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 2018/'19. [Operator Instructions] Today, I am pleased to present CEO, Henrik Clausen. Speakers, please begin.
Good morning, everyone, and thank you for joining the call today. With me here, I have our CFO, Nikolaj Wendelboe; and our Head of Brand & Markets, John Mollanger. I will start off by going through the highlights and regional developments and then Nikolaj will take you through the financials. I will then finish with our key strategic priorities for '19/'20 and outlook, and we will thereafter open the line for questions. So please move to Slide 4. Financially, '18/'19 was a disappointing year. Revenue declined by 13.6%. The key drivers of decline was the adverse impact from slower-than-expected transition of the sales and distribution network as well as fewer product launches compared to last year. The group gross margin improved to 48.5% compared to 43.6% in 2017/'18. The improvement was across all product categories, primarily driven by developments in product mix and tailwind from the U.S. dollar in particular, whereas the discontinuation of the Earset had an adverse impact on the gross margin for the year. Our EBIT margin dropped to 2.1% due to the lower revenue. However, thanks to our asset-light operating model, the impact on our EBIT margin was partly mitigated. Finally, free cash flow was impacted by the decline in sales, which caused a buildup of our own inventory levels. Looking ahead, we believe that we can return to profitable growth and deliver a positive cash flow in '19/'20. The key to achieve that would be the continued transition of the sales and distribution network and successful launches of upcoming products. I'll go in more detail on our outlook later in the presentation.Please turn to Slide 5. The full year revenue was adversely impacted by 3 key factors. Firstly, revenue was adversely impacted by the slower-than-expected transition of the sales and distribution network. For a number of years, we have operated as a wholesale company and opened thousands of multibrand points of sales, often through distributors. But with little control of the consumer experience and channel performance, this created a potential risk of diluting the long-term value of our brand. This was not sustainable and we needed an omni-channel approach to our consumer interaction and take more ownership of the in-store and online brand experience to gain control over where and how our products are presented to consumers. During the year, we, therefore, closed a number of nonperforming points of sales with little recurring sales and instead focused on retail segments that cater to consumers looking for luxury-lifestyle products and increased our sellout focus. We have not yet succeeded in this transition. And we fully acknowledge that part of this is down to our own execution.Secondly, we clearly underestimated the impact of having fewer product launches this year. Having fewer product launches in '18/'19 was a conscious decision as this was a transition year going from 2 business units with 2 road maps to 1 brand and a joint product platform.Thirdly, looking across our product categories, the key driver for revenue decline was related to our Staged category, more specifically TV revenue. Especially in the second half of the year, revenue in Staged was impaired by higher-than-normal retail inventory levels established during the first half of the year, where we as well as retailers had expected a better sellout performance in the later part of the year.Our On-the-go products declined as well. This was primarily related to lower sales of Bluetooth speakers, which followed a more general trend where network-connected speakers had taken over the sales. We continue to believe that the changes we have initiated to reset our go-to-market approach to a more retail-driven model is necessary if we are to deliver sustainable long-term growth. And while we haven't succeeded with this transformation yet, we have made progress in several areas. We continue to build brand equity and awareness for collaborations with lifestyle brands and artists such as RIMOWA and David Lynch. During the year, we worked hard to ensure that we have a strong pipeline of new and innovative products to launch in the coming quarters and years. A few months ago, we announced the Beovision Harmony, which is a strong manifestation of the core capabilities of sound design and craft and illustrates well our ability to drive innovation in close cooperation with our technology partners. We have seen good progress in the development of the new cross-product platforms on which our future products will be based. This will make us more efficient both from a product development and a financial performance point of view. We expect that this will also significantly improve our time to market and improve frequency in product launches in the future.While we faced major challenges with the transition of the sales and distribution network, we also made progress. We completed the rollout of the new contractual framework to our monobrand partners in Europe. This will support a more consistent consumer experience going forward and has already improved our ability to monitor sellout data and retail inventory levels. We also onboarded several new partners in China, North America, Australia and New Zealand, to mention a few, as well as continue to work to establish clusters in key urban areas. Furthermore, we launched our new eCom platform which, in addition to generate sales, will drive further data insights. Finally, invested in the necessary organizational competencies within digital, retail and software as well as recruited some strong people in key positions, including Nikolaj as our new CFO, and Snorre, our new CTO.I would now like to go through the results of the fourth quarter. So please turn to Page 6. Revenue was DKK 618 million, a decline of 26% compared to last year. The decline resulted in a negative EBIT margin of 10%. The lower-than-expected revenue resulted in an increase of our inventory level, which was the main driver of the negative free cash flow of DKK 69 million in the quarter. The decline in revenue was related to the Staged and On-the-go product categories. The Staged revenue was approximately DKK 10 million lower than past year -- or last year.Part of the decline relates to the last year being supported by discontinued TVs, which amounted to DKK 33 million. However, the existing TVs and stereo speakers declined by DKK 70 million compared to last year. We have based our expectations for the fourth quarter on a normalization of sellout volumes as we had positive sellout performance in both Q2 and Q3. But as illustrated on the graph in the middle of this page, sellout volumes declined in Q4, which reflected a general softening of the TV sellout in key markets such as Germany and Denmark.The revenue decline in the On-the-go category was driven by 3 main factors. Firstly, revenue related to Beoplay Earset was significantly lower compared to last year. We launched the product in Q4 '17/'18 with a strong sell-in, in that quarter. Since then, the product has not lived up to our expectations. We, therefore, decided to discontinue the product and reduce the retail price. The negative year-on-year revenue effect from the Earset was DKK 55 million in the quarter.The second effect was decline in revenue from Bluetooth speakers, which we had also seen in the previous quarters. Lastly, high retail inventory levels had a negative impact on demand from the retailers. We experienced an inventory buildup during the first half of the year in anticipation of higher sales during the year. As we now know, this did not materialize and we have worked with our partners to normalize retail inventory levels.I will now briefly talk about our 4 segments. So please turn to Page 8. Revenue in EMEA declined by 28% to 2,000 -- DKK 298 million. Gross margin improved to 47.8%, supported by FX but negatively impacted by the effect of the Beoplay Earset as mentioned earlier. Looking at the revenue development. The decline is related to the Staged category, which declined by approximately DKK 100 million. The Staged category accounts for 55% of revenue in EMEA. So the decline in TV sales had a significant impact in EMEA's overall performance. During the year, we continued to focus the multibrand distribution on more branded retail execution and with a greater focus on luxury-lifestyle related distributions such as department stores, travel retail and high-end consumer electronic retailers. We saw further reduction in nonperforming multibrand point of sales, predominantly within the telecom operator and mass consumer electronic chains. Within monobrand, we completed the rollout of our new contractual framework to our monobrand partners in Europe. We also saw several partners consolidate into clusters. This work will continue into '19/'20 to create scale benefits for our partners.Let's turn to Slide 9. Revenue in America declined by 18%. Revenue in the region is predominantly On-the-go products, which accounted for 69% of revenues. The primary reason for the decline in revenue was related to the transformation of the multibrand network. A significant number of multibrand points of sales opened in recent years have shown not to create enough recurring revenue after initial opening and have, therefore, been closed again. As revenue in the Americas has predominantly been through the multibrand network, this has had a significant negative impact on revenues in '18/'19.Revenue in the quarter was positively impacted by the Beoplay Earset, where the sale of a significant number of units have been driven through third-party retailers at a discount. This transaction impacted the gross margin by 16.7 percent points. This was the main reason for the decline in gross margin in Americas, which fell to 28.6% compared to 52.9% in the same quarter last year. The transition of the sales and distribution network in Americas resulted in a reduction in the number of multibrand points of sales. However, during the year, we have seen solid tractions with key partners in expanding more branded retail execution, including department stores in U.S. and Canada. Furthermore, our cluster partner in Southern California has opened another monobrand store in La Jolla during the fourth quarter. So let's turn to Slide 10. In Asia, revenue declined by 31% to DKK 193 million. As in other regions, the gross margin was negatively impacted by the Beoplay Earset. Excluding this effect, the gross margin was up compared to Q4 last year. As we communicated in the third quarter, the high sell-in level in Q3 would have a corresponding adverse impact on the turnover in Asia in Q4. The new monobrand partners are developing distribution in China and the transformation of multibrand retailers is now focused on stronger brand execution while sales pressure was eased in Q4 to enable monobrand foothold. The revenue in Staged and Flexible Living was largely unchanged compared to the same quarter last year while the On-the-go category declined by DKK 94 million. Beoplay Earset revenue accounted for DKK 41 million of this decline. Looking at the development of our sales and distribution network. Three new monobrand stores opened in Asia in the quarter whereas multibrand points of sales was reduced. We exposed our brand to consumers and multibrand retailers through an exhibition of the Bang & Olufsen legacy in MixC, which is a Chinese luxury-lifestyle mall.Finally, I would like to take you through our brand partnership segment, so please turn to Page 11. Revenue in the segment was up by 3% to DKK 65 million, which was related to Brand Partnering. We have seen revenue from both HP and HARMAN increase with the latter being supported by Bang & Olufsen's products being featured as an audio option in more car models. Our aluminum production for third parties continued to decline, which followed the development we have seen in the previous quarters. The improved gross margin was primarily due to the lower-margin aluminum activities accounting for a smaller share of the income in this segment.And with that, I would like to turn over to Nikolaj, who will take you through the financials for the quarter.
Thank you for that, Henrik. And if you turn to Page 13, I will briefly recap on the financials. Henrik has already spoken to many of the details. But overall, group revenue quarter-over-quarter declined by 26%. And as already said, the main drivers are lower sales of TVs and stereo speakers, the normalization of inventories at some of our key retailers and then the one-off effect from the Beoplay Earset. Gross margin increased by 4.7 percentage points quarter-over-quarter. This improvement is supported by currency effects and adversely impacted by the Beoplay Earset one-off as well. But that means that overall the margins on our core product categories actually increased quarter-over-quarter.EBIT margin was negative by 10.7% in the quarter. Lower gross profit, higher capacity costs are the main drivers for the development, and higher capacity costs related to investment in product development, marketing and distribution costs, which I will get into on the next slide.So please turn to Page 14. Our development costs were up by 18% with incurred development costs increasing by 42%. This increase relates to investment in our pipeline of new innovative products for '19/'20 as well as new cross-product platforms, which our future products will be based on.Distribution and marketing costs were up by 19%. This was primarily related to investments into branded spaces, stores, regional marketing activities and digital media, all supporting our performance in the coming years. Administration costs are up by DKK 7 million, reflecting the investment into the transformation process, also supporting our growth ambitions. So all in all, the increase in capacity costs is reflecting investments into the future.Please turn to the next page, Page 15. CapEx is up by DKK 31 million, basically reflecting the investment that I just talked about in products and platforms and especially in the product pipeline we expected to launch in '19/'20. Of the DKK 51 million in CapEx, DKK 24 million relates to capitalization of development costs.Net working capital increased by DKK 10 million to DKK 410 million in the fourth quarter. This increase relates to inventory buildup. We have not been able to scale back all production to reflect the changed sales levels seen during the second half of the year. And because of the lower profit, higher CapEx and increased net working capital, our free cash flow was negative DKK 69 million in the quarter.The negative free cash flow, of course, impacted our net cash position. It was DKK 420 million at the end of the quarter. An additional impact on the net cash position comes from the share buyback program, which did run in the first weeks of the first quarter before it was terminated on March 26. And with that, I would like to hand it -- the word back to Henrik.
Okay. Thank you, Nikolaj. And please turn to Page 17. Before I go through our outlook, I will outline the strategic priorities for '19/'20. First of all, to build brand equity and awareness, we have started to implement a more localized go-to-market approach. This means that we are moving more execution power out locally to enable faster and leaner decision-making while still ensuring a strong global brand governance structure. Structures around global content creation has also been optimized. And during '18/'19, we have established an in-house data insights team that will enable us to become much more data-driven in our approach to demand creation. At the same time, we will continue our efforts to maintain and expand our current portfolio of brand partners. Our RIMOWA collab proved to be valuable from brand awareness perspective. And we will continue to pursue similar collabs.Secondly, we will be vigilant in our efforts to ensure successful launches of the upcoming products across all categories. First up is Beovision Harmony, our new TV. We've done more than 100 VIP events with key consumers or customers all over Europe already and has been very well received and will hit the stores in October. We will also work to ensure that we finalize the development of our new product platform. These platforms are crucial to our future innovation and we'll work to ensure that we make the progress needed on this.Thirdly, we will work diligently to ensure that we move forward on the transition of the sales and distribution network. We will open new points of sale in all key markets in close collaboration with our retail partners while we continue to address the low-performing, nonstrategic areas of our retail network. Part of the transition will also be to normalize the retail inventory levels, especially in EMEA and Asia. This work will impact the first half of the year.For the growth and profitability potential of the company to materialize, it is essential that we continue to strengthen the competencies within areas such as product creation and design, brand retail execution, digital and software. The company will continue to focus on strengthening the consumer-facing digital touch points, product platforms and group IT infrastructure as part of its digital transformation.Finally, I'll elaborate on our outlook for '19/'20, so please turn to Page 19. For 2019/'20, we expect a single-digit revenue growth in constant currencies. Our guidance on revenue growth reflects that we expect to see negative revenue growth in the first half of the year impacted by the continued normalization of retail inventories, which also impacted our performance in the second half of '18/'19. All regions are expected to be affected, but we expect to see most significant impact in Asia. This is because retail inventory, to a large extent, was built up during the first half of '18/'19. Furthermore, we expect a negative revenue performance by monobrand stores especially in Europe in the second half of '18/'19, driven by the Staged category to continue into the first part of '19/'20 and adversely impacting growth. Our brand product launches, starting with Beovision Harmony in Q2 and then continuing with more products into the second half of the year will, on the other hand, support our revenue growth.EBIT margin is expected to be above '18/'19. Growth would be supported by expected higher revenue as well as improved gross margin, excluding FX effects. We had a positive impact from FX during '18/'19. And this will have a negative effect in '19/'20 with around 2 percentage points. The implementation of IFRS 16 relating to licensing will have a positive effect of approximately 1 percentage point.Our free cash flow is expected to be positive for the year. In '18/'19, net working capital increased as explained earlier. And we have an ambition to reduce net working capital again. However, we expect the first half of the year to be negatively impacted by seasonalities and the expected headwind from revenue. Compared to last year, free cash flow is expected to be impacted positively by our brand partnerships with HARMAN as this is expected to come fully cash positive during Q2. Previously, license fees had been offset against the prepayments we received when we sold the automotive business to HARMAN.And finally, IFRS 16 will also have a positive effect on free cash flow of approximately DKK 30 million. Due to the uncertainty related to our transition of the sales and distribution network to a more retail-driven model, we have decided not to provide mid-term guidance for now. And with that, we will open for questions. Thank you.
[Operator Instructions] Our first question comes from the line of Jesper Ilsoe of Nordea Markets.
I just have a few questions. So firstly, so when do you expect to be back at more, let's say, normal underlying conditions? So when have you -- when do you expect to have fixed your internal problems in your sales and distribution network? So I know it's a difficult question. So I know you're still working on it, but I'm sure you have a base case internally. I'm just wondering if you can share what time lines you are working on at the moment. So is it the base case that it will be this financial year? Or will it be next year? Or what's the base case? That's the first question.
I mean, the -- sort of the quick answer would be, it's reflected in our guidance for next year. There's no doubt that first half will be challenged partly by transformation and partly by inventory level. And then based on the product road map and the improvements that we expect to see performance-wise, working with partners that we have onboarded, we expect the growth to start, kick in, sort of in a meaningful way in the second half of the year, bringing us back on a, say, positive growth trajectory or -- so that would be the overall reflection. We feel that from a competence point of view, we've made quite significant positive changes in our own organization, we feel that we have a structure in place now with strong regional management, getting both EMEA and Americas operational for real in the second half of the year. And with the launch of the new digital platform, which is not only eCom, which is access to analytics and insights in the latter part of the year, we feel that we are in a very different spot to where we were beginning of the year in terms of being able to manage and drive our business. And at the same time, on the partner side, we have made quite significant progress over the year. I mean, we have onboarded key partners in China. We've done the same in U.S. We have resolved the issue we had with partners in Australia and New Zealand. And we are consolidating with the key partners now in all the key regions and cities. So with that, we believe that we have a much more robust foundation for executing and then delivering on the aspiration and the guidance for next year.
Okay. That makes sense. Just a question on the growth in H1 versus H2 then. So if I look at your growth last financial year in '18/'19, you had plus 2% in Q1 and minus 9% in Q2. Should we expect your growth rates in H1 to be negative more than 10%? Or would it be less? So in other words, so is the one-offs in H2 '18/'19 going to continue into this financial year? That's one question.
I mean, my answer to that would be that we will not guide more specifically than we have done. I mean, we expect to see sort of negative impact being carried in based on inventory levels and the fact that new product launches will not kick in before Q2 and onwards. And that's why we have guided on sort of a relative balance on growth in second half and more negative development in the first half of the year.
I have one last question, then I'll step back to the queue. Just a house model question, so perhaps you can help us explain a bit more what we should expect on the gross margin this year. So you mentioned that underlying, so excluding U.S. dollar effect, it will be up. Should we expect it to be like 1 percentage point lower than the last financial year? Or what's the base case here?
So all in all, we expect to have, as you know, headwinds from currency impact, especially the dollar going into the year. But we also expect our product mix to improve in the year and also with the launches that are coming during the year. So we will see or foresee a small improvement in the overall gross margin.
Sorry, expected to rise versus the '18/'19 levels? I'm not talking about underlying, I'm just talking reported numbers.
We expect it to rise marginally.
Our next question comes from the line of Poul Jessen of Danske Bank.
I was just wondering if you could put a few words on the year which we left on the miss on the guidance. The total miss for the year was about DKK 700 million to DKK 800 million on the revenue. And you say it's due to -- that you have been too optimistic on the revenue in a year where you had no major product launches and you have discontinued the TVs. Can you say something about what have caused you to be so optimistic without that and in a year where you had the transformation of the retail on top of it?
When we went into the year, we had a strong belief that we would be able to effectively drive the changes through the sales and distribution networks. Of course, we had a game plan moving into the year. And there, we just have to acknowledge that our ability to drive the change plus the partner network's readiness was not where we had expected it to be. I think that's sort of the overall blunt reflection on that. From a product point of view, we've made some specific and cautious decisions on a lower cadence of product intros, not because we think that, that's ideally where we wanted to go, but we felt it was important to ensure consolidation of the platforms, specifically in connected audio but improvements on On-the-go to enable a much more consistent and much more frequent product intro already from this fiscal year. And then in the TV category, the BeoVision Eclipse TV, we have communicated before, was not only a TV, it was a first step into something that is becoming more of a platform, enabling more flexibility and potentially more frequency and formats even in the Vision category. So we knew that and we made some cautious decisions and specific decisions around that. And then we doubled down on what you would call product life segments. I mean, we worked harder with collabs, we worked harder with different manifestations of the products, themes, colors. We've done quite a lot of technology updates. So you see the whole enablement on the Google side, technically on cars and Wi-Fi and with GVA. And the expectation that when we went into the year that the combo of those activities plus an expectation of ability to execute much stronger on the transition with own competencies and partners did not take off. I think that's the reflection. So we're running out of juice from a new product point of view because we didn't create enough momentum in the beginning of the year of the changes we needed in quality on the ground.
And then looking into the current year on the new products, you say that it will be back-end loaded. You have announced the Harmony. But if we look into the Christmas sales and the autumn, I guess that the Flexible Living or On-the-go will be quite important if you can get momentum there. Should we expect that there will be new products in that category coming up ahead of the season sales?
John, you can add a bit. But I would say you're right that season is important. And then of course, we cannot comment on products that we have not announced. But it's an important season and we feel that we are well prepared for that. But John, any reflection from your side?
Yes. The first thing I would say, Poul, is -- I will maybe requalify back-end loaded. I think what we are saying is it's from Q2 onwards. Harmony will be a Q2 product and it's a very significant one. With an availability in stores, actually it will be optimal for Christmas trading. So this is, I think, the first answer. The second answer is outside of the core innovations on a technical point of view, you should expect that we will fuel Christmas with executions, seasonal collections and other merchandising and life cycle management and then we'll dive into further new products for Q3 and 4. So I think we're well equipped. And again, it's not so much a back-end load, it's a Q2 start.
And the expectation is to deliver new product manifestations in all use cases from Q2 onwards, as John indicates.
Okay. And then final one for now. On the new TV concept, that you split the sale of the display and the audio parts so that you'll only get the audio part and the retailers or franchisees have to buy the displays from LG directly, should we see that concept continuing into all future TVs? Or is it the only selected one -- it's just -- because if you do that, then you have to take part of the revenue out of your P&L versus the past.
I think the first part is that I don't think we can sort of communicate specifically on the business model because I don't think we have been fully communicated externally how it's going to play out. So stay a little bit tuned on that. And then what we will see with Harmony, who knows? We indicated some opportunities in terms of how we could create business model going forward. But it doesn't necessarily have to be only one model going forward. There will be different concepts, different opportunities, both from a product platform point of view as well as from a commercial point of view.
Our next question comes from the line of André Thormann of ABG.
So my first question is when you have announced the Harmony TV, have you seen any impact on sales of your existing TV? So Eclipse, has it been harder to sell Eclipse after announcing Harmony?
The overall comment is that we feel that the products and the concepts are quite different, so they will be able to coexist. But ruling out that there are some impacts, then probably we'd be wrong. There will, of course, be customers that would think about the future TV versus the existing. And that might have some impact short term. I think as we commented overall, at least the feedback from key markets is that there is a general sort of slowness in sellout of TVs across brands in the quarter. But ruling out that there will not be any impact would probably be wrong.
Just to add to that. Eclipse is a perfectly viable product. And we don't necessarily see on the Net Promoter Score any downgrade to it. I think another point to witness is that when we have had the Harmony events that Henrik was referring to, Eclipse is part of that. So it's not only a Harmony event, those are events on our Vision portfolio. And as we go forward and think more channel-by-channel, there would be a room for Eclipse and I'm thinking [indiscernible] to be there that we will promote.
Okay. But just to be sure on this, is the plan to maintain Eclipse or to drive it out within this year? Can you elaborate some on that?
No. Eclipse as a category of product will not disappear, then there will be technical improvement, the screen components of that. And that may lead to some acceleration of life cycle and some very specific SKUs. But as a category and a use case, it will not fall away from our portfolio.
Okay. And then my next question is regarding this Earset. As I understand it, you have -- it hasn't been a success and then you have to give some rebate. And that's kind of like a one-off thing. Is it correctly understood that this is not a failure we have seen before on any of your products historically?
I think it is fair to say. It is fair to say. And we've taken the lesson of that on a product creation, product design and testing point of view. Just to qualify, when you said, some rebate, I would more see Earset as the first time where we took responsibility, thinking as a retailer, to deplete and close out so that the market would not be disturbed by that. So we have had an active intervention to make sure we take away and liquidate inventory quantities. And that's what you see reflected in the figures of Earset.
Okay. But just to be sure on what you say, what happened was that you have -- basically, the stores couldn't sell out this Earset product. And then you had to give them some kind of compensation for that. Is that correctly understood?
That's greatly understood. So the product did not perform in the market. And as John said, we took the responsibility for managing, including what you just said on compensation. And I think the changes that this -- this had quite a significant impact in ensuring a way of work, where we take that responsibility and manage stock and inventory and then slowly moving them. So cost needs to be part of how we engage and operate as a brand. But the size and the impact was unusual, let me put it like that.
Okay. But then just hypothetically, let's say that you launch another product and it fails, will this be the practice going forward? Or is it, I mean, something special?
No. I think you cannot conclude that. And as I said, the first thing we have done outside of the commercial intervention is taking the consequences in terms of a product creation process so that we don't run into similar issues in the future. That product has a very specific problem on an execution point of view that we don't think will happen again.
Okay. And then my next question is regarding the net cash position. I can see you had this DKK 420 million now and you have a minimum goal of DKK 500 million. When should we expect you to reach the DKK 500 million? And what is it exactly you should do?
Well, as we say, we expect to have a positive net cash flow in the year we are going into. So obviously, we expect to get closer to the DKK 500 million. But I don't think we deliberately are communicating a specific target date. But it is still our target to reach the DKK 500 million, of course.
Okay. But that's within -- I mean, end of next year we should see DKK 500 million?
That is within our plans that we are working on. But we are not setting a specific target date. We are saying we are delivering a positive cash flow next year. And that will, of course, contribute to reaching the DKK 500 million.
Our next question is a follow-up from Poul Jessen of Danske Bank.
First question is you mentioned the management changes you have had. Can you comment on if you believe you are in place for the not only top management but also the layers below on both categories and geographies and other competencies?
Just to do sort of quick walk-through, I think that from a management point of view, just to start there, I think that we have a good balanced team now. Of course, now having an experienced CFO onboard is, of course, a good thing in terms of stability and dynamics. At the same time, we've added strong competencies on product creation from Snorre. And with the background he has from Silicon Valley, I think that, that's the right mix to the rest of the team, including John, who has a strong profile on brand and markets. And then with a strong digital profile like Christian Birk, I think that for me it's a good balanced team. So at least my plans will not be to change that, but make that team more as effective as a team now which, of course, is the priority for all of us. From a regional point of view, of course, the regions are an absolute key vehicle for securing the growth and develop the business. And we feel now with the recruitments we've done both from the Americas and from EMEA, we have strong leadership at regional level. And those 3 regions and those leaders are working super closely with the overall management team in driving the business. So I think that we are in a good spot there. From a digital point of view, we made a lot of key recruitments. I think we are strong now both on eCom from a platform point of view, data and analytics, insights and performance medium. So we have quite a solid leadership and bench strength now on analytics and digital. From product creation point of view, a key priority has been to build bench strength on software. I think we have -- we feel that we have strong leadership in place now for our internal software team. Another key element in the product creation team is the link to our Chinese vendors and, therefore, the Singapore team. And I feel that we have a strong leadership team in place in Singapore. So I think from a product creation point of view, I think Snorre has a solid lineup. And then on John's portfolio, and you can comment as well, John, I think from a design product management point of view, we are good in place. We did a senior recruitment for design, a U.S. citizen. And we have a solid Head of Product Management as well. So I mean you asked a broad question, so you got a little bit of a long answer. But the answer is that we are definitely getting there from a competence point of view. And then even at subregional level, we made recruitments now for the DACH region specifically. We consolidated the Northern Benelux region, solid leadership. We've added strong leadership on Southern Europe. So I would say we're quite far now in ensuring the competence. And of course, there are a few select key recruitments, more specialized going on. But we are in a very different spot compared to beginning of the year and feel that we are in a good spot. And we've been able to attract quite high-caliber talent. So the challenge is more now orchestrating the team and driving the change and the improvements now primarily in sales and distribution over the next 6 to 12 months.
Okay. I then have a number of shorter questions. I may have missed it, the Earset missed or changed the gross margin impact. Did you comment on quantifying the impact there in DKK?
No, we didn't comment on the specific margin in DKK, but...
You commented on the margin in percentage, didn't you, on the impact on gross margin? The number was 2.5, impact on gross margin for the quarter.
For the quarter.
On group level?
Yes. So quite significant, yes.
Yes. That means you were 51% adjusted for that?
Yes. And then you have, of course, a bit of a tailwind from the FX. But you're right, there was 2.5 reduction based on the Earset.
Then on the channel inventories, do you have any estimate on how much excess inventory you have in the channel that has to be removed?
We have a good oversight of what stock levels are across regions and across partners. I must say stock level varies and different partners have different perspectives on what a more normalized stock level is. We feel that we are now in -- sort of in control and the partners have an approach now to normalizing. But as we've said, we expect that to still impact us in the current years, most significantly in first half of the year. But then we should be back to what we call a normalized level, which would still entail quite significant differences, depending on partner preferences and geographies.
But is it a 3-digit number that you have to take out still?
I will not comment more specifically than what I said here. But of course, the guidance from a growth point of view for the year reflects normalization to happen as well in current fiscal year.
Okay. Then about Australia and New Zealand, when do you expect them to be back on a full level. During this year or will it take longer?
Debate what a full level is, but we have made quite good progress already in both Australia and New Zealand, actually opened quite a few stores in New Zealand specifically. And overall, 5 stores in Australia and New Zealand. But I think looking -- I would say 3 stores for New Zealand over the last quarter, was that -- okay. So we think that we are in a good spot. And therefore there's no reason why run rate should not be back within this fiscal year. That's the progress we see right now.
Okay. Then on the cash flow comment, so just a clarification. The DKK 30 million from IFRS 16, which should have a positive impact, just to be certain, that DKK 30 million we should then find below the free cash flow, so total cash flow for company is unchanged, I assume?
Correct.
So you take it as a repayment of lease liabilities below the free cash flow instead?
Yes, exactly. So the implementation of IFRS 16 does not have a net cash impact, but it has an impact on the free cash flow because you move the impact on lease agreements out of EBITDAC, so actually increases your EBITDAC positively. But, of course, you have to offset that as a repayment of the leasing obligations below free cash flow. So no cash impact, but it has a free cash flow impact from a reporting perspective.
Okay. That's as expected then. Then the cash R&D is moving up in the fourth quarter and has done so in the previous 2 quarters or slightly. How should we look at the cash R&D going forward from the current full year level of the DKK 269 million?
The plan is not to comment specifically on that. But there's a very direct link between what happened in Q4 and the expected product launches for the current year, and specifically the launches planned for Q2.
So we should see higher cash spend in the first half?
Well, from the overall perspective, as also mentioned earlier, with the development we expect to see over the quarters in the business, it will also have an impact on the cash flow as well.
But I think the comment was that as we have more products coming up, of course, we will see some impact from a product and from a capacity cost and from a product development CapEx point of view in first half of the year. I'm not talking about the specific levels. But the expectation is that you'll see an influx of new products, as John mentioned, from Q2 onwards.
And then the final one for me, that's the On-the-go segment, where you had declined this year. Now you are at DKK 1.2 billion in annual revenue in On-the-go. And you talk about, as others are also reporting, a 40% decline, at least in several regions, of the Bluetooth speakers. Is this fair to assume that Bluetooth speakers is now less than 20% of that segment?
It's fair to assume there's a significant drop, which doesn't necessarily reflect the use case change as much as a technology change. I think you've seen in the report that we commented on the fact that some of those lost sales were migrating towards network-connected and Wi-Fi speakers. So that is one part. And the second part is that we will not exit the logic of ultra-portability in speakers, but the technology may evolve.
So you moved from a revenue from On-the-go to flexible?
That's what you see in the report at least for the fiscal that just ended, yes.
And we have a follow-up from André Thormann of ABG.
Just one last question. In terms of Asia, I understand that I think it was in Q3, you had some sell-in boost to Asia. And that hurt you also this quarter. How far ahead will this sell-in, in Asia hurt you going forward? Is that H1 next year...
I don't think we could be more specific than what we have been saying. But what we've communicated that there will be an impact into the fiscal year and then significant -- most significant in the first half of the year.
[Operator Instructions] As there are no further questions coming through, I'll hand back to our speakers for the closing comments.
Okay. I will then just say thank you for joining the call. Thanks for good and fair questions. And of course, we will be available to address any further sort of questions or share reflections after the call. So thank you very much, have a nice day. And I'm sure a lot of you are going to enjoy the summer, so please do. Thank you.