Annual Report (ESEF) • Feb 8, 2023
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Download Source FileUntitled ANNUAL REPORT 2022 WE GIVE A VOICE TO PEOPLE'S LOVES Pandora A/S · Havneholmen 17-19 · 1561 Copenhagen V · Denmark · CVR no. 28505116 Pandora is the world’s largest jewellery brand. Known by more people and crafting more jewellery than any other brand in our industry, we provide affordable luxury to consumers in more than 100 countries. Made from high-quality materials and with endless possibilities for personalisation, millions of people around the world cherish and collect Pandora jewellery to express who they are and what matters to them. WE GIVE A VOICE TO PEOPLE'S LOVES OUR PURPOSE CONTENTS 2022 THE BIG PICTURE 5 At a glance 6 Letter to the shareholders 7 Executive summary 10 Highlights 2022 12 Five-year summary 13 Financial guidance 2023 CORPORATE GOVERNANCE 35 Corporate governance 39 Board of Directors 41 Executive Leadership Team 43 Shareholder information FINANCIAL STATEMENTS 51 Consolidated nancial statements 91 Management statement 92 Independent auditor's report 96 Parent Company nancial statements FINANCIAL REVIEW 46 Group performance 48 Group protability 49 Balance sheet and cash ows Sustainability Report Our Sustainability Report provides detailed information on sustainability and our responsible business behaviour. The Sustainability Report serves as our supplementary document to the United Nations Global Compact Communication on Progress, which will be submitted later in 2023 using the new CoP digital platform, and as such is our disclosure in accordance with sections 99(a), 99(b) and 107(d) of the Danish Financial Statements Act. The report is available at pandoragroup.com/sustainability/resources/ sustainability-reports. Annual Report Our Annual Report is our detailed annual disclosure relating to company performance, strategy, corporate governance and financial results. The report is available at pandoragroup.com/investor/news-and- reports/annual-reports and at cvr.dk following approval at the Annual General Meeting. Remuneration Report Our Remuneration Report includes full disclosure of Board and Executive Management remuneration. The report is available at pandoragroup.com/investor/corporate- governance/remuneration-reports. OUR BUSINESS 17 Our business model 18 Our Phoenix strategy 23 Industry trends 25 People and sustainability 29 Managing risks 4 16 34 50 45 THE BIG PICTURE Finishing touches Annika and Yeliz from our Visual Merchandising team putting eort into the store display ahead of a collection launch. 5 At a glance 6 Letter to the shareholders 7 Executive summary 10 Highlights 2022 12 Five-year summary 13 Financial guidance 2023 ANNUAL REPORT 2022 THE WORLD'S LARGEST JEWELLERY BRAND recycled silver and gold purchased in 2022 61% million customer visits to our stores and online >600 million pieces of jewellery sold, corresponding to three pieces every second 103 employees 1 32,000 points of sale in more than 100 countries 6,500 DKK billion revenue 26.5 Pandora in Paris Our holiday campaign took over the streets of Paris in December 2022. 1 Average headcount through the year. AT A GLANCE PandoraJewelry theocialpandora Pandora-a-s theocialpandora @Pandora_Corp @theocialpandora pandoragroup.com ANNUAL REPORT 2022 set in 100% recycled silver and gold - was a significant milestone that points to the future of luxury. We are proud that our efforts are noted, and in 2022 we were one of a small number of global companies to achieve an ‘A’ score from the leading climate organisation, CDP, for our cli- mate action. Pandora reacted quickly to the war in Ukraine, stopping all business with Russia and Belarus in February 2022. Pandora was also the first corporate partner to answer UNICEF’s call for support for its Ukraine response with a swift donation of USD 1 million. Since 2019, Pandora has donated a total of USD 10 million towards UNICEF through donations and special jewellery collections. Looking ahead, we see significant growth opportunities both in mature and less-developed markets. Continuing to deliver on our Phoenix strategy, we will protect profitability while investing for growth through network expansion and other initiatives. We will also keep progressing towards our ambitious sustainability targets. Our 2022 results have been achieved thanks to the extraordinary commitment of our colleagues around the world in what has been a very demanding year. We have captured this spirit in our new global employer brand, Craft the Incredible, which helps us attract top talent and build a great workplace. This was reflected in our employee surveys, which showed very high engagement levels, placing us in the top 5% of benchmark companies worldwide. On behalf of the Board and the Executive Leadership Team, we extend our sincere gratitude and thanks to employees, cus- tomers and shareholders for their continued trust in Pandora. UNLOCKING OUR POTENTIAL Pandora launched the Phoenix strategy nearly two years ago – a strategy designed to drive sustainable growth by leverag- ing our key assets: strong brand awareness, a global distribu- tion network and industry-leading manufacturing capabilities. Since then, we have been executing exceptionally well on our strategic priorities, and in 2022 we saw the potential of Phoenix begin to unfold. Despite the significant disruptions from war, inflation and the pandemic, we met our guidance from the beginning of the year, delivering record-high revenue for four consecutive quarters and growth in most key markets. These results show the strength and resilience of Pandora’s business model. Our brand awareness remains unrivalled, and Pandora Moments, the core of our business, continues to resonate with thousands of consumers every day. We also launched new platforms, like Diamonds by Pandora, and exciting collaborations like Keith Haring and Marvel. We are also progressing on our digital transformation. We are increasingly able to personalise our marketing com- munications based on our strong customer data. We are also upgrading our digital infrastructure, which will improve the customer experience across all touchpoints. Pushing boundaries and reshaping the industry We wish to lead the way on sustainability and are rethinking how jewellery is designed and produced with the planet and its people in mind. In 2022, we made important progress on our ambition to become a low-carbon, circular, and inclusive, diverse and fair business. Our North America launch of Diamonds by Pandora - lab-created diamonds that are grown, cut and polished using 100% renewable energy and In a year marked by global instability, Pandora delivered on its targets and strategy. We successfully grew our largest platform, Pandora Moments, and pushed the boundaries of our industry with the launch of Diamonds by Pandora. We are well positioned to navigate the current economic downturn and come out strong. LETTER TO THE SHAREHOLDERS PETER A. RUZICKA Chair of the Board of Directors ALEXANDER LACIK President & Chief Executive Ocer ANNUAL REPORT 2022 THE BIG PICTURE 2018 20202019 2021 2022 6.4 22.8 5.9 3.9 5.8 23.4 19.0 21.9 6.7 26.5 Wholesale and third-party distribution 7,349m 28% share of revenue 2022 was another year of growth and significant strategic progress for Pandora. In a year with unforeseen external challenges, we delivered solid revenue growth in all quarters and acted as a responsible industry leader as we continued to execute on our Phoenix growth strategy. In 2022, Pandora delivered record-high revenue of DKK 26.5 billion, corresponding to organic revenue growth of 7% compared to 2021. The growth was delivered across most product platforms and geographies and is a testimony to the strategic investments made in the last couple of years. These developments, combined with operational efficiency and agile execution, laid the foundation for a very strong year. Pandora delivered solid results despite difficult market conditions such as COVID-19 in China, inflationary pressure and the war in Ukraine, and managed to deliver on the 2022 guidance despite these unforeseen headwinds. Despite the DELIVERING GROWTH DURING EXTRAORDINARY TURBULENCE challenges seen in 2022, Pandora’s customers remain loyal and the brand strong. Our strong foundation, the desirability of our products and our affordable luxury proposition place us in a good position against the uncertain geopolitical and economic backdrop of 2023. Our efforts to drive sustainability continue to play a central role in creating a resilient business. Our actions to make Pandora low-carbon, circular and inclusive, diverse and fair are the right thing to do as a corporate citizen and will help us mitigate against the impacts of climate change, the significant regulatory shift that is underway, and growing consumer expectations. On 5 October 2023, we will host a Capital Markets Day to update our shareholders on our continued execution on and progress of the strategy. OUR CHANNELS Revenue, DKK, and share of revenue, % OUR GROWTH JOURNEY DKK billion Pandora online stores 5,612m 21% share of revenue Pandora physical stores 13,503m 51% share of revenue 1 Presented on the basis of the applicable accounting standards at the time. 2 2019 and 2020 figures exclude Programme NOW restructuring costs. Revenue EBIT 2 EXECUTIVE SUMMARY ANNUAL REPORT 2022 THE BIG PICTURE 2022: 2021: Growing the core while fuelling with more Pandora launched the Phoenix strategy in May 2021 and execution is on track. In 2022, our Moments incl. Collabs segment represented 73% of total revenue and delivered sell-out growth of 5%. Brand metrics are strong, the core Pandora Moments platform is growing, and important steps to build new product plat- forms have been taken. Growing Moments is a key pillar in our Phoenix strategy. In order to drive additional revenue growth on top of Pandora Moments, Pandora is leveraging existing product platforms and launching new product platforms that are within or close to the existing core business. A good example is our lab- created diamonds collection, Diamonds by Pandora. Following a test launch in the UK in 2021, we successfully launched the Diamonds by Pandora collection in North America in August 2022. This is our first collection made with 100% recycled silver and gold. With this collection, we aim to democratise diamond jewellery by making it accessible to a wider audience. Pandora ME is another product platform designed to drive additional revenue growth, which primarily targets Genera- tion Z. In 2022, Pandora ME grew 40% compared to 2021. The Diamonds by Pandora and Pandora ME platforms are both part of our second segment, Style, which represented a 27% share of our business and delivered sell-out growth of -1%. Style also includes Pandora Timeless and Pandora Signature. Read more about our Phoenix growth strategy on page 18. Our key markets In 2022, sell-out growth continued to be positive across most key markets. Our largest market, the US, saw an expected decline in 2022 following extraordinary growth in 2021 fuelled by government stimulus cheques. Compared to a cleaner pre-pandemic base in 2019, the performance in the US remained strong with 53% organic growth. Pandora continues to see ample growth opportunities in the US in the mid-term, coming from both Style 1. US 30% DKK 7,907m 30% DKK 7,026m 2. UK 14% DKK 3,802m 14% DKK 3,314m 3. ITALY 10% DKK 2,580m 10% DKK 2,443m 4. GERMANY 5% DKK 1,307m 5% DKK 1,191m 6. FRANCE 4% DKK 1,190m 5% DKK 1,122m 7. CHINA 3% DKK 737m 5% DKK 1,126m Read more about segment and revenue information in note 2.1 . 73% 27% Moments incl. Collabs OUR SEGMENTS Share of revenue, % of total PUSHING THE BOUNDARIES OF SUSTAINABLE JEWELLERY Diamonds by Pandora is made with 100% recycled silver and gold, and with lab-created diamonds produced using 100% renewable energy. OUR KEY MARKETS Share of revenue 5. AUSTRALIA 5% DKK 1,271m 5% DKK 1,131m 1 2 3 4 6 7 5 ANNUAL REPORT 2022 THE BIG PICTURE Innovative design, responsible sourcing and craftsmanship are at the heart of Pandora. The picture illustrates the stone-setting process of crafting a hand- finished piece of jewellery. higher brand awareness and network expansion. In 2022, we ac- quired 49 stores from franchise partners in the US and opened net 32 new concept stores. A part of our strategy is to further strengthen our presence in the US, not least on the West Coast. Our key markets in Europe delivered positive sell-out growth in 2022. In 2021, these markets were impacted by tempo- rary store closures due to COVID-19, but they saw a strong rebound in 2022. The UK and Germany delivered double-digit sell-out growth rates following solid execution. In Italy, we started to see an impact from a weak macro backdrop in the second half of 2022, and sell-out growth ended at 5% in 2022. In France, we detoxed the promotional level and ended the year with sell-out growth of 4%. Australia delivered sell-out growth of 6%, driven by healthy un- derlying business and an easier comparison due to COVID-19 temporary store closures in 2021. Performance in China was significantly impacted by the continued and widespread COVID-19 restrictions during 2022 and sell-out growth was -47%. China is the largest jewellery market in the world and represents a significant opportunity for us. We have previously communicated that we aim to triple our business in China com- pared to 2019, but have postponed our investment to trans- form our business in China until market conditions stabilise. Pandora’s business outside of its seven key markets contin- ued to grow in 2022. The largest markets outside of the seven key markets are Spain and Mexico, which ended the year with a revenue of DKK 1.1 billion and DKK 1.0 billion respectively. Brand momentum remains strong Our strong brand momentum continued in 2022 and Pandora maintained a leading brand position. Pandora’s global unaided brand awareness remained well ahead of the closest com- petitor, and Pandora ranked number one in five out of seven key markets. We also launched our new loyalty programme, My Pandora, in France and continued our network expansion to strengthen our brand and business even further. Addition- ally, Pandora initiated selected and careful price increases across its portfolio of products. Financial performance Total revenue reached DKK 26.5 billion, corresponding to revenue growth of 8% in local currency. The EBIT margin remained strong at 25.5% in 2022. Distributions to shareholders in 2022, including both divi- dends and share buybacks, totalled DKK 5.1 billion, equal to 11% of the market cap of Pandora at the end of 2022. For 2023, the Board proposes a dividend of DKK 16 per share and a new share buy-back programme of DKK 2.4 billion until 30 June 2023 with an intention to go up to DKK 5.0 billion over the course of the next 12 months, assuming no material deterioration in the macroeconomic climate. Pandora in a strong position to manage uncertain macro environment During 2022, the macroeconomic environment continued to deteriorate. Inflation and higher interest rates are impacting consumers across many countries. Up until now, Pandora has demonstrated a good level of resilience against these head- winds. As a consequence of the macro headwinds, Pandora is implementing several preemptive measures. Should a re- cession scenario become a reality, Pandora will be in a strong position to manage macroeconomic turbulence thanks to the company’s robust business model, favourable margin structure, strong cash generation, low financial leverage and conservative capital structure. We have implemented prudent cost measures and will continue to do so, and our strong starting point will also enable us to continue to invest and accelerate during a recession as required. Sustainability: top ambitions and ratings As the world’s largest jewellery brand, we wish to lead our industry on sustainability – a foundational pillar of our growth strategy, Phoenix. Our targets include halving carbon emissions by 2030, shifting entirely to recycled silver and gold by 2025, and achieving gender parity in our leadership no later than 2030. With our lab-created diamond jewellery we show how a transformative and more sustainable future of luxury can take shape. Our sustainability performance and disclosure has received top ratings from leading organisations such as CDP, Sus- tainalytics, MSCI, Nordea and the Danish Institute for Human Rights. Read more about sustainability on page 25. ANNUAL REPORT 2022 THE BIG PICTURE THE BIG PICTURE Expanding the Pandora network In 2022, Pandora opened net 88 new concept stores, of which 32 were opened in the US, as well as 130 new owned and operated shop-in-shops, of which the majority were opened in Latin America. These openings are part of the roughly 600 locations across our top markets identified as part of our Phoenix strategy, where we see potential to drive profitable growth by opening new stores. Of these stores, 50% are in the US and China and 80% are concept stores. It is attractive to open new stores, as the EBIT margin is accretive to the Group. Additionally, there is a short payback period on the initial CAPEX investment and an attractive, low-risk profile. In 2023, we will further capitalise on these locations by opening net 50 to 100 concept stores. Read more about our network expansion on page 22. HIGHLIGHTS 2022 Pandora stops business with Russia and Belarus On the day Russia invaded Ukraine, Pandora decided to stop all business with Russia and Belarus. We also informed our suppliers and business partners that Pandora will not accept raw materials, products or services supplied directly or indirectly from Russia or Belarus. Additionally, we donated USD 1 million towards UNICEF’s human- itarian relief work in Ukraine. Before the war, Russia and Belarus accounted for less than 1% of our total revenue, and the business was handled by local distributors. Pandora does not have any remaining assets tied up with these distributors, and we no longer count their stores as part of the Pandora network. Pandora brings lab-created diamonds to North America In August, we launched our highly antic- ipated Diamonds by Pandora collection in the US and Canada. The collection features lab-created diamonds that are grown using 100% renewable energy and that have a carbon footprint that is only 5% when compared to mined diamonds. It is also the first Pandora collection to be crafted with 100% recycled silver and gold. ANNUAL REPORT 2022 A THE BIG PICTURE North American headquarters relocates to New York City In December, we announced the open- ing of Pandora's new North American headquarters located at Times Square in New York City. The new office will create around 130 full-time jobs. New York is the largest commercial market in the US and one of the largest commercial mar- kets in the world. The new headquarters will place Pandora in closer proximity of leading talent as we continue our long- term growth ambition in the US, for example to increase market share and double revenue in the US compared to 2019. Our North America Hub in Baltimore will remain at the current location through at least 2026, and both the Baltimore corporate office and the logistics centre in Columbia, Maryland, remain open and integral to our US business operations. Collaborations to grow business and build brand Collaborations with other brands enable Pandora to reach more consumers around the globe, and we have increased our focus in this space. Sales from collabora- tions have tripled over the past five years. 2022 saw superheroes arriving to our stores with the popular launch of our first Marvel X Pandora collection. By the end of the year, the 14 carat gold-plated Marvel Iron Man was the fourth best-selling charm in Pandora’s full charms assort- ment, and the Marvel Infinity 14 carat gold-plated ring saw huge popularity and was the top three best-seller in the rings category. We also launched our first art collabora- tion with the aim of expanding our brand into new cultural universes. The collabora- tion was inspired by the late street artist and activist Keith Haring, who was part of the legendary New York art scene during the 1980s. The collection features Haring’s colourful and symbolic works, including the barking dog, angel baby and signature bold lines. Recognised with “A” score for transparency on climate change Pandora’s leadership in corporate trans- parency and performance on climate change received recognition by the global environmental non-profit CDP, securing a place on its annual ‘A List’. Based on data reported through CDP’s 2022 Climate Change questionnaire, Pandora was one of around 2% of CDP-evaluated companies to achieve an ‘A’ out of nearly 15,000 companies scored. This was a milestone in our journey to become a low-carbon business. pieces in the Keith Haring X Pandora collection 12 of our total revenue came from the Marvel X Pandora collection 2.4% ANNUAL REPORT 2022 FIVE-YEAR SUMMARY DKK million 2022 2021 2020 2019 2018 Financial highlights Revenue 26,463 23,394 19,009 21,868 22,806 Organic growth, % 7% 23% -11% -8% -2% Sell-out growth, (like-for-like), % 2 4% 20% -12% -8% -4% Earnings before interest, tax, depreciation and amortisation (EBITDA) 8,716 7,838 4,999 6,148 7,421 Operating profit (EBIT) 6,743 5,839 2,684 3,829 6,431 EBIT margin, % 3 25.5% 25.0% 20.4% 26.8% 28.2% Net financials -210 -461 -190 1 151 Net profit for the period 5,029 4,160 1,938 2,945 5,045 Financial ratios Revenue growth, DKK, % 13% 23% -13% -4% 0% Revenue growth, local currency, % 8% 24% -11% -6% 3% Gross margin, % 76.3% 76.1% 75.6% 72.7% 74.3% EBITDA margin, % 32.9% 33.5% 26.3% 28.1% 32.5% EBIT margin, % 25.5% 25.0% 14.1% 17.5% 28.2% Effective tax rate, % 23.0% 22.6% 22.3% 23.1% 23.4% Equity ratio, % 33% 38% 37% 24% 33% NIBD to EBITDA, x 3 0.8 0.4 0.5 1.1 0.8 Return on invested capital (ROIC), % 48% 59% 25% 27% 53% Cash conversion incl. lease payments, % 39% 88% 183% 133% 86% Net working capital, % of last 12 months' revenue 4.2% -5.0% -7.6% -1.3% 6.7% Capital expenditure, % of revenue 4.9% 2.7% 2.6% 3.8% 5.0% DKK million 2022 2021 2020 2019 2018 Stock ratios Total payout ratio (incl. share buyback), % 4 100% 115% 65% 147% 104% Dividend per share, proposed for the year, DKK 16.0 16.0 - 9.0 9.0 Dividend per share, paid, DKK 16.0 15.0 - 9.0 9.0 Earnings per share, basic, DKK 54.2 42.1 20.0 30.3 47.2 Earnings per share, diluted, DKK 53.7 41.7 19.9 30.1 47.0 Consolidated balance sheet Total assets 22,013 18,542 19,984 21,571 19,244 Invested capital 13,961 9,884 10,540 14,268 12,071 Net working capital 1,104 -1,181 -1,447 -293 1,536 Net interest-bearing debt (NIBD) 6,794 2,882 3,151 9,019 5,652 Equity 7,167 7,001 7,389 5,249 6,419 Consolidated statement of cash flows Cash flows from operating activities 4,434 6,228 5,975 6,775 6,624 Capital expenditure – total 1,290 641 491 822 1,129 Capital expenditure – property, plant and equipment 929 341 369 556 753 Free cash flows incl. lease payments 2,602 5,137 4,908 5,075 5,558 Sustainability Scope 1, 2 & 3 emissions, tonnes CO equivalent 280,370 277,450 266,075 296,777 n/a Recycled silver and gold, total, % 6 61% 54% 57% 60% n/a Leadership Team gender ratio, female/male, % 7 29/71 23/77 n/a n/a n/a 1 Comparative figures have not been restated following the adoption of IFRS 16 Leases. 2 Sell-out growth includes sell-out from all concept stores, including partner owned and Pandora online. Sell-out growth is a like-for-like KPI and includes stores which have been operating for +12 months and stores which are temporarily closed due to COVID-19. Other points of sales are not included in sell-out growth. 3 2019 and 2020 figures exclude Programme NOW restructuring costs. 4 Excluding sale of treasury shares amounting to DKK 1.8 billion in Q2 2020. 5 Within limited assurance scope. The scope 2 emissions are calculated as market-based emissions. All emissions are in metric tonnes, as aligned with the Greenhouse Gas Protocol. 6 Within limited assurance scope. 7 The Leadership Team comprises Vice Presidents, Senior Vice Presidents, members of the Executive Leadership Team and the Board of Directors. ANNUAL REPORT 2022 THE BIG PICTURE macroeconomic uncertainty and, as usual, will be narrowed as visibility improves through the year. The low end of the organic growth range would require a worsening of trading conditions relative to today. Whilst predicting near-term sales trends is currently chal- lenging, Pandora’s strong brand position, solid financials, flex- ible business model and position in affordable gifting make the company well equipped to weather a potential recession and at the same time seize relevant investment opportuni- ties which may arise. Revenue guidance Pandora is currently planning for sell-out growth of flattish to a decline of mid-single digits, depending on how macroeco- nomic conditions progress through the year. Continued net- Resiliency in an uncertain environment The economic outlook for 2023 remains highly uncertain. High inflation and rising mortgage rates suggest that consumer spending will come under pressure. The brand has demonstrat- ed strong resilience since macroeconomic conditions started to worsen during 2022, and current trading remains encourag- ing. For now, Pandora has seen some, but only limited, signs of a shift in consumer spending. Nonetheless, Pandora will plan for a range of scenarios, including a weakening of the current mac- roeconomic backdrop. Our guidance considers external factors, our own internal brand initiatives and current trading to form an initial wide range. Pandora is therefore currently targeting an organic growth of -3% to 3% and an EBIT margin of Around 25%. The wid- er-than-normal revenue guidance range reflects the elevated ORGANIC GROWTH -3% to 3% EBIT MARGIN Around 25% work expansion is expected to add 2 to 3 percentage points to growth and help lift organic growth to -3% to 3%. Forward integration is expected to add around 1% revenue with reve- nue growth in local currency ending at -2% to 4%. The organic growth guidance can be illustrated as shown above. Profitability guidance The EBIT margin guidance for 2023 is Around 25% and can be illustrated as shown on the following page. Temporary and non-recurring costs from 2022 drive a tailwind of 0.8 percentage points. Structural cost reductions and the price increases implemented in Q4 2022 will be funding the invest- FINANCIAL GUIDANCE 2023 1 Sell-out growth (like-for-like) including temporarily closed stores. ORGANIC GROWTH GUIDANCE Percentage point approximations 2022 actuals Sell-out growth 1 Flattish to mid single-digit decline Network expansion Phasing of sell-in & other 2023 guidance Forward integra- tion Local currency growth Foreign exchange 2023 revenue 26.5 DKK billion DKK billion -1%2-3% -3% to 3% 1% -2% to 4% -2% 25.4-27.0 ANNUAL REPORT 2022 THE BIG PICTURE ments in our Phoenix strategy initiatives and future growth. Higher-than-normal salary increases are expected to suppress the EBIT margin by 1.0 percentage points. Foreign exchange rates and commodity assumptions per 31 January 2023 currently represent a net headwind of 0.4 percentage points. Lastly, operating leverage will mainly decide where Pandora will end the year. The guidance also allows for an additional el- ement of cost flexibility which could be utilised depending on the growth outcome. The EBIT margin phasing through the year is expected to be slightly more skewed towards the second half than usual. This reflects, among others, phasing of costs, hedged silver prices and foreign exchange rates. 2023 guidance – other parameters Pandora expects to open net 50 to 100 concept stores and 50 to 100 owned and operated other points of sales in 2023. CAPEX is expected to end at around 6% share of revenue, primarily driven by investments into the store network, dig- ital initiatives and crafting facilities. The effective tax rate is expected to be 23% to 24%, unchanged from last year. Capital Markets Day September 2021– financial targets Pandora hosted a Capital Markets Day (CMD) in September 2021 and provided the following financial targets: • 5-7% organic growth CAGR from 2021 to 2023 • 25-27% EBIT margin in 2023 Since the targets were communicated in September 2021, the geopolitical and macroeconomic situation has worsened significantly. Additionally, the 2023 targets did not include any impact from COVID-19, which had a severe negative impact on the performance in China in 2022. As previously mentioned, the impact of these factors on the 2023 CMD targets is uncertain but despite the headwinds the new 2023 EBIT margin guidance is just within the targeted range. In relation to the organic growth target announced at the CMD, the outcome is somewhat dependent on macroeconomic conditions, but the upper end of the new 2023 guidance would also see Pandora within the targeted CMD range. Capital structure policy and cash distribution At the end of 2022, Pandora’s leverage ratio was only 0.8x NIBD to EBITDA and consequently at the lower end of the capital structure policy range of 0.5x to 1.5x. The increased leverage of 0.4x versus 2021 primarily reflects significant cash distributions to the shareholders as well as increased inventories and higher CAPEX through the year. During 2022, Pandora paid out DKK 5.1 billion to its share- holders, equivalent to 11% of market cap as of 31 December 2022. DKK 1.5 billion was distributed as an ordinary dividend of DKK 16 per share and DKK 3.6 billion were distributed through share buybacks. Pandora continues to be highly cash-generative and has ample liquidity to continue cash distributions to shareholders. Pan- dora has decided to update its dividend policy from previous- ly targeting a 2% dividend yield to now paying a progressive dividend (stable to increasing dividend per share). For 2023, the Board proposes a dividend of DKK 16 per share and a new share buyback of DKK 2.4 billion until 30 June 2023 with an in- tention to go up to DKK 5.0 billion over the course of the next 12 months, assuming no material deterioration in the macro- economic climate. The total cash distribution of DKK 6.4 billion will be the highest in Pandora’s history. The Board already has the authority to initiate a share buyback at any point in time. Disclaimer: the guidance contains forward-looking statements, which include estimates of financial performance and targets. These state- ments are not guarantees of future performance and involve certain risks and uncertainties. Therefore, actual future results and trends may differ materially from what is forecast in this report due to a variety of factors. Please also refer to the full disclaimer on page 90. FOREIGN EXCHANGE AND COMMODITY ASSUMPTIONS AND IMPLICATIONS AS OF JANUARY Average 2022 Average 2023 Financial impact 2023 Y-Y USD/DKK 7.07 6.87 THB/DKK 0.20 0.20 GBP/DKK 8.73 8.45 CNY/DKK 1.05 1.02 AUD/DKK 4.91 4.81 Silver/USD (per ounce) 24.9 22.7 Revenue (DKK million) Approx. -500 EBIT (DKK million) Approx. -225 EBIT margin (foreign exchange) Approx. -1.0% EBIT margin (commodities) Approx. 0.6% EBIT MARGIN GUIDANCE BRIDGE Percentage point approximations Cost reductions & price increases Phoenix investments Temporary/ non-recurring costs 2022 actuals 25.5% 0.8% 1.1% -1.0% Annual salary increases -1.0% Foreign exchange Operating leverage (mid-point) -1.0% Commodities 0.6% 0.0% 2023 guidance Around 25% ANNUAL REPORT 2022 THE BIG PICTURE STORY “ 1 2 3 4 5 6 7 8 Pandora, a line of lab-created diamond jewellery currently available in UK, the US and Canada. The US is the world’s largest market for diamond jewellery, and we aim to transform the market with more affordable products that also have reduced carbon emissions. “A diamond is a diamond. Thanks to innovation, lab-created diamonds are exactly the same and just as beautiful as mined diamonds, but grown in a lab instead of mined from the ground. We want to make diamond jewellery accessible to a wider audience and for more occasions. Diamonds are not only forever, but for everyone,” says Joshua Braman, Senior Vice President, Diamond, Pandora. Diamonds grown in the US with low carbon emissions Lab-created diamonds have the ex- actly same optical, chemical, thermal and physical characteristics as mined diamonds and are graded by the same standards known as the 4Cs – cut, co- lour, clarity and carat. Our lab-created diamonds are grown, cut and polished using 100% renewable energy and have a carbon footprint that is only 5% when compared to mined diamonds. Pandora no longer uses mined diamonds. LAB-CREATED DIAMONDS POINT TO THE FUTURE OF LUXURY In the 1950s, scientists succeeded in creating the first diamonds in a lab. The diamonds were initially used mostly for industrial purposes, but in recent years the technology and quality have im- proved, and today lab-created diamonds are a growing part of the market for diamond jewellery. Following a successful test launch in the UK, Pandora introduced Diamonds by The lab-created diamonds are grown in the US and point to a future of low-carbon diamonds for jewellery. For perspective, if all diamonds were mined with the same low-carbon footprint as our lab-created diamonds, it would save more than 6 million tonnes of carbon emissions annually – equivalent to replacing all cars in New York City with electric cars. First collection with 100% recycled silver and gold To further reduce the climate impact of our jewellery, it is the first Pandora col- lection crafted with 100% recycled silver and gold. This brings the greenhouse gas emissions of the collection’s entry product – a silver ring with a 0.15 carat lab-created diamond (USD 300) – down to 2.7 kg CO 2 e, which is equal to the aver- age emissions of a t-shirt. The new collection is a significant break- through for Pandora, as the company has committed to craft all its jewellery from recycled silver and gold by 2025. A growing market The global diamond jewellery market is a USD 84 billion industry. Lab-created diamonds currently account for around 10%, but the segment is growing faster than the rest of the market. North America is the largest market for lab-created diamond jewellery. Begins with tiny seeds of high-quality lab-created diamonds Seeds placed in vacuum chamber with very high heat Chamber lled with carbon-rich gas Using 100% renewable ener- gy, microwave energy heats the gases and gas molecules break apart Carbon atoms bond to the seeds and they grow one layer at a time The lab-created diamonds are cut and polished using 100% renewable energy Pandora chooses lab-created diamonds with high-quality grading Lab-created diamonds are set in jewellery crafted using 100% recycled silver and gold One of my recent customers was very excited about Pandora’s sustainable jewellery, as she was looking for a gift to celebrate her granddaughter’s PhD degree in Environmental Science. She was stunned by the 0.5ct lab-created diamond necklace, which became a surprise gift for the occasion. MELISSA Store Manager ANNUAL REPORT 2022 STORY “ OUR BUSINESS I love getting to know each and every customer’s story. I think it is truly unique for my job. I value every step of helping my customers to anchor unforgettable moments and to find self-expression through Pandora’s jewellery. ANGIE Sales Associate, Italy 17 Our business model 18 Our Phoenix strategy 23 Industry trends 25 People and sustainability 29 Managing risks ANNUAL REPORT 2022 OUR BUSINESS MODEL BUY INPUT BUSINESS ACTIVITIES OUTPUT OUTCOME Every day, millions of people express who they are and what matters to them with their Pandora jewellery. Whether it is a display of friendship or romance, or a love for art, gardening or our planet. Our jewellery is a way to show these loves. That is our purpose: We give a voice to people’s loves. Crafting at scale Strong marketing and brand Omnichannel retail operations Design inspired by art and data Efficient distribution Affordable luxury with sustainability integrated from source to sale Industry-leading profitable growth Natural resources: Raw materials, water and energy Community: Employees and stakeholder engagement Innovation: Data and design Manufacturing: Crafting facilities Supply chain: Supplier partnering Financial: Cash flows Natural resources: Processed materials, emissions, waste and waste water Community: Job creation and tax contribution Innovation: Relevant and personalised products Manufacturing: High-quality products Supply chain: Sustainable supply chain Financial: Shareholder returns Responsible and circular sourcing ANNUAL REPORT 2022 OUR BUSINESS B R A N D G R O W T H P I L L A R S V A L U E S D E S I G N P E R S O N A L I S A T I O N P E O P L E S U S T A I N A B I L I T Y D I G I T A L I S A T I O N S C A L E E X C E L L E N C E WE GIVE A VOICE TO PEOPLE’S LOVES W E C a r e W E D r e a m W E D a r e W E D i v e r C O R E M A R K E T S F O U N D A T I O N Phoenix has four growth pillars aiming at delivering sustainable and profitable revenue growth: brand, design, personalisation and core markets. Phoenix centres around the significant untapped opportunities within Pandora’s core business. The gross list of opportunities is rich, and we have deliberately prioritised the most important to guide decision-making and the allocation of resources. OUR PHOENIX STRATEGY In 2021, we launched our Phoenix growth strategy with our purpose, We give a voice to people’s loves. During 2022, we saw good progress across our Phoenix initiatives, which we will continue to build on in 2023. On 5 October 2023, we will host a Capital Markets Day to give an update on our Phoenix strategy. Phoenix builds on our strong foundation and is focused on the significant untapped opportunities in Pandora's core business. ANNUAL REPORT 2022 OUR BUSINESS Growth pillar 1: Brand Pandora is a global affordable luxury brand with a high level of consumer awareness, strong brand equity, and a loyal customer base. Our strong brand momentum continued in 2022 and Pandora maintained a leading brand position. Pandora’s global unaided brand awareness remained well ahead of the closest competitor, and we ranked number one in five out of seven key markets. To ensure that Pandora continues to excite customers and win the hearts of the new generations, we focus on increasing brand desirability. Using behavioural science, data analytics and social listening to understand our consumers, we can create more engaging, authentic and culturally relevant brand experiences across all touchpoints, including products, campaigns, stores, the selling ceremony, online and more. Over the past years, we have increased our media invest- ments considerably, and we will continue to invest at a competitive level to maintain brand awareness leadership in today’s complex and fragmented media landscape. Pandora’s global unaided brand awareness remained well ahead of the closest competitor, and we ranked number one in five out of seven key markets. No. 1 ANNUAL REPORT 2022 OUR BUSINESS The Pandora product universe Moments incl. Collabs Pandora Moments, home of our iconic snake chain bracelet and ten different jewellery themes, is the core of our business. It allows for self-expression, modern storytelling and collectability. We also col- laborate with well-known brands to create jewellery with characters and icons from universes like Marvel, Walt Disney and Pixar. In total, Moments incl. Collabs accounts for 73% of revenue. Style To fuel our brand with incremental growth, we offer our consumers additional collections. In total, Style accounts for 27% of revenue. Pandora Timeless offers sparkling modern classic design with a twist and includes Pandora Timeless Wish with its wishbone motifs and distinct mesh bracelets from Pandora Reflexions. Pandora ME pays tribute to a Genera- tion Z mindset in a uniquely bold and customisable link chain design and styling accents to reflect every aspect of their personality. Diamonds by Pandora seeks to democ- ratise diamonds by using lab-created diamonds elevated in designs of floating and unique shapes lending a stand-alone luxurious expression. Another collection is Pandora Signature, characterised by the Pandora logo, pavé, hearts and beads adding a geometric dimension and linear aesthetic. Growth pillar 2: Design Pandora has three clear design priorities: drive the core (Moments), fuel the brand with more platforms, and establish dedicated support models for each platform. Pandora’s original charms and bracelet offering, Moments, has formed the basis for the company’s success over the past two decades. Today, Moments incl. Collabs accounts for 73% of total revenue. We see ample opportunities to continue growing the Moments business by ensuring a strong pipeline of innovation behind charms and charm carriers, personalisation and collabo- rations. Combined with commercial focus and visibility, this will ensure we build on our core strength. To fuel the brand with more, we added new product platforms to our assortment which are designed to target specific con - sumer segments and drive incremental growth. New platforms are considered low-risk opportunities, as they are built on existing assets and infrastructure. When going to market, we in - troduce new platforms in steps to test, learn and adjust before potentially scaling up. In 2022, we continued to roll out new platforms such as Pandora ME and Diamonds by Pandora. In 2022, Pandora ME generated 40% in sell-out growth compared to 2021 and we continued to diversify the platform’s proposi - tion by launching the first gold-plated pieces in October. These gold-plated pieces accounted for a 16% share of revenue within Pandora ME in the fourth quarter. Diamonds by Pandora delivered sell-out growth of 130% and ended the year at DKK 213 million in revenue. In 2022, the 0.15 carat lab-created diamond ring was the bestseller among our customers. In addition, strategic collaborations continue to drive growth. The Marvel collaboration was successfully launched with the goal of further expanding brand awareness and building other co-created universes. In 2022, two Marvel collections were launched and accounted for 2.4% of our total revenue. ANNUAL REPORT 2022 OUR BUSINESS markets. We also see growth opportunities outside our key markets, for example in Spain, Canada and Latin America. Mexico is one example of a market in which growth opportuni- ties have been successfully exploited. Pandora entered Mexico in 2017 and has achieved strong growth in a relatively short time span: revenue increased from DKK 122 million in 2017 to DKK 994 million in 2022. Read more about our geographical performance in our Financial review on page 45 . Our strong foundation To succeed with the four growth pillars in our Phoenix strategy, we are building on our strong foundation. People — We work as a world-class team, leveraging our global presence. Our operating model enables us to deliver a strong and consistent customer shopping experience while we constantly refine our ability to work as one global company with one brand expression, shared processes and clear roles. We strive to create a healthy performance culture powered by innovative digital solutions where we craft the incredible. Read more about people efforts on page 25 . Digitalisation — The solid digital foundation we have built enables us to deliver on our strategy. This includes more use of data and advanced analytics, modern IT solutions, and many other aspects of digitalising our business. We are also unifying the tech and data platform that drives Pandora today. We also invest in the back-end systems at our crafting facilities, in our supply chain and in a new Enterprise Resource Planning (ERP) system, which will support and further enhance our digital foundation. Sustainability — We believe high-quality jewellery, strong business performance and high ethical standards go hand in hand, and we craft our jewellery with respect for resources, environment and people. Our ambition is to be an industry leader in sustainability. We strive to become a low-carbon and circular business that is also inclusive, diverse and fair with a positive impact across our entire supply chain. Read more about sustainability on page 25 . Excellence — We will continue to improve our operational excellence, expand and leverage our profitable store network and continue embedding a cost-conscious mindset. Scale — Pandora is the largest jewellery manufacturer in the world, and we will continue to strengthen this part of our organisation to benefit from our scale. Through an integrated and sustainable supply base we will enable consumer-centric, innovative products while at the same time driving continuous optimisation of cost, quality and service. In 2022, we took the first steps towards our new factory in Vietnam. As a result, we decided to reorganise the legal structure and consolidate our crafting activities into a separate manufacturing sub-group. Read more about the intra-group restructuring in note 3.3 in the Parent Company financial statements. Growth pillar 3: Personalisation A key strength at Pandora is the direct relationship to mil- lions of consumers through our strong owned and operated retail network and online touchpoints. This connection pro- vides rich insights on purchase history, website visits, email and paid media, allowing Pandora to offer a better and more personalised service throughout the customer journey. In 2022, we launched the Personalisation Centre of Excellence as the focal point for these efforts. The team works in cross-functional “pods” based on mixed disciplines spanning marketing, data science and technology. Each pod is respon- sible for a critical customer group (for example repeat buyers or gifters) and has specific goals to achieve (for example the number of occasions where a gifter buys Pandora). To further drive personalisation, we launched the loyalty programme My Pandora in France. By offering members exclusive benefits and effectively gathering customer data, the programme has proven to significantly increase customer value. My Pandora has over 520,000 members in France and will be rolled out to more markets in 2023. Growth pillar 4: Core markets Pandora has a rich and diversified geographical presence across the world. There are ample opportunities to grow both our seven key markets and other markets. The markets with the highest potential for growth are the US and China, where our network footprints are underpenetrat- ed. Additionally, the Pandora brand is not as strong in these markets as in the UK, Italy and Australia, so there is potential to drive revenue growth through higher brand awareness. Markets like France and Germany also represent opportunities for growth, as brand awareness is relatively low in these Best-selling bracelet with 1.2 million pieces sold Our bracelets remain popular among our consumers as they enable them to express themselves through beautiful Pandora charms. In 2022, our heart-lock Moments bracelet was our best-selling bracelet with more than 1.2 million pieces sold. ANNUAL REPORT 2022 OUR BUSINESS STORY Central store in New York City The new incredible Evoke store on Fifth Avenue in New York City is a great addition to our network in the US. It is strategically positioned to increase brand accessibility to our customers in the southern part of Manhattan. In 2022, we added 80 owned and oper- ated concept stores through forward integration, including two large franchise acquisitions in North America. We took over 37 stores from Ben Bridge Jeweler, primarily on the US West Coast, and 13 stores from Panbor in Las Vegas. We also acquired 25 concept stores and nine shop-in-shops from our Portuguese distributor, Visão do Tempo, to assume full ownership of the business in Portugal. “Our strong store network expansion and optimisation efforts during 2022 EXPANDING THE PANDORA NETWORK accretive, have a short payback period, and the risk is low. Another element in Pandora’s network strategy is forward integration by taking over partner stores. We assess possible transactions on a case-by-case basis, for example when a franchise contract expires or if a partner wishes to exit the business. We evaluate each opportunity on a number of parameters, including performance, future potential, opera- tional set-up, proximity to other Pandora stores, and scale. We see significant potential in making our brand more accessible in many of our markets, and in 2022 Pandora opened net 88 new concept stores and net 130 owned and operated shop-in-shops. These stores are part of approximately 600 locations across our top 40 markets that we have identified as the most at- tractive opportunities to drive profitable growth. The locations were selected based on a detailed mapping and evaluation of 13,000 global locations. The business case for opening new stores is attractive. New stores are EBIT margin have resulted in a record number of new openings with stellar performance across the board while simulataneously improving the quality of our existing physical footprint. We expect this to continue during 2023 with most of the activities taking place in North America, Latin America and parts of Asia,” says Kai Aejmelaeus, Senior Vice President, Omnichannel Network, Pandora. In 2023, we expect to open net 50 to 100 concept stores and net 50 to 100 owned and operated shop-in-shops. ANNUAL REPORT 2022 STORY In 2022, we announced plans to build a new crafting facility in Vietnam, our first outside Thailand. RESPONDING TO A CHANGING WORLD Changes and global trends emerge that require businesses to adapt and respond. For Pandora, four major industry trends are of particular relevance to our Phoenix growth strategy. Macroeconomic uncertainty The business landscape continues to undergo changes, some of which have been accelerated by uncertainty shocks like the pandemic, the Russian invasion of Ukraine, and global supply chain disruptions and product shortages. According to McKinsey’s Consumer Pulse 1 conducted in the US, con- sumers are twice as pessimistic about the economy today as they were throughout the pandemic. PANDORA’S RESPONSE Even though Pandora relies on discretionary consumer spending, the fact that the majority of our revenue is gener- ated from gifting and our affordable positioning provides a level of resilience. Pandora is also in a healthy position due to our favourable margin structure, strong cash generation and low financial leverage. A stress-test of Pandora’s financial capacity shows the company would still be highly profitable even in a deep recession scenario. We saw proof of that in 2020, when the pandemic hit the hardest and yet the EBIT margin for 2020 landed above 20%. We have fully variable ex- penses that are mainly related to cost of goods sold, point- of-sale materials, variable rent, freight costs and variable salary. Additionally, most of our marketing expenses, which accounted for 14.1% of revenue in 2022, can be adjusted with short notice. To mitigate risk related to macroeconomic uncertainty, we already took several precautionary measures in 2022 by re- ducing costs and reprioritising non-urgent initiatives such as postponing expansion plans in Thailand. Further cost actions are currently being taken. We also announced plans to build a new crafting facility in Vietnam, our first outside Thailand. By diversifying our geographical footprint, we become more resilient to potential supply disruptions. Read more about management’s judgements and estimates on page 58. A seamless customer experience While the physical store experience remains essential in an industry that is all about experiencing the product, consum- er demand for digital shopping has accelerated significantly during the pandemic, and so has consumers’ expectations to omnichannel services. Not least mobile shopping is moving rapidly, with the global mobile commerce market valued at USD 268 billion in 2021, expected to grow at a Compound Annual Growth Rate (CAGR) of 27% until 2030. PANDORA’S RESPONSE To provide a seamless omnichannel shopping experience that meets our customers’ preferences, Pandora has invested significantly in digital capabilities in recent years. In 2022, we migrated our largest market to a new e-commerce platform optimised for mobile usage, and remaining markets are scheduled for 2023. Reflecting a positive consumer response, our online Net Promoter Score was 5 percentage points higher compared to 2021 and exceeded our target for 2022. In 2022, we also optimised our Click & Collect process further so that we are now able to deliver to customers in as little as two hours to meet last-minute gifting needs and launched our new loyalty programme, My Pandora, in France. 1 McKinsey 2022. INDUSTRY TRENDS ANNUAL REPORT 2022 OUR BUSINESS Running the business, sustainably The requirements on global brands to operate with high standards of responsible business across the sustainabil- ity agenda continue to increase. Local governments are increasing regulation, investors assess the sustainability performance, and many consumers are highly engaged in the debate. The correlation between average consumer pref- erence and brand credentials in sustainability is still largely uncharted, but indications are that groups of consumers attach increasing importance to the subject when making their purchasing decisions. Research from Boston Consulting Group 1 found that 38% of consumers switched from their preferred clothing brand to one with better environmental and social practices. PANDORA’S RESPONSE As part of the Phoenix strategy, we wish to lead the way on sustainability in the industry by becoming a low-carbon, circular, and inclusive, diverse and fair business. In 2022, New ways of working COVID-19 has changed office routines across the world. Flexible ways of working were born in response to the pandemic but have since become a desirable job feature that many employees expect their employer to provide. McKinsey’s American Opportunity Survey 2 conducted among American respondents shows that when people have the opportunity to work flexibly, 87% take it. To attract and retain talent, many companies are introducing solutions that meet employees’ expectations to flexibility and a healthy work-life balance. PANDORA’S RESPONSE Pandora is investing in the long-term well-being of our employees, and our FutureWork principles for office employees support new ways of working. New flexible working policies include guidelines for virtual meetings, a new e-learning platform, and a new digital people portal that focuses on development, goal setting and career growth. We have also introduced role model awards, expanded our incentive programme, and launched digital tools for day-to-day work and career growth. Hiring top talent is essential for the continued growth of Pandora, and in 2022 we launched a new employer brand, Craft the Incredible, to attract great talent. We also built a strong global recruitment team, opened a global Digital Hub in London and moved our North American headquarters to New York City to access an even larger talent pool. Read more about our people efforts on page 25. we made strong progress on our ambitious targets. We launched the Diamonds by Pandora collection in North America, featuring lab-created diamonds that are grown, cut and polished using 100% renewable energy and set in 100% recycled silver and gold. We formalised our human rights programme with a focus on key business areas where impacts to people are highest. In 2022, we also conducted a global employee listening survey with focus on inclusivity. The survey showed an 86% inclusion score, above our 2025 target of 85%. Through Pandora’s long-standing partnership with UNICEF, we support children and adolescents around the world through learning and skills development, rights awareness and gender equality activities, just as we supported UNICEF’s emergency relief work in Ukraine. For the seventh consecutive year, we received the highest ranking in MSCI’s annual sustainability rating. 1 Watchwire 2021. 2 McKinsey 2022. Recyclable silver dust Silver dust is a by-product of our crafting process. Silver dust is just as valuable as silver grains and is part of our recycled metals process. ANNUAL REPORT 2022 OUR BUSINESS Innovative & agile organisation Digital platform World-class talent Healthy performance culture Empowering & transformational leadership Sustainability leader PEOPLE AND SUSTAINABILITY Creating strong results starts with our people and is founded on responsible business practices. That is why Pandora nurtures its people and drives a strong sustainability agenda. Innovative and agile organisation Pandora operates and is organised to combine art and innovation in a way that delivers strong results. Cross-func- tional teams are responsible for developing and marketing our products using consumer insights and data. Closely aligned with the business, our supply organisation boosts speed and agility when delivering to customers. We have two powerful digital hubs in London and Copenhagen to acceler- ate and strengthen our digital journey. To bring leadership closer to customers and ensure strong execution, we have designed a flat organisation and have created direct connections between our nine clusters and our Global Office. Leadership Effectiveness Score Inclusion Score Employee Net Promoter Score 8.3 86% 58 Five integrated people and sustainability priorities as part of Phoenix Leveraging synergies across a combined people and sustainability agenda, our work is focused on five key areas underpinned by an advanced digital platform. World-class talent Pandora is a global workplace with more than 32,000 employees representing more than 125 nationalities and spanning disciplines such as crafting, distribution, retail and office. Attracting top external talent is imperative to supporting Pandora’s growth agenda, and during 2022 we worked to achieve ambitious recruitment goals in a highly dynamic employment market. In August, our new employer brand, Craft the Incredible, came to life to express what it means to work at Pandora and to attract external talent to our teams around the world. ANNUAL REPORT 2022 OUR BUSINESS Healthy performance culture Pandora’s purpose, We give a voice to people’s loves, paired with our four core values – We Care, We Dream, We Dare, and We Deliver – set a shared direction for our work. Business results are important, but just as important is how we get there. And part of this is building a workplace where employees thrive and feel compelled to recommend it to others. For example, we have set an Employee Net Promoter Score (eNPS), a measure of employee sentiment and engagement, as a core indicator for the company. In 2022, the eNPS was 58, an increase of 20 compared to 2021, and in the top 5% of Pandora’s benchmark in the consumer sector. Building an amazing company where we can achieve incred- ible things also means nurturing a culture where we can be ourselves. Twice yearly, employees are asked to provide feedback on their inclusion and diversity experience at Pandora. In 2022, Pandora had an inclusion score of 86%, in the top quartile of Pandora's benchmark in the consumer sector. We believe that inclusion, diversity and fairness are core tenets of a responsible growing business, and they are key in our strategic sustainability priorities. Empowering and transformational leadership Driving transformational and courageous leadership that can inspire and empower colleagues is a top priority. In 2022, employees scored Leadership Effectiveness at 8.3, which is a significant increase compared to 7.9 in 2021. This has led to an increase in employee engagement overall. In line with our diversity and inclusion target, we increased the ratio of wom- en in the Leadership Team from 23% in 2021 to 29% in 2022. A good improvement, which underlines our commitment to make Pandora an even more equitable and fair workplace. To heighten and globalise our leadership standards, we launched our first global leadership development programme, RISE, in 2022. Pandora RISE guides and inspires people leaders on how to develop, coach and enable perfor- mance for their team members. It is important that leaders at Pandora feel empowered to create the best conditions for our employees and enable the realisation of the Phoenix strategy. The programme will be rolled out to 3,900 leaders over the next two years. In addition, more than 350 top leaders are continually trained on our talent approach to ensure solid leadership growth and succession for the years to come. Our efforts to create a world-class workplace are under- pinned by continuous investments in a global digital infra- structure that supports and empowers our employees. In 2022, we rolled out several new components in the areas of learning, performance management and recruitment, with more to follow in 2023. With investments made in 2022, we will fully digitise our core people processes and start wider utilisation of data through our enhanced analytics capabili- ties. Our digital platform serves as our foundation to deliver on each of our people and sustainability priorities. leaders to enrol in our Global Leadership Programme, Pandora RISE, over the coming two years top leaders have been trained on our talent approach 3,900 >350 We are guided by four values: We Dream We Dare We Care We Deliver Through activating this campaign, Pandora has been able to attract highly skilled talent from leading brands and across other industries. Our new employer brand was integral to at- tracting around 1,100 office colleagues in 2022 and the hiring of more than 4,500 retail colleagues for our peak trading period in the fourth quarter. ANNUAL REPORT 2022 OUR BUSINESS Sustainability leader As the global leader in affordable jewellery, we believe that we have a responsibility to rethink how jewellery is designed and produced with the planet and its people in mind. Therefore, sustainability is one of five foundational elements of Pandora’s Phoenix strategy, contributing to long-term growth ambitions and aligning actions with values. Placing sustainability at the core of our business is a natural path for us to take as a responsible global brand and a means of future-proofing our company. Our sustainability strategy has three priorities: low-carbon business, circular innovation and inclusive, diverse and fair culture. We have set long-term targets and developed detailed roadmaps for each of these priorities. Read more about our sustainability targets on the following page. Additionally, our sustainability strategy is a commitment to responsible business operations and adhering to local regulation and international guidelines. To deliver on our ambition and targets, in 2022 we continued to expand the number of people dedicated to this work with teams at our Global Office in Denmark, in our crafting and supply activities in Thailand and in other strategic locations. We are proud that our efforts are noted, and in 2022 we were one of a small number of global companies to achieve an ‘A’ score from the leading climate organisation, CDP, for our climate action. Our sustainability priorities LOWCARBON BUSINESS CIRCULAR INNOVATION INCLUSIVE, DIVERSE AND FAIR CULTURE Sustainability Report 2022 Read more about Pandora's reporting to the Task Force on Climate-Related Financial Disclosures and EU taxonomy disclosures in our Sustainability Report 2022 . ANNUAL REPORT 2022 OUR BUSINESS 1 Gender parity in leadership refers to an equal number (50/50) of men and women in leadership positions from Vice President and up (including the Board) with a +/- 5 percentage points variation. 2 We use '-' to indicate that data for the data point has not previously been disclosed. 3 Read more to our commitment and targets to the United Nations’ Sustainable Development Goals in our Sustainability Report 2022. OUR SUSTAINABILITY TARGETS UN SDGs 3 PROGRESS AND STATUS OUR NEXT STEPS Achieved progress against target Increase in emissions compared to baseline Yet to be achieved 2019 2021: 54% 2022: 61% 2025 BY 2030 – Reduce total greenhouse gas emissions by 50% from a 2019 baseline (Scopes 1, 2 and 3) by: - Reducing emissions in own oper- ations by at least 90% to become carbon neutral (Scopes 1 and 2 market-based). - Reducing value chain emissions by 42% (Scope 3). BY 2040 – Achieve net zero emissions. In 2022, our Scope 3 emissions increased by 4% since 2021, largely due to a higher level of purchased goods and services. We saw reductions in other areas thanks to increased supplier-specific data. The overall Scope 3 increase was expected and reductions will materialise in the coming years. • Scopes 1 and 2: We will continue the geographic roll-out of purchasing Renewable Energy Certificates to cover more markets in the short term, while also exploring other opportunities to source renewable energy (for example, Power Purchase Agreements). The share of recycled silver and gold purchased in 2022 was 61%. Over the course of 2022, we transi- tioned procured silver and gold for in-house produc- tion to recycled sources, and we completed third-party audits for most of our component suppliers and contract manufacturers to strengthen end-to-end traceability. • In 2023, we will focus on transitioning our component and contract manufacturers and suppliers to recycled sources, expanding our options for recycled sources, and begin phasing out any non-recycled stock in our inventory. We achieved an inclusion score of 86% in our latest employee survey. The resulting score ranks us in the top quartile within our global benchmark, and has us on track for our 85% target by 2025. • We have achieved our inclusion score target, so our focus will be on maintaining and improving our score. For example, we are analysing survey data to have a better understanding of how we can best support underrepresented groups. • We have developed and designed an additional learning module to address the importance of inclusive leader- ship. We are working to integrate the module as part of our global leadership programme, Pandora RISE. • We will be reviewing inclusion within our recruitment process and succession planning to ensure a sustaina- ble approach towards achieving gender parity. • We will continue to build guidelines and reporting systems to track progress on our customer engage- ment targets. BY 2025 – Use only recycled silver and gold in the crafting of our jewellery. 2019 2019 2021: 255,290 2022: 264,224 2022: 6% 2030 2030 SCOPES , AND RECYCLED SILVER AND GOLD SCOPE (tonnes CO 2 e) INCLUSION WOMEN IN LEADERSHIP BY 2025 – Create an inclusive workplace and increase the share of underrepresented groups. BY 2030 – Achieve full gender parity 1 , reaching 1/3 women in leadership by 2025. BY 2025 – Reflect societal diversity in our customer engagement. LOW-CARBON BUSINESS CIRCULAR INNOVATION INCLUSIVE, DIVERSE AND FAIR CULTURE 2022 86% 2022 29% 2025 85% 2030 50% 2025 33% 2021 23% We made good progress in 2022 by improving gender parity in leadership by 6 percentage points to 29%. • Scope 3: In 2023 and beyond, we will continue the development and implementation of our supplier engagement programme and scale our outreach to suppliers on collection of carbon footprint data and dialogue on carbon reduction initiatives. 2021 — 2 We have decreased our total greenhouse gas emissions by 6% compared to our 2019 baseline. In 2022, we reduced emissions from own operations by 27% compared to 2021. This was achieved primarily through the purchase of Renewable Energy Certificates to cover most of our owned and operated stores and offices in Europe and 100% of electricity consumption at our crafting facilities in Thailand. 2019 2021: 22 ,160 2022: 16,146 2025 SCOPES AND (tonnes CO 2 e) ANNUAL REPORT 2022 OUR BUSINESS OUR BUSINESS At Pandora, we carefully monitor and assess potential risks to the company on an ongoing basis. MANAGING RISKS Our approach to risk management Our enterprise risk management is focused on early identification and assessment of risks followed by mitigating actions to protect the business. We see a well-functioning risk management process as key to maintaining and building Pandora’s position as the world’s largest jewellery brand. Pandora’s Chief Financial Officer heads up the company’s Risk Management Board, which consists of senior management represen- tatives from across our value chain. All areas of our business report their most significant risks to the Global Insurance & Risk Office, along with assessments of those risks and an overview of implemented mitigations and next milestones. To read more about our enterprise risk management efforts, please visit pandoragroup.com. Our key risks The Board of Directors reviews and discusses key risks that could threaten our business model or the future performance, solvency or liquidity of Pandora. Key risks and our responses are further described on the following pages. The key risks do not represent all the risks associated with our busi- ness. Other risks not presently identified or ones currently deemed to be less material may also have an adverse effect on our business. Brand and product relevance As a large, global brand, the strength and integrity of our brand is a fundamental asset. It is important that our product offerings remain relevant to our customers. A lack of brand or product relevance or a severe break of good business practices constitute a significant business risk that could result in lower traffic to our stores and online shopping sites and reduce revenue. • Create consumer-centric innovation, fuelled by consumer insights and rigorous testing • Build brand awareness and desirability through competitive media investments • Strengthen capabilities within data analytics and technology • Deliver 360-degree brand experience across all consumer touchpoints online and oine • Continue monitoring trademarks and patents and ghting infringements • Continue Code of Conduct training in support of good business behaviour. Brand access We sell our products globally and rely on a strong channel network and solid insights to engage with consumers in their preferred marketplace. A personalised and unique shopping experience is im- portant for developing customer loyalty. Not being able to engage consumers and provide them with a relevant omnichannel shopping expe- rience can result in a decline in revenue. • Engage store associates by continuing to develop the selling ceremony and oer relevant training programmes • Strengthen focus on personalisation of shopping experiences across channels • Invest in improving digital and omnichannel customer experiences • Continuously optimise the store network by relocating, opening and closing stores. Global business disruptions As a consumer brand with a fully inte- grated value chain, we depend on a fully operational supply chain and unhindered access to our sales channels. Global disruptive events such as pandemics, lockdowns, extreme climatic events, geopolitical or social unrest can result in both lower revenue and higher costs through changing consumer behaviour, temporary store and crafting facility closures, labour shortages and supply chain disruptions. • Expansion of online distribution capacity • Geographical and channel diversication • Global Crisis Management team and increased focus on business continuity • Ongoing review of supply chain - see mitigating actions under “Supply chain disruptions” below. AREA DESCRIPTION RISK MITIGATION ANNUAL REPORT 2022 OUR BUSINESS Supply chain disruptions Pandora operates a fully integrated value chain and most production is in-house. Procurement of raw materials and the ability to produce and distribute nished products are critical for meeting customer demand. Breakdowns, political unrest, re, natural catastro- phes etc. at Pandora’s or key suppliers’ sites may result in disruption of our supply chain and have a signicant impact on our nancial performance. Having crafting facilities located exclusively in Thailand elevates the risk of supply disruption. • Dual sourcing where feasible • Buers of production components and nished goods • Crafting at two separate locations in Thailand • A new crafting facility in Vietnam • Engagement of external manufacturers to provide exibility • Optimised B2B and B2C distribution capacity. IT security breaches Reliable IT systems and infrastructure are critical to the company’s ability to operate eectively. We also have a duty to safeguard the data of our customers, partners and employees as well as our own data. Breaches of IT security, for example caused by malware attacks, could have a severe impact on Pandora’s ability to maintain operations for a period of time and, hence, its nancial perfor- mance. The disclosure of condential information could compromise the privacy of customers or other individuals. • Comprehensive Cyber Security Programme to upgrade existing capabilities and regularly report progress to the Board of Directors and the Executive Leadership Team • Ongoing security monitoring supported by incident response teams • Third-party vulnerability and security maturity assessments • Cyber and information security awareness training and phishing tests for all business areas • Specialised training for high-risk teams, including the Executive Leadership Team • Data Ethics Policy established and Privacy Board operational. Breakdown of IT systems Operating a global company with a fully integrated value chain is dependent on stable and ecient IT systems. Pandora operates a number of legacy IT systems, including ERP. If Pandora were to fail or otherwise be unable to upgrade its IT systems in a timely, precise and ecient manner, this could have a negative eect on Pandora's operations and nancial results. Furthermore, a lack of interoper- ability and an obsolescence of core IT systems could have consequences in terms of operational eciency and business continuity. • Investment in technology upgrades, including an ongoing upgrade of the ERP platform • Cross-functional alignment and project groups to ensure timely implementation of technology upgrades • Ongoing standardisation and consolidation of IT systems across geographies • Increased focus on business continuity plans. Talent attraction and succession Pandora needs highly talented and capable people across all key functions and markets to drive growth and sustainable performance and enable us to deliver on our strategy. Failure to attract, develop and retain the right talent as well as maintaining a strong succession pipeline for leadership and critical roles could be a risk to delivery of our strategy. • Frequent employee advocacy surveys to measure employee engagement and leadership eectiveness to facilitate retention • Chief Talent Ocer Programme to get to know our talent, develop them for future roles and build succession depth • Launch of Global Leadership Programme (Pandora RISE) • Enhanced focus on employer branding with the targeted Employee Value Proposition, Craft the Incredible • Inclusion & Diversity goals as part of our strategic priorities linked to the Long-term Incentive programme for senior leaders. Responsible business behaviour Pandora has a reputation for responsible business behaviour. This reputation benets the company in several ways, from attracting new employees to meeting consumer expectations. If Pandora violates legislation, disregards principles of good corporate citizenship or fails to adhere to social or environmental standards, it could damage our brand reputation. • Mandatory ethics and compliance training • Upgraded external access to our whistleblowing hotline • Responsible Supplier Programme, including training and vendor audits • Environmental, social and governance reporting to ensure transparent and credible disclosure • Commitment to ambitious climate targets and other sustainability initiatives • A tax strategy aimed at paying fair taxes in all markets where Pandora operates. AREA DESCRIPTION RISK MITIGATION ANNUAL REPORT 2022 OUR BUSINESS Macroeconomic development As a global jewellery brand, Pandora operates in a discretionary consumer spending category and is exposed to a weak macroeconomic environment and general changes in consumer behaviour. Adverse macroeconomic conditions and general changes in consumer behaviour may result in lower demand for our products and impact our revenue. • Continuous monitoring of the macroeconomic landscape • Continuous monitoring of consumer behaviour and trends • Pursuing exibility in cost base, including frequent break options in store leases • Continued pursuit of cost savings, including preemptive measures already implemented in late 2022 • Geographical diversication of revenue streams • Stressing our aordable price positioning • Option of “buy now, pay later” payment models. Market uctuations Our products are made of precious metals, mainly silver and gold. As a global business, Pandora has signicant revenue in USD, USD-related currencies and GBP. Our crafting facilities are based in Thailand and consequently we have signicant net cost in THB. Pandora is exposed to a weakening of the USD, USD-related currencies and GBP and a strengthen- ing of the THB and precious metal prices. Currency uctuations and increases in the price of precious metals can have a signicant impact on the compa- ny’s nancial performance and cash ows. • Hedging at least 50% of the combined annual commodity, exchange rate and interest rate risk. However, at least 70% of the annual commodity exposure must be hedged • Ongoing review of sales prices. Facing up to environmental risks We understand the need to prepare for the risks that will arise from changing weather patterns, rising sea levels and other climate impacts. In 2022, we carried out a climate change scenario analysis as recommended by the Task Force on Climate-Related Financial Disclosures. In 2023, we will consider relevant mitigation actions. Read more in our Sustainability Report 2022. AREA DESCRIPTION RISK MITIGATION ANNUAL REPORT 2022 1982 THE BEGINNING In a small jeweller’s shop in modest surroundings in central Copenhagen, Denmark, goldsmith Per Enevoldsen and his wife Winnie set out on the journey of what will later become one of the world’s largest jewellery brands. From the beginning, they are driven by a desire to offer women a universe of high-quality, hand-finished and contemporary jewellery at affordable prices. STORY 2000 2006 2014 1989 2010 2005 1982 40 YEARS OF PANDORA JEWELLERY In 2022, Pandora celebrated its 40th anniversary. An exceptional journey from a small shop in Copenhagen to the world’s largest jewellery brand. Pandora is founded as a small goldsmith shop called Populair Smykker in Copenhagen, Denmark. Pandora’s signature charm bracelet concept is launched and Pandora gets its name. Ten of the original charms are still part of our collection today. The first Pandora concept store opens its doors in Hamburg, Germany. Pandora starts crafting jewellery in Thailand, where Per Enevoldsen holds the very first ring crafted. Pandora is listed on the Nasdaq Copenhagen stock exchange. Pandora’s first fully-owned crafting facility opens in Bangkok. Pandora enters a ten-year strategic alliance with The Walt Disney Company. ANNUAL REPORT 2022 2017 2020 2019 2021 2022 Our state-of-the-art, resource- efficient, LEED Gold-certified crafting facility opens in Lamphun in Northern Thailand. Our crafting facilities run on 100% renewable energy and we set the ambition to become carbon neutral in our own operations by 2025. Pandora enters long-term partnership with UNICEF. We introduce jewellery with lab-created diamonds to reach new customers and deliver on our sustainability commitments. Pandora reaches record-high revenue and employs more than 32,000 people worldwide. It all began in 1982. Per Enevoldsen and his wife Winnie Liljeborg opened a small goldsmith's shop on the Danish shopping street Nørrebrogade to sell jewellery un- der the name Populair Smykker, Danish for "popular jewellery". The first product was a ring crafted from solid sterling silver. Per and Winnie soon expanded into a wholesale business and started sourcing its jewellery from Thailand, a country well-known for its craftsmanship tradi- tion. In 1989, they established their own crafting facility in Bangkok, which allowed them to scale up production while keep- ing quality high and prices affordable, paving the way for our future success. An icon that changed jewellery In 2000, Populair Smykker changed its name to Pandora and launched the iconic charm bracelet that sparked our international breakthrough. Pandora Moments invited customers to collect and combine charms on a bracelet to create their own unique piece of jewel- lery that would express their individual- ity and celebrate personal milestones. The business grew quickly and expand- ed beyond Denmark’s borders into important new markets, including the US and Canada in 2003 and Australia and Germany in 2004. In 2022 alone, around 65 million charms were crafted, that is six million more charms than in 2021. A truly global jewellery brand Having become the world’s largest jewel- lery brand, Pandora today offers a wide selection of jewellery collections crafted with a commitment to having the lowest possible impact on the environment, people and communities. We sell prod- ucts in more than 100 countries through 6,500 physical and online stores, as well as social media and other platforms. STORY CONTINUES ANNUAL REPORT 2022 STORY CORPORATE GOVERNANCE Pandora’s Global Oce at Havneholmen in Copenhagen employs more than 900 people. >900 35 Corporate governance 39 Board of Directors 41 Executive Leadership Team 43 Shareholder information ANNUAL REPORT 2022 Clusters • North America • Latin America • Pacific/Greater Asia • Western Europe • Greater China • Southern Europe & MEA • Eastern Europe • Northern Europe • British Isles Executive Leadership Team Executive Management Board of Directors Annual General Meeting CORPORATE GOVERNANCE Board of Directors Composition The Board currently has seven members, all of whom were elected at the Annual General Meeting for a term of one year. With the exception of Christian Frigast, all Board members are independent in the context of the Danish Recommendations on Corporate Governance. At the time of his reelection to the Board in March 2022, Christian Frigast could still be considered as independent. However, since August 2022 Christian Frigast has been a member of the Board for more than 12 years and can no longer be regarded as an independent Board member in the context of the Danish Recommendations on Corporate Governance. The composition of the Board is intended to ensure complementary competencies and diversity to effectively support Pandora’s strategy and ensure that all decisions are well considered. Leadership structure Corporate authority is divided between the Board of Directors (the Board) and Executive Management. The Board outlines the overall vision, strategy and objectives of Pandora’s business activities and supervises the performance of Executive Management. The Board has established Audit, Remuneration and Nomina- tion Committees, and members and Chairs to these commit- tees are appointed from within the Board. The committees’ terms of reference are available at pandoragroup.com. Members of Executive Management are appointed by the Board. Executive Management is responsible for the day-to- day management and for the execution of Pandora’s strategy. In addition, the Group has an Executive Leadership Team. The team members are responsible for the day-to-day operations of their respective business areas and also serve as a part of Pandora’s overall leadership. A connected organisation Fast execution and collaboration across clusters and global functions. The nine clusters report to the Chief Commercial Officer. Our governance structure The Board supervises Executive Management’s work and is responsible for Pandora’s general and strategic direction. ANNUAL REPORT 2022 Board evaluation Each year, the Board conducts an internal self-evaluation focusing on the effectiveness and skills of the Board. The ideal mix of skills and experience required of Board members includes: • Board experience • Executive management • Sectoral experience • Digitalisation • Sustainability • Retail • Marketing and brand • Finance An external assessment of the Board’s skills and effective- ness is conducted every three years to ensure objectivity and benchmarking. In 2022, an internal Board effectiveness self-evaluation was conducted across seven areas: value creation and strategy, Board agenda and meetings (including committees), talent and culture, Board composition, Board members’ contribu- tions, Chair's effectiveness, and reporting/risk management. The conclusions are shared with the Chair, the Board mem- bers and Executive Management, followed by a thorough discussion. The assessment of the last self-evaluation held in 2022 identified that the Board continues to consist of individuals who possess relevant skills and experience, and are engaged and well-prepared. The Board structure and committee work are effective and well-functioning, including interactions with Executive Management. Board activities in 2022 The Board held nine meetings in 2022. Its primary focus was to oversee the executional progress of Pandora’s Phoenix strategy following its announcement at Pandora’s Capital Markets Day on 14 September 2021. Furthermore, the Board spent time on sustainability and compliance matters as well as risk management. Audit Committee The Audit Committee currently has four members, appointed for a one-year term. The Audit Committee's responsibilities include assisting the Board in monitoring the effectiveness of the internal control and risk management systems and reviewing Pandora’s financial reporting and audit process. The Audit Committee conducts its work according to its Terms of Reference. In 2022, the Audit Committee met six times. Its main activities were to: • review key accounting principles, significant accounting estimates, key financial risks and compliance with tax regulations; • monitor the external financial reporting process; • monitor the effectiveness of Pandora’s internal control and risk management systems, including internal audit; • monitor the external auditors and their independence; • review Pandora’s whistleblowing reporting system and whistleblowing cases; • review Pandora’s treasury policy; • review Pandora’s tax policy. Independent auditor Pandora’s independent auditors are appointed for a term of one year at the Annual General Meeting following a proposal from the Board, which is based on a recommendation from the Audit Committee. The framework for the auditors’ duties, including their remuneration, audit and non-audit services, is agreed annually between the Board and the auditors follow- ing the recommendation of the Audit Committee. AUDIT COMMITTEE Committee meetings attended Heine Dalsgaard 1 Birgitta Stymne Göransson Catherine Spindler Jan Zijderveld 1 Chair Meeting attended Meeting not attended BOARD MEMBERS Board meetings attended Peter A. Ruzicka 1 Christian Frigast 2 Heine Dalsgaard Birgitta Stymne Göransson Marianne Kirkegaard Catherine Spindler Jan Zijderveld 1 Chair 2 Deputy Chair Meeting attended Meeting not attended MEETINGS IN 2022 Board of Directors 9 Audit Committe Remuneration Committee Nomination Committee 6 5 3 ANNUAL REPORT 2022 CORPORATE GOVERNANCE Remuneration Committee The Remuneration Committee currently has three members, appointed for a one-year term. The Remuneration Committee assists the Board in ensuring that Pandora’s remuneration policies strike an appropriate balance between the interests of Pandora’s shareholders and a rewarding and motivating remuneration of Executive Management and senior employees. In 2022, the Remuneration Committee met five times. Its main activities are described in the Remuneration Report available at our website: pandoragroup.com/investor/cor- porate-governance/remuneration-reports. Nomination Committee The Nomination Committee currently has four members, appointed for a one-year term. The Nomination Commit- tee works according to its Terms of Reference and its main responsibilities are assessment and evaluation of the Board and Executive Management, including performance, skills and experience, and nomination of candidates to the Board and Executive Management. Further, the committee monitors talent and succession policy and ensures compliance when making Board, Executive Management and Executive Lead- ership Team appointments. Finally, it deals with succession planning for Executive Management positions and reviews as well as monitors diversity policy to ensure compliance. In 2022, the Nomination Committee met three times and had a few additional ad hoc exchanges relating to the Board’s self-evaluation. Its main activities were to: • prepare and conduct the Board assessment in accordance with the Danish Corporate Governance Recommendations; • review cultural enablers that have driven colleague engagement, including our Employee Value Proposition and Leadership development; • assess performance of Executive Management and the co- operation between the Board and Executive Management; • review succession planning for Executive Management roles. Additional information The Corporate Governance Statement for 2022, cf. section 107(b) of the Danish Financial Statements Act, is available at our website: pandoragroup.com/investor/corporate-gover- nance/governance-statement. Pandora's full sustainability disclosure, cf. section 99(a), 99(b) and 107(d) of the Danish Financial Statements Act, is available in our Sustainability Report 2022 at pandoragroup. com/sustainability/resources/sustainability-reports. Pandora's Global Data Ethics Policy, cf. section 99(d) of the Danish Financial Statements Act, available at pandoragroup. com/investor/corporate-governance/data-ethics, is built on our care and respect for consumer and employee privacy. We apply equality and fairness in our processing of data, we respect the person behind the data, and we focus on sustainable data practices. We also recognise the importance of Artificial Intelligence Safety. For this purpose, we have created a Global AI Safety Standard, which came into force on 1 August 2022. As a company we have committed to conduct business in full compliance with the principles for the safe use of AI as set out in the AI Safety Standard, and we will begin implemen- tation of these principles in 2023. See Pandora's Global Data Ethics Policy NOMINATION COMMITTEE Committee meetings attended Christian Frigast 1 Birgitta Stymne Göransson Marianne Kirkegaard Peter A. Ruzicka 1 Chair Meeting attended REMUNERATION COMMITTEE Committee meetings attended Peter A. Ruzicka 1 Christian Frigast Jan Zijderveld 1 Chair Meeting attended ANNUAL REPORT 2022 CORPORATE GOVERNANCE and assess measures to manage, reduce or eliminate iden- tified risks. The IACC function assists Pandora’s Executive Management and the Audit Committee in identifying and monitoring financial risks in the financial reporting process. The Audit Committee reviews selected high-risk areas on a frequent basis, including significant accounting estimates and material changes to accounting policies. Control activities The financial information reported by Pandora A/S and its subsidiaries follows a formalised and structured process and is controlled by local controllers with local market knowledge as well as the controlling function within Pandora Global Business Services and Corporate Finance. The Group con- trolling function is continuously trained in new accounting and reporting requirements and monitors compliance with relevant legislation on an ongoing basis. The financial reporting process is dependent on the Group’s IT systems. Any weaknesses in system controls and related risks to the financial reporting are mitigated by manual controls. Each entity and Global Business Services assesses its control environment through a self-assessment of the effectiveness of the implemented controls. The IACC function evaluates the effectiveness of the Group's control environment on an ongoing basis and reports its findings to the Audit Committee. Monitoring Pandora’s internal control procedures and risk management systems, including the whistleblowing function, are continu- ously monitored, tested and documented. The Audit Committee assists the Board in supervising the financial reporting process. Internal control and risk management systems in relation to the financial reporting process The Board and Executive Management are responsible for Pandora’s internal control and risk management systems in relation to the financial reporting process. Control environment The Group’s internal control framework identifies key processes, inherent risks and control procedures to reduce and mitigate financial risks and ensure reliable financial reporting. The Audit Committee assists the Board in supervising the financial reporting process and monitoring the effectiveness of the internal control and risk management systems. Executive Management is responsible for maintaining and strengthening the overall control environment, identifying weaknesses and ensuring necessary steps are taken to mitigate financial risks through standardisation and process optimisation. A central Internal Audit and Compliance Controlling (IACC) function has been established to help Pandora accomplish its objectives by bringing a systematic and disciplined approach to evaluating and improving the effectiveness of internal control, compliance and governance processes. The head of the IACC function reports directly to Pandora’s Corporate Finance function with a dotted reporting line to the Audit Committee Chair. Risk assessment The Board and Executive Management assess risks on an on- going basis, including risks related to the financial reporting, The Audit Committee monitors internal control and the risk management process to ensure that identified risks are mitigated. In addition to monitoring of procedures and systems, financial risks are reviewed through audits performed by the IACC function. Information and communication Group entities are assigned dedicated controllers within Corporate Finance to ensure a direct line of communication. The Corporate Finance function reports to the Chief Financial Officer. In addition, the IACC function is present at all Audit Commit - tee meetings and provides regular status updates on the control environment. Furthermore, the head of IACC has regular meetings with the Chief FInancial Officer and meet- ings with the Audit Committee without the presence of the Leadership Team. This set-up ensures transparency and that communication is shared with the Audit Committee on a timely basis. The Board has adopted an Investor Relations Policy that requires all communication to stakeholders, including financial reporting, to be conducted adequately, timely and openly – both internally and externally – and to be conducted factually and truthfully and in compliance with laws and applicable regulations. ANNUAL REPORT 2022 CORPORATE GOVERNANCE Heine Dalsgaard Marianne Kirkegaard BOARD OF DIRECTORS Peter A. Ruzicka Christian Frigast Birgitta Stymne Göransson Catherine Spindler Jan Zijderveld ANNUAL REPORT 2022 CORPORATE GOVERNANCE CORPORATE GOVERNANCE Year of birth: 1964 Member since: 2019 Professional position: Non-executive Board member. Non-executive functions: Chair of Royal Unibrew A/S and member of the Boards of Axfood AB, Aspelin Ramm Gruppen AS and AKA AS. Skills and experience: Vast operational experience with strategy execu- tion and transformation as well as retail and brand optimisation at executive level. Furthermore, Peter A. Ruzicka contributes with experience from other Board positions and insight into capital markets. Year of birth: 1951 Member since: 2010 Professional position: Executive Chair of Axcel Management A/S. Non-executive functions: Chair of Aktive Ejere (Active Owners Denmark), EKF Danmarks Eksportkredit (Denmark’s Export Credit Agency), Eksport Kredit Finansiering A/S and Danmarks Skibskredit Holding A/S and member of the Board of its subsidiary; Vice Chair of PostNord and Axcel Advisory Board; member of the Boards of Frigast A/S, Nissens A/S, Danmarks Eksport- og Investeringsfond and CBS Executive Fonden; adjunct professor at Copenhagen Business School. Skills and experience: Experience within areas such as general management, capital markets, consumer sales and retail execution. Year of birth: 1968 Member since: 2020 Professional position: Executive chairman in Baker & Baker UK Ltd. Non-executive functions: Member of the Boards of Faerch Group, Salling Group A/S, BioMar and AKK AB. Skills and experience: In-depth international insight into the consumer market, experience advancing the social sustainability agenda and experience of the complete value chain within large corpo - rate multinationals. Year of birth: 1977 Member since: 2020 Professional position: Deputy Chief Executive Officer of Lacoste. Non-executive functions: None. Skills and experience: Experience within international brand strategy, digital transformation and vast experience in beauty and cosmetics, high-growth pureplay digital environ - ments and lifestyle apparel retail. Year of birth: 1964 Member since: 2021 Professional position: Non-executive Board member. Non-executive functions: Member of the Board of Ahold Delhaize N.V. and Senior Advisor to a number of private equity firms. Skills and experience: International consumer market insight, extensive expe- rience advancing environmental and social sustainabili- ty, and exposure to the full value chain. Year of birth: 1971 Member since: 2021 Professional position: Chief Financial Officer of IVC Evidensia Ltd. Non-executive functions: Member of the Board of Novozymes A/S. Skills and experience: Experience within areas such as international financial and executive management from large corporate multinationals. Heine Dalsgaard Jan Zijderveld Christian Frigast Deputy Chair Catherine Spindler Marianne Kirkegaard BOARD OF DIRECTORS Year of birth: 1957 Member since: 2016 Professional position: Non-executive Board member. Non-executive functions: Chair of Industrifonden and Min Doktor AB and member of the Boards of Asker AB, Elekta AB and Bure Equity AB. Skills and experience: Experience within areas such as consumer goods, retail execution, IT, digital, financial insights and capital markets. Birgitta Stymne Göransson Peter A. Ruzicka Chair The Board members’ full CVs are available at pandoragroup.com. ANNUAL REPORT 2022 CORPORATE GOVERNANCE CORPORATE GOVERNANCE EXECUTIVE LEADERSHIP TEAM Alexander Lacik Anders Boyer Stephen Fairchild Mary Carmen Gasco-Buisson Martino Pessina Jeerasage Puranasamriddhi David Walmsley Byron Clayton ANNUAL REPORT 2022 CORPORATE GOVERNANCE CORPORATE GOVERNANCE President & Chief Executive Officer (CEO) Year of birth: 1965 Member since: 2019 Registered Executive Management. Alexander Lacik has more than 30 years’ experience from large global consumer goods companies. Before joining Pandora, he was Chief Executive Officer of Britax Ltd., a British manufactur- er of childcare products. He has also held Chief Executive Offi- cer and senior management positions at Kasthall Golv & Mattor, Procter & Gamble and Reckitt Benckiser, where he held a number of positions, including head of Reckitt Benckiser North America. He has a Bachelor’s degree in Business Administration from the University of Växjö, Sweden. Executive Vice President & Chief Financial Officer (CFO) Year of birth: 1970 Member since: 2018 Registered Executive Management. Anders Boyer has more than 20 years’ experience in finance, business management and turnarounds. Prior to joining Pandora, Anders held positions as Chief Financial Officer at Hempel and GN Store Nord, and Finance Director and subsequently Regional Director of ISS. Anders started his career at A.P. Moller-Maersk, where he worked for ten years. He has an MSc in Finance and Accounting from Copenhagen Business School, Denmark. Chief Commercial Officer Member since: 2020 Chief Supply Officer Member since: 2020 Chief Digital & Technology Officer Member since: 2019 Chief Human Resources Officer Member since: 2023 Chief Product Officer Member since: 2011 Stephen Fairchild Byron Clayton Anders Boyer David Walmsley Martino Pessina Jeerasage Puranasamriddhi EXECUTIVE LEADERSHIP TEAM Chief Marketing Officer Member since: 2022 Mary Carmen Gasco-Buisson Alexander Lacik The Executive Leadership Team members’ full CVs are available at pandoragroup.com. ANNUAL REPORT 2022 CORPORATE GOVERNANCE CORPORATE GOVERNANCE Jan Feb Mar May Jun Jul Aug Sep Oct Nov DecApr 600 200 800 1,000 400 SHAREHOLDER INFORMATION Pandora’s capital structure policy is to maintain NIBD to EBITDA between 0.5x and 1.5x. At the end of 2022, Pandora’s leverage ratio was only 0.8x NIBD to EBITDA and thus at the low end of the capital structure policy range. The increased leverage of 0.4x versus 2021 primarily reflected significant cash distributions to the shareholders and increased inven- tories and higher CAPEX through the year. Proposed distributions Pandora continues to be highly cash-generative and has ample liquidity to continue cash distribution to shareholders. For 2023, the Board proposes a dividend of DKK 16 per share and a new share buyback of DKK 2.4 billion until 30 June 2023 with an intention to go up to DKK 5.0 billion over the course of the next 12 months, assuming no material deterioration in the macroeconomic climate. The total cash distribution of DKK 6.4 billion will be the highest in Pandora’s history. The Board already has the authority to initiate a share buyback at any point in time. Review of 2022 share buyback and dividends In 2022, Pandora paid out an ordinary dividend of DKK 16 per share. The total amount paid was around DKK 1.5 billion. In 2022, reflecting macroeconomic concerns, the Pandora share price decreased by 40% and ended the year with a clos- ing price of DKK 488. The active capital allocation policy meant that Pandora returned DKK 5.1 billion through cash distribu- tions to shareholders in the calendar year, totalling 11% of the total market capitalisation as of 31 December 2022. The liquidity in the Pandora share remains strong with a free float of 100% of total shares outstanding and around 86 million shares traded in 2022, corresponding to 89% of shares outstanding. In addition to being listed in Copenhagen, Pandora has a sponsored level 1 American Depository Receipt (ADR) programme. The ADRs are traded in the US over-the-counter under the symbol PANDY. Further information regarding the ADR programme can be found on our website: pandoragroup.com. Capital structure and cash allocation Pandora’s capital structure serves to ensure that the com- pany has sufficient financial flexibility to pursue its strategic goals and preserve a stable financial structure based on a strong balance sheet. ANNUAL DISTRIBUTIONS DKK billion FY 2023 Proposed FY 2022 Actual FY 2021 Actual FY 2020 Actual FY 2019 Actual Dividend (ordinary + interim) 1.4 1.5 1.5 0.8 1.8 Nominal dividend per share, DKK 16.0 16.0 15.0 9.0 18.0 Share buyback programme 5.0 1 3.6 3.3 - 2.2 Total cash return 6.4 5.1 4.8 0.8 4.0 1 Includes DKK 0.4 billion from already announced share buyback running until February 2023 and DKK 4.6 billion of new share buyback (with an intention to go up to DKK 5.0 billion) expected to be paid out in 2023 calendar year, assuming no material deterioration in the macroeconomic climate. Pandora shares have been listed on the Nasdaq Copenhagen stock exchange since 2010. Pandora is included in the blue chip OMX C25 index and has around 36,000 registered shareholders. SHARE PRICE DEVELOPMENT DKK ANNUAL REPORT 2022 CORPORATE GOVERNANCE Financial calendar 2023 08 Feb Annual Report 2022 08 Feb Sustainability Report 2022 16 Mar Annual General Meeting 03 May Interim Report Q1 2023 15 Aug Interim Report Q2 2023 05 Oct Capital Markets Day 08 Nov Interim Report Q3 2023 Share information Exchange Nasdaq Copenhagen Trading symbol PANDORA Identification number/ISIN DK0060252690 Number of shares 95,500,000 of DKK 1, each with one vote Share classes 1 GICS 25203010 Sector Apparel, Accessories & Luxury Goods Segment Large ADR information ADR trading symbol PANDY Programme type Sponsored level 1 programme (J.P. Morgan) Ratio (ADR:ORD) 4 ADRs : 1 ordinary share (4:1) ADR ISIN US 698 341 2031 In addition, Pandora repurchased shares at a total price of DKK 3.6 billion in 2022, including DKK 0.7 billion from the pre- vious buyback programme finalised on 4 February 2022. Shareholders As of 31 December 2022, Pandora had two major sharehold- ers. Parvus Asset Management 1 has disclosed holding rights to shares corresponding to 5.4% of the total outstanding voting rights, and Blackrock 2 has disclosed holding rights to shares corresponding to 8.6%. As of 31 December 2022, the geographical split of institutional investors was (% of share capital): • UK 34% • US 23% • Denmark 13% As of 31 December 2022, Pandora’s Board of Directors and Executive Management held a total of 95,616 and 280,098 Pandora shares respectively, corresponding to 0.39% of the total share capital. Investor Relations The Executive Management is responsible for the existence of an Investor Relations function, which is responsible for ensur- ing compliance with Pandora’s Investor Relations Policy. Inves- tor Relations reports directly to the Chief Financial Officer. The purpose of Pandora’s investor relations activities is to ensure that relevant, accurate and timely information is made available to the capital markets to serve as a basis for regular trading and a fair pricing of the share. Prior to the announce- ment of interim and annual reports, a four-week silent period is in place. In addition, members of the Board of Directors and Executive Management are only allowed to trade shares in a four-week trading window following the announcement of in- terim and annual reports. Pandora will ensure that the compa- ny is perceived as visible, accessible, reliable and professional by the capital markets and that Pandora is regarded among the best relative to peers. This will be achieved by complying with the rules and legislation for listed companies on Nasdaq OMX as well as Pandora’s internal policies. Company website Our website (pandoragroup.com ) provides comprehen- sive information about the company, its activities, share performance and shareholders. Additionally, all company announcements, including interim and annual reports, as well as investor presentations, webcasts and conference call transcripts are made available on the website in due time. Furthermore, the website contains a constantly updated financial and event calendar showing events and activities related to investors. A comprehensive list of the 23 analysts covering the Pandora share is maintained, including names, institutions and contact details. 1 Parvus Asset Management Europe Limited, London, UK. 2 BlackRock, Inc., Wilmington, Delaware, US. ANNUAL REPORT 2022 CORPORATE GOVERNANCE 46 Group performance 48 Group protability 49 Balance sheet and cash ows FINANCIAL REVIEW net concept stores opened in 2022. The store openings were mainly in the US and China and are part of our ambition to increase our overall footprint in these markets, closely linked to our Phoenix strategy. 88 ANNUAL REPORT 2022 GROUP PERFORMANCE 2022 was yet another record-breaking year for Pandora as revenue reached an all-time high. Pandora slightly exceeded the financial guidance on organic growth and reached the high end of the financial guidance on EBIT margin. This was despite an increasingly challenging macroeconomic backdrop throughout the year, COVID-19 restrictions in China and the impact from a high comparative base in the US owing to government stimulus cheques in 2021. In the second year of the Phoenix growth strategy, organic growth was 7% compared to 2021 and 17% compared to 2019. Growth was driven by continued strong brand momentum across major markets. Brand-specific investments in digital, commercial and personalised marketing over the past three years have been paying off whilst the launch of new platforms, such as Diamonds by Pandora, has been well received. Good momentum across most key markets Pandora delivered strong performance in most of its key markets. The UK, our second-largest market, delivered strong sell-out growth of 10% compared to 2021, driven by strong demand for the Pandora Moments platform. Italy and Germany saw solid sell-out growth and ended the year at 5% and 18%, respectively. In the second half of the year, Italy started to see negative impact from the challenging macroeconomic declined for Pandora and sell-out growth ended at -7% compared to 2021, following the effect of government stimulus cheques in 2021. Moments incl. Collabs compounds solid growth The Moments incl. Collabs segment continued its solid per- formance in 2022. Despite a challenging macro environment, Pandora Moments incl. Collabs delivered positive sell-out growth of 5% in 2022, underpinning its position as a leading product category in the jewellery market, even in uncertain times. Growing Pandora Moments is the number one priority in the Phoenix strategy. REVENUE BY KEY MARKET, YTD DKK million 2022 2021 Sell out growth (like-for-like) Organic growth Share of revenue FY 2022 Share of revenue FY 2021 US 7,907 7,026 -7% -3% 30% 30% China 737 1,126 -47% -39% 3% 5% UK 3,802 3,314 10% 15% 14% 14% Italy 2,580 2,443 5% 6% 10% 10% Australia 1,271 1,131 6% 9% 5% 5% France 1,190 1,122 4% 6% 4% 5% Germany 1,307 1,191 18% 10% 5% 5% Total top-7 markets 18,795 17,353 -2% 1% 71% 74% Rest of Pandora 7,669 6,041 21% 23% 29% 26% Total revenue 26,463 23,394 4% 7% 100% 100% backdrop. France saw positive sell-out growth of 4%, however Pandora is not satisfied with the performance. In 2022, Pandora focused on detoxing the promotional level in France, with the aim of building a stronger base business to capitalise on future ambitions. Throughout 2022, China remained a drag on performance. The COVID-19 restrictions in the market further delayed the relaunch of the Pandora brand. China remains of high strate- gic importance for Pandora. Organic growth compared to 2019 remained very strong in the US and ended at 53%. As expected, the US market ANNUAL REPORT 2022 FINANCIAL REVIEW Diamonds by Pandora shows potential Pandora's second product segment, Style, delivered sell-out growth of -1% in 2022, mainly dragged down by Signature. The largest product platform within Style is Timeless, which offers classical jewellery to our consumers. Timeless is also Pandora's second-largest product platform and represents significant opportunity for growth. Style also includes Pandora ME, which is designed to target Generation Z and grew 40% compared to 2021. Another product platform within Style is Diamonds by Pandora, a collection of lab- created diamond jewellery made out of 100% recycled silver and gold. Pandora took the platform to North America in August 2022, across 269 Pandora stores in the US and Canada as well as online. The US is the world’s largest mar- ket for lab-created diamond jewellery, estimated at around USD 1.2 billion. The market is expected to continue to grow, and lab-created diamonds are outpacing the diamond industry's overall growth. In 2022, total revenue was DKK 213 million. The collection is available in the UK, the US and Canada. Store network development In 2022, Pandora opened net 88 concept stores. The store openings were mainly located in the US and China and are part of Pandora’s ambition to increase its overall footprint in these markets. The expansion comes with a significant opportunity for further value creation, and we expect to open an additional net 50 to 100 concept stores in 2023. Furthermore, through 2022, Pandora converted 25 concept stores and nine shop-in-shops in Portugal from third-party distribution stores to Pandora-owned stores. Pandora also took over 13 concept stores in Las Vegas from Panbor, and 37 concept stores from Ben Bridge Jeweler, primarily on the US West Coast. REVENUE BY CHANNEL DKK million 2022 2021 Organic growth Growth in local currency Share of revenue FY 2022 Share of revenue FY 2021 Pandora owned 1 retail 19,115 15,922 11% 16% 72% 68% - of which concept stores 12,150 9,133 21% 29% 46% 39% - of which online stores 5,612 5,977 -10% -10% 21% 26% - of which other points of sale 1,353 812 55% 57% 5% 3% Wholesale 6,628 6,705 -2% -7% 25% 29% - of which concept stores 3,508 3,737 -3% -13% 13% 16% - of which other points of sale 3,120 2,968 -1% 0% 12% 13% Third-party distribution 721 767 0% -7% 3% 3% Total revenue 26,463 23,394 7% 8% 100% 100% REVENUE BY SEGMENTS DKK million 2022 2021 Sell-out growth (like-for-like) Growth in local currency Share of revenue FY 2022 Share of revenue FY 2021 Moments incl. Collabs 19,192 16,610 5% 11% 73% 71% - Moments 16,578 14,699 3% 9% 63% 63% - Collabs 2,614 1,911 20% 30% 10% 8% Style 7,272 6,784 -1% 3% 27% 29% - Timeless 4,362 4,091 -2% 2% 16% 17% - Signature 1,883 1,990 -12% -9% 7% 9% - ME 815 656 40% 21% 3% 3% - Diamonds by Pandora 213 48 130% 298% 1% 0% Total revenue 26,463 23,394 4% 8% 100% 100% STORE NETWORK Number of points of sale 1 2022 2021 Growth Concept stores 2,542 2,454 88 - of which Pandora owned 2 1,653 1,423 230 - of which franchise owned 588 700 -112 - of which third-party distribution 301 331 -30 Other points of sale 3,985 4,080 -95 1 Pandora does not own any of the premises (Land and buildings) where stores are operated. Pandora exclusively operates stores from leased premises. 1 As of Q1 2022, Pandora excludes concept stores and other points of sales from third-party distribution related to Russia and Belarus. Comparative figures for 2021 were restated accordingly. 2 Pandora does not own any of the premises (Land and buildings) where stores are operated. Pandora exclusively operates stores from leased premises. ANNUAL REPORT 2022 FINANCIAL REVIEW GROUP PROFITABILITY Pandora delivered strong profitability again in 2022 with EBIT increasing by 15%, a testimony to the operating leverage in Pandora’s business model. Moments incl. Collabs generated a gross margin of 75.6% while Style generated a gross margin of 78.2% compared to 75.3% and 78.1% in 2021, respectively. Overall, gross margin was slightly up compared to 2021. The increase was mainly due to favourable channel mix and overall efficiencies in produc- tion. The increase was delivered despite the negative impacts from higher commodity prices, which impacted gross margin negatively by 0.9 percentage points. Furthermore, temporary headwind of 0.5 percentage points from inventory buybacks in connection with franchise acquisitions and non-recurring COVID-19 cost in Thailand also depressed gross margin in 2022. Lastly, the impact on Pandora’s gross margin from foreign exchange rates was neutral compared to 2021. The OPEX ratio decreased by 0.3 percentage points compared to 2021, despite higher sales and distribution expenses from the expansion of owned and operated stores. Marketing expenses ended at 14.1% of revenue in 2022, compared to 15.3% in 2021, and administrative expenses ended at 8.0% of revenue compared to 8.7% in 2021. The EBIT margin ended at 25.5%, up 0.5 percentage points compared to 2021, despite headwinds from rising inflation, higher interest rates and geopolitical uncertainty. Pandora also wrote down DKK 50 COST OF SALES AND GROSS PROFIT DKK million 2022 2021 Growth in constant FX Share of revenue 2022 Share of revenue 2021 Revenue 26,463 23,394 8% 100.0% 100.0% Cost of sales -6,273 -5,590 7% -23.7% -23.9% Gross profit 20,190 17,803 9% 76.3% 76.1% OPERATING EXPENSES DKK million 2022 2021 Growth in constant FX Share of revenue 2022 Share of revenue 2021 Sales and distribution expenses -7,602 -6,352 16% 28.7% 27.2% Marketing expenses -3,720 -3,587 0% 14.1% 15.3% Administrative expenses -2,125 -2,026 3% 8.0% 8.7% Total operating expenses -13,448 -11,965 9% 50.8% 51.1% EBIT DKK million 2022 2021 EBIT margin EBIT margin Operating profit (EBIT) 6,743 5,839 25.5% 25.0% EBIT margin Gross margin 25.5% 76.3% Highly profitable business million of trade receivables related to Pandora’s exit from the Russian market. Net financial items ended at a cost of DKK 210 million com- pared to DKK 461 million in 2021. The development was due to favourable exchange rate movements. Total tax expenses amounted to DKK 1.5 billion (2021: DKK 1.2 billion), corre- sponding to an effective tax rate of 23.0% in 2022 compared to 22.6% in 2021. The increase was a reflection of an overall stronger performance combined with non-capitalised tax as- sets. Lastly, net profit improved to DKK 5.0 billion compared to DKK 4.2 billion in 2021. Pandora lifted earnings per share (EPS) by 29% compared to 2021, with EPS ending at DKK 54.2 in 2022. ANNUAL REPORT 2022 FINANCIAL REVIEW BALANCE SHEET AND CASH FLOWS Solid capital position Net working capital ended at 4.2% of revenue in 2022. The increase in net working capital of DKK 2.3 billion was mainly driven by deliberate inventory build-up to protect availability, in order to mitigate risk of stock-outs and disruptions in the supply chain. In addition, the increase on inventory was also driven by more openings of owned and operated stores and revenue growth. Free cash flows ended the year at DKK 2.6 billion, down from DKK 5.1 billion, and is a reflection of the before mentioned increases in inventory as well as higher CAPEX. Pandora increased CAPEX from a 3% share of revenue in 2021 to a 5% share of revenue in 2022, equal to a DKK 649 million increase in absolute CAPEX. The increase in CAPEX was mainly due to network expansion as Pandora opened net 88 concept stores and 130 owned and operated shop-in-shops in 2022. Additionally, taxes paid ended at DKK 1.8 billion in 2022 compared to DKK 0.8 billion in 2021, also impacting both free cash flows and cash flows from operating activities neg- atively. The increase in taxes paid related to tax from prior year and higher tax paid for 2022. Cash flows from investing activities increased to DKK 1.8 billion compared to DKK 0.6 billion in 2021, due to increasing acquisition activity and higher CAPEX from network expansions and investments in digital capabilities. ROIC remained strong, landing at 48% in 2022 compared to 59% in 2021. The decrease was mainly a function of higher invested capital due to the before mentioned inventory build- up and increased right-of-use assets as a consequence of net opened Pandora owned and operated concept stores at the end of 2022. On a run-rate basis, new Pandora concept stores are ROIC-accretive. The investments made support Pandora's execution on the Phoenix growth strategy and Pandora sees potential for expanding the ROIC going forward. Balance sheet Total non-current assets increased to DKK 14.3 billion at the end of 2022 (2021: DKK 12.6 billion), mainly due to an increase in goodwill from acquisitions, an overall higher CAPEX spend across all asset types, higher right-of-use assets coming from network expansion, and higher deferred tax assets. The increase in current assets was mainly related NET WORKING CAPITAL Share of preceding 12 months' revenue 2022 2021 2020 2019 2018 Inventories 15.9% 12.8% 10.3% 9.8% 13.8% Trade receivables 4.8% 4.3% 4.6% 7.5% 7.2% Trade payables -11.8% -14.0% -16.9% -14.2% -9.9% Other net working capital elements -4.7% -8.2% -5.6% -4.5% -4.5% Total 4.2% -5.0% -7.6% -1.3% 6.7% EPS growth ROIC 29% 48% to inventory build-up, which had reached a sustainable level at the end of 2022. Net interest-bearing debt amounted to DKK 6.8 billion at the end of 2022 (2021: DKK 2.9 billion), corresponding to a financial leverage of 0.8x (2021: 0.4x). The increase in net inter- est-bearing debt was mainly driven by significant cash returns to shareholders in 2022 through a combination of dividends and share buybacks, equivalent to 11% of market cap at the end of 2022, and increasing inventory levels. At the end of 2022, equity in Pandora amounted to DKK 7.2 billion, roughly in line with DKK 7.0 billion in 2021. The increase was driven by profit for the year offset by payout of DKK 5.1 billion to the company’s shareholders. In 2022, we paid out DKK 1.5 billion in ordinary dividend and bought back own shares for a total of DKK 3.6 billion. ANNUAL REPORT 2022 FINANCIAL REVIEW 51 Consolidated financial statements 91 Management statement 92 Independent auditor's report 96 Parent Company financial statements “ I love working with Pandora’s exciting digital transformation. Considering the ambitious journey we are on, there are immense opportunities for everyone to grow and I really enjoy being part of the company’s success. PRASHANT Delivery Manager, Denmark FINANCIAL STATEMENTS ANNUAL REPORT 2022 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER CONSOLIDATED INCOME STATEMENT DKK million Notes 2022 2021 Revenue 2.1 26,463 23,394 Cost of sales 2.3, 3.1, 3.2 -6,273 -5,590 Gross profit 20,190 17,803 Sales, distribution and marketing expenses 2.3, 3.1, 3.2 -11,322 -9,939 Administrative expenses 2.3, 3.1, 3.2 -2,125 -2,026 Operating profit 2.1 6,743 5,839 Finance income 4.6 412 152 Finance costs 4.6 -622 -613 Profit before tax 6,533 5,378 Income tax expense 2.5 -1,504 -1,218 Net profit for the year 5,029 4,160 Earnings per share, basic (DKK) 4.2 54.2 42.1 Earnings per share, diluted (DKK) 4.2 53.7 41.7 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME DKK million Notes 2022 2021 Net profit for the year 5,029 4,160 Other comprehensive income: Items that may be reclassified to profit/loss for the year Exchange rate adjustments of investments in subsidiaries -196 370 Commodity hedging instruments: - Realised in net cost of sales -1 -4 - Realised in net financials 46 -16 - Realised in inventories 241 -141 - Fair value adjustments -39 -219 Foreign exchange hedging instruments: - Realised in net financials 110 249 - Fair value adjustments -61 -287 Tax on other comprehensive income, income/expense 2.5 23 83 Items that may be reclassified to profit/loss for the year, net of tax 123 36 Items not to be reclassified to profit/loss for the year Actuarial gain/loss on defined benefit plans, net of tax 2.3 12 10 Items not to be reclassified to profit/loss for the year, net of tax 12 10 Other comprehensive income, net of tax 135 46 Total comprehensive income for the year 5,164 4,206 ANNUAL REPORT 2022 FINANCIAL STATEMENTS ASSETS DKK million Notes 2022 2021 Goodwill 4,822 4,418 Brand 1,057 1,057 Distribution 1,047 1,080 Other intangible assets 642 538 Total intangible assets 3.1 7,568 7,094 Property, plant and equipment 3.2 2,226 1,816 Right-of-use assets 3.3 2,978 2,532 Deferred tax assets 2.5 1,261 891 Other financial assets 249 222 Total non-current assets 14,282 12,555 Inventories 3.5 4,211 2,991 Trade receivables 3.6 1,262 1,009 Right-of-return assets 3.8 54 70 Derivative financial instruments 4.4, 4.5 231 69 Income tax receivable 2.5 155 68 Other receivables 1,024 738 Cash 794 1,043 Total current assets 7,731 5,988 Total assets 22,013 18,542 EQUITY AND LIABILITIES DKK million Notes 20212022 Share capital 4.1 96 100 Treasury shares 4.1 -3,320 -3,416 Reserves 918 795 Proposed dividend 1,430 1,516 Retained earnings 8,044 8,007 Total equity 7,167 7,001 Provisions 3.7 363 416 Loans and borrowings 4.3, 4.4 3,130 2,765 Deferred tax liabilities 2.5 172 113 Total non-current liabilities 3,665 3,295 Provisions 3.7 21 26 Refund liabilities 3.8 628 724 Contract liabilities 3.8 136 163 Loans and borrowings 4.3, 4.4 4,458 1,161 Derivative financial instruments 4.4, 4.5 74 209 Trade payables 3.9, 4.4 3,131 3,267 Income tax payable 2.5 1,068 1,003 Other payables 4.4 1,666 1,694 Total current liabilities 11,181 8,246 Total liabilities 14,846 11,541 Total equity and liabilities 22,013 18,542 CONSOLIDATED BALANCE SHEET AT 31 DECEMBER ANNUAL REPORT 2022 FINANCIAL STATEMENTS DKK million Notes Share capital Treasury shares Translation reserve Hedging reserve Dividend proposed Retained earnings Total equity 2022 Equity at 1 January 100 -3,416 905 -110 1,516 8,007 7,001 Net profit for the year - - - - - 5,029 5,029 Other comprehensive income, net of tax - - -108 231 - 12 135 Total comprehensive income for the year - - -108 231 - 5,041 5,164 Share-based payments 2.3, 2.4 - 199 - - - -95 104 Purchase of treasury shares 4.1 - -3,588 - - - - -3,588 Cancellation of treasury shares 4.1 -5 3,486 - - - -3,481 - Dividend paid 4.2 - - - - -1,516 2 -1,514 Dividend proposed 4.2 - - - - 1,430 -1,430 - Equity at 31 December 96 -3,320 797 121 1,430 8,044 7,167 The Board of Directors will propose at the Annual General Meeting that an ordinary dividend of DKK 16 per share, corresponding to DKK 1.4 billion (2021: DKK 16 per share, corresponding to DKK 1.5 billion), be distributed for 2022. In 2021, an extraordinary dividend of DKK 15 per share was paid, corresponding to DKK 1.5 billion. In 2022, Pandora continued the share buyback programmes, which resulted in repurchases of 6,595,620 treasury shares, corresponding to DKK 3.6 billion (2021: 3,943,797 treasury shares, corresponding to DKK 3.3 billion). For further shareholder information on dividend payments, see page 43. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 Equity at 1 January 100 -93 535 215 - 6,632 7,389 Net profit for the year - - - - - 4,160 4,160 Other comprehensive income, net of tax - - 370 -325 - 1 46 Total comprehensive income for the year - - 370 -325 - 4,161 4,206 Share-based payments 2.3, 2.4 - 1 - - - 209 210 Purchase of treasury shares 4.1 - -3,325 - - - - -3,325 Dividend paid 4.2 - - - - -1,481 2 -1,479 Dividend proposed 4.2 - - - - 2,997 -2,997 - Equity at 31 December 100 -3,416 905 -110 1,516 8,007 7,001 ANNUAL REPORT 2022 FINANCIAL STATEMENTS DKK million Notes 2022 2021 Operating profit 6,743 5,839 Depreciation and amortisation 1,973 1,999 Share-based payments 2.4 87 166 Change in inventories -1,012 -799 Change in receivables -531 -77 Change in payables and other liabilities -559 327 Other non-cash adjustments 4.7 -18 70 Finance income received 7 3 Finance costs paid -466 -468 Income tax paid 2.5 -1,790 -832 Cash flows from operating activities, net 4,434 6,228 Acquisition of subsidiaries and activities, net of cash acquired 3.4 -562 -66 Purchase of intangible assets -353 -289 Purchase of property, plant and equipment -838 -296 Change in other assets -36 17 Proceeds from sale of property, plant and equipment 5 2 Cash flows from investing activities, net -1,785 -631 Dividend paid 4.2 -1,514 -1,479 Purchase of treasury shares 4.1 -3,527 -3,325 Proceeds from loans and borrowings 4.3 4,994 1,315 Repayment of loans and borrowings 4.3 -1,985 -3,004 Repayment of lease commitments 4.3 -1,068 -991 Cash flows from financing activities, net -3,100 -7,484 Net increase/decrease in cash -452 -1,887 DKK million Notes 2022 2021 Cash and cash equivalents at 1 January 1,043 2,912 Exchange gains/losses on cash 4 18 Net increase/decrease in cash -452 -1,887 Cash and cash equivalents at 31 December 595 1,043 Cash balances 794 1,043 Overdraft -199 - Cash and cash equivalents at 31 December 595 1,043 Cash flows from operating activities, net 4,434 6,228 - Finance income received -7 -3 - Finance cost. paid 466 468 Cash flows from investing activities, net -1,785 -631 - Acquisition of subsidiaries and activities, net of cash acquired 562 66 Free cash flows excl. lease payments 3,670 6,128 Free cash flows incl. lease payments 2,602 5,137 Unutilised committed credit facilities 4.4 6,693 6,023 The above cannot be derived directly from the income statement and the balance sheet. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER ACCOUNTING POLICIES Cash flows from operating activities are presented using the indirect method. Cash flows in currencies other than the functional currency are translated at the average exchange rates for the month in question, unless these differ significantly from the rates at the transaction dates. ANNUAL REPORT 2022 FINANCIAL STATEMENTS Notes The notes are grouped into five sections related to key figures. The notes contain the relevant financial information as well as a description of accounting policies applied for the topics of the individual notes. SECTION 1 BASIS OF PREPARATION 56 1.1 Principal accounting policies 57 1.2 New accounting policies and disclosures 58 1.3 Management’s judgements and estimates under IFRS 58 SECTION 2 RESULTS FOR THE YEAR 59 2.1 Segment and revenue information 60 2.2 Government grants 62 2.3 Sta costs 62 2.4 Share-based payments 63 2.5 Taxation 64 SECTION 3 INVESTED CAPITAL AND WORKING CAPITAL ITEMS 68 3.1 Intangible assets 69 3.2 Property, plant and equipment 72 3.3 Leases 73 3.4 Business combinations 74 3.5 Inventories 76 3.6 Trade receivables 76 3.7 Provisions 77 3.8 Contract assets and liabilities 77 3.9 Trade payables 78 CONTENTS SECTION 4 CAPITAL STRUCTURE AND NET FINANCIALS 79 4.1 Share capital 80 4.2 Earnings per share and dividend 80 4.3 Net interest-bearing debt 81 4.4 Financial risks 82 4.5 Derivative nancial instruments 84 4.6 Net nancials 86 4.7 Other non-cash adjustments 86 SECTION 5 OTHER DISCLOSURES 87 5.1 Contingent assets and liabilities 88 5.2 Related parties 88 5.3 Fees to independent auditor 88 5.4 Events occurring after the reporting period 88 5.5 Companies in the Pandora Group 89 5.6 Financial denitions 90 ANNUAL REPORT 2022 FINANCIAL STATEMENTS ANNUAL REPORT This section introduces Pandora’s accounting policies and significant accounting estimates. A more detailed description of accounting policies and significant estimates related to specific reported amounts is presented in the respective notes. The purpose is to provide transparency on the disclosed amounts and to describe the relevant accounting policy, significant estimates and numerical disclosure for each note. BASIS OF PREPARATION SECTION 1 Best-selling charm in 2022 In 2022, our absolute best-seller charm was the Murano Glass Sea Turtle Dangle Charm which sold almost 300,000 pieces. ANNUAL REPORT 2022 FINANCIAL STATEMENTS Pandora A/S is a public limited company with its registered office in Denmark. The Annual Report for the period 1 January to 31 December 2022 comprises the consolidated financial statements of Pandora A/S and its subsidiaries (the Group) as well as sep- arate financial statements for the Parent Company, Pandora A/S. The financial statements have been prepared in accor- dance with International Financial Reporting Standards (IFRS) as adopted by the EU and additional requirements of the Danish Financial Statements Act. The financial statements have been prepared on a historical cost basis, except for derivative financial instruments, which have been measured at fair value. The Annual Report is presented in Danish kroner (DKK) and all amounts are in millions unless otherwise stated. Due to round- ing, numbers presented throughout this report may not add up precisely to the totals, and percentages may not precisely reflect the absolute figures. Apart from changes due to the implementation of new or amended standards and interpretations as described in note 1.2 New accounting policies and disclosures, accounting policies are unchanged from last year. iXBRL reporting Pandora A/S has filed the Annual Report 2022 in the European Single Electronic Format (ESEF), XHTML, which can be displayed in a standard browser. The consolidated financial statements NOTE 1.1 PRINCIPAL ACCOUNTING POLICIES are tagged using eXtensible Business Reporting Language (iXBRL), which complies with the ESEF taxonomy included in the ESEF Regulation. The Annual Report submitted to the Danish Financial Supervisory Authority consists of the XHTML docu - ment together with certain technical files, all included in a file named PAND-2022-12-31-en.zip. Alternative performance measures Pandora presents financial measures in the Annual Report that are not defined according to IFRS. Pandora believes these non-GAAP measures provide valuable information to investors and Pandora’s management when evaluating performance. Since other companies may calculate these differently from Pandora, they may not be comparable to the measures used by other companies. These financial measures should there- fore not be considered to be a replacement for measures de- fined under IFRS. For definitions of the performance measures used by Pandora, see note 5.6 Financial definitions. ACCOUNTING POLICIES The overall accounting policies applied to the Annual Report as a whole are described below. The accounting policies related to specific line items are described in the notes to which they relate. The description of accounting policies in the notes forms part of the overall description of Pandora’s accounting policies. and expenses, unrealised gains and losses and dividends re- sulting from intercompany transactions are eliminated in full. Functional and presentation currency The consolidated financial statements are presented in DKK, which is also the functional currency of the Parent Company. Each subsidiary determines its own functional currency, and items recognised in the financial statements of each entity are measured using that functional currency. Transactions and balances Transactions in foreign currencies are initially recognised in the Group entities at their respective functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate of exchange ruling at the reporting date. All adjustments are recognised in the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are trans- lated using the exchange rates at the date when the fair value is determined. Foreign exchange rate adjustments arising on monetary items which are considered part of the net investment in for- eign entities are recognised in other comprehensive income. Group companies with another functional currency than DKK The assets and liabilities of foreign subsidiaries are translat- ed into DKK at the rate of exchange prevailing at the report- ing date, and their income statements are translated at the exchange rates prevailing at the dates of the transactions. Notes 2.1 Segment and revenue information 2.2 Government grants 2.3 Staff costs 2.4 Share-based payments 2.5 Taxation 3.1 Intangible assets 3.2 Property, plant and equipment 3.3 Leases 3.4 Business combinations 3.5 Inventories 3.6 Trade receivables 3.7 Provisions 3.8 Contract assets and liabilities 4.2 Earnings per share and dividend 4.3 Net interest- bearing debt 4.5 Derivative financial instruments 4.6 Net financials Consolidated financial statements The consolidated financial statements comprise the financial statements of the Parent Company and its subsidiaries. Sub - sidiaries are fully consoli dated from the date of acquisition, being the date on which Pandora obtains control, until the date that such control ceases. All intercompany balances, income ANNUAL REPORT 2022 FINANCIAL STATEMENTS Exchange rate adjustments arising on translation are recognised in other comprehensive income. On disposal of a foreign sub - sidiary, the component of other comprehensive income relating to that particular foreign operation is recognised in the income statement. Consolidated income statement The consolidated income statement is presented based on costs classified by function. Cost of sales comprises direct and indirect expenses incurred to generate revenue for the year, comprising raw materials, consumables, production staff, depreciation, amortisation and impairment losses in respect of production equipment. Sales, distribution and marketing expenses comprise expens- es related to the distribution of goods sold and sales cam- paigns, including packaging materials, brochures, wages and salaries and other expenses related to sales and distribution staff as well as depreciation, amortisation and impairment losses in respect of distribution equipment. Administrative expenses comprise expenses incurred in the year to manage Pandora, including expenses related to ad- ministrative staff and depreciation, amortisation and impair- ment losses in respect of assets used in the administration. The allocation of amortisation and impairment losses from in- tangible assets is presented in note 3.1 and the allocation of depreciation and impairment losses from property, plant and equipment in note 3.2. NOTE 1.1 PRINCIPAL ACCOUNTING POLICIES (CONTINUED) NOTE 1.2 NEW ACCOUNTING POLICIES AND DISCLOSURES Implementation of new or amended standards and interpretations Pandora has adopted all new or amended standards (IFRS) and interpretations (IFRIC) as adopted by the EU and which are effective for the financial year 1 January to 31 December 2022. The implementation of these new or amended stan- dards and interpretations had no material impact on the financial statements for the year. The new standards that are not yet effective are not expected to have any material impact on Pandora. NOTE 1.3 MANAGEMENT’S JUDGEMENTS AND ESTIMATES UNDER IFRS SIGNIFICANT ACCOUNTING ESTIMATES In preparing the consolidated financial state- ments, management makes various judge- ments, accounting estimates and assump- tions that form the basis of the presentation, recognition and measurement of Pandora’s assets and liabilities. Determining the carrying amounts of some assets and liabilities requires judgement, es- timates and assumptions concerning future events. Judgements, estimates and assump- tions are based on historical experience and other factors, which management assesses to be reasonable, but which by their nature involve uncertainty and unpredictability. These assumptions may have to be revised, and unexpected events or circumstances may occur. Pandora is subject to risks and uncertain- ties that may lead to actual results differing from these estimates, both positively and negatively. Climate change In preparing the consolidated financial statements, management has considered the impact of climate change, particularly in the context of the Group’s sustainability targets to the extent possible. Pandora’s targets to reduce its greenhouse gas emissions by 50% by 2030 and achieve net zero emissions by 2040 as well as to only use recycled silver and gold in its jewellery by 2025 are included in the Group’s financial forecasts. These con- siderations did not have a material impact on management’s judgements and estimates, consistent with the assessment that climate change is not expected to have a significant impact on the Group’s future cash flows or going concern assessment. In addition, consideration has been given to the potential financial impacts of climate-re- lated risks on the carrying value of goodwill through a qualitative review of the Group’s climate change risk assessment. This review did not identify any material financial impacts. Pandemic and macroeconomic uncertainty The pandemic and macroeconomic un- certainty caused by the Russian invasion of Ukraine continue to affect the global economy. Pandora continues to assess the value of intangible assets and property, plant and equipment, and internal forecasts have considered the ongoing impacts on income and expenses from the pandemic, infla- tionary pressure and higher interest rates. Changes in selling prices and direct costs are based on past experience and management’s expectation of future changes in the markets where the Group operates. Specific risks for Pandora are discussed in the relevant sections of the Management’s review and in the notes. The areas that involve a high degree of judge- ment and estimation and are material to the financial statements are described in more detail in the related notes. Notes 2.1 Segment and revenue information 2.5 Taxation 3.3 Leases 3.5 Inventories 3.8 Contract assets and liabilities 5.1 Contingent assets and liabilities ANNUAL REPORT 2022 FINANCIAL STATEMENTS ANNUAL REPORT This section comprises notes related to the results for the year, including reporting segment disclosures, and provides additional information related to two of Pandora’s performance measures: revenue and EBIT. A detailed description of the results for the year is given in the Financial review on page 45. RESULTS FOR THE YEAR SECTION 2 Net profit DKK million 2021: 4,160 5,029 Effective tax rate 2021: 22.6% 23.0% EBIT margin 2021: 25.0% 25.5% Revenue DKK million 2021: 23,394 26,463 ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 2.1 SEGMENT AND REVENUE INFORMATION Pandora’s activities are segmented into two reportable segments, each responsible for the end-to-end performance of collections. One includes Moments incl. Collabs, while the other, Style, covers newer collections and innovations. The two operating segments include all channels relating to the distribution and sale of Pandora products. Management monitors the profitability of the operating segments separately for the purpose of making decisions about resource allocation and performance management. Segment results are measured at gross profit as presented in the table below. INCOME STATEMENT BY SEGMENTS DKK million Moments incl. Collabs Style Group 2022 Revenue 19,192 7,272 26,463 Cost of sales -4,688 -1,586 -6,273 Gross profit 14,504 5,686 20,190 Operating expenses -13,448 Consolidated operating profit (EBIT) 6,743 Profit margin (EBIT margin) 25.5% 2021 Revenue 16,610 6,784 23,394 Cost of sales -4,106 -1,485 -5,590 Gross profit 12,504 5,300 17,803 Operating expenses -11,965 Consolidated operating profit (EBIT) 5,839 Profit margin (EBIT margin) 25.0% GEOGRAPHIC INFORMATION, REVENUE DKK million 2022 2021 US 7,907 7,026 China 737 1,126 UK 3,802 3,314 Italy 2,580 2,443 Australia 1,271 1.131 France 1,190 1,122 Germany 1,307 1,191 Denmark 28 32 Rest of world 7,641 6,009 Total revenue 26,463 23,394 REVENUE BY SEGMENTS DKK million 2022 2021 Moments incl. Collabs 19,192 16,610 - Moments 16,578 14,699 - Collabs 2,614 1,911 Style 7,272 6,784 - Timeless 4,362 4,091 - Signature 1,883 1,990 - ME 815 656 - Diamonds by Pandora 213 48 Total revenue 26,463 23,394 Goods transferred at a point in time 26,386 23,321 Services transferred over time 77 73 Total revenue 26,463 23,394 REVENUE BY SALES CHANNEL DKK million 2022 2021 Pandora physical stores 13,503 9,945 Pandora online stores 5,612 5,977 Wholesale and third-party distribution 7,349 7,472 Total revenue 26,463 23,394 The use of sales channels for the distribution of Pandora jewellery depends on the underlying market maturity and varies within markets but is consistent when viewed between segments. GEOGRAPHIC INFORMATION, ASSETS DKK million 2022 2021 US 2,073 1,754 Australia 450 453 Germany 602 602 Denmark 2,117 1,983 Thailand 495 516 Rest of world 1,832 1,785 Total intangible assets 1 7,568 7,094 Property, plant and equipment 2 2,226 1,816 Right-of-use assets 3 2,978 2,532 Deferred tax assets 1,261 891 Other non-current financial assets 249 222 Current assets 7,731 5,988 Total consolidated assets 22,013 18,542 1 The allocation of intangible assets in the table above reflects the country in which the assets were acquired, including goodwill, in the functional currency in which it is denominated. This is different from the presentation in note 3.1 Intangible assets, where goodwill is allocated in accordance with management reporting and moni- toring. 2 The crafting facilities in Thailand accounted for DKK 1,045 million (2021: DKK 1,025 million), corresponding to 46.9% of property, plant and equipment (2021: 56.4%). 3 Right-of-use assets mainly relate to stores and offices. Non-unit driven revenue, comprising mainly franchise fees, is allocated proportionately to the different revenue categories. ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 2.1 SEGMENT AND REVENUE INFORMATION (CONTINUED) SIGNIFICANT ACCOUNTING ESTIMATES Recognition and measurement of revenue is based on es- timates and judgements relating to expected sales returns allowed to customers in most countries. These judgements can have a material impact on the timing and measurement of recognised revenue as well as the level of the refund liability. Reductions in revenue from expected sales returns are calculated based on historical return patterns and on a case-by-case basis for commercial and other reasons. ACCOUNTING POLICIES Retail sales – products Revenue from the sale of products through Pandora owned and operated stores is recognised when a store sells a product to the customer. Payment is usually due when the customer picks up the prod- uct in the store or the product is delivered from an online store. However, in some instances collection is delayed and a receivable recognised, see note 3.6 Trade receivables. A refund liability and a right-of-return asset are recog- nised for products expected to be returned, see note 3.8 Contract assets and liabilities. The estimate for returned products is based on historical experience and expectations. Based on knowledge of the nature of returns, it is considered highly probable that a significant reversal of cumulative revenue recognised will not occur. Rebates and discounts granted to cus - tomers are recognised as a reduction in revenue. The Group’s obligation to repair or replace faulty products is part of the standard terms and is there- fore recognised as a contract liability, see note 3.8 Contract assets and liabilities. Revenue is further measured excluding sales taxes and duties when these are passed on to customers. Sales taxes and duties incurred on sales that are not recoverable from the local taxation authorities are reported gross as part of revenue and cost of sales. Wholesale and third-party distributors – products Pandora manufactures and sells jewellery to wholesalers and third-party distributors. Revenue is recognised when control of the products has been transferred to the wholesaler or third-party dis - tributor. Change of control of the products occurs when they have been delivered to the wholesaler or distributor and no further obligation exists that can affect the transfer of control. Delivery has taken place when the products have been shipped to the location of the wholesaler or distributor and control of the goods has been transferred to the buyer. Revenue from the sale is recognised based on the price specified in the contract. Revenue is only recognised to the extent it is highly probable that a significant reversal will not occur. A refund liability and a right-of-return asset are recognised for products expected to be returned, see note 3.8 Contract assets and liabilities. The estimate for returned products is based on historical experience and expectations. Based on knowledge of the nature of returns in the wholesale and distributor channels, it is considered highly probable that a significant reversal of cumulative revenue recognised will not occur. Provisions for rebates and discounts granted to wholesalers and franchisees are recognised as a reduction in revenue. The Group’s obligation to repair or replace faulty products is recognised on a gross basis in the income statement as both a reduction in revenue and a decrease in cost of goods sold. This is due to the handling of warranty claims, which leads to replacements instead of repairs. Revenue is further measured excluding sales taxes and duties when these are passed on to customers. Sales taxes and duties incurred on sales that are not recoverable from the local taxation authorities are reported gross as part of revenue and cost of sales. When control has been transferred, a receivable is rec- ognised as the consideration to be paid is conditional only on the passage of time. The price specified in the contract is not adjusted for any financing element as payment terms never exceed 12 months. Loyalty programme Revenue related to the loyalty programme points value is deferred up to the time the points are used. The stand-alone selling price of loyalty points issued is calculated by multiplying the estimated redemption rate and the monetary value assigned to the loyalty points. In estimating the redemption rate, Pandora considers breakage, which repre- sents the portion of points issued that will never be redeemed. ANNUAL REPORT 2022 FINANCIAL STATEMENTS Pandora did not receive any significant government subsidies in 2022 as a result of the pandemic (2021: DKK 152 million). The majority of the subsidies received in 2021 were related to employee retention and facility cost and included the gov- ernment programmes “Coronavirus Job Retention Scheme” and “Business Rates Relief” in the UK, “Unemployment Ben- efits” and “Tax Credit Rental” in Italy, and “Short-Time Work Subsidy” in Germany. There are no unfulfilled conditions or other contingencies attached to the subsidies recognised. During the pandemic, Pandora retained all staff, including store staff while stores were closed. The government subsi- dies partially funded the associated cost, and related mainly to sales and distribution. NOTE 2.2 GOVERNMENT GRANTS ACCOUNTING POLICIES Government grants are recognised where there is rea- sonable assurance that the grant will be received and all attached conditions complied with. Income from government subsidies as a result of the pan- demic has been recognised as a deduction in the expense item the subsidies were intended to compensate. The Group’s pension plans are primarily defined contribution plans. Pandora has defined benefit plans relating to employ- ees in Thailand. The defined benefit plans are recognised at the present value of the actuarially measured obligations. In 2022, these obligations amounted to DKK 80 million (2021: DKK 81 million). In 2022, the actuarial gain was DKK 12 million (2021: gain of DKK 10 million) recognised in other comprehensive income. DKK million 2022 2021 Total remuneration to Board of Directors 8.1 7.9 Board members receive a fixed travel fee when attending Board meetings abroad. Total travel fee for 2022 amounted to DKK 0.9 million (2021: DKK 0.4 million). For further details, see our Remuneration Report. NOTE 2.3 STAFF COSTS DKK million 2022 2021 Wages and salaries 4,883 4,041 Pensions 208 177 Share-based payments 87 166 Social security costs 341 256 Other staff costs 545 395 Total staff costs 6,064 5,034 Staff costs have been recognised in the consolidated income statement: Cost of sales 1,177 1,063 Sales, distribution and marketing expenses 3,777 3,010 Administrative expenses 1,109 961 Total staff costs 6,064 5,034 Average number of full-time employees during the year 26,986 22,441 ACCOUNTING POLICIES Wages and salaries, social security contributions, leave and sick leave, bonuses and non-monetary benefits are recog- nised in the financial year in which services are rendered by employees of Pandora. Whenever Pandora provides long- term employee benefits, the costs are accrued to match the rendering of the services by the employees. Termination benefits are recognised at the time an agree- ment between Pandora and the employee is made and no future service is rendered by the employee in exchange for the benefits. DKK million Base pay Bonus Shares Benefits Other Total 2022 Total remuneration to Executive Management 17.1 16.2 23.2 2.6 - 59.0 2021 Total remuneration to Executive Management 16.2 16.6 26.6 2.4 - 61.9 The 2021 remuneration includes the DKK 1.2 million cost of shares related to the former Exec- utive Management. ANNUAL REPORT 2022 FINANCIAL STATEMENTS Decisions to grant share-based incentive programmes are made by the Board of Directors in accordance with general guidelines on incentive pay for Pandora. The total cost related to share-based payments was DKK 87 million (2021: net cost of DKK 166 million). The programmes for 2021 and 2020 were recorded at the maximum level as the maximum performance is expected to be met, while the programme for 2022 was recorded at target. The cost of share-based payments is included in staff costs. In the remaining vesting periods, an amount of DKK 87 million (2021: DKK 174 million) is expected to be recognised in respect of the current programmes. The weighted average remaining contractual life of the shares at the end of the period was 1.3 years (2021: 1.5 years). For shares exercised in 2022, the average share price at the time of exercise was DKK 692. Long-term incentive programmes Pandora is launching annual incentive programmes targeting Executive Management and other employees. The calculat- ed value of each programme is recognised over the vesting period (three years) based on the likelihood that programme targets will be met. For Executive Management, a further two-year holding period applies. Vesting of the performance shares granted in 2022 is subject to achievement of Pandora’s earnings per share (EPS) for the financial year 2024 and on the achievement of sustainability NOTE 2.4 SHARE-BASED PAYMENTS SHARES OUTSTANDING Executive Management Other employees Total Average exercise price per performance share, DKK 2022 Shares outstanding at 1 January 279,306 869,598 1,148,904 0.9 Shares granted during the year 42,106 214,252 256,358 - Shares exercised during the year - -252,971 -252,971 2.6 Shares lapsed during the year - -80,830 -80,830 - Shares outstanding at 31 December 321,412 750,049 1,071,461 0.3 2021 Shares outstanding at 1 January 229,018 707,613 936,631 1.1 Shares granted during the year 50,288 205,415 255,703 - Shares exercised during the year - -4,754 -4,754 - Shares lapsed during the year - -38,676 -38,676 0.8 Shares outstanding at 31 December 279,306 869,598 1,148,904 0.9 NUMBER OF SHARES IN PANDORA A/S Vesting date Shares 31 December 2022 Maximum market value at launch (DKK million) Accumulated cost recognised (DKK million) Remaining value to be expensed (DKK million) Programme start date November 2018 1,2 2021 7,865 2 2 - March 2019 1,2 2022 105,662 27 16 - July 2020 3 2023 373,711 152 133 - July 2020 2 2023 115,491 36 36 - April 2021 3 2024 172,760 154 70 31 April 2021 2 2024 50,288 26 17 9 April 2022 3 2025 203,578 130 18 39 April 2022 2 2025 42,106 26 4 9 Total number of shares outstanding 1,071,461 552 296 87 1 Although technically structured as options for legacy Danish tax treatment reasons, the awards have the characteristics of Performance Share Units because the option exercise price is 1% of the share price. 2 Programme related to Executive Management, where a two-year holding period applies. 3 Programme related to other employees. targets which will be assessed against objectives based on Pandora’s internal projections. As financial KPIs are commer- cially sensitive, Pandora’s practice is to communicate these after the end of the performance period. For further details, see our Remuneration Report. Assumptions on fair value of shares The volatility of the shares is based on the historical volatility of the price of Pandora A/S shares. The risk-free interest rate is based on a Danish government bond with similar maturity. The dividend yield applied is equal to 2.5% for the 2022 pro- gramme and is based on the assumed future dividend over the vesting period and the share price on the date of the grant. Actual paid dividends may differ from the assumptions applied in the valuation of the market value. Given that the exercise price for one performance share equals up to 1% of the market price of one share at grant date, the fair value almost equals the market value of one share at grant date. The assumptions therefore have very limited impact on the estimated fair value of the performance shares granted. ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 2.4 SHARE-BASED PAYMENTS (CONTINUED) Income taxes Income tax expense Income tax expense was DKK 1.5 billion in 2022, corresponding to an effective tax rate of 23.0% (2021: DKK 1.2 billion, 22.6% for the Group). As in 2021, the effective tax rate of 23.0% was negatively impacted by paid withholding taxes on dividend and other pay - ments, non-deductible expenses and non-capitalised tax assets from limitation in deduction for marketing expenses in China and other expenses with no tax deduction. The effective tax rate was reduced as part of the investment agreement entered into with the Thai Authorities, Board of In - vestment (BOI), where a specific part of the profit is treated as non-taxable profit for an agreed period. NOTE 2.5 TAXATION ACCOUNTING POLICIES Selected Pandora employees receive remuneration in the form of share-based payment transactions, whereby programme participants render services as consideration for equity instruments (“equity-settled transactions”). Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the grant date. The calculated fair values are based on either the Black-Scholes model or the Monte Carlo model according to the performance conditions of each programme. The cost of equity-settled transactions is recognised as staff costs together with a corresponding increase in equity over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The income statement expense or income for a period represents the movement in cumulative expenses recognised at the beginning and end of that period. INCOME TAX EXPENSE DKK million 2022 2021 Current income tax charge for the year 1 1,799 1,500 Change in deferred tax for the year -355 -201 Adjustment to current tax for prior years 58 -42 Adjustment to deferred tax for prior years 2 -39 Total income tax expense 1,504 1,218 Deferred tax on other comprehensive income 65 -92 Current income tax on other comprehensive income -88 9 Total tax on other comprehensive income -23 -83 1 Withholding taxes are included in current income tax charge for the year. RECONCILIATION OF EFFECTIVE TAX RATE AND TAX 2022 2021 % (DKK million) % (DKK million) Profit before tax 6,533 5,378 Corporate tax rate in Denmark, 22% 22.0% 1,437 22.0% 1,183 Deviation in foreign subsidiaries’ tax rates compared with the Danish rate -0.6% -41 0.3% 17 Non-deductible expenses 1.3% 87 3.1% 166 Tax incentives -2.4% -158 -2.9% -157 Adjustment to tax for prior years 0.9% 60 -1.6% -82 Non-capitalised tax assets, net 1.1% 76 0.6% 30 Withholding taxes/other taxes 0.7% 43 1.1% 60 Effective income tax rate/income tax expense 23.0% 1,504 22.6% 1,218 ANNUAL REPORT 2022 FINANCIAL STATEMENTS SIGNIFICANT ACCOUNTING ESTIMATES Pandora is subject to income tax in the countries in which the Group operates, comprising various tax rates world - wide. Significant judgements are required in determining the accrual for income taxes, deferred tax assets and liabil - ities, and provision for uncertain tax positions. Provision for uncertain tax positions is measured according to IFRIC 23. As part of Pandora conducting business globally, tax and transfer pricing disputes with tax authorities may occur. Any unresolved disputes with local tax authorities are recognised as income tax payable/receivable based on the expected value method or the most likely amount. Man - agement believes that the provision made for uncertain tax positions is adequate. However, the actual obligation may deviate from this and is dependent on the result of litiga - tions and settlements with the relevant tax authorities. ACCOUNTING POLICIES Income tax expense for the year comprises current tax and changes in deferred tax, including changes in tax rate, adjustment to prior years and changes in provision for uncertain tax positions. Tax is recognised in the income statement, except to the extent that it is related to items recognised in equity or other comprehensive income. The tax rates and tax laws used to compute the amounts are those enacted or substantively enacted, by the report- ing date, in the countries in which Pandora operates and generates taxable income. Deferred tax At the end of 2022, deferred tax assets amounted to DKK 1,261 million (2021: DKK 891 million) and deferred tax liabili- ties amounted to DKK 172 million (2021: DKK 113 million). Net deferred tax assets amounted to DKK 1,089 million (2021: DKK 778 million). Of the total deferred tax assets recognised, DKK 35 million (2021: DKK 23 million) related to tax loss carryforwards, the utilisation of which depends on future positive taxable income exceeding realised deferred tax liabilities. It is management’s opinion that these tax loss carryforwards can be utilised. Tax assets not recognised were DKK 142 million (2021: DKK 62 million), of which DKK 66 million (2021: DKK 36 million) relate to tax loss carryforwards that are not expected to be utilised in the foreseeable future. Tax losses that can expire amount- ed to DKK 24 million (2021: DKK 18 million). No deferred tax has been recognised in respect of entities’ earnings that are intended for distribution in the short term, as no material tax expense will be payable on distribution. Only insignificant latent tax liabilities remained at 31 Decem- ber 2022. These liabilities are not recognised as the Group is able to control this liability and it is considered probable that the liability will not crystallise in the foreseeable future. DEFERRED TAX DKK million 2022 2021 Deferred tax at 1 January 778 396 Exchange rate adjustments 6 6 Recognised in the income statement 353 240 Recognised in other comprehensive income -65 92 Recognised in equity, share-based payments 17 44 Deferred tax at 31 December 1,089 778 Deferred tax assets 1,261 891 Deferred tax liabilities -172 -113 Deferred tax, net 1,089 778 BREAKDOWN OF DEFERRED TAX DKK million 2022 2021 Intangible assets -686 -633 Property, plant and equipment 42 7 Right-of-use assets 20 16 Current assets 1,434 999 Non-current assets and liabilities 244 366 Tax loss carryforwards 35 23 Deferred tax, net 1,089 778 NOTE 2.5 TAXATION (CONTINUED) ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 2.5 TAXATION (CONTINUED) Our approach to taxes and taxes paid With our significantly expanded work on sustainability, we are building this important part of the foundation for Pandora’s growth journey. Our sustainability strategy is reflected in our tax approach and we aim at paying a fair tax in all markets where we operate. Pandora considers tax to play a key role for societies and an important contribution in order to reach the goals of the global sustainability agenda. Pandora is committed to ensure compliance with the letter and spirit of tax law in the markets where we operate, while striving to maximise shareholder value in a responsible way. The Group tax policy, which has been approved by the Board of Di- rectors of Pandora, is available at pandoragroup.com/investor/corporate-governance/tax-in- formation and includes more information on our approach to taxes. Pandora operates globally under a vertically integrated business model, and we own a signifi- cant part of our value chain from production to retail. Pandora’s transfer pricing policy follows a so-called principal tax model, where profit follows risk and value creation throughout the value chain. While all steps of the value chain are important to Pandora, Pandora A/S is the principal value driver and also assumes the majority of business risks. Pandora allocates a profit margin, based on benchmark studies, to entities in the Group, and the residual profit (or loss) in the value chain remains with Pandora A/S. With a principal tax model, Pandora by nature has a significant number of intercompany transactions. Intercompany transactions are based on arm’s length stan- dard and therefore priced on a basis consistent with the way unrelated parties would have priced such transactions. This impacts the taxes we pay in the countries in which we do business. Pandora understands the need for more trans- parency by both taxpayers and tax administrations, and the need to provide more clarity about Pandora’s position on tax. In doing so we provide insight in accordance with the EU Directive to be adopted, which introduces public coun- try-by-country reporting for our key markets. The full coun- try-by-country report for all markets, including definitions, is available at pandoragroup.com/investor/corporate-gover- nance/tax-information. COUNTRY-BY-COUNTRY OVERVIEW FOR KEY MARKETS 1 DKK million Business activities Total revenue incl. related party 2 Third-party revenue in P&L Profit before tax Tax paid Current income tax charge for the year Employees (FTE) Accumulated earnings UK 3,988 3,802 375 44 25 1,764 415 Italy 2,744 2,580 110 39 41 851 78 France 1,297 1,190 49 29 18 562 103 Germany 1,679 1,307 88 21 26 907 64 Denmark 17,890 28 14,002 1,217 1,294 913 15,148 US 17,126 7,907 212 140 56 2,022 60 Australia 1,803 1,271 352 76 107 302 160 China 739 737 -123 39 0 1,124 -77 Thailand 6,788 - 976 64 38 14,186 425 Rest of world 8,495 7,641 137 122 111 4,356 233 IFRS eliminations 387 - -9,646 - 83 - -7,547 Total Group - 26,463 6,533 1,790 1,799 26,987 9,063 1 The country-by country overview for key markets is based on the accounting information collected for the Pandora Group Annual Report for 2022. 2 Total revenue includes third-party revenue, related party revenue, other income and financial income. Headquarters Crafting facilities DistributionWarehouse ACCOUNTING POLICIES Deferred tax on all temporary differences between the carrying amounts for financial reporting purposes and the tax base of assets and liabilities is measured using the balance sheet liability method. No deferred tax is recognised on temporary differences that arise from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit or loss. The recognition of deferred tax assets includes the expected tax value of tax loss carryforwards to the extent that these tax assets can be offset against positive taxable income in the foreseeable future. The same applies to deferred tax assets related to investments in subsidiaries. Management has considered future taxable income and applied judgements to determine whether deferred tax assets should be recognised. Deferred tax assets and liabilities are measured according to current tax rules and at the tax rates expected to be effective on elimination of the temporary differences. Deferred tax assets and liabilities are offset if the Group has a legally enforceable right to offset current tax assets against current tax liabilities and the deferred tax relates to the same taxable entity and the same tax authority. ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 2.5 TAXATION (CONTINUED) CASH INCOME TAX PAID DKK million 2022 2021 Income tax expense in income statement -1,504 -1,218 Tax on other comprehensive income 88 -9 Adjustments regarding deferred taxes -353 -240 Movement in income tax receivable/payable -21 635 Income tax paid in the year -1,790 -832 - of which relates to prior years -658 9 - of which relates to current year -1,132 -841 Income tax paid in the year -1,790 -832 58 88 MOVEMENT IN NET TAX PAYABLE DKK million Net tax payable, start of year Current income tax charge for the year Adjustments to current tax in prior years Income tax on comprehensive income Income tax paid in the year as reflected in our cash flows Net tax payable, year-end 934 1,799 1,790 913 FROM INCOME TAX EXPENSE TO TAX PAID DKK million Income tax expense in income statement Adjustments regarding deferred taxes Income tax on comprehensive income Net tax payable, start of year Net tax payable, year-end 1,504 353 88 934 913 1,790 Income tax paid in the year as reflected in our cash flows In 2022, we paid corporate taxes in the amount of DKK 1,790 million (2021: DKK 832 million). The increased tax payments mainly relate to Denmark and Pandora’s key markets as the profit in these markets has increased significantly. The major part of the taxes paid is attributable to Denmark and Pando- ra’s key markets and the main part of the tax payments relate to the current year. Paid income tax Income tax paid reflects the cash tax payments made in the year and relates to taxes on account for the current year as well as payments regarding prior years. For the majority of the countries, the final taxes are paid in the year following the fi- nancial year, creating a timing difference in cash tax payments. At the beginning of the year, net income tax payable by Pandora amounted to DKK 934 million. The net income tax payable decreased to DKK 913 million during the year, as shown in the bridge “Movement in net tax payable”. The decrease is reflected in the higher tax paid for 2022. The higher profit before tax in 2022 compared to 2021 increase the tax to be paid, which is due for payment in 2023. The difference between income tax expense in the income statement and income tax paid is explained in the bridge “From income tax expense to tax paid”. The income tax expense in the income statement for 2022 has been calcu- lated at DKK 1,504 million. The income tax expense includes taxes on other income posted on equity and adjustments to taxes for timing differences. Adding the tax payable from 2021 of DKK 934 million, we have a total tax payable of DKK 2,703 million. Of this amount DKK 913 million is due to be paid in 2023 or later, and the remaining DKK 1,790 million were settled as cash tax payments in 2022. ANNUAL REPORT 2022 FINANCIAL STATEMENTS ANNUAL REPORT The notes in this section describe the assets that form the basis for the activities of Pandora and the related liabilities. Financial risks are described in note 4.4. In 2022, the increase in net working capital was mainly driven by a deliberate inventory build-up to protect availability, in order to mitigate risk of stock-outs and disruptions in the supply chain. INVESTED CAPITAL DKK million Notes 2022 2021 Intangible assets 3.1 7,568 7,094 Property, plant and equipment 3.2 2,226 1,816 Right-of-use assets 3.3 2,978 2,532 Other non-current financial assets 249 222 Non-current provisions 3.7 -363 -416 Net working capital 1,104 -1,181 Deferred tax, net 2.5 1,089 778 Currency derivatives, net 23 -27 Income tax receivables/payable, net -913 -935 Invested capital 13,961 9,884 WORKING CAPITAL DKK million Notes 2022 2021 Inventories 3.5 4,211 2,991 Trade receivables 3.6 1,262 1,009 Trade payables 3.9 -3,131 -3,267 Operating working capital 2,342 732 Other receivables 1,078 808 Current provisions 3.7, 3.8 -649 -750 Commodity derivatives, net 133 -113 Contract liabilities -136 -163 Other payables -1,666 -1,694 Net working capital 1,104 -1,181 INVESTED CAPITAL AND WORKING CAPITAL ITEMS SECTION 3 Invested capital DKK million 2021: 9,884 Net working capital/revenue 2021: -5.0% CAPEX DKK million 2021: 641 13,9614.2%1,290 ANNUAL REPORT 2022 FINANCIAL STATEMENTS DKK million Goodwill Brand Distribution Other intangible assets Total 2022 Cost at 1 January 4,418 1,057 1,609 2,059 9,143 Acquisition of subsidiaries and activities 364 - - - 364 Additions - - - 361 361 Disposals - - - -5 -5 Exchange rate adjustments 39 - 4 19 62 Cost at 31 December 4,822 1,057 1,613 2,434 9,925 Amortisation and impairment losses at 1 January - - 528 1,521 2,049 Amortisation for the year - - 33 263 297 Impairment loss for the year - - - - - Disposals - - - -4 -4 Exchange rate adjustments - - 4 11 15 Amortisation and impairment losses at 31 December - - 566 1,791 2,357 Carrying amount at 31 December 4,822 1,057 1,047 642 7,568 DKK million Goodwill Brand Distribution Other intangible assets Total 2021 Cost at 1 January 4,247 1,057 1,601 1,747 8,652 Acquisition of subsidiaries and activities 12 - 13 - 25 Additions - - - 300 300 Disposals - - - -6 -6 Exchange rate adjustments 161 - -5 18 173 Cost at 31 December 4,418 1,057 1,609 2,059 9,143 Amortisation and impairment losses at 1 January - - 491 1,218 1,708 Amortisation for the year - - 33 219 251 Impairment loss for the year 1 - - - 85 85 Disposals - - - -5 -5 Exchange rate adjustments - - 5 4 8 Amortisation and impairment losses at 31 December - - 528 1,521 2,049 Carrying amount at 31 December 4,418 1,057 1,080 538 7,094 1 The impairment loss of DKK 85 million relates to write-down of software applications. The loss is mainly recognised as sales, distribution and marketing expenses in the income statement. NOTE 3.1 INTANGIBLE ASSETS DKK million 2022 2021 Amortisation and impairment losses have been recognised in the income statement as follows: Cost of sales 46 46 Sales, distribution and marketing expenses 107 146 Administrative expenses 143 144 Total 297 337 The majority of the intangible assets have been acquired through business combinations. ANNUAL REPORT 2022 FINANCIAL STATEMENTS Goodwill Additions in 2022 relate to acquisitions of activities. Note 3.4 Business combinations includes an overview of acquired goodwill for the year. Brand The ‘Pandora’ brand is the only brand of the Group that is capitalised in the consolidated financial statements. It com- prises a group of complementary intangible assets relating to the brand, domain name, products, image and customer experience related to products sold under the Pandora brand. The brand was acquired as part of the Pandora core business in 2008. Distribution Distribution includes distribution network and distribution rights. The distribution network covers Pandora’s relations with its distributors. The main part of the distribution network was acquired with the Pandora core business in 2008. Distribution rights mainly relate to the distribution rights for Pandora products in North America. These were acquired with the American distributor in 2008 and the carrying amount at 31 December 2022 was DKK 1.0 billion (2021: DKK 1.0 billion). Other intangible assets Other intangible assets mainly comprise software. NOTE 3.1 INTANGIBLE ASSETS (CONTINUED) ACCOUNTING POLICIES Goodwill Goodwill is initially recognised at the amount by which the purchase price for a business combination exceeds the recognised value of the identifiable assets and liabilities acquired. Goodwill comprises future growth expectations, buyer-specif- ic synergies, the workforce in place and know-how. Subsequent to initial recogni- tion, goodwill is measured at cost less accumulated impairment losses. Goodwill is not amortised, but is tested for impairment annually or if an impairment indica- tion arises. Impairment losses charged in previous years cannot be reversed. Brand Brand is initially recognised at cost based on the “Relief from Royalty” method, which is considered to have an indefinite useful life and is impairment tested annually. Distribution The distribution network is initially recognised at fair value based on an estimation of the costs the entity avoids by owning the intangible assets and therefore the entity does not need to rebuild the network (the cost approach). The distribution network is amortised over an expected useful life of 15 years. The distribution rights for Pandora products in the North American market are measured based on a residual model, since the distribution agreement underlying the distribution rights is non- terminable. Consequently, the distribution rights are considered to have an indefinite useful life. Other acquired distribution rights are initially recognised at cost based on the “Mul- ti-period Excess Earnings” model and amortised over their expected useful lives. Other intangible assets Software is initially recognised at cost and amortised over 2-5 years. Software obtained through a Software-as-a-Service (SaaS) arrangement is capitalised to the extent that IAS 38 criteria are met and amortised over the contract period. Amortisation is allocated to segments on a pro rata basis based on the standard cost per segment. Impairment At each reporting date, Pandora assesses whether there is any indication that an asset may be impaired. If any such indication exists, or when annual impairment testing of an asset is re- quired, Pandora estimates the recoverable amount of the asset. The recoverable amount of an asset is the higher of the fair value of the asset or cash-generating unit (CGU) less costs to sell and its value in use. The recoverable amount is determined for the smallest group of assets that is independent from other assets or groups of assets. Where the carrying amount of an asset or CGU ex- ceeds its recoverable amount, the asset is written down to its recoverable amount. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In deter- mining fair value less costs to sell, an appropriate valuation model is used. The most significant factors when assessing the potential need for impairment are: — decreasing revenue; — increasing production cost; — decreasing brand value; — changes to the product mix. The indicators above should be viewed in the context of Pandora’s relatively high margins and low asset base. The brand is applied and supported globally in all of the Group’s entities. The brand is maintained and preserved through common strategy and product development at Group level and marketing in the individual sales entities. The brand is conse- quently tested for impairment at Group level. Like the brand described above, goodwill is reported and managed internally at Group level. Due to the constraint in IAS 36, goodwill is allocated to the grouped CGUs in the two operating segments for impairment testing purposes. It is manage- ment’s opinion that this best reflects Pandora’s value creation. ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 3.1 INTANGIBLE ASSETS (CONTINUED) DISCOUNT RATES AND GROWTH RATES IN TERMINAL PERIOD Discount rate before tax Growth rate in terminal period 2022 Moments incl. Collabs 12.6% 2% Style 12.7% 2% Group 12.6% 2% 2021 Moments incl. Collabs 11.7% 2% Style 11.7% 2% Group 11.7% 2% Method for impairment testing In the impairment test, the recoverable amount is compared with the carrying amount. The recoverable amount is based on a calculation of the value in use using cash flow estimates based on the budget for 2023 and a forecast for the two subsequent years. The long-term growth rate in the terminal period has been set so that it equals the expected long-term rate of inflation. All intangible assets are tested for impairment if there is any indication of impairment. Intangible assets with indefinite useful life are tested at least annually. DKK million Goodwill Brand Distribution 2022 Moments incl. Collabs 3,505 766 758 Style 1,316 291 289 Total 4,822 1,057 1,047 2021 Moments incl. Collabs 3,204 766 783 Style 1,214 291 298 Total 4,418 1,057 1,080 ALLOCATION OF INTANGIBLE ASSETS TO CGUS • revenue development taking into account development in network (stores, retail/wholesale share), product mix and market share; • cost of sales based on raw materials consumption affected by mix of materials (stones, gold and silver), salaries and average lagged hedge commodity prices at the time the budget is prepared; • development in operating expenses; • currency rates are based on actual rates at the time the budget is prepared; • increasing inflation and interest rates. Net working capital in the budget for next year, relative to the revenue of each group of CGUs, is based on historical expe- rience and is maintained for the remainder of the expected useful economic lives. Net working capital thus increases on a linear basis as the level of activity increases. The impairment test of the brand at Group level is based on the "Relief from Royalty" method. The impairment tests did not identify any need for impairment losses to be recognised. Based on sensitivity analysis, it is man- agement’s opinion that no probable change in any key assump- tions would cause the carrying amounts of the two operating segments or at Group level to exceed the recoverable amounts. Even with a significant reduction in growth rate and an in- crease in discount rate, management has not identified any likely impairment. Assumptions The calculations of the recoverable amounts of CGUs or groups of CGUs are based on the following key assumptions. Discount rates reflect the current market assessment of the risks specific to each CGU or group of CGUs. The Group discount rates have been estimated based on a weighted average cost of capital for the industry. The rates have also been adjusted to reflect the market assess- ment of any risk specific to each group of CGUs. The EBIT figures used in the impairment test are based on the budget for next year, prepared and approved by management, and a forecast for the two subsequent years. Higher inflation rates were observed in 2022, affecting the estimates for the upcoming years. Pandora expects the long-term inflation rate to stabilise and the 2% growth rate applied is thus an estimate of the expected average inflation in the terminal period. As such, no real growth has been applied to the terminal period when calculating the recoverable amounts. The EBIT margin in the budget of each group of CGUs is based on historical experience and expectations concerning: ANNUAL REPORT 2022 FINANCIAL STATEMENTS DKK million 2022 2021 Depreciation has been recognised in the income statement as follows: Cost of sales 167 176 Sales, distribution and marketing expenses 359 364 Administrative expenses 37 42 Total 563 582 NOTE 3.2 PROPERTY, PLANT AND EQUIPMENT DKK million Land and buildings Plant and equipment Assets under construction Total 2022 Cost at 1 January 1,193 3,582 91 4,866 Acquisition of subsidiaries and activities - 32 - 32 Additions 55 211 663 929 Disposals -15 -350 - -365 Transfers 43 425 -468 - Exchange rate adjustments 26 39 3 68 Cost at 31 December 1,302 3,937 289 5,529 Depreciation and impairment losses at 1 January 366 2,684 - 3,050 Depreciation for the year 89 474 - 563 Disposals -14 -341 - -355 Exchange rate adjustments 8 37 - 45 Depreciation and impairment losses at 31 December 449 2,854 - 3,303 Carrying amount at 31 December 853 1,083 289 2,226 2021 Cost at 1 January 1,238 3,461 44 4,742 Acquisition of subsidiaries and activities - - 11 11 Additions 11 129 199 339 Disposals -40 -249 - -289 Transfers 14 150 -164 - Exchange rate adjustments -30 91 2 64 Cost at 31 December 1,193 3,582 91 4,866 Depreciation and impairment losses at 1 January 323 2,366 - 2,689 Depreciation for the year 90 492 - 582 Disposals -38 -242 - -280 Exchange rate adjustments -8 68 - 59 Depreciation and impairment losses at 31 December 366 2,684 - 3,050 Carrying amount at 31 December 827 898 91 1,816 ACCOUNTING POLICIES Property, plant and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life according to the table below. Asset Useful life Land Indefinite Buildings 20-50 years Leasehold improvements Lease term Plant and equipment 3-5 years Other fixtures and fittings 3-5 years ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 3.3 LEASES Pandora leases stores, various offices, office equipment and cars. The vast majority of depreciation relates to leased stores and is presented in the sales, distribution and marketing expenses. Costs recognised in the period for short-term and low-value leases were DKK 60 million (2021: DKK 39 million). Expenses are recognised on a straight-line basis. OTHER ITEMS RELATING TO LEASES DKK million 2022 2021 Interest expense 162 99 Total interest for the period 162 99 Due to the pandemic, Pandora received rent concessions from landlords in 2021 amounting to DKK 56 million, which was recognised under sales and distribution expenses in the income statement in 2021. The impacts in 2022 were insignificant due to limited COVID-19 closures. Total cash outflows for the year relating to leases was DKK 1,702 million (2021: DKK 1,377 mil- lion), comprising fixed lease payments in scope of IFRS 16 of DKK 1,068 million (2021: DKK 991 million), variable lease payments of DKK 412 million (2021: DKK 248 million), interest paid of DKK 162 million (2021: DKK 99 million), and short-term and low-value leases of DKK 60 million (2021: DKK 39 million). DKK million 2022 2021 Property 1,098 1,066 IT 1 1 Cars 11 9 Other 4 4 Total depreciation and impairment losses on right-of-use assets for the period 1,114 1,081 Amounts recognised in the income statement: RECOGNISED DEPRECIATION AND IMPAIRMENT LOSSES ON RIGHT-OF-USE ASSETS CHARGED TO THE INCOME STATEMENT RIGHT-OF-USE ASSETS DKK million 2022 2021 Property 2,960 2,507 IT 2 3 Cars 11 14 Other 5 8 Total right-of-use assets 2,978 2,532 Amounts recognised in the balance sheet: LEASE LIABILITIES DKK million 2022 2021 Non-current 2,113 1,724 Current 950 886 Total lease liabilities 3,063 2,610 Additions of right-of-use assets were DKK 1,717 million in 2022 (2021: DKK 690 million). Lease liabilities are recognised in loans and borrowings. SIGNIFICANT ACCOUNTING ESTIMATES When assessing the lifetime of leases, Pandora considers the non-cancellable lease term and options to extend or terminate the lease where Pandora is reasonably certain to extend or not to terminate. Leases in Pandora mainly comprise stores, office buildings, cars, IT and other office equipment. Most lease contracts for stores average three to five years with a three to five-year option to extend in approximately 21% of current leases, typically with one or more termination options. The lease term for stores has been assessed to be up to ten years, depending on loca- tion, revenue and earnings. For office buildings, the lease term is usually five to 15 years. For other assets, the life is equal to the non-cancellable lease term, and extensions are not considered for these. Many of the Group’s property leases contain variable payment terms that are linked to the volume of sales made from leased stores according to normal market practice. In 2022, around 24% (2021: 18%) of the lease payments recognised in the in- come statement were variable rent. Pandora has estimated that a 1% increase in annual physical store revenue would conse- quently result in a 0.5% (2021: 0.5%) increase in lease payments. The average standard store leases are three to five years with a three to five-year option to extend in approximately 21% (2021: 18%) of current leases, typically with one or more termi- nation options. Approximately 25% of current leases were up for renegotiation in 2022. The estimated value of lease options that Pandora is not reasonably certain of executing, is around DKK 0.3 billion (2021: DKK 0.4 billion). ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 3.3 LEASES (CONTINUED) ACCOUNTING POLICIES Pandora applies a single recognition and measurement approach to all leases, except for short-term leases and low-value leases. Pandora recognises right-of-use assets at the commencement date of the lease when the asset is available for use. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, lease payments made at or before the commencement date, key money, less any lease incentives received. Key money is measured at cost and amortised over the term of the contract. Right-of-use assets are depreciated on a straight-line basis over the shorter of the asset’s useful life and the lease term. At each reporting date, Pandora assesses whether there is any indication that a right-of- use asset may be impaired. If any such indication exists, Pandora carries out impairment testing for the relevant CGU. Pandora recognises lease liabilities at the commencement date of the lease, measured at the present value of lease payments to be made over the lease term. Lease payments include fixed payments less any lease incentives receivable. Some leases are exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease li- ability until they take effect. Payments relating to services are not included in lease liabilities. Some property leases contain variable payment terms that are linked to sales generated from a store. Variable lease payments that depend on sales are recognised in profit or loss in the period in which the condition that triggers those payments occurs and are not included in the lease liability. In calculating the present value of lease payments, Pandora uses its incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, for example a change in the lease term or a change in the lease payments. Lease payments are classified in financial activities in the statement of cash flows. Pandora applies the short-term lease recognition exemption to its short-term leases. Payments related to short-term leases and leases of low-value assets continue to be recognised on a straight-line basis as an expense in the income statement. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise some IT equipment and other office equipment. In March 2021, the IASB issued COVID-19-Related Rent Con- cessions beyond 30 June 2021 - amendment to IFRS 16 Leases. The IASB extended the period of the relief for lessees arising as a direct consequence of the pandemic from 30 June 2021 to 30 June 2022. As a practical expedient, a lessee may elect not to assess whether a COVID-19 pandemic-related rent concession from a lessor is a lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the COVID-19 pandemic-related rent concession the same way it would account for the change under IFRS 16, if the change was not a lease modification. Pandora applied the extension of the practical expedient to all contracts with rent concessions occurring as a direct consequence of the pandemic and where they meet all conditions of the practical expedient. NOTE 3.4 BUSINESS COMBINATIONS The contribution from the acquisitions as highlighted below includes retail revenue and net profit after the acquisition date. Lost revenue and net profit from the franchise channel have not been adjusted, thus the highlighted contributions cannot be directly linked to the income statement from a performance perspective. Acquisitions in 2022 Ben Bridge In Q1 2022, Pandora took over 37 concept stores in the US and Canada (32 concept stores in the US acquired on 3 March and five concept stores in Canada acquired on 25 February) from Ben Bridge in two business combinations. Net assets acquired mainly consisted of store properties, inventories and related liabilities. The total purchase price for the acquisitions was DKK 291 mil- lion. Based on the purchase price allocations, goodwill was DKK 194 million. Excluding the tempo- rary drag on gross margin from inventory buybacks, the contributions to the Group’s revenue and net earnings from the acquisition were DKK 445 million and DKK 186 million respectively. Panbor On 13 July 2022, Pandora took over 13 concept stores in Las Vegas from Panbor. Net assets acquired mainly consisted of store properties, inventories and related liabilities. The total pur- chase price for the acquisitions was DKK 166 million. Based on the purchase price allocations, goodwill was DKK 95 million. Excluding the temporary drag on gross margin from inventory buy- backs, the contributions to the Group’s revenue and net earnings from the acquisition were DKK 121 million and DKK 55 million respectively. Portugal On 20 July 2022, Pandora acquired the distribution in Portugal from the previous distributor, Visão do Tempo. The acquisition comprised mainly inventories, non-current assets and liabilities relating to 25 concept stores and nine shop-in-shops. The total purchase price for the acquisitions was DKK 99 million. Based on the purchase price allocations, goodwill was DKK 64 million. Excluding the temporary drag on gross margin from inventory buybacks, the contributions to the Group’s reve- ANNUAL REPORT 2022 FINANCIAL STATEMENTS ACCOUNTING POLICIES Business combinations are accounted for in accordance with the IFRS 3 acquisition method. The cost of an acqui- sition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the acquirer measures the non-controlling interests in the acquiree either at fair val- ue or at the proportionate share of the acquiree’s identi- fiable net assets. Acquisition costs incurred are expensed. Subsequent to initial recognition, goodwill is measured at cost less any accumulated impairment losses. As goodwill is reported and managed internally at Group level, goodwill acquired should also be allocated to the Group. However, goodwill acquired is allocated to the grouped CGUs in the two operating segments for impair- ment testing purposes due to the constraint in IAS 36. If any part of the cost of an acquisition is contingent on future events or performance, the cost is recognised at fair value at the time of acquisition. Changes to the fair value of the contingent payment are recognised in net financials in the income statement. ACQUISITIONS DKK million 2022 2021 Distribution rights - 13 Property, plant and equipment and right-of-use assets 159 84 Inventories 195 34 Assets acquired 354 131 Non-current liabilities 78 50 Payables 3 - Other current liabilities 61 27 Liabilities assumed 141 77 Total identifiable net assets acquired 213 54 Goodwill arising on acquisitions 364 12 Purchase consideration 577 66 Cash movements on acquisitions: Deferred payment -14 - Net cash flows on acquisitions 562 66 NOTE 3.4 BUSINESS COMBINATIONS (CONTINUED) nue and net earnings from the acquisition were DKK 99 million and DKK 51 million respectively. Other business combinations in 2022 Pandora acquired five more concept stores in the US and Italy in 2022. The purchase price was DKK 20 million. Assets acquired mainly consisted of inventories and other assets and liabilities relating to the stores. Of the purchase price, DKK 11 million was allocated to goodwill. Total business combinations in 2022 The total purchase price for the acquisitions in 2022 was DKK 577 million. Based on the purchase price allocations, goodwill was DKK 364 million. Goodwill from the acquisitions was main- ly related to the synergies from converting the stores from wholesale and distribution to Pandora owned retail. All the goodwill recognised was deductible for income tax purposes. Cost relating to the acquisitions was immaterial and has been recognised as operating expenses in the income statement. Excluding the temporary drag on gross margin from inventory buybacks, the contributions to the Group’s revenue and net earnings from the acquisitions for the period 1 January to 31 December 2022 were DKK 693 million and DKK 305 million respectively. On a pro forma basis, if the acquisitions had been effective from 1 January 2022, the impact on Group revenue and net earnings for the period 1 January to 31 December 2022 would have been approximately DKK 825 million and DKK 346 million respectively. Acquisitions in 2021 In 2021, Pandora took over 29 concept stores in the US in two business combinations. Net assets acquired mainly consisted of store properties, inventories and related liabilities. The total purchase price for the acquisitions was DKK 66 million. Based on the purchase price allo- cations, goodwill was DKK 12 million. Goodwill from the acquisitions was mainly related to the synergies from converting the stores from wholesale to Pandora owned retail. Of the goodwill acquired, DKK 12 million is deductible for income tax purposes. Cost relating to the acquisitions was immaterial and is recognised as operating expenses in the income statement. The contributions to the Group’s revenue and net profit from acquisitions for the period 1 January to 31 December 2021 were DKK 307 million and DKK 93 million respectively. On a pro forma basis, if the acquisitions had been effective from 1 January 2021, the impact on Group revenue and net profit for the period 1 January to 31 December 2021 would have been approximately DKK 358 million and DKK 112 mil- lion respectively. Acquisitions after the reporting period No acquisitions to an extent of significance to Pandora took place after the reporting period. ANNUAL REPORT 2022 FINANCIAL STATEMENTS DKK million 2022 2021 Receivables related to third-party distribution and wholesale 747 672 Receivables related to retail revenue sales 515 337 Total trade receivables at 31 December 1,262 1,009 Ageing of trade receivables at 31 December Not past due 1,035 850 Up to 30 days 176 159 Between 30 and 60 days 31 - Between 60 and 90 days 12 - Over 90 days 8 - Total past due, not impaired 227 159 Total trade receivables at 31 December 1,262 1,009 Development in impairment losses on trade receivables Impairment at 1 January 86 121 Additions 61 12 Utilised -11 -20 Unused amounts reversed -55 -30 Exchange rate adjustments 2 3 Impairment at 31 December 83 86 NOTE 3.6 TRADE RECEIVABLES SIGNIFICANT ACCOUNTING ESTIMATES Estimates relating to write-downs are impacted by fore- casting accuracy in the number of obsolete products that will need to be remelted. The impact from remelt is also influenced by fluctuations in the market prices of silver and gold. Further, significant management judgements are required with regards to the calculations of internal gain on inventory when goods are sold from production entities to sales entities. DKK million 2022 2021 Raw materials and consumables 743 779 Work in progress 151 148 Finished goods 3,088 1,911 Point-of-sale materials 229 153 Total inventories at 31 December 4,211 2,991 Inventory write-downs at 1 January 765 740 Write-downs during the year 118 154 Utilised in the year -148 -129 Inventory write-downs at 31 December 735 765 NOTE 3.5 INVENTORIES Write-downs Inventory write-downs primarily relate to finished goods and are recognised in cost of sales, DKK 97 million (2021: DKK 141 million), and operating expenses, DKK 21 million (2021: DKK 13 million). Write-downs include mainly the cost of remelting obsolete jewellery. Remelting of goods (realised and unrealised) negatively im- pacted gross profit by DKK 63 million (2021: DKK 103 million). Production overheads Production overheads are calculated using a standard cost method, which is reviewed regularly to ensure relevant assumptions concerning capacity utilisation, lead times and other relevant factors. ACCOUNTING POLICIES Inventories are valued at the lower of cost and net realis- able value. Costs are accounted for on a first-in, first-out basis (FIFO). Besides raw materials, costs include labour and a proportion of production overheads based on nor- mal operating capacity, but excluding borrowing costs. Point-of-sale materials comprise purchase costs regarding equipment, displays and packaging materials etc. and are also accounted for on a FIFO basis. Trade receivables are amounts due from the sale of goods sold to wholesalers and distribu- tors, or due from landlords, malls or e-commerce providers responsible for the collection of cash on behalf of Pandora related to retail sales. The impairment on receivables decreased by DKK 3 million for the year. Realised losses were not material and remained low. Net realisable value Net realisable value is based on the estimated selling price less estimated costs of completion and distribution. Alter- natively, for inventories that are not expected to be sold, net realisable value is based on the remelt value of the reusable raw materials (primarily silver and gold). ANNUAL REPORT 2022 FINANCIAL STATEMENTS ACCOUNTING POLICIES Trade receivables are initially recognised at the amount of consideration that is unconditional unless they contain significant financing components, and consequently rec- ognised at fair value. The Group holds trade receivables with the objective of collecting the contractual cash flows and therefore measures them subsequently at amortised cost using the effective interest method. Pandora applies the simplified approach to measure expect- ed credit losses, using a lifetime expected loss allowance. NOTE 3.7 PROVISIONS DKK million 2022 2021 Provisions at 1 January 442 399 Additions in the year 77 127 Utilised in the year -15 -11 Unused provisions reversed -120 -77 Exchange rate adjustments - 5 Provisions at 31 December 384 442 Provisions are recognised in the consolidated balance sheet as follows: Current 21 26 Non-current 363 416 Provisions at 31 December 384 442 ACCOUNTING POLICIES Provisions are recognised when Pandora has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is recog- nised in the income statement net of any reimbursement. NOTE 3.8 CONTRACT ASSETS AND LIABILITIES DKK million 2022 2021 Contract assets Receivables from sale of products, see note 3.6 1,262 1,009 Right-of-return assets 54 70 Total contract assets 1,316 1,078 Contract liabilities Prepayments from customers 16 11 Coupons, gift cards etc. 102 92 Loyalty programme 18 60 Refund liabilities 628 724 Total contract liabilities 763 887 In view of the low historical loss rates on receivables, ad- justing these rates to reflect current and forward-looking information on macroeconomic factors such as GDP and un- employment rates affecting the ability of customers to settle receivables will not increase the risk of losses significantly. NOTE 3.6 TRADE RECEIVABLES (CONTINUED) DKK million Refund Warranty Total 2022 Liability at 1 January 478 246 724 Performance obligations for which consideration has been received 982 327 1,309 Revenue recognised, included in the contract liability -897 -214 -1,111 Contract liabilities reversed -243 -66 -308 Exchange rate adjustments 19 -5 14 Refund and warranty liability at 31 December 339 288 628 2021 Liability at 1 January 382 273 654 Performance obligations for which consideration has been received 1,238 218 1,456 Revenue recognised, included in the contract liability -974 -171 -1,145 Contract liabilities reversed -189 -80 -269 Exchange rate adjustments 21 6 27 Refund and warranty liability at 31 December 478 246 724 Provisions are liabilities of uncertain timing or amount and consist of defined benefit pension plans of DKK 80 million (2021: DKK 81 million), obligations to restore leased property of DKK 163 million (2021: DKK 132 million), and other legal and constructive obligations of DKK 141 million (2021: DKK 203 million). See note 5.1 Contingent liabilities for estimates relating to litigation. Management continues to assess credit risk in order to en- sure credit risk never exceeds the recognised write-down on trade receivables. For a further description of credit risk, see note 4.4 Financial risks. ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 3.9 TRADE PAYABLES The Group generally accepts that vendors sell off their receivables arising from the sale of goods and services to the Group to a third party. Pandora has established a supply chain financing programme where vendors can sell off their receivables from Pandora on attractive terms, based on invoices approved by Pandora, but at the bank's sole discretion. Pandora is not directly or indirectly a party to these agreements. The amounts payable to suppliers included in the supply chain financing programme are classified as trade payables in the balance sheet as well as in the statement of cash flows (working capital within cash flows from operations) and amounted to DKK 79 million at 31 December 2022 (2021: DKK 24 million). NOTE 3.8 CONTRACT ASSETS AND LIABILITIES (CONTINUED) ACCOUNTING POLICIES Pandora recognises a refund and warranty liability related to return rights provided to customers in most countries. A corresponding right-of-return asset is also recognised as part of contract assets. The value of the right-of-return asset is determined by how many of the returned products are expected to be sold. Remaining products are written down to remelt value together with returns covered by warranties. The refund liability for estimated sales returns is recognised when there is historical experience or when a reasonably accurate estimate of expected future returns can other- wise be made. The income effect recognised is the gross margin of the expected returns and the potential effect of writing down parts of the returned goods to remelt value. Changes to the right-of-return asset and refund liability are recognised gross in the income statement, as both revenue and cost of sales. Refund liability to cover warranty claims is based on ex- pected replacements provided for products still covered by warranty at the end of the period. The liability is recog- nised gross in the income statement, as both a reduction in revenue and in cost of goods sold. This is due to the handling of warranty claims, which lead to replacements instead of repairs. As a common practice in Pandora, no costs to obtain contracts with customers were capitalised in 2022 or previous years. SIGNIFICANT ACCOUNTING ESTIMATES In most countries, Pandora has provided return and war- ranty rights to customers. The handling of warranty claims leads to replacements instead of repairs. The recognised refund liability relating to return and warranty rights is assessed to a large extent on the basis of historical return patterns. ANNUAL REPORT 2022 FINANCIAL STATEMENTS ANNUAL REPORT NET INTEREST-BEARING DEBT DKK million 2022 2021 Loans and borrowings, non-current 1,017 1,041 Lease liabilities, non-current 2,113 1,724 Loans and borrowings, current 3,508 274 Lease liabilities, current 950 886 Cash -794 -1,043 Net interest-bearing debt 6,794 2,882 CAPITAL STRUCTURE AND NET FINANCIALS SECTION 4 This section includes notes related to Pandora’s capital structure and net financials, including financial risks (see note 4.4). As a consequence of its operations, investments and financing, Pandora is exposed to a number of financial risks that are monitored and managed by Pandora’s Group Treas- ury. Pandora uses a number of derivative financial instruments to hedge its exposures to fluctuations in commodity prices and currencies. Derivative financial instruments are described in note 4.5. Pandora’s capital structure policy is to maintain a leverage ratio (NIBD to EBITDA ratio) between 0.5x and 1.5x (including leases in accordance with IFRS 16). At 31 December 2022, the ratio was 0.8x (2021: 0.4x), reflecting Pandora’s continued strong cash generation. In 2022, cash conversion ended at 39% as a result of a deliberate decision to build up inventory. Undrawn committed facilities of DKK 6.7 billion underpin Pandora’s strong liquidity position. DKK 6.7bn ANNUAL REPORT 2022 FINANCIAL STATEMENTS 6,595,620 treasury shares, corresponding to a total purchase price of DKK 3.6 billion (DKK 0.7 billion related to the share buyback programme launched in 2021 and DKK 2.9 billion related to the share buyback programme launched in 2022). At 31 December 2022, Pandora had yet to repurchase own shares at a total purchase price of DKK 0.4 billion as part of the share buyback programme. Own shares of DKK 0.4 billion have been repurchased after 31 December 2022. Treasury shares All treasury shares are owned by Pandora A/S. Treasury shares include hedges for share-based incentive plans granted to the Executive Management and other employees. NOTE 4.1 SHARE CAPITAL SHARE CAPITAL Number of shares Nominal value (DKK) 2022 Balance at 1 January 100,000,000 100,000,000 Cancellation of shares -4,500,000 -4,500,000 Balance at 31 December 95,500,000 95,500,000 2021 Balance at 1 January 100,000,000 100,000,000 Balance at 31 December 100,000,000 100,000,000 TREASURY SHARES Number of shares Nominal value (DKK) Purchase price % of shares 2022 Balance at 1 January 4,261,882 4,261,882 3,416,201,836 4.3% Used to settle share-based incentive plans -252,971 -252,971 -198,579,700 -0.3% Purchase of treasury shares 6,595,620 6,595,620 3,588,038,037 6.7% Cancellation of treasury shares -4,500,000 -4,500,000 -3,485,684,600 -4.5% Balance at 31 December 6,104,531 6,104,531 3,319,975,573 6.4% 2021 Balance at 1 January 322,839 322,839 92,742,356 0.3% Used to settle share-based incentive plans -4,754 -4,754 -1,264,761 0.0% Purchase of treasury shares 3,943,797 3,943,797 3,324,724,241 3.9% Balance at 31 December 4,261,882 4,261,882 3,416,201,836 4.3% NOTE 4.2 EARNINGS PER SHARE AND DIVIDEND DKK million 2022 2021 Profit attributable to equity holders 5,029 4,160 Weighted average number of ordinary shares 92,746,543 98,775,946 Effect of performance shares 949,850 898,708 Weighted average number of ordinary shares adjusted for the effect of dilution 93,696,393 99,674,654 Basic earnings per share, DKK 54.2 42.1 Diluted earnings per share, DKK 53.7 41.7 There have been no transactions between the reporting date and the date of completion of the Annual Report involving shares that would have significantly changed the number of shares or potential shares in Pandora A/S. Dividend The Board of Directors will propose at the Annual General Meeting that a dividend of DKK 16 per share (2021: DKK 16), corresponding to DKK 1.4 billion, be distributed for 2022. No divi- dend is paid on treasury shares. At the Annual General Meeting of Pandora A/S on 10 March 2022, the shareholders resolved to cancel 4,500,000 treasury shares. At 31 December 2022, the share capital comprised 95,500,000 shares with a par value of DKK 1. No shares have special rights. In 2022, Pandora launched a new share buyback programme under which Pandora expects to buy back own shares up to a maximum value of DKK 3.3 billion. In 2022, Pandora purchased ANNUAL REPORT 2022 FINANCIAL STATEMENTS ACCOUNTING POLICIES Dividend proposed is recognised as a liability at the date of the adoption at the Annual General Meeting (decla- ration date). Extraordinary dividend is recognised as a liability at the declaration date. In 2022, a dividend of DKK 1.5 billion in total was paid. Dividend paid had no effect on the Group’s tax expense for the year. For further shareholder information on dividend payments, see page 43 . Distributable reserves Cash distribution to the shareholders is, by law, limited to the amount of the free reserves of the Parent Company. As at 31 December 2022, free reserves in the Parent Compa- ny amounted to DKK 15.2 billion, of which DKK 5.9 billion was derived from an intra-group restructuring to bring together its crafting activities into a separate crafting sub-group, which will oversee all crafting activities across the Group. For further information on the intra-group restructuring see note 3.3 Investments in subsidiaries and business combina- tions in the Parent Company financial statements. When calculating the amount available for distribution of dividend and share buyback, treasury shares are deducted from distributable reserves. NOTE 4.2 EARNINGS PER SHARE AND DIVIDEND (CONTINUED) TOTAL LIABILITIES FROM FINANCING ACTIVITIES DKK million Financial liabilities 1 January Cash flows, net New leases, etc. Other 1 Foreign exchange adjustments Financial liabilities 31 December 2022 Non-current borrowings 1,041 74 - -99 - 1,017 Non-current lease liabilities 1,724 - 1,253 -857 -6 2,113 Current borrowings 274 2,935 - 299 - 3,508 Current lease liabilities 886 -1,068 465 665 2 950 Total liabilities from financing activities 3,926 1,941 1,717 7 -3 7,588 2021 Non-current borrowings - 1,315 - -273 - 1,041 Non-current lease liabilities 2,066 - 495 -899 61 1,724 Current borrowings 3,003 -3,004 - 274 1 274 Current lease liabilities 993 -991 215 637 32 886 Total liabilities from financing activities 6,063 -2,680 710 -262 94 3,926 1 Includes the effect of the reclassification of the non-current portion of interest-bearing loans and borrowings to the current portion due to the passage of time. Also includes the effect of accrued but not yet paid interest on interest-bearing loans and borrowings, upfront prepayment of lease liabilities and the effect of the lease modification and reassessment. The Group classifies interest paid as cash flows from operating activities. NOTE 4.3 NET INTEREST-BEARING DEBT ACCOUNTING POLICIES On initial recognition, interest-bearing debt and borrowings are measured at fair value less trans- action costs. Subsequent to initial recognition, interest-bearing loans and borrowings are meas- ured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised and through the effective interest rate method. Amortised cost is calculated by taking into account any discount or premium at inception, and fees and other costs. ANNUAL REPORT 2022 FINANCIAL STATEMENTS Purchases are hedged from 1 to 12 months forward with a hedge ratio target that decreases with time to maturity as illustrated to the right. Any deviation from the policy must be ap- proved by the Audit Committee. Commodity hedging is updated at the end of each month or in connection with revised 12-month rolling production plans. Actual production may deviate from the 12-month rolling production plan. In case of deviations, the realised commodity hedge ratio may deviate from the estimated hedge ratio. The effective portion of the realised gain or loss from commodity hedging is recognised in Group inventories and subsequently in cost of sales. For the fair value of hedging instruments, see note 4.5 Derivative financial instruments. Foreign currency risk Pandora’s presentation currency is DKK, but the majority of Pandora’s activities and invest- ments are denominated in other currencies. Consequently, exchange rate fluctuations may have a substantial impact on Pandora’s cash flows, profit (loss) and/or financial position in DKK. The majority of Pandora’s revenue is denominated in USD, EUR, GBP, AUD, MXN, CAD and CNY. The functional currency of subsidiaries is generally the local currency, and a substantial portion of Pandora’s costs relates to raw materials purchased in USD. In addition, Pandora incurs costs As a consequence of its operations, investments and finan- cing, Pandora is exposed to a number of financial risks that are monitored and managed by Pandora’s Group Treasury. To manage financial risks, Pandora may use a number of finan- cial instruments, such as forward contracts, silver and gold swaps, currency and interest rate swaps, options and similar instruments within the framework of its current policies. Financial risks are divided into commodity price risk, foreign currency risk, credit risk, liquidity risk and interest rate risk. It is Pandora’s policy to hedge at least 50% of the combined commodity, exchange rate and interest rate risk. However, at least 70% of estimated commodity purchases for the next 12 months must be hedged. The table to the right illustrates the sensitivity on 2022 reve- nue, EBIT and EBIT margin from exchange rates and commod- ity price movements. In addition, the sensitivity of assets and liabilities as at 31 December from currency movements is illustrated on the next page. Commodity price risk Raw material risk is the risk of fluctuating commodity prices resulting in additional production costs. The most important raw materials are silver and gold, which are priced in USD. It is the policy of Pandora to ensure stable, predictable raw material prices. Based on a rolling 12-month production plan, the general policy is for Group Treasury to hedge at least 70% of the Group’s expected purchases. NOTE 4.4 FINANCIAL RISKS 2022 2021 SENSITIVITY ANALYSIS ON EXCHANGE RATES AND COMMODITY PRICES 1 DKK million Change in exchange rate and commodity prices Revenue EBIT EBIT margin impact Revenue EBIT EBIT margin impact USD +10% 858 367 0.5% 748 350 0.7% CAD +10% 80 47 0.1% 65 38 0.1% AUD +10% 167 117 0.3% 127 81 0.2% GBP +10% 382 252 0.6% 333 235 0.6% EUR +1% 71 44 0.1% 62 39 0.1% CNY +10% 73 -9 -0.1% 111 7 -0.1% MXN +10% 86 47 0.1% 48 22 0.0% THB +10% - -220 -0.8% - -238 -1.0% GOLD and SILVER +10% - -218 -0.8% - -182 -0.8% 1 Revenue and EBIT would have been impacted by the above amounts if exchange rates and commodity prices in 2022 had been higher than the realised exchange rates and commodity prices. The impact would have been the opposite if exchange rates and commodity prices had been decreasing by similar percentages. The analysis is based on the transaction currency. The analysis excludes the effects of hedging and time-lag of inventory. Min Max COMMODITY HEDGE RATIO TARGET (%) % MONTHS AHEAD % MONTHS AHEAD % MONTHS AHEAD % MONTHS AHEAD REVENUE BREAKDOWN BY CURRENCY (%) USD EUR Other GBP AUD CNY MXN CAD 20212022 5% 6% 5% 3% 3% 3% 2% 3% 27% 27% 14% 14% 32% 32% 12% 12% ANNUAL REPORT 2022 FINANCIAL STATEMENTS It is Pandora’s policy to hedge foreign currency risks related to the risk of declining net cash flows resulting from exchange rate fluctuations. Pandora does not hedge balance sheet items or ownership interests in foreign subsidiaries. For 2022, 70% of the cash flows from the main currencies were hedged based on a rolling 12-month liquidity forecast. Cash flows are hedged from 1 to 12 months forward with a hedge ratio that decreases with time to maturity. Foreign currency hedging is updated at the end of each month or in connection with revised 12-month rolling cash forecasts. The realised profit (loss) from exchange rate hedging is taken to financial items. The table below illustrates the currency revaluation impact in DKK million on net profit and changes in equity resulting from a change in the Group’s primary foreign currencies after the effect of hedge accounting. Credit risk Credit risk is primarily related to trade receivables, cash and unrealised gains on financial contracts. The maximum credit risk related to financial assets corresponds to the carrying amounts recognised in the consoli- dated balance sheet. It is Pandora’s policy for subsidiaries to be responsible for credit evaluation and credit risk on their trade receivables. Any deviations from standard agreements must be approved by Group Treasury and/or the Chief Financial Officer. Note 3.6 Trade receivables includes an overview of the credit risk related to trade receiv- ables. Rating of trade receivables does not differ materially either by type of customer or geographic location. The risk of further impairment is considered to be limited. Credit risk related to Pandora’s other financial assets mainly includes cash and unrealised gains on financial contracts. The credit risk is related to default of the counterparty with a maximum exposure corresponding to the carrying amount of the assets. Group Treasury is responsible for managing these credit risks. Liquidity risk Pandora’s cash conversion is high and Pandora maintains an adequate level of cash and unuti- lised credit facilities to meet financial obligations when due. Pandora’s liquidity risk is consid- ered to be low. Pandora has two new term loans of DKK 3.7 billion committed until December 2023 and May 2030, respectively. Pandora has uncommitted credit facilities to ensure efficient and flexible local liquidity management. The credit facilities are managed by Group Treasury. NOTE 4.4 FINANCIAL RISKS (CONTINUED) CURRENCY EXPOSURE FROM ASSETS AND LIABILITIES 1 DKK million 31 December 2022 31 December 2021 Change in exchange rate Profit (loss) before tax Equity Profit (loss) before tax Equity USD +10% -22 240 38 -188 CAD +10% 33 - 28 -8 AUD +10% 11 -64 8 -43 GBP +10% - -64 -47 -159 EUR +1% -9 -34 3 3 CNY +10% -17 -9 -21 -35 MXN +10% 52 52 11 11 THB +10% -46 247 -71 170 1 The movements in the income statement arise from monetary items (cash, borrowings, receivables and payables) where the functional currency of the entity differs from the cur- rency that the monetary items are denominated in. The movements in equity arise from monetary items and hedging instruments where the functional currency of the entity differs from the currency that the hedging instruments or monetary items are denominated in. The impact would have been the opposite if exchange rates had been decreasing by similar percentages. The analysis is based on the transaction currency. denominated in THB. Changes in the exchange rate of these currencies versus DKK will result in changes to the translated value of future EBIT and cash flows. Pandora finances the majority of its subsidiaries’ cash re- quirements via intercompany loans denominated in the local currency of the individual subsidiary. A devaluation of these currencies against DKK will in general result in a foreign exchange loss in the Parent Company. Exchange rate fluctuations may lead to a decrease in revenue and an increase in costs and thus declining margins. In addition, exchange rate fluctuations affect the translated value of the profits or losses of foreign subsidiaries and the translation of foreign currency assets and liabilities. OUTSTANDING COMMITTED LOAN FACILITIES (END OF DECEMBER 2022) Available facilities DKK million Maturity date Drawn amount DKK million Available liquidity Revolving credit facilities 1 7,065 April 2027 372 6,693 Term loan maturing in 2030 1 744 May 2030 744 - Term loan maturing in 2023 3,000 December 2023 3,000 - Total 10,808 4,116 6,693 1 The revolving credit facility and the term loan maturing in 2030 are both sustainability-linked facilities. ANNUAL REPORT 2022 FINANCIAL STATEMENTS LIABILITIES FALL DUE AS FOLLOWS DKK million Within 1 year Within 1 and 5 years After more than 5 years Total 2022 Non-derivatives Loans and borrowings 3,615 813 253 4,681 Lease liabilities 1,134 2,046 539 3,718 Trade payables 3,131 - - 3,131 Other payables 239 - - 239 Derivatives Derivative financial instruments 74 - - 74 Total at 31 December 8,193 2,859 792 11,844 2021 Non-derivatives Loans and borrowings 274 1,050 - 1,324 Lease liabilities 977 1,600 275 2,851 Trade payables 3,267 - - 3,267 Other payables 289 - - 289 Derivatives Derivative financial instruments 209 - - 209 Total at 31 December 5,016 2,650 275 7,941 NOTE 4.4 FINANCIAL RISKS (CONTINUED) Interest rate risk Interest rate risk is the risk of interest rate fluctuations resulting in changed interest rate payments and market value of net borrowings. At the reporting date, all interest-bearing loans and borrowings were based on floating interest rates. Pandora uses a number of derivative financial instruments to hedge its exposure to fluctua- tions in commodity prices and exchange rates. Derivative financial instruments include silver and gold swaps and foreign exchange forward contracts. DKK million Assets Liabilities Carrying amount Hedge reserve, net of tax 2022 Commodities 166 -33 133 103 Foreign exchange 65 -42 23 18 Total derivative financial instruments 231 -74 157 121 2021 Commodities 8 -121 -113 -90 Foreign exchange 61 -88 -27 -20 Total derivative financial instruments 69 -209 -140 -110 NOTE 4.5 DERIVATIVE FINANCIAL INSTRUMENTS All else being equal, it is estimated that a general increase in interest rates by 1.0 percentage point would lead to a DKK 49 million decrease in profit before tax and equity, excluding tax effect (2021: DKK 6 million decrease). Contractual maturities of financial liabilities The table below breaks the Group’s financial liabilities down into relevant maturity groupings based on contractual ma- turities for: • all non-derivative financial liabilities; • net and gross settled derivative financial instruments for which the contractual maturities are essential for an understanding of the timing of the cash flows. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts as the impact of discounting is insignificant. Based on the Group’s expectations for the future operation and the Group’s current cash resources, no significant liquidity risks have been identified. ANNUAL REPORT 2022 FINANCIAL STATEMENTS unrealised foreign exchange instruments is tested against observable foreign exchange forward rates. The value of financial instruments recognised in other com- prehensive income is recycled from equity at the time the instrument is settled, within 12 months. Derivative financial instruments that qualify for cash flow hedge accounting The hedges are expected to be highly effective due to the nature of the economic relation between the exposure and the hedge. The effective portion of the unrealised gain or loss on all hedg- ing instruments is recognised directly as other comprehensive income in the equity hedging reserve. The ineffective portion is recognised in net financials. The effective portion of the realised gain or loss on a com- modity hedging transaction is recognised in Group inventories and subsequently in cost of sales whereas the ineffective portion is realised in net financials. The realised gain or loss on all foreign exchange contracts is recognised in net financials. The ineffectiveness impact in net financials was a loss of It is Pandora’s policy to hedge at least 70% of the Group’s expected gold and silver consumption based on a rolling 12-month production plan. The table below illustrates the timing of the hedges related to the purchase of gold and silver for production, excluding the time-lag effect from inventory to cost of sales (when the product is sold). The time-lag from use in production to impact on cost of sales is usually 2 to 7 months. Classification according to the fair value hierarchy The fair value at 31 December 2022 of Pandora’s derivative financial instruments was measured in accordance with lev- el 2 in the fair value hierarchy (IFRS 13). Level 2 is based on non-quoted prices, observable either directly (as prices) or indirectly (derived from prices). Pandora uses input from third-party valuation specialists to quote prices for unrealised derivative financial instruments. The value of unrealised silver and gold instruments is tested against the prices observable at London Bullion Market Association (LBMA). The value of HEDGED AND REALISED PURCHASE PRICES At use of the gold and silver for production (USD/OZ) Realised in 2022 Hedged Q1 2023 Hedged Q2 2023 Hedged Q3 2023 Hedged Q4 2023 Gold price 1,806 1,835 1,839 1,793 1,847 Silver price 24.29 23.48 21.75 20.42 22.27 Commodity hedge ratio, % Realised 70-100% 70-90% 50-70% 30-50% NOTE 4.5 DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) ACCOUNTING POLICIES Derivative financial instruments are initially recognised at fair value at the date on which a contract is entered into and are subsequently measured at fair value. For derivative financial instruments not traded in an active market, the fair value is determined using appropriate valuation methods. Such methods may include comparison with recent arm’s length market transactions, reference to the current fair value of another instrument that is substantially the same, or discounted cash flow analysis. Pandora has designated certain derivative financial instru- ments as cash flow hedges as defined under IFRS 9. Hedge accounting is classified as a cash flow hedge when the hedges of a particular risk is associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions. Pandora designates and documents all hedging relationships between commodity contracts and purchase transactions. The effective portion of the unrealised gain or loss on all hedging instruments is recognised directly as other com - prehensive income in the equity hedging reserve. The inef- fective portion is recognised in net financials. T he effective portion of the realised gain or loss from commodity hedg- ing is recognised in Group inventories and subsequently in cost of sales. The realised profit (loss) from exchange rate hedging is taken to financial items. DKK 46 million (2021: gain of DKK 16 million). For information about risk management strategy, see note 4.4 Financial risks. ANNUAL REPORT 2022 FINANCIAL STATEMENTS OTHER NON-CASH ADJUSTMENTS DKK million 2022 2021 Effects from exchange rate adjustments 16 129 Effects from IFRS16 rent concessions -30 -56 Other, incl. gains/losses from the sale of property, plant and equipment -4 -4 Total other non-cash adjustments -18 70 NOTE 4.7 OTHER NON-CASH ADJUSTMENTS FINANCE INCOME DKK million 2022 2021 Reclassified from equity hedge reserves 12 53 Total finance income from derivative financial instruments 12 53 Finance income from loans and receivables measured at amortised cost: Foreign exchange gains 393 78 Interest income, bank 5 19 Interest income, loans and receivables 2 2 Total finance income from loans and receivables 400 99 Total finance income 412 152 FINANCE COSTS DKK million 2022 2021 Reclassified from equity hedge reserves 167 286 Total finance costs from derivative financial instruments 167 286 Finance costs from financial liabilities measured at amortised cost: Foreign exchange losses 134 116 Interest on loans and borrowings 100 34 Interest on lease liabilities 162 99 Other finance costs 59 78 Total finance costs from loans and borrowings 455 327 Total finance costs 622 613 NOTE 4.6 NET FINANCIALS ACCOUNTING POLICIES Finance income and costs comprise interest income and expenses, realised and unreal - ised gains and losses on payables/receiva- bles and transactions in foreign currencies. For all financial instruments measured at amortised cost, interest income or expense is recognised using the effective interest rate, which is the rate that discounts the estimat - ed future cash payments or receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. ANNUAL REPORT 2022 FINANCIAL STATEMENTS ANNUAL REPORT OTHER DISCLOSURES SECTION 5 Third best-selling ring in 2022 The Marvel Infinity ring from the Marvel X Pandora collection was among our top three best-selling rings overall in 2022. Since the ring was introduced in early 2022, Marvel fans and excited consumers have bought a total of almost 135,000 pieces. ANNUAL REPORT 2022 FINANCIAL STATEMENTS NOTE 5.1 CONTINGENT ASSETS AND LIABILITIES Litigation Pandora is a party to various legal proceedings with current business partners, authorities and other third parties, related to copyright, marketing conduct and pricing. None of these proceedings is expected to have a material effect on Pandora’s financial position or future earnings. Related parties with significant interests At 31 December 2022, treasury shares accounted for 6.4% of the share capital (2021: 4.3%), for further information see note 4.1 Share capital. Other related parties of Pandora include the Board, Execu- tive Management and their close family members. Related parties also include companies in which the aforementioned persons have control or significant interests. Transactions with related parties As part of the share buyback carried out in 2022, Pando- ra purchased own shares from shareholders. The shares were purchased at the volume-weighted average purchase price for the shares purchased under the share buyback programme in the market on the relevant day of trading. Pandora did not enter into any significant transactions with members of the Board or the Executive Management, except for compensation and benefits received as a result of their membership of the Board, employment with Pandora or shareholdings in Pandora. For further information see note 2.3 Staff costs and note 2 .4 Share-based payments. NOTE 5.2 RELATED PARTIES SIGNIFICANT ACCOUNTING ESTIMATES The factors taken into account when estimating a poten- tial liability in connection with litigation include the nature of the litigation or claim. Other factors taken into account are the development of the case, the judgements and recommendations of legal or other advisers, experience from similar cases, and management’s decision on how the Group will react to the litigation or claim. DKK million 2022 2021 Fee for statutory audit 11 10 Other assurance engagements 2 1 Total audit related services 13 11 Tax consultancy - - Other services 1 - Total non-audit services 1 - Total fees to independent auditor 14 11 The costs are recognised in the consolidated income statement as administrative expenses. Pandora has implemented a policy regarding non-audit services provided by the auditor appointed at the Annual General Meeting. The policy states which services are allowed or prohibited. Other non-audit services include fees for advisory services. All non-audit services have been approved according to the policy for non-audit services and within the 70% fee cap restrictions. NOTE 5.3 FEES TO INDEPENDENT AUDITOR NOTE 5.4 EVENTS OCCURRING AFTER THE REPORTING PERIOD No subsequent events have occurred after the balance sheet date that required adjustment to or disclosure in the consolidated financial statements. Contractual obligations Pandora has entered into a number of long-term purchase, sales and supply contracts in the course of the Group’s ordinary business. Contractual obligations amounted to DKK 827 million at 31 December 2022 (2021: DKK 500 million) and relate mainly to commercial collaborations and IT contracts. Apart from the liabilities already recognised in the balance sheet, no significant financial losses are expected to be incurred as a result of these contracts. Contingent assets In October 2022, Pandora’s European Distribution Center, located in Hamburg, Germany, was affected by a fire. The extent of any potential insurance compensation is being assessed, and discussions are ongoing with the insurers. Due to the premature state of discussions and the associated uncertainties, Pandora has not recognised an indemnity claim under the business interruption insurance policy as of 31 December 2022. No other material insurance compensation has been recognised in 2022. ANNUAL REPORT 2022 FINANCIAL STATEMENTS The table below shows information about the Group entities at 31 December 2022. Company Ownership Registered office Date of consolidation OWNED BY PANDORA A/S Pandora Jewelry Argentina SRL 100% Argentina 27 September 2017 Pandora Österreich GmbH 100% Austria 23 May 2012 Pandora Jewellery Belgium NV 100% Belgium 13 April 2017 Pandora do Brasil Participações Ltda. 100% Brazil 24 October 2013 Pandora Jewelry Ltd. 100% Canada 7 March 2008 Pandora Jewelry Chile SpA 100% Chile 7 May 2017 Pandora Jewelry Colombia S.A.S 100% Colombia 17 January 2019 Pandora Int. ApS 100% Denmark 1 October 2009 Pan Me A/S 100% Denmark 16 January 2015 Pandora Jewelry Taiwan A/S 100% Denmark 18 May 2018 Pandora Production Holding A/S 100% Denmark 3 May 2022 Pandora Jewellery UK Limited 100% England 1 December 2008 Pandora Jewelry Finland Oy 100% Finland 1 January 2012 Pandora France SAS 100% France 25 February 2011 Pandora Jewelry GmbH 100% Germany 5 January 2010 Pandora EMEA Distribution Center GmbH 100% Germany 5 December 2011 Pandora Jewelry Asia-Pacific Limited 100% Hong Kong 1 November 2009 Pandora Jewelry Limited 100% Ireland 10 January 2018 Pandora Italia SRL 100% Italy 23 May 2012 Pandora Jewelry Japan Ltd. 100% Japan 29 October 2014 Pandora Jewelry Macau Company Ltd. 100% Macau 1 January 2016 Pandora Jewelry Mexico, S.A. de C.V. 100% Mexico 8 March 2017 Pandora Jewelry Mexico Servicios, S.A. de C.V. 100% Mexico 8 March 2017 Pandora Jewelry Mexico Import, S.A. de C.V. 100% Mexico 4 April 2018 Pandora Jewelry Panama S.A. 100% Panama 5 July 2016 Pandora Jewelry Panama Retail, S.A. 100% Panama 14 April 2021 Pandora Jewelry Peru S.A.C 100% Peru 10 July 2018 Pandora Jewelry CEE Sp. z.o.o. 100% Poland 1 March 2009 Pandora Jewelry Shared Services Sp. z.o.o. 100% Poland 7 February 2012 Company Ownership Registered office Date of consolidation OWNED BY PANDORA A/S Pandora Portugal, Unipessoal LDA 100% Portugal 4 April 2022 Pandora Jewelry Singapore Pte. Ltd. 100% Singapore 1 January 2016 Pandora Jewelry Slovakia s.r.o. 100% Slovakia 6 September 2016 Pandora Jewellery South Africa Pty Ltd. 100% South Africa 31 January 2017 Pandora Jewellery Spain S.L 100% Spain 28 September 2017 Pandora Sweden AB 100% Sweden 4 November 2013 Pandora Schweiz AG 100% Switzerland 6 December 2011 Pandora Services Co. Ltd. 100% Thailand 15 October 2010 Pandora Jewelry Mücevherat Anonim Şirketi 100% Turkey 4 November 2013 Pandora Jewelry Inc. 100% United States 1 July 2008 Pandora Jewelry Latam LLC 100% United States 20 October 2021 Company Ownership Registered office Date of consolidation OWNED BY OTHER COMPANIES IN THE PANDORA GROUP AD Astra Holdings Pty Ltd. 100% Australia 1 July 2009 Pandora Jewelry Pty Ltd. 100% Australia 1 July 2009 Pandora Retail Pty Ltd. 100% Australia 1 July 2009 Pandora do Brasil Comércio e Importação Ltda. 100% Brazil 24 October 2013 Pandora Franchise Canada Ltd. 100% Canada 19 January 2011 Pandora Retail Canada Ltd. 100% Canada 4 February 2014 Pandora Jewelry (Shanghai) Company Ltd. 100% China 4 February 2015 Pandora Jewelry Design (Beijing) Company Ltd. 100% China 1 March 2016 Pandora Jewelry CR s.r.o. 100% Czech Republic 2 December 2009 Panmeas Jewellery LLC 100% Dubai 16 January 2015 Pandora Jewelry Hong Kong Company Ltd. 100% Hong Kong 4 February 2015 Pandora Jewelry Hungary Ltd. 100% Hungary 2 June 2010 Pandora Jewelry B.V. 100% Netherlands 20 September 2010 Pandora Norge AS 100% Norway 17 August 2010 Pandora Jewelry Romania SRL 100% Romania 18 August 2011 Pandora Production Co. Ltd. 100% Thailand 7 March 2008 Pandora Jewelry LLC 100% United States 7 March 2008 Pandora Franchising LLC 100% United States 1 November 2009 Pandora Ventures LLC 100% United States 10 May 2012 Pandora ECOMM LLC 100% United States 21 August 2014 Pandora Group has seven dormant companies, which have been omitted from the table. Pandora A/S has no dormant companies. NOTE 5.5 COMPANIES IN THE PANDORA GROUP ANNUAL REPORT 2022 FINANCIAL STATEMENTS Forward-looking statements This Annual Report contains forward-looking statements, including, but not limited to, guidance, expectations, strategies, objectives and statements regarding future events or prospects with respect to the Company’s future financial and operating results. Forward-look- ing statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words such as “expect”, “estimate”, “intend”, “will be”, “will continue”, “will result”, “could”, “may”, “might” or any variations of such words or other words with similar meanings. Forward-looking statements are subject to risks and uncertain- ties that could cause the Company’s actual results to differ materially from the results discussed in such forward-looking statements. Prospective information is based on management’s then current expectations or forecasts. Such information is subject to the risk that such expectations or forecasts, or the assumptions underlying such expectations or forecasts, may change. The Company assumes no obligation to update any such forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements. Some important risk factors that could cause the Company’s actual results to differ ma- terially from those expressed in its forward-looking statements include, but are not limited to: economic and geopolitical uncertainty (including interest rates and exchange rates), financial and regulatory developments, general changes in market trends and end-con- sumer preferences, demand for the Company’s products, competition, the availability and pricing of materials used by the Company, production and distribution-related issues, IT failures, litigation, pandemics, and other unforeseen factors. The nature of the Company’s business means that risk factors and uncertainties may arise, and it may not be possible for management to predict all such risk factors, nor to assess the impact of all such risk factors on the Company’s business or the extent to which any individual risk factor, or combina- tion of factors, may cause results to differ materially from those contained in any forward-looking statement. Accordingly, forward-look- ing statements should not be relied on as a prediction of actual results. Key figures and financial ratios stated in the consolidated financial statements have been calculated in accordance with the CFA Society Denmark guidelines. Pandora presents the following alternative performance measures not defined according to IFRS (non-GAAP measures) in the Annual Report: Furthermore, a breakdown of ‘Operating working capital’, ‘Net working capital’ and ‘Invested capital’ is given on the section 3 divider. NOTE 5.6 FINANCIAL DEFINITIONS Revenue growth, % (The current year’s revenue - last year’s revenue) Last year’s revenue Revenue growth, local currency, % (The current year’s revenue at last year’s exchange rates - last year’s revenue) Last year’s revenue Gross margin, % Gross profit / revenue Effective tax rate, % Income tax expense / profit before tax Equity ratio, % Equity / total assets Payout ratio, % Dividends paid for the year / net profit Total payout ratio, % Dividends paid for the year plus value of share buyback / net profit EPS basic Net profit / average number of shares outstanding EPS diluted Net profit / average number of shares outstanding, including the dilutive effect of share options ‘in the money’ Sell-out growth, (like-for-like) % Like-for-like including stores which have been operating for +12 months and stores which are temporarily closed due to COVID-19 Organic growth, % Revenue growth in local currency relative to the same period in the comparative year adjusted for the acquisition/ divestment of distributors and franchisee stores (the effect of converting wholesale to retail revenue and vice versa) EBITDA Earnings before interest, tax, depreciation and amortisation EBITDA margin, % EBITDA / revenue EBIT Earnings before interest and tax EBIT margin,% EBIT / revenue Free Cash Flows Cash flows from operating activities, excluding financial items and cash flows from investing activities excluding acquisi- tions of subsidiaries and activities Capital expenditure (CAPEX) Purchase of intangible assets and property, plant and equipment for the year, excl. acquisitions of subsidiaries Days sales outstanding (DSO) Last three months of wholesale and third-party distribution revenue relative to trade receivables from these channels and not adjusted for VAT Return on invested capital (ROIC), % EBIT / invested capital incl. goodwill NIBD Loans, borrowings, capitalised leases and other liabilities relating to obligations to acquire non-controlling interests (current and non-current) less cash NIBD to EBITDA NIBD / EBITDA (rolling 12 months) Cash conversion incl. lease payments, % Free cash flows before acquisitions / EBIT ANNUAL REPORT MANAGEMENT STATEMENT The Board of Directors and the Executive Management have today discussed and approved the Annual Report of Pandora A/S for 2022. The Annual Report has been prepared in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial State- ments Act. It is our opinion that the consolidated financial statements and the Parent Company financial statements give a true and Peter A. Ruzicka Chair Marianne Kirkegaard Christian Frigast Deputy Chair Catherine Spindler Heine Dalsgaard Jan Zijderveld Birgitta Stymne Göransson Alexander Lacik Chief Executive Officer Anders Boyer Chief Financial Officer STATEMENT BY THE EXECUTIVE MANAGEMENT AND THE BOARD OF DIRECTORS fair view of the financial position of the Group and the Par- ent Company at 31 December 2022 and of the results of the Group's and the Parent Company's operations and cash flows for the financial year 1 January to 31 December 2022. Further, in our opinion, the Management's review gives a fair review of the development in the Group's and the Parent Company's activities and financial matters, results of oper- ations, cash flows and financial position as well as a descrip- tion of material risks and uncertainties that the Group and the Parent Company face. In our opinion, the Annual Report of Pandora A/S for the financial year 1 January to 31 December 2022 with the file name PAND-2022-12-31-en.zip has been prepared, in all material respects, in compliance with the ESEF Regulation. We recommend that the Annual Report be approved at the Annual General Meeting. Copenhagen, 8 February 2023 Executive Management Board of Directors INDEPENDENT AUDITOR’S REPORT ANNUAL REPORT Our opinion We have audited the consolidated financial statements and the Parent Company financial statements of Pandora A/S for the financial year 1 January to 31 December 2022, which comprise statement of comprehensive income, balance sheet, statement of changes in equity, statement of cash flows and notes, including accounting policies, for the Group and the Parent Company. The consolidated financial statements and the Parent Company financial statements are prepared in ac- cordance with International Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act. In our opinion, the consolidated financial statements and the Parent Company financial statements give a true and fair view of the financial position of the Group and the Parent Com- pany at 31 December 2022 and of the results of the Group’s and the Parent Company’s operations and cash flows for the financial year 1 January to 31 December 2022 in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act. Our opinion is consistent with our long-form audit report to the Audit Committee and the Board of Directors. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and additional requirements applicable in Denmark. Our responsibilities under those standards and requirements are further described in the “Auditor’s responsibilities for the audit of the financial statements” section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Inter - national Code of Ethics for Professional Accountants (IESBA Code) and the additional ethical requirements applicable in Denmark, and we have fulfilled our other ethical responsibil - ities in accordance with these requirements and the IESBA code. To the best of our knowledge, we have not provided any prohibited non-audit services as described in article 5(1) of Regulation (EU) no. 537/2014. Appointment of auditor Subsequent to Pandora A/S being listed on Nasdaq OMX Copenhagen, EY was appointed auditors of Pandora A/S on 8 April 2011. We have been reappointed annually at the General Meeting for a total consecutive period of 12 years up to and including the financial year 2022. Subsequent to a tender process, we were re-appointed at the Annual General Meeting on 11 March 2021. Key audit matters Key audit matters are those matters that, in our profession- al judgement, were of most significance in our audit of the financial statements for the financial year 2022. These mat- ters were addressed during our audit of the financial state- ments as a whole and in forming our opinion thereon. We do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled our responsibilities described in the “Au- ditor’s responsibilities for the audit of the financial state- ments” section, including in relation to the key audit matters below. Our audit included the design and performance of procedures to respond to our assessment of the risks of ma- terial misstatement of the financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the financial statements. INDEPENDENT AUDITOR’S REPORT To the shareholders of Pandora A/S INDEPENDENT AUDITOR’S REPORT ANNUAL REPORT Our procedures in relation to revenue recognition and measurement of expected sales returns included considering the Group’s accounting policies for revenue recognition, including those related to measurement of expected sales returns, and assessing compliance of policies with applicable accounting standards. We identified and assessed internal controls related to the timing of revenue recognition and measurement of expected sales returns. We tested the effectiveness of the Group’s internal controls in relation to calculation of expected sales returns and timing of revenue recognition. On a sample basis, we tested sales transactions taking place at either side of the balance sheet date as well as credit notes issued after the balance sheet date to assess whether those transactions were recognised in the correct period. We assessed the key assumptions applied by Management regarding expected sales returns based on our knowledge of the business and by reviewing the supporting documentation prepared by Management. As part of our audit we have utilised data analytics, analys - ing the relationship between revenue, trade receivables and cash receipts. Furthermore, we evaluated the disclosures provided by Management in the consolidated financial statements and the Parent Company financial statements to applicable accounting standards. Revenue recognition and measurement of expected sales returns Revenue is recognised when control of the goods has been transferred to the buyer and it is measured at fair value of the expected consid- eration to be received, less rebates, discounts, sales taxes, duties and expected sales returns. Revenue recognition and measurement of the related expected sales returns was a matter of most significance in our audit due to the inherent risk in the estimates and judgements which Management makes in the normal course of business as to timing of revenue and measurement of expected sales returns. Details on revenue recognition and expected sales returns are provided in notes 2.1 and 3.8 of the consolidated financial statements and in notes 2.1 and 3.5 of the Parent Company financial statements, to which we refer. Income tax recognition and provisions for uncertain tax positions The Group has extensive international operations and con- sequently, Management makes judgements and estimates in determining the recognition of income taxes, deferred taxes and provisions for uncertain tax positions. In Thailand, the Group is subject to Board of Investment (BOI) agreements, where many, but not all, types of net income are tax-exempt, and therefore, changes in profit allocation could significantly impact the Group’s consolidated tax expense. On this basis, income tax recognition and provisions for uncertain tax positions were a matter of most significance in our audit. Additional details on income taxes are provided in note 2.5 of the consolidated financial statements, to which we refer. Our procedures in relation to recognition of income taxes, de- ferred taxes and provisions for uncertain tax positions included assessing the Group’s processes for recording and assessment of provisions for uncertain tax positions. Our procedures also covered evaluating the assumptions applied by Management in determining the recognition and measurement of income taxes and deferred taxes while taking into account relevant correspondence with relevant tax authorities. Our own tax specialists performed an as- sessment of the Group’s recognition of income taxes and deferred taxes, including correspondence with relevant tax authorities to consider the completeness of the tax provisions. In addition, we assessed the assumptions applied, taking into consideration our own tax specialists’ knowledge and experience. Further, we evalu- ated the disclosures provided by Management in the consolidated financial statements and the Parent Company financial statements to applicable accounting standards. Inventory valuation Our procedures in relation to inventory valuation included assess- ing the Group’s processes related to inventory valuation including on a sample basis testing of direct costs related to raw materials, labour costs and attributable overhead costs incurred in the crafting process, recording of write-downs and understanding of the process for internal gain elimination. We assessed the basis for write-downs and performed analytical procedures to assess slow-moving items. We assessed the key assumptions applied by Management regarding items’ life-cycle status and expected value of the reusable raw materials based on our knowledge of the busi- ness, and on a sample basis tested the supporting documentation. Further, on a sample basis we tested the calculation of elimination of internal gain at Group level. Furthermore, we evaluated the disclosures provided by Management in the consolidated financial statements and the Parent Company financial statements to appli- cable accounting standards. DESCRIPTION OF MATTER CONSIDERATION OF THE MATTER IN THE AUDIT The Group carries inventory in the balance sheet at the lower of cost and net realisable value. Significant management judgements are required with regards to valuation of inventories due to the uncertainty associated with the estimate of slow-moving items and expected value of the reusable raw materials, as well as calcula - tions of elimination of internal gain. Given the level of management judgements and estimates, inventory valuation was a matter of most significance in our audit. Additional details on the valuation of inventories are provided in note 3.5 of the consolidated financial statements and in note 3.4 of the Parent Company financial state - ments, to which we refer. INDEPENDENT AUDITOR’S REPORTANNUAL REPORT Statement on the Management’s review Management is responsible for the Management’s review. Our opinion on the financial statements does not cover the Management’s review, and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the Management’s review and, in doing so, consider whether the Management’s review is materially inconsistent with the financial statements or our knowledge obtained during the audit, or otherwise appears to be materially misstated. Moreover, it is our responsibility to consider whether the Management’s review provides the information required under the Danish Financial Statements Act. Based on the work we have performed, we conclude that the Management’s review is in accordance with the financial state - ments and has been prepared in accordance with the require- ments of the Danish Financial Statements Act. We did not identify any material misstatement of the Management’s review. Management’s responsibilities for the financial statements Management is responsible for the preparation of consol- idated financial statements and Parent Company financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act and for such internal control as Management determines is necessary to enable the preparation of finan- cial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, Management is re- sponsible for assessing the Group’s and the Parent Com- pany’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting in preparing the financial statements unless Management either intends to liquidate the Group or the Parent Company or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance as to whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Rea- sonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and additional requirements applicable in Denmark will always detect a material misstatement when it exists. Mis- statements can arise from fraud or error and are considered material if, individually or in the aggregate, they could rea- sonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit conducted in accordance with ISAs and additional requirements applicable in Denmark, we exercise professional judgement and maintain professional scepti- cism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks and obtain audit evidence that is sufficient and ap- propriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepre- sentations or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appro- priate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and the Parent Company’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and relat- ed disclosures made by Management. • Conclude on the appropriateness of Management’s use of the going concern basis of accounting in preparing the financial statements and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s and the Parent Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial state- ments or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group and the Parent Company to cease to continue as a going concern. • Evaluate the overall presentation, structure and contents of the financial statements, including the note disclosures, and whether the financial statements represent the under- lying transactions and events in a manner that gives a true and fair view. INDEPENDENT AUDITOR’S REPORT ANNUAL REPORT • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We re- main solely responsible for our audit opinion. We communicate with those charged with governance re- garding, among other matters, the planned scope and tim- ing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a state- ment that we have complied with relevant ethical require- ments regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applica- ble, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial state- ments and the Parent Company financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter. Report on compliance with the ESEF Regulation As part of our audit of the consolidated financial statements and Parent Company financial statements of Pandora A/S we performed procedures to express an opinion on whether the Annual Report of Pandora A/S for the financial year 1 January to 31 December 2022 with the file name PAND-2022-12- 31-en.zip is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format (ESEF Regulation) which includes requirements related to the preparation of the Annual Report in XHTML format and iXBRL tagging of the consolidated financial statements, including notes. Management is responsible for preparing an Annual Report that complies with the ESEF Regulation. This responsibility includes: • The preparing of the Annual Report in XHTML format; • The selection and application of appropriate iXBRL tags, including extensions to the ESEF taxonomy and the anchor- ing thereof to elements in the taxonomy, for all financial information required to be tagged using judgement where necessary; • Ensuring consistency between iXBRL tagged data and the consolidated financial statements presented in human readable format; and • For such internal control as Management determines nec- essary to enable the preparation of an Annual Report that is compliant with the ESEF Regulation. Our responsibility is to obtain reasonable assurance on whether the Annual Report is prepared, in all material re- spects, in compliance with the ESEF Regulation based on the evidence we have obtained, and to issue a report that includes our opinion. The nature, timing and extent of proce- Torben Bender State Authorised Public Accountant mne21332 Jens Thordahl Nøhr State Authorised Public Accountant mne32212 Copenhagen, 8 February 2023 EY Godkendt Revisionspartnerselskab CVR no. 30 70 02 28 dures selected depend on the auditor’s judgement, including the assessment of the risks of material departures from the requirements set out in the ESEF Regulation, whether due to fraud or error. The procedures include: • Testing whether the Annual Report is prepared in XHTML format; • Obtaining an understanding of the company’s iXBRL tagging process and of internal control over the tagging process; • Evaluating the completeness of the iXBRL tagging of the consolidated financial statements, including notes; • Evaluating the appropriateness of the company’s use of iXBRL elements selected from the ESEF taxonomy and the creation of extension elements where no suitable element in the ESEF taxonomy has been identified; • Evaluating the use of anchoring of extension elements to elements in the ESEF taxonomy; and • Reconciling the iXBRL tagged data with the audited consolidated financial statements. In our opinion, the Annual Report of Pandora A/S for the financial year 1 January to 31 December 2022 with the file name PAND-2022-12-31-en.zip is prepared, in all material respects, in compliance with the ESEF Regulation. ANNUAL REPORT 2022 PARENT COMPANY PARENT COMPANY PANDORA A/S FINANCIAL REVIEW The Parent Company operates as the principal of Pandora, and all inventories are consequently traded from the crafting facilities in Thailand to wholesalers and sales subsidiaries through the Parent Company. Similarly, all inventories are returned from subsidiaries through the Parent Company for the purpose of remelting any excess inventory. Gross profit is therefore impacted by realised losses from remelting activities and unrealised losses from inventory write-downs. Fluctuations in market prices of silver and gold also have a material impact on gross profit. Apart from the sale of jewellery, the Parent Company maintains and develops Group functions, including administration, distribution, business development, retail set-up, product development and risk management, which all determine the activity level in the Parent Company. The risk management activities carried out by the Parent Company include hedging the Group’s risk relating to commodity prices and exchange rates. Revenue was DKK 16.7 billion (2021: DKK 13.6 billion), while net profit was DKK 12.7 billion (2021: DKK 5.4 billion). The increase in net profit was mainly related to the increasing activity and gain from intra-group share transfer. In 2022, Pandora A/S received dividends from subsidiaries of DKK 2.4 billion (2021: DKK 2.8 billion). At the end of 2022, equity amounted to DKK 15.6 billion (2021: DKK 7.9 billion). The increase was primarily driven by profit for the year partly offset by paid dividend of DKK 16 per share, corresponding to DKK 1.5 billion (2021: DKK 1.5 billion). Free cash flows including lease payments ended at DKK 8.2 billion (2021: DKK 3.0 billion) driven mainly by a strong result for the year. Other events and impacts in 2022: • In 2022, Pandora A/S continued its existing share buyback programmes and launched a new share buyback programme under which Pandora expects to buy back own shares up to a maximum value of DKK 3.3 billion. A total of 6,595,620 treasury shares were acquired during the year, corresponding to a total purchase price of DKK 3.6 billion. • In 2022, Pandora initiated the expansion of the Group’s crafting capacity in Vietnam to support the company’s long-term growth. By diversifying its geographical footprint, Pandora will become more resilient to potential supply disruptions as well as strengthen its business continuity plans. As a result, Pandora decided to reorganise its crafting activities into a separate crafting sub-group by establishing a new intermediate holding company, Pandora Production Holding A/S, which will oversee the crafting activities across the Group’s crafting facilities. Consequently, Pandora A/S transferred its controlling equity investment in Pandora Production Co. Ltd. to Pandora Production Holding A/S as a contribution in-kind against shares in Pandora Production Holding A/S. The intra-group transaction was carried out at fair value, which resulted in a gain of DKK 5.9 billion and is described in more detail in note 1.1 Principal accounting policies and note 3.3 Investments in subsidiaries and business combinations, including the significant assumptions in measuring fair value. DKK billion revenue 2022 DKK billion net prot 2022 16.7 12.7 ANNUAL REPORT 2022 PARENT COMPANY INCOME STATEMENT DKK million Notes 2022 2021 Revenue 2.1 16,686 13,583 Cost of sales -7,226 -6,440 Gross profit 9,460 7,143 Sales, distribution and marketing expenses 2.2, 3.1 -2,295 -2,082 Administrative expenses 2.2, 3.1 -1,261 -1,259 Operating profit 5,904 3,802 Gain from intra-group share transfer 3.3 5,917 - Dividends from subsidiaries 3.3 2,437 2,848 Impairment of investments in subsidiaries 3.3 -60 -135 Finance income 4.5 652 222 Finance costs 4.5 -799 -509 Profit before tax 14,051 6,228 Income tax expense 2.4 -1,380 -808 Net profit for the year 12,671 5,420 STATEMENT OF COMPREHENSIVE INCOME DKK million Notes 2022 2021 Net profit for the year 12,671 5,420 Other comprehensive income: Items that may be reclassified to profit/loss for the year Commodity hedging instruments: - Realised in net cost of sales -1 -4 - Realised in net financials -2 -4 - Fair value adjustments -4 8 Foreign exchange hedging instruments: - Realised in net financials 110 249 - Fair value adjustments -61 -287 Tax on other comprehensive income, hedging instruments, income/expense 2.4 -9 8 Other comprehensive income, net of tax 33 -29 Total comprehensive income for the year 12,705 5,391 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER ANNUAL REPORT 2022 PARENT COMPANY ASSETS DKK million Notes 2022 2021 Intangible assets 3.1 3,705 3,573 Property, plant and equipment 23 31 Right-of-use assets 3.2 99 104 Investments in subsidiaries 3.3 11,140 5,257 Loans to subsidiaries 5.2 5,035 878 Other financial assets 26 12 Total non-current assets 20,028 9,855 Inventories 3.4 1,023 687 Trade receivables 14 13 Receivables from subsidiaries 5.2 3,690 6,829 Right-of-return assets 3.5 258 216 Derivative financial instruments 4.3, 4.4 231 69 Income tax receivable 37 27 Other receivables 403 116 Cash 37 142 Total current assets 5,692 8,099 Total assets 25,721 17,953 EQUITY AND LIABILITIES DKK million Notes 2022 2021 Share capital 4.1 96 100 Treasury shares -3,320 -3,416 Reserves 329 216 Dividend proposed 1,430 1,516 Retained earnings 17,051 9,462 Total equity 15,586 7,877 Provisions 52 51 Loans and borrowings 4.2, 4.4 1,090 1,124 Deferred tax liabilities 2.4 163 93 Total non-current liabilities 1,306 1,269 Refund liabilities 3.5 1,941 1,674 Loans and borrowings 4.2, 4.4 3,506 298 Derivative financial instruments 4.3, 4.4 74 209 Payables to subsidiaries 4.4, 5.2 1,455 4,937 Trade payables 3.6, 4.4 786 831 Income tax payable 580 488 Other payables 4.4 486 371 Total current liabilities 8,829 8,807 Total liabilities 10,135 10,076 Total equity and liabilities 25,721 17,953 BALANCE SHEET AT 31 DECEMBER ANNUAL REPORT 2022 PARENT COMPANY DKK million Notes Share capital Treasury shares Hedging reserve Other reserves 1 Dividend proposed Retained earnings Total equity 2022 Equity at 1 January 100 -3,416 -20 236 1,516 9,462 7,877 Net profit for the year - - - - - 12,671 12,671 Other comprehensive income, net of tax - - 33 - - - 33 Total comprehensive income for the year - - 33 - - 12,671 12,705 Transfers - - - 80 - -80 - Share-based payments 2.3 - 199 - - - -93 106 Purchase of treasury shares 4.1 - -3,588 - - - - -3,588 Cancellation of treasury shares 4.1 -5 3,486 - - - -3,481 - Dividend paid - - - - -1,516 2 -1,514 Dividend proposed - - - - 1,430 -1,430 - Equity at 31 December 96 -3,320 13 316 1,430 17,051 15,586 The Board of Directors will propose at the Annual General Meeting that a dividend of DKK 16 per share, corresponding to DKK 1.4 billion (2021: DKK 16 per share, corresponding to DKK 1.5 billion), be distributed for 2022. In 2021, an extraordinary dividend of DKK 15 per share was paid, corresponding to DKK 1.5 billion. In 2022, Pandora continued the share buyback programmes, which resulted in repurchases of 6,595,620 treasury shares, corresponding to DKK 3.6 billion (2021: 3,943,797 treasury shares, corresponding to DKK 3.3 billion). For further shareholder information on dividend payments, see note 4.1 Share capital to the consolidated financial statements. STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 Equity at 1 January 100 -93 9 198 - 6,830 7,044 Net profit for the year - - - - - 5,420 5,420 Other comprehensive income, net of tax - - -29 - - - -29 Total comprehensive income for the year - - -29 - - 5,420 5,391 Transfers - - - 38 - -38 - Share-based payments 2.3 - 1 - - - 202 203 Effect of merger with subsidiary 3.3 - - - - - 45 45 Purchase of treasury shares 4.1 - -3,325 - - - - -3,325 Dividend paid - - - - -1,481 2 -1,479 Dividend proposed - - - - 2,997 -2,997 - Equity at 31 December 100 -3,416 -20 236 1,516 9,462 7,877 ¹ Other reserves include non-distributable reserves under Danish legislation relating to the capitalisation of internal development projects. ANNUAL REPORT 2022 PARENT COMPANY DKK million Notes 2022 2021 Operating profit 5,904 3,802 Depreciation and amortisation 238 286 Share-based payments 2.3 58 106 Change in inventories -335 -268 Change in intercompany receivables/payables 3,815 -1,629 Change in receivables -344 171 Change in payables and other liabilities 269 97 Other non-cash adjustments 4.6 -408 384 Finance income received 239 31 Finance costs paid -295 -369 Income tax paid -1,219 -513 Cash flows from operating activities, net 7,922 2,098 Acquisitions of subsidiaries and activities, net of cash acquired 3.3 3 138 Purchase of intangible assets -325 -253 Purchase of property, plant and equipment -3 - Change in other financial assets -1 - Dividends received 1 575 858 Cash flows from investing activities, net 249 743 Dividend paid -1,514 -1,479 Purchase of treasury shares 4.1 -3,527 -3,325 Proceeds from loans and borrowings 4.2 4,939 1,315 Repayment of loans and borrowings 4.2 -8,319 -1,412 Repayment of lease commitments 4.2 -28 -26 Cash flows from financing activities, net -8,449 -4,927 Net increase/decrease in cash -277 -2,086 DKK million Notes 2022 2021 Cash and cash equivalents at 1 January 142 2,228 Net increase/decrease in cash -277 -2,086 Cash and cash equivalents at 31 December -135 142 Cash balances 37 142 Overdrafts -172 - Cash and cash equivalents at 31 December -135 142 Cash flows from operating activities, net 7,922 2,098 - Finance income received -239 -31 - Finance costs paid 295 369 Cash flows from investing activities, net 249 743 - Acquisition of subsidiaries and activities, net of cash acquired -3 -138 Free cash flows 8,225 3,041 Unutilised committed credit facilities 2 6,693 6,023 1 Non-cash dividends received amounted to DKK 1.9 billion (2021: DKK 2.0 billion). 2 See note 4.4 Financial risks to the consolidated financial statements. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER The above cannot be derived directly from the income statement and the balance sheet. ANNUAL REPORT 2022 PARENT COMPANY Notes for the Parent Company The notes are grouped into five sections related to key figures. The notes contain the relevant financial information as well as a description of accounting policies applied for the topics of the individual notes. For some notes, reference is made to notes in the consolidated financial statements. SECTION 1 BASIS OF PREPARATION 1.1 Principal accounting policies 103 1.2 New accounting policies and disclosures 103 1.3 Management’s judgements and estimates under IFRS 103 SECTION 2 RESULTS FOR THE YEAR 2.1 Revenue from contracts with customers 104 2.2 Sta costs 104 2.3 Share-based payments 104 2.4 Taxation 104 SECTION 3 INVESTED CAPITAL AND WORKING CAPITAL ITEMS 3.1 Intangible assets 105 3.2 Leases 106 3.3 Investments in subsidiaries and business combinations 106 3.4 Inventories 107 3.5 Contract assets and liabilities 107 3.6 Trade payables 107 CONTENTS SECTION 4 CAPITAL STRUCTURE AND NET FINANCIALS 4.1 Share capital 107 4.2 Liabilities from nancing activities 108 4.3 Derivative nancial instruments 108 4.4 Financial risks 108 4.5 Net nancials 109 4.6 Other non-cash adjustments 109 SECTION 5 OTHER DISCLOSURES 5.1 Contingent assets and liabilities 109 5.2 Related parties 110 5.3 Fees to independent auditor 110 ANNUAL REPORT 2022 PARENT COMPANY The Parent Company financial statements show the finan- cial position, results and cash flows of Pandora A/S on a non-consolidated basis for the financial year 1 January to 31 December 2022. Parent Company financial statements The accounting policies of the Parent Company are un- changed from last year and identical to the accounting policies in Pandora’s consolidated financial statements, with the following exceptions: Foreign currency translation Foreign exchange adjustments of balances accounted for as part of the total net investment in entities that have a func- tional currency other than DKK are recognised in profit for the year as net financials in the Parent Company financial statements. Derivative financial instruments The effective portion of realised and unrealised gains and losses on all commodity hedging instruments is reconised as cost of goods sold, while the ineffective portion is rec- ognised in net financials. Derivative financial instruments are treated as economic hedging if the hedge accounting requirements in IFRS 9 are not met. Dividends from subsidiaries Dividends from investments in subsidiaries are recognised in the financial year in which they are declared. NOTE 1.1 PRINCIPAL ACCOUNTING POLICIES NOTE 1.2 NEW ACCOUNTING POLICIES AND DISCLOSURES The description in note 1.2 New accounting policies and disclosures to the consolidated financial statements regarding new standards issued effective for the Annual Report for 2022 fully covers the Parent Company as well. Investments in subsidiaries Investments in subsidiaries are measured at cost. Impair- ment testing is carried out if there is any indication of impairment, as described in Pandora's consolidated financial statements. The carrying amount is written down to the recoverable amount whenever the carrying amount exceeds the recoverable amount. If the Parent Company has a legal or constructive obligation to cover a deficit in subsidiaries, a provision for this is recognised. Intra-group restructuring Transfer of shares for shares Pandora A/S accounts for transactions in which an investment in a subsidiary is acquired in exchange for shares in subsidiar- ies, at the fair value of the shares transferred. As of the date of the transfer of the shares, the investment in the subsidiary is disposed of at fair value and the gain/loss is recognised in the income statement. Mergers Mergers are accounted for at booked value based on the consolidated accounts. As of the date of the transfer of the business, the investment in the subsidiary is replaced by the consolidated carrying amounts of underlying assets and liabilities. The difference between the consolidated carrying amounts and investment in subsidiary is recognised in equity. Transfer of businesses without consideration are reflected in the financial statements of the Parent Company from the date of transfer, hence comparative information for the transferred business has not been adjusted. NOTE 1.3 MANAGEMENT’S JUDGEMENTS AND ESTIMATES UNDER IFRS SIGNIFICANT ACCOUNTING ESTIMATES In the process of preparing the Parent Company financial statements, a number of accounting es- timates and judgements have been made that affect assets and liabilities at the reporting date and income and expenses for the reporting period. Management regularly reassesses these estimates and judgements, partly on the basis of historical experience and a number of other factors in the given circumstances, see note 1.3 Management’s judgements and estimates under IFRS to the consolidated financial statements. For the significant accounting estimates related to the impairment of subsidiaries see note 3.3 Investments in subsidiaries and business combinations and for the return and warranty provision see note 2.1 Revenue from contracts with customers and note 3.5 Contract assets and liabilities. Profit for the year was significantly impacted by gain from intra-group transfer of shares. Significant accounting estimates are described in note 3.3 Investments in subsidiaries and business combinations. ANNUAL REPORT 2022 PARENT COMPANY REVENUE BY SALES CHANNEL DKK million 2022 2021 Third-party distribution 16,686 13,583 Total revenue 16,686 13,583 REVENUE BY SEGMENTS DKK million 2022 2021 Moments incl. Collabs 12,117 9,496 - Moments 10,404 8,504 - Collabs 1,714 992 Style 4,569 4,087 - Timeless 2,540 2,266 - Signature 1,136 1,183 - ME 575 567 - Diamonds by Pandora 318 70 Total revenue 16,686 13,583 Goods transferred at a point in time 16,684 13,580 Services transferred over time 2 4 Total revenue 16,686 13,583 NOTE 2.1 REVENUE FROM CONTRACTS WITH CUSTOMERS ACCOUNTING POLICIES Revenue is recognised when control of the products has been transferred to the subsidiaries. Change of control of the products occurs when they have been delivered to the subsidiary and no further obligation exists that can affect the transfer of control. The Parent Company provides return rights to subsidiaries, which cover products received in subsidiaries for both returns and warranty, based on historical return rates and current return liabilities in subsidiaries. DKK million 2022 2021 Wages and salaries 850 760 Pensions 64 54 Share-based payments 58 106 Social security costs 16 7 Other staff costs 103 65 Total staff costs 1,090 993 Staff costs have been recognised in the income statement: Sales, distribution and marketing expenses 530 497 Administrative expenses 561 496 Total staff costs 1,090 993 Average number of full-time employees during the year 898 797 The performance share programmes described in note 2.4 Share-based payments to the consolidated financial state- ments are issued by Pandora A/S. The value of shares granted to employees in the Parent Company’s subsidiaries is recognised in investments in subsidiaries. As described in note 2.4 Share- based payments to the consolidated financial statements, the costs related to share-based payments were DKK 87 million (2021: DKK 166 million), of which DKK 58 million relates to Pandora A/S (2021: DKK 106 million). NOTE 2.2 STAFF COSTS NOTE 2.3 SHAREBASED PAYMENTS NOTE 2.4 TAXATION ACCOUNTING POLICIES Income tax Pandora A/S is taxed jointly with its Danish subsidiaries. These subsidiaries are included in the joint taxation from the date they are recognised in the consolidated financial statements and up to the date on which they are no longer consolidated. The jointly taxed Danish companies are taxed under the on-account tax scheme. Further information is provided in note 2.5 Taxation to the consolidated financial statements. Revenue mainly comprises sales of jewellery to subsidiaries carrying out the distribution. All sales are thus intra-group sales. Contracts are generally five-year distribution con- tracts. Key management personnel at Pandora A/S represent the same individuals as key management personnel of the Pandora Group. For information regarding remuneration of key management personnel of Pandora A/S, see note 2.3 Staff costs to the consolidated financial statements. ANNUAL REPORT 2022 PARENT COMPANY INCOME TAX EXPENSE DKK million 2022 2021 Current income tax charge for the year 1 1,291 1,009 Change in deferred tax for the year 83 -180 Adjustment to current tax for prior years 9 -21 Adjustment to deferred tax for prior years -3 - Total income tax expense 1,380 808 Deferred tax on other comprehensive income 9 -8 Tax on other comprehensive income 9 -8 1 Withholding taxes are included in current income tax charge for the year. RECONCILIATION OF EFFECTIVE TAX RATE AND TAX 2022 2021 % DKK million % DKK million Profit before tax 14,051 6,228 Corporate tax rate in Denmark, 22% 22.0% 3,091 22.0% 1,370 Non-taxable dividend income -3.9% -536 -10.1% -627 Non-deductIble impairment expenses 0.1% 13 0.5% 30 Gain from intra-group share transfer -9.3% -1,302 - - Non-deductible expenses and non-taxable income 0.5% 67 0.1% 3 Other adjustments incl. adjustment to tax for prior years 0.1% 9 -0.2% -14 Withholding taxes 0.3% 38 0.7% 46 Effective income tax rate/income tax expense 9.8% 1,380 13.0% 808 DEFERRED TAX DKK million 2022 2021 Deferred tax at 1 January -93 -318 Recognised in the income statement -80 180 Recognised in other comprehensive income -9 8 Recognised in equity, share-based payments 19 37 Deferred tax at 31 December -163 -93 Deferred tax liabilities -163 -93 Deferred tax, net -163 -93 BREAKDOWN OF DEFERRED TAX DKK million 2022 2021 Intangible assets -605 -552 Property, plant and equipment 9 10 Inventories 25 6 Provisions 380 329 Other assets and liabilities 28 114 Deferred tax, net -163 -93 NOTE 2.4 TAXATION CONTINUED NOTE 3.1 INTANGIBLE ASSETS DKK million Goodwill 1 Brand 1 Distri- bution Other intangible assets Total Cost at 1 January 1,139 1,044 1,541 1,273 4,997 Additions - - - 337 337 Disposals - - - -2 -2 Cost at 31 December 1,139 1,044 1,541 1,608 5,332 Amortisation and impairment losses at 1 January - - 457 967 1,424 Amortisation for the year - - 30 173 203 Amortisation and impairment losses at 31 December - - 487 1,140 1,627 Carrying amount at 31 December 1,139 1,044 1,054 467 3,705 Cost at 1 January 549 1,044 1,541 1,011 4,144 Additions from merger 590 - - - 590 Additions - - - 270 270 Disposals - - - -8 -8 Cost at 31 December 1,139 1,044 1,541 1,273 4,997 Amortisation and impairment losses at 1 January - - 427 755 1,182 Amortisation for the year - - 30 130 160 Impairment loss for the year 2 - - - 82 82 Amortisation and impairment losses at 31 December - - 457 967 1,424 Carrying amount at 31 December 1,139 1,044 1,084 306 3,573 1 The impairment test did not identify any need for impairment losses to be recognised, and no probable change in any key assump- tions that would cause the carrying amount to exceed the recoverable amounts. 2 The impairment loss of DKK 82 million in 2021 relates to write-down of software applications. The loss has mainly been recognised as sales, distribution and marketing expenses in the income statement. ANNUAL REPORT 2022 PARENT COMPANY LEASE LIABILITIES DKK million 2022 2021 Non-current 74 83 Current 26 24 Total lease liabilities 100 107 Additions of right-of-use assets were DKK 20 million in 2022 (2021: DKK 3 million). NOTE 3.2 LEASES RIGHTOFUSE ASSETS DKK million 2022 2021 Property 94 98 Cars 5 6 Total right-of-use assets 99 104 Amounts recognised in the balance sheet: DKK million 2022 2021 Sales, distribution and marketing expenses 93 125 Administrative expenses 110 117 Total 203 242 NOTE 3.3 INVESTMENTS IN SUBSIDIARIES AND BUSINESS COMBINATIONS INVESTMENTS IN SUBSIDIARIES DKK million 2022 2021 Cost at 1 January 5,499 6,457 Additions 1 7,120 4 Disposals 2 -1,202 -1,022 Additions relating to share-based payments 25 60 Cost at 31 December 11,442 5,499 Impairment at 1 January 242 107 Impairment for the year 60 135 Impairment at 31 December 302 242 Carrying amount at 31 December 11,140 5,257 1 In 2022, mainly relating to the investment into Pandora Production Holding A/S of DKK 7,114 million. 2 In 2022, mainly relating to the intra-group share transfer of Pandora Production Co. Ltd., Thailand, of DKK 1,197 million. In 2021, DKK 899 million related to the merger of Pandora Jewelry Central Western Europe A/S into Pandora A/S, and DKK 114 million relat- ed to the capital reduction in Pandora Jewelry Mexico. Amortisation and impairment losses have been recognised in the income statement as follows: Depreciation on right-of-use assets charged to the income statement for the period was DKK 26 million (2021: DKK 26 million). Interest expense for the period was DKK 1 million (2021: DKK 1 million). Total cash outflows relating to leases was DKK 29 million in 2022 (2021: DKK 26 million). NOTE 3.1 INTANGIBLE ASSETS CONTINUED Lease liabilities are recognised in loans and borrowings. Dividend received In 2022, Pandora A/S received a total of DKK 2.4 billion in dividends, mainly from subsidiaries in Thailand (DKK 1.1 billion), the UK (DKK 0.5 billion), and the US (DKK 0.3 billion). In 2021, Pandora A/S received a total of DKK 2.8 billion in div- idends, mainly from subsidiaries in Thailand (DKK 0.9 billion), the US (DKK 0.7 billion), the UK (DKK 0.4 billion) and Spain (DKK 0.3 billion). Annual impairment test As at 31 December 2022, the cost price of investments in subsidiaries was assessed for impairment and Pandora identified an indication of impairment. The impairment test identified impairment charges for 2022 amounting to DKK 60 million (2021: DKK 135 million). The impairment was related to investment in the subsidiary in South Africa. The impairment test was based on a three-year forecast and an applied market-specific discount rate in the range of 18% to 22%. The growth rate applied was an estimate of the expected growth for the market in the terminal period, including the expected average inflation. Transfer of Pandora Production Co. Ltd to Pandora Production Holding A/S In 2022, Pandora A/S made an intra-group restructur- ing whereby its controlling equity investment in Pandora Production Co. Ltd., Thailand, was transferred as a contri- bution-in-kind to a newly established intermediate holding company, Pandora Production Holding A/S. ANNUAL REPORT 2022 PARENT COMPANY DKK million 2022 2021 Finished goods 868 588 Point-of-sale materials 155 99 Total inventories at 31 December 1,023 687 Inventory write-downs at 1 January 253 259 Write-downs during the year 163 113 Utilised in the year -142 -119 Inventory write-downs at 31 December 274 253 NOTE 3.4 INVENTORIES Inventory write-downs are recognised in cost of sales, DKK 152 million (2021: DKK 99 million), and operating expenses, DKK 11 million (2021: DKK 14 million). DKK million 2022 2021 Contract assets Receivables from sale of products 1,046 5,430 Right-of-return assets 258 216 Total contract assets 1,304 5,646 Contract liabilities Refund liabilities 1,941 1,674 Total contract liabilities 1,941 1,674 Refund liabilities The Parent Company recognises a refund liability related to return rights provided to subsidiaries. A corresponding right- of-return asset is also recognised as part of contract assets. The value of the right-of-return asset is determined by how many of the returned products are expected to be sold. Remaining products are written down to remelt value. NOTE 3.5 CONTRACT ASSETS AND LIABILITIES NOTE 3.6 TRADE PAYABLES Pandora generally accepts that vendors sell off their receivables arising from the sale of goods and services to Pandora to a third party. Pandora has established a supply chain financing programme where vendors can sell off their receivables from Pandora on attractive terms, based on invoices approved by Pandora, but at the bank's sole discretion. Pandora is not directly or indirectly a party to these agreements. The amounts payable to suppliers included in the supply chain financing programme are classified as trade payables in the balance sheet as well as in the statement of cash flows (working capital within cash flows from operations) and amounted to DKK 54 million at 31 December 2022 (2021: DKK 24 million). See note 4.1 Share capital to the consolidated financial statements. NOTE 4.1 SHARE CAPITAL The commercial and strategic rationale is explained in the Management’s review. For those rea- sons, and the fact that the new holding structure impacts future cash flows for the Parent Com- pany, it is management’s judgement that the transaction should be accounted for at fair value. The intra-group transfer was carried out at the fair value of Pandora Production Co. Ltd, which amounted to DKK 7.1 billion using a generally accepted valuation method in the form of a re- turn-based discounted cash flow valuation model. A gain of DKK 5.9 billion is recognised within Gain from intra-group share transfer in the income statement. The transaction is non-cash and there is no impact on the statement of cash flows. Input and assumptions applied in the discounted cash flow valuation model comprise level 3 inputs only, as there are no quoted prices in active markets for an identical asset or other observable market inputs. The valuation is based on internal financial forecasts for the period 2023 to 2027, reflecting the macroeconomic uncertainties as well as the cannibalisation effect from the new crafting facility in Vietnam. In addition, the valuation is affected by the Group’s transfer pricing setup, a terminal growth rate of 1.6% and an applied market specific discount rate post tax of 10%. As an illustration of the sensitivity of the assumptions, a 0.5 percentage points increase/de- crease in the discount rate would affect the valuation by approximately +/- DKK 0.4 billion, and a 1.0 percentage point increase/decrease in the forecasted EBIT margin would affect the valuation by approximately +/- DKK 0.6 billion. Merger with Pandora Jewelry Central Western Europe A/S in 2021 In 2021, Pandora A/S merged with the 100%-owned subsidiary Pandora Jewelry Central Western Europe A/S, with Pandora A/S as the surviving company. Assets obtained through the merger consisted of goodwill (DKK 590 million), cash (DKK 17 million), other current assets (DKK 1,176 million) and total liabilities (DKK 839 million). NOTE 3.3 INVESTMENTS IN SUBSIDIARIES AND BUSINESS COMBINATIONS CONTINUED ANNUAL REPORT 2022 PARENT COMPANY NOTE 4.2 LIABILITIES FROM FINANCING ACTIVITIES TOTAL LIABILITIES FROM FINANCING ACTIVITIES DKK million Financial liabilities 1 January Cash flows, net 1 New leases Other 2 Financial liabilities 31 December Non-current borrowings 1,041 74 - -99 1,017 Non-current lease liabilities 83 - 13 -23 74 Current borrowings 274 2,935 - 272 3,481 Current lease liabilities 24 -28 7 23 26 Total liabilities from financing activities 1,423 2,981 20 173 4,597 Non-current borrowings - 1,315 - -273 1,041 Non-current lease liabilities 105 - 2 -23 83 Current borrowings 2,976 -2,975 - 273 274 Current lease liabilities 27 -26 1 22 24 Total liabilities from financing activities 3,107 -1,687 3 -1 1,423 1 Cash flows from loans and borrowings in the statement of cash flows include internal loan movements. The effect was an outflow of DKK 6.4 billion in 2022 (2021: inflow of DKK 1.6 billion). 2 Includes the effect of the reclassification of the non-current portion of interest-bearing loans and borrowings to current due to the passage of time. Further, it includes the effect of accrued but not yet paid interest on interest-bearing loans and borrowings and upfront prepayment of lease liabilities. The Parent Company classifies interest paid as cash flows from operating activities. As a consequence of its operations, investments and financ- ing, Pandora A/S is exposed to a number of financial risks that are monitored and managed by Pandora's Group Treasury. The Parent Company’s financial risks and the management of these are in all material respects identical to the disclosures LIABILITIES FALL DUE AS FOLLOWS DKK million Within 1 year Within 1 and 5 years After more than 5 years Total 2022 Non-derivatives Loans and borrowings 3,588 813 253 4,654 Lease liabilities 27 75 - 102 Payables to subsidiaries 1,455 - - 1,455 Trade payables 786 - - 786 Other payables 77 - - 77 Derivatives Derivative financial instruments 74 - - 74 Total at 31 December 6,007 888 253 7,148 2021 Non-derivatives Loans and borrowings 274 1,050 - 1,324 Lease liabilities 25 75 9 109 Payables to subsidiaries 4,937 - - 4,937 Trade payables 831 - - 831 Other payables 112 - - 112 Derivatives Derivative financial instruments 209 - - 209 Total at 31 December 6,388 1,125 9 7,522 NOTE 4.4 FINANCIAL RISKS NOTE 4.3 DERIVATIVE FINANCIAL INSTRUMENTS All hedging is carried out by the Parent Company’s Treasury department. As all instruments are also recorded in the Parent Company, all effects from financial instruments are shown in note 4.5 Derivative financial instruments to the consolidated financial statements. made in note 4.4 Financial risks to the con solidated finan- cial statements, unless otherwise stated below. Credit risk The Parent Company’s credit risk includes the risk related to receivables from subsidiaries. Contractual maturities of financial liabilities The table below provides a breakdown of Pandora A/S’ financial liabilities similar to note 4.4 Financial risks to the consolidated financial statements. ANNUAL REPORT 2022 PARENT COMPANY FINANCE INCOME DKK million 2022 2021 Reclassied from equity hedge reserves 19 53 Total finance income from derivative financial instruments 19 53 Finance income from loans and receivables measured at amortised cost: Interest income from subsidiaries 300 31 Foreign exchange gains 330 138 Interest income, bank 2 - Total finance income from loans and receivables 633 169 Total finance income 652 222 FINANCE COSTS DKK million 2022 2021 Reclassified from equity hedge reserves 127 298 Total finance costs from derivative financial instruments 127 298 Finance costs from financial liabilities measured at amortised cost: Interest costs to subsidiaries 2 11 Foreign exchange losses 524 120 Interest on loans and borrowings 100 34 Interest on lease liabilities 1 1 Other finance costs 46 45 Total finance costs from loans and borrowings 673 211 Total finance costs 799 509 NOTE 4.5 NET FINANCIALS NOTE 4.6 OTHER NONCASH ADJUSTMENTS OTHER NONCASH ADJUSTMENTS DKK million 2022 2021 Effects from exchange rate adjustments -146 5 Effects from derivative financial instruments -255 380 Other, incl. gains/losses from sale of property, plant and equipment -7 - Total other non-cash adjustments -408 384 Litigation Pandora is a party to various legal proceedings with current business partners, authorities and other third parties, related to copyright, marketing conduct and pricing. None of these proceedings is expected to have a material effect on Pando- ra A/S’ financial position or future earnings. Contractual obligations Pandora A/S has entered into a number of long-term pur- chase, sales and supply contracts in the course of the com- pany’s ordinary business. Contractual obligations amounted NOTE 5.1 CONTINGENT ASSETS AND LIABILITIES to DKK 794 million at 31 December 2022 (2021: DKK 491 million) and relate mainly to commercial collaborations and IT contracts. Apart from the liabilities already recognised in the balance sheet, the company does not expect to incur any significant financial losses as a result of these contracts. Other contingent liabilities The Parent Company has issued guarantees totalling DKK 270 million at 31 December 2022 in favour of certain subsidiaries related to securing local credit lines and rental agreements (2021: DKK 508 million). The Parent Company is jointly taxed with Danish subsidiaries. The company is jointly and severally liable with other jointly taxed Danish companies within the Group for income tax and withholding taxes due on or after 1 July 2012 in the joint taxation. Contingent assets See note 5.1 Contingent assets and liabilities to the con- solidated financial statements. ANNUAL REPORT 2022 PARENT COMPANY TRANSACTIONS ENTERED INTO WITH RELATED PARTIES DKK million 2022 2021 Income statement: Sales to subsidiaries 16,679 13,577 Purchases from subsidiaries -6,739 -5,977 Recharges from subsidiaries -737 -589 Gain from intra-group share transfer 5,917 - Dividends from subsidiaries 2,437 2,848 Finance income 300 31 Finance costs -2 -11 Total 17,855 9,880 Balance sheet: Loans to subsidiaries, non-current 5,035 878 Trade receivables from subsidiaries 1,032 5,418 Loans to subsidiaries, current 2,658 1,411 Right-of-return assets 258 216 Payables to subsidiaries -1,455 -4,937 Refund liabilities -1,941 -1,674 Total 5,587 1,312 Development in impairment losses on trade receivables Impairment at 1 January 39 24 Additions 5 15 Impairment at 31 December 44 39 NOTE 5.3 FEES TO INDEPENDENT AUDITOR NOTE 5.2 RELATED PARTIES In addition to the related parties disclosed in note 5.2 Related parties to the consolidated financial statements, related parties of Pandora A/S include the subsidiaries listed in note 5.5 Companies in the Pandora Group to the consolidated financial statements. DKK million 2022 2021 Fee for statutory audit 3 3 Other assurance engagements 1 1 Total audit related services 4 4 Other services 1 - Total non-audit services 1 - Total fees to independent auditor 5 4 The costs are recognised in the income statement as administrative expenses. ANNUAL REPORT 2022 PARENT COMPANY Pandora A/S Havneholmen 17-19 1561 Copenhagen V Denmark CVR no. 28505116 Phone +45 3672 0044 www.pandoragroup.com Annual reportAuditor's report on audited financial statementsParsePort XBRL Converter2022-01-012022-12-312021-01-012021-12-315299007OWYZ6I1E46843Reporting class D5299007OWYZ6I1E4684328505116Pandora A/SHavneholmen 17-191561 Copenhagen VOpinionBasis for Opinion30700228EY Godkendt Revisionspartnerselskab5299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember5299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember25299007OWYZ6I1E468432022-01-012022-12-315299007OWYZ6I1E468432021-01-012021-12-315299007OWYZ6I1E468432022-12-315299007OWYZ6I1E468432021-12-315299007OWYZ6I1E468432021-12-31ifrs-full:IssuedCapitalMember5299007OWYZ6I1E468432022-01-012022-12-31ifrs-full:IssuedCapitalMember5299007OWYZ6I1E468432022-12-31ifrs-full:IssuedCapitalMember5299007OWYZ6I1E468432021-12-31ifrs-full:TreasurySharesMember5299007OWYZ6I1E468432022-01-012022-12-31ifrs-full:TreasurySharesMember5299007OWYZ6I1E468432022-12-31ifrs-full:TreasurySharesMember5299007OWYZ6I1E468432021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember5299007OWYZ6I1E468432022-01-012022-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember5299007OWYZ6I1E468432022-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember5299007OWYZ6I1E468432021-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299007OWYZ6I1E468432022-01-012022-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299007OWYZ6I1E468432022-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299007OWYZ6I1E468432021-12-31PAN:DividendsProposedOrDeclaredBeforeFinancialStatementsAuthorisedForIssueButNotRecognisedAsDistributionToOwnersRecognisedInEquityMember5299007OWYZ6I1E468432022-01-012022-12-31PAN:DividendsProposedOrDeclaredBeforeFinancialStatementsAuthorisedForIssueButNotRecognisedAsDistributionToOwnersRecognisedInEquityMember5299007OWYZ6I1E468432022-12-31PAN:DividendsProposedOrDeclaredBeforeFinancialStatementsAuthorisedForIssueButNotRecognisedAsDistributionToOwnersRecognisedInEquityMember5299007OWYZ6I1E468432021-12-31ifrs-full:RetainedEarningsMember5299007OWYZ6I1E468432022-01-012022-12-31ifrs-full:RetainedEarningsMember5299007OWYZ6I1E468432022-12-31ifrs-full:RetainedEarningsMember5299007OWYZ6I1E468432020-12-31ifrs-full:IssuedCapitalMember5299007OWYZ6I1E468432021-01-012021-12-31ifrs-full:IssuedCapitalMember5299007OWYZ6I1E468432020-12-31ifrs-full:TreasurySharesMember5299007OWYZ6I1E468432021-01-012021-12-31ifrs-full:TreasurySharesMember5299007OWYZ6I1E468432020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember5299007OWYZ6I1E468432021-01-012021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember5299007OWYZ6I1E468432020-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299007OWYZ6I1E468432021-01-012021-12-31ifrs-full:ReserveOfCashFlowHedgesMember5299007OWYZ6I1E468432020-12-31PAN:DividendsProposedOrDeclaredBeforeFinancialStatementsAuthorisedForIssueButNotRecognisedAsDistributionToOwnersRecognisedInEquityMember5299007OWYZ6I1E468432021-01-012021-12-31PAN:DividendsProposedOrDeclaredBeforeFinancialStatementsAuthorisedForIssueButNotRecognisedAsDistributionToOwnersRecognisedInEquityMember5299007OWYZ6I1E468432020-12-31ifrs-full:RetainedEarningsMember5299007OWYZ6I1E468432021-01-012021-12-31ifrs-full:RetainedEarningsMember5299007OWYZ6I1E468432020-12-315299007OWYZ6I1E468432021-01-012021-12-31cmn:ConsolidatedMember5299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember15299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember25299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember15299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember25299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember35299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember45299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember55299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember65299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember75299007OWYZ6I1E468432022-01-012022-12-31cmn:ConsolidatedMember1iso4217:DKKiso4217:DKKxbrli:sharesxbrli:pure
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