Thank you, and welcome to Pandora's conference call following the release of our Q4 and 2014 full year results, distributed through the wires this morning at 8:00 A.M. The presentation for this call, as well as the full version of Pandora's annual report for 2014, is available on pandoragroup.com/investor. My name is Morten Eismark from Pandora Investor Relations, and with me here today is CEO Allan Leighton and CFO Peter Vekslund. In accordance with the guidance on, sorry, the agenda on slide 2, Allan will go through a few Q4 and full year highlights, as well as the guidance for 2015, followed by Peter, who will talk you through the Q4 numbers in more detail. Finally, Allan will conclude the presentation, and we'll be happy to take your questions.
Before handing over to Allan, I kindly ask you to pay close attention to the disclaimer on page three. Allan, please go ahead.
Good morning, everyone, and what a great morning it is. If you could turn to slide 4, I want to start off by giving you the headlines for Q4. Q4 was our strongest quarter ever. Revenue was up 40.4%, 35.2% in local currency. Our EBITDA was up 52.6%, and our cash conversion was 169%. Our concept stores, fueled by existing store like-for-likes, and the power and the quality of the new stores that we opened during the year, added close to DKK 1 billion in Q4. We continue to have like-for-like growth in all our major markets. Our products offer has never been more relevant, more fashionable, or more affordable. The quality of our networks is in the best shape ever.
Our execution at retail level has improved significantly, and this, supported by market-leading share of voice in Q4, fueled our outstanding Q4 performance. If you turn to slide 5, we'll talk a bit more about the full year 2014. The record set of numbers in Q4 caps a very successful 2014 for Pandora, with revenue growing at 32.5% to DKK 11.942 million. Despite some noticeable currency move at the end of the year, the revenue growth for the full year in local currency was almost the same, at 32.7%. Revenue growth for the year was driven by all geographies, supported by strong growth, in particular, charms and rings.
The rings category increased 117%, and in the year did more than DKK 1 billion in revenue we set as our target. It precisely did DKK 1.2 billion. The category was driven by a very relevant product portfolio, as well as strong marketing and in-store focus, which will continue into 2015. During Q4, we launched a Christmas collection, which was very well received by the consumer, and in North America, we launched the new Disney products, which were received equally well. As part of our strategy, we continue to expand our branded network with particular focus on concept stores. During 2014, we opened 310 new concept stores to bring our total to 1,410.
The revenues from concept stores increased by 51.4% and now represents 56.4% of our total revenue, a number we aim to increase going forward. sell-out, which I'll return to in a couple of slides, continue to be positive. And as was in the case in 2013, we've been able to generate positive like-for-like sales in all four reported markets in all four quarters of the year. EBITDA for the year was DKK 4.3 billion, an increase of 49% compared to 2013, and the EBITDA margin was 36%. This margin improvement was primarily driven by a tailwind from the gross margin of around 4%, driven by lower commodity prices. The increase in profitability led to a free cash flow of almost DKK 4 billion for the year. This was double the DKK 2 billion of last year.
Finally, we completed our DKK 2.4 billion share buyback program during the year as part of our effort to return cash to our shareholders. If you turn to slide 6, this talks a bit more about the regional development in Q4. As for the full year, all the geographic regions contributed with strong growth for the fourth quarter. Actually, all reported geographies showed 30% growth or more, bar Germany. Americas, which represented 39% of revenue, was up 43.5% in Q4. This was helped by 8% of tailwind from currencies. The U.S. alone was up 30% and 20% in local currency, and had its strongest quarter ever, with revenue for the first time of more than 1 billion DKK. Revenue in the U.S. was driven by a combination of strong like for like and the network growth.
We've added 38 high quality new concept stores in the U.S. in 2014 to a total of 315 stores. Driven by the growth from the new non-like -for-like stores, total retail sell-out in the U.S. were in the high teens. As mentioned, our new Disney products were launched in North America in November and added meaningful revenue for the quarter. Initial feedback has been good, and although it's early days, it appears that Disney products are a successful addition to our product portfolio. In other Americas, Canada continues to be the key driver. Although being a relatively developed market, we continue to see increasing demand for our products. Revenue in Canada increased an amazing 64% for the quarter, and for the year represented around 7% of group revenue. The Disney products were also launched in Canada.
Americas, as in the last three quarters, was helped by the inclusion of Brazil, which, if you remember, as of Q1 2014, had been moved from Other Europe. This added another DKK 74 million for the quarter and added DKK 171 million for the full year. Revenue from Europe, representing 46% of revenue, was up 33.3% for the quarter, driven by primarily the UK, Italy, France, and Russia. The UK continues to perform extremely well, and although a highly penetrated market, our revenue grew 28.2% in local currency for the quarter. Revenue from Germany increased 3% for the quarter, and as we've said many times before, we're in a transition phase, and revenue will continue to be volatile.
But as announced in January, as part of the resetting of the business in Germany, we've entered into an agreement to assume a number of leaseholds in Germany, of great sites, where we plan to open our own owned and operated stores in 2015. We've currently successfully assumed roughly two-thirds of these leaseholds, and all expected 78 leases should be wrapped up around March at the latest. Revenue from both Italy and France increased by more than 50% for the quarter, driven by an improved network and healthy like-for-like growth. For the full year, Italy and France represented around 25% and 15%, respectively, of revenue from Other Europe. Revenue in Russia was up 34% for the quarter, and although we are currently operating in a more challenging business and consumer environment, we continue to see good demand for our product.
During the fourth quarter, we opened 10 new Concept Stores in Russia. Like-for-like sales-outgrowth, as in Q3, was lower compared to earlier in the year and previous years, and revenue from Russia in 2014 represented about 15% of revenue from Other Europe and around 5% of the company. Revenue from Asia Pacific represented about 15% of revenue for the quarter and increased by 57.3%. Primary drivers being Australia and Hong Kong. Revenue from Australia, amazingly, was up 31.2% or 30.4% in the local currency. The growth driven by a combination of strong like-for-likes, expansion, and enhancement of our store network. In 2014, we added 12 more Concept Stores in Australia to bring the total to 90 in the country.
Other Asia Pacific increased by more than 100% for the quarter, with Hong Kong being the largest contributor to growth. Revenue from Hong Kong, which is a top 10 jewelry market in the world, increased by more than 100% compared to Q4 last year. We now have 16 owned and operated stores in this market, of which eight opened in 2014. Most of these are now performing on par with our best sales density stores in the group. Of the other markets in the region, Malaysia, South Korea, Taiwan, as well as China, contributed well to growth for the region in the quarter. And this morning, you have seen our announcement on China. If you turn to slide 7, this is about sales-out.
The positive like-for-like rates continued in the fourth quarter across all four major markets and continued to be driven by the newness in our stores, increased awareness through the local marketing campaigns, as well as our continued focus on improving in-store execution across the markets on a day-in, day-out basis. All major markets are now seeing positive like-for-like eight quarters in a row, which is a very strong performance by any standard. Like-for-like sales-out growth in the U.S. was 4.7% positive. There's still variance across the region. The growth in the Northeast, where we've, you know, been progressing to refresh the network, has improved but still is negative. All the other major U.S. regions grew with high single-digit like-for-like rates or more, and the West Coast is strongly double-digit.
Sales-out growth in Australia and the UK were exceptional, driven by a very positive reception at Christmas, which hit the stores in the quarter, as well as the autumn collection, which we launched in late August. Like-for-like in Germany continued to be driven by our owned and operated stores, which for the quarter increased 6%, while the franchisee stores continued to be negative. If you turn to slide 8, this is about newly launched products. Our newer products continue to perform well, and roughly half of our sales are coming from new products. And this continues to be created by products launched within the last 12 months. In terms of sales-out, the demand is equally as strong. During the quarter, we launched a Christmas collection, which was very well received, and in North America, we simultaneously launched the Disney products.
They, as previously mentioned, launched in all the concept stores in the region, but also the Disney theme parks and Disney Online. Based on the initial success, we plan to launch more Disney products already as part of our spring/summer collections for 2015. Essence, which we don't talk about a lot, which we launched more than a year ago, continues to show really encouraging performance. The UK, Italy, and Asia Pacific are among the markets where Essence has been really successful. If you turn to slide 9, this takes us through to what we would like to do in terms of dividend share buyback. You know, as you know, and Q4 is a classic example of this, our business model generates a significant amount of cash. And in line with our capital structure policy, you know, we return any net cash to our shareholders.
For the financial year 2013, we paid out a dividend of 6.5 DKK per share, and we bought back own shares to a value of 2.4 billion DKK. At our upcoming annual general meeting, the board of directors intends to propose to our shareholders that the company share capital should be reduced by counting the shares purchased in the program, and clearly, that excludes any shares that we need to cover our option programs. Following our strong 2014 and our confidence in 2015 and beyond, we'll significantly increase our expected payout to our shareholders. The board has decided to approach the AGM that a dividend of 9 DKK to be paid out for 2024. This will be an increase of 38% on last year.
The board has also opted to initiate a share buyback program of up to DKK 3.9 billion, that was launched today and finalized before the end of 2015. This is an increase of 63% to the share buyback program in 2014. The share buyback program, the mechanics are basically the same as last year. It will run a Safe Harbor. We'll, on a weekly basis, issue an announcement in respect to the transactions made, and that will keep everybody posted on the progress of the program. If we turn and move to slide 10, which is the financial expectations.
As in 2014, 2015, we focus on much the same thing, driving our top line growth by increasing sales-out in existing stores, by growing total retail sales-out, and by expanding our store network, primarily by adding additional concept stores in high quality locations to the network. The revenue for 2015 is expected to be more than DKK 14 billion, with the two growth drivers, network and like-for-like, expected to contribute equally. Going into 2015, we've got some tailwind from currency. If you use today's FX rates and you take a look at the phasing, you'd expect a tailwind of somewhere in the 3%-5% range for the full year. The EBITDA margin is expected to increase from 36% in 2014 to around 37% in 2015.
Our EBITDA margin continued to be tempered by investment in infrastructure, investing behind our growth. Increase includes an expected gain from lower hedge commodity prices, compared to 2014, probably in that 1%-2% range. Again, we've got a number of infrastructure and IT projects, which we need to put in place. CapEx, as we flagged before, will step up, this year and for the next couple of years. This year, we're talking around 800 million DKK. This is really all about developing the facilities down in Thailand, investments in our distribution network. We've also got the accelerated expansion in Germany, and China, and Japan, and we've got some significant IT investments.
We expect CapEx in the next year, two years, to stay around this level, as we continue to invest in the same areas. And finally, we expect to open more than 300 new concept stores in 2015, including around 60 new owned and operated. That's a 60 net, new owned and operated in Germany, related to the leaseholds that we mentioned earlier. And the geographic split of the remaining concept stores roughly will be similar to what we've seen this year. Tax rate will be around 20%. So, that is a bit of a headline of 2014 and some guidance for 2015. I'll hand you over now to Peter, who will give you a bit more detail on the financials. Peter?
Yeah, thanks, Allan, and please turn to slide 11. Strong revenue growth across all regions led to a total revenue growth of 40.4%, to a total of DKK 3,961 million. In local currency, revenue increased by 35.2%. Volumes increased by 22.1%, and the average sales price increased to 145 DKK, from 126 DKK a year ago. The average selling price increase was primarily driven by an increased share of revenue coming from rings, as well as a shift in channel mix, with more revenue now coming from our owned and operated stores. On a product-by-product basis, prices have been kept virtually unchanged throughout the year. Revenue growth was distributed evenly between like-for-like sales in and network expansion.
Revenue from concept stores increased by nearly DKK 1 billion, and represented 62% of our revenue for the quarter, up from 54% in the same quarter last year. The development is in line with our strategy of focusing on branded sales channels and concept stores in particular. Please turn to slide 12. Now turning to the development in our distribution network. Total number of points of sale increased by 65, compared to Q3 2014, to a total number of 9,006 points of sale globally. During the quarter, we added 103 new concept stores and a net total of 202 branded points of sale. The majority of the concept store openings in the quarter were in Europe and Americas, with Russia, U.K., and U.S. being the largest contributors.
During the quarter, Pandora added 33 owned and operated concept stores to the network, including 10 in Germany, 8 in France, and 4 in Hong Kong. In the last twelve months, the number of unbranded points of sale have been reduced by more than 900 stores, primarily in Germany, Italy, the Netherlands, the Nordic markets, as well as some of our distributor markets. Please turn to page 13. Both our core categories are continuing to perform well. Revenue from charms increased by 35.1% compared to the same period last year, while revenue from silver and gold charms bracelet was up 18%. The categories together represent 78.8%, which is a decrease from 83.6% a year ago, primarily due to the strong performance in rings.
The lower growth in bracelets compared to earlier quarters should probably be seen in the light of more than 200% growth in the other bracelets category, if you exclude leather bracelets. Rings increased by 112.6% for the quarter, and represented 9% of total revenue in Q4. The revenue from rings continues to be driven by the improved offering, as well as increased marketing activities focusing on rings. Particularly, Australia and the U.K. have seen a strong contribution from rings, but actually, most markets are increasing their share of revenue generated from rings. Revenue from rings is lower compared to the third quarter, which is due to the fact that rings is a less preferred Christmas present compared to charms. Other jewelry increased 64.4%.
The growth was driven by most subcategories, including revenue from earrings and necklaces, both increasing around 50% compared to the same quarter last year. Other bracelets had a strong quarter and increased, including other leather, our leather bracelets, around 80%, driven by several new bracelets launched in the second half of 2014. Please turn to page 14. Gross profit was DKK 2,835 million, compared to DKK 1,918 million in the same period last year, resulting in a gross margin of 71.6% in Q4, compared to 86% last year. The increase in gross margin for the quarter, compared to Q4 2013, was driven by lower hedge prices on commodities.
Excluding our hedging and the time lag effects from our inventory, the underlying gross margin in Q4 2014 would have been approximately 74%, based on average gold and silver market prices for the quarter. Under the same assumptions, a 10% deviation in quarterly average gold and silver prices would impact our gross margin by approximately 1 percentage point. Please turn to page 15. Operating expenses for the quarter were DKK 1,454 million, versus DKK 1,027 million in Q4 2013, representing 36.7% of revenue in Q4 2014, versus 36.4% in Q4 last year. Sales and distribution expenses were DKK 645 million, an increase in, of 31.4% compared with Q4 last year, and corresponding to 16.3% of revenue, compared to 17.4%, Q4 last year.
The nominal increase in sales and distribution expenses were mainly driven by higher revenue and increased number of Pandora-owned stores, as well as costs related to the expansion of our e-commerce platform. Marketing expenses were DKK 455 million, compared to DKK 273 million in Q4 2013, corresponding to 11.5% of revenue, compared to 9.7% in Q4 2013. The increase was due to targeted investments in higher PR and media activity, focusing on our core categories, and obviously, also on the Christmas collection, and in North America, the new Disney products. Administrative expenses for the quarter increased and was DKK 354 million, representing 8.9% of revenue, compared to 9.3% in Q4 2013. The increase in administrative costs was primarily due to higher IT costs and an increased headcount. Now, please, slide 16.
Looking at the regional EBITDA margin, the EBITDA for Q4 2014 increased by 52.7% to DKK 1,444 million, resulting in an EBITDA margin of 36.5%, compared to 33.5% last year. The EBITDA margin for Americas for the quarter was 35.8%, and down 1.8 percentage points compared to the same quarter last year, despite a positive gross margin impact on the regional margin. Americas margin for the quarter was negatively impacted by approximately 2 percentage points, due to the acquisition of the 22 concept stores from Hannoush in the US. The initial inventory in the stores were acquired by Pandora at wholesale prices, which has a short-term negative impact on margins, as we only capture the retail margin on the acquired inventory.
As in the three previous quarters, the inclusion of Brazil in Other Americas, as opposed to the previously Other Europe, had a negative impact of around 1 percentage point for the fourth quarter. Finally, we saw an increase in marketing spend in the quarter. The EBITDA margin for Europe increased by, from 40.4% in Q4 2013 to 44.5% in the current quarter. The increase was primarily driven by the improved gross margin. The EBITDA margin for the Asia Pacific region improved 14.6 percentage points to 53.3% for the quarter. The improvement was primarily driven by leverage from increasing revenue in the region, as well as the improved gross margin. Now, please turn to slide 17.
For the quarter, net financial income amounted to a loss of DKK 122 million, of which DKK 29 million was an exchange rate loss, primarily due to fluctuations in the exchange rate translation of intercompany balances. The opposite was the case in Q4 2013, where we had a net gain of DKK 23 million. The remaining DKK 93 million was primarily related to losses on FX and commodity contracts. Income tax expenses were DKK 252 million in Q4 2014, implying an effective tax rate of 20% in line with our guidance. Reported net profit increased by 36.3% to DKK 1,007 million in Q4 2014, compared to a net profit of DKK 739 million in Q4 2013. Please turn to slide 18.
Operating working capital at the end of Q4 2014 corresponds to 16.7% of the preceding twelve-month revenue, compared to 20.5% at the end of Q4 2013, and 24.9% at the end of Q3 2014. Inventory was DKK 1,684 million at the end of Q4 2014, corresponding to 14.1% of the preceding twelve-month revenue, compared to 19.7% in Q3 this year, and 16.5% in Q4 last year. The increase is mainly due to higher revenue, as well as higher inventory in our owned and operated stores, due to an increase in the number of O&O stores, including the Hannoush store inventory, which was transferred to Pandora at the end of the quarter. Current inventory is at a relatively low level, and you should expect inventory as a percentage of revenue to increase going forward.
Trade receivables was DKK 1,110 million at the end of Q4, corresponding to 9.3% of preceding 12-month revenue, compared to 12.3% in Q4, Q3 2014, and 9.9% at the end of Q4 last year. The decrease compared to Q3 2014 is primarily due to a very strong cash collection following the Christmas sales end. Trade payables at the end of the quarter were DKK 804 million, compared to DKK 539 million at the end of Q4 2013, and DKK 758 million at the end of Q3. In Q4 2014, Pandora's CapEx was DKK 176 million, primarily related to the opening of O&O stores and movement in offices. Investments in intangible assets were DKK 60 million, mainly related to global IT projects.
Finally, we had a net cash positive position at the end of the year of DKK 1,121 million, corresponding to a net interest-bearing debt to EBITDA of -0.3, compared to 0.2 at the end of Q4 2013. With this, I'd like to hand back to Allan to conclude the presentation.
Thank you, Peter. So, if you go to slide 19, this sort of summary of 2014. Revenue's up 32.5%, 310 new concept stores, gross margin 70.5%, EBITDA margin 36%, free cash flow DKK 3,868, conversion at 125%. Dividend increase proposed at 38% to DKK 9 per share. Guidance for 2015, more than DKK 14 billion, EBITDA margin around 37%, and a share buyback program of 3.9 million DKK, an increase of 63% compared to 2014. So, you know, that's the summary. We said that we'd give you some sort of structure of way to think about the future. If you go to slide 20, that gives you a bit of a heads up on that.
And this will give you some idea about how we're thinking about the framework for the future and the next few years and, you know, what the sort of driving ideals of the company will be. And the first one is to enhance and broaden out on our product platform, continue to do what we've been doing. Secondly, this increase in constantly refresh the quality of our store network. Without any doubt, this refreshment and increasing of our store network have a big impact on our business, and we continue to do that. There's an opportunity, we believe, to develop a significant omni-channel business, which isn't just the online business, but how we connect, you know, our Facebook and our membership and our wish list to how we trade online.
Fourth bullet is really where the money is beginning to go when you look at CapEx. We've got to build an infrastructure that supports our growth, and we'll continue to do that. And finally, as you can see from today, the China thing is really all about now beginning to create a scale business in Asia. And, you know, they're the sort of five sort of things that people should think about how we're driving the business forward. So anyway, that concludes our presentation, and I think we'll open it up for Q&A.
Thank you. If you would like to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you would like to cancel your request, please press the hash key. Once again, that's star and one if you would like to ask a question. Your first question comes from the line of Michael Rasmussen from ABG. Please ask your question.
Yes, good morning, everybody, and once again, a fantastic performance, guys. Three questions, please. First of all, on your U.S. like-for-like outperformance versus the underlying market, can you give us a little bit of kind of a bridge on rank the reasons, I would say, for this great performance in the U.S.? Second question, in relation to also the slide on medium- to long-term kind of future framework that you mentioned. How should we think in terms of e-commerce? Now you're online in seven markets, I believe, in Western Europe. Should we see a potential launch in the U.S. and in Australia this year? And built into your guidance, are there any impacts from a growth in e-commerce?
If you could add a little bit of detail on that, please. Final question, being on the concept store openings, how large part of the concept store openings that you've guided for, whether that's 275 or 300, I couldn't fully understand that, will be China? And what is the revenue base in China, when China goes O&O in July? Thank you.
Okay, Michael, thank you. We'll sort of work our way through this. I think the U.S., there are a number of factors. I mean, clearly, you know, the quality of that network is improving. And we saw a bit of that, I think, come through in the like-for-likes, i.e., the stores that have been open in the previous year going into like-for-like. I think that's the—that would be the first point. I think the second point is clearly, Hannoush bringing... Although that business is still negative like-for-like, it's improved a lot, so that obviously is gonna have an impact. And clearly, all we've done so far in those stores is all about inventory and training of our people. So, you've got a bit of an impact from that.
Generally, you know, Disney's, you know, we're, we're not trying to- we won't quantify Disney, but Disney's been, it's been very good. And as you know, that was only in the concept stores. It wasn't anywhere else. And, and, I think that's clearly had an, an impact on, in terms of where we were. I would say our execution in the U.S. has stepped up a lot, in the last 12 months, and I think we've seen that come through. And, and then finally, you know, we, we- as you can see, the, the number I love the most in this, report is the 11% spend on marketing. You know, I've been trying to do this for years.
And there was a lot of marketing support for our brands across all the markets, but in the US. And then, of course, you know, without any doubt, you know, the, I think the, the Christmas product, the autumn collection, again, was better than it was the previous year. So, you've got a combination of those things that I think are all fueling in, and that's what's, you know, what's driven that performance. So, I think that's where we are on the US. On e-com, you know, it's early days yet still. You know, I think the UK is really the only market that we can really see a pattern from because they've been trading for a year or so.
The UK, over that in Q4, was ahead of the 10% that we've always talked about. So, that's a really encouraging sign. And we're seeing all the things that we've seen in the US, high conversion in the UK, high conversion rates, you know, very low returns, continued male bias, and not a lot of cannibalizations. So, I think we feel, you know, good about it. We, you know, when we go to Australia and the US and any other markets, we'll sort of talk about it as we go along. As you know, we sort of don't flag these things in advance.
But as I said to you before, you know, all the markets have been working on how they go online, and the question has always been for us, you know, they've got to be able to prove that they can provide the fabulous service that we've been able to provide in all the other markets, and for me, that's the underpinning issue. And then on our concept stores of the 300, there's an element of the thinking of China in that. As you see, we made that announcement this morning. I'd say that we may be looking somewhere in the range of 15-20 concept stores in China in the second half of the year, this year, as we start to establish ourselves.
I think the thing about the concept stores, which is a very important point, is that, you know, there's two things happening. It's not just the number of concept stores; it's the quality of them. And I refer to the U.S. You know, when we look at like-for-like sales, that's very important for us, but we've been starting to look at total retail sales-out, too, which clearly encompasses all of the new stores and the sales-out from those new stores. And there's no doubt that the stores that we've opened in the last couple of years, because of their quality and the quality of those locations, you know, really make a big difference, too, in the sales-out in the year. So, I think hopefully that answers your three questions.
Thanks, Allan. So, just understanding it right. So, the +17% revenue growth that you guide for doesn't really include any growth in e-commerce in 2015 or?
It does include some growth in e-commerce in 2015. Yes, it does.
Okay. Thank you.
Your next question comes from the line of Lars Topholm from Carnegie. Please ask your question.
Yes, I would also like to applaud you for a very strong Q4. I, I have a couple of questions. One is actually continuing where Michael left on the guidance, because if I understood you correctly, Allan, you have 3%-5% currency tailwind. And if I look at adding 300 concept stores, your average concept store count should be up by 24%. If they generate 60% of revenue, that alone should add 14% to revenue, and then combining that with the currency effect actually brings you to DKK 14 billion. So my question is, are you not factoring in any same-store sales growth, or what am I missing here? Question number two is on China and maybe also Japan.
So, I understand the strategy for this year, but is it possible to add some flavor on where you see these markets, say, three, four years down the road, maybe in terms of number of concept stores, which existing market should we compare it to? And then a final question, if I may, on the US dollar impact on your earnings. Are you naturally short dollar? Or how does it actually affect earnings? I know it's a positive for revenue, but if you can comment on impact on gross margin and EBIT level, I'd be happy. Thank you very much.
Thank you, Lars. I'll get Peter will cover the U.S. dollar piece. I think on this guidance, we always have this debate. You know, we've said equally, it's a sort of equally network and like-for-like growth. You know, everybody does their calculation to get to where we get to. I think suffice to say, you know, we feel comfortable with the guidance that we've given. It does assume some like-for-like growth. It does assume some clearly some network growth, and it does assume you know, some movement in terms of of currency. But you know, I'm not going to give you the constituent parts of it, because that wouldn't be right.
In essence, you know, we're pretty happy with the guidance that we've given based on, you know, where we're coming from.
But I'm not missing any negative particular influence, am I?
Lars, you never miss anything, so, I don't think you'll be missing anything on this occasion either.
Thank you.
The second thing is on China, you know, what way is going to give you? I think that we spent really the last 18 months understanding how to do business in China. And we took a lot more control on the stores that we've got there. I think we've really upped, as we always do, the sort of execution, merchandising piece. Then what have we learned? I mean, the most important thing, we've learned that the product is hugely acceptable, and, you know, very successful. And for us, that's the fundamental piece. You know, does the product work? And it does. Interestingly, of the top 100 selling lines in China, 90 of them would be in the top 100 selling lines across the world.
Generally, the top 100 lines across the world for us are very much the same. So, the best sellers are very much the same. Where there is a difference, it tends to be a bit in color and a bit in size, and much more, you know, much more colorful and clearly smaller sizes. We've really focused on the East Coast, and I think that's where we'll start, in the tier 1 and tier 2 cities on the East Coast. And as we talked about before, we'll build city by city, build the brand off the back of that, and then see where we go to.
So, I can see us really spending a couple of years, at least, on the East Coast, tier 1, tier 2 cities, and then I think we'll move a bit more inland, do a bit more central, and the west. We've building a head office down there. We'll be in Shanghai. We've appointed somebody to run the business. We're building our team down there. So, we've been doing all of those things. I think in terms of guidance for where you get to, you know, I'm very loathe to do this. You know that we...
You know, what we do is we look at now every, every market, we look at every city, and we plot where we want to be, and, and that's made a big difference to the quality of our that we've got. So, if you know, we'll go one store at a time, because that's how we build the business. I'm, you know, the way to think about Swarovski, I think they've got 200+ stores down in China, and that may be a, you know, a good benchmark to think about over the next few years.
Thanks.
Yeah, and, the question regarding the US dollar, we have actually included in our annual report on page 56, a table with a sensitivity analysis on the currency. And, in that, you have the impact of an exchange rate increase of 10% on the dollar. You have an impact on both revenue and EBITDA, and that's a positive impact on both revenue and EBITDA. But you should bear in mind that the Thai baht is closely pegged to the US dollar. So, at the EBITDA level, it is a natural hedge, you would say. We have a 0 impact on the EBITDA.
Thank you very much.
Bear in mind that we hedge our cash flows, not our P&L. So, all the hedging gains and losses ends up in financial items.
Yeah. Thank you very much.
Thank you, Lars.
Your next question comes from the line of Chiara Battistini from J.P. Morgan. Please ask your question.
Good morning. Hi, and my congratulations as well. Great set of numbers and, and guidance and cash returns. Just a couple of questions from me, please, left. One is on the, on the differentials of gross margin on, in your owned and operated stores versus your franchise stores. As I said, this is becoming a gross margin driver. So, as you continue to increase your exposure to O&O stores, I was wondering what the differential in gross margin is there, please? And then, the marketing spends step up that we see in Q4 of 11.5% of sales, I was wondering if this is sort of the level that we should consider as sustainable going forward or more the 10% we used to, look at in the past, please?
It's Allan. So, can you just repeat that last question? I didn't quite get it.
Sorry. On the marketing spend, as a percentage of sales, historically, you've always guided to roughly 10% of sales. In Q4, we have seen now a huge step up in terms of marketing spend. So, I was wondering if this 11%-11.5% is more of a sustainable level going forward, compared to the 10% you usually were guiding to, please? Yeah, so let me... I'll do in the reverse order. On the marketing thing, you know, I still think 10% is a very good proxy. As you know, Chiara, if you've been listening to me for a few years, you know, we never get to 10%. And I've always, that sort of always infuriated me because I think it's a big piece of, you know, our competitive edge.
You know, within our, the way in which if you look at our P&L and the way our business is structured, we should be able to invest that sort of money, and we should be doing. And at Christmas, we did, and it did it a bit more. And as I said earlier on, I think it had a big impact in terms of driving brand awareness and driving traffic. But I think, you know, going forward number all around that 10% is a good place to be. We've always been that.
It'll be maybe up and down by quarter, but as I say, of all the numbers in this, the number I like the most was the fact that we actually managed to spend the money driving the brand, which is, you know, what we're here to do.
Absolutely.
And the second thing is in terms of owner-operated stores. So, what we tend to look at on an EBITDA margin basis, rather than on a gross margin basis, and because clearly, you've got, you have operating costs in the owner-operated stores, you don't have in the franchise stores, i.e., you fill them for the people. We're very comfortable with our owner-operated stores and the EBITDA margin that they're making as they go into maturity. So, we think on balance, that they clearly have a positive revenue effect. The EBITDA margins are very similar to our concept stores, our franchise stores, but clearly, the EBITDA cash is significantly more.
Great. Thank you very much. Your next question comes from the line of Kristian Godiksen from SEB. Please ask your question.
Yes, hello, gentlemen, a couple of questions from me. I was wondering, the gross margin, the underlying gross margin for Q4, of, of the around 74%, Is that also impacted from the Hannoush, of the around 2% for, for Americas? And are there other items which I need to adjust for, for making it normalized, just as in Q3, regarding the re-melting? That was the first question. The second question, I was wondering what your plans are regarding to handling the depreciation of the ruble going into 2015, regarding price increase, and how much will you share the pain with the, with the master dealer? And lastly, you stated that we should expect that inventories should go up from this level.
I was wondering if you could give some a bit more flavor, what are the magnitudes. Yes, thank you.
Hey, I'll, Peter will do the gross margin thing. As far as the ruble, and I'll get Peter out to it. I mean, so first of all, the ruble has no impact on us. We bill in euros. So, from a financial perspective, we have no impact. What happens to the ruble has no impact on us. Except for where it does clearly have an impact is on consumers. And so the ruble impact for us is not a financial one in terms of currency, it's more what's it doing to the consumer in Russia. And as you know, it's not been good in general terms. We're actually relatively pleased with our Russian business because we continue to trade there, we continue to grow there.
We're probably one of the few, if not the only, brand that's growing in Russia. We have bank guarantees as to make sure we get our payment. We are still investing, you know, it could be what, you know, in the region of half a point of margin impact in terms of our investment in that market, but we still continue to do that. We've put some prices up, not very many, about 25% of the range picked, selectively to try and help the situation. But our position in Russia is just, it doesn't change.
You know, we see it as a market that's a very good market for us, in the mid- and long term, and we just continue to ride it out, and make sure that we, you know, we, we take advantage of the situation, and, and I think that's what we're trying to do, today. Do you wanna comment, Peter, on that?
Yes, on the gross margin, you're right, the naked gross margin of 74%, which is excluding any hedging, is calculated as we normally do. We have not made any adjustments for Hannoush or anything else. To give you a hint, you can probably calculate it as we have disclosed the Hannoush impact in Q4 on the regional EBITDA margin for Americas.
Do you wanna comment on inventory in terms of what level? I mean, it's more likely to go back to historical levels, I think, would be the way to think about it. Is that right, Peter?
Yes. Inventory is quite low at the end of Q4, DKK 1.7 billion, and that is very low, so you should not see that as the level going forward. You should expect an increase in that.
More to where we've been historically on an inventory is the way to think about it, I think.
All right, thank you. Just a few follow-up questions. But in regard to Q4, what about the re-melting? Are there any anything else we should be aware of, besides the Hannoush? And then just also coming back to the Russian answer, just relating to, we have seen the depreciation of the ruble being very significant. I think it's down from current spot prices, around 30%-34% year-over-year. So, I guess I know I'm aware that you bill in euros to the master dealer, but how about holding back prices from him for him? I guess, I...
In Q4, I was under this impression that you shared some of the pain with the master dealer in order for him not to raise prices equivalent to what the ruble has depreciated. What is your expectation for 2015 here?
On what we do, we have a very close dialogue with our Russian partner and agree on prices and so on. We have split the pain on the ruble, and that has an impact of around 0.5 percentage point in Q1 for 2015, and that is as far as we're looking ahead on prices in Russia.
That assumes the price we made. So it's—I mean, that's roughly been our investment. So, we split the pain. It costs us about 0.5 point of margin, roughly, you know, ±0.1, 0.2. And we put some prices up, but the majority of prices we've held. So, really, our position has not changed. Our position is we, you know, we want to continue to grow in this market. We're taking advantage, I think, of the fact that everybody else is pricing up big time, to hold our position. As I say, you know, we're still growing in that market, which I think is pretty unique. We're taking a long-term view.
Okay. And just finally, with regard to any other things or items you should adjust for in Q4 remelting or anything on the underlying gross margin?
I'm looking at Peter, and he's shaking his head, so I think the answer is no.
Okay, sounds good. Thank you, guys.
Thank you.
Next question comes from the line of Stephanie D'Ath from the Bank of America. Please ask your question.
Hi, congratulations on the strong set of results. My first question is regarding your EBITDA guidance of 37% for 2015. Given the hedging gain... I mean, the benefit from lower raw material prices, you probably have at least 100, and if not 150, 200 basis points tailwinds from lower raw material prices. Where do you therefore see higher OpEx, given you only assume 100 basis points expansion? Is it more coming from A&P or mostly distribution and selling? And I also noticed in terms of the benefit from raw material prices, you used to say 1-2 points for a 10% deviation in commodity, which is now only 1 point. So, that would be my first question.
My second question, please, relates to the percentage coming from your own operated stores. It's up to 22%. Where do you see that going in 2015 and onwards? And then, if you could please quantify the benefit from Disney in the U.S. sell out, that would be huge, hugely useful. And on rings, if you could give us an indication of how much it represents as a percentage of sales in Australia and the U.K., please. Thank you.
Okay, well, there's a lot there. We'll do them in reverse order, and I'll try and be right. Rings, I think, is 15% of the business in the UK, and 16, 15, 16% and around 20 in Australia. So, you know, that, that, they are the round about numbers and, and you know, we're very pleased with that business. GBP 1 billion pound of business built it from nowhere, moving to the right place, exactly what we're going to do. Second thing is on Disney, we're not quantifying. It's too early, we'll wait and see.
I think suffice it to say that we're very pleased with it, and as I pointed out earlier, you know, it was clearly one of the factors of our significant outperformance in the U.S. versus other retailers. The owned and operated share of the business will grow, and the reason it will grow is because China will be initially set up that way. Clearly, the Hannoush stores come through during the course of the year, and Germany, where we will hopefully get these 60-odd new owned, they'll all be owned and operated stores. So, it's going to grow as a share of our business in the short term.
And remember, we use it for two reasons, strategically, as we are in Germany, and also in places like China. We use it in the cities to build the brand, and then we back off the franchise of the whole thing. So, it will continue. It will continue to grow. And we don't have a problem with that because the profitability of these businesses is very strong from an EBITDA percent perspective. But of course, in terms of cash generation from the EBITDA, as the revenues are so big because of the quality of the locations, it's a very positive impact on our P&L. The other way we sort of think about it is that if you look at, for the year in Q4, we're about 22% of our business was owner operated .
The way we also sort of think about it is we look at it as a, as a percent of our retail sales. So, basically you divide the number by 2, and it gives you a pretty good idea about what it is of our retail sales. It's about 10% of our retail sales-out, so I feel pretty comfortable about that. So, owner will grow. It's very profitable. It generates a huge amount of cash. It gives us quality locations, and strategically we use it. But we'll sort of talk about it two ways, share of total business and what it is in terms of share of retail. As far as our EBITDA is concerned, you're right.
We've got a couple of points of tailwind, which is really good, and we've got, you know, a lot of tailwind in terms of our commodities. But we will continue to invest in the business, and you know, we're not here for one quarter or one month or one year. We're here for a long time. And there are things that we need to invest in our business in terms of our infrastructure, in terms of people, and you know, a great example being Asia. If you look at the EBITDA, you know, some huge EBITDA growth year-on-year on Asia, 14 points, whatever it was, and that's because the growth is way ahead of the infrastructure.
We'll put infrastructure in to support it. Yeah, we got a couple of points, and one of it will come through, and one of it we'll invest back into the business because that's what great businesses do.
Okay. And regarding the change from 1-2 percentage point benefit toward only 1 percentage point from the lower commodity prices, why is that not impacting to the same extent as previously?
Could you want to...
Yeah, I mean, we are saying it's a 1-2 percentage point.
But it's only one percentage point right now in the latest presentation.
Yes.
Is it 1-2, or is it 1?
... It's what we put in there. It's the 1%, the 1.
Okay, why is that down from 1 to 2?
Because that's our latest view of where it is.
It's not a linear development on that, so you cannot-
It goes with the phasing of the volume.
Yeah.
Okay. And just to, sorry, come back on your answer regarding profitability of your owner- operated store. So, it's of course, accretive in terms of absolute EBITDA generation, but in terms of margin, it is dilutive, right?
No, we look at in terms of gross margin, but we don't look at, we look at it by EBITDA margin. So, we run the business by EBITDA margin, and EBITDA margins of our owned and operated stores are very strong. And from a cash flow perspective, they're, they're also very, very strong.
But the EBITDA margin of an average owned and operated store, is that high as your group margin?
If you look at the... Well, you, it depends which way you're trying to calculate. You're fixated on Gross Margin, and we're fixated on-
No, no, no. No, EBITDA, EBITDA, on an EBITDA margin level.
EBITDA margin is the same, but of course, there's a larger cash EBITDA on our owned and operated stores.
Yeah.
That we like.
Yeah.
Yes. So, then the EBITDA margin is as high in your owner- operated stores then?
Yes. Our EBITDA margin is as high, and in some cases higher in our owner- operated stores, and we generate huge amounts of cash from them. So, they're very, very positive. Very, very significant.
Okay, thank you very much.
Thank you very much.
Your next question comes from the line of Patrik Setterberg from Nordea. Please ask your question.
Yes. Congratulations, what a good set of numbers as well from me. A couple of questions. The first one is, how should we think about the product mix for 2015? Will it stay similar to the one we saw in 2014, or should we expect the charms and the charms categories to come further down? Secondly, I can almost sense that you're saying that you have been taking market shares in the US in the fourth quarter. Could you confirm that? And my last question is regarding the share buyback program. Will that be fully funded by your free cash flow in 2015, or will you reduce, or will you be willing to reduce your net cash position?
So, the reverse order is yes, it will be fully funded. Yes, we have increased market share in the US. And yes, the mix is very similar to this year.
Maybe let me just elaborate on the, on the share buyback. We, ended 2014 with DKK 1.1 billion in, in cash, and we have a capital structure policy of a net interest bearing debt to EBITDA of, 0-1. And, with the share buyback we have proposed, and, and we're putting in place, we will, that will put us into our capital structure policy.
Thank you.
In line with capital structure policy, yeah.
Very good, and very clear answers. Thank you very much.
Your next question comes from the line of Anne-Laure Bismuth from HSBC. Please ask your question.
Good morning. So, congratulations for the very good set of numbers. Also, just a few questions regarding Germany. So, the completion of the improvement of the network should be completed by end of 2015. My second question is regarding rings. What is the percentage of sales of rings in the U.S., and do you plan to be focused on rings in other areas than in the U.K. and Australia going forward? And when do you plan to have a positive like-for-like on the Northeast in the U.S.? To have a like-for-like back in positive territory. Many thanks.
So, on the Northeast, like-for-like, as soon as possible is your answer. We're working hard on that. Because remember, in the Northeast, on the Hannoush, it has improved a lot, actually. But it's largely just, as I said, the because of we're executing things better, we've got better inventory. We've not actually done very much to the stores, so we're actually now start to physically change some of the stores. So, that, I think, will have an impact on Hannoush. So, you know, as soon as possible is the answer to get it back into, to like-for-like. The rings, in the US, we still see as a big opportunity. It's close to group average.
I don't want to give you the number, but it would be pretty close to the average performance in the rest of the markets. And I think you'll see quite a lot of focus in the US on rings this year. I think that's what we'll tend to see from that. As far as Germany is concerned, clearly, the taking these stores from BiBA is a very big strategic move. And it's gonna take a lot of work this year. You know, that's a lot of stores to convert. And we've got a separate team, we've got a very good plan to enable us to do it.
But I think that we'll start to have the network from the beginning of next year, in a shape that we can really start to trade it as we've traded the rest of as we trade the rest of the countries. I think it's a very important move for Germany. It gives us a bit of a leap in terms of being able to get the right sites, because you can see, you know, where we're in the right sites in our owner-operated stores, we can get, you know, good like -for-like out of the business, so, we know that the product's gonna work. The issue for me has always been the quality of the network, and we'll fix this.
So, I think you're not gonna see very much from Germany this year because we're gonna just be fixing it. But it's a big fix, and you'll start to see the real benefit of Germany in 2016 and 2017.
Thank you very much.
Thank you.
Your next question comes from the line of Frans Høyer from Jyske Bank. Please ask your question.
Yes, good morning. Just on, on the owner-operated stores and the strategy behind that, could you talk about the pros and cons of pursuing, owner-operated, strategy, more wholeheartedly? And could you also talk about the... I understand it's still early days for the Disney Collection. I understand the product is actually in Canada as well, I didn't realize. But you're going to do more new products under this collection in the spring. Could you talk about the plans going forward for, for that whole issue? And also, some comments on Japan, and finally, on Essence, please, how is that, unfolding? What is your reading of that collection or that concept as things stand now, please? Thank you.
I'll go in reverse order. So, essence we're quite pleased with the progress. You know, we, you know, we're sort of quietly, quietly under the radar, supporting in different markets, building it up. You know, in my view, if we can get that, you know, sometime during the course of this year to be, you know, 5% or 6% of, of, of sales, that'd be a really good place to be. It is that in a number of markets, it's still got a bit of a way to go in others, and it's still relatively new in markets where, you know, clearly, we've been building the businesses on Moments before we move into Essence. So, I think we're, you know, quietly pleased with Essence, and going about, you know, building that business in a pretty, unfussy way.
Japan, as you know, we've entered into a new arrangement. We're starting to establish a bit of our own team down there, and we'll open some more Concept Stores in Japan this year. I see, you know, Japan is a slow burner. It's a great market. It's a very difficult market. It's a very shop-driven market, which, to be honest, is not something we have great success at. And real estate is very expensive, and therefore, that tempers our ability to put retail space down. So, I think we, you know, we can grow in Japan, and we will grow in Japan, but I think that it is a slow burn, and with some difficulty. But we'll make progress on it.
Disney, I think we had 45 DVs that we put in, design variations, 629 in the concept store, 16 in the Disney sites and things like that. They've done, you know, done well, and we're pleased with it. And then in the spring, summer collection, I think of this year, there'll be roughly the same number of additional DVs going in. So you know, what's in there has done really well, and then we'll refresh it in our collections. And you know, as we thought it would, this is Disney. Disney is one of the biggest brands in the world.
It strikes a real chord with the U.S. consumers, and we thought that's what happened, and that's what's happened.
Geographically, any other plans geographically for the Disney Collection?
No, it's the moment... I mean, we've got it for the Americas, and at the moment, that's where we'll be. I mean, I think, you know, let's prove it out, where in its homeland, and I think we're doing that. Owner-operated, you know, I think, you know, think about how wholeheartedly, maybe not quite how we're doing it. It is... For me, owner-operated, we have this strategic role, and it has a strategic role in the business. Its role is in markets where we're building the business, you set up an O&O, and then you build a franchise business off the back of that, and then some of those, you move some of those O&O to franchise. So that's the sort of first strategic reason for it.
The second strategic movement is because our P&L has really improved so much in the last few years, you know, our ability to get, you know, the, a triple A sites in the major cities is we have a P&L that enables us to do that, which we didn't have as much, you know, two, three years ago. And those triple. You know, retail is a very simple business, get great products and get great sites. And we've always had great products, and they've got better. We're just now getting greater sites.
So, you know, in my view, the other strategic role of O&O is where those rents are so expensive, franchisees can't take them, but we can within our P&Ls because of the profitability of our model, then there's the big strategic triple A sites in major cities that we operate as owner-operated because the franchisee couldn't afford them in reality. And then the third chunk is really, you know, where we're taking things over in markets. A lot of our distributor markets were built up owner-operated, and therefore, when we take them on, they become owner-operated for us, and we have an ability over time to franchise some of those. But, you know, places like Brazil that has a big impact on in terms of what we're doing.
Germany, where we've had a real strategic issue in terms of quality of network, the only way we're gonna be able to develop that business is build an owner-operated business. And then clearly, the BiBA acquisition, which is very opportunistic but strategically very good, then that will build, clearly build out as an owner-operated business. So we think about it in those three strategic plans, and what it comes to, it comes to, when you think about it, that way around. But, you know, we've been able to really work on the profitability of them. As you said earlier, they're as profitable as our concept stores at EBITDA % margin, but, you know, the revenue in those stores is significantly better. So we're coming at it in, on those three fronts.
Very clear. Thank you.
Thank you. There are no further questions at this time.
Good. All right, everyone, thank you very much. Have a good day. We're definitely gonna have one. Thanks a lot. Bye.