Pandora's (PNDZF) CEO Anders Colding Friis on Q2 2015 Results - Earnings Call Transcript

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Pandora A/S (OTCPK:PNDZF) Q2 2016 Earnings Conference Call August 8, 2016 4:00 AM ET

Executives

Magnus Jensen - Vice President, Head of Investor Relations

Anders Colding Friis - President and Chief Executive Officer

Peter Vekslund - Executive Vice President and Chief Financial Officer

Analysts

Chiara Battistini - JPMorgan

Kristian Godiksen - SEB

Anne Bismuth - HSBC

Lars Topholm - Carnegielast

Michael Rasmussen - ABG

Frans Høyer - Jyske Bank

Klaus Kehl - Nykredit Markets

Piral Dadhania - RBC Capital Markets

Elena Mariani - Morgan Stanley

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter Report 2016 Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Magnus Jensen, Head of Investor Relations. Please go ahead, sir.

Magnus Jensen

Good day and welcome to Pandora's conference call in connection with our Q2 2016 results which we announced earlier today. My name is Magnus Jensen, from Pandora's Investor Relations. And with me today are Pandora's CEO, Anders Colding Friis; and CFO, Peter Vekslund.

In accordance with the agenda on Slide 2, Anders will present some of the highlights for Q2, before Peter will take you through the numbers in more detail. Finally, Anders will conclude the presentation, and following, we'll be happy to take any questions you may have.

Before handing over to Anders, I kindly ask you to pay attention to the disclaimer on Page 3. Anders, please.

Anders Colding Friis

Thank you, Magnus, and good morning, everybody. Please turn to Slide number 4. Total revenue for the quarter increased 20% off 25% local currency to DKK 4.3 billion driven by double digit growth in local currency in all of our three regions.

All the individual product categories also increased with double digit growth supported by a continued relevant product offering including the two product collections launched in the second quarter of ‘16 the Mother’s Day in the high summer.

Revenue from our concept store is including the eSTORE increased 39% compared to the second quarter of last year. And during the quarter, we opened 68 new concept stores and closed roughly 300 multi-branded.

The eSTORE which is time to be opened in China and Canada in the second half of ‘16 generated around 4% of group revenue for the quarter and that compares to around 2.5% in the second quarter of 2015.

Like-for-like sales growth for the group was 7%. EMEA and Asia Pacific continued the very positive trend whereas Americas like-for-like for the quarter was minus 1%. In general, Americas was impacted by a difficult retail environment and some markets were in negative territory for the quarter. However, like-for-like, in the U.S. was positive at 2%.

EBITDA for the quarter increased to DKK 1.6 billion and corresponded to an EBITDA margin of 37.2% compared to 36.4% in the second quarter last year. The improvement was primarily driven by a high gross margin, partially offset by the ongoing expansion in East Asia.

Free cash flow was DKK 576 million compared to minus DKK 268 million in the second quarter last year, which was negatively impacted by a one-off of DKK 642 related to a settlement with the Danish Tax Authorities.

Finally, at the end of second quarter 2016, we bought back shares for around DKK 2 billion out of the total share buyback program of up to DKK 4 billion for 2016.

Now please turn to Slide number 5. Before turning to our regional revenue development, I would like to share few words specifically on our results in the U.S. The development in the U.S. was generally positive with a revenue increase of 11% in local currency. The increase was driven by 2% like-for-like sales growth supported by flat to positive growth in all major regions. The North East region was the strongest region at 4% growth driven by better conversion and higher basket ties. The West region stores offers a bit from declining traffic in Las Vegas.

As we expand flat to declining foot for outside out stores in both high street and in most overall, we are pleased with the development in the U.S. One of the main drivers the like-for-like growth was increased focused on rings and ear rings with the two categories increasing significantly compared to last year. The expanded category focus can have an impact on established categories especially in the developed market like the U.S. And combined with a very strong quarter for the Disney collection second quarter last year including the launch into shop-in-shops and multi-branded stores in April, the revenue from Charms in local currency was flat for the quarter. Excluding revenue from Disney Charms, growth in the U.S. would have been significantly higher.

Additionally, our eSTORE in the U.S. which have now been operating from more than a year contributed significantly to the growth driven by more than 100% traffic increase since last year. So far we are very satisfied with the progress.

In terms of the store network, we’ve added 36 new concept stores in the second last year to a total of 335 stores in the U.S., while we closed around 400 multi-branded stores as part of the cleanup. Furthermore, during the first half, Jared has planned upgraded almost 100 of their stores to shop-in-shop. Status end of last week was that they had upgraded around 165 stores.

Please turn to Slide number 6. Americans recorded DKK 1.7 billion in revenue, an increase of 5% of 10% in local currency compared to second quarter 2015. Like-for-like sales growth for the quarter was as mentioned minus 1%, impacted by negative like-for-like sales development in Brazil, Canada and in the Caribbean Islands. The overall growth in the region was driven primarily by the U.S. which generated revenue of DKK 1.3 billion, corresponding to 8% growth in DKK.

Revenue in Canada increased 3% in local currency but decreased 5% DKK compared to second quarter 2015. By like-for-like was negative in Canada, impacted by slower traffic in our stores. We’ve added seven new stores in the last 12 months. Revenue in EMEA was DKK 1.9 billion and increased 28% in reported revenue of 32% in the local currency. EMEA concept stores like-for-like growth was 10% excluding the third party distributors which include Russia, the EMEA like-for-like development would have been around 20%.

Revenue in the U.K. which represents 25% of revenue for the region increased 7% of 17% in local currency. Growth in the U.K. was primarily driven by strong performance in the existing store network as well as the addition of net 36 concept stores. Like-for-like was double digit driven by continued strong in-store execution. We saw no immediate impact from the Brexit for the quarter, besides from the currency impact. Based on the current outlook for the U.K. following Brexit, we have no plans of changing our business approach but we are prepared for a few pumps due to the current uncertainty regarding Britain’s involvement with the EU.

Italy and France continue to perform very well and revenue into two countries increased with 40% and 70% respectively compared to second quarter 2015. Growth was driven by high double-digit like-for-like growth and the opening of 14 and 16 concept stores respectively in the last 12 months. Italy generated 25% of EMEA revenue while revenue from France corresponded to around 15%.

Revenue in Germany increased around 70% for the quarter, generating of 10% of EMEA revenue. Second quarter last year was negatively impacted by a one off provision of DKK 53 million, excluding this, growth in Germany would have been 17%. This was driven by a low double-digit like-for-like as well as the addition of net 33 new concept stores in the last 12 months. In the same period around 300 multi-branded stores has been closed.

Finally revenue in Asia Pacific increased with 43% of 51% in the local currency, to a total of DKK 792 million. The quarter was again positively impacted by the conversion effect from acquisition in Singapore and Macau from general this year and China since July last year. Excluding the one-off effect from this conversion, the growth was 24%.

Australia revenue increased around 30% compared to second quarter last year driven primarily by high double-digit like-for-like growth which continues to be supported by very high brand awareness and perception as well as strong install execution.

Furthermore, tourists particularly from China are driving part of the growth in Australia. We’ve served an increasing share of tourist entering our stores more than 50%. However, the total effect on our business is difficult to quantify.

Revenue in Australia represented around 40% of the revenue from Asia Pacific. Total sales out in Hong Kong was up with around 10% in local currency and generated around 15% of the revenue for the region. However like-for-like in Hong Kong was negative, primarily due to the high number of new store opened in the last 12 months as well as the demo declining traffic due to the economic environment in the area.

Revenue in China increased significantly compared to last year and represented along 25% of revenue in Asia Pacific for the quarter compared to around 8% in the second quarter of 2015. The increase was primarily driven by high double-digit like-for-like growth as well as the conversion of distributor revenue to retail revenue which had an impact of around DKK 65 million for the quarter.

Additionally, we opened 9 new Pandora owns concept stores in China during the quarter to a total of 37 stores in the last 12 months. Year-to-date, we’ve added 14 new concept stores and we are seeing a very positive progress in our plan. Therefore, we now expect to open around 40 new concept stores in China in 2016 as well as in 2017 and 2018. This compares to previously communicated, 30 stores in 2016, and 25 for 2017 and 2018.

In terms of pricing, we’ve done very limited changes to all prices in our different markets over the last four years. As a consequence, we are now in a situation where prices on a number of products when we look across the different geographies are out of sync. To align our pricing structure in the three weekends, we’ve decided to do a number of price changes which you will see in our stores starting from third quarter and then faced in over the next 9 to 12 months.

The goal is not to have same prices in all market, but rather that the ranking of all products price wise is similar across all market. You should not expect this strive any meaningful impact on margins as it includes both price increases as well as decreases, but rather which is the goal that we would have more clear and uniform pricing structure across the group.

Now, please turn to Slide number 6. Following a strong first half of 2016, we’re on track to meet our full year guidance, which we revised in connection with our first quarter results. We continue to expect revenue to be more than DKK 20 billion for 2016 and EBITDA margin to be about 38%.

CapEx for the year is now expected to be around DKK 1.2 billion, where we previously expected it to be around DKK 1 billion. The upgrade is due to faster progress than expected in a number of business project including IT related investments, Thailand and other.

Finally, we upgrade the expectations to number of new concepts stores, which we now expect to be higher than 300, also we now anticipate that there would be split with 50% in EMEA, 25% in Asia Pacific and 25% in Americas, so they were expected to be distributed to 6-20-20.

With this I give the word to Peter, who’ll give you some more details on the numbers.

Peter Vekslund

Yes, thank you, Anders and please turn to Slide 8. For the quarter, revenue from concepts stores and shop-in-shops increased 33%. The branded stores contributed with 77% of revenue, up 7 percentage point compared to Q2 2015.

Revenue from Pandora owned stores increased by 65% and represent 34% of revenue compared to 25% a year ago. The increase was driven by a good performance in all stores as well as e-STORE which as Anders mentioned now represents 4% of total revenue compared to around 2.5% in Q2 last year.

Furthermore, we added 168 O&O concepts stores to limit work. The third party distributor revenue decrease by 24% compared to Q2 last year primarily due to PANDORA’s takeover of distribution China, Singapore and Macau. Excluding the three countries, revenue from third party distributors decreased 5% compared with Q2 2015. The underline decline was primarily due to the continued challenging business environment in Russia.

Please turn to Slide 9. In Q2, we added net 68 new concept stores to a total of 366 new concept stores in the last 12 months. This includes the addition of 14 Pandora owned concept stores in the quarter and 168 in the last 12 months. Of the 168 stores, 29 was acquired from the former distributor in China and 15 were acquired from our distributor in Singapore and Macau. Shop-in-shops increased with 161 new stores for the quarter, of which 98 was related to Jared upgrade. Finally we’ve closed more than 300 multi-branded stores in the quarter, primarily in the U.S. and Germany.

Please turn to Slide 10. Revenue from Charms increased 10% for the quarter and represented 62% of revenue. Growth in Charms was impacted by a single digit negative growth in Americas, primarily due to the strong introduction of Disney last year, which mainly consist of Charms. Revenue from Charms in EMEA and Asia Pacific increased around 20% and 50% respectively.

Bracelets increase was 34% driven by Moments and ESSENCE, which was up 63%. Two collections was helped by success for promotions in all regions and the launch of a number of new bracelets in the first half of the year. Together the revenue from Charms and Bracelets correspond to 79% of revenue and their growth contributed was 59% of the total growth for the quarter.

Rings continue to do well with revenue of DKK 544 million and a growth of 42% compared to the second quarter last year. Revenue from rings was 13% of total revenue compared to 11% same quarter last year.

Revenue from other jewelry which contained earrings and necklaces increased 57% for the quarter. As part of our effort to become a full jewelry brand, we started to focus on Earrings at the beginning of the year. The change in approach has not been to add more Earrings to the assortment but rather to increase focus in staff training and marketing and make sure we have the right earrings.

So far we are satisfied with the development for Q2, revenue from earrings increase more than 80% compared to Q2 2015, corresponding a 4% of total revenue, also necklaces did well and increased revenue for almost 60%.

Now, please turn to Slide 11. Gross profit was DKK 3.260 billion, corresponding gross margin of 75.3% compared to 71.5% last year. The increase was mainly driven by tailwind from favorable raw material prices having a positive impact of roughly 1.5 percentage point and an increase in revenue from owned and operated stores with a positive impact of 1.5 percentage points. Production complexity had a negative impact of approximately 1 percentage point.

Furthermore, as a positive one-off, we reclaimed duties regarding prior years which has benefited U.S. with approximately 1 percentage point for the quarter. Final regarding in these raw material price increases, we do not expect any additional impact on gross profit for the year, because we’re already fully hedged of 2016, so still 1 to 2 percentage points compared to 2015.

For 2017, which is partially hedged, we expect a headwind in very rough numbers of around 1 percentage point, and for 2018 and onwards, a headwind of around 2 percentage point compared to 2016, if prices be on chain.

Sales and distribution expenses increased 35% to 20.7% of revenue compared to 18.4% one year ago. The increase in share revenue was mainly driven by additional owned and operated stores which had an impact of around 3 percentage point. Marketing expenses increased 27% from 9.4% of revenue for the quarter compared to 8.9% in Q2, 2015. The increase in marketing was primarily PR and media.

Administrative expenses for the quarter increased 32% to DKK 473 million equal to 10.9% of revenue on increase of 1 percentage point compared to Q2 2015. The increase was mainly driven by ongoing IT expenses, our new offices in Singapore and China, as well as one-off cost related to the transition into a new IT service provider corresponding 1% of revenue.

Net financials provide a net gain of DKK 7 million in contrast to a loss of DKK 69 million in Q2, 2015. Both amounts were primarily related to FX charges. Net profit increased to DKK 1.2 billion compared to DKK 910 million last year.

Please turn to Slide 12. The group EBITDA for the quarter was DKK 1.609 billion, up 23% compared to same quarter last year equal for margin of 37.2%.

Americas increased the EBITDA margin by 2 percentage point to 40.3%. The increase was primarily driven by the improved gross margin including the one-off related to reclaimed duties which contributed with approximately 2.5 percentage point of Americas. The increase was partially offset by gender mix including more revenue from old and operated stores. EBITDA margin in EMEA was up 5.2 percentage point to 36.5% primarily driven by the higher gross margin supported by operating leverage in the regions due to the higher revenue.

Furthermore, Q2 2015 was negatively impacted by a safe return provision in Germany, but an impact of approximately 3 percentage point. As expected, the expansion in Asia impacted the EBITDA margin for Asia Pacific, which decreased from 44.9% to 32.3% in Q2 2016. The decrease was primarily due to the increasing cost related to the expansion in China and Japan including the takeover of the distributor in Singapore and Macau where we are establishing our own organization.

Combined, it had a negative impact of around 13 percentage points for the quarter. This includes a one-off inventory effect of around three percentage points on the gross margin related to the acquisition of the distributors in Singapore and Macau.

Please turn to Slide 13. The operating working capital at the end of the quarter corresponded to 15.8% of the preceding 12 months revenue, an increase of 1.4 percentage points compared to the end of last quarter. The increases were primarily due to high inventories due to a plant inventory built up ahead of the Autumn/Winter collection launch.

Q2 CapEx was DKK 352 million compared to DKK 239 million in the same quarter last year. The increase was primarily due to the opening of owned and operated stores, increasing investments in the production in Thailand, as well IT infrastructure projects.

Free cash flow for the quarter was DKK 576 million compared to minus DKK 268 million last year. The increase was driven by higher profit as well as Q2 2015, be negatively impacted by DKK 642 million related to the settlement for the Danish Tax Authorities.

The ended Q2 the total interest bearing debt of DKK 4.2 billion and our net cash position of DKK 540 million. Our net interest bearing debt-to-EBITDA at the end of the quarter was 0.5 which is in line with our overall capital structure policy.

And with this, I’ll hand over to Anders who will summarize the quarter.

Anders Colding Friis

Thank you, Peter. Please turn to Slide number 14. So in summary for the second quarter, revenue increased 20% of 25% in local currency. We continued the rollout of stores with addition of 68 new concept stores during the quarter. Gross margin was 75.3%, EBTIDA margin 27.2%, we had a free cash flow of DKK 576 million. Revenue and EBITDA guidance was maintained while CapEx increased to approximately DKK 1.2 billion and we now expect to open more than 300 concept stores in 2016.

To all in all, the second quarter for Pandora, we all are pleased across the world have done a remarkable job.

We’ll now open for any questions to the quarter. Operator, please.

Question-and-Answer Session

Operator

[Operator Instructions] Now we’ll take an opening question from Chiara Battistini from JPMorgan. Please go ahead your line is open.

Chiara Battistini

Hello, good morning, thank you for taking my questions. I have a few actually first of all on the U.K., as I saw on the slide, you’re saying U.K. like-for-like in quarter was up low double digits, which I think it was in line with Q1 and the total growth was actually for the U.K. was up 17% from your release and despite a lot of space opening. So can you walk us through this mismatch between the space growth plus for like-for-like being that strong and then there is a lean number up 17% or is there a mismatch between sell-in and sell-out we should be thinking off and therefore a very healthy inventories in the trade there?

Then on the full year guidance and as you are increasing the number of openings for the year by you’re leaving the sales guidance unchanged, are you telling us anything on the implied like-for-like for the H2 or we shouldn’t be reading too much into that?

Then on the shop-in-shops in the America, can I ask as I see that the market running doors are going down, because I guess you are restating the Jared stores, but then I don’t understand why the shop-in-shops were also down in Americas. So is there anyone of there that we should be thinking also in Q2 please? Thank you.

Anders Colding Friis

Thank you very much. I’ll take the first question and then Peter will take the two next questions. In the U.K. yes, correct like-for-like were up double digit. What you have to be very much aware of this that there is no direct link between us selling in and the sell out what we have a focus on is very much the sales out of the stores. And if we just make sure that we have good like-for-like numbers, we also know that the sales in will come. So there will from quarter-to-quarter be a bit of the mismatch and I also think that was what you expected. So that is correct. And then, Peter?

Peter Vekslund

On the additional 25 stores that I think that both of those will be open late in the year and therefore the impact on our full year revenue would be limited this year. On the shop-in-shops, you’re right on the conversion into on the Jared stores. Also please bear in mind that the last year we introduced Disney into the multi-branded channels including shop-in-shops in the U.S., so where so we are off against a high number from last year.

Chiara Battistini

Perfect. I think I mention if I am just may add another one on the pricing comments you’ve made were very interesting. Can you give us some color on the kind of pricing architecture you’re trying to achieve and so saying 100 in Europe, what would be the premium in the other markets, please?

Anders Colding Friis

Maybe just as general note on what we’re doing on pricing, what we’ve done is we actually conducted a very big consumer study where we looked at our pricing architecture across the markets. Historically, we’ve done the pricing in the markets. But what we can see is that actually across all the markets, the consumers have the same perception of the product, so that’s the reason why we want to you can say clean it up. If you look at our indexes, we normally have an index of around 100 in Europe. We have a little bit in the U.S. say 90. And then when we go to Asia, we have 120 and a little bit higher than that in China. So those are the general rules for it. And then because of currency movements, we a little bit lower in Australia.

Chiara Battistini

Okay, thank you.

Anders Colding Friis

You’re welcome.

Operator

We will take it on next question from Kristian Godiksen of SEB. Please go ahead. Your line is open.

Kristian Godiksen

Yes, hello, a couple of questions from me as well. Maybe if you could comment a bit on that discrepancy of the organic growth which is yeah basic you say is around 8.3%, if I take the one third of the 25% growth in local currency and then this 9% in sales out like-for-like if you just for the third party markets. I guess my question is, should we continue to expect that the organic growth will be lower than the sales out like-for-like growth? And basically what I’m saying is that it will lower growth from non-concept store more than offset the stronger growth in the eSTORE which is with the less not included in the sales of like-for-like growth? So that was the first question.

And then secondly, maybe if you could comment a bit more and give some elaborations on what is it that is giving the negative like-for-like growth X in Americas ex-U.S. so both a couple of questions on or comments on the Caribbean, Brazil and also in Canada?

And then maybe just thirdly, if you could confirm a bit regarding all the one-offs that you see in the quarter, I thought I heard in the call, was there any impact from the gross margin from the acquisition of the Singapore, Macau? And also maybe if you could come in a bit more on the one-offs regarding, should we expect to continue to see some of regarding Jared sell-in, IT transition is that also in Q2 will alone and maybe also on the complexity, what should we expect for the remember remainder of the year? Thanks.

Anders Colding Friis

Thank you, Kris. And there was lot of questions out there. Your second question if I got it right and then Peter will elaborate on the second. I’ll talk a little bit about the like-for-likes in the Americas.

If you look at Brazil, I think that everybody understands that Brazilians is in a special state. We have in local currency in the market quite a growth of 22% but at the same time, we can see that our like-for-like numbers are negative. But I think Brazil is a little bit self-explanatory. If you look at the Caribbean, you have to understand that the Puerto Rico which is a big market for us is a in a bit of a special state, actually domestically and that has put a limit to the consumer spending, at the same time we see a bit less traffic in the Caribbean in general based on tourists.

And then the last market, where we can see some negative development is Canada where we have I would say very, very low negative like-for-like numbers and nearly as low as you can get them. And I mean Canada, I think that clearly we can see some of the oil producing states which was you having a little bit of a softness, but at the same time, you also have to say that there is options for us to strengthen our in-store and retail execution and that is of course a little part of it.

So that gave you a bit of flavor on that and then Peter you will elaborate a few on other questions.

Peter Vekslund

Yes. First, on your calculation, taking a walk one third of the growth through the like-for-like and just starting this is one third on its rough figures. It’s not the exact math on that guidance. But the main component of the discrepancy looking for that is related to distributors, that is Russia, it’s Spain and it’s a Taiwan which is a drag on the number.

On the one offs starting on revenue, we have an effect from a conversion of DKK 10 million related to China and also Singapore and Macau. We have IT where we have changed the supply of IT services impacting margins with 1 percentage point. And the inventory buyback in Singapore and Macau impact the market was the 0.5 percentage point. That was the overall. Than on the complexity, we did see an impact in Q2 and our overall guidance for the year that complexity will have an impact of a probably in the low end of the range 1 to 2 percentage point impact for the year. Finally - I thing that was all your questions.

Kristian Godiksen

Yes, also maybe just regarding the - just confirm that the IT transition also Jared so then was only Q2 specific, I know Jared was also in Q1, so maybe you can confirm that we should expect something in Q3, Q4, either of those two components?

Peter Vekslund

I think on IT, you will ever be done implementing IT systems and doing transitions but what we can see now is that should be the one-off for the quarter and we have not planned for anything for the rest of the year.

Anders Colding Friis

And the percent that we’re mentioning is a specific project which was in second quarter, so that will not come back. So I mean it’s mentioned in that transitioning to in an IT.

Kristian Godiksen

I have just a question -

Anders Colding Friis

What question, I apologies for that, there was a huge draw back in America, that is also a one-off one percentage point on the model.

Kristian Godiksen

Okay. And then maybe on the on the Jared selling that’s been going on for Q1 and Q2, is that something we should expect will continue as they you said you’ve opened about 100 stores out of the 200 stores. So I guess we should expect that to continue in when Jared operates the stores as we go along the year?

Anders Colding Friis

That could be a bit more selling in Q3 and hopefully a lot of replenishment of the inventories as they start selling.

Peter Vekslund

And we’ve actually operated by now 165 stores.

Kristian Godiksen

Okay, okay. And then maybe just coming back to my initial first question regarding the difference between the sales-in and sales-out, so basically what you’re saying is that when you look at it, it’s the third party market which is the main reason of the two - you say this the sales-in like-for-like and then the sales-out like-for-like. So basically, the eSTORE growing faster which is not included in the sales out like-for-like, it’s basically being offset by the lower growth in third party markets. But I guess also from other concepts stores that how you should think about it, so basically we should think about these two numbers being more or less the same going forward or?

Peter Vekslund

I’ll not making a direct link between those two just saying in this quarter, it’s the distributors that is being grad on the organic growth. And you’re right, on the other components, you are mentioning like eSTORE which is included in organic growth but not in the like-for-like growth.

Kristian Godiksen

Okay, so you can’t come on and you think is eSTORE all as equal, we know that for sure that it’s a basic adopting right. You said that yourself in the kind of traffic. So that should always equal drag up your organic growth or and then on your other component is taking it down, so - but you can’t give any flavor on what to expect and in which kind of magnitude the two components would affect going forward?

Peter Vekslund

So you’re right on that one, that just on the eSTORE that is traffic to the store that has toggled, it’s not the revenue.

Anders Colding Friis

We gave the revenue, it moved from 2.5% of our revenue before. And then if you look at EMEA specifically and look at the distributors actually if you take out the distributors in EMEA, we would have had a like-for-like development of 20% and that is of course very much Russia which of that.

Kristian Godiksen

Yeah. What I was referring to was just that in the eSTORE, it’s because you say from 2.5% to 4%, but in the same time also that you have grown the business by let’s say 30%. So no doubt that eSTORE is growing faster than the rest of the business, so that it all is equal benefiting the organic growth number, but it’s still lower than your just sales out like-for-like when and adjusting for the third party market. So just the moving parts there what to expect going forward.

Anders Colding Friis

I think we’ve given you, what we can.

Kristian Godiksen

Okay, okay. Thanks a lot.

Anders Colding Friis

Welcome.

Operator

We will take our next questions from Anne Bismuth of HSBC. Please go ahead, your line is open.

Anne Bismuth

Thank you, good morning everyone. I just wanted to know if it’s possible to have the percentage of online sales in your group sales and where you plan to run off the Europe eSTORE mix.

My second question is, so it’s a little bit—can you come back on your impact on gross margin that you mentioned earlier about the raw material prices in ‘17 and ‘18? And finally, what should we expect in terms of selling that percentage of sales in full year 2016? Thank you very much.

Anders Colding Friis

I’m sorry. But the first and the last question kind of didn’t come through very well. The last question was -

Anne Bismuth

No, I was just asking about the percentage of home line sales in the group sales mix and where do you plan to roll out eSTORE next? My second question is about the raw material impact on gross margin in full year 2017 and 2018? And finally about the less percentage of sales for full year 2016 that we should expect?

Anders Colding Friis

Well, I think that if you look at the eSTORE first and then Peter can the other questions. The eSTORE as we said was 2.5% of revenue last year last year and was 4% this year. So we’ve seen a very nice growth in that and that’s why we’ve also included in this quarter’s announcement a number for that, so we can see how that is moving. And if we look at the expansion of that, we’re going to open two new eSTOREs this year, one in Canada and one in China.

On the impact of the raw materials for 2016, we still see an impact positive impact 1 to 2 percentage points partially being offset by production complexity this year. Going to 2017, we see an impact of around in rough numbers around 1 percentage point on the market and additional 1% in 2018. So 17 minus 1%, 18 minus 2% compared to this year in very rough numbers based on the current prices. On the admin percentage of sales, say for modeling purposes still 9% to 10% for the full year.

Anne Bismuth

Thank you.

Anders Colding Friis

You’re welcome.

Operator

We would take our next question from Lars Topholm of Carnegielast. Please go ahead, your line is open.

Lars Topholm

Yes, a couple of questions on my side, on the Jared upgrades from the data you have available, are you seeing any cannibalization from the existing U.S. concept store base from Jared, adding most square meters for Pandora?

And then Anders, you mentioned, you making these price adjustments and my understanding is some of the growth you are experiencing in Australia is to Asian tourists and the price differences between countries in Asia. Should we expect that this exercise will shift demand from Australia to for example China or other parts of Asia.

And then a third question, if I may you mentioned, Disney such of come for Q2 this year, can you elaborate more on how much Disney contributed to Q2 last year? Thank you.

Anders Colding Friis

Let’s start with Jared upgrades. And clearly we are very happy with the upgrade and I think that seeing the store side actually have the pleasure of in July to see a few of the upgrades and it’s looking very good. And clearly it’s part of our development of our retail footprint as a brand of footprint. We cannot see and do not see at this time I expect that site to see a cannibalization on an overall basis between the different channels. What we do is that we want to have more branded space, so we have upgrade Jared’s, but as you know and as we’ve said, we’ve also closed all the unbranded and multi-branded stores. So it’s not like we see a lot of cannibalization on that.

The price adjustments and just to make this very precise, this is not a question of us changing our all indexes in the individual markets. They are going to stay as they are. What we’re doing is we are moving the individual prices around and you can say that where we’ve been actually a products in one market could be priced at the top of price in another market just because the individual markets thought that was the right thing to do and that is not corresponding to the consumer’s expectations on pricing.

So actually what we’re doing is, we’re aligning our prices not sure they’re going to be the same, but the prices are going to be in the same structure. So the ring would be if we have one price in one market which is an index 100 markets the price would be roughly index 80 and in an index 80 market or 120 in an index, 120 market, if that to makes it very clear what we’re doing. But we’re not moving between the different markets.

Lars Topholm

So in other words if your products are priced higher today in China than in Australia that will also apply after this exercise?

Anders Colding Friis

We’re not planning any changes to that.

Lars Topholm

Excellent.

Peter Vekslund

On Disney, first of all Disney that is a 10 year strategic partnership that we have entered into with Disney, in connection within introduction we have a last number off the design variations being introduced last year and few of this year also last year, we expanded into the multi-branded stores in the U.S. So overall, we do see a significant negative growth in Disney this quarter compared to last year. But again we in for the long haul with Disney and do see a meaningful contribution to the U.S. revenue on Disney.

Lars Topholm

And that I understand. But my question was different. It was, what was the impact of this Disney sold into the shop-in-shops in Q2 last year because you mentioned it’s specifically as a swing factor for you, so just wonder if you can quantify it?

Anders Colding Friis

Yes, we mentioned it as effects of or not quantifying that in a more details.

Lars Topholm

Okay. Perfectly well. Thanks.

Anders Colding Friis

Welcome.

Operator

We will take our next question from Michael Rasmussen of ABG. Please go ahead, your line is open.

Michael Rasmussen

Thank you very much. First of all guys, in the set of numbers, can you tell us please what came as the most positive surprise and what was the most negative surprise versus your original expectations?

And my second question, coming back to the eSTORE, do you plan to include this development in your like-for-like numbers as stores have been open for 12 months and also if you would give us the Q3 and Q4 share of revenues from last year?

And finally, can you just for modeling purposes, marketing costs, are you still looking for close to 9% full year and I was still looking at about 20% sales and distribution costs? Thank you.

Anders Colding Friis

Yes. Positive and negative surprises. Actually I think that when we look at the quarter it was actually as we expected. If you look at something we are very happy with we can say that China has really moved very, very well and forward. So that’s a very good one. Then of course is you can always say that you are bit surprised that what is happening in Brazil, but that is you can say expected with the development there, any surprise where we are we would all like a little better maybe is kind of where we can see that we can we can do better in some of the stores. So I’d say that’s probably the flavor on that but overall 25% organic growth in the quarter in local currency is something we feel very good about.

eSTORE like-for-likes, we do not at this time have any view that we are going to include it in our like-for-like numbers. And what we wanted to give you this quarter was a flavor of how we’re doing so that was why we gave you those numbers this quarter and so that you know where we where we have thoughts, but we are considering what to do in the future as well. And I am not saying that we are never going to include it. But at this time, we haven’t made any decision on it.

Peter Vekslund

And maybe just a short comment from my side on that, with the change of our external discloser from Q1 of this year and of course we are evaluating that, that’s also why we gave you the U.S. like-for-like number this quarter as well as the eSTORE of here revenue.

Michael Rasmussen

And Peter, maybe you could for modeling, could share the Q3 and Q4 this year like you did 2.5% last year in Q2?

Peter Vekslund

We are not ready to share those are this call, but it’s about 2.5% and 4%. So if you take in that range you are probably totally off.

Michael Rasmussen

Okay, I would just assume that Q4 was somewhat higher.

Peter Vekslund

Yeah.

Michael Rasmussen

Okay. And on costs -

Peter Vekslund

Cost structures, no changes to that, so sales and distributions still around or slightly above the 20%, marketing 9% and admin in the 9% to 10% range.

Michael Rasmussen

Thank you.

Peter Vekslund

You’re welcome.

Operator

We will take our next question from Frans Høyer of Jyske Bank. Please go ahead, your line is open.

Frans Høyer

Good morning, thank you. Yes, I wondering if you could elaborate a little bit on the slowdown in sales growth in Europe from I think these - the number was 47% in Q1 and it’s 28% roughly speaking in Q2. I understand the Russia part of that but maybe there is more to it?

Also would you or are you seeing any signs that the sensitivity of Pandora’s sales to short of general economic trends that or the resilience to shower trends, are there any changes in how that is behaving in your view?

Anders Colding Friis

Well, I’ll do the last one and then Pete will do the first one. The easy answer is, we still see a strong development also in markets where we - even though we saw see general times which is not supporting the growth that we have right now. Having said that if you look at some of the markets which has been impact and take Russia, take Brazil, of course we also under influence of the development in the market also in the U.S. where we get that the more traffic is out, still 2% like-for-like in a market like that we find is good, but it’s likely totally resilient and I don’t think we’ve ever been. But clearly as we become bigger in some of these markets, we will also see a little bit more impact.

Peter Vekslund

And there the growth in Europe, we discussed the U.K. earlier at the call, so U.K. growth going from 30 down to 17, also Italy 70% growth in Q1, slowing down as the absolute figures gets higher to around 40% and then Spain where we have a distributor also some impact from that.

Frans Høyer

So I understand, those are the numbers but what is it your seeing Italy slowing from 70 to 240, what is actually happening, you suggest an inventory sort of projection or is it something more structural?

Anders Colding Friis

I think that what is happening is as we build these markets and remember now Italy is 25% of EMEA which is as big as the U.K. and we are getting to a point where clearly the percentage growth is going to be smaller and it’s what we expect that overtime clearly the percentage-wise our growth is going to be Pandora.

Frans Høyer

Okay, thanks very much.

Anders Colding Friis

You’re welcome.

Operator

We will take our next question from Klaus Kehl of Nykredit Markets. Please go ahead, your line is open.

Klaus Kehl

Yeah, hello, Klaus Kehl from Nykredit Markets. Three questions if I may. First of all I know that you have not given us any guidance about Q3, but could you just give us any indications for what you are seeing in U.K. after the price involved? That would be my first question.

And secondly, Russia has been drag on your numbers for quite a while, but I guess soon or later revenues must simply start to decline. Can you give us any kind of flavor what it looks like for second half?

And thirdly, you are seeing a very negative impact on your gross margin from the acquisition that you made in Singapore in Asia. But I guess you must soon or later have worth your way through the inventories. Would it be fair to expect a marked improvement in second half of ‘16? That would be my questions.

Anders Colding Friis

Thank you very much. I think that when we talk about guidance, we’ll stick to our overall guidance for the year. I can say that the only thing we’ve seen and that is also mentioned in our release is that we’ve seen the currency impacts in Britain so far. So that is what we can see and then we’ll have to see. Do we expect to see some bumps on the road? Absolutely. And can consumer confidence be influenced by the negotiations and what is going to happen for the Britain to leave EU? Absolutely. And we will mention that as we see it but as I said, in Q2, the only think we’ve seen has been the currency effect on it.

And you can say Russia the same, we feel very good, you have to say it’s about actually slightly below 1% of our total revenues in the group, so it’s a small part of it and we will see how it works out. I think that in general in Russia, we do a good job in a difficult market and clearly we are influenced by what is happening and that gives us some negative like-for-like numbers?

Peter Vekslund

And on Asia and the impact of margins, let’s say two factors influencing the markets in Asia or the margins. One is the inventory buyback which impacts the quarter by 3 percentage point and we are now through that inventory, so no further impact from that. We are however still building our organization in Singapore and China and Japan and that does have an impact on our margins. That said, we believe we will get about getting a bit of leverage also in Asia as revenue picks up.

Klaus Kehl

Okay. And then just to be perfectly clear about U.K., so what you are saying is that here for July and August, it’s business as usual, obviously the - yeah, the currency has moved but the underlying development is fine, is that the color?

Anders Colding Friis

We can comment on second quarter and also honestly if we look at the beginning of this quarter, we are still good, we haven’t seen any major impact. So - but I think that it is worth expecting that there will be some turbulence in U.K. going forward.

Klaus Kehl

Okay. Thank you very much.

Anders Colding Friis

You’re welcome.

Operator

We will take our next question from Piral Dadhania of RBC. Please go ahead, your line is open.

Piral Dadhania

Yeah, thanks very much for taking my questions. Most of them have been answered but I was just curious is to your 2017, 2018 gross margin guidance you are looking for down 1 percentage point due to raw material headwinds in ‘17 I think to in ‘18, how much of that gross margin guidance factors in changing your pricing architecture starting in the second half this year. So I guess what I am telling really is how much should we expect prices to increase to help offset your raw material headwinds that you are facing in ‘17, ‘18?

Anders Colding Friis

The very, very short and easy answer is not. The pricing architecture and the changes we are doing that is not expect to have any material impact on our average prices in Pandora, so that’s not building. And what we have to be aware of is that we see an increase in prices of gold and silver but we are also at an absolutely - we come from an absolutely low, so with the price increases that we see in the market, on the spot market right now would be back in the beginning of 2015, so it’s like we’ve seen a totally ramp up of commodity prices. So we are not planning any price increase to come for that. We need to be relevant in the markets where we operate and that is the way that we look at it.

Piral Dadhania

Okay, brilliant, thank you.

Anders Colding Friis

You’re welcome.

Operator

And we’ll take our next question from Elena Mariani of Morgan Stanley. Please go ahead, your line is open.

Elena Mariani

Hi. Good morning. A few follow-up questions from me, please. The first one is in the U.S. So this quarter you said that like-for-like as specifically in the U.S. was approximately 2%. I remember that in the first quarter, it was positive as well but have you experienced a slowdown specifically for the U.S. in the second quarter versus Q1? And then do you think I know you’ve been asked this question before, but do you think that somehow your eSTORE performance is that cannibalizing a little bit that we can move performance there.

The second question is again on the gross margin next year and the following year, I understand your guidance around the raw material prices and around the pricing architecture, do you see this negative impact to be fully compensated by the rollout of your own and operated stores?

And this leads to me and that’s my third question. Can you give us a rough idea of the split between own and operated stores and third parties within your overall concept store opening guidance and how this would affect gross margin but also sales and distribution expenses over the next year or so? Thank you.

Anders Colding Friis

I’ll try to do the first part and then Peter will do this second part and hopefully we’ll get all of it there. If we look at U.S. like-for-like, the reason why we gave the number is also because we’ve understood that has been a very, very big interest in this. And I’d say if you look at it it’s not a big difference, so it’s roughly the same as we saw in the first quarter.

eSTORE cannibalization is a big question and I think that the best market to look at for that. We haven’t seen anything and we’re not feeling it in the U.S. but the best market to look at is actually U.K. where we’ve been active for the longest period of time and there we can see as we have increased our sales in eSTORE and we’ve previously said that it’s more than 10% of our revenue, we have not seen any impact on the like-for- like numbers. So in our general thinking, the two channels work hand-in-hand and well together. Can there potentially be a little bit of impact and cannibalization here and there? Yes, of course and that is also logical, but basically we believe the two channels work well together, so the total will be bigger as we have both available for the consumer and then Peter will.

Peter Vekslund

Yeah, the impact of a commodity prices on the gross margin, we gave some insight into the impact on 2017 and 2018, it’s not like we are starting giving specific guidance on those two years but we wanted to remove some of the uncertainty around impact of commodity prices. Just the impact on gross margin from own and operated that is a positive on the gross margin but there will be an increased cost of operating the stores on the sales and distribution costs which offset the impact on gross margin.

Elena Mariani

Okay, thank you. And can you give us rough idea of the implied state between own and operated and third parties, but you’re so well out please, thank you.

Anders Colding Friis

And I don’t think we give a keen up of what you should expect over time is that the revenue part from own and operated is going to increase a bit one third and then to a little bit in 2016, but expected to grow a bit.

Elena Mariani

Okay. Thank you.

Anders Colding Friis

You’re welcome.

Operator

We will take our next question from Chiara Battistini of JPMorgan. Please go ahead, your line is open.

Chiara Battistini

Hello, hi, thank you very much. I just have a few follow-up questions if I may first of all on your comment on these next following-up on last question, you said Disney was a very big drag for the quarter to us and Disney was negative year-on-year in quarter two because of the timing of the shipment from last year, does that mean that the drag actually states as you go into H2, so we should expect lower drag basically in H2? Then on the inventories, inventories were particularly elevated in at the end of the quarter, is it just a matter of timing of shipments ahead of the autumn/winter for Q3 or are you - I mean are you happy, I guess the question is are you happy about your inventory levels everywhere in the trade?

And finally, just a follow up on your comment on Brexit, that you’re expecting some bounce on the road, is your full year guidance then also reflecting these expected bouncer or not? Thank you.

Anders Colding Friis

I’ll start with the last one and the answer is, yes, it is. When we - and I’m not sure I fully got the Disney question. Clearly what happened last year in this quarter was that we opened for sales to a number of new stores and they increased their inventories of Disney. So that was a first half situation, so second half we’ll see less of that. So if it that was the question, this is the answer.

Chiara Battistini

Yes. Perfect. Thank you.

Peter Vekslund

On the inventories, you’re right that inventories are increasing. If you take inventories as the percentage of sales compare to same quarter last year than they actually at the same level 15.5 Q2 last year, 15.7 Q2 this year. So it’s also or it’s due to mid-off for the autumn/winter as well as increased revenue.

Chiara Battistini

That’s great. Then just then justify, if I understand correctly on the Brexit point on your guidance as you haven’t seen bounce, if you continue not to see bumps then your guidance is conservative for the year?

Anders Colding Friis

I think our guidance is our guidance.

Chiara Battistini

Okay.

Anders Colding Friis

That’s the way that is.

Chiara Battistini

Okay. Thank you.

Anders Colding Friis

Welcome.

Operator

We will take our next question from Kristian Godiksen of SEB. Please go ahead, your line is open.

Kristian Godiksen

Thank you. Just two short follow-ups for me. Maybe if you could elaborate a bit on the continued strong performance in the Northeast region in the U.S. outgrowing the rest of the U.S. market, I guess should we expect or maybe you can confirm, is there a difference in your performance in driving over O&O stores revenue compared to franchisee concepts store growth rates? And if that is the case, should we expect for you to maybe potentially take over more stores as you did in the Northeast region with it? That was the first question.

And second maybe just because I know you are giving a bit more visibility on the gross margin expectations for 2017 and 2018. Maybe if you could just confirm that should we expect anything other than raw material prices to affect your gross margins such as a complexity that’s something that we should expect going forward or all other items? Thank you.

Anders Colding Friis

I do the first one and yes, we have a strong performance in Northeast and we mention that because we actually feel quite proud about that. As you know the Northeast was a region where we had some negative like-for-like development t and some issues. We took over, they have new store up there and it also supported very strongly the retail mindset that we want to have in the U.S. organization. So the learning we have from the Northeast region is clearly something that we’re pushing into the other regions in the U.S. And in connection to that, yes, we will in all well developed markets take a little bit more own and operated stores, because we can see that it supports the retail mindset and the our performance in the markets.

Peter Vekslund

On the gross margin and the impact of a commodity prices, we did give some extra flavor on 2017 and 2018 to remove the uncertainty around the impact of commodity prices. However, we are not for the time being raised a few more guidance regarding 2017 and 2018 which take to current year guidance which we have confirmed in this quarter.

Kristian Godiksen

Okay. Thank you. Maybe just a very, very short follow-up on the first one, so could you maybe get some thinking regarding how much of a share should we expect O&O stores for the concept stores to make up in that just say the medium term on the coming years?

Anders Colding Friis

I think that we’ve already touched upon that subject and what we said is expected around a third this year and expect that to grow a bit over the coming years.

Kristian Godiksen

Okay, okay, thanks a lot.

Anders Colding Friis

You’re welcome.

Operator

We will take our next question from [indiscernible]. Please go ahead, your line is open.

Unidentified Analyst

Hi, good morning. You mentioned that the FX at 5% impact on sales, could you give us the impact on EBITDA or EBIT. Please?

Anders Colding Friis

On the impact of FX for the full year, we expect a headwind of 3% and for the quarter you’re right it was 5%. In terms of the margins or for the quarter we didn’t have any impact on the EBITDA margin.

Unidentified Analyst

Thank you.

Operator

We have no further questions queued.

Anders Colding Friis

Thank you very much for your questions and for participating in the conference. Have a great day.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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