Good day, and welcome to the Pandora Conference Call for The Q3 Report 2015. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Morten Eismark, Head of Investor Relations.
Thank you, and welcome to Pandora's conference call following the release of our Q3 2015 results announced earlier today. The presentation for this call, as well as a full version of the Q3 release, is available on pandoragroup.com/investor. My name is Morten Eismark from Pandora Investor Relations, and with me here today is CEO Anders Colding Friis and CFO Peter Vekslund. In accordance with the agenda on Slide two, Anders will go through a few Q3 highlights, followed by Peter, who will walk you through the Q3 numbers in more detail. Finally, Anders will conclude the presentation, and we'll be happy to take your questions. Before handing over to Anders, I kindly ask you to pay close attention to the disclaimer on page 3. Anders, please.
Good morning, everyone. Please turn to Slide number four. Following a strong first half of 2015, the momentum in the business has continued into the third quarter, where the revenue was DKK 3.9 billion, an increase of 38% or 28% in local currency. Revenue growth for the quarter was driven by all geographies as well as all product categories, and the new collections launched during the quarter were again received well by our consumers. Actually, all collections launched this year continue to be appreciated by our consumers. From the beginning of the year, as part of our strategy to further enhance the Pandora brand, we've changed the way we use promotions in a number of markets, including the U.S., Canada, and Germany.
In some markets, like Germany, we have reduced the amount of promotions, while we, in other markets, including the U.S. market, have changed the focus, generally in an effort to be less predictable with our promotions. This has had a negative impact in North America for the quarter, where revenue from bracelets have been impacted by the decision to run a charm campaign instead of the traditional third quarter bracelet campaign. In terms of stores, we continue to expand our branded network with focus on concept stores, and during the quarter, we added net 112 new concept stores to the network. Revenue from concept stores increased 49% for the quarter and now contributes to more than 60% of group revenue.
Sales- out growth, measuring growth out of stores more than 12 months old, continues to be positive in all four reported markets, and I will return to this in a couple of slides. EBITDA for the quarter increased 43% to almost DKK 1.5 billion, corresponding to a margin of 37.2%, compared to 35.9% in third quarter of 2014. The margin increase was driven by an improvement in the gross margin, which had a tailwind of around 2 percentage points from lower raw materials. Free cash flow for the quarter was DKK 263 million and was impacted by an increase in inventories and trade receivable, as well as anticipated higher CapEx compared to last year.
We maintain our full-year guidance, however, with a lower anticipated tailwind on the top line from currency of 10% compared to our previously communicated 12%. Finally, our share buyback program is running according to plan, and we have now bought back shares worth DKK 3 billion out of the DKK 3.9 billion that we expect to do. Please turn to Slide number five. All reported markets, except for the U.S., again, generate double-digit growth in local currency for the quarter. Revenue in the U.S. increased 6% in local currency to DKK 1.1 billion and was, as mentioned, impacted by a decision to change the promotions in the market.
The change has been made to further enhance our brand in the U.S. by running slightly fewer promotions, but also create less predictable promotion activities in an effort to reduce promotion-driven buying behavior by our end consumers. In general, we are happy about the performance in the U.S., which continues to be driven by network expansion as well as like-for-like growth. The latter was driven particularly by the rings category, as well as a continued high demand for Disney and the Pandora Rose collections. Revenue from Other Americas increased 15% in local currency. The positive development in Brazil continues and was driven by a combination of opening new concept stores and double-digit like-for-like growth. Revenue in Canada decreased 10% for the quarter.
However, the positive like-for-like sales- out development continued for the quarter, and in an effort to optimize in-store inventories, retailers in Canada have reduced their inventory and consequently spent less. The impact is expected to continue into fourth quarter. Revenue from Europe was up 41% for the quarter or 36% in local currency, driven by all major markets. Revenue in the U.K. increased 37% in local currency for the quarter and was driven by positive like-for-like growth, as well as expansion of the store network.... This includes the already announced acquisition of 4 very successful U.K. concept stores in April, which has given us a couple of percentage points additional growth in the U.K. Revenue from Germany increased 50% to DKK 216 million, which includes a reversal of return provisions corresponding to around DKK 20 million.
The growth in Germany was primarily driven by the expansion and improvement of the store network, including the addition of net 75 new concept stores in the country over the last 12 months. Last week, we opened the last of the 77 stores in the locations we acquired earlier in the year, and the stores are performing according to the plan. Revenue from Other Europe was up 33% in local currency and was primarily driven by Italy and France. Revenue from each of the two countries increased by more than 50%, which was primarily driven by strong like-for-like sales- out growth. Revenue in Russia decreased 84% for the quarter, and as highlighted in the second quarter, we experienced a more hesitant purchasing behavior from our local distributor in Russia, which is caused by the increasingly challenging Russian retail environment.
As a consequence, we continue to expect revenue growth in Russia for the full year to be in the region of -25% to -50%. Revenue from Asia Pacific increased 75% for the quarter or 63% in local currency. Revenue in Australia increased 45% in local currency, which was primarily driven by continued high like-for-like growth. Other Asia Pacific increased 77% in local currency, driven primarily by Hong Kong and China. In China, we initiated our new partnership with Oracle in the beginning of the quarter, and distributor revenue, now recognized as retail revenue, added around DKK 70 million to our revenue compared to third quarter of 2014. Furthermore, like-for-like sales- out in China continues to increase, with double-digit growth rates and also 8 new concept stores were added during the quarter.
Revenue in Hong Kong increased around 50% in local currency, primarily driven by expansion of the store network, which has been increased by 10 concept stores to a total of 22 over the last 12 months. Revenue from Hong Kong and China now each represent around 30% of the revenue in Other Asia Pacific. Now, please turn to Slide number six. The positive like-for-like rates have continued across all four reported markets. Like-for-like growth in the U.S. was 1.7%, and looking at the different regions, growth in the Northeast remained slightly negative for the quarter. However, the stores taken over from Hannoush last year have now been brought into positive territory, and in terms of refitting, we are now more than halfway through the 22 stores.
The other major regions in the U.S. were flat to slightly positive compared to third quarter of 2014. Like-for-like growth in Australia was 44.5% and is our best quarter ever in terms of like-for-like. The increase is primarily driven by an increase in store traffic, but also an increase in units per transaction, driven by our continued effort to enhance in-store execution. Like-for-like in the UK was 7.5% up and was driven by a strong performance from our new products, as well as Pandora Rose. In the quarter, sales were supported by the first ever autumn TV campaign in the U.K.
Like-for-like in Germany was up 1.9%, and as highlighted on earlier calls, we would not have been surprised to see negative like-for-like growth in Germany following the large rollout of stores, but our effort to improve the German market appears to be working. Please turn to Slide seven. Guidance for the full year is basically unchanged, with revenue above DKK 16 billion and an EBITDA margin of approximately 37%. However, we now expect a tailwind from currencies of around 10% on top line, compared to the 12%, which was highlighted in connection with second quarter results. We've increased CapEx from DKK 900 million to around DKK 1 billion, mainly as we see faster progress in investments in Thailand, as well as in IT-related projects. Expectations regarding tax rate and in-store openings are unchanged.
With this, I will now hand over to Peter, who will give you some more details on our financials. Peter, please.
Thank you, Anders. Please turn to Slide eight. Revenue for the quarter increased by 37.5% or 28% in local currency. Like-for-like growth contributed with roughly a third of the growth, and our network expansion, including the acquisitions of distributors and concept stores, contributed the remaining two-thirds. The additional revenue from converting the wholesale revenue to retail value of acquired stores added around DKK 150 million to revenue for the quarter when comparing to Q3 of last year, of which almost half is related to China. Volume increased by 13.6%, and the average sales price increased by 21%. The increase in the ASP was driven equally by 3 factors. First, channel and market mix, primarily because of the higher share of retail revenue. Secondly, product mix, which was impacted by the higher share of revenue from rings. And thirdly, currency.
Revenue from owned and operated stores increased 145% to DKK 1,019 million, and is now 26% of group revenue, compared to 15% in Q3 of last year. The strong increase in retail revenue is driven by like-for-like growth, as well as the addition of 275 new owned and operated stores in the last 12 months, of which 118 are stores acquired from franchisees. And finally, the DKK 150 million mentioned earlier from conversion of wholesale revenue to retail. Please turn to Slide nine. Our focus on concept stores continue, and during the quarter, we added net 112 new concept stores, of which 83 are owned and operated. The large increase in owned and operated stores is primarily due to the takeover of distribution in China, as well as the store rollout in Germany.
We now have 1,666 concept stores, which contribute with more than 60% of revenue for the quarter. We continue to close unbranded stores, and during the quarter, we closed 277 stores. Please turn to Slide 10. Revenue from charms increased by 36%, whereas revenue from silver and gold charms bracelets increased by 9%. Revenue from bracelets were impacted by a negative development in North America during the quarter, driven by the decision not to run a traditional Q3 bracelet campaign in U.S. and Canada, which has been the case over the last 10 years or so. Revenue from bracelets in all the other markets saw double-digit growth in Q3. The focus on the rings category continues, and revenue from rings increased by 79% for the quarter, corresponding to almost 16% of total revenue.
The category was primarily driven by a strong development in Americas, where the share of revenue from rings is close to 20%, but also the U.K., where revenue from rings increased by more than 100%. Other jewelry increased by 37%, driven by revenue from earrings and necklaces, both increasing more than 80%, while other bracelets decreased by 14%, due to the aforementioned change in campaigns. Please turn to Slide 11. Gross profit was DKK 2,893 million, corresponding to a gross margin of 74%, compared to 70.3% last year. The increase was mainly driven by tailwind from more favorable raw material prices, as well as market and channel mix.
The increase was partially offset by unfavorable currency rates and a negative impact of approximately one percentage point due to the takeover of the distribution in China, where initial inventory in the stores was taken over by Pandora at distributor prices. This is similar to when we took over the inventories from Hannoush, and will also have a small impact in Q4. Based on spot prices, our gross margin for Q3 would have been approximately 76%. As you know, the spot margin has traditionally been a reasonable proxy for the expected margin 12 months in advance due to our hedging policy. However, as our product designs are becoming more complex and the raw material component of our production costs are decreasing, and consequently, you should be cautious to model the spot margin as a proxy for the future.
Raw materials, as a percentage of cost of goods sold, is now approaching 50%, compared to the historically communicated around two-thirds. Furthermore, as you know, we are building a new production site in Chiang Mai, which also could have a short-term impact on margins when opening next year. Please turn to Slide 12. Operating expenses for the quarter were DKK 1,554 million, representing 39.7% of revenue, versus 36.5% in Q3 of 2014. Sales and distribution expenses were DKK 807 million, corresponding to 20.6% of revenue, compared to 15.5% in Q3 of last year.
The increase was mainly driven by the increasing number of owned and operated stores, which had an impact of around 3.5 percentage points on the ratio, as well as an increase in amortization, driven by the takeover of distribution in China, Japan, and the store expansion in Germany. Marketing expenses increased 39% to DKK 360 million. This corresponds to 9.2%, which is on par with Q3 of last year. The absolute increase was driven by more media spend, as well as an increase in point-of-sale material, driven by more concept stores. Administrative expenses for the quarter increased 15% to DKK 387 million, which represent 9.9% of revenue. The increase was mainly driven by an increase in IT spend, as well as an increase in headcount. Please turn to Slide 13.
EBITDA for the quarter increased by 42.5% to DKK 1,454 million, resulting in an EBITDA margin of 37.2%, compared to 35.9% in Q3 2014. The EBITDA margin for Americas for the quarter was 41.6% and up 0.3 percentage point compared to the same quarter last year. The improvement in the gross margin was offset by an increase in number of employees, primarily related to the increase in own and operated stores in the region. The EBITDA margin for Europe was 48%, compared to 47.8% in Q3 last year. The gross margin increase was offset by the negative impact from the store expansion in Germany, as well as the decrease in revenue from Russia.
In Asia Pacific, the EBITDA margin was 37.3% compared to 45.2% in Q3 2014. The anticipated decrease, which we highlighted in the last call, was due to our expansion in China and Japan, which had a negative impact on the margin in the region of around 10 percentage points. The impact was roughly split between establishing ourselves in the region and the earlier mentioned impact on the gross margin from taking over distributor inventories. Please turn to Slide 14. Net financial income for the quarter amounted to a loss of DKK 35 million, compared to a loss of DKK 57 million in Q3 of last year. The tax rate for the quarter was 22.9%, up from 20% in Q3 last year, as a consequence of the settlement with the Danish tax authorities.
Net profit increased 39% to DKK 1.006 billion. Please turn to Slide 15. Operating working capital at the end of the quarter corresponded to 19.6% of the preceding twelve-month revenue, a decrease of 5.3 percentage points compared to the same time last year. The decrease was mainly due to a relative decrease in inventory, impacted by lower raw material prices, as well as a better cash collection from our retailers, improving our trade receivables. Inventories in absolute term increased by DKK 423 million compared to Q2 2015. This primarily due to the seasonal buildup of inventory ahead of Christmas. Also, trade receivables was up DKK 383 million, primarily due to extended credit terms in some markets ahead of Christmas, as always in Q3.
Q3 CapEx was DKK 384 million, compared to DKK 135 million in the same quarter last year. The increase was primarily due to the opening of owned and operated stores in the quarter, as well as increasing investment in the production in Thailand. Free cash flow for the quarter was DKK 263 million, compared to DKK 567 million last year. The decrease was primarily due to higher CapEx, as relatively large increase in working capital, as well as Q3 last year being positively impacted by a one-off of DKK 175 million related to a repayment of VAT in Germany. Finally, we ended the quarter with a net interest bearing debt of DKK 2,175 million, compared to DKK 1,030 million Danish kroner at the end of Q2.
The increase was mainly due to the ongoing share buyback program, where we bought shares back worth DKK 1,405 million during the quarter. The debt corresponds to a net interest bearing debt to EBITDA of 0.4, which is in line with our overall capital structure policy. With this, I'll hand back the word to Anders for some closing remarks.
Thank you, Peter. So in summary, for the third quarter, the revenue increased by 37.5%. We continued our rollout of stores with the addition of 112 new concept stores during the quarter. Our gross margin was 74%, EBITDA margin was 37.2%, the key free cash flow, DKK 263 million, and our full year revenue guidance is maintained at more than DKK 16 billion. The share buyback of up to DKK 3.9 billion in 2015 is on track. So all in all, another good quarter in Pandora, where more than 15,000 employees across the world have done a remarkable job. We will now open for any questions to the quarter. Operator, please.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key, followed by the digit one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. Our first question today comes from Chiara Battistini from JP Morgan. Please go ahead.
Good morning. Hi, thank you for taking my questions. First question, on the U.S. If I can ask, how was, how would you describe U.S., and what did you see in the U.S. besides this promotional campaign that didn't give the results you were hoping for? Or if you could help us giving us some color on the exit rate on the quarter, and if you could tell us how October started once the promotion was out of the comp? And then a second question on Disney. First, on the agreement that you announced on Asia, I was wondering if this is also on an exclusive basis like it is in the U.S., in Americas? And can you confirm whether you had launches for Disney in Q3 in Americas, and whether you are planning on launches for Q4?
Finally, on Australia and U.K., like-for-likes that remain very, very strong. If you could tell us more on the drivers of this trend for both markets, please. Thank you.
One question, I didn't get your question around Disney. Could you repeat that, please?
Yeah, sure. Sorry. I was wondering whether Disney is also on an exclusive basis in Asia, like it is for the Americas. And I was wondering on the launches you had in Q3, if you had a new chance of launching in Q3, and how much you're planning to launch in Q4 for Disney?
Okay, well, if we start with the U.S. and look at the quarter, I think that we're very happy with the quarter we have. I think that when we look at the promotion activity, you have to put it into the context of us having done the same bracelet campaign over the past 10 years. One of the things that, in my opinion, is damaging to a brand is if we get too predictable, so therefore we change that. If we take that part of the quarter out of the equation, the U.S. did very well.
So all in all, I think that, based on, on, the, the activities in the U.S. and the fact that we've changed our promotions there, a, a development of 6% is something that I feel very good about. If we look at Disney in, in Asia, it is an, exclusive agreement, and, we, are very happy that Disney have approached us to, continue the development of our cooperation. We've had very good development in the U.S., and we also believe that we can get some meaningful business out of this in, in Asia. And maybe, Peter, you would have a comment if you-
Yeah, and just on in Asia, that was launched in Q4. That was in November, that the products were introduced in Asia.
Chiara, I think you had a third question, but I think we missed it. Could you repeat your third question, please?
Yes. First, just a follow-up on the Disney in Americas. Second, did you have major launches for Disney in Q3? And then my third question was on the drivers of the like-for-like strength in both Australia and the U.K.
Okay. The first thing is that we continuously refresh our assortment in connection to our drops, and there's no changes on that, either on our normal assortment or on Disney. So that continues as it has been, historically. And then, if we look at the major drivers for the development, I think that it's very encouraging to see the numbers in Australia. And clearly it is very much about in-store execution, and the consumers are very happy with the way we do things. And clearly also our collections, which are put into the market, has good traction. That is the same in the U.K. In the U.K., we can add, we have also introduced the Pandora Rose collection, which has also had an impact on this.
Just finally, on Pandora Rose, will you roll it out also to other markets in Q4, or just for the U.K. and the U.S. for now?
We put it into the U.S. first to see how that would work, and we were relatively encouraged with that, but we wanted to try one more market, so therefore we have it in the U.K. We have, at present time, no plans to further develop the distribution of Pandora Rose.
Okay, perfect. Thank you very much.
You're welcome.
We will now take a question from Anne-Laure Bismuth of HSBC.
Good morning. I just wanted to know, what should we still expect marketing to sales ratio of 10% in full year 2015? And what should we expect for full year 2016, also 10%? In China, can you come back on how many stores you plan to open in Q4 and for or full year 2016? And, regarding the online, what was the percentage of online sales in the U.K. in Q3, and if we can have an indication for the U.S.? And finally, should we still expect a tax rate of 30% for full year 2015? Thank you very much.
Thank you for your questions. Ten percent marketing, yes, you should definitely expect that. We will do our utmost to continue supporting our brand and the guidance around or the indication around 10% stands. In China, we have now 38 stores, and we have a total guidance number for the year. We will continue developing, and you can expect that we will also open stores in the last quarter, but we do not give an exact number for that. The online development, I think that the way you should look at online, and I think that's important, is it is a supplement for our consumers to enjoy buying Pandora online, as well as in brick and mortar, and that's the way we see our online channel.
So we are very happy that we can give this offer to our consumers, and then we'll see how it develops. If we look at the U.K., that is the only place that we have so far giving any figures, it is still around 10% of our revenue.
And, the question on the tax rate, no changes to that. So, we still expect 30% for this year and going forward from next year, 2016, around 21% in tax rate.
Thank you.
You're welcome.
We will now take a question from Lars Topholm from Carnegie.
Yes, thanks for taking my questions, of which I have three. First and all, for Q3, you mentioned the change bracelet campaign as a negative. I know you have had a rings campaign running from October 1 to October 25. So my first question is, how, if you can say anything about how successful that has been? Then a second question goes to the decline in the return provisions from 7% to 6% of sales. Is it a correct approximation that that adds roughly DKK 80 million to your revenue? And a third question goes for the underlying development in revenue from charms and bracelets.
So it's up 8.8%, but if I take out more owned and operated and take out the currency effect, is it then fair to assume it's down around 6%? And if that's fair, can you maybe comment how much it's down in the U.S.? It's suggested should be down maybe 20% in the U.S. Can you comment on that, please? Thank you.
Thank you for your questions. I'll take the first question, and then Peter will take the two following questions. While you say we mention our change bracelet campaign as a negative, I think that we try to mention that as a positive, because I actually think that is what we need to do to support our brand in the U.S. So at least in my world, this is something which is helping us build our brand even stronger in the U.S. market. If you look at the rings, overall, we had a development in rings, and it constitutes 16% of our revenue for the quarter. I find that is very strong, very good, and also the U.S. had a very strong quarter in rings, so it was across all geographies.
For me, it is important because what we are on, on trying to do is to build Pandora into a jewelry brand. So this is really good support, for that. And then I'll leave the two other questions.
But I was asking about the rings campaign you have been running in the U.S. in Q4, so from October 1 to October 25. If you can put-
We will talk about Q4 when we meet next time.
Oh, okay. Thanks. Yeah.
On the returns provision, you're right, that is now at 6% of the consolidated revenue. And as the return provision primarily is related to the U.S., and the U.S. share of consolidated revenue is decreasing, so is the returns %. It's also, whenever we take back returns, so it can fluctuate in the 6%-7% range. So no major changes as we see it on return.
Okay, there's not a change in overall return policy, it's simply a matter of geographical fluctuations?
Absolutely. No change in return policy.
Okay, good.
On your last question, a lot of numbers, so it's negative, but I cannot confirm any exact percentages.
Oh, okay. Thank you very much.
You're welcome.
Our next question today comes from Kristian Godiksen of SEB.
Yes, hello, a couple of questions from my side. I was wondering if you could comment something about the progress of refreshing the network in the Northeast of the U.S. So, what is your progress on the negative like for like there? Is it still improving? And also, how many of the stores have you refreshed to the new Evolution store design? The second question is regarding the higher level of amortization you have in Q3. Is that the new run rate we should expect? And does that primarily relate to the acquisition of distribution rights in Asia, or is this more of higher amortization due to the rollout of more owned stores and hence higher amortization of key money?
And then thirdly, if you could give an update on Russia, which is hurting, I should say. I'm a bit surprised that that you're still opening or that the master deal is still opening stores there. Could you maybe give some some more flavor on that, please? Thank you.
I'll take the first and the last question, and then the amortizations. I'm sure that Peter, he will, in a very good way, cover. If we look at the Northeast and the refreshing of the network, as you know, we are continuously continuing our effort to clean up our store network, and that also goes for the Northeast. If we look at the refitting of our stores, we are more than halfway through. We have refitted to the new concept, 13 out of the 22 stores. And as I mentioned previously, what we can see for the Hannoush stores, if you take them as a total, we have moved into positive like-for-like numbers in the quarter. So quite encouraging.
If we take Russia, in Russia, we can see that even though the Russian retail market is in has some issues right now, the Pandora business in Russia with our distributor is actually doing pretty well. If we look at the development and look at the total figures for the business, it is roughly flat. And I think that's something that anybody would call pretty good in a Russian market. So what is happening, and the reason why we see these very low sales number from Pandora, is actually because the inventory levels in Russia is kind of falling, is getting smaller.
That's also why we say that if you look at the year, you should expect between 25% and 50% decrease in our sales to our distributor. But the distributor sales to retail or to consumers is actually in broad terms, roughly flat, even though they had a slightly negative development in like-for-like, and that is, of course, because they are continuing opening stores and profitable stores.
Yes, and on the amortization, that is related to China, Japan, and the stores that we're opening in Germany. So approximately half of the increase is related to China, and that will, that will be fully amortized end of this year.
Okay. So just, sorry, a number of follow-up. So the half of the increase is due to China, and that's amortized the rest of the year, you say. So the other half, is that just key money then?
That, that is related to Japan, and also in Germany, where we have taken over the 77 leases, and for that, we of course have paid some money, and that will be amortized over the terms of the, of the lease. So you could say, over the next couple of years.
Okay. And then, sorry, just some follow-ups for you, Anders. So regarding Russia, do you then expect that the master dealer will continue to open stores? As you say, they are continuing to be profitable. And then also just to follow up on the refreshment of the network. So I guess if the Hannoush stores now are beginning to have positive like-for-like, but you still have negative like-for-like in the region, do you then have other plans for taking over other concept stores in this region or... And also, when do you expect that you are the full way in for the total of the 22 stores?
If we start with Russia, they opened eight stores in the third quarter. And we have to remember that Russia is less than 2% of our total revenue, which puts it a little bit into context. But they are doing well. It's a good business, and we are very happy with our distributors who in Russia are doing a very good job in a very difficult market. And if we look at the Hannoush stores, we are in positive territory, yes, and that is something which is encouraging. We have no plans to take over other stores in the Northeast.
Okay. And when do you expect the full 22 stores to be the new store design?
Well, it can take another year or so before we are through it.
Okay.
One thing which is important is to say that we do this to make sure that when we can renew the leases, then we refurbish the stores, and we don't want to refurbish a store for a lease which could be expiring. So that's the reason why it takes a bit of time.
Okay. Many thanks.
You're welcome.
Our next question comes from Poul Jessen from Danske Bank.
Yes, thank you. I have two questions left. One is about the Forex impact, where you take the tailwind down, but you say that it's based on current currencies. My, does that include the recent changes that we've seen, or is that by end of October? Just a clarification. And then you mentioned also the impact from the new factory in Thailand from 2016. Can you elaborate a little more on what size of impact we'll expect there? Thank you.
I'll take the second one, and then Peter will answer the first question. If you look at the facility that we are presently building in Lamphun, close to Chiang Mai, we expect to start operations in the fourth quarter of 2016. But before we really get it up and running and see some real meaningful volumes coming out of the facility, we will be into 2017. So clearly, there will be some implications when we start manufacturing in Chiang Mai until we get it up and running. The exact numbers we do not guide on.
And on the currency impact, you're right, we have previously had 12% in tailwind on commodity or currencies, and that is down to 10% for the full year. And that is the impact calculated as of today. Obviously, there's only a month and a half left of the quarter, so 10% is what you should expect for the full year.
Okay, thank you.
You're welcome.
We will now take a question from Patrik Setterberg, from Nordea.
Yes, good morning. Two questions from my side as well. The first question is regarding the strategic change of promotions. Do you already by now know about any promotion that will have any negative effect in the fourth quarter? That is my first question. And then secondly, previously, you have been warning about that we should expect to see a negative like-for-like growth in Germany. Is this still the case?
Thank you very much. And, yes, the strategic change we have in promotions is an important part of, of, making sure that we support our brand.... And, I'm very happy with the fact that we have done that, as we have also mentioned, both in Germany and in the U.S. If we look to the fourth quarter, we do not expect, so the easy answer and short answer to your question is no, we do not expect that to have an impact in fourth quarter. Now, I think that what we all have to be very focused on is the fact that promotions is not something like a machine.
So it's not like you put in a promotion in the machine, and then you know exactly what it sells. We try to do the right promotions, but of course, when we do promotions, we also want them to work. What we have done in this quarter is that we've had a promotion which has been running for more for 10 years or so, in more or less the exact same week. So what was happening was that people were lining up outside our stores to get a free bracelet, and we did not believe that was what we wanted to do for our brand, so therefore we changed it. But when we look into the fourth quarter, we have no at this time expectations of our promotion changing that.
Then, if we look at Germany and the expectation of negative like-for-like, we can only repeat what we've done before. You should still expect that it could be the case for the fourth quarter. Now, we have actually, right now, opened all the stores in Germany, and thereby, the competition is harder than ever with our existing stores. So, that is something that you and we should expect for the fourth quarter. At the same time, we have expected it before, and so far, we have not seen it, which means that actually, we are in pretty good shape in Germany, and we are doing well also compared to our original plans. And I would say we would put it like this, that we are very much on track.
Okay. Thank you, Andres.
Welcome.
Our next question comes from Klaus Kehl, from Nykredit Markets.
Yeah, hello, Klaus Kehl from Nykredit Markets. Two questions. The first one is related to your, cost development in, yeah, in the OpEx here in, this quarter. And the question is, whether it would be fair to say that you have, all the cost, for the store expansion up front, and then when these stores are ready for, Q4, then we should see a, yeah, a meaningful positive impact in, Q4 when the revenue starts to, to kick in? That would be my first question. And my second question would be about cash flow. You said that you have, been, building up inventories ahead of Q4.
Would it then, yeah, all else equal, be fair to expect a strong cash flow in Q4? That would be my questions.
Those are good questions for Peter, so he will take them.
Yes, starting out with the cash flow, usually Q4 is a strong quarter on cash flow because we do a collection of a lot of receivables in the quarter, as well as we receive the cash from all our own and operated stores. So, usually strong cash flow in Q4. On the cost and the OpEx, when opening stores, obviously, we do incur rent and so on before the store is opening, and there's a ramp-up of revenue. So over the first year to two, there's a ramp-up of the profitability of a store, and that, of course, does have an impact of the quarters.
But would it be fair to say that the ramp-up in costs should not continue then in Q4, while revenues ought to pick up due to Christmas sales?
You can say in general, on the sales and distribution cost, we have guided you all for modeling purposes of 17%-19%. And obviously, as our O&O share increases, then that number will more be in the 19% range. So also expect an uplift in that going forward.
I think that it's important to say that it takes time for a store to get up and running, and that's the way you should expect it. So it's not something which is done in a quarter. We see that one of our most important marketing vehicles in Pandora is really our stores. And clearly, as consumers, they understand that we are present in an area, they will more and more visit those stores. So it's not something which is done just in a quarter.
Okay. Thank you.
Welcome.
We will now take a follow-up question from Lars Topholm from Carnegie.
Yes, thank you. Just a small household question. When, when you add 112 new stores and the 83 are owned and operated net, including 30 from China, transferred from franchise to owned and operated stores, just to be absolutely sure, that means you opened 59 new franchise stores. Is that correct?
Overall, it makes sense, without verifying the exact specific figures you mentioned.
Thank you very much.
We will now take a follow-up question from Chiara Battistini of JP Morgan.
Hi, sorry. I have just a couple of follow-up questions, if I may. First of all, earrings and necklaces continue to do... It's the second, third quarter that you're posting very strong growth in earrings and necklaces.... Are you still confirming you're not putting specific campaigns behind these product categories yet, like you're doing for rings? So it's something that we should expect to continue to go strongly as we go into next year. And then, you're increasing the CapEx guidance for the, well, for both production facilities in Thailand and the IT-related projects. So I was wondering if you could give us more color on these IT projects and what these are for, and how we should expect those to impact the business going forward, please. Thank you.
Thank you very much. It is correct, and it's encouraging from our perspective that we see the earrings and necklaces actually growing in the quarter by 80%. We can confirm that we haven't started putting a specific focus on any of those two categories. It is part of our total jewelry offering and a part of the effort to become a jewelry brand. So when you look at some of our advertisement, you will see that we also feature our earrings and our necklaces, but we are still focusing very much on rings, and the fact that the rings is now 16% of our revenue, if you look at the exact numbers in DKK of that, it is a substantial business in rings.
So all in all, an effort to build us as a jewelry brand, but we haven't put specific focus on neither earrings or necklaces at this time. If we look at the CapEx guidance and the fact that we have upgraded the number a little bit, is only that we have a little bit more transparency in that, and we can see that our plans are progressing well, both on IT and on our facility in Lamphun, near Chiang Mai. So it's more a question of that, and I don't think that you can kind of predict that with a certainty which is that big.
Thank you very much. But can I ask, what are these IT project-related, well, these projects for IT, is there anything specific there?
It is, this is Peter. It's the usual product- projects. It's a global ERP system, it's a point of sale system, and as well as merchandising and CRM systems. So building an infrastructure for the future of Pandora.
Great, thank you.
You're welcome.
We now have a question from Frans Høyer, from Jyske Bank. Mr. Høyer, your line is now open. You may now ask your question.
Can you hear me?
Oh, certainly we can.
Sorry about this. Okay, the U.S., the North American sales up 5.7% in the local currency. I would expect or guess that selling space is up by 15%, and you've had some tailwind on the owner-operated selling space as well, adding some percent to sales. So it is looking... I just want to get a little more clarity on what's actually happening here. It looks rather weak, and I understand the point about the charms and the promotional activity around that, as well as the Canada inventory issues. Could you try and quantify the Canada inventory adjustment issue? How much of the 5.7% sales growth in the region was affected by that? And also, how much was an effect of the promotional activity around charms, bracelets?
I can see Peter is eager to answer your question.
Thanks.
Yeah, on the 5.7% growth in local currency, that is for the U.S. alone. Canada is included in Other Americas, and we do see some destocking or reduction in inventories, but still positive like-for-like in Canada.
If we do take so out of the DKK 8.3, how much was the inventory adjustment in Canada?
We are not being that, that precise on, on that.
Was it a percent? Was it 5? Was it more?
No, but we're not being that precise on these-
Okay.
Stocking and destocking effects. Again, what we are focusing on that, we do have a positive like-for-like in Canada.
Yes, understood. With regard to the bracelets category, sales up 8%. Again, how much do you think it would have been without the changes to your promotional campaign activity?
I think that it would be very speculative to start looking at that. I think that we can say that we are very happy with the development that we've seen in the quarter, both on our charms and bracelets, but also on the other categories, like the rings and the necklaces and the earrings.
This was an annual, a campaign that used to run annually, once a year, was it?
It was a campaign which we had in around the same week, and have had it for the same week every year, and the campaign has been for ten years or so.
Yeah
That we give a, a bracelet to-
Yes
- the consumer with a minimum purchase. That's been the framework for it, and predictability is never good when you're looking at-
No
- promotions.
And now you have canceled this campaign, it's not going to happen anymore?
Well, I think that what we need to do is to continue doing meaningful promotions, which will support our brand, and that we will also do in the future.
All right. Finally, finally, a question.
But we would look to be a lot less predictable, and that's the important part.
Okay, understood. And with regard to the production expansion in Thailand, and the ramp up during 2016, is this a bigger expansion of production than as a percent of the existing capacity than you have seen on several occasions before? Or is it pretty much in the same size bracket?
It is a different thing from the fact that what we have done historically is very much that we have built capacity to cope with demand. Now we are building a totally new facility in Lamphun, and that is going to give us some extra capacity for the group, which will help us for the coming years.
So it is a more substantial addition than we've seen, the brownfielding, the sort of bolt-on expansions that we've seen before?
It is, yes.
Okay. Thanks very much.
You're welcome, and I think we are getting to the point where we need to close now.
There are currently no further questions.
Okay. So thank you very much for your questions, and, it's been a pleasure. Have a very good day.
That will conclude today's conference call. Thank you for your participation. You may now disconnect.