Welcome to the Bang & Olufsen Interim Reports third quarter 2019-2020. For the first part of this call, all participants will be in listen-only mode, and afterwards there'll be a question-and-answer session. Today I'm pleased to present CEO Kristian Teär. Please begin.
Thank you.
Thank you. Good morning.
Apologies for being a few minutes late. Thank you for joining the call. With me today, I have our CFO, Nikolaj Wendelboe. As we also today will talk about our short-term strategic initiatives, we have also invited Christian Birk, our Head of Marketing, Digital, and Customer Experience, and Christoffer Poulsen, Head of Product Management, who will be available for the Q&A session. As you know, our original plan was to host the Capital Markets Day tomorrow. I had really been looking forward to presenting our thinking for the next couple of years, as well as presenting my team, who will be driving these changes as we're making to the business. What we could, of course, not plan for was the world being impacted by a global pandemic. This has impacted our financial outlook and has furthermore created a lot of uncertainty.
Therefore, given these extraordinary circumstances we are in, we will today focus more on the short-term activities, but we will also inform you about the strategic direction for the future. Before we come to the strategic update, we would like to quickly go through the financial performance for Q3. On March 13, we published our preliminary numbers. We had to revise our currency exposure and our revenue declined by 14% in local currencies instead of 12%, as stated in our preliminary numbers. Reported revenue remains unchanged compared to preliminary numbers at DKK 613 million. Just to restate what we said on March 13, Q3 was overall as we had expected. China was the first country to be impacted by COVID-19, and we did see an impact in the last part of the quarter related to in-store traffic, whereas online sales and business-to-business was as expected throughout the quarter.
Product availability from production partners was only marginally impacted by COVID-19 in Q3. The EBIT margin before special items was positive, with 0.3% in the quarter, which is encouraging. Likewise, we delivered a positive free cash flow for the quarter, driven by both the development in EBITDA as well as the net working capital. We maintained the guidance announced on March 13, and I will now turn over to Nikolaj, who will go through the financials in greater detail.
Thank you, Christian. Please turn to page five. As Christian said, revenue was DKK 630 million in Q3, which was a decline of 14% compared to last year, and the decline in revenue was overall as expected. Although COVID-19 started spreading in late December, it only had a marginal impact on our performance, where revenue was also supported by product launches. On a positive side, Western Europe was in line with last year, and our brand partnering activities grew by 27%, still reflecting the increase in revenue from brand licensing from our long-term partners. Gross margin declined by 5.3 % points and 2.7 % points if we exclude effects of currency hedges. The decline compared to last year was primarily driven by sales of inflight products at lower prices and higher logistics costs. EBIT margin before special items was 0.3%.
The margin was impacted by a decline in revenue and lower gross margin, whereas capacity costs were lower and therefore offset some of the negative effect from lower sales. That brings us to earnings after tax, which was negative by DKK 275 million. The result was impacted by an impairment charge relating to our deferred tax assets. The impairment charge reflects that we have decided to use a more conservative assessment of the deferred tax assets. It is important for me to stress that this has no cash effect for the company. Please turn to page six. Revenue declined in all three regions, but different factors in each region contributed to the decline. Across all regions, the Staged category is on par or growing compared to last year, which is explained by the launch of Stage and Harmony.
Also, across regions, the decline was primarily in the On-the-Go category related to headphones and earphones, impacted by our consolidation of multibrand points of sale. Please turn to page seven. Our CapEx costs declined in the quarter, which was related to development costs and distribution marketing costs. Development costs declined by DKK 18 million compared to the same period last year. DKK 10 million reflected lower amortizations. Incurred development costs were down by DKK 9 million. This was due to timing of expenses and does not reflect a change or reduction in activity level. Distribution marketing declined by 16%. As we also talked about in the second quarter, we have focused part of our marketing spend towards upgrading in-store fixtures and execution, and these costs are capitalized. Our administration costs grew by DKK 3 million.
This was due to DKK 3 million in special items related to our cost reduction program.
Please turn to page 8. The total CapEx was DKK 53 million in Q3, which was DKK 17 million higher than last year. CapEx reflected both the development of new products and technology and investments into store fixtures. We continued to see reduction in net working capital and is now at DKK 366 million. We succeeded again in Q3 in delivering a positive free cash flow of DKK 39 million due to the improved net working capital position and positive EBITDA. Finally, the net cash position was DKK 102 million. Excluding the effect of leasing-related interest-bearing liabilities, the net cash position was DKK 285 million. By the end of the third quarter, our cash position was DKK 327 million, and we strengthened our cash position by DKK 29 million in the quarter. And with that, I would like to hand the word back to you, Kristian.
Thank you, Nikolaj. So if we look at our outlook then for 2019 and 2020, our outlook is unchanged compared to the outlook published on March 13. The outlook reflects the increased uncertainty with COVID-19 that has happened in the world. We will see a negative effect of temporary store closures and quarantine measures. We are, of course, working with different mitigating activities. This includes applying for government relief packages as well as collaborating with our partners. We will adapt our sales and marketing activation between offline and online to support local market conditions as COVID-19 develops. We have maintained our plan for product launches in Q4. We have not been materially impacted by production constraints so far, but COVID-19 is, of course, a risk in this respect as well, and some uncertainty thus remains.
Finally, we expect to see an increased overdue debtors following the temporary store closures and reduced traffic because of COVID-19. Based on these assumptions, we maintain our guidance as stated before. Now I would like to move into our strategy update. If you change the page and go to the next page, what we have done with the strategy is a strategy that will bring B&O safely into the future. Following our disappointing financial performance for the first half of 2019 and 2020, we decided to launch a strategy process. The purpose was to uncover symptoms and root causes for our poor performance and to design solutions for a turnaround in the short to medium term. While past years of transformation at Bang & Olufsen have gradually built a strong and scalable business model, fundamental issues remain unsolved.
Scaling the current business without resolving fundamental issues comes at the risk of diminishing returns on our growth investments. Our new strategic direction, therefore, materializes in two lanes. Lane one outlines how we intend to fix the basics in our core business to restore a healthy and profitable profit and loss statement. Lane two describes how we will reorient our business towards the more focused growth. If we move on to the next slide, I have decided, because we could not meet, that you would meet my team that I have put in place to embark on this journey. We have extended and expanded the group leadership team to 12 members, and you can see all the members here as well. We have also included our regional managers into the group leadership team to get closer to the customers and get closer to our business.
We have also appointed a new head of Europe who will start the 1st of May, and his name is Jorge Aguiar. At the same time, we have broken out omnichannel, out of the combined organization omnichannel and, and Europe, and Arnaud will continue to lead that organization. We have also included product management, which is an important function, into the group leadership team. We have consolidated marketing into one function, under Christian Birk. The other functions remain the same. But by doing these changes, I believe we have created a very, very strong leadership team that will execute on this strategy that I will now lay out for you. So if we move to the next slide, what you know that we have already started on doing is strengthening our sales organization.
I said when I joined that we needed to strengthen sales and marketing, and we started to do that already immediately by removing a layer in the headquarters function, by removing Brand and Markets. We also have taken further steps in Europe, where we have broken four clusters into seven clusters, and we have appointed a new European leader, and we have appointed three other cluster leaders. A new leader for the U.K. has been announced yesterday as well, and the remaining leaders will be announced in due course. We will also, in these key European markets, build a full organizational team with all functions, being capable of executing on monobrand as well as multibrand, and as well as on digital as well as on B2B.
So by putting a complete team in place for sales and marketing in our key markets, we will believe we will have a better outcome and a more successful outcome. We have also, as announced previously, started a cost reduction program. We have announced that we target for next year to save DKK 175 million. We are already executing on this, and we have, unfortunately, then had to lay off 115 employees, and we have announced that, which is sad but necessary to get the cost in level with our revenues. We are mainly doing this in administration. We're mainly doing this by simplifying the organization, and by taking it out in non-product-related spend, so to continue to keep a strong product development organization, continue with product management, and continue with a strong sales and marketing organization.
I already mentioned that we have flattened the organization, and we are making a bigger group leadership team. Then, due to corona, we have decided to accelerate our digital efforts. As you know, we already had the digital in our strategy, and digital is an important part of everybody's and all company strategies these days. And we also had digital as a very important portion of our strategy. Now we are accelerating that, and we are going to do more digitally in the countries where our offline business is currently closed. And there is a lot of things that we can do still, and the way that we activate our customer base that we have and the way that we interact with new customers, we're going to do it digitally instead. So we are ramping that one up and accelerating this work.
If we move to the next slide, we still have issues to fix. We have divided them up into five issues that you can see here. We need to get closer to our consumers. We need to understand our consumers, and we need to support our consumers better. We are putting a new CRM program in place, and we are changing some of our policies together with our monobrand partners on how we serve and how we better can serve our consumers. We are also revisiting some of our products to see how we can improve the user experience further and make a better and much simpler user experience. We also have an amazing brand, and the brand is well recognized by everybody, but we haven't fully realized the potential of the brand.
We have not been very clear and specific on who our target audiences and the target personas are. And we have, in the new strategy, identified clearly four target personas that our marketing will target, our product development will target, our sales and marketing will target. So we will get an alignment around the activities that we do towards these four personas, and we will come back to who they are and what they are. Retail, monobrand and multibrand, we still have more potential in retail. We know from the stores that we have upgraded into our new store concept that we do get growth, and we are continuing that journey when it comes to monobrand stores by moving stores into the right locations, making them in the right size with the right outfit and with the right assortment and with the right training.
We know we can get growth from monobrand retail. Also, multibrand will continue to play an important role. We similarly have proof points here that when we do multibrand right and when we put the right resources in place, we do get a return on investment, and also our partners do get return on investment. We'll continue that journey, and we will primarily focus on the focused markets that we'll come back to in a second, and put a full resource team in, the right competencies in, to go and do that. Also on the product side, we, we will for next year launch more products than we have done in recent years, which is encouraging, and, and we are working hard on that product roadmap.
We have in the past missed time-wise, some of the big trends that have been happening on the product side, and we aim to catch up with that and, of course, be more on par with when big trends are happening in the market. By understanding technology and by working together with technology partners, I think we have a good chance of doing that. Like I already said, we have put a new organization and a new organizational structure in place, both in the headquarters but also in the key markets, and we will continue to strengthen our local organizations, our sales and marketing organizations, our product development organization, and product management organization, and support primarily, again, the key markets.
If we move away to the next slide, you will see that we have actually also a lot of good things that have happened to us over the last 10 years that we will continue to build on. We have, when we launched Play, actually become a younger brand, and we have started to target a younger audience, and they are fully aware of our products. We have had great success over the last couple of years in China and with the Chinese luxury consumer, and we intend to continue to build on that success in China. And as you will see as well, China is, and will be one of our key priority markets. We also have, as you know, amazing products, and we have had amazing design products and crafted products and sound products.
In the past, many of these products were wired, but we have been going through this transition now of making more and more of our portfolio wireless, and more and more of our portfolio is software feature-defined. We have a strong software team in place, and we will continue to strengthen that software team and build on that. We have today two platforms that we are using across our product portfolio, and the Beosound Balance that we just recently have launched is launched on this new software platform that will enable us to launch products faster and with a higher quality and with a better and a consistent user experience going forward. We have been fortunate to have a monobrand network and our own distribution. We will continue to work with our own distribution, with the right partners in the right places, and strengthen them.
But in parallel, of course, as well, continue with multibrand, with lifestyle stores, and make a big effort on the digital side. And as you know from previous calls we have had, we will continue with a sell-out-focused model. We will not sell-in, unless there is demand for the product. Then we also have, and we have created over the years, an asset-light operating model, which is serving as well, gives us flexibility to ramp costs down but also to ramp production capacity up. And we have some good partners here, and we'll continue to work with them when it comes to our operating model and production model. If we move to the next slide, you can see some of our strong and solid foundation that we are standing on. Everything builds on craft and design and sound performance.
And we have and we are the only one who have a global luxury brand in the consumer electronic space, and we will continue to be that luxury brand in the consumer electronic space. And we are recognized for that worldwide, which is a fantastic asset for us and also a fantastic opportunity to continue to build on, and I'll come back to that a little bit later. We also have some really amazing and iconic products, and we have this year launched some amazing products. We still have some amazing products to be launched for this year, but also for next year then we have a very solid and strong product roadmap that is better than this year and, and more products than this year but also than many previous years.
We also do have in-house capabilities that are unique in terms of sound understanding, in terms of our sound labs, and in terms of capabilities in acoustics that nobody else has. And we will, of course, continue to build on these capabilities, and that is enabling us to make amazing designs and use amazing materials that still sound really, really good. And then we know from the proof points and from the assessments that we have done that our model is actually scalable. And that is good news for us. And we, of course, will continue to scale our business as we move forward. Then, finally then, we are a consumer-centric company. We put the consumers in the center of everything we do. We'll continue to do that.
With the new marketing organization, and with product management being on board, we will be able to build stronger and better products for the future and better experiences for the future for these four specific consumer segments that we have defined. If we move to the next slide, our future aspiration is to regain strength and fast. The first wave in this, and that is where we have spent a lot of time and we will continue to spend a lot of time, it's to get back into black. It's to make money. And we haven't made money up till now in recent quarters, and we will have to make sure that we do make money.
And the efforts that we have done since I joined has been to strengthen, of course, our sales and marketing, but now we have also taken cost out, and we will become a more efficient organization by doing that, and we will balance our cost side with our revenue side. And when we don't make any money, the only priority is to make money. Also then in this work, it comes to fixing basics and setting a solid baseline in place and a solid basement in place. And we will come back to that on the subsequent slides as well. This is part of our core, core focus for, for the remaining, part of this year and also well into next year, to make money, to come back to profitability.
I will not give an outlook on how quickly this can happen, but you can rest assured that we are putting in all efforts we can to make this happen as quickly as we can. When that is done, then, of course, we will continue to grow our business, and, and good news is that our business is scalable, and we know that, we have the capability of growing the business. And then if you look even further out, we know that we are playing in an industry that is growing. Both the consumer electronics industry is growing. And the luxury industry is growing. And by being in the combination of these two industries, we have a possibility to grow with the market and faster than the market. So in these three waves is how we're going to execute the strategy.
So if we move to the next slide and we start looking at what we actually are then doing short term for the next 12 months, and maybe beyond, that even is to execute on this strategy house that you see. If you allow me to walk you through this house from the bottom up, it is, like I said, it starts with the basement. We need to control the controllables, have a cost base that is matching the revenue base that we foresee. With the adjustments that we have announced and with the cost and the fitness program that we have executed and are executing on, we believe we have found that equilibrium. Then, it’s about focus because we can’t be everywhere for everybody anytime.
So we have decided to focus on countries and customers and partners where we have high probability to find money, so time to money, effort to money, probability to money, and also where we have had strongholds in the past, where our brand is the strongest and where we have the distribution and where we then quickest can gain traction, regain traction for our business. We have decided to focus on six European markets that you can see there. So it's Denmark, it's Germany, it's France, it's U.K., it's Switzerland, and it's Spain. And in these six countries, we will invest and we will execute fully on the strategy, fully on monobrand, fully on multibrand, fully on digital, fully on B2B, and, win these countries first before we move on with the same full effort into all other countries.
There are other countries, of course, where we do business today that are not mentioned among these six, and we will continue to do business with these countries, and, we will continue to serve them. But where we really will focus on executing our strategy will be on these six markets plus China, which I will come back to. Then it's about products. And I already said I feel very good about the product portfolio that we have, developed during this year that we have in front of us.
But there are certainly things that we want to do better in the product portfolio as well, and we're working hard on those improvements, predominantly in the user experience and also to make sure that our products are launched at the right time, four seasons with the right quality and, of course, are being then sold with the right marketing and with the right sales force. I also feel good about that. And as I said, we have more launches ahead of us than we have had this year. So I also feel good about that. Then on the fourth floor in this house, we have China. And we have been doing very, very well in China over many years, and China will continue to be an important part for anybody in luxury and anybody in consumer electronics.
For us then being in both of these spaces, China will continue to play an important role, and we will double down on our efforts to build an organization locally in China but also the way that we support them, from headquarters and from other support functions. Then on the fifth floor in this house, we have our brand partnering business and brand licensing business. That is a business that is doing very well. We, as Nikolaj and I said, we grew 27% in Q3. We have long-term contracts in place with many of our partners here, and we will continue to develop the partnerships that we have. But we also have, which is very encouraging, engaged with many other opportunities for brand partnering and brand licensing.
And we have, over the last couple of quarters, developed a very strong funnel for new brand partnering and brand licensing that we will come back and tell you about more in due time when the contracts have been finally approved for publication. So those are the four, five floors in the house. Then the sixth floor, we have; it's not really on the attic, but it's almost on the attic. We have brand marketing and sales that, of course, will cut across all the other floors and making sure that we do sales and marketing properly and that we use our brand strengths properly. The online platform and the full digital I already spoke about, that is, of course, key, and we will accelerate that now in corona times.
And then it's all about people, and it's all about having the right talent and the right people in place, and we have strengths in our organization. Then you see three more growth opportunities outside here. And we have a lot of opportunities outside the house as well, but we need to prioritize them, and we have prioritized them into B2B and large B2B opportunities. We are working in the telecom space. The telecom providers are already present in the living rooms, and we're looking to be part of their living room experience. And we're working with some of the world's biggest telecom operators here. We are pursuing the U.S. in case you wondered what happened with the U.S. But we have realized that we need to find a partner to be able to scale the U.S.
There are a few big partners out there that many of the other brands in consumer electronic space are using that is offering their services to us in terms of fulfillment, in terms of distribution, in terms of sales and marketing. We are engaging with these partners now to help us to grow in the U.S. but also to help us to be efficient and effective in the other parts of the world, where we are not focusing our own effort. We have the high-net-worth individuals, people with a lot of money, that we have not particularly targeted in the past, and we will put in extra effort.
We have understood on how the purchasing process is happening with these individuals, and therefore we will, of course, adapt accordingly and make sure that we are present in the places and do proper marketing and marketing programs in place to address the opportunity that we see with the ultra-high-net-worth individuals. So that is the short term, and that is really to get back into black, to make money, and to set the solid foundation. The long-term strategy, if we move to the next slide, is happening in parallel. And, of course, the impacts and some of these impacts will take a longer time to execute on. We have, as I said, identified four consumer target segments that we are going to address. This has been well-researched. This work has been going on for a while.
They are the Gen Z of the world, which is the new younger target audience. We have a lot of Gen Zs in China. We have a lot of luxury Gen Z customers in China. We also know that these luxury Gen Z customers are coming to Europe and are shopping in Europe. So we will target them. We have the carriers. We have the well-established. Those are already many of them our customers today, and we will continue to serve them, but we have to find them into two different personas. Then we have the high-net-worth individuals that we have really not specifically targeted before as the fourth target, persona. So that is what we are going to build products for, develop products for, experiences for, and do our sales and marketing for.
If we move to the next slide, you will see that we will keep our three use cases. We will keep On-the-Go . We will keep Flexible Living, and we will keep Staged. What we will do, however, is that we will add three more capabilities to these use cases. We will start to offer much more limited editions and, and much more bespoke opportunities. When our customers and we know that there's a request from these customer segments to have bespoke products, and they appreciate limited edition products, it's also good for us to do special editions and limited editions for channel differentiation when we go to monobrand and multibrand.
We have amazing capabilities in Struer and in the world when it comes to doing craft, craftsmanship in aluminum and in wood that nobody else can, that we haven't fully utilized, that we'll start to utilize across these three product categories. We will also put the B&O Classic program in place. There's a lot of interest in our older products and keep them alive. Also, from a longevity and from a sustainability point of view, this has been much requested, and our products have a much longer lifespan than any other consumer electronics. And many of our customers want them updated and want them refurbished, and we will put a program in place to offer that type of services as well. So in summary, for the product portfolio—sorry—in summary, if we move to distribution, we will continue to work with monobrand, multibrand, and e-commerce.
And we will focus on, like I said, certain markets for this. We will continue to make sure that we have stores in the right place, that we have the right store staff training, and that we are able to look after our customers fully in all those focused countries that we're going for, both for multibrand, monobrand, and e-commerce. And we're putting those resources in place as we speak. Then if we move to the capabilities that we have that will help us to win and that we will differentiate with, we will continue to be differentiated by design, sound, and craftsmanship. Those are unique capabilities that have formed our past and will form our future. But we will add to that the limited editions, a classical program, a bespoke program, and continue to work with.
We have interesting opportunities for more brand collaborations that we will announce going forward. We also have an influencer program and key opinion leader program that we're putting in place that will help us to drive sales and then, of course, do special appearances in terms of pop-ups and POS collaborations. So this will help our portfolio to differentiate and, of course, our products to win against competition. So if we turn to the final slide, so in summary, what we are going to do over the short period of time and then that will also take us into the future is to make sure that we make money, that we have a cost structure that is sized to the revenues that we foresee.
We have, as I already said, put many efforts and already many activities in place for this with new organizations, with new people, with new talents. We are focusing on seven key countries where we're going to build our capabilities up to the full extent. We have more and better products coming, and we know what the insights on the current portfolio are, and we know what the insights for the future consumers are, and we will continue to build products for that. And then we have an amazing brand that is recognized across the world that will give us, I would say, a unique opportunity to continue to work with big partners in the technology space, which we are already doing, in the distribution space to help us to win new territories and win new markets.
Also, of course, then for brand partnering and brand licensing where we will add value, to the products and to other brands that we will continue collaboration with. So in summary, those are the four things that we will do long-term and that will bring us back to growth and profitability. So that concludes my strategic directional update, and we are now ready to take your questions.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypad now to join the queue. Once your name's announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. So there'll be a brief pause now whilst we register any questions. Our first question comes from the line of André Thormann of ABG. Please go ahead. Your line is open.
Thanks a lot for taking my question. Just, to start off, I mean, in terms of the strategy on these seven key markets, I hope I don't overlooked it. But, but what about U.S. that's not part of it, and, and why?
Yeah. Thank you, André. Thank you for the question. It's a very good question. I'm sorry if I skipped that through too quickly. If you look on the house slide, you will see that in the growth opportunities that we have, there is an American flag in strategic partnerships. We will continue to work with the current partners that we have in U.S. We have monobrand stores. We just opened our SoHo store. We have multibrand partners with Neiman Marcus and with Hudson on the airport. We will continue to do that. The challenge we have in the U.S. is a huge opportunity for us, but it's also a huge continent. And to scale that and to get scale quicker, we believe we need to find a partner that will help us to scale the U.S. market. Good news is that this is what most companies are doing.
This is also what Apple did in the beginning when they launched their iPhone back in 2007. They found a telecom carrier that became their partner and their go-to-market model, and they scaled by doing that. This is also the way they currently operate in the U.S. They are not doing all of the work themselves even though they are one of the biggest companies in the world. So we have been and are in talks with many of the big distribution partners that are present in the North American market and in the global market for that matter as well. We are currently exploring ways of partnering with them to get full leverage of the U.S. market and to be able to grow quicker there.
But otherwise, if we as a small company would go and do that all by ourselves, it would be a very costly exercise and would take a very long period of time. So good news is there seems to be many who are interested in partnering with us and helping us to get our products out to the American consumers as well. And that's why they are not in the house, but they are in the separate ring in the middle.
Okay. Okay. Yeah, thanks a lot. And, in terms of the brand partnering, I mean, is there anything more specific to say about that? Is it primarily new partners, or is it have areas do you see further potential within your existing partners? Or I mean, can you give some more flavor on what you're seeing there?
So we have a few very good partnerships already, and many of those are long-term partnerships. We will continue to expand those partnerships. I will not announce anything here, but of course, when we have contracts to announce, we will do that. We have been working with, like I said, in a very diligent way, with our brand partnering team on the sales funnel. We are in contact with many big global players who have an interest in the capabilities that we have in terms of sound tuning, in terms of understanding sound, and then, of course, also that have an interest in using our name to show that they have an enhanced sound performance in their products. We will disclose those contracts when they are disclosable, so to speak. There is a funnel, and we're very happy about that.
That will continue to be a strategic cornerstone in our strategy going forward. That's all I will say about that today.
Thank you, then. Okay. But if you look at the Q3 numbers, I mean, which increased these four positives 26% or 27%, did anything especially happen there, or was it just the existing portfolio of partners?
Oh, the existing portfolio of partners was drove that. So they sold more. They were successful, and we had teamed up with products that they have that were successful, and that's why we got growth.
Okay. And maybe then, the last about the strategy. In terms of this target on younger people primarily in Asia, I mean, does that, looking at the slide, it seems that you will focus more on, I mean, these on-the-go products in Asia. Is there any consideration in terms of pricing of products in the strategy, or will that remain as unchanged price?
Yeah. So I'll introduce you to my new team member, Christian Birk here, who is heading up marketing, who will be able to answer both your questions on Gen Z and pricing.
So thank you for the question, André. So specifically for the younger segment, what we do see, as Kristian referenced, is there is huge growth in luxury around the Gen Z segment in China. We definitely intend to make sure that we have our share of that. We see our products resonate with Gen Z also in China, and we see the majority of Chinese luxury purchases are actually also made outside of China, which is how it affects, you can say, also our European and North American operations. Why we call it out specifically here is because this specific segment lives in a different world than some of our other segments. So we are investing efforts both on the marketing side and channel side to make sure that we are present in front of those segments at the right channels where they interact currently.
On pricing specifically, we, I don't think announcing any sort of pricing specifics here as part of strategy, but what we do see is that our brand resonates with this audience. There is definitely a willingness to pay in the Gen Z segment when it comes to our products. So we have not sort of made any, you can say, reflections beyond the fact that we really want this segment, and there seems to be an appreciation for our brand and our products in this segment, and we want to chase that opportunity even further than what we do today.
Just to understand here, in terms of the younger crowd in China, the primary focus to target, and that is on-the-go products, right?
Yes. That is correct.
Yes. That is correct.
Okay. And then, I mean, you have previously mentioned that the competition on, at least headsets, is very hard, the competition. And for example, if we see launches from Bose, the Bose 700 and so on, I mean, can you mention some more about what you will do to target this? Is it purely to announce new products, or what is it?
I think what we see interesting about our brand versus some of the competition in the industry is we're not just delivering great sound capabilities. We're also delivering a lot of other capabilities that this segment really buys into. So our craftsmanship, our designs, our appreciation for sustainability are things that resonate with this audience. So from that perspective, what we see, and we talk to quite a few of them, is there seems to be a great match between what we offer, and, and what they ultimately want to bring into their lives in terms of luxury accessories and personal accessories, which goes beyond just a great headset.
Don't you all also see that the competitors are focusing increasingly more on design in On-the-Go products?
We see there is an appreciation for design, for sure, and everyone wants to make this a key differentiator, you can say. There is an appreciation also within the audience that this is part of the buying decision. We just feel that this has been part of our DNA for the last 95 years, and we have a great starting point for delivering on a design proposition that takes us ahead of competition specifically around that.
Okay. Okay. Thanks. And then maybe on some other matters, just in terms of this cost program, these 150 full-time employees, 115 employees primarily in the support functions. We also spoke about it in the call a week ago. Just to be sure, how many employees do you have in support functions in total?
Thank you for the question.
Thank you for the question. Nikolaj, answer that question.
Yeah. So, thanks, André. Well, when we define support functions here, it's not about only people in finance and HR and IT, because obviously, then we would be back to have zero people in those functions. So support function here, we need to view in a broader sense. So this is also other support functions that we have in the company that are more sort of internal focused in terms of some of the functions we have around product support, for instance, internal sales support towards our markets. So all the functions that have an administrative nature but throughout the company.
Position, I mean, is there a number on, on all of the Gen Z employees?
I don't have a number now on all those employees, for the specific ones, you can say, we have taken out. But to give you an example, from sort of what you would call traditional support functions, finance, IT, HR, where we have had sort of the hardest look, we are reducing with a little more than one-third of the employees in those specific functions.
Yes. Yeah. So to help a little bit more here, it's on IT, it's on HR, it's on communications, it's on legal and finance in those functions, predominantly, that we're taking these positions out.
Got it. Employees in finance, IT, and HR have been reduced.
Operations legal.
Okay. Okay. Cool. And then also just to be sure on this cost program, I mean, in terms of cost lines, where is it primarily that the cost will be reduced? Was that an admin cost, or is it also a cost of goods sold, or where is it?
Yeah. So it will be primarily in admin cost, but it will also be under distribution costs from the logistics side of things. And then there will also be a smaller part in COGS. But that is more related to the phase two of the program, which we are initiating now, as we also spoke about in the last call. So what we did last week in terms of taking our people is hitting the CAPEX line, administration costs, distribution costs primarily.
Thank you, André. We need to.
Thank you, André. We need to proceed to. Questions from the rest of the audience as well?
Rest of the audience as well. Sorry. Thank you for the question.
We have one further question in the queue, and that's from the line of Poul Jessen of Danske Bank. Please go ahead. Your line is open.
Yes. Thank you. I have a large number of questions. Just to be certain about the strategic direction, because there's been some back and forth in the past when we had Tue Mantoni move downwards to the Play segment to become more volume gain. Then we had Henrik Clausen who moved more up to the luxury end, hiking price points and so on. So where's your balance now? Just to get it clear, is it luxury, or do you also see the volume market in on-the-go segment, or how do you want to position it?
Fair question. So we will be luxury in consumer electronics, but at different price points. So, I've been talking about good, better, best. But good is, of course, already on the premium side or just above premium. But we will have products in that are accessible for most of the consumer electronics buyers. But we will not go mainstream, so we will be a little bit higher than that in terms of the positioning. But good, better, best can serve as a, yeah, picture to mentally see that in front of you. Then we will continue in all three categories. So we will continue in play. We will continue in Flex, and we will continue in staged.
And a little bit of rationale for that is when we look at the assets that we have, and we look at what I said before, time to money, effort to money, probability to money, we have a huge customer base, a loyal customer base that we need to continue to serve. And many of them go to our monobrand network and purchase from the monobrand network. There, one of the critical components for the monobrand network is to have, of course, Staged products and to have screen products, to have speaker products. And therefore, Mono will be critical. Staged will be critical for that.
What we have not been so successful with in the past in the monobrand network due to price variations and due to price inconsistencies is that they have had a more difficulty in selling the Play areas that have been then mainly going online and going in multibrand. But by having different editions and by having more differentiation in terms of editions, we will help the monobrands to get customers to buy things in their stores on Play as well. Then on the growth side, and when we move to China, that is part of the strategy, we have high hopes and high expectations on Play in China. But also in order to be that iconic and desirable brand in China, we build that brand based on Stage and on the Stage products and on the high-end products and on the luxury products.
That is what is making our play areas more desirable than anybody else, in the consumer electronics space. So we continue with all three.
Have you made any assessment on what's the value size in the markets that you're addressing on the segments where you are gonna focus?
Yeah. So if you look at it from overall world market perspective, both in consumer electronics and in luxury, there is number one, those are huge billion-dollar markets. So our share is, of course, very, very small, which is giving us, I think, a big opportunity and a big potential. If you look at those, you see the fastest growing one is in headsets, when it comes to consumer electronics. The other segments are big as well and also growing, which is good for us. Then if you look at luxury, the biggest luxury segment growing is home luxury, so also speaks for having a stage portfolio. That's all I will say about that for the time being. Birk has something he wants to add.
Maybe just to add on quantifying the size of the four segments, we know that there will be people that might not directly fit into these four boxes that will buy our products moving forward. But we have quantified the number of these people in the four segments across our core markets, and we believe there is enough of them for us to fulfill our growth ambitions. So just wanted to add that beyond the sort of the luxury category, consumer category, we have done the quantification of the audience and sized that up and believe that's sufficient to fulfill our growth ambitions.
Okay. Just clarification, you mentioned six markets in Europe and then China, but other places, you say six plus two. The two is that, the U.S.?
So, it is six plus, China predominantly. Then you have Korea as well that we are also focusing on. We're doing well in South Korea, and our products are doing well there, so we continue on that as well. But yeah, six plus China is what I mistakenly said. But it's Korea as well, South Korea.
So six plus two. It's on slide 22 where you say six plus two.
Yeah. Correct. It's Korea.
Korea. Wouldn't there be a pressure for you to succeed in some way in the U.S.? I was just thinking about both Ford and HP, to continue their royalty partnership. They must have a B&O brand in the U.S. to align to or be compared to, or can you succeed in the U.S. or continue those two partnerships without a successful U.S. presence?
Fair question. We will continue in the US the way we are doing currently, right? So we opened a flagship store in SoHo, which is an amazing, I think, experience store and carries our brand well in New York. We're about to open a few more stores in the U.S. as well. But to scale it up to any big-size scale faster, that's what we have picked it out of the house and put it into the circles. It requires special effort. It requires partnership to get it to scale. We are spending resource, and we are spending efforts. We are looking into partnerships, like I said, on how we will be able to scale the U.S.
So it's very much on the target list, but we just have not cracked the equation to justify the spend for the U.S. right now versus the investment that I can do in the six plus two other countries. But we are on the case, and we are talking to many, and I'm talking to many, of the partners over there on how we actually will set up a strategic partnership on B2B that is nationwide, on distribution that is nationwide, and, of course, on the product side as well in brand partnering.
I'm just following through your strategic slides. So you show that you are getting very soon a new head of Europe or EMEA. And I just took him on LinkedIn. He's coming from Logitech. I was just wondering or curious about when you pitch to get someone joining B&O from another company like Logitech. What's your pitch? Is that the good brand, the opportunities? Because it must be challenging looking at your own position, B&O's position right now to take people out of a highly or well-run company and then move to B&O at this time. So what's the pitch there?
So B&O has an amazing brand strength, and the history and the products that we have is one good reason for people to join. But I think the other thing is, more importantly, is when these qualified people assess where we are and what we want to do and how they can help, they believe in it, like I did when I joined. I believe we have an amazing opportunity when we do the things in the right way and get the right people and the right teams in the right places. And that's what Jorge believes as well. But I'll let him answer the question himself when he starts 1st of May.
Okay. Then on slide 15, you talk about the consumers where you have lost the core consumer in the past. And I think over the last 5-8 years, when I've been traveling with CEOs and executives, and we have spoken about B&O as a business case and a long-term survival, then most of these were B&O customers on both audio and TV. They all left because they said it became too expensive, also because that Sonos was seen as an easier product and so on. So what will make you relevant for this? I assume that would be a target group as a customer that you get the executives and as a client again. But currently, they are lost because they've found alternatives.
I think there I think there's two probably reasons for that. One is the sales and marketing and the targeting towards these people because we haven't talked to them. The other thing is what you also point out to is, of course, user experience and simplicity and how our products are working. But I'll let Christoffer take the second part. Sales and marketing is one, and the targeting of marketing is one. And then improvement in product and usability and simplicity is one. But I'll let Christoffer add in here.
So to add here, we can say we continue to see a demand from especially the high-net-worth individuals for our most immersive experiences. And that's why we continue to invest and develop in this product category. Furthermore, we have added new propositions to the portfolio. And the latest here in the nature of Beosound Stage, which is the soundbar that we launched in the autumn. And on this product, we see a strong comeback in terms of customers we have lost who's actually buying into the brand again here, plus we see an interest from new customers. So we will balance the portfolio when it comes to the Staged, well-established and high-net-worth individual segments in terms of meeting both the needs of the existing base.
So, our fans and also those fans who left us, give them a reason to come back. I think Beosound Stage is a good example of how we address this.
Thank you, Christoffer. No, just talking about Stage, are you willing to give any indications on the volumes that you have been shipping on that one? Because, personally, I believe that could be a lot faster, but I have no clue of how much you're selling on it.
We won't disclose.
So we won't disclose the numbers. But I think Nikolaj said in the Earnings Release that we have you can see the overall category, how Staged is doing there. But I think we, we need to let if there are anybody else asking questions, we need to see if we have some more questions. But thank you for all those.
All those questions.
We have one final follow-up in the queue, and that's from the line of André Thormann of ABG. Please go ahead. Your line is open.
Thanks a lot for taking my question. Just to continue in terms of in the press release, it says that you are considering your capital structure. I mean, can you elaborate a bit more on what your thoughts is on capital structure in this situation?
Yeah. I will do. So given all the uncertainty that there is around there and the business risks that we see, of course, in there are increasing uncertainty. And we are looking into all aspects of our finances and balance sheet and how we can strengthen our position. It goes to cost. It goes to capital. It goes to, yeah, basically the whole contingency of what the world is going through. So capital is a part of that contingency as well. I will not elaborate more on it, but we're looking at all aspects of capital.
Then, on monobrand stores, just to understand, it looks like you have been closing eight monobrand stores during the quarter, and then you have taken over this store in Copenhagen Airport. Why have you taken over this store?
So, Copenhagen Airport is a strategic location for us. It's, first of all, our home country. And, coming back to what we want to express in terms of experiences and show our heritage and show our products and show the future for the consumers, and the target segments that we just talked about, Copenhagen Airport is a fantastic opportunity for us to do that. The previous store was more a transactional store where we sold products, and we are building more of an experience store in Copenhagen right now. So that's why we're taking it over. I need to end here with having the final question, and if there's a final question from Poul.
And we'll take the final question from Poul Jessen of Danske Bank. Please go ahead. Your line is open.
So it's the final question. That's a tough one because it has to replace, like, Capital Markets Day as well. No, let me just take a technical one. You mentioned that you should have access to software and IoT, and that's a core part of the strategy for the multiroom and everything else, I believe. Do you have access to partnership on all platforms? And I think here it's Spotify Connect, Apple, Amazon, Google. And then we also know that Sonos has been making a lot of noise that other companies are violating their IP rights on multirooms through wireless. Do you have what's necessary to deliver a full, complete product as of today?
I'll let Christoffer.
Yeah, yeah, yeah. Let's Christoffer take that question. I would, I would probably say no comments on that one or we don't elaborate on that one. But I'll let Christoffer have a chance as well.
Yeah. I cannot go into details on all the points here. What I can say is that we have, over the last year, basically been upgrading our entire Flexible Living portfolio with AirPlay 2 compatibility. We see ourselves as a very strong player in terms of being a strong citizen in the ecosystems around us. We will continue to focus on convenience and simplicity. That's been part of our agnostic approach to how you can use our products.
Okay. I think we need to close here. Thank you, everybody, for taking your time and listening. It was difficult to do this for us, and I'm sure for you as well, on just a, a webcast like this. I really would have hoped we could have had a chance to meet face to face to do the Capital Markets Day. As you may have seen from the announcement, it was we have postponed it, but until further notice. So, so hopefully, we will be able to come back and, and have a proper Capital Markets Day where we can share what we're doing and meet in person. But thank you for listening, and thank you for taking your time.