Pandora's (PNDZF) CEO Anders Friis on Q4 2015 Results - Earnings Call Transcript

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Pandora AS (OTCPK:PNDZF) Q4 2015 Earnings Call February 9, 2016 4:00 AM ET

Executives

Morten Eismark - Vice President-Group Investor Relations

Anders Friis - President & Chief Executive Officer

Peter Vekslund - Executive Vice President & Chief Financial Officer

Analysts

Chiara Battistini - JPMorgan

Kristian Godiksen - SEB Enskilda

Lars Topholm - Carnegie Bank

Anne Bismuth - HSBC Bank

Michael Rasmussen - ABG Sundal Collier Norge

Frans Høyer - Jyske Bank

Operator

Good day and welcome to the Annual Report 2015 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Morten Eismark, Head of Investor Relations. Please go ahead, sir.

Morten Eismark

Thank you. Welcome to PANDORA's conference call following the release of our Q4 and full year 2015 results announced earlier today. The presentation for this call, as well as a full version of PANDORA's Annual Report 2015, 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 2, Anders will go through a few Q4 and full-year highlights, as well as the guidance for 2016 before Peter will talk you through the Q4 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 three. Anders, please.

Anders Friis

Thank you, Morten. Good morning, everyone. Please turn to slide number four. Before moving on to the fourth quarter numbers, I'll take you through some of the highlights for 2015. Following a strong fourth quarter, we ended 2015 with a full year growth of 40%, which was driven by robust development in all regions. Also, all product categories experienced strong growth, supported by a continued, relevant product offering; including the seven new launches we did in 2015, which all were received well by the consumers.

Rings, in particular, continued to do well, and represented more than DKK 2 billion in revenue, corresponding to around 12% of revenue for the year. In 2015, we continue to expand our branded network with focus on the concept stores and we added a net of 392 new concept stores. Revenue from concept stores increased 54% in 2015 and contributed more than 60% of group revenue. Also, we added seven new markets to our online platform, including important markets like the U.S. and Australia.

Sales-out continues to be positive and we have been able to generate positive like-for-like sales-out in all four reported markets in all four quarters of the year. EBITDA for the year was DKK 6.2 billion, an increase of 45% compared to 2014. The EBITDA margin was 37.1% compared to 36% in 2014 and a guidance around 37%. The margin improvement was primarily driven by tailwind from the gross margin of around 2 percentage points. However, tempered by our expansion in Germany, China and Japan.

The free cash flow was DKK 2.4 billion and was impacted by the decision to make a settlement with the Danish Tax Authorities, resulting in a one-off payment of DKK 995 million. Excluding this one-off, free cash flow would have reached DKK 3.4 billion. Finally, we returned roughly DKK 5 billion to our shareholders, including a dividend of DKK 9 per share, as well as the DKK 3.9 billion share buyback program.

Now, please turn to slide five where I will focus on the fourth quarter numbers. As for the full year, all geographic regions contributed with strong growth for the quarter, with all reported markets generating double-digit growth also in local currency.

Revenue in the U.S. increased 17% in local currency to DKK 1.5 billion and was driven by a combination of network expansion and like-for-like growth. The latter was driven by a strong Christmas sales as well as a continued high demand for the Disney and the PANDORA Rose collections.

Revenue from Other Americas increased 15%. The positive development in Brazil continued and was driven by a combination of opening of new concept stores and double-digit like-for-like growth. Revenue in Canada was flat compared to Q4 last year, while the like-for-like sales-out development continues to be positive. As highlighted at the last call and as was the case in Q3, retailers in Canada have reduced their inventory and consequently spent less. We now believe inventories are broadly normalized in Canada.

Revenue in the UK increased 36% in local currency for the quarter and was driven by positive like-for-like growth. This was supported by the launch of PANDORA Rose as well as the continued success of the Rings category. Furthermore, growth was supported by the addition of 39 concept stores during 2015 including 16 in the fourth quarter alone. Finally, the acquisition of four very successful stores in April added around DKK 40 million to the UK revenue for the quarter.

Revenue from Germany increased 72% to DKK 356 million. The growth in Germany was primarily driven by the expansion and improvement of the store network including the addition of net 74 new concept stores in the country during 2015.

Revenue from Other Europe was up nearly 50% and was primarily driven by Italy and France. Revenue from the two countries increased by more than 50% which was primarily driven by strong like-for-like sales. Revenue in Australia increased 48% in local currency, which was primarily driven by continued high like-for-like growth.

Other Asia Pacific increased 76% driven primarily by Hong Kong and China. Growth in China was driven by double-digit like-for-like sales outgrowth, as well as the addition of 24 new concept stores during 2015. Furthermore, distributor revenue now recognized as retail revenue, added around DKK 50 million to revenue compared to the fourth quarter of 2014.

Revenue in Hong Kong increased around 40% in local currency, primarily driven by expansion of the store network which has been increased by 9 concept stores to a total of 25 in the last 12 months. Revenue from Hong Kong and China each represented around 30% of revenue in Other Asia Pacific.

Now, please turn to slide number six. As highlighted, the positive like-for-like rates have continued across all four reported markets. Like-for-like growth in U.S. was 4.2% and was driven by a positive development in all major regions including the Northeast. Obviously, it is too early to say if this region has been turned around, but it is great to see that the dedicated focus we've put in to the region is paying off.

Like-for-like growth in Australia was 42% and was primarily driven by an increase in store traffic as well as units per transaction driven by our continued effort to enhance the in-store execution.

Like-for-like in the UK was 19% and driven by a strong performance from our new products as well as PANDORA Rose. Please remember that the like-for-like numbers do not include the eSTORE, which also had a very strong performance in the quarter.

Like-for-like in Germany was 5.2% and was a positive surprise given the fact that we have almost doubled our network since fourth quarter last year. Our efforts to improve our network and perception in Germany are improving, and I think this is a clear token of that.

Please turn to slide number seven. As you're all aware, our business model generates a significant amount of cash. And in line with our capital structure policy, we'll return any net cash to our shareholders. For the financial year 2014, we paid out a dividend of DKK 9 per share, and we bought back own shares to a value of DKK 3.9 billion through 2015.

At our upcoming Annual General Meeting, the board of director intends to propose to our shareholders that the covenant share capital should be reduced by cancelling the shares purchased under the program excluding the shares needed to cover option programs.

Following our strong 2015 and confidence in 2016 and beyond, we'll increase the expected payout to our shareholders. The board has decided to propose to the AGM that dividend of DKK 13 is to be paid out for 2015, an increase of 44% compared to last year. And the board has also opted to initiate a share buyback program of up to DDK 4 billion to be launched today and finalized before the end of 2016. The mechanics of the share buyback program will basically be the same as last year as it will run as a Safe Harbor program. We will, on a weekly basis, issue an announcement in respect of transactions made to keep you posted on the progress of the program.

Now, please turn to slide number eight. Now turning to our guidance for the year. In 2016, we will again focus on driving growth in our existing stores as well as expanding our store network. Revenue for 2016 is expected to be more than DKK 19 billion with existing stores expected to contribute with roughly a third of the growth and expansion of the store network contributing with the remaining two-thirds.

We expect the EBITDA margin for 2016 to be more than 37% and this includes a positive impact of 1 to 2 percentage points from lower commodity prices which, however, is expected to be offset by an increase in the production complexity. Furthermore, the margin is anticipated to be positively impacted by increasing leverage and cost in our developed markets but this will partially be offset by our expansion plans primarily in Asia.

Regarding the phasing between the quarters, the EBITDA margin in the second half of the year is expected to be higher than the first half, primarily due to costs related to the expansion in Asia. CapEx for the year is expected to stay around DKK 1 billion. This includes development of the crafting facilities in Thailand, investment in the store network, as well as continued high IT investment. This level is also expected to continue into 2017.

The tax rate for 2016 is expected to be 21%, which compares to an effective tax rate of 31% in 2015 or 22% excluding the impact from the settlement with the Danish Tax Authorities in May of 2015. The decrease is primarily due to the reduction of the Danish corporate tax rate. Finally, we plan to add more than 250 new concept stores during the year, of which roughly 60% are expected to be opened in Europe, 20% in Americas, and 20% in Asia Pacific.

Before I hand over to Peter, I would like to speak to you about a new organizational initiative in PANDORA which we have labeled Project Agility. The aim of Agility is to build a more efficient global organization with a purpose of optimizing workflows to support future growth. Furthermore, we intend to move critical business decisions closer to the markets and to our consumers. We are doing this by introducing a more efficient and less complex organization with fewer reporting layers and, consequently, a more simplified communication structure.

I think it's important to stress that Project Agility is not a cost-cutting exercise, but the significant development in PANDORA over the last five to six years calls for a streamlining of the current organizational setup. Basically, what got us here will not get us to where we want to be in the future.

As part of the process, we unfortunately also had to cancel a number of positions in our global organization and around 100 people have left or will leave PANDORA in the coming month. As a consequence, you will see a smaller impact on the margin in the first quarter of 2016 of around 1 percentage point. However, for the full year, the impact from Agility will be insignificant.

And with this, I'll hand over to Peter, who'll give you some more details on our financials. Peter?

Peter Vekslund

Yeah. Thank you, Anders. Please turn to slide nine. Revenue for the quarter increased 43.4% or 35.8% in local currency. Like-for-like growth contributed 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, of which around DKK 50 million is related to China.

Volume increased 21.1%, and the average sales price increased 18.6%. The increase in the ASP was driven equally by three factors: first, general 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 118% to DKK 1.893 billion, and was 33% of group revenue compared to 22% in Q4 2014. Strong increase in retail revenue is driven by like-for-like growth, as well as the addition of 271 new owned and operated stores in the last 12 months, of which 97 are stores acquired from franchisees. Also, the contribution from our eSTOREs has increased, driven by a strong like-for-like development and, of course, the addition of seven new markets in 2015, including the U.S.

Please turn to slide 10. Our focus on concept stores continues and during the quarter, we added net 136 new concept stores, of which 34 are owned and operated. In 2015, we opened a net total of 392 and in total, we now have 1,802 concept stores which contributed with around 70% of revenue for the quarter.

Also, we continued to strengthen our shop-in-shop network with a net total of 119 stores opened in 2015. This trend is planned to continue in 2016. And as part of this, our U.S. partner, Jared, plan to upgrade more than 200 of their multibranded stores with PANDORA shop-in-shops. We continued to close unbranded stores. And during the quarter, we closed net 540 stores, which brings the reduction of unbranded stores for 2015 to 1,422.

Now, please turn to slide 11. All product categories increased with double digit growth rates for the quarter. Revenue from Charms increased by 34%, whereas revenue from silver and gold charm Bracelets increased 54%. Growth in both categories was driven by all regions, including the U.S. which, as you might recall, was impacted by changes in promotions in Q3.

Revenue from Rings was up 87% for the quarter and represented 11.7% of total revenue for the quarter which compared to 9% in Q4 last year. Revenue from Rings increased across all geographies and continues to be driven by the improved offering, as well as increased marketing activities focusing on Rings. Other jewelry increased by 51% driven by revenue from Earrings and Necklaces which increased 90% and 50%, respectively, for the quarter.

Please turn to slide 12. Gross profit was DKK 4.205 billion corresponding to a gross margin of 74% compared to 71.6% last year. Increase was mainly driven by tailwind from more favorable raw material prices having a positive impact of roughly 2 percentage point and an increase in revenue from owned and operated stores with a positive impact of 1.5 percentage points. The increase was partially offset by unfavorable currency rates deducting around 1 percentage point. Based on our spot prices, our gross margin for Q4 have been approximately 76%.

As mentioned in the Q3 call and as Anders highlighted in connection with our 2016 guidance, our product designs are becoming more complicated. And consequently, our production is also becoming more complex. Therefore, please remember that spot margin is not a fully accurate estimate for the future gross margin.

Please turn to slide 13. Operating expenses for the quarter were DKK 2.203 billion, representing 38.8% of revenue versus 36.7% in Q4 2014. Sales and distribution expenses were DKK 1.052 billion corresponding to 18.5% of revenue compared to 16.3% in Q4 last year. The increase was mainly driven by a higher share of owned and operated stores, which had an impact of around 2.5 percentage point on the ratio, as well as an increase in amortization of around DKK 40 million, driven by the takeover of distribution in China, Japan and the store expansion in Germany. And China is now fully amortized.

Marketing expenses increased 31% to DKK 596 million which correspond to 10.5% of revenue for the quarter. For the full year, we spent just below 10% of revenue in marketing which is on par with last year.

Administrative expenses for the quarter increased 57% to DKK 555 million which represent 9.8% of revenue. The increase was mainly driven by head count including establishment of offices in China, Japan and Singapore.

Also for the quarter, administrative expenses were impacted by a one-off of around DKK 75 million related primarily to our movement of our headquarter here in Denmark as well as organizational changes. The organizational changes include severance payments related to a couple of high level positions as well as preparation for Project Agility which Anders highlighted earlier in the presentation.

Please turn to slide 14. EBITDA for the quarter increased by 48.5% to DKK 2.144 billion, resulting in an EBITDA margin of 37.7% which compare to 36.5% in Q4 2014. EBITDA margin for Americas was 38% compared to 35.8% in Q4 2014. The increase was primarily driven by a higher gross margin but partially offset by an increase in costs related to a higher number of employees which is primarily driven by the increase in our owned and operated stores in the region.

The EBITDA margin for Europe increased to 48% compared to 44.5% last year driven by the improved gross margin as well as operational leverage. EBITDA margin for the Asia Pacific region decreased to 47.7% compared with 53.3% in Q4 2014. The decrease was primarily due to the anticipated increase in costs related to the expansion in China, Japan and Singapore, which had a negative impact of around 7 percentage points for the quarter.

Please turn to slide 15. Net financial income for the quarter amounted to a loss of DKK 84 million compared to a loss of DKK 122 million in Q4 last year. Tax rate for the quarter was 28.3%, up from 20% in Q4 last year. The increase is primarily a result of the impact of the tax position of other group entities following the settlement with the Danish Tax Authorities in May. Net profit increased to DKK 1.375 billion.

Now please turn to slide 16. Operating working capital at the end of the quarter corresponded to 14.3% of the preceding 12-month revenue, a decrease of 2.4 percentage points compared to the same time last year. Decrease was mainly due to an improvement in our trade receivables to sales ratio. Inventories in absolute terms increased with DKK 673 million compared to Q4 last year, which primarily due to a higher activity and increase in owned and operated stores as well as currency development. The decrease in raw material prices had a negative impact on inventories of around 13% compared to the end of 2014.

Q4 CapEx was DKK 319 million compared to DKK 176 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 1.464 billion compared to DKK 1.705 billion last year. The decrease was primarily due to tax and interest expenses of DKK 353 million related to the settlement made with the Danish Tax Authorities, as well as the higher CapEx spend.

Finally, we ended the year with a net interest-bearing debt of DKK 1.718 billion compared to a net cash position of DKK 1.121 billion at the end of 2014. The increase was mainly due to the DKK 3.9 billion share buyback program that were completed in 2015, as well as the CapEx level for the year. Net debt corresponds to a net interest-bearing debt to EBITDA of 0.3, which is in line with our overall capital structure policy.

And with this, I'll hand back the word to Anders for some closing remarks.

Anders Friis

So, in summary for the full year, our revenue increased by 40%. We continued rolling out stores with the addition of 392 new concept stores during the year. Our gross margin was 72.9%; the EBITDA margin, 37.1%; the free cash flow, DKK 2.449 billion; the proposed dividend of DKK 13 per share; and a share buyback program of up to DKK 4 billion. Finally, guidance for 2016 of more than DKK 19 billion with an EBITDA margin of more than 37%.

So, all in all, a great year for PANDORA, where more than 18,000 employees 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

Thank you. [Operator Instructions] We will now take our first question from Chiara Battistini from JPMorgan. Please go ahead.

Chiara Battistini

Good morning. Hi. Thank you for taking my questions. A few from me, please. First on your full year guidance, I was wondering if you could provide us more color with it. Because as I calculate, you say one-third will come from like-for-like for growth and two-third from space. But my calculations would imply roughly 5% like-for-like and 11% of space. And you're coming from 10% like-for-like in 2015, and based on your store network guidance, I think you - at least I calculate 16%, 17% growth from space. So are you being conservative here both on like-for-like or space or am I missing anything?

Then I had a question on the gross margin. Just a clarification. You mentioned in 2016 you're expecting to have a positive impact from raw materials. So, 100, 200 basis points offset by the increased complexity of the production. So all in all, are you expecting flat gross margin for 2016? And what about the positive channel mix you should get from an increased share of O&O? And finally on the gross margin, how are you thinking about the latest moves of raw materials? And do you see your gross margin at least at current spot levels, please? Thank you.

Anders Friis

Thank you, Chiara, for your questions. I'll do the first and then Peter, he will take the second one. When we look at our guidance, the above DKK 19 billion that we are guiding is reflecting the transparency that we have right now in the business. So, do not look at that as conservative. That's the first point.

Then the second point, we try to provide you with a little bit of flavor on how you should think of it, but it is not exact science. So, actually, just take an example. If we open a concept store, we often close unbranded stores in the surroundings. So, you can't calculate it exactly like that. But the transparency we have right now in the business gives us the opportunity to guide above DKK 19 billion. So, I think, Peter, he will address the gross margin questions.

Peter Vekslund

Yes. On the gross margin, you are absolutely right. We expect an upside of 1% to 2% on commodities, offset by increased production complexity. Then our - even though we're not guiding on the gross margin, we expect an uplift in gross margin of 0.5% to 1% related to our increased owned and operated share. Regarding the latest movement in commodity prices, we are pretty much fully hedged for 2016, so don't expect any material impact on 2016 of those movements.

Chiara Battistini

Thank you. And just maybe, if I can, a follow-up on your guidance. So, the 250 openings you are guiding, at least 250 openings you're guiding for in 2016, how many of these will be own retail, so O&O, please?

Anders Friis

Well, we do not guide on our share of owned and operated. But clearly, as you know, we have over the years, taken upon ourselves a few more owned and operated stores. So, you can expect that also to continue into the coming year.

Chiara Battistini

Okay. Thank you.

Operator

We will now take our next question from Kristian Godiksen from SEB. Please go ahead.

Kristian Godiksen

Yes. Hello. This is Kristian Godiksen. So, I have a number of questions as well. I think just, first of all, just a household question. It's regarding the tax rate of the 21%. Have you in that guidance assumed that you will get a tax relief in Chiang Mai?

Secondly, also just coming back to the number of store openings of more than 250. Can you please describe to me why is it that it should be lower compared to last year, which will be significantly below even if you adjust for the net 60 stores, extraordinary store openings in Germany?

And then just thirdly on your free cash flow, you said that you would pay out all generated cash. So, should we expect a free cash flow above DKK 5 billion since that is what you will pay out in both share buyback and dividends? Yeah. Thank you.

Anders Friis

I'll do your second question, and I think Peter, he'll be happy to do the others. If we look at the number of stores, and I think we've actually highlighted this before, what is important for us is that when we open new stores, that we do it with the focus on quality. So, we need to make sure that we have the right leases, and we believe that that can support the development of our total store network.

So, right now, what we see is 250 stores, which we can highlight and see that we will have an opportunity open in 2016, and that's why we guide that number. Clearly, as you also state, 2015 was a special year because we had the German operation where we opened - based on the project more than 60, but actually totally around 70, a little bit more than 70 stores. So, that, of course, comes on top of a normal year. But the 250 is where we think that - what we are confident that we can open in the coming year.

Peter Vekslund

And on the question on the tax rate of 21%, you're right. That does assume a tax exemption also for the new facility in Chiang Mai.

Kristian Godiksen

Have you already received that?

Peter Vekslund

Yes.

Kristian Godiksen

Okay. And on the free cash flow?

Peter Vekslund

On the free cash flow, we're not guiding exactly on the free cash flow. What we're saying is we will stick to our capital structure policy zero-to-one net interest-bearing debt to EBITDA. And please remember that in 2015 we started the year with net cash positive position and actually moved into the interval in 2015. So that is as specific as I can be.

Kristian Godiksen

Okay. Thank you.

Anders Friis

You're welcome.

Operator

We will now take our next question from Lars Topholm from Carnegie. Please go ahead.

Lars Topholm

Yes. Congrats with the good Q4. A couple of questions also to guidance. Can you give some flavor on how more owned and operated and how online FX guidance, how should we model that in?

And likewise on your comments to the margin guidance. You mentioned that your tailwind in gross margin will be offset by complexity but then said that further down you would only have a partial offset. Does that implicitly mean you guide for a higher margin than last year? And a third question, if I may. The swing in 2016 from China being fully amortized, can you just remind me how much that is? Thank you.

Anders Friis

I'll do the first one and I think that Peter will do the questions on the margins. If we look at the - as I've said, we do not guide on owned and operated share of our total stores. So, our owned and operated, when we see the opportunity's within the framework that I think we've talked about previously, which is if we can see the opportunity and we see a very good store, we'll take it ourselves. If we resale a market like Germany, we will do it as we have done in Germany.

When we enter into a new market like China, we want to have some stores. And clearly, also, if you look at China, when we take over a distributor, we'll get some more stores. We think, still, that it's good to have a good share of owned and operated, but we also have a preference for franchise as the majority. If you look at how much it is, and it's not an exact figure, you can say that historically, we've been around 30%, and you could probably expect that in the future.

Lars Topholm

Yeah. But my question is slightly different because you leave 2015 with more owned and operated stores than you started 2015. So, I just wonder what is the annualized dynamic effect in 2016 from all the stores you opened in 2015 on your own book.

Anders Friis

I don't think we have a number for that, Lars.

Peter Vekslund

And one impact, the conversion of - to retail revenue and that does impact 2016 with around DKK 300 million.

Anders Friis

But that would be, actually, the stores we've taken over with distributors.

Lars Topholm

Okay.

Anders Friis

If you look at the online, which was also part of the question, we do not disclose figures on online. We still have a good more than 10% development in the UK. So, that's very encouraging. And remember that our eSTORE is not included in our like-for-like numbers.

Lars Topholm

In relation to that, can you comment a bit more on U.S. and the 17% sales-in growth? How much impact from online have you got there? And I remember in Q4 2014, you had channel filling in the U.S. Can you comment a bit on to what extent you've seen channel filling here in 2015? I mean, 17% growth sounds like high since comps are tough. So, is it your feeling there has been channel filling again in the U.S., so how do you see that?

Anders Friis

I think if you look at the eSTORE, that's not sales-in. That's sales-out. So, it's actually revenue, which you should compare to owned and operated. And the way we look at our online stores, it is just another concept store. And we've got a good start of online sales in the U.S., but we do not have a figure for you.

Lars Topholm

Okay.

Operator

We will now take our next question from Anne-Laure Bismuth from HSBC. Please go ahead.

Anne Bismuth

Yes. Good morning. Can you - I just was wondering, what was the impact of FX on gross margin in full year 2015? My second question is, can you come back on the impact of the 1% that you mentioned regarding in Q1 2016 regarding the new organizational structure? And finally, in Russia, so some rumors recently mention a potential buyback of the distribution network there. So, do you have any comment on that? Thank you very much.

Anders Friis

Okay. I'll do the two last ones and then Peter will get back to the first one. Well, firstly, the Agility project that I talked about in the call here has been a project we've worked on for quite some months. And the purpose of that has been to make sure that the organization is set up in the right way. As I said, one of the things we've done has been to take out layers in the organization. So, the distance between management and actually the stores and eventually the consumers is smaller.

The guidance that we provided, I can say, the expectation you should have is for the first quarter will have some payments to the people who have left PANDORA. And then we estimate that to be around 1%, and as I said. And over the year, clearly, we will have a front-loaded cost. And then by the end of the year, we also see some savings on that because we had kind of eased the organization a little bit.

And then on Russia, we do not have any comments on the ownership. We are happy with the development in Russia.

Peter Vekslund

And the question on the impact on the gross margin for the full year of 2015. The FX have a negative impact of 1 percentage point.

Anne Bismuth

Thank you very much. And just on Russia, so the Russia should be back in positive territory in full year 2016?

Anders Friis

Sorry. I didn't get that.

Anne Bismuth

In Russia, should we expect a positive growth in...

Anders Friis

What we should expect? Russia is a very, very small part of our total business. It's less than 2%. And what you should expect is that Russia is a difficult market, and I do not expect Russia to be anything but difficult also in 2016.

Anne Bismuth

Thank you very much.

Anders Friis

You're welcome.

Operator

We will now take our next question from Michael Rasmussen from ABG. Please go ahead.

Michael Rasmussen

Thank you. If you like to talk a little bit more about Earrings, can you talk a little bit about how that is going to affect the total ASP and if you could describe anything about margins, I'm thinking about the complexity and raw material usage of the product.

Second question being on the U.S. market in terms of the 200 stores from Jared. How is that, all else equal, going to impact the revenues? If we look at average revenues for shop-in-shop versus a gold store, can we kind of use that in our modeling? And then finally in terms of online, you still have the target of reaching 10% of sales and are there any markets where you are 10% at the moment? Thank you.

Anders Friis

If we look - start with the Earrings, where we will start having a focus on that, I think that what is important is that to say that we are starting the focus. You can even say if you look at our results for 2015, we have started to some extent because we had an increase of 90% in 2015 on Earrings. We would say it's more or less the same price as Charms. So, that's what you should expect but clearly as in any product group, there are deviation depending on the product.

The U.S., you have to be aware of the fact that the 200 stores Jared is a conversion. It's not new stores that we are building. So, what is going to happen is that Jared is going to take a - we'll get more branded space and we are moving it from its present status which is gold and into shop-in-shops. So, we expect to have a positive impact of it and that is all baked into our guidance for 2016.

And then there was the last thing and that was the online part, and you can say as we've previously stated, the UK is around - a little bit above you can say 10% of revenue and that is the only market that we have given any numbers on. And, clearly, that is also the most developed online market in PANDORA.

Michael Rasmussen

Thank you. Can I just have a quick follow-up question on the U.S. market in terms of like-for-like? You've previously talked about the 3% to 5% like-for-like range would kind of be a medium to long-term guidance. Is that basically where we should see you guys being in 2016?

Anders Friis

I think that we can say that was what we ended up on fourth quarter numbers, which was a good number. And I think that's where you should expect us to be in the future as well. Yes.

Anders Friis

Thank you. Thank you.

Operator

We will now take our next question from Frans Høyer from Jyske Bank. Please go ahead.

Frans Høyer

Yeah. Thank you very much. I revert to the point about the gross margin. My notes, I hear what you say about 100 to 200 basis points benefit from metals, 50 to 100 basis points benefit from channel mix, and then an offset from the complexity.

But, I mean, the complexity issue is something that has been with you for a while, and I was - I mean, from the Capital Markets Day, it was very clear that you made lots of increased complexity in the products over the past several years. Are we now looking at a quantum leap in this development, a quantum leap in the complexity in 2016 versus 2015?

Anders Friis

Well, I think it's a continuous development that you're seeing. And I think that the best way of getting a grip on it I think is by actually looking at the product offering we've had over a number of years. So, we are still adding more stones. We said, I think, around 2.5 billion stones last year, and that is actually increasing. But you can say that's not the only thing.

You also do more products where we actually combine materials, gold and silver. So, all in all, you can see that it is a continuous move in that direction. And it is important for us to say that that complexity is also what is supporting our development as a company. So, I don't think you can say it's a quantum leap. I think it's been a continuous development where we find new ways of making even more interesting products for consumers.

Frans Høyer

But will it be enough to offset the tailwind on metals prices and own-operated stores, i.e., the 100 basis points on metals and 50 basis points on channel mix?

Peter Vekslund

Yeah. On the gross margin, you can say there is - the commodity upside is netted out by the increased complexity.

Frans Høyer

Okay.

Peter Vekslund

Then there's a small upside related to owned and operated...

Frans Høyer

Understood.

Peter Vekslund

...which then the EBITDA level is offset by increased cost for the owned and operated stores.

Frans Høyer

Understood. Okay. Thanks very much.

Anders Friis

Thank you.

Operator

We will now take a follow-up question from Lars Topholm from Carnegie. Please go ahead.

Lars Topholm

Yes. Two because you actually forgot to answer my question. So, when you say on slide 8 that your leverage will only partly be offset, does that implicitly mean you guide a higher margin for 2016 than for 2015?

And then, a second question, maybe some more flavor on Germany where you are able to grow like-for-like despite adding all these stores. Do you feel you have now solved Germany, so we should expect you to unlock some more of the potential there or just some more flavor on the development there? Thank you.

Anders Friis

Thank you, Lars. Let me do Germany, and then Peter will take the other question. I think that, of course, it's pretty encouraging. I think we have on these calls over the year for every quarter told you to expect negative like-for-like numbers in Germany and actually we have delivered positive like-for-like numbers, which is a positive surprise also for us. So, I would say we're off to a good start.

Now Germany is a market where we really need to reset the business in totality. So, now we have the store network and gotten that right. So, we are now continuing engaging with the consumers to try to build or rebuild the brand in the German market. So that's where we are right now and if you look at the penetration in German market and compare that to other markets, there's still things to be done and we will continue that process over the coming years.

Peter Vekslund

And on the margin, we ended 2015 with an EBITDA margin of 37.1% and we are guiding for more than 37%. So, you can say if we'll end the year at 37.1% then it's flat but we are guiding above.

Lars Topholm

Thank you.

Operator

We will now take our next question from Kristian Godiksen from SEB. Please go ahead.

Kristian Godiksen

Yes. Hello. Just a couple of follow-ups from me, please. So, you said in the Q4 results that you also saw positive like-for-like from the Northeast region. Can you elaborate a bit on that? So, what is the like-for-like compared to the rest of the region and also how far are you in the process of refreshing that network? I remember that at the end of Q3 you said that you had upgraded 13 out of the 22 stores. So, where are we now?

And then just, secondly, regarding the new marketing push in both China and Germany, and also new markets, what should we expect on the marketing to sales? Should we expect that to go beyond 10% or still be just close to the 10% level? And then just, thirdly, I was wondering if you had any comments regarding the new accounting principles regarding capitalization of operating leases? How will that impact you and how would you adjust your numbers potentially? Thank you.

Anders Friis

Well, northeast first, I think it's very nice to actually be able to talk about the Northeast with a positive like-for-like development. If we look at the stores in the Northeast, we are taking and actually refurbishing the stores as the leases, they are renewed because we don't want to refurbish a store and then renew the lease later because there might be impact on that that we would not get to further. But it's going in the right direction and we are taking them as we go along.

If we look at the marketing push, if you look at the total marketing spend, I think you should expect between 9% to 10% for the coming year. And that is in line with what we've done previously. Clearly, we have some markets where we are well-penetrated and are more developed. And then you have newer markets which demands a little bit more of an effort also on marketing. So, between 9% and 10% would be a good figure to expect for the coming year.

Kristian Godiksen

Okay. Sorry, just a quick follow-up before the accounting standards. So, just how many stores have you upgraded now compared to Q3 where you had the 13 out of the 26 stores?

Anders Friis

I think 12.

Kristian Godiksen

12? I remember you said 13, as I remember at the Q3 results that has been upgraded.

Anders Friis

No. 12 has been upgraded at this time.

Kristian Godiksen

Okay.

Anders Friis

Well, it's around that figure. But I think it's 12. That's what we have in the portfolio.

Kristian Godiksen

Okay.

Peter Vekslund

Yes. And then, on the accounting for leases, you're right. That will have an impact on many companies, also on PANDORA. We do have a couple of years to implement that standard. You can see in our Annual Report that we do have the lease obligations of around DKK 2.5 billion and that will end up as debt in our balance sheet when we adopt the standard. But we don't expect any major impact on this in terms of loan agreements or debt covenants and so on.

Kristian Godiksen

And how about your capital structure targets? Will you adjust them for this new standards?

Peter Vekslund

When we implement the new standard, we'll of course communicate any impact on our capital structure policy.

Kristian Godiksen

Okay. Thank you.

Operator

As there are no further questions in the queue, that will conclude today's question-and-answer session. I would now like to turn you back to the host for any additional or closing remarks.

Anders Friis

Thank you very much for your questions and for the interest and have a great day.

Operator

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

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