Bang & Olufsen a/s

Hello, everyone, and thank you for joining the call. Due to the COVID-19, we're not sitting together as we normally do, so this will be our first to be apart at different locations. Today, I will start by going through the highlights of the quarter and provide an update on how we are progressing on execution of our strategy. Afterwards, Nikolaj Vendelbo, our CFO, will take you through our financials in more detail. Then I will go through the outlook for 2021 before we open up for questions. Our head of marketing and digital customer experience, Christian Birk, is also with us today and will take part in the Q&A session later. So if we move to slide four, we announced the preliminary numbers for Q2 on December 15th, where we also communicated our increased outlook for the year. Those numbers are unchanged, with the exception of the Q2 growth in local currencies, which ended at 12% instead of 11%, as we had estimated in the preliminary numbers. Overall, we are pleased with the second quarter results. As communicated in December, we delivered a positive EBIT as well as a double-digit growth for the second consecutive quarter and a positive cash flow. We achieved growth in all regions and the results were primarily driven by strong execution on our key strategy priorities, successful product launches and higher consumer demand for home entertainment products. We did experience headwind related to COVID-19 with lockdowns impacting markets across the world, as well as higher logistics and component costs. I will go into more details on how we have worked to mitigate that on the next slide. An important part of making the company profitable again is our cost program, launched in March and with targeted annual savings of 175 million. I'm pleased that this program is progressing. We achieved a positive free cash flow of 139 million in Q2, and we go into Q3 with 582 million in available liquidity, which allows us to continue to execute on our strategy and get through the current wave of COVID-19. Based on our performance in the first half of our financial year, we increased our outlook in December. We now expect revenue to be between 2.3 billion and 2.5 billion. A bit before special items, we negative 50 million to positive 25 million and free cash flow to be between negative 50 million to positive 100 million. So please turn to the next page. We have seen COVID-19 impacting our business in three key areas during Q2. First, we have seen lockdowns in a number of our markets. By the end of Q2, 82 stores in France, United Kingdom, Belgium, among others, were closed, and currently 160 stores out of our 467 Monobrand stores are closed. Many stores can still transact and run installations, but it does, of course, impact daily operations. During Q2, we worked closely with our Monobrand partners to mitigate these challenges. We increased the focus on existing consumer base who already has a relationship with the local dealers. We significantly increased our digital efforts to increase awareness. And finally, we adjusted our e-commerce revenue sharing model in those markets impacted by lockdowns. Secondly, we saw a more unstable supply situation Scarcity on components in the consumer electronic industry led to higher prices on some components and problems meeting demand on some products, which was higher than anticipated. We also experienced challenges to production due to reduced labor capacity in regions severely impacted by COVID-19. We have increased our focus on supply chain management and added more resources internally to solve these together with our global supply partners. Thirdly, as other consumer brands, we were impacted by reduced global logistic capacity. To meet demand, we increased the use of air freight, which together with higher freight rates led to higher logistic costs. When the supply situation normalizes, we will again return to more sea and rail freight, which will help to bring costs down. There are still a lot of uncertainties related to COVID-19, and we do expect this global pandemic to impact our business in the coming quarters. We continue to work diligently with both retail and supply partners to mitigate the challenges related to this. If we move on to the next slide. We have shown our strategy house in previous earnings calls, but I want to re-emphasize that our strategy is and how we are executing on our strategy. Currently, we're in the first phase where our focus is on fixing the basics and becoming profitable again. With our current progress, which is also reflected in our outlook, we are within reach of being profitable this financial year. We still have a lot of work ahead, but I'm encouraged by the progress we have made both financially and in the underlying business, despite the challenges related to COVID-19. We have made significant improvements in many areas in Q2, and I will give you an update on some of those focus areas on the next couple of slides. If we move to the next slide, In our strategy, we have identified eight core markets where we want to win before we scale our business. In Europe, the six core markets realized 13% growth driven by Monobrand and our own e-commerce. Multi-brand stagnated, and this was mainly due to delays in some changes to strengthen the operating model, COVID-19 impacting travel retail, and a softer participation in Black Friday sales compared to last year. We have made changes to our multi-brand channel to ensure a stronger foundation for future growth. This included a new commercial framework as well as the onboarding of several new partners. Among others, we have onboarded both Ingram Micro and Techdata as new distribution partners in Europe. We expect this to improve our sales performance already in Q3 and Q4. Monobrand continue to perform well. To strengthen our relationship with the partners and to further improve sales, We completed a comprehensive partner survey during the quarter to strengthen our collaboration and partnership with the dealer network. This will now form the basis for future initiatives in this channel. In Q2, we also took over two monobrand stores in London to gain more control of the brand experience and ensure the right activation in the city as a whole. The stores are targeting the high net worth individual segment in particular, which is one of our key consumer segments. In the two Asian core markets, we grew revenue by 6%. Our sales in Asia has benefited from higher demand for home entertainment products as we have successfully adjusted our go-to-market approach to cater for this demand. As a consequence, the flexible living category grew more than 75% in the two core Asian markets in Q2. A large share of our revenue in Asia has historically been generated from on-the-go products. So in Asia, we were particularly challenged by the impact of COVID-19 on travel retail. We decided to make changes to the Greater China Region management in December to further accelerate the growth and strengthen our capabilities across the channels. We expect to add more resources to the team like we have done in Europe in the coming quarters to help realize the growth potential we see in China and South Korea, both short and long term. If we move to the next slide, please. Innovative products are the heart of Bang & Olufsen and it has been a key priority for us to maintain a high frequency of launches this financial year. We launched seven new or upgraded products in the first six months and that contributed to the positive development in our financial performance. The products have been well received by our consumers and many of them are best in class in their category and we expect to launch more than five new or upgraded products in the next two quarters to add to our already strong portfolio. In December, we launched the second generation Eclipse 65-inch TV. In Q2, we launched two new products, BeoRemote Halo and BeoVision Contour, two upgraded products in BeoVision 20 and BeoVision Eclipse second generation, as well as the Golden Collection to celebrate our 95th anniversary and the Rafa E8 Sports collaboration. The launch of Biovision Contour was a testament to our agile development capabilities. Since the launch of our strategy, part of our focus has been to launch a smaller size TV proposition to respond to second room and second home demand with a lower price proposition. This demand was highlighted also by our monobrand partners, and we are proud that we brought this product to market in a record-breaking short period of time. In Q2, we also revealed the first product in our classic editions program, the Biogram 4000C, which has been very well received among Bang & Olufsen consumers and highlighted the longevity of our products. The classic editions program is one of the three new product initiatives, which also include limited editions and bespoke programs that we have introduced to boost brand awareness and differentiation in the marketplace. The new technical platform first introduced in the Biosound Balance and Biosound A1 second generation continue to perform well in Q2. But we also released several software updates for our old platform. To improve the user experience on these platforms, we have added new features, solved known connectivity issues, and updated Apple Airplay and Google Cast software. We continue to see our products being rated best in class and receive awards. Our Biosound A1 second generation, which has already received several awards, got a five out of five star rating by WhatHiFi. In November, we received an honorary prize by Lead&Build in recognition of our ability to continue to innovate and bring new iconic products to the market, even after 95 years. So let's move to the next page. In line with our strategy, we continue to develop and launch several new initiatives in Q2 to further strengthen our digital platforms. On our own e-com platform, we continue to invest and expand the e-com functionality into our apps, social media platforms, and create retail network enablers like Click and Collect Pilot, now launched in the UK. With people facing restrictions due to COVID-19 lockdowns, our augmented reality or AR experience app allow customers to place our speakers and TVs in their home virtually. And we have seen increase in traffic to this app in Q2. We also launched a new functionality to now allow customers to try on their favorite headphone style virtually and place their orders directly through the app. Providing the best possible consumer and customer experiences is a significant focus for us. We now have an internally built system which, by combining a range of internal and external data sources, allows us to see where our customers are facing certain pain points. Related to that, we have built tools for customer services to diagnose product remotely and deploy any fixes needed. All of these initiatives help to serve our customers better. We see that this leads to higher performance on our own e-com, which grew by 74% compared to Q2 last year, but also to drive a better customer experience. And our data indicates increasing customer satisfaction across all product categories. And with that, I would like to turn over to you, Nikolaj, to take us through the financial development.

Thank you, Christian. Now, please turn to page 11. As Christian said, we have delivered our second consecutive quarter with double-digit growth, and this was also the first quarter with positive EBIT since we launched our new strategy. Revenue increased by 12% in local currency. Like in Q1, the revenue growth was related to home entertainment products and especially flexible living performed well, growing by 61% in the quarter. We saw this trend in all regions. All regions delivered year-on-year growth. Compared to last year, product launches had a positive effect on growth. In the stage product category, we did see a small decline in Q2 compared to last year. This decline was expected as we in Q2 last year launched a new TV, Real Vision Harmony, and our soundbar, Real Vision Stage, driving sell-in in that quarter. For the first half of the year, the stage category was up by more than 20%. Looking at our channels, the main driver behind the growth was the Monobrand channel, but also our online sales platform performed well. As Christian mentioned, our own e-commerce platform grew 74% and we are also seeing our e-tail partners growing. Revenue from the multi-brand channel declined in Q2, which was related to the work with changing the operating model of the channel in Europe that Christian mentioned before. Multi-brand is of course also impacted negatively by the decline in travel and lockdowns in certain countries as for example the UK. This impacted our on-the-go category. But it's important to mention that our newly launched products like BeoSound A1 second generation, BeoLid 20 and BeoPlay H95 are doing well and revenue from Bluetooth speakers and headphones increased compared to last year. Brand partnering and other activities grew by 13% in Q2. PC sales are still doing well, and furthermore, car manufacturing has normalized in the quarter. The gross margin increased by 2.1 percentage points. Last year, we made a provision for component liability, which had a negative impact on the margin that year of approximately 4 percentage points. Adjusting for this, we saw a decline in gross margin of approximately 2 percentage points. This was mainly due to higher component cost and logistic cost. Especially logistic cost increased as a result of more products being moved by air to ensure deliveries to partners in a situation with a tight supply chain. The cost was further accelerated by freight rates increasing following capacity being lower. The EBIT margin before special item increased by 13.9 percentage points to 4.1%. The improvement was driven by the revenue growth and the higher gross profit as well as lower capacity cost. The lower cost being a result of the cost reduction program yielding savings of 32 million in the quarter. Please turn to the next page. As I mentioned, all regions delivered year-on-year growth in Q2. Home entertainment products were the main driver, with all types of speaker categories growing, but especially flexible living products drove the growth. In EMEA, revenue grew by 13% in local currency. The monobrand and e-commerce channels were the main growth drivers. The multibrand channel was impacted negatively by the work with changing the operating model of the channel. The growth came from flexible living and on-the-go products. Flexible living was driven by most products in the category. Within on-the-go, the growth was driven by newly launched products like H95, Bivoli 20 and A1 second generation. The decline in the stage category was related to the TV portfolio and impacted by the product launches last year, and the decline was, as mentioned before, expected. Sales of speakers increased, but was restricted by availability of products due to the global company shortage in the industry. America has increased by 29% in reported figures, but 41% in local currency. The growth was seen across all channels and all product categories. The growth in the stage category was mainly driven by speaker sales, but again limited by product availability. Flexible living grew across most products in the category. It was also supported by some multibrand partners expanding the product range they offer to consumers. The on-the-go category grew in both speakers, headphones, and earphones, and mainly driven by newly launched products like A1 second generation, Bioli 20, H95, and E8 Sport. In Asia, revenue increased by 5% in local currency driven by flexible living and mainly related to the monoband channel. The growth in the flexible living category came from all speakers. As with the other regions, the decline in the stage category was related to TVs where speakers delivered growth. The decline in international travel activity impacted on-the-go. Because the on-the-go category accounts for relatively more in Asia than in other regions, the decline in international travel affects Asia relatively more. Finally, brand partnering and other activities grew by 16% in local currency. The increase was related to both HP and Harman, driven by PC sales and the normalization of car manufacturing. Please turn to the next page. Our capacity cost declined by 17% in the quarter and 14% excluding special items. We saw a cost decline in all three cost categories. The cost reduction program yielded 32 million in savings in Q2, bringing the total cost savings to 63 million in the first half of the year. The cost savings are mainly related to non-product related cost and headcount reductions in administrative functions. The savings in Q2 were only slightly more than in Q1. The reason for this is related to the supply chain challenges seen in Q2, which means that the cost reduction ambition on product-related cost was delayed. We have focused on securing supply and components, slowing down the work with reducing product-related cost. These temporary challenges have not changed our targeted cost savings. Our development costs declined by 14%. This was related to lower amortization, where the incurred development costs were 1% higher than last year, reflecting our continued focus on product development. Our distribution and marketing costs declined by 11% compared to last year. The decline was partly driven by the cost reduction program, but also postponement of planned in-store marketing activities due to COVID-19. Instead, we invested in building brand awareness and online activation. Finally, administration costs declined by 25 million or 45%. Excluding special items, administration costs declined by 9 million or 23%, which was mainly related to the cost reduction program. Please turn to the next page. CapEx was 12 million lower than in Q2 last year. The decline was mainly related to lower investments in retail due to COVID-19. Investments in product development and technology platforms were at the same level as last year. Our net working capital decreased by 108 million in the quarter, mainly driven by higher trade payables and other liabilities. Net working capital to the last 12 months revenue was 11.4%, which is 5.4 percentage points lower than Q2 last year. The increase in other liabilities was related to accruals on employee costs, taxes, VAT and holiday allowances. I will return to net working capital in a moment. Free cash flow was positive by 139 million, impacted by net working capital and EBITDA being positive 74 million compared to negative 22 million last year. We have introduced a new term in this quarter, namely available liquidity. We want to mitigate the effects of having a large cash position and facing negative interest rates. We have therefore invested 450 million in AAA rated Danish mortgage bonds. To maintain our financial flexibility, we enter into repo transactions whereby we can assess intraday financing if needed. By the end of Q2 we had borrowed 25 million. Available liquidity consists of cash and bonds minus repo borrowing. Our available liquidity position increased to 582 million in the quarter compared to 497 million by the end of Q1. We have in Q2 also purchased own shares for an amount of 42 million to hedge our share-based long-term incentive program. Please turn to page 15. Maintaining control with our working capital continues to be a very high priority for us. Inventory was at the same level as Q1, but significantly lower than Q2 last year. We have since Q2 last year reduced inventory with 142 million. With increasing demand experienced at the moment, we are ramping up production capacity with our partners. Trade payables increased to 481 million, which was 154 million higher than Q1. The increase was related to the ramp of production in Q2. Finally, our trade receivables increased to 417 million, mainly due to higher sales compared to Q1. Sales with the extended credit was 5% in revenue and related to new product launches and also the golden collection. Overdue trade receivables continues to be at a satisfactory level. And with that, I would like to hand it back to Christian.

Thank you, Nicolai. Before opening for questions, I will just briefly go through the outlook and the highlights, so please move to the next page. The outlook for 2021 is unchanged compared to the updated outlook presented on December 15th, when we increased our expectations for the year. The outlook for 2021 depends on numerous factors. I will not go through them all, but just highlight some of the main ones. I will refer you to the report for a full description of the assumptions. We expect revenue to be between 2.3 and 2.5 billion. We assume that the impact of COVID-19 in the second half of the year will not be materially different from what we saw in the first half. Furthermore, we expect to launch more than five new and upgraded products in the second half of the year. We expect the EBIT before special items to be between minus 50 million and plus 25 million. Component and logistic costs are expected to remain at the higher than normal level experienced in Q2. Finally, free cash flow is expected to be between minus 50 million and plus 100 million. The outlook on free cash flow reflects the revenue and EBIT expectations and CAP is expected to continue reflecting the product launch plan. So please turn to the next page. So to summarize, we had another strong quarter. First of all, the strategy we launched in April last year is working and our focus on core markets is paying off. We have launched seven new and upgraded products in the first half of the year, which have all been well received by the market. And we have planned to launch more than five new and upgraded products in the second half of the year, of which we already launched the first in December. We have onboarded new distribution partners in Europe and the US to strengthen the multi-brand and B2B performance. We have accelerated our efforts on digital and e-commerce, and it is progressing very well. This has also been one of the mitigating actions we have taken to mitigate the impact of COVID-19 and the lockdowns on our business. Our available liquidity increased further in Q2, and we are now at 586 million, driven by our performance on free cash flow. Finally, and before going to the Q&A, I just want to take the opportunity to again thank the whole B&O team, all our employees who have been working extremely hard on executing our strategy during these difficult and uncertain times. And with that, we will open up for questions.