Bang & Olufsen A/S
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Bang & Olufsen A/S
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Ladies and gentlemen, welcome to the Bang & Olufsen Annual Report 2017/'18. [Operator Instructions] Today, I'm pleased to present Henrik Clausen, President and CEO; and CFO, Anders Aakær Jensen. Speakers, please begin.
Good morning. This is Henrik Clausen with the rest of the Bang & Olufsen team, first of all, thank you for joining in this sunny summer morning. Thank you for prioritizing the call. The way we're going to do this is a little bit back to business as usual. So we will spend time, and we, meaning Anders and I, walking through the financials. But since this is a conclusion to the year and start to a new year, I'll deep dive a bit more on direction and strategy than we usually does and then follow up on some of the direction that we outlined last year and that we are now crystallizing in more firm direction for the future, but I'll come back to that slightly later.But just to kick off the conversation, I suggest we move to Slide 4, which is part of the summary of the year's events. And from a financial point of view, I think we can conclude that it's been a good -- it's been a satisfactory year for Bang & Olufsen for several reasons. One thing is obviously delivering on the ties we've set, including the small adjustments we've done upwards throughout the year. But net-net, we are growing the business 14% lower currency. If you look to financial numbers, 11%; EBIT margin delivered of 3%; EBITDA margin, 9%; and a solid cash flow of DKK 85 million. So from a financial point of view, we feel that we not only executed the year, but we've set a good basis and a good base line, a good foundation for what we need to do going forward. And then we're going to deep dive on some of the specials in the presentation later, but I just want to share a few reflections initially. One thing that has been driving and has been comforting to see that we've been able to keep our level of innovation, both in terms of new product intro, but at the same time, improving our game on product life cycle management and specifically in the context where we, in part of the organization, have done quite big changes from a supply chain partner point of view. And we've seen that we've been able to carry those changes through without jeopardizing our ability to innovate and launch products, which has been good to see. We have, throughout our year, been doubling down on the brand and the brand as a luxury-lifestyle brand. We already discussed that a year ago, but I'll come back to, how we do that and how we plan to take that to the next level. We firmed up our approach to the key geographies, specifically China has shown good progress this year. There's still things to do in China, we'll come back to that, but we've made solid progress this year. Same for U.S. and even for Europe, which is momentarily growing slower. And we are starting to get our act more solid together in terms of, at least, for more medium to long term, but we'll come back to that later. And then as I mentioned on product and innovation, we've made quite significant steps in our journey towards a more agile, asset-light operating model, and that's of course reflected not only in our ability to grow in a sustainable way, but actually to deliver the margins and the cash flow that we need for the future. So all in all, we look at the year as satisfactory and on plan and setting a good foundation for what we need to do going forward.So with that, over to you, Anders.
Thank you very much, Henrik. So we now turn to Page #6, and this is just a fly-in as we are closing the year, reflecting on a key milestone, a key important milestone for Bang & Olufsen. And you can then ask why is that a key milestone. I think that a few points here that I think are important to just reflect on. First of all, this is the third year in a row where Bang & Olufsen have had a growth of more than 10%, a double-digit growth, and over the last 5 years have had a compounded average growth rate of 11%. The second point is that over many years, the big problem in the company has been the ability to then generate this revenue and this revenue growth into profitability. And this is the year where we are making that turning point and delivering a 3.3% EBIT for the company. And as you can see, that has been the struggling part over the last many years. The last point, and that's in combination with the EBIT, a very important point, is that the health of the company that you can express in terms of the ability then to turn your earnings and your EBIT into cash flow is also solid. That started already last year with DKK 91 million in positive free cash flow, and this year with DKK 85 million in positive free cash flow. So all in all, on 3 key elements of this journey for Bang & Olufsen: continued growth year-on-year and now a positive EBIT and the ability to turn that into positive cash flow. So that's why it's an important milestone to look ahead on. So if we then start to dig in a little bit more on the year and then I turn to Page #7 and just look at what happened here over the last quarter and then what have concluded then for the full year. So revenue in the fourth quarter was 6%; in local currency, it was 8%. For the full year, as Henrik mentioned, we had the effort delivering 11% growth, and when we measure the growth that we're actually achieving locally around the world, it's 14%.For the quarter, it was a 6.7% EBIT. That's the highest for this year. It's a good traction. It's a good, you can say, combination of growth and maintaining our capacity cost, and I'll come back to that part. And that leads to a full year EBIT of 3.3% and DKK 110 million, an improvement compared to last year of close to DKK 150 million. And as I said, this has turned into a positive free cash flow. So all in all, when we look at the guidance that we have given, we have made the guidance on the revenue of more than 10%. We have, as Henrik mentioned earlier this year, adjusted our EBIT guidance to around 3% and we're delivering above that. And we have said that we are able to deliver positive free cash flow, and we have delivered the DKK 85 million. So all in all, meeting what we have guided to the market. Now going a little bit more specific into the development of the revenue in the fourth quarter and for the full year. Just high level, the 11% or the 14% is split up in the 2 business units of Bang & Olufsen and B&O PLAY. And to start with the latter one, then 25% growth for B&O PLAY; in local currency, 28% growth. This is in line with what we have communicated and what we have expected early on. And as you will see, this is driven throughout the entire world. And then we have a special, you can say, or a little bit change of development in Europe that we talked about in Q3 and that we also see in Q4, and I'll come back to that part. But all in all, a very satisfying growth that we have seen in B&O PLAY. For Bang & Olufsen, it has been a flat development, also in line with what we expected, a 1% growth. Measured in local currency, it's 4%. If you then start to adjust and we can always do that kind of calculations, but in the context of previously owning co-branded stores or having stores that were highly inefficient and closing those down, the impact is actually 2%. So if we take that into account, we have realized around 3% growth in Bang & Olufsen and 6% in local currency. When we then look into the regions, it's obviously evident here that, as we also saw in the third quarter, fourth quarter has had high growth in China; in local currency; we're more than 60%. It's a reflection of the, you can say, the initiative that started even 12 months ago or even earlier with a new organization in place, with a new focus in place and the work with more partners out in China that has delivered that growth. But obviously, still a growth where we are in a transition and a phase where we're now moving forward to start to build a solid platform even -- or you can see even more solid platform for the future. For the rest of the world, we also achieved high growth of 27%, very good to see. And for North America, we saw in the quarter 7% growth, and for full year, we've actually seen a 17% growth in North America. So all in all, for all of those regions, we have seen growth rates more than 10% for the full year, and we have seen a good traction in the fourth quarter.For the European region, Q4 was impacted, obviously, by, you can say, the transition that we're doing as I communicated about the closure of the stores and divestments of stores. But it's also impacted by a refocusing, in particular on the third-party multi-brand channel, where we're looking into creating a much more solid foundation for the future, much more focused on luxury retail. And I think Henrik will come back to this journey and how we see that in the coming future. This transition is something that has happened here over the third quarter and the fourth quarter and it's a transition that we're also communicating will continue into the first half of next year.So all in all, in most of the areas, we've seen very high growth, to our expectations, and we have started a fundamental transformation of our sales moving forward.Then if we look to the next slide on Slide 9, we can see the development overall in the gross margin is 41% or 40.9%. I think we said earlier at the beginning of the year that we would expect to hit a gross margin around 40%. So we are at that level. We're achieving the 41%. And it's a combination of improvements in both, you can say, our ability to launch and sell products with higher profitability and also the mix of the products that we have now in the portfolio helping us. Obviously, a small part impact from brand partnering. You now have the numbers that you can see. So you'll also learn that it's not primarily driven from the brand partnering, the improvement on the gross margin. When we look in particular to the fourth quarter, I think it's very important to notice the significant improvement is in the Bang & Olufsen segment. It's an improvement that is primarily driven from improvement in the product profitability. It's a reflection that we see the operating model that we have worked on over the last couple of years really starting to kick in, in particular on TVs with the cooperation with LG. And as we have communicated earlier, we did expect to see significant impact out of that cooperation. But overall, it has been a good favorable mix, driving a 5% point improvement in the Bang & Olufsen segment. And for the full year, that's almost a 3% point impact. For the B&O PLAY, for the fourth quarter, we again saw an improvement on the gross margins of 1.2% points. And overall, for the full year, we have an improvement of 0.4 points. Obviously, we had the conversation in the third quarter about, you can say, rebalancing and part of a cleanup in the third quarter. And some of the rebuilding of the network and distribution setup in Europe in multichannel is also impacting our margins in fourth quarter. So set aside of that impact, we have still been able to improve and increase the margins also for the B&O PLAY in the quarter and for the full year.If we then turn to the next slides and look at the development in our capacity costs, then the formula that we set ahead of us was to increase our revenue much more than we increased our costs. And we have increased overall costs by 2%, in comparison increasing the revenue by 11%. So all in all, that's a good formula driving EBIT for the company.The underlying capacity costs for the fourth quarter were 34% of revenue compared to 38% last year. And overall, we have been able to decrease the relative spend of costs by 3 percentage points for the full year. And by that, you can see only increasing the overall cost by DKK 26 million, while at the same time growing the company by 11%. Again, one important thing to notice here in the fourth quarter is what is happening with the development. So if just look at the line called incurred development costs at the left-hand sides in the last section, you'll see that the incurred development costs in the fourth quarter is DKK 53 million at a comparison, DKK 132 million. So now really start to see the impact that we've been communicating since we started the journey of creating a different operating model where we're working through partners that our development costs will decrease significantly. That also means that our capitalization ratio will go down, as you can see. And for the time being, we will have higher depreciations than what we are capitalizing, and that's the impact that we are communicating throughout the year, and that's the reason why we had the difference between the EBITDAC and the EBIT. But that will slowly start to close down and that's the reflection of the operating model kicking in. Another part that's important to notice is that, overall, for the full year, our cost on distribution and marketing is almost flat. But really important to notice is that we have invested heavily in selected growth areas on purpose so we fuel the, you can say, the top line, our ability to grow the company, whereas we, in other areas, have decided to optimize our costs, also impact from closing own stores is included. So net-net, there is a solid investment into the brand, into marketing and into driving growth in the future. And I think that's an important point, something that we will come back to in the strategy, a reflection moving forward and in our guidance, because what we want to achieve moving forward is to sustain that growth, but we want to do that by also putting activities and investment behind the brand and behind the digitalization of the company and behind marketing and support to our partners and to the customers and to the products. So that's a part that we'll come back to in the guidance and we can talk more, too. But all in all, except for these areas, we see flat development in cost, which is basically the benefit of what we've been through over the last couple of years. If I then turn to the next page, on Page 11, and just talk a little bit about the balance sheet and what we see. Last year, we closed the balance sheet with a net working capital of almost 0%; in terms of revenue, DKK 27 million. This year, it's DKK 100 million. It's still extremely low in ratio, so we have maintained our ability to have a net working capital of only 3% on average; we have been tracking 5%. And obviously, therefore, there is an increase in net working capital, but still a very low number in ratio when we look at the ratio compared to the revenue. When we look at the investment side, that's also a part of the new operating model, so -- and less development into new products because we're doing that together with our partners. And therefore, we see a decline in the CapEx for the full year. And then, finally, when we sum it all up, the earnings that we have delivered and the change in net working capital not working in our favor, however, the CapEx working in our favor, we have seen that the translation from making an EBIT into cash flow has been a good translation again this year.So all in all, that's the closure of the financial performance for 2017/'18. And you can say a satisfactory result from a financial performance point of view. That has also led to a discussion and a conclusion from the board's side, and that's a discussion we have had with you guys here, is that what is our point of view on our capital structure for the future. And what the board has proposed for the Annual General Meeting to conclude on is a net cash position of minimum DKK 500 million. Today, we're closing the year with a net cash position of DKK 985 million, an improvement of the DKK 85 million compared to last year. And that's why it is suggested at the coming AGM to initiate a share buyback program of DKK 485 million, obviously subject to approval of that program. So that's the conclusion of that in this strategy -- or in this period here. And obviously, that will be dealt with at the coming Annual General Meeting that we're having on the 23rd of August. I think with that, Henrik, I'm going to hand it over to you and talk about reflections for the future.
Okay. Thank you, Anders. Okay, I suggest we move to Page 14, looking ahead. And you can say on strategy and outlook, so to keep it relatively simple and say it's all about the brand. And then, of course, all about the brand have quite a lot of implications in terms of how we think about the business and how we drive it going forward. But I think that is important to understand that in the context of where we are taking the company. And of course, that has a natural link back over to the heritage and the current position of the business and the brand, but just want to state this is the ambition for the company. And we think, with what we have, the assets we have, the position we have in the market, that's a bold but achievable position to reach. So become to most desired audio brand in the world is the vision for the company and the brand. And then I'll talk you through 4 strategic themes, I mean, that support why and how we are going to execute on the ambition.So let's move to the next page on brand positioning. And historically, and even recently, we've talked about the equity of Bang & Olufsen and the brand, and we spent time talking about that at the closure of last fiscal year and talked about the importance of managing our business across business units in a way that reflects that joint brand equity. And we are today going to spend a bit of time on talking how we're going to take the next steps, and of course, we have had a journey over the last year. We've been more and more solid in terms of what are the implications of working the overall equity of the brand in the right direction. But just to set some -- a bit of context here, I mean, there are quite a few dimensions that we can work from a brand positioning point of view, but to simplify, we'll say that the ambition or the vision for the brand is to move more clearly, more distinctly into the luxury-lifestyle space. I think that in the categories that we work in, largely defined as consumer electronics, there's definitely a space. There's a relevance for a brand, and we have a claim to fame, which is not far from how we have executed and how we've thought about the brand across the business units historically, but that's definitely a point in terms of need to elevate and create more consistency in terms of how we execute the brand. And a few pointers when we talk luxury and lifestyle, again, many dimensions, but a couple of pointers that are important and will drive the actions in the company.One thing is having and living the ability to place the customer experience at the center or ahead or in front of technology. I mean, that's been a heritage of Bang & Olufsen. That's an opportunity out there. That's a position we want to take. And there's an element of attention to detail in product and customer experience. That again is part of the heritage, is part of where the world is going in terms of expectations from a luxury-lifestyle brand. And that's a direction we will continue to elaborate and drive across the company. So luxury and lifestyle is the direction, with the clarifications mentioned.Then let's move to the next slide and then talk about the brand. And a few important pointers. Of course, we cannot, in the context of this call, go through all sort of thorough analysis across the board, but we've sort of chosen, and you'll see that throughout my deck, at least the next few slides, that we've taken a few pointers, but you can take this as representations for deeper analysis and studies that we've done. But we just wanted to illustrate what we are seeing out there. And then first point would be around awareness. As we illustrate, general, quite bigger answers in awareness associated with the brand and you can see that reflected. And not surprisingly, an awareness is bigger in Europe, acceptable in U.S. and then lower in China and Japan. But an additional point worth noting is that for our core segment, our core customer targets, and I'll call it creative curators and come a little bit back to that, that cuts across our business units, there's definitely a high degree of awareness which will cause us an opportunity. And then there's another reflection, we'll come back to that later, where that the target audience is quite concentrated from a geography point of view, not only nationally, but in countries, meaning big cities, which again is an opportunity if we execute well. So that's one point worth noticing. Then on brand equity. Again, here, you can do several analyses, but what this slide basically say is that when you ask customers out there, they don't see the difference between a Bang & Olufsen and a B&O PLAY from a brand perspective. There's no clarity on what products are represented by one business unit or the other, which is finding not very surprising because the way we have driven the conversation, the way we have driven the brand across the 2 business units have actually been quite consistent in terms of messaging and how we have taken it out. And that again is reflected that, from a customer point of view, there's no difference. They see Bang & Olufsen as Bang & Olufsen across all product segments, again, which for us is an opportunity. It's not only a reflection, there's an opportunity going forward. And then specifically if we link that to brand affinity, we see that overall, Bang & Olufsen has a very, very strong position in the conversion from aided awareness and into consideration, which indicates if we can fuel awareness in a much more consistent, solid way, the translation to consideration is going to be quite effective. And of course, driving the brand equity in a consolidated focused way will obviously help that and specifically targeting a core audience that are clearly defined across our business. And then the last point, of course, making sure that the on-ground execution is consistent and on-brand will drive the final step from consideration into real purchase. So there's a logic between thinking the brand equity more consolidated across our business.That leads us to the next page, Page 17, where we will take the next step from a brand perspective and moving from a situation where we are operating the business not only from a business unit point of view, but, to some extent, from a brand position as 2 reflections of same equity into one reflection of that same equity. And that means that the target audience across our portfolio will be what we define as the creative curators, which are customers that consistently prioritize curated experiences, appreciated the added value of sound, design and craftmanship, which is a reflection of the core competencies of Bang & Olufsen, which is actually reflected across our portfolio and was the starting point not only for Bang & Olufsen for the way we thought play originally, and an audience that predominantly live in urban areas. So it's quite a well-defined target. And our testing we have done shows that, that segment cuts across customers in the 2 business units that we've historically been operating.So we feel very comfortable and confident that taking that step, which is a natural evolution of quite a lot of things that we've already done over the last year, including operating both U.S. and China as integrated organizations and integrated businesses. And on top of that, and I think Anders alluded to that, I think with that direction, we think the time is right to step up on how we spend from a marketing point of view. Because with a consistent target audience, well-defined and a clear brand proposition, the payback from investing in awareness and brands will be quite significant. That's why if you look to the business plan period, you see a step-up from current levels on our marketing spend. No numbers here, but approximately be an increase from 7% to 11% throughout the strategy period and actually stepping up quite fast towards that already in the coming year. So that's the direction we will take from a brand perspective.Then from a product operating model, just want to reflect around our confidence on how the new operating model works and just do that with specific examples, just to give you the comfort that what we've thought strategically and the way we've executed actually enables us to execute on the products and on brand in a quite consistent way. So it's a part of the process over the last few years moving to an operating model where we focus on our key competencies around sound, design and craftsmanship, and as Anders stated, in hardcore internal competencies in those select areas. But for everything else, we work in a partnering model. So the cooperation we have with LG, manages everything TV. The cooperation with Tymphany, that's not only a partner for on the go or flex, but actually been a significant partner -- is a significant partner for our more staged-type products, our TV propositions, which was manifested for the sale of factory to Tymphany a year ago. That all is now falling into place as a solid new way of operating where we focus on core and partners provide [indiscernible].Same goes for what we call technology ecosystems, so embracing a world where bigger platforms from Google and Amazon and Apple will play key roles in the home and providing connectivity and basic access to services. We found a way of embracing that through our own product platforms, but at the same time, leveraging and sort of riding the wave of these ecosystems. So net-net, we've seen the operating model sort of being executed, at least from an operational practical point of view. And then just shown for illustration a few cases that illustrates that this model does not only kick in when you look at the financial numbers, it goes back to Anders' comment on how both the cash flow and profitability have developed, but actually at the product level, you see the same, which is obviously comforting.So taking the Eclipse TV as an example, I mean, we moved into -- from a situation where we've basically done everything in-house to launching the Eclipse TV a year ago in a fully cooperative model with LG where everything screen and everything TV software is LG. And we've actually been able to grow that business in a relatively mature market and at the same time deliver an experience that is, from a quality perspective, beyond what we've done historically. Another reflection coming back to operating model, using the A9 as an example. Our perspective on products, products being iconic and therefore ambitious in terms of design, craft and acoustics makes the portfolio more sustainable over time. And that sets direction for how we think all individual products going forward and this is an example from the historic PLAY portfolio. And we see a product like the A9 that was introduced in '11/'12 is still running at a growth rate about 10%. Of course, we've updated technology. But from a statement point of view, from a design point of view, the product has shown longevity, and we see that as a direction and as an opportunity going forward across the portfolio. Then on H9i, which is our current highest-end headphone, we see the performance of the product from launch and 12 month going. That's the high line in the graph. Of course, we've seen that being able to drive that price point much more effectively from a volume point of view than a, let's say, comparable or earlier product introduced 4 years ago, the H2, which was a lower price point, but a less clear manifestation of the brand in terms of craft, design and sound. So again, pointing to the fact that staying true to our positioning and executing products with the right ambition level works effectively for a brand like Bang & Olufsen with the position we have.And then last point, we use BeoSound Shape as an example of a product that we introduced a year ago that's considered as radically innovative in the industry. I mean, generated a lot of attention and, for whatever that's worth, a lot of awards, but a product that's built entirely out of the new value chain. So an example of that, working with partners in a new value chain focusing in, doubling down on all key competence on sound, craft and design, enables us to create manifestations that actually stand out. So all these evidence supports the fact that in the new operating model, delivering financial results is fully capable of driving the innovation and the ambition level that we need for our products going forward. I know that's quite a lot -- a long segue, but I think that that's quite important in terms of understanding where we're taking the company in terms of use cases.And then if we look forward, the way we'll think about our business, we will think about our business as, say, 3 overall product categories supporting a unique set of use cases. And just take them from left to right. First will be on-the-go, which naturally will be headphone and earphones. So manifestation will be E8, H9, H8, and the smaller portable speakers here, the P2. That is and has been a growing segment and we'll see like that going forward. We work here with global platform standards. Strong life cycle management will be key. And of course, we need to ensure that we've got access to the right lifestyle-luxury point of sales that can support and drive the products from a value and positioning point of view. Today, that is approximately 40% of the portfolio and relatively fast growing, and we see that as well going forward. When it comes to flexible living, we see that as products that our targeted consumers that wants flexibility in use and placements in our domestic settings. Other ways of defining of the category is when people talk about connected audios, all the opportunities for in-home experiences based on flexible audio streaming platforms. And again, here, we see that as an opportunity [indiscernible]. Currently, we are engaging in that segment or in that product category, both from a PLAY business unit and from a Bang & Olufsen business point of view. And you can see that reflected in that -- the BeoSound product we're sort of midway here is a Bang & Olufsen product and the A9 is B&O PLAY. But from a functionality point of view, from a use case point of view, they live in the same space. And of course -- and we see that reflected, that the opportunity is there for real because we see growth rates across those 2 products. And depending on what kind of business unit they're part of, it's actually double digits. So there's definitely an opportunity, but there's a need to consolidate our approach into the segment and ensure consistency in terms of how people connect and how they interoperate. But again, here, all products in that category needs to be true manifestations of our core capabilities. They need to support the global ecosystems, as mentioned before. And again, here, there will be a need to develop distributions to support and drive the sales over time. This is a category currently, is much smaller across our business. Over time, we expect that to be fastest growing, at least in the business plan period, and that requires a consistent approach to brand, product and channels going forward, will be supported by the direction we take in the company. And then on the staged product categories, we think products that are used in more stationary settings were sort of more immersive-type listening and viewing experiences. And of course, here, examples would be also our higher-end speakers or stereo manifestations like the BeoLab 50 that we recently launched; the TV, where you can say the Eclipse TV is a first manifestation from Bang & Olufsen around sound for vision. The relationship we have with LG and the platform we have there, of course, will enable other manifestations over time. But I think that's been a great starting point that has enabled us to be part of that use case without being part of the technology and platform development from a vision and TV software point of view. Then finally, we see a product like Shape, also recently launched, which is again, it's a manifestation of a stationary setting, but it's a product built on a completely new value chain with economics and logistics opportunities associated with that. The opportunity here would be to drive future sound for vision. It's 40% of current business. Over time, that business combined will grow slower, at least from a revenue point of view than On-the-go and Flexible Living.If we then move to Page 20 on brand partners and collaborations. I mean, overall, the direction on brands and collaboration has been -- and we've communicated that before in the context of how we have reported numbers for the Bang & Olufsen units as an integrated part of our business. And it is an integrated part of our business. So we see our brand partners and our collaboration partners as an integrated part of developing our brand and our business. And then, I'll just double down on a -- I mean, a clarification, another thing is relevant, we have partnerships that for us go slightly deeper from a technology and engagement point of view. That we'd find us brand partnerships that would not only drive awareness, but that would have, as I mentioned, a technology company and typically quite a significant license component. And manifestations of those types of partnerships will be our current relationship with HP, HARMAN and LG. These partnerships will continue to be important. And we have a strong alignment with the partners in terms of how we want to take the relationships and how we make sure that the manifestations of the relationships reflects the brand direction that we are taking for Bang & Olufsen. And then we have collabs that are more ad hoc in nature. They will still be focused on awareness, definitely be focused around brand equity amplification and distribution, focused with, you can say, like-minded brands. And examples here would be the collabs we have done with Saint Laurent, specific individuals like David Lynch or the collaboration with Supreme. But we see brand partnerships and collaboration as an integrated part of how we develop and how we drive our business moving forward. And it will continue like that. Then let's move on to retail development on Page 21. First comment on monobrand. With the direction we take the brand and the need for being able to deliver a full brand experience, both from an experience but actually from an execution of sales process point of view, makes the brand and network key for the company, not only short term but long term.If we look to current performance we move a little bit back to some of the reflections we had earlier on in the presentation on the network in Europe. There's quite a lot of diversity within the network or a lack of consistency. But the insight is that when we have stores placed at the right place, meaning -- typically meaning more densely populated, meaning bigger cities with right mix of target audience, right location, meaning high traffic and close to related retail, meaning more luxury-type, more lifestyle-type retail, they're significantly amplified in terms of performance per square meter. And we already see that play out. We, of course, indicated that working with current partners on consolidation, moving on point of sales, onboarding new partners for right location for point of sale is a huge opportunity. So that is a process that has been ongoing, and we will continue to drive not only in Europe, where we probably have most of the transition going on, but it will be the same direction that we were going to take branded stores with partners in U.S. and China here more from a rebaselined situation going forward.Then on multibrand. Again here, the purpose of multibrand is to ensure the manifestation of the brand and build equity for target customers and reach out effectively to new audiences. And again here, location will be key. And of course, location driving volume is absolutely essential going forward. And then again a couple of data points. Of course, a more consistent and broader analysis of the company, just showing an example from a European key market. And I think we have a quite significant skew from a performance point of view towards the best-performing point of sales across chains and within chain or channel partners. So we see that 20% of points of sales now account for 90% of revenues. And we talked about that earlier in terms of a gradual refocus from number to performance per channel in terms of how we're going to drive and how we're going to transition the third-party retail network. Another point would be revenue per store. So when we see when we move from more generic, more mass market consumer electronics into department stores and airport retail, of course, there's significant kicker in terms of additional revenue per square and therefore performance of stores, which naturally will drive the transition that will happen going forward on TPR. Back to the conversation of Europe but not only for Europe, the focus of that set of channels will be consistent across geographies. And then finally, on online or digital, which I have to say has not historically been a forte of the company or I would say priority. But there's no doubt that being luxury and lifestyle, digital has a key role to play but needs to be executed consistently from a brand perspective and from an omni-channel perspective. But of course, insights here would be that even for luxury, a lot of the funnel, the sales process happens digitally online and we need to engage and be relevant there. And from an e-tailer point of view, meaning TPR, digital TPRs, they already play a quite significant role in our current channel mix, so typically 30% of sales in specific geographies for third-party retail will be digitally driven.So that sort of informs 2 things. One thing is taking control with those key accounts and working professionally, then across geographies and at the same time, strengthening our internal e-com capabilities. And the plan would be here to consolidate the sites we have and introduce a new platform early next year. And then, moving towards closure and towards outlook for the company. We have organized from 1st of July our business around the key geographies. So not groundbreaking, but we think about our business as an Americas, an EMEA and an Asia. And the growth rates that we see going forward will be distributed as sort of indicated on Slide 22. So for Americas, we've been through a phase of rebaselining. I think we've got our team in place in New York in the U.S. And we are gradually now building retail, strengthening retail presence in U.S. and specifically focusing in on New York and West Coast. And we expect to do a store opening, a grand store opening by end of the year in New York. And at the same time, U.S. is a place where a lot of our brand partners are present in a significant way. We believe that we are in a -- there's an opportunity to lever and leverage those partnerships much more consistently than we've done historically. And then for U.S., specificating e-com e-tailer execution, right, is important, a little bit back to our focus on building the right competencies now for the business going forward.For Europe, growth will be slower than the CAGR of above 20% for Americas. And that will reflect sort of a distribution where growth outside Europe will be bigger and growth in Europe will be influenced by the changes that will happen in the network across multibrand over the next at least the short to medium term.For Asia, we see a growth rate of 15% to 20%. A key focus would be China and Japan, which is already delivering solid growth and could ask why not higher growth with the growth rates we've seen in China recently? And the reflection would be that we believe we've done well in China. We've established a solid platform now. And we've largely done that by professionalizing our approach to digital and major e-tailers. But building consistently going forward and ensuring the right brand presence will require physical stores to complement building the right way. And for that purpose, we are onboarding new partners with some of the first couple of new partners that will build physical retail hand-in-hand with driving the e-tail business. And that would require that we manage that in a, let me say, slightly more sort of phased approach because we need to build both. We need to ensure that we optimize the channels more across. And that would mean that the growth of this short to medium term would be slower to ensure that we drive the brand the right way for China. And that will have an overall implication for growth rates at least short to medium term for Asia. But net-net, still very solid growth rates for Asia.Then moving to the next slide on competencies and processes. Digital for Bang & Olufsen will be a significant focus and step-up. And that covers several areas. One thing is everything consumer-facing touch points, so app and web. Consistency from a product platform point of view, back to the point that we sort of integrated the portfolios across the company, we're now ensuring agnostic-ity across the major ecosystems. So that's a step-up as well. And then we do a general modernization of back-end and of infrastructure in the company. Net-net, a significant step-up from a competence and investment and people point of view in the organization.On a global supply chain point of view, I think we made some quite significant steps going hand-in-hand with the changes we've made in the operating model. And so we are onboarding global logistics partner and next wave. And the development will be more specifically targeting optimizing at a -- from a geographic point of view, so making sure that we are tightening our setup specifically for U.S. and China on top of EMEA plus the digitalization that needs to happen next step here. And from an overall capability point of view, now what we see is a reflection of moving from a brand that our company that's been focused more on product wholesale to a company much more actively engaging in driving and building the brand and taking responsibility for the experience at the customer and the touch points, plus a significant step from a digitalization point on view.And that leads me to sort of final comments on targets and outlook. So for the 3-year perspective, the guidance will be to continue a -- the 10-year -- 10%-plus CAGR for the company, reflecting a plus 5% CAGR for EMEA; Europe, slower; outside Europe, faster; Asia, CAGR 15% to 20%, reflecting the buildup of more physical in China, so a short-term balanced approach to physical versus digital to ensure the right brand development; and Americas, that will grow fast from a relatively low base, but now with a new team and competencies in place and the right focus from an execution point of view, we believe that, that's definitely achievable. And then from an EBIT margin, sort of adding another year compared to guidance next year, so we see ourselves moving to the space of above 15% EBIT in 2021 and a free cash flow associated with that of plus 10% of revenue. And that leads me to the final comment right now on outlook for this fiscal year, which is quite consistent with what we just went through. But I just want for reference just quickly from where we ended '17/'18. So we ended at 10%. We ended at 11% versus an outlook, at least an updated outlook, for the year of about 10%. So very much on, and we see that traction continue. Seeing the breakdown from a geography point of view reflects what we indicated from a more long-term perspective earlier on. Brand partnering. We ended last year with a guidance between DKK 160 million and DKK 200 million. And we guided throughout the year to be sort of in the lower end of the range, which is reflected in DKK 166 million that we see for last year realized. And then looking forwards, we project at least short to medium term that brand partnering will grow at a moderate speed. What does that reflect? That reflects that the priority has been in the conversations with the brand partners to ensure that the way we work going forward is consistent. And I would say more consistent with the core equity of the Bang & Olufsen brand. We have a joint interest in that in terms of product manifestations and how to drive the brand. That will drive the sort of a more cautious, more consistent approach to [indiscernible], but of course, create opportunities long term because driving the brand right is the real driver of value creation longer term. From a cap cost point of view, from a percentage point of view, we ended at 38% realized in '17/'18. Same percentage-wise will be the same place for '17/'18 which -- and reflect an improvement at gross margin level but an expectation to step up investments, specifically for digital and marketing and brand build with what we've just been through. That will lead us to an EBIT margin at group level moving from the 3%-plus last year to between 7% to 9%, which is sort of well on track for delivering plus 15% in 2021. And then a targeted free cash flow for next year of more than DKK 100 million.So that concludes sort of a slightly more lengthy walk-through. But since there's quite a lot of content, we wanted to prioritize that for this call. And of course, we will be open for a few questions. Know that we are running relatively late. And then I think there will be ample opportunities going forward for deep-diving. And I think we have -- and I think we have some sessions already tomorrow with some of you. But of course, we are open for business and conversations, not only today but going forward. So thank you very much and we leave that phone for questions.
[Operator Instructions] And our first question comes from the line of Poul Jessen from Danske Bank.
I have a few questions about the strategy of going towards one brand, which is then the Bang & Olufsen brand. How will that impact your automotive business, where it's separated right now from the Ford deal? Will B&O PLAY, having exclusivity and then the others, will the B&O PLAY and Ford disappear? And if so, how will the more luxury brands look at that? And if it's not disappearing, how will you then support B&O PLAY brand towards the Ford versus not only then in the cars? Then on the capital structure, you now do a share buyback and you target more than DKK 0.5 billion in cash. Going forward, what should we look for -- and that's beyond this year, how should we look at the capital structure? And will you prioritize share buybacks over dividends in the years beyond? Then on the reporting structure, you are now changing the geographical split and you're introducing 3 new segments. What kind of disclosure should we look for going into the coming years or quarters? And then finally, on the monobrand, EU, where you have to review the number of stores, what target should we set up for EU or Europe, within, let's say, 3 years on the number of monobrand stores?
Okay. Let me -- or let me start with automotive and spend, specifically Ford. Of course, we have done alignment with HARMAN on how to execute. And I think from a practical point of view, today, you have B&O in the cars, so there is no B&O PLAY in Ford as such. But you're right, it's been part of the conversation that we could leverage PLAY specifically for certain activities. So what we've done is that we've spent time with HARMAN thinking through the portfolio. Of course, it's not only Ford and Audi, it's Ford and Audi and Lamborghini and Bentley. And then we found an approach to how we make Bang & Olufsen special for those OEMs. So there's going to be a quite distinct approach to how we are going to engage with Ford and how you'd see B&O expressed with Ford versus how you would see Bang & Olufsen expressed with a Bentley and a Lamborghini. And the association from a product point of view, where we expect that Ford will more be associated with the On-the-go portfolio, and then from a product point of view, we can -- we work the assets around Staged more closely to Bentley and Lamborghini. So we've found a way. But of course, there needs to be a practical manifestation of that. But that's the way forward. And John, I don't know -- I didn't introduce John, but I have John with me here. So John has previously been heading the B&O business unit. He will take over now as Head of Brand and Markets. And of course, part of his job going forward is managing the key relationships we have with the OEMs for automotive, so any additional thoughts on top of that. But I think from a process point of view, of course, we are clear on what we want to do. But from a substance point of view, any reflections on how...
Not much to add, Henrik, on the process point of view. Maybe one comment on substance is that in terms of trademark, as you rightfully said, B&O, and not B&O PLAY, is present with the Ford relationship. And on the others, I think, not only will be no change in strategy, but the Bang & Olufsen trademark will be the label used across luxury and sports vehicles and the portfolio there. And I think what is to be expected is more value-creating activities both ways in cars and potentially out of cars.
Okay. And then let me, since I started off here, talk a little bit about monobrand. We're not going to give a specific target. I will assume there will be fewer stores over time. And there will definitely be a stronger focus on the right locations. And then the way we are going to evolve the network is in a dialogue with our partners, which will be sort of geography-for-geography. And some partners would want to build and maybe take responsibility for more stores over time. And some partners will say, in a 2-, 3-year perspective with the change in portfolio and the requirements to drive luxury lifestyle, "It might not be for me." But that would be an ordered process that will happen over the next specifically 2 years, the key focus will be. And as you rightly say for Europe, there's more action needed. Of course, with more stores, it's more scattered network. But we feel that we have a process towards that. And of course, in addition to that, we will be able to onboard select professional partners that want to operate based on the direction we have said here, which we are quite confident will be possible.
All right, Poul. And then you had two other questions. So in terms of the capital structure, then what we are writing here is that we have a target of a net cash position of DKK 500 million. And that's the target that has been concluded with the board. And that's what we're going to drive through in the coming years. And then in terms of would there be other means of distributing cash, that has not been decided yet. For now, it's a share buyback program that we are initiating. And it can be a combination of something else in the future. But as said, that's a board decision that will be concluded on a yearly basis. And then the reporting structure? Yes. So the reporting structure, obviously now as we have communicated here, the starting point is the regions. So we're going to drive the company not as business units but as Bang & Olufsen in 3 regions. And that's the starting point. So obviously, revenue in the region and the gross profit in the regions is evident. We will, along the way, be more and more particular in our granularity and report as far as we can and give some kind of earnings number for the regions. That has not finally been concluded yet, how we're going to drive that. But obviously, we're moving in that direction. We're also going to report on the categories. So the product categories, we will report on. So you have that insight moving forward. And then we have previously -- just to mention maybe a small detail, but we previously had quite a lot of a focus on the EBITDAC. I think we have decided here, as you have noticed, not to report on EBITDAC, not to guide on EBITDAC moving forward. So we will have more traditional KPIs, such as the EBIT number.
And then I think maybe a final addition, of course, we understand that we need to have a specific focus on key geographies, Europe, China and U.S. in the setup going forward. So you should expect that we will have no specific conversations around that.
Okay. Then just a short follow-up and I'll come back. On the monobrand, you now create this Staged segment. Will you be willing to sell that in third-party retail as well? Or will that still only be the monobrand?
From a principle point of view, the answer is yes, we will. I mean, across the portfolio, the thinking would be that products can move in the right channels. The practicality will, of course, be that the Staged portfolio would largely be driven by our monobrand network. But we, of course, will work selectively with partners that can complement that. But we'd want to do it in a way where we create that consistency around channels going forward. So the first answer is yes. And then it's, the specific execution will be quite targeted. So for the coming years, you will see that as a key driver of that business going forward.
Our next question comes from the line of Jesper Ilsoe from Nordea Markets.
Just one question on your EBIT margin outlook for the next financial year. So you write in the report that you expect the flat ratio on capacity cost versus this financial year, so '17/'18. So does that mean that you expect the increase in EBIT margin entirely to be driven by gross margin increase? And also additional to that, when you look at the 7% to 9% EBIT margin that you expect for the financial year, so the moving parts in that, is that only gross margin increase, but also we also expect that in order to reach the 9% EBIT margin that we should see some kind of decreases in the ratio in capacity costs? That was the first question. The next one is on license income. So just to understand what you mean by a moderate increase, so in absolute terms, is that like DKK 10 million increase? Is that DKK 30 million? And also, just looking back over the recent quarters, you mentioned that you were in negotiations with a new partnership. So should we expect that not to be concluded this financial year and therefore that explains the moderate increase?
I'll take the EBIT here. So you're absolutely right. And that's also why we are very particular in writing in our guidance that we believe that the capacity cost ratio will be at the same level in '18/'19 as it was for '17/'18. And it means that the 3% to 5% point increase in EBIT is coming from a 3% to 5% increase in the gross margins. And that is the storyline when we move ahead in the coming year. I can take -- so for the license income, so as we have communicated earlier, we will not give specific numbers to the outlook here. I think we had the same guidance last year, where we gave a range. And this year, we're saying a moderate increase in the brand licensing. I think what you can interpretate by that is that growth that we're driving in the year is growth from the categories and from the regions. And the margins improvements that we are generating is primarily coming from the business that we're operating in and not be driven from license income.
Yes. And I think on the first point on margins, I think that's why spent a little bit time on strategy. And you can see for some of the numbers, I mean, we believe that there's a significant potential for being much more prudent on how we execute the brand across. You see that reflected in the margin and the margin development on the sort of historic brand Bang & Olufsen portfolio. But we see the same for the rest of the categories. But that, of course, requires that we start to execute another way. I think the downside, if we don't do that, we will not see positive development. So there's a consequence of the strategy. And I think that there -- but there's a prudent reflections in terms of numbers that we need to step up our investment both from a competence point of view and from a brand point of view to support that. And that's reflected in what Anders just said. Then on -- same for license revenues, it's -- I think there are different ways to get to license revenues. I think there's a sustainable way and there's a not sustainable way. And I think the sustainable way is to work consistent with your brand equity. If not, I mean, you would over time dilute your position. And you will see that reflected in your long-term development of that business. So of course, for us, it's been core, specifically to last year, to reengage with all the key partners, brand partners to ensure that we are on the same path in terms of relationship and renew those relationships with that ambition, which is reflected in the fact that we've sustained all those relationships. They are all long term now in nature. We'll see manifestations that are super true to the brand. And of course, that will create opportunity short term -- or longer term. But short term, we will not sacrifice that for sort of a aggressive buildup of license revenue. So that's reflected in why we say prudent [ on margin.]
Okay. Just one follow-up, if possible. So if you look at the marketing spend this year, where you say that you are going to increase it heavily to increase brand awareness and the like, should we expect that to continue in the coming years as well? Just to understand, so how many years will you expect to bump up this marketing expense?
I think if you look at the graph on the report, we believe that we are moving into and above bench situation. And we are also believing that the return on that investment will be much sharper by aggregating the 2 brands and overspending on key geographies. So we don't foresee a further increase in the years to come. We think we'll be efficient and above par.
And our next question comes from the line of Poul Jessen from Danske Bank.
A few ones about R&D spend. You spent cash of about 6% of revenues on R&D. And then I assume that there is some spend also included in your gross margin due to external partnerships. Can you indicate something about what your total R&D spend? The reason is now we've got the prospectus from Sonos and we can see that they spend about 12% and they are more or less a single-product company on the multi-room speaker solutions. But there's quite a difference also as their revenues is twice yours. Then can you comment if you see any impacts or risk coming from trade wars in general as you're sourcing primarily in China? And then finally, just trying to come back to the royalties, where you said moderate growth. And we know that this year, there should be much more volume on the Ford deal than last year. Is it compensating for something disappearing? Or does the potential value in these royalties from Ford just less than what should be expected? Or if you could quantify what you mean by moderate, is that more or less than 10%?
So if I start with the R&D, so we will not disclose and cannot disclose any specific target number on that. I think what is reflected in our figures, Poul, is where we come from, where we had a model that required us to do investments in projects that would typically run 2, 3 years, where we would have to do quite a lot of the investment upfront. And we are now moving into significantly lower spend but not reduced innovation and reduced R&D activity because that is what we're now carrying out with our different partners. And you are right, obviously then you're moving some of that into the gross profit. But we cannot and will not give a guidance on that number. Trade wars?
I mean, that's not the easiest one to answer, of course, and obviously outside of our control. But if we look at the first installment of the threats, we don't foresee that we would be in the targeted product categories, so let's say, less imminent for us than for other industries. And I think part of the growth and the outlook guidance you have seen, we'll rebalance the 3 regions together so that we are less exposed to potentially up and downsides. So we don't foresee any sharp negative on that in the near future.
Yes. On licensing, Poul, we're not going to get more today. We stick to what we have here. And that is a reflection of a year where we have -- we are now aligned on how we are going to work consistently with our brand partners going forward. And you would say, transitioning into that work, given that more long term, more value-focused perspective in the relationship will happen over the course of this year. That means that, net-net, from a license point of view, we will see a moderate development in revenues. I think from a quality of engagement and therefore potential long-term value creation, I think that there will be opportunities. But we think that, that's too early to guide or be specific about that because that requires, I don't know, close engagement, more work the coming year with the partners. But we think we have established now the right basis for developing short to long term in a more right way. But that would mean moderate growth this year.
Okay. I was away when Jesper was having his question. I was just wondering on the Q3 numbers, there was a lot of discussion about this potential new partner which was on or off or delayed or whatever. Now you say moderate. Does that mean that it's off?
I don't have any more comments to -- we will have conversations with partners and existing partners. I think the core of the business is associated with the partners that you know. And of course, we feel that there is significant potential to these partners. So the priority is definitely to develop that. But that doesn't mean that you would not see new partners onboarded. But the focus will be on the existing partners. And the guidance now will be moderate growth for the coming year.
And as there are no more questions registered, I'll now hand back to our speakers for closing comments.
Okay. So this is Henrik. And I would thank you for, first of all, spending the time. As I said, it's a privilege to have all you guys onboard. And good questions. Hopefully, you thought that the answers were valuable. And of course, we will be open for conversation and discussions, some before summer, but we expect to reach out and engage much more immediately after summer. So but -- so with that, I would just leave you with -- for those of you who are going on vacation or are on vacation, enjoy summer, enjoy some time off. At least in this part of the world, the weather is suited for that. And then, we look forward to meet you all after summer. So thank you very much.