem, the U.S. isn’t one market, it’s many markets. And the performance and characteristics of the different regions within the U.S. are very different. I think generally, we saw that Christmas comes late, but – and the retailers come late every year for the last 25 years.

This just seems to be telling slightly later and without any doubt in the U.S., a big factor in that lateness was the weather and we could see in our regionality the weather impacts both in terms of total sales out but also in terms of when consumers buy and when they don’t.

I mean, I think our general view on the U.S. is, it’s okay in terms of the general market condition and if you could do what you do you will do better than okay. And as I say, we were pretty pleased with the Q4 performance.

The second thing, let me talk about online, I mean, we are clearly our longest experiment in this is in the UK. And where we’ve now annualized, we are very pleased with the online performance in the UK. It’s got all the characteristics that we wanted.

It’s got a very high conversion rate. It’s got very low level of returns. It’s actually got again a preponderance of – a higher preponderance of mail purchases which is – for gifts which one of the markets which we are competing, I think is, very strong.

We don’t give specific numbers, I won’t do, because it’s too early days yet. But the UK I’d say is getting pretty close to where we would want it to be in terms of participation. We launched in a few other markets, Germany, Austria and France, it’s very early days, so it’s – there is not really very much to say and they were really launched in the New Year which is generally a quieter time anyway.

So we are going to have a much better idea as we go through the year. As for the markets, as I say, the most important thing is, we are in an area of controlled growth. We will go to other markets when we feel that it’s right to go to those markets, but when you go to a big market, it is very important that you have the infrastructure in place to support that.

I mean, that’s the biggest thing we’ve learnt in the UK. We’ve really put our time and attention on providing fabulous customer service and clearly in any of the big markets that would be a per-requisite. Henrik, do you want to take the tax point?

Henrik Holmark

Yes, on the tax, the effective tax rate is really driven by the mix of your income. So, that means where we generate our taxable income and that mix also includes – both includes the commercial side of the business, but also includes the distribution of income between our Danish operations and our Thai operations.

And we expect a slightly different split between our Thai and Danish tax payments. Next year and as you will know, we have we enjoy some tax benefits in Thailand which means that we effectively pay very little tax in Thailand. So shipping that a little bit will impact the effective tax rate. We don’t expect significant changes to this going forward. So that’s basically how we look at it.

Chiara Battistini – J.P. Morgan Cazenove

Cool, thank you very much.

Henrik Holmark

Thank you.


Your next question comes from Lars Topholm from Carnegie. Please ask your question.

Lars Topholm – Carnegie

Yes, congrats with another excellent quarter. A few questions. First of all, in Thailand, your capacity expansion, can you give some flavor on how much you increase capacity and by when is German running and maybe comment on, if there is any disruption to your business from the political situation, particularly in Bangkok?

Then a second question, when we spoke to deals we got the impression some actions were in backlog by the end of Q4, can year-over-year comment on that and maybe give some indications as to how demand has started in early 2014? And then a final question which is more of a household question. How much of other Americas is in fact Canada now? Thank you.

Allan Leighton

Thanks, Lars I’ll sort of do all three. So, Thailand, I was there last week for three days and there is a bit of disruption in the city center itself, but actually we’ve seen no impact on it at all. And in fact, I have to say, all the time I was there I didn’t see a single piece of trouble.

The second thing is in terms of capacity, we’ve done a couple of things. So you know, we went to a night shift that’s now largely fully deployed and we’ve – as we’ve always done, we’ve done some small things in terms of process.

We’ve put some different bits of key things and we feel, I think pretty good about our capacity for certainly in the next 12 or 18 months. And we are also in the process now of finalizing maybe a combination of a couple of things in terms of putting in permanent capacity and obviously moving away from the night shifts.

There is room on the current facility. This car park actually that we could put another building on and we are looking at doing that and we still are looking at developing a new location outside of Bangkok and I think that will all be confirmed up in the next few months.

But I feel pretty good that we’ve got – we’ve certainly got capacity for what we need to do and I think we’ve got some very good plans for what we need to do in the future. So, I feel pretty good about what’s happening in Thailand.

The other thing is in terms of and clearly we’ve been talking about how we started the year and I think – I mean, clearly, we were a bight tight in terms of product towards the end of the last year.

And we’ve got – I think we probably went into this year in a slightly better inventory position than we did last year. But, I think we have a slightly better would be the way I described the Christmas period as you can see a very strong. So that’s really the only piece of color that I can give you on that. And what’s your third question?

Lars Topholm – Carnegie

That was Canada, which proportion of other America is Canada?

Allan Leighton

We don’t –

Henrik Holmark

For the full year, that is more than 75%...

Allan Leighton

Of the growth.

Henrik Holmark

Growth, yes.

Allan Leighton


Lars Topholm – Carnegie

Okay. I love it when Allan says we don’t give the numbers and then you give them, thank you very much guys.

Allan Leighton

We thought you read it in the annual report.

Lars Topholm – Carnegie

Okay. Thank you.

Henrik Holmark



Your next question comes from the line of Michael Rasmussen from ABG. Please ask your question.

Michael Rasmussen – ABG Sundal Collier

Yes, hello everybody. I’d like to start up by stalking a little bit about on your competitor in the market enters the jewelry, I see that they are expanding in the UK, Italy, Spain, Germany and the U.S. also. Can you talk a little bit about their products? Are they relatively similar to your products in terms of pricing and offering and so on? And are you seeing any of your retailers choosing to changeover to Jewelry?

A second question on the product mix, I see that rings as a percentage of sales dropped to 5.9% in the fourth quarter from 7.7% in the third quarter 2013. I was kind of hoping that we would see rings as a percentage of the group go up a little bit, can you talk about a little bit if you have some initiatives that you can push rings further?

And then finally a question for Henrik, great development in working capital. Is this kind of a one-off level? Or is there more we can do going into 2014 and also taking into account the current state of the inventory? Thank you.

Allan Leighton

Thank you. So, on rings, actually we thought it was a quite a good performance on rings. As you know, we got a – we will put a lot of activity behind rings this year. Both in terms of where it sits in the collections but more in terms of support and focus in store and in the markets where it fits in our core advertising and marketing campaigns,

And also really importantly in terms of availability of products from Thailand on a consistent basis. And it’s a combination of those three things. So we would expect to see a stronger and strong performance to rings in this year.

In Australia, it is now a significant level of our business. And it’s got there in Australia I think because, of those three things, They have absolutely kept the availability good they got great execution in stores which really takes a share of voice and mind in terms of our retailers and they are very strong marketing campaigns.

The reception of the products is actually been very, very good. So, I think, we don’t have to do that much apart from get really focused on it. So I would expect to see big kick on from rings this year in all of the markets. And it’s an area of focus.

As far as competition, as you know, we – as you can see from our performance that we – in many ways we are the people to compete with and we tend to look at in a slightly different way to everybody else.

We are in the jewelry market, but actually, because we are affordable luxury we are much broader than that and I think I’ve said you before, I believe the long- quite a large of our sales has nothing to do with purchases from other jewelry.

So we’ve not really seen anything from a competitive perspective that’s having a much of an impact on our business. We just frankly get on with our own business, because that’s the thing we can influence, there is not much else we can do about what other people do. Henrik do you want to?

Henrik Holmark

On the working capital part, we are very happy with the performance in Q4. So, as I mentioned, we have seen a particularly strong performance on the accounts receivable side. We have some people being very efficient in collecting cash at the end of the year.

So, I mean, I see limited possibilities for becoming more efficient on that in fact, you might see actually in some quarters the accounts receivable bouncing back a little bit to previous levels.

So, I mean, I was very happy with the level that we were at the 25% in Q3 I am extremely happy with the 20% in Q4, but, I mean, what I am saying is, we don’t expect additional improvements from this where you may see some quarters swinging back a little bit. But we are very happy.

Michael Rasmussen – ABG Sundal Collier

Okay, thank you very much. That’s helpful.


Your next question comes from Antoine Belge from HSBC. Please ask your question.

Antoine Belge – HSBC

Yes, good morning. It’s Antoine Belge at HSBC. Three questions if I may. First of all, you mentioned the very good performance in new markets of Italy and France and which are markets which you already have – really the big markets for jewelry. So, how are you taking the market share from other players?

Who are you taking market share from and what are your store opening plans for 2014? And second question relates actually to the 2014 initial guidance? What is the gross margin assumption that you have taken because as you mentioned, gross margin restated for hedging, inventories et cetera should be at the 72% level at some stage?

And so does it mean that you are expecting some reinvestment in what you mentioned especially about IT to compensate for that gross margin expansion?

And my third question relates to China. In 2014, will you still be in a sort of testing phase in China? What are your most recent developments in China? Thank you.

Allan Leighton

Do you want to do the gross margin first?

Henrik Holmark

Sure, on the gross margin, you are referring to the 72% in Q4 underlying, remember that we hedge 12 months ahead so that does basically looks ahead to 12 months plus the lime lag from going through the inventories when you look at the 72%.

If you look at the full year the underlying was around 70%, so the spot rate based margin and I think that’s what you should be, I mean, looking to really when looking into 2014, remember that, we really only benefit from the reduced commodity prices last year towards, I mean, end of Q2 and really second half 2014.

Allan Leighton

On the market questions, you are right, I mean, France very big jewelry market. I would say we have further up – basically the penetration curve in Italy than we are in France. So France, probably 18 months behind, where Italy is.

Market share, we sort of don’t look at where we take it from because of – say there are number of things tend to happen. First of all we grow the market. Secondly, we take a lot of our sales from outside of the market and it’s the same point, we really focus on what we are doing ourselves.

We tend not to focus on too much on what everybody else is doing, because clearly we cannot control that. We don’t give concepts to – in terms of the guidance by market, but both of those will continue to be play that part in that Concept store growth. With France, probably kicking on a little bit more this year. In China, I think, Kenneth and the team done a really good job in terms of trying to really identify what is the best approach to go down.

I think we are pretty close to deciding that and I don’t think we would see a significant amount of change in this year, but I would expect to see certainly more activity towards the latter half of the year in China as we start to execute that strategy. What has been very encouraging is, Kenneth and team really worked on the existing stores in China and the like-for-like sales out of those stores are very, very encouraging as we got the range and the execution rights.

So, I think, we absolutely believe this is a huge opportunity for the company. We are going to go in a steady way, because I think that is the way to do it. But, from what we’ve seen from what we’ve been able to achieve in the last 12 months in the Concept stores, the product is absolutely right for this market.

Antoine Belge – HSBC

Okay, maybe just a follow-up, so, back to the guidance, I think you mentioned that the marketing expense ratio should be pretty stable and when I look at your sales guidance of more than 10.000 gross, I mean there should be some kind of leverage at least at the general and admin levels.

I mean, are you expecting any – how do you see G&A on a selling expense is moving as a percentage of sales. And actually finally, in terms of the first quarter, I mean are there any calendar effect that you would like to flag apart from the later date of Easter?

Allan Leighton

On the – there is no calendar things to flag, we are hoping that this year is a year that we’ve got a not a lot of noise in that, but we got a much better comparison. I think, think about the leverage on OpEx is, if anything to leverage we got on OpEx, last year it got ahead of itself, i.e. the sales in those emerging markets were much greater than we had thought.

And therefore, we got probably more leverage than we should have done and the history is, we must build our infrastructure to support that on an ongoing basis. And secondly, in terms of marketing, that point is that, I think we feel pretty comfortable with the levels of marketing in a general sense that we spend, because we are just getting much cleverer at making sure that the money spent on the face-to-face piece as opposed to all the other pieces.

Antoine Belge – HSBC

Thank you very much.


Your next question comes from Dan Wejse from Nordea. Please ask your question.

Dan Wejse – Nordea

Yes, hello, Dan Wejse with a number of questions. First on revenue per sales distribution channel. What we saw in Q4 was very, very strong growth in Concept stores and also good growth in – however, gold, silver and white didn’t grow at all and we actually saw a decline in the number of gold stores.

So if you could elaborate basically on what happened in the gold stores and also on the – what else you are thinking about the opening as for these stores, will they follow the Concept stores or are you seeing any changes to what has been the case in the past? Then on your other Americas, how much revenue from an absolute level did you get from acquiring the Brazilian operations in Q4?

And then lastly, just to make sure the gross margin guidance or the gross margin ex hedges of 72% is that including or excluding the two percentage point’s gains you got in the quarter?

Allan Leighton

I’ll let – Henrik can answer the hedging points. On the other Americas, the contribution from Brazil in Q4 was, largely zero and so it’s not a big part of it. On the store stand, I think that you’ll see some oscillation quarter-to-quarter and we will do for the next 12 to 18 months, because as you know.

The way that it – we look at it very much market-by-market and depending on how some of the markets are developing actually versus France, Russia in the mix then that has a bit of an impact on what happens to gold, silver and white. So for example in France, shopping is very important, in Italy less important.

So, in all probability, you will see some more shopping off the back of France. So it’s very much driven by market-by-market as we look at the network and from what’s the right network for those market is based on where they got.

So, we are not, we are absolutely as you know fixated on driving our branded business and that includes Concept stores shopping shop and gold and so that will continue but the mix of way they will and white and silver gain will clearly over time does decline as a percent of our sales.

But in some markets, we will still play an important role as we build the network and distribution. So we are not targeting particular areas to drive the revenue per store, it’s just the way that it comes out based on the mix of activities that we are doing at the same time.

But fundamentally, we have a branded and fundamentally we look at market-by-market how we build the network and then how that network gets changed after probably four to five years in the market.

Henrik Holmark

And on the gross margin point, the 72 is excluding that two percentage point impact?

Dan Wejse – Nordea

Okay, just to be – just to follow-up on the store, Allan, thank you for your note on the different markets, but why did gold stores actually declined in the quarter. Were there some special things happening in Europe?

Henrik Holmark

Are you talking about the number of stores?

Dan Wejse – Nordea

Number of stores – gold stores and also especially that and also the fact that revenue actually declined in the quarter.

Henrik Holmark

The number of stores declined because we have some markets where we basically changed some distribution. You have been reading Danish papers I assume. So, we can see that we are doing some things in Denmark and we have a market like Holland that we are also making some adjustments to right now.

So that’s basically what’s driving the number of stores. In terms of the revenue per store, this is difficult to look at on a quarterly basis. You will see these fluctuations quarter-by-quarter. So I wouldn’t go too much in to that, but the network as such we continue as Allan mentioned to just as we expand particularly the Concept store footprint.

Allan Leighton

So, Dan, it’s something we are not worried about with that way. It’s something we are building up market-by-market.

Dan Wejse – Nordea

Okay, perfect. Thanks.


Your next question comes from William Hutchings from Goldman Sachs. Please ask your question.

William Hutchings – Goldman Sachs

Good morning. I have two questions. One on the consumer and one on back to the size of the network and the plans going forward. At first, you are managing to get growth both through maturing or markets where you’ve been in for a little while like the U.S. and in particular the East Coast of the U.S.

I wonder if you could help explain how much of your growth is coming from new consumers that you are acquiring and how much is coming from existing consumers which are replenishing and coming back to the brand – repeat customers.

And on distribution, just to help us understand where you are in the sort of progression of the changes on the model What do you see is the future potential in terms of number of Concept stores and also in terms of this legacy, how many points of sale do you feel you still want to reduce to get to the right size, are you at too many points of sale?

And related to that question is, have you considered using any of the excess capital and excess cash you are generating to take control of these Concept stores and not run them yourself, you can then need to highlight how successful the Concept store model is presumably that would be accretive return of capital to be put to use to manage those stores themselves. Thank you.

Allan Leighton

There is a few strategic questions there. So let me start with the end one, in terms of own and operated place in our business, and it’s largely part of the way which we establish Concept or where there are very expensive sites that franchisees could not afford to take, we tend to take those locations and run them ourselves.

Our model is to try the capital light as we can and so we quite like the model that we have. Clearly the number of owner operated again goes up and down as a percent of our sales depending on where we are in a particular market at a particular time in terms of building the network.

And so, we are very pleased with our owner operated stores. Our owner operated stores are very profitable and they also have the magnitude of sales that is how brighter sales in our Concept sales. So they absolutely play a role, but it’s not our plan to certainly become a max retailer owning of such locations.

And that also tells back in to your distribution point is – how long is the piece of string and as we build our networks, market-by-market, so we don’t have a global view of how many stores we should have in each one of the Concept. It’s a bottom up process not the top down process and it evolves, because where you are in a market five years is very different for where you go into the future.

So, the size of the network will evolve. In my view, there is another at least five years of evolution and at the end of that time, we will have a much better idea of what the true network then looks like at that stage. And then as far as customer is concerned, then, clearly, again very much depends on the products. As I say, the thing about ESSENCE has been more mail slightly younger and so that tends to bring new customers into the mail.

Our existing bracelet business is clearly existing customers who are adding to that particular vehicle of distribution. So again, we tend to look at this thing, market-by-market, customer-by-customer and clearly our idea is to keep our offering although very focused on affordable luxury and very focused on the middle market, because that’s what we do. Then clearly, the opportunity within that is to get some younger, some older, through mail or gifts, but that's what the marketing activity and the launches are all about.

William Hutchings – Goldman Sachs

That’s very helpful. I look forward to carrying on the Analyst Breakfast on Thursday. Thank you.


Your next question comes from the line of Frans Høyer of Jyske Bank. Please ask your question.

Frans Høyer – Jyske Bank

Good morning. Could you talk about the rollout of the ESSENCE COLLECTION, I understand it’s not in all markets yet, can you give us quantify the rollout how much is still left on that?

Also related to that, the innovation that ESSENCE represents, should we expect you to come out with further initiatives along these lines in 2014? A third question relating to the U.S. you mentioned that the weather had been a factor in the U.S. in Q4? And could you give us some type of idea of the impact we know about the weather being generally an issue in the states so far in Q1, 2014, a comment on that.

And then finally, just to understand the provision which added 2% or the reverse provision which added two percentage points to your gross margin in Q4 for the group. It looks like most of that was in Europe. Is that correct and how much did it affect the EBITDA margin in Europe.

Allan Leighton

So, Henrik, do you want to talk the provision one through?

Henrik Holmark

It’s true that adults in Europe is related to our ecommerce business and it impacts the EBITDA margin for Europe with approximately four percentage points.

Frans Høyer – Jyske Bank


Allan Leighton

In reverse order, I think that the – I’d say the impact in the U.S. from the weather in Q1 probably is – just talking to the U.S. guys, in terms of the weather, and I am talking about the weather rather than the performance is, the weather has been bad but not as bad as it was in Q4. And that doesn’t necessarily relating to anything that is that’s – is a view.

As far as in innovation, that’s what we do and clearly, we wouldn’t lay out if we thought a whole lot of new products coming down the track, but that’s what we do. And we got – one of the things I was really focused on when I was down in Thailand is the innovation center that we’ve built down there.

Our objective is to make that the best innovation center in the world for jewelry and our innovation is not just about new products it’s about more materials, it’s about how we go to market and it’s about how we manufacture and process things. So it’s not just is a – on new products.

I actually think we are beginning to develop a real competitive edge in the way in which we innovate and clearly and as we go forward there will be new products. But, whether they come this year or next year it will depend on how we feel about how good the product is, because our products have to satisfy two things, they have to be a really good product but they also have to support or create a new concept and that’s what we do.

ESSENCE is largely, it’s in a number of countries, but largely all the business is in the four or five core businesses. It’s only in Concept stores. As we go through this year we will evaluate where we put it and when we put it and remember in my view ESSENCE is very new.

It’s like three months in the market and you learn a bit but you learn much more when you’ve been in the market for six months. And so, and roll to other markets during the year probably, but again we will decide market-by-market and – in my view we just need to learn a little bit more about the product before we finally press those buttons.

Frans Høyer – Jyske Bank

Thanks very much.


Your next question comes from the line of Fasial Ahmad from Handelsbanken. Please ask your question.

Fasial Kalim Ahmad – Handelsbanken Capital Markets

Hey it’s Fasial Ahmad from Handelsbanken Capital Markets. I have couple of housekeeping questions. Firstly, on your capital expenditure budget for 2014. Can you try and give us a bit more flavor on that and decompose how much of that is really ongoing CapEx and how much is maybe a one-off kind of extra thing related to the Thailand expansion which you are doing?

That’s the first question and the second question is regarding your Concept store openings, how should we think about seasonality in those store openings? Is it going to be front-end loaded or evenly distributed throughout the year? And the last question that’s on the timing of your drops, has there been anything unusual during Q4 and how will the calendar and the Easter impact your drops during Q1 and Q2? That's all, thank you.

Allan Leighton

So, do you want to – Henrik you did a couple of expenditure points?

Henrik Holmark

Yes, sure. If you work from the 2014 level, the roughly DKK300 million excluding the trough peaks then correct that we had moved around DKK100 million related to Thailand for a new factory. We topped it up a little bit. So that’s the main part of that jump and then we have actually four markets moving their offices during 2014. So that will drive some CapEx and the rest is, there is some IT infrastructure in that and a little bit of all in.

Allan Leighton

And as far as drops, there is some marginal day changes but nothing that we see of any significance. So, that will be very much like-for-like. In terms of Concept stores, again, we don’t really guide on the seasonality of them.

It is probably not a bad thing to look out where we’ve been to the last couple of years that sort of – they generally come that way and they do move around a bit and as all new store openings do. I think the major point on Concept stores, again I just stress it, for us it is not a new merit game. It is absolutely about quality it is not about quantity.

And I think as I said before, if we only have 100 but they were really, really good, I’d much rather do that then open 200 that’s where our average. But the ones that we put are, we are going to talking about what we know today. We feel pretty confident about that that will be the number during the year, they will move around a bit in terms of when they come through and that we believe they are all high quality sites.

Fasial Kalim Ahmad – Handelsbanken Capital Markets

Okay, just a follow up question on the capital expenditure for 2014. A potential new site in Thailand, is that included in the budget in the DKK550 million budget.

Allan Leighton


Fasial Kalim Ahmad – Handelsbanken Capital Markets

Okay, thank you. Excellent.


Your next question comes from the line Niels Leth from SEB. Please ask your question.

Niels Leth – SEB

Just a quick follow-up about your reporting structure you have mentioned a few times that you are considering to change your segmentation going forward, is there any news on that issue?

Allan Leighton

We are looking at whether we can improve our disclosure, but no news on that. We will let you know when if that happens and obviously make sure to give you all the details also on a historical basis when and if that might happen. But there is no news right now on that.

Niels Leth – SEB



The last question comes from the line of from Christine Jensen from Citi. Please ask your question.

Christine Jensen – Citi

Hi, there. I just got a couple of questions if I may. You mentioned the poor weather affecting still in the US and have you seen any difference with the poor weather in the UK now that you have a bigger proportion of online sales?

And secondly, you talk about increasing the proportion of rings and investing in this category, do you have any idea of what you would like this to be going forward or indeed how you would like this proportion of sales relative to categories to change over the long-term? And thirdly, in terms of the Concept stores that you plan to open next year, can you give us any idea of where you think these are likely to be? Thank you.

Allan Leighton

So, thank you very much Christine. On the Concept stores, again they will largely follow similar to this year. I think there is a few more – some of the France and Germany will probably be a slightly higher proportion than they were this year and some of the really new, new markets like Turkey and places like that will also be a contributing factor.

On rings, we don’t really – I think I’ve said that, over time, I’d like that category and then we think about as a percentage of sales, because it’s not that limited, and I would mind if the 3% of sale is the business of ten times bigger than it is today. But our mid-term objective to create DKK1 billion on the rings.

And then thirdly, in terms of weather, I mean, remember the comment on the U.S. was about Q4 and in terms of the impact that it had on the timing of purchases and it was largely a northeast issue. In the UK as you know the weather has been pretty bad. It’s difficult to comment on how performance in that, but I am not over worried about it, put it that way.

Christine Jensen – Citi

Okay, thank you.


There are no further questions at this time, sir. So please continue.

Allan Leighton

Good, all right. Well, thank you everybody, thanks for the call. I know we’ll some of you tomorrow and some of you on the Thursday and we look forward to that. Thank you very much for your time and attention.


That does conclude our conference for today. Thank you for participating. You may all disconnect.

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