Pandora A/S

CSE:PNDORA

Earnings Call Transcript 2018-Q3

[Operator]

Welcome to the Pandora interim report for the third quarter first 9 months of 2018. [Operator Instructions] Today, I'm pleased to present Brian Granberg from the Investor Relations. Please begin.

[Brian Granberg, Investor Relations Officer]

Good morning, everyone. And welcome to the conference call for Pandora's results for Q3 2018, which we released this morning. My name is Brian Granberg from the Investor Relations team. With me I have our new COO, Jeremy Schwartz; our CFO, Anders Boyer; as well as the Chairman of the Board, Peder Tuborgh.I would like to note that the call today will be longer than usual as there are many items we need to cover to provide sufficient details for all of you. Before I hand the word over to Jeremy and Anders, Peder will share a couple of words on our business. Peder, please.

[Peder Tuborgh, Chairman]

Thank you, Brian, and welcome, ladies and gentlemen. Today's announcement reflects that Pandora has taken a new look at how to execute on our strategy and that we are taking very forceful action to deliver renewed sustainable goals. Back in January, we launched our strategy to transform Pandora to a full-range branded jewelry retailer. Our earnings reports in May and in August made it clear that we were not progressing fast enough on our journey. A key parameter to that stood out, and it actually still stands out, is our continued drop in like-for-like sales. It has because clear to the board that we have not been executing forcefully enough on our strategy. It has also become clear that our challenges are not only about refreshing our product assortment but also about other aspects of how to service our customers. This ultimately led us to change the management.Since Q2, we have been in very close dialog with our new joint leadership Anders Boyer and Jeremy Schwartz. Together we have diagnosed the business and decided on the first important actions to bring us back on track. Today, we launched Programme NOW to step change how we execute on our strategy. Anders and Jeremy will describe this to you in details later.The program aims at driving like-for-like growth and significantly improving efficiencies and execution across the company. As you will see, the program underlies that we are thinking in a new way about how to manage our business. Going forward, our emphasis will be on one, sustainable growth, two, an entirely different cost mindset and three, operating as one global company. We believe this is what is needed.Let me be the first to say that we should have arrived at these conclusions earlier. But I’m pleased to see that a joint management group now act forcefully to turn this situation around. Today's announcement also reflects that we are not in waiting mode until a new CEO is on board. The change of our network expansion plans is a first major step to drive the business forward. And there will be other significant changes from Programme NOW as we continue our diagnosis of challenges and opportunities. We will communicate more in February.Let me emphasize that we stand on a strong foundation and a strong business model. We have a leading brand position and a global retail footprint. We have excellent creative and innovative capabilities and an unrivaled production setup, actually, second to none. And we remain a highly cash generative high-margin business. And it's from this position that we will step change the execution of our strategy.Finally, I would like to say that I am encouraged by the interests we are receiving in the search for a new CEO and new members of the board. On both accounts, we are in contact with some interesting candidates. We want to find the right candidates and we will take the time we need to do that. On this subject, we will, of course, come back to you when we know more. Please Brian, back to you.

[Brian Granberg, Investor Relations Officer]

Thank you, Peder. I will now hand over the word to Jeremy. But before I do so, I’d like to point your attention to the disclaimer on Page 2. Jeremy, please.

[Jeremy Schwartz, Chief Operating Officer & Co]

Thank you, Brian. And good morning everyone listening. A couple of words about me to start. I joined Pandora in September. Back in 2004 though, my team and I were the architect of the Sainsbury's supermarket's turnaround. It was strongly rooted in reengaging women shoppers in a new sharper business purpose, brand and product offer with very strong results, which I think is going to be relevant here.I've also worked at L'Oreal for 12 years, which like Pandora, is focused on meeting the needs of women with products that increase their confidence and reflect their personality. And lastly, I was the CEO of The Body Shop for the last 4 years, which has actually several similarities with Pandora, not least, shifting the company and investment mindset from a traditional [ re-data ] to putting e-com data and omni-channel at its center. Also focusing all employees on understanding their customer, the needs of their customer and the behaviors, both globally but also in specific countries like China and the U.S.A. And of course, the absolute need to focus ruthlessly on like-for-like productivity and reducing costs everywhere.Getting close to our customers, stores and business has been my first priority. And so I've visited all our main countries. The U.S. stores and franchisees were insightful. And I'm really pleased we've recruited a strong regional president in Sid Keswani. In China, we've also recruited a retail and e-com expert GM, Geena Tok. And we both visited Tier 1 and also Tier 2 cities as well as meeting our Tmall partner. Our APAC team are based in Hong Kong, and as always, I've seen very impressive stores in Hong Kong.Now you may be surprised to know that I'm actually a metallurgist by training and my visit to our factories in Chiang Mai and Bangkok showed we combine both traditional craftsmanship with really leading-edge, modern manufacturing techniques. And I'm confident we're able to create the great products we need.So I look forward to meeting many of you face to face and let me hand over to Anders to share the messages of today. Anders?

[Anders Boyer-Søgaard]

Thank you, Jeremy. Moving on to Slide 3. As we said back in August, Q3 was expected to be a difficult quarter, and it was indeed a difficult quarter. Revenue growth ended in negative territory despite 10% tailwind from acquisitions and concept store opening. And this is due to the fact that the wholesale business was significantly impacted by timing of shipments as well as reduction of inventories. And we'll get back to that later on. As a consequence of more destocking in the wholesale channels, less forward integration and higher uncertainty on like-for-like in the fourth quarter, we have lowered our revenue guidance to 2% to 4% for the full year. A positive note is that that the EBITDA margin is still expected to be around 32% despite the lower revenue. As Peder just said, we have diagnosed the business during the last few months. And Jeremy and I and the rest of the management board has spent considerable time asking questions and understanding, testing and looking in all corners of the business. And that lead us to 3 very important messages today.First of all is we're not progressing fast enough on our journey. And it's clear that we need to think in a new way about how we manage the business. And it's also clear that we have substantial unexploited opportunities across the company and that our top line challenges is not just about refreshing our product assortment. And that's why this morning that we launched Programme NOW.Secondly, the first important step of the program is that we adjust our network expansion strategy. In short, we have decided to cut down significantly the number of acquisitions and reduce and redirect our concept store openings to primary white space areas.And thirdly, as a consequence of this, we canceled the long-term 7% to 10% revenue guidance. Looking forward, we see a lower but more sustainable growth level mainly driven by positive like-for-like and supported by some store openings and maybe a few acquisitions still.On the margin side, we still see strong profitability ahead of us but we need further analysis on what the net impact is of the cost reduction opportunities on the one hand and the needed investments to drive positive like-for-like on the other hand before we can be more concrete on exactly where we see the margin. And we'll get back to that on a later slide.And then please turn to Slide 4. Just a couple of quick highlights for the quarter and we'll get back to some of the numbers in more detail later on. Revenue was down 3% in local currency, and that's clearly not satisfactory. We had expected the quarter to be impacted by weak sell-in to the wholesale channel but it was impacted even more so. And you will later on see that the timing of shipments, the destocking and weak sell-in to other points of sale actually had an impact on revenue to the tune of minus 10% in the quarter.The EBITDA margin also came in below expectations at around 29% due to the lower revenue. But as just mentioned, we still expect to be able to keep the full year margin at around 32%. Total like-for-like remained negative at minus 3%. And that's the same level as we saw in the first half of the year but it's down from minus 1% that we saw in the second quarter. Like-for-like in our new product launches was flat 0 and has not helped lift like-for-like as expected. And this is part of what we will address in Programme NOW.So please turn to Slide 5 and Jeremy, please?

[Jeremy Schwartz, Chief Operating Officer & Co]

Getting close to our products, our stores, teams and customers is really giving Anders and I a good grounding in the current reality of our situation, but also a sense of a vision for the future. On the left-hand column of this chart, we note some of the strengths and on the right some of the opportunities we've not yet exploited. And I'm going to go through a number of these. So starting off on the left of the chart, clearly we're a big jewelry company, but worth noting, we only have 2% market share. Of course big can be good, but it's way better when it operates as one global company. Just reflecting Pandora's speed of growth gave it the skills to open up new countries and concept stores. Now we need to leverage that scale and best practice working as one global company to drive speed of execution, efficiency and importantly productivity, without of course losing our local relevance.On the second point, around our brand, we have a global brand tracking, which shows really an enviable and high brand name awareness. But to be frank, we don't have a strong enough brand proposition and this is something we're going to fix. Also Pandora is not yet a customer-driven company. And yet the global stores state and e-com site can be really a super-rich source of first person data. So the opportunity to create personalized one-on-one relationships, communication and buying experience is to be done. Now as you would expect Anders and I are working on quick wins and we've launched therefore a demand-centric growth model, which has interviewed 28,000 customers worldwide to understand who our present and our future customers are and of course what they want.As we've said, we have an incredible design, craft and manufacturing capability and yet, finally there is an opportunity to communicate far more emphatically about the quality proposition. For example, the Pandora Charms are actually 100% silver and that every single product is hand finished. We don't say this.Now on a different subject, as you know Pandora has increased promotions to drive short-term sales but it comes at a cost as many of you will know around brand perception and frankly customers waiting for the next deal. To rebalance the quality of our sales, promotional levels will really need to be reduced. And at the same time, our core icons i.e. products that we've had for a while and our new products really amplified much, much more than we've been doing to engage new customers to drive traffic, which is critical, new occasions and new needs.So as a quick win, the profit contribution of every single promotion has been analyzed and we will share the future lower promotional weight plan when we meet next.Now there are not many retailers that have got 2,600 concept stores globally. And for me, it's very reassuring to see the high store profitability we have across the matrix. But there's actually an opportunity now to become more sophisticated to segment the retail network, its experience and in particular, the merchandising so that we can flex our investments and help customers and store staff navigate our offer better. As a quick win, we are recruiting right now a Head of Merchandising to lead a new global merchandising function that we've just created and this will help part of this journey. Now every one of you knows consumers enjoy shopping at our eSTORE and in our stores.Pandora frankly is yet to fully meet customers' expectations to have a seamless omni-channel journey between their mobile phone, computer, website and stores. Just to remind you, the sorts of things people want nowadays, and of course it changes every day, is they want a site to remember the page, they've just looked at. They want to engage 24/7 in a chatbot to sort out issues. And if they go in store and something is not there, they now want the store staff to source online that product and send it immediately to their home. Now ironically, Pandora Charms are all about a personalized experience and that is what our e-com needs to do too. Now I can tell you there are many quick wins we're actioning in omni-channel but I'd just pick one little example that I think you're going to like, which is we're using Mobify to make the mobile e-com experience in the U.S. faster and more inspirational and that goes live ASAP.So Anders, tell us some more from the cost side, please?

[Anders Boyer-Søgaard]

Jeremy, on the cost side, several initiatives have been taken in the past but reality is that we have never really addressed cost in a structured hardnosed way where fundamentals are questions and we will change that. And along the same lines, we need a structured, systematic approach to the way that we use capital because cash is a cost, resource, also in Pandora. We are very profitable and we are very cash generative but that does not mean that cash is for free. And then, please turn to Slide 6. And Jeremy, please?

[Jeremy Schwartz, Chief Operating Officer & Co]

So we've taken this chart from the Capitals Market Day because we thought that was useful which laid out a 2022 Pandora Strategy and the main supporting activities. I'm sure you would agree with the 4 strategic pillars and that is why at this stage they remain unchanged. Obviously, you can see below these, there are several substrategies, which on the whole make good sense and we see these remaining as broadly the same. It's within the execution around the goals set, the business cases, the plans and the speed to delivery that we're doing our strategy health check. You will therefore see the changes from the Capital Market Day presentations being concrete and visible with regard to the execution, both today and when we meet again. So let's explore a bit more about what we mean by this Anders?

[Anders Boyer-Søgaard]

Moving on to Slide 7. And in order to gain speed, drive, change and grab the opportunities we see, we need to approach this as a dedicated program. And launching a dedicated program is also a signal that we're thinking in a new way about how we manage our business. We call it Programme NOW and it's about 3 things. It's about reigniting growth, and that's like-for-like growth and not total growth. It's about pursuing the cost opportunities that we have identified during our health check and keep questioning how we spend our money. And last but not least, is about working as one unified global company and that means a much more structured approach to what is being done locally. What is being done regionally and what is being done globally. Because we do have duplication of efforts today. And I know this latter thing sounds blurry and unspecific but it's actually quite important in order to succeed on the journey that we are on.Then please turn to Slide 8.

[Jeremy Schwartz, Chief Operating Officer & Co]

So a key part of the Programme NOW is a diagnosis into the root causes of the business performance. However as Point 1 on the chart shows revised network expansion, it's quite clear from the analysis undertaken already that we can act now to revise our network expansion strategy, which I'll explain on Chart 9. To reignite sustainable growth will frankly take a little longer to scope out. And [ McCraw ] is drilling into the consumer-driven reasons for the change in the performance of our business and of course, Charms in particular. And we plan to share relevant findings and go-forward plans in the New Year. Anders, will you explain about the costs and working capital?

[Anders Boyer-Søgaard]

Yes, on the cost side, I think the only thing I really want to say at this point in time is that we have seen significant opportunities across all cost buckets and that we have seen significant opportunities in all parts of the value chain. But exactly how much we can take out, how fast we can do it and what the restructuring costs will be require some further diagnosis. But a couple of examples on where we do see cost opportunities is in our cost of goods sold. It's across IT and it's across our concept store network. But let's elaborate a bit on the network expansion strategy on Slide 9.

[Jeremy Schwartz, Chief Operating Officer & Co]

So returning to the revised network strategy. If you look at the left-hand panel in dark, we have 3 main inputs that informed our decision around this approach. Firstly, with negative like-for-like growth in physical stores, the business cases that underpin franchise buyback really are now less attractive. Secondly, the jewelry category really should lend itself to excel in e-com. And so our focus will be putting omni-channel at the heart of our efforts and investment. Of course, we're going to use it to drive traffic from our website to our stores, reduce store inventory, collect rich customer data and meet customers' demand for seamless and frictionless buying wherever and whenever they want to. But over time, as you know, it will probably require less stores to do this.Finally, we want to direct our financial and human capital resources to driving positive like-for-like sales rather than using them to open and acquiring stores. So, if you look at column 2, this is regarding the franchisees, we can see that the headwind that we indicated of between DKK 500 million and DKK 1 billion in top line sales contribution will of course reduce significantly by reducing further buybacks.Now of course, there will be franchisees reaching the end of their agreement period, where an action has to be required. Our new strict decision-making criteria though will first support the franchisee renewing their agreement, if they are a strong operator and they have the desire to do so. Secondly, we then hope another professional franchisee can purchase a store if the original seeks an exit.Finally, if the store warrants remaining open, we will secure a price that gives true value for money to the Pandora company.Now just as a side note, I want to just inform you that all our franchisees around the world will be informed today right now about this change of approach with an intent to reignite our relationship and really drive like-for-like together.If we move to column 3, we're also informing them about a new limit on the opening of new stores. They will be focused on less penetrated markets, such as China, Latin America and India for example. So the 1,000 additional concept store openings communicated at the CMD in January for 2020, after the 250 stores that we've opened in 2018, will be cut back significantly.The store opening plan, of course, will be reviewed annually and if the pace of e-commerce expansion or other traffic and store economic factors change, the plans will be adjusted accordingly. In addition, a new and rigorous store management framework has been deployed, where we will review our existing store base at the end of lease. And if the profitability and outlook remains strong, we will consider release renewal, otherwise we'll consider relocation or closure.Please turn to Slide 10, where Anders will take you through some of the financial implications of this program.

[Anders Boyer-Søgaard]

Thank you. And back at the Capital Market Day in January this year, we present an ambition to grow the top line by 7% to 10% per year and maintain an EBITDA margin of around 35%. With what we announced today, obviously has an impact on our long-term targets and not least the revenue target.In relation to the revenue target of 7% to 10%, most of you will probably recall that some 6% to 8% of that was related to acquisitions and store openings, with acquisitions being 2% to 4% per year and store openings being around 4% per year.And with our change of network expansion strategy, future revenue growth will be at a lower, but more sustainable level driven by first the foremost like-for-like plus some store openings in white space areas.Contrary to the revenue target, the EBITDA margin target is not canceled, but it's being reviewed. And I'll come back in a second of why we -- exactly why we say it like that. Specifically for '19 we see that as a year of transition.I'll just give you a few comments on what to expect on the top line in 2019. First of all, there'll be quite some tailwind from acquisitions and store openings already done in 2018. And that will be to the tune of DKK 1 billion or 4 percentage points of tailwind.Secondly, you should expect an impact from a reduction in promotions and markdowns. And that will put pressure on our like-for-like, but we actually do not expect it to have an impact on the EBITDA margin.Thirdly, there will continue to be some headwind from a normalization of inventories in the wholesale channels -- channel. So all-in-all that means that '19 will not only be a great year from a revenue point of view, but it will be a big step in the direction of a more sustainable and healthy growth level.On the margin side, it's too early to say how we think about the net impact of the additional cost reductions on the one hand and additional investments in driving like-for-like on the other, but we will report on this in February '19.But then please move on to Slide 11 and this sort waterfall charts that we have put together because -- we've done this because we wanted to give you some flavor on our thinking about margins. In the ideal world, we would provide a revised revenue and margin target today. But that's –- it's not where we are yet, because we're still in a diagnosis phase in some areas.We do however believe that we have enough knowledge to provide some more details on what we mean when we say that the EBITDA margin target is being reviewed and that's what we try to do on this Slide 11.If you start on the left, we still expect an EBITDA margin of around 32% this year in 2018 and that's the anchor. Then we have the 3 percentage points tailwind, which we already discussed back in August coming, among others, from the cost initiatives that we have launched already during 2018.Then our health check shows that we -- there's significant more costs to be taken out. We do not know exactly how much yet, but when you look at the chart, it's deliberate that we draw the size of the box like this, where it’s visibly bigger than the 3 percentage points bucket that's just to the left of it. And the sum of the first 3 buckets 32%, plus 3%, plus further cost reductions as part of the NOW program sums up to more than 35%. And that's the starting point and that's a good starting point. But it's also clear that we need to invest more in driving our like-for-like growth.In the next few months of analysis will show how much we need to invest and thereby alter what the net impact is of these 2 buckets being, so the net impact of the cost reductions and the reinvestments are investments in like-for-like growth.That's one important premise on -- for this bridge and that's what's stated in the headline of the waterfall. And that is that it assumes positive like-for-like. If like-for-like is not positive, the bridge will obviously look different.And then please move on to Slide 12. Where we have a go at digging into the core. And we have been through some of these numbers already. So I'll do it short and just go all the way to the right of the chart looking at the cash conversion.Cash conversion was 89% in the quarter. And included in this cash conversion number is one of the first small signs of a different way of doing things. And what I'm hinting at is that we have reviewed payment terms and payment practices with our suppliers and this has a visible impact in Q3 with accounts payable being up around DKK 0.5 billion since June 2018.Then please move on to Slide 13. And we think this is an important slide, maybe a somewhat different way of breaking the revenue development since last year. But that's 2 things we would like to highlight on this slide.First of all, revenue growth in Q3 is significantly impacted by things you could consider temporary of nature and that's the bucket called timing of shipments and changes in inventory levels, as well as the bucket called other point of sales decline in other points of sale.The development in other point of sale shown here is a mix of negative like-for-like and changes in inventories. And we don't know exactly what that split is. But the fact is that these 2 buckets taken together is somewhere between minus 8% and minus 10% impact on revenue in Q3. And that makes the reported Q3 number look worse than actually thing it is. It doesn't change that Q3 was unsatisfactory, but we just wanted to call this out.Secondly, the other important message on this slide is that inventories are not yet normalized as we still see that inventories in the wholesale channel are too high and with too many slow-moving items. So we do expect still that the reported growth will be negatively impacted for some quarters still.Then Jeremy will take us through Slide 14.

[Jeremy Schwartz, Chief Operating Officer & Co]

So on Slide 14. We're looking at revenue per channel. Pandora own retail continues to increase as a share of total revenue, mainly driven by opening and acquiring concept stores. At the same time the eSTORE performs well though with a higher promotional waiting. Total revenue increased 34%.Franchise on the right concept store declined partially from buybacks, negative like-for-like. And as Anders just mentioned, along with wholesale the timing impact of shipments and inventory reduction in the quarter, total revenue declined 27%. For clarification, the Christmas collection was shipped in the U.S. in Q3, 2017 and this year being Q4, the value of that shipment is around DKK 175 million. Also note revenue from the distributors not shown here decreased 21% due to the takeover of our Spanish and Irish distributor.If you move to Page 15 we will look at products. So on Slide 15, we can see that the product category performance has been impacted in Q3, of course by the weak sell-in. However the Charms category, which represented 53% of revenue did decline by 9%. But I need to tell you the performance does vary by region and type of Charm and is really not satisfactory. The diagnosis phase we mentioned will get to the true root causes of what is happening on Charms and identify ways that we could reignite purchase intent.Just being philosophical for a second, the power of Pandora brand comes from jewelry that is not just for looks, but also can tell a story for us and about the consumer. The needs for consumers to tell these stories is both timeless and universal and that plays into the Charms offer. So we hope we will share plans for Charms next year.It's encouraging though to see the bracelets grew by 13% benefiting from 39 new bracelet types including the sliding and the padlock items, which I'm sure you've seen. Now importantly our classic snake chain bracelet, which was actually launched in 2016 grew 13% like-for-like. And I think this is an important sign of the importance of all core icons as well as new products in thinking about growth.Necklaces is actually the second largest category in the market, so it's pleasing to see that from a small base they grew by 23% on the back of actually 5 quarters of growth of over 40% each quarter. Now this was partially fueled by the reactivation of the Signature collection, which again just for your interest was first launched in 2015. Unfortunately rings declined by 8% and earrings by 13%.Moving to Slide 16 and our countries. The top 7 countries represent 69% of the sales. And we saw the U.S., China and Germany in positive like-for-like in Q3. Germany is showing good growth across stores in online, while the U.S. and China has a good contribution from the eSTORE, while retail frankly was weaker. In Italy, Australia, U.K. and France unfortunately delivered like-for-like growth in the quarter in spite of strong e-com growth in those countries. It is worth just remembering and noting that the prices in Mainland China were reduced by 15% in June to counter the increasing challenge with the grey market trading. And I can tell you that transactions have increased particular actually on Tmall as a result of the lower prices, but the store traffic remains unchanged.As you think about growth though, we did open 60 new stores in the last 12 months and that explains partially the plus 28% in local currency. In Australia, just to clarify, prices were actually increased in June and Australians are particularly price sensitive, we can see with purchase rates declining on those products that were targeted with price increases.Overall traffic and transactions have reduced as a result of this, but also the curtailing of the Chinese cross-border trading, which was part of the objective of this whole pricing strategy. And of course though, it is strategically correct to progressively increase Australian prices with the rest of the world.Now Anders will now discuss the EBITDA bridge between Q3 2017 and 2018.

[Anders Boyer-Søgaard]

Yes, on the Slide 17 we have the EBITDA margin bridge. and overall the EBITDA margin was also here significantly impacted by the timing of shipments and the change in inventory levels in the wholesale channel, as well as the negative like-for-like that we saw in the quarter, total like-for-like in the quarter. And that's the 2 biggest bucket in this waterfall to the left on the page. I'll also like just to call out that in the third quarter inventory buyback related to acquisitions impacted the gross margin with and thereby also the EBITDA margin with 1.6 percentage point. And that means that if we stop acquisitions completely there would be a 1.6 percentage point tailwind on the gross margin and the EBITDA over time as we get past acquisitions behind us.And now please turn to Slide 18. As already mentioned, we do see some upside also on net working capital across all 3 components payables, receivables and the inventories. And as you can see in these numbers, our trade payables are up in percent of revenue to the tune of DKK 0.5 billion as I just mentioned earlier on.But we're not happy with the development in trade receivables and in inventories. And although the development in inventories can be explained by more O&O stores and higher cost prices, we do think that the inventory level is too high.In relation to receivables we can look at that at Slide 19. And day sales outstanding was up 5 days in the quarter from 63 to 68 days this year. And I had actually expected that DSO would come out better than this in the third quarter, but we had IT challenges again in the U.S. and they actually escalated by the end of the third quarter and that pushed up overdue receivables by the end of the quarter.And the driving force behind that is the implementation of AX in the U.S. And AX being our new ERP system that we're implementing not just in the U.S. but globally. We do also see some challenges on that front here in the fourth quarter where we have a team on the ground that so far deals with this matter in a manual way.Turning to Slide 20 and the guidance for the year. The new lower revenue guidance of 2% to 4% is driven by 3 things. First of all, the third quarter was disappointing and we see higher than expected impact from changes in inventories in the wholesale channel and that includes weak sell-in to the other points of sale.Secondly, as we reduce the number of acquisitions, this will have an impact already this year to the tune of DKK 200 million or around 1 percentage points of less growth. And finally, we've had a tough start in the fourth quarter with like-for-like being down below the year-to-date level and the year-to-date level being minus 3%. And it's clear that in order to reach the upper end of this new guidance 4% growth for the full year, we would need a significant increase in growth in the fourth quarter and implicitly in order to meet the high end of that guidance, we would need 8% growth in the fourth quarter.And when you evaluate that number please remember that we will have much easier comps in Q4 due to much less impact from timing of shipments and changes in inventories plus that we will still have a continued significant tailwind from concept store openings and forward integration.And reiterating just one positive thing is that we expect the EBITDA margin to be around 32% still, despite the lower revenue guidance.Finishing off quickly so we can move on to Q&A, we would like to reiterate that we are taking immediate action as a consequence of the disappointing numbers. We are launching Programme NOW today and we've already taken a first important step by changing our network expansion strategy.So thank you for listening for 40 minutes here, and we are now ready to take your questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line Michael Vitfell-Rasmussen of ABG Sundal Collier.

[Michael K. Vitfell-Rasmussen]

Three questions. I would like to address my first question to Peder, please. So Peder can you tell us a little bit about what exactly is it that you're looking for in a new CEO, what kind of type are you looking for? Because it seems like you have 2 guys here heading Pandora right now which is very, very strong background both within strategic and also the financial side. So that's my first question. My second question goes a little bit to some of the newer products. So if you could talk a little bit about how the initial take has been of the Reflections launch. Was it better than Shine earlier this year? And how many Charms per bracelets are you seeing consumers are buying here? And then my final question that goes on to prices in general, do you believe that you have the right price strategy for Pandora? Will you need to maybe lower prices and how has the reaction been also from the price hikes outside of Australia, where -- which you mentioned here Peder? Sorry, Anders.

[Anders Boyer-Søgaard]

For the questions, Michael this is Anders here and we will I think we'll start out with Peder addressing the first question and then Jeremy will address the 2 last questions that you have. Peder, please.

[Peder Tuborgh, Chairman]

Yes. Thank you very much. I understand the question. We are looking for a CEO who has a proven track record in the areas that Jeremy and Anders, as you rightly point out, in an excellent way are mastering. That's I think how I'm going to answer that question.

[Jeremy Schwartz, Chief Operating Officer & Co]

So, I'll pick up on Reflections. So obviously it's early days. But I think the first thing is from a pure consumer and store staff feedback. They are positive, positive because it's addressing a new opportunity which is obviously our flatter and way of expressing the Charms expression which is perhaps a little bit more contemporary. We can see that the number of Charms per bracelet purchase at the moment is between 1 and 2 and that's partly because of the choice of Charms we've actually created. And people normally, the way they do it in some countries, not in China, but let's say in Europe, and America will choose 1 or 2 for the first purchase. And then we'll come back and collect. And that's obviously, the power of the whole Charms model, which is people come back. So we've got around a target of 10% of the targets sell out of new products, which we're aiming for. And just looking at the data, we seem to be on track for that. So we know we're warmly positive. I would say. Now of course the question is, is it driving like-for-like sales? And the reality is we can as we've articulated that the new products in total are not driving new traffic to the level we need. So that's why we're going through this diagnosis phase. When it comes to pricing, I think one of the things that the team have been doing for the last couple of years, which really is, I would say pretty exceptional because not every company does this, is to move the business to a global pricing strategy so that you don't have huge disparities between countries, which leads to this grey market effect which of course then corrupts all your interpretation of the data. So first of all, I would celebrate that. And adding obviously, the work in China and Australia, though it does have a short-term impact on places like Canada and Australia, where a lot of the grey market movements have been occurring. In the end, when that nets out that will be in a better place. Obviously, pricing is a critical part of any strategy. And during this diagnosis phase, we are looking at that very question about price tiering, because that really is the area to understand better the role of price tiering to attract different customers at different price points. And we will be able to talk about that in more detail when we see you next.

[Operator]

Our next question comes from the line of Elena Mariani of Morgan Stanley.

[Elena Mariani, Vice President]

I also have a few questions on the new restructuring plan. My first one is really on how you're going to prioritize these numerous initiatives apart from the first quick wins? From one side, you're talking about a big cost cutting program. On the other side, you're talking about enhanced marketing, personalization, a different store experience. So how do you plan to balance the cost savings program with the investments required to reboot the top line growth? In my view, this could take way longer than the 2 year time frame you have provided, particularly given that at the moment there is no CEO on board and middle management is still being reshuffled. The second question is on the Pandora brand and the product. I just would like to go back to your view there. You mentioned in the release that you've seen the future, a normalized level of like for like in the low to mid-single-digit camps, post-restructuring. But the recent performance shows that new product launches have not meaningfully changed momentum in the quarter. So it means to me that newness is not enough to drive further consumer interest. And apart from the possible mismanagement at the retail level, or perhaps the pricing architecture, do you feel that the brand is tired, consumers are tired of the brand, or maybe the market is saturated with Charms? So what's your overarching view here on the brand? And finally, I would like to get your early opinion on the store network. You already have a medium-term view on how distribution should be restructured. Talking about the proportion of retail versus wholesale, but also the magnitude of the store closure program you would have to go through to better balance physical sales versus online sales. I would imagine that particularly in some of the regions we should expect a meaningful number of closures and I just would like to know if I'm right.

[Anders Boyer-Søgaard]

Thank you very much, Elena for your 3 question. I think I'll start out and just give a couple of comments on the restructuring and priorities and I think Jeremy will address the last 2 questions. But on the priorities and you're actually spot on that it's a big program and we see many opportunities across the company to do things in a better -- a better way and we have to prioritize as always. But it even more so given the situation that we are in exactly the -- what the sequence will be, we only know when the -- when we finalize our diagnosis phase. Having said that, on the cost side we are moving ahead full speed because we have been through many parts of that diagnosis already, it's not fully completed, but there we will move ahead and just, if you like, calculate backwards in order to make sure that we have the resources needed to take out the cost at the -- at a -- as high a speed as possible. This is -- we have created a new position in our management board a Chief Transformation Officer for the same reason, reporting directly to Jeremy and I. Because this is not just another project, it's a program, it's bigger than a -- much bigger than a project. And then each of our management board members, senior vice presidents will be running relevant part of the work streams that we decide to prioritize. But on top of that we will need significant support, analytical capacity hand and feet from a consultancy company, in order to make sure that we can drive this through at as high a speed as possible. But exactly how it all pans out, we'll come back with when we meet next in connection with the full year announcement.

[Jeremy Schwartz, Chief Operating Officer & Co]

So just on the brand and the product. I -- my counsel at the moment and what I will say to you is it's too early to reach too strong conclusions, even the ones you've mentioned. Because we are, as we've said, doing a deeper and more thorough piece of research and reflection then has perhaps been done. And that's because of the situation we're now in going from fantastic growth to not in that situation. But I think the first indication sellers, that the brand has got tremendous legs but we haven't made the most of it, is the way I would leave that point. I think the second point is, I would say that the products, the new products that I've seen are extremely relevant and would be seen, in my view, to be very competitive. But one of the challenges that a business like this has is to ensure that the consumer, and she knows that the new products are being launched and visible. So 2 of the whole examples of what we're doing about that, the first one I mentioned is to create a global merchandising function. And the role of that function is to think more reflectively and we're more clearly about how we present our different ranges so that when customers come into stores, they really can identify them far quicker and realize that we're talking to them. Now to implement something like that, as you rightly say, takes time. And that's why we wanted to share with you the concept of quick wins and quick decisions because many things can be done quickly and make an impact. But other things will take time to both execute and for their results to be seen. And we'll share more of this phasing, which you articulated and correctly identified when we see you next. But we're working on the fast and the longer more strategic changes that require it. In terms of the network. I think one of the things that really differentiates Pandora versus probably almost any other retailer is the EBITDA profitability of our stores. So we're starting with a store base that has an EBITDA profile which exceeds many, many other retailers. So you could say therefore, we've got far more headroom at a store level from an EBITDA point of view and therefore right now our focus is on developing e-com, developing omni-channel and we will tell you about those things because we are moving quickly in a quick win way to catch up frankly with where we need to be. And of course we will then share, our plan is to share on an annual basis what our store network view is based on the latest lease term completions that we will be having in that year. As I mentioned on the state of e-com and the movement of traffic and particular locations which might have been popular for 5 years but now have been replaced by another [ mall ]. So our approach will be an annual update to you on how that network should change at that moment in time.

[Operator]

Our next question comes from the line of Chiara Battistini of JPMorgan.

[Chiara Battistini, Co]

My first question would be on the takeover of the franchises on the forward integration. I was just wondering, if you're going to reduce the takeover of the franchises going forward, what are your plans for the existing franchisees that you were previously planning to take over? Would you consider accelerating the closures of franchisees whose contract is coming up to expire if that comes to that? And then on the gross margin in Q3, which surprised me on the negative side. Could you please quantify the moving parts within the gross margin move in Q3? And notably, how much the negative metal mix effect impacted the gross margin in the quarter? And about that, am I right, I've calculated that the silver products were down around 15% in the quarter. Is that a right estimate please?

[Jeremy Schwartz, Chief Operating Officer & Co]

Okay, so this is Jeremy Schwartz and I'll pick up on the franchisees. So I think first of all, what we're indicating to you and telling every franchisee in the world today is that we view them as collaborators and partners in our go-forward strategy. So they are people who often are extremely sophisticated retailers and business people in their own right. They quite often have multiple brands or they've been working on the Pandora business for 10, 15 years or so. So we see them as a great asset going forward. As we mentioned early, but I will repeat it because it will have been lost. We are also being extremely explicit to you and to them about our decision-making process, which first and foremost if they come up to the end of their term is to, if they are good and have the desire to extend that term with them, because if they're a good operator who wants to work, we want them on site. If though however, they say for whatever reason, that they want to end that relationship, what we will be asking them to do is to find an alternative owner. Now that owner though, will need to meet our criteria at some point for competence because we want to ensure that, that outlet or chain of outlets meets and continues to grow. If that is exhausted and the outlet, the store still meets our criteria that will be -- that it will be profit enhancing in a net PV value over time, then we will consider buying it. But if actually the store is underperforming or not meeting our criteria, then we will let that be closed. So we are telling them that, we've told you that and we will -- we are being very transparent about the way that we will make decisions around this. So hopefully that's helpful.

[Anders Boyer-Søgaard]

And then on to your question, Chiara, on the gross margin side. If you use Slide 17 as your placeholder of what went as a go through that breakdown then the metal and product mix and sort of the longer production time that we talked about also earlier during the year is to the tune of and a drag on gross margin of 2.5 percentage point. And then, on the higher part of on all revenue that goes the other way with tailwind on the gross margin of around plus 2 percentage points. And then we have 0.5 percentage points drag on the inventory buyback related to acquisitions. And then, the last piece is a drag on gross margin from commodities which is around 0.5 percentage points give and take.

[Chiara Battistini, Co]

And just on my question on whether the silver products were down around 15% in the quarter?

[Anders Boyer-Søgaard]

Couldn't quite as you said this, what was it, could you repeat the question again, please?

[Chiara Battistini, Co]

Just based on your comments in the press release this morning on the increased penetration of Rose and the Shine collection. I calculated then the silver products were down around 15%, is that a fair assumption?

[Anders Boyer-Søgaard]

I don't think that is because you've done a quick calculation that we may not have caught in the way, can we come back to you on that? The [ RLT ].

[Chiara Battistini, Co]

Sure, absolutely.

[Anders Boyer-Søgaard]

Is there anybody else who wants to know?

[Operator]

Our next question comes from the line of Lars Topholm of Carnegie.

[Lars Topholm, Co]

A couple of questions on my side. First of all, on admin cost, you reversed DKK 100 million of provisions, so a,does it boost your EBIT by DKK 100 million everything else equal? And b, what run rate for admin costs should we assume for Q4? Question number 1 in your presentation and then comments, you mentioned that there's still too many slow-moving items in the channel and I'm very sure you have had considerations about this. But what is the reason for not making a channel clean up exercise at this stage, assuming slow-moving items will probably never really move. And you want to do less promotion, so you can flush it. Question number 3, you mentioned Q4 is off to a weak start. Can you maybe say, if this is due to specific markets or more across the whole network. And then, maybe a final question on the longer production times, you just mentioned. Is there any getting up on the learning curve from Q2 to Q3, so year-on-year maybe production times are longer, but sequentially, you actually produce these items a bit faster. How does that look?

[Anders Boyer-Søgaard]

Thank you Lars for the questions. I -- should I start out answering the -- maybe the first one and the last one of us on the production time. And then, Jeremy will come back on the 2 in the middle, if you like. On the admin cost, it's true that as a reversal of provision to the tune of DKK 100 million in the quarter, so that's absolutely correct. As you can also then argue that, there's a couple of things going the other way, one being the severance payment related to change of management, and severance payments related to the just about 400 people that were let go back in early August and that more or less all balances out in the quarter. But it is true that is a reversal of provisions related to incentive programs in Q3. Then I also -- then you also asked about the run rate going into Q4 and it has no structural change in admin costs so far and we're not expecting some big restructuring cost, that's not that -- we're not that far down the Programme NOW yet. So for Q4 specifically, you shouldn't expect any changes compared to, so where we've been for the last number of quarters. Then on production time, yes that is -- we do see that there is a learning curve. Production time was up quite significantly as we started producing some of the more complex new products. But there is clearly a learning curve. It's not already kicked in here yet, but we do see some opportunities to get down production time again a bit on these new items that we have launched during 2018.

[Jeremy Schwartz, Chief Operating Officer & Co]

Okay. Picking up on the slow-moving items. We have been drilling down into each line item of what these are including doing stock takes in the third-party, so we can get a good picture of that. What we've decided is to really focus on the post-Christmas sale, which is a great opportunity to flush out slow-moving items, which are a blend of things that people bought too much of or that they haven't been great sellers for whatever reason. And to use a more sophisticated approach to markdown thinking, which can target in a more sophisticated way, the level of markdown required to drive through those items. So we are hoping and planning and targeting to double the clearance rates through or more than double the clearance rate through that Christmas work. And we will update you I'm sure in the New Year on the approach from the success of that. And that’s what we decided to take as a team, as the approach going forward as opposed to something more significant. On the Q4 weak start, as you know we’re #1, we’re new here so we’re drilling down into all the data. And of course what we got to do is drill down not just in this year, but last year because everything is always often about annualization. And we can see that has been expressed, I think the word was everything has been done to meet the targets last year and there was some extremely strong promotional mechanics used in October for example last year, which we don’t want to annualize because then you get into a bad habit of that sort of thing. So partly it's been driven by a different level of promotions. We’ve also launched things like Disney in Europe last year, which was highly successful and we’re not annualizing something of such uniqueness. So there is quite a few pieces. But I think, we've not lived through, Anders and I a Christmas in Pandora. We lived through Christmases in other different businesses. And Christmas always has its own shape also with things like Black Friday in different categories. So we haven't yet got that intuitive feeling about how daily run rates are working and like-for-like. And it's because of what we saw in October and our belief that there's a blend of what we've just described with potentially other elements going on at a core level that we have indicated to you a new guidance for the year based on what the rest of the year could look like. So we think that is a sensible approach to take in this context.

[Lars Topholm, Co]

One final question if I may, because if we look at the like-for-like momentum it stands out to me that it's better in less penetrated markets such as U.S. and China. And it looks honestly very bad in more mature markets such as Italy, U.K., Australia, I think one could add Canada to that. What do you think is the reason for this markedly different momentum between mature and less mature markets and do you see any risk that there is saturation point for Pandora?

[Jeremy Schwartz, Chief Operating Officer & Co]

To be honest I -- my -- we can cut the data and we are cutting the data to try and find clusters of countries that are behaving in a similar way so that we can build a cluster based strategy. I don't want to use the word, I don't agree with your diagnosis that will be a far too strong a word, but I don't think the diagnosis you've articulated is a good or a complete explanation of the like-for-like we're seeing. And I could cut it in a completely different way. So I wouldn't want you to walk away with that being a explanation if I may suggest. So that's just point one. I think, at this time it's really too early to use, to say, do we believe the brand and the business is saturated. Because, for example, I'll give you a concrete example, if you go town by town through the U.K., or France, or Italy and this is what I'm doing or China even; and you say for that particular town, how many people have we got in the vicinity of the store that it's servicing and would that person in that town be going to another town to see there's another Pandora there. We can see in many places the distance is so far they wouldn't know there's another Pandora. They've got their Pandora and they're not saying, "Oh my gosh, there's lots of Pandora around." Now we have some big cities where perhaps that movement may be different because we know the mobility of people by city and country is different. But my first point would be let's hold on until we've done the diagnosis. And, of course, just generically we know though that there is a tendency for brands nowadays to have to balance availability with exclusivity and without a doubt Pandora secret is about the balance of those 2 things. And we need to ensure, going forward, that we've worked out what that right balance is and how we nourish that journey and that balance well. So I would take that away as an important thought that we are thinking about.

[Operator]

Our next question comes from the line of Thomas Chauvet of Citi.

[Thomas Vincent Chauvet]

I have 3, please. The first one I'm trying to reconcile the EBITDA margin bridge on Slide 11. So you're trying to think correctly assuming you have positive LFL, you start from 32% base in FY'18 plus 3 points from the DKK 350 million of cost savings procurement and job cuts. And then more cost savings in the future offset by reinvestments in marketing to drive LFL. So net-net Anders, is it yielding in your view, to an EBITDA margin above or below the 32% that you will report for 2018, consensus I think for the next 2 years is that about 31%? And just related to that given the positive impact you will have from the changes in lease accounting on your EBITDA margin, when are you going to start to talk about EBIT margin and guide about EBIT margin rather than EBITDA? Secondly on China, I think total LFL one, so no major change in trend, but obviously you had the big price cuts. Can you elaborate more precisely on the volume impact and whether that price cut has helped cleaning up the bulk of the grey markets? Or how much do you estimate still are the grey markets weighing on China growth? And finally on the CEO search, could it be that, given -- I mean the -- maybe urgency of the situation and how long it takes perhaps to hire someone and to bring it to the company, could it be that the CEO is to be found inside Pandora to be maybe more plug and play at this time?

[Anders Boyer-Søgaard]

Thomas, I think we'll probably start from behind and then have Peder answer the question about the CEO source. And then I can come back and answer the -- so the EBITDA and EBIT IFRS related questions. And Jeremy finishing of commenting on the grey market. If that's okay, Peder?

[Peder Tuborgh, Chairman]

Let me answer in this way that it has been important to me and the board, as we change management, not long ago that we could put in place a well-functioning management -- board management team, Anders Boyer and Jeremy, that together could serve the office of the CEO and take the scene immediately in the company. And that has proven to be a very good process. On further comments to the CEO process, I would refrain from bringing more details just saying that we are looking for the right person, we are taking our time. Not because we have endless time, but we also feel confident that the way we are working now also with the board very close to the action at the moment with -- there are some things that we need to follow through as you've understood from today's presentation and we're doing so. So let me come back to you when we have some more to say on the CEO search. For now, we are occupied in the launching the project NOW, it's been underway for a while. We understand the company through different lenses and more details today and are seeing -- I mean an emerging number of initiatives that as Jeremy put out and Anders as well both short-term and long-term needs to be initiated. And so with that, my main focus at the moment whilst the CEO process continues in the pace that such a process should continue.

[Anders Boyer-Søgaard]

So topic on China.

[Jeremy Schwartz, Chief Operating Officer & Co]

So on China, if I just totally understand your question properly, the reduction in price has led to an increase in units sold in line with the price increase. And that gives us really a net -- non-increase in sales value if you -- so is that clear? Hopefully that's clear. And what we do see though is the elasticity on Tmall is significant versus in stores. So we've seen a dramatic increase in transactions on Tmall and that's probably because as you know pricing is very transparent and visible when you go online much more so than stores where you go to work your way through it as a consumer. So I think we've -- that sums up that. And then in terms of grey market, if I'm really honest with you, I can't give you a number right now. What I do know is that the amount of grey market has gone down and we're happy with that.

[Anders Boyer-Søgaard]

In regards to your first question, Thomas, on the EBITDA that’s -- it's too early. Ideally, I think, we would have liked to come out with more concrete guidance on top line and on bottom line. But we're just -- we're still in our diagnosis phase in the program with both a fairly big plus being further cost reductions and a minus being further investments in driving our top line. And it's just too early to be specific yet on where that ends up. And on the EBIT versus EBITDA, we have put in an updated slide in the appendix, far back in the appendix on 30 -- Page 32 in the Road Show take where we can see that come '19, the IFRS change will lift the EBITDA margin by around 4 percentage points next year. And when we come out with our guidance for 2019, we will talk about what to guide on going forward. But I think as we've indicated in some settings during the Q2 announcement, it might make sense to transition looking at EBIT or EBIT margin as our main profitability KPI.

[Thomas Vincent Chauvet]

Just to follow up maybe for Jeremy on the grey markets. When you say well, it's been contained further in China but it's been displayed, you said earlier, into other markets and you were talking about price reduction. I mean can you clarify, are you looking to narrow further the gaps across all your regional markets or are you satisfied now with the current price gaps?

[Jeremy Schwartz, Chief Operating Officer & Co]

For clarity, we have said that we've seen a significant reduction in grey market from Australia and Canada due to the price realignment in China and the very small marginal benefit it gives the traders to actually cross-border ship. Of course, we're going to continue to review prices and if we see any change, we will make the right moves and will inform you at the right time.

[Operator]

Our next question comes from Hans Gregersen of Nordea.

[Hans Gregersen]

A few questions. If we look on the change in your strategy towards franchise operators. Have you seen that the previous strategy has had a negative impact on growth and that's why you're changing it, that's the first question? If we look on the diagnosis process you've done so far have you had any external support for that? Thirdly, do you anticipate on the changed, let's say, retailing outlook that there will be some goodwill impairment? And then finally, as you intend your EBITDA margin for the full year despite of lower revenue that would imply negative leverage. What extra cost cutting have you factored in?

[Anders Boyer-Søgaard]

Hans it sounds like most of that was actually for me to comment on. You asked about whether the one of the reasons for changing franchise strategy was about that we've seen some negative growth coming from that. But that -- that's not it, the main drivers or the reasons why we changed direction on franchise acquisition strategies as Jeremy mentioned, one is that we do see a weak sell out of the -- in the physical stores and that's what we are reacting on and slowing down acquisitions of our franchisees. And then secondly, we need to focus on driving like-for-like in our existing store network. Year-over-year in Q3, we have opened up or acquired 401 stores, concept stores, and that takes a lot of focus and energy and we can't do that while we have negative like-for-like in our -- across the company. Then on the -- on external support for the diagnosis phase. Yes, we have had, we actually have had arranged a quite extensively external support but it's been driven by the new Chief Transformation Officer that we have in place, together with the management board. So nothing is owned by external parties. Each of the pieces that we're looking into is owned by a member of the management board. And we are -- I am sorry -- we're working together with a global big well-known consultancy company but supported by experts so in -- in specific more, narrow fields. And then on the goodwill. No, nothing is in the pipeline, the way the goodwill impairment is done in Pandora is on a regional basis and that creates a lot of headroom in between. So the book values and the implied value of the different regions. So that's so I would say not on the agenda at all. And then in terms of the last question maybe, I didn't get that right. I'm just saying, listen to what Brian is saying of whether that's -- where the extra cost cutting have been factored in into the EBITDA margin. I didn't really catch that…

[Jeremy Schwartz, Chief Operating Officer & Co]

So on the EBITDA margin when we look ahead at least, I think Slide 11 showed that very well as Anders mentioned that we do see cost lines across the P&L, where we can improve that significantly. So a lot of cost exercises can be made and that will of course improve the EBITDA margin. But as Anders also mentioned, a part of that or all of that will be reinvested into improving our like-for-likes going forward.

[Hans Gregersen]

The question -- can you hear me? Hello.

[Brian Granberg, Investor Relations Officer]

Yes, we can hear you loud and clear.

[Hans Gregersen]

The question was, if you look on your changed guidance for this year, in terms of revenue -- you cut your revenue, that must have a negative impact on margins from lower sales base. As you maintain the margin is that driven by additional cost cutting, specifically impacting Q4?

[Anders Boyer-Søgaard]

Thank you Hans, I didn't get that right in the first setting. When you look at the 4% to 7% guidance that we gave back in Q2. Then we also said, we can actually reach just around 32% even in the lower end of that range. And then, so moving from 4% in the old guidance, down to the 2% in the new guidance, there is -- so you can look at 2 components. One is a 1 percentage points less growth from forward integration and that it doesn't actually dilute margins because forward integration is actually a little bit margin diluting. So we could actually argue that it goes somewhat the other way around. So it's only, and now you can't see my body language here, but only in the quotation marks, 1 percentage points of lower growth that we need to bridge in order to get to around 32% margin. Having said that, I would like to say that if we end up around into the lower end of the revenue guidance around 2% rather than around 4%, it's probably likely that around 32% should be interpreted as something that that's a bit below 32%. If we get all the way down there to 2% local currency growth. I hope that clarifies it.

[Operator]

Our next question comes from the line of Fredrik Ivarsson from Kepler Cheuvreux.

[Fredrik Ivarsson, Equity Research Analyst]

Couple of questions for me as well. First on the gross margin, we've seen silver prices coming down quite a bit lately. And I'm just curious on your preference here, will you try to reap the full benefit of that through a stronger gross margin or will you more reinvest part of it at least into the offering to drive sales?

[Jeremy Schwartz, Chief Operating Officer & Co]

We know that we are obviously taking options on price. To be honest, if we are just really honest with you right now. We don't have the information at hand. Can we come back to you with that because we'll have to look at our forward buying on that and see and get you a good answer.

[Anders Boyer-Søgaard]

If I understood your question correctly Fredrik. Then it would be -- but if silver prices have come down recently then that's absolutely true whether we are -- sort of whether that has an impact on our ASPs and how we think about our price setting. Was that what you asked about?

[Fredrik Ivarsson, Equity Research Analyst]

Yes I'm just curious on whether you want to drive sales or more revenue or like-for-like focus now? Or if you have a preference of reaping the full benefit of the lower raw material prices in terms of a stronger gross margin?

[Anders Boyer-Søgaard]

But then, yes, the way that we set prices is not based on cost. It's based on a sort of consumer research. So what's a consumer willing to pay. So it's a little bit black and white way of saying it but cost doesn't have an impact on the way that we set our recommended retail prices. So the lower silver prices will, everything else equal, flow through to our gross margins and EBITDA margins in the quarters to come. And as you would see somewhere hidden in the notes in the quarterly release, we've actually hedged a bit further out than normal for exactly that, that reason we have hedged into full 2019. And that should give us some 50 basis points of margin tailwinds report in 2019.

[Fredrik Ivarsson, Equity Research Analyst]

And another one on the 8% to 10% headwind in the quarter, you mentioned. How much of that do you assume to get back in Q4 in the new 2% to 4% guidance?

[Anders Boyer-Søgaard]

In terms of the part of that bucket that we're calling, timing and inventory changes, plus and minus that will disappear in the fourth quarter because we -- when we look at the comparison based Q4 of 2017, net, net as of low impact from timing of shipments. So that's so that -- half of those 2 buckets that disappears. We still do expect to have headwind from -- in other points of sales in the quarter but not to the tune that we have seen in the third quarter. So I think it will be quite an easier comparison base in the quarter that we're standing in right now.

[Operator]

Our next question comes from the line of Anne-Laure Bismuth of HSBC.

[Anne-Laure Bismuth]

So in the past when you had to do a profit run, you did that most almost 2 weeks before. So just for the picture and to understand how you -- what is your plan in terms of communication? Why did you not do that regarding Q3? And my second question is about the -- still I want to come back on the search for the new CEO I understand that the priority is to focus on the strategic initiative that you announced today but how long can you reasonably assume to -- how long can you take to recruit the right person as the CEO for Pandora?

[Anders Boyer-Søgaard]

I think we'll start off in the reverse order having Peder address the CEO question as first and then I'll revert on this first question afterwards.

[Peder Tuborgh, Chairman]

Yes. I think you would know from experience, certainly I do, that there's no formula for the timing of such a process. Obviously, we can continue the process endlessly. But we do believe, as I -- do previously that both the board and the management at the moment should stand very strong in the phase that we are in and initiating all the right initiatives in the company. That being said the search is ongoing, there has been discussions also on the board level as we are also have announced that we're looking for new board members. So I'm pleased with that part of the process and when the timing is right then timing is right. I'm sorry to phrase it in that way, I would not like to say there is a certain deadline on this search. But we will come back to you when the time is right.

[Anders Boyer-Søgaard]

And on the other question on the timing of the profit warning that came out this morning. We have had discussions all the way up until actually I think ending this morning. I can't even remember 6 a.m. having meetings with the organization on trying to sort of exactly understand where we are hitting. But you should remember that we've just got the October numbers. Obviously, we had an idea about where October was moving but we got the October numbers. Saturday, I think it was, or was it Sunday morning. Can't even remember. And we are acting on those and having meetings both yesterday evening with the Americas organization and our APEC organization again this morning before we could make a final conclusion on where we're hitting?

[Anne-Laure Bismuth]

And just what is giving you confidence you can reach return to a breakeven growth in Q4 given yet the weak performance in October and the yes, the ongoing clearance in the wholesale channel, so yes if you can give us some more clarity on that?

[Anders Boyer-Søgaard]

I will --I can do that. If you have -- one way to think about the guidance that we've given for the full year is that it -- on local total growth, local currency growth, it implicitly means between 2% growth in Q4 and 8% growth in Q4 as total growth. And in that number, you have to the tune of DKK 900 million in tailwind from forward integration and store opening. So we starting on a sort of on a DKK 900 million is a positive starting point. That's more than 10% tailwind as a starting point in Q4. So that leaves I would say one way to look at it that look leaves quite some room for negative like-for-like and lower revenue in other points of sale. But the way to think about it is that in the upper end of the guidance, it implicitly means a like-for-like in the fourth quarter close to 0, low single-digit negative. And in the low end of the guidance, the -- around 2% for the full year, high single-digit negative total like-for-like in the quarter. That's kind of the range that we are implicitly talking about in this guidance.

[Operator]

Our next question comes from the line of Klaus Kehl of Nykredit Market.

[Klaus Kehl]

Two questions from my side. You have stated a couple of times that you have had a weak start to Q4 and especially October. I was just wondering does that include the shipping of the Christmas collection? Or will they -- haven't you shipped the Christmas collection yet? That's my first question. And secondly, when we think about your margins going into '19, you highlighted that like-for-like is obviously a pretty important driver. And I understand that you cannot give us guidance for like-for-like in '19. But if you could just give us your thoughts about what positives and negatives we could think about going into '19 that could be very helpful?

[Anders Boyer-Søgaard]

Thank you, Klaus. I can -- maybe I can comment on both of the questions. When we see -- say that we've had a weak start to Q4. We're actually referring to like-for-like and it's often there the timing of shipments doesn't have an -- that doesn't have an impact. But that's the way to think about it. And when we say that we've had a weak start to Q4 is because the like-for-like is below the level that we've seen for the first 9 months of the year. On the other questions about sort of thoughts on like-for-like in 2019, it's a little bit too early to be specific on how to think about that. But when we -- when I went through Slide 10 in the deck, we gave a couple of indications on what could impact like-for-like next year being sort of lower promotions and markdowns that will be a drag on the year in like-for-like when you do it. But just reiterating low expected impact on the EBITDA margin. And then we -- so that's the -- and then I think it's clear that we've had some negative momentum so far in 2019 on our like-for-like. But it's too early to be concrete. Apart from saying, as I did on Slide 10 that we don't expect '19 to be a great year from a revenue point of view.

[Operator]

Our next question comes from Piral Dadhania of RBC Capital Markets.

[Piral Dadhania, Analyst]

Just from a -- quickly on your relationship with franchisees, you talk about reigniting that relationship. So could you maybe just touch on to what extent that is damaged given the forward integration strategy and potential appetite from franchisees to exit Pandora contract? And I guess in that context, assuming that the physical retail store like-for-like is down double-digit, I estimate it to be about minus 12, minus 13. Any comments on that will be helpful. To what extent would franchisees wish to remain in these commercial terms? And what are you going to be saying to them today and in the months to come that the performance will improve. Just wanted to sort of understand how the franchisee side of the equation will evolve?

[Jeremy Schwartz, Chief Operating Officer & Co]

As you know our relationship with the franchisee is a business partnership, where it works very well when you have aligned if different goals. And I think that in speaking to some of the franchisees in America, in Philippines and in Europe the conversations I've had with them is that obviously when we signal an intent to acquire with scale franchisees it questions the way we value them. So I think that we can demonstrate really pretty quickly through the words we're saying today, through the message we're giving and then through our actions and for example we have a Franchise Council in 2 weeks time in the U.S. which we will be attending that the new management and our new direction has a different approach. And I think they will be able to feel that and see that because for example, we're going to crank up the level of communication both ways, because we want to hear great ideas from them and vice versa. I think you'd be careful in your interpretation of the like-for-likes you're thinking of. And so I wouldn't be in the sort of scale of thinking that you're in. And I think, if you also then just look at a couple of things. First of all, we are the most profitable jewelry business that they will be having in their business. So as we know speaking to all franchisees they're EBIT and EBITDA focused as people, so profit is their #1 metric that they like to look at. And I think it doesn't take long for them to realize that we're a great contributor to that. And we also have a brand and product that is -- has got great, great potential. And as you know this is a very fragmented market with few brands that really have the sort of kudos and opportunity we have. So I would say my feeling is that they're going to be supporting us.

[Operator]

And we have one further question on the line that's from Elena Mariani of Morgan Stanley.

[Elena Mariani, Vice President]

Yes, this is just a small follow-up please. I was wondering if, as part of your diagnosis, you identified the need to review your disclosure structure. And whether there's anything you could anticipate on this front given that we've had many changes in the past few years and quarters. And I was interested in understanding how you're going to look at the business going forward more from a channel perspective, so retail versus wholesale, from a retail sorry -- from a geographic perspective. And if you could provide any clarity around this?

[Anders Boyer-Søgaard]

Obviously, we are on an ongoing basis reviewing disclosure and we've made a couple of changes already this year with disclosing like-for-like, total like-for-like and for a number of markets as well back in Q2. And this quarter also giving a little bit of additional disclosure on how to break down our trade receivables. And actually also giving historical total like-for-like. You will see that some -- in one of the footnotes in the company announcement that we have given that quarter-by-quarter for 2017. So the only thing I would say for that's in the making, as we speak, is the EBITDA versus EBIT discussion that we've just had earlier on this call. And we'll review that and get back to that when we come and meet next in February 2019. But we're always listening for input from analysts and investors and so far, yes, we have reacted on it by disclosing our total like-for-like.

[Jeremy Schwartz, Chief Operating Officer & Co]

And just one very small bill from a internal management point of view I can assure you that Anders and I are really cranking up the accountability of data and the way we're looking at the business in various cups to run it in a more productive and efficient manner.

[Elena Mariani, Vice President]

So going forward you're going to continue to provide total like-for-like sell out across all channels and also separately a retail like-for-like.

[Anders Boyer-Søgaard]

That's clearly the intention, yes.

[Operator]

And we have had third question from Hans Gregersen of Nordea.

[Hans Gregersen]

Just to your guidance for Q4, when you talked about the local currency growth, you mentioned DKK 900 million from forward integration including M&A. Does that also include the inventory phasing in the U.S. where you mentioned DKK 175 million last year, the first question. Second question, you are investigating the like-for-like growth levers, I understand that. Could you just give some sort of indication on what sort of communication framework we should expect at Q4 in this regard?

[Anders Boyer-Søgaard]

On the first question that's in the implicit guidance that we talk about for Q4 that DKK 175 million Christmas thing is included in that. For the full quarter, if you take everything into consideration in the fourth quarter of 2017, there's no net impact in specifically in that cup base from the timing of shipment. And then on the second question just making sure that I understood exactly what that was, what levels about…

[Hans Gregersen]

Understand you're investigating the like-for-like growth drivers you're going to implement. I understand you're not willing or you cannot share any details now, but can you explain or just hint to us in what way you're thinking on communicating the findings to us?

[Anders Boyer-Søgaard]

Well specific numbers or specific drivers with a weight on what you're looking at.

[Jeremy Schwartz, Chief Operating Officer & Co]

I think what we can say at this point in time is that we are still in a diagnosis phase and once we have concluded on that and come out with our -- next in February '19 we will communicate the program in a way that makes it possible for our investors to understand where are we on that journey, on that Programme NOW journey. And exactly how that is should be done we need to get past our diagnosis phase and understand the phasing and the magnitude of what we are embarking on.

[Anders Boyer-Søgaard]

Actually they are going to provide that much information and you need to talk to them for [Audio Gap]how things are actually developing. And I think if we take the bad news first I think there are some bad news in the statement or what they are saying to me[Audio Gap]there was a little bit of a technical problem sorry for that for the complete silence, but thank you everyone for taking the extended time today to listen in to what we have to say about the third quarter. And to be looking forward to meet you again soon. Thank you.