Bang & Olufsen a/s

Ladies and gentlemen, welcome to the Bang & Olufsen Interim Report, third quarter 2020 to 2021. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Today, I'm pleased to present Christian Thier. Speaker, please begin.

Hello, everybody. Also, welcome from my side, and thank you for joining today's call. Just like in our Q2 call in January, we are not sitting together due to the COVID pandemic and the restrictions surrounded by it. So today I will start by going through the highlights of the quarter and give an update on how we are progressing on our strategy execution. Then Nicolai Wendelbo, our CFO, will take you through our financials more in detail. And after that, we will go through the outlook for 2021 before we open up for questions, as always. Our head of marketing and digital and customer experience, Christian Birk, will also be joining us today as part of the Q&A session. So if we move to the next slide. With a revenue growth of 16% in local currencies, this was the strongest quarter so far this fiscal year. Overall, we're pleased with the results, not least as Q3 was expected to be a quarter with the hardest comparable figures to beat. If you remember Q3 last year, we delivered positive EBIT before special items driven by the first cost initiatives we initiated immediately after our December 2019 profit warning. The growth in this quarter was driven by strong execution in our eight core markets in Europe and Asia. We saw strong performance across all key distribution channels, reflecting our work to improve channel execution. We have continued to focus on demand creation through our targeted marketing initiatives as well as strengthening our digital focus. We have seen this pay off as the revenue from our e-commerce platform grew by 129% compared to last year. All of our initiatives resulted in a positive EBIT before special items and free cash flow for the second quarter in a row. The improvements were supported by the progress with our cost reduction program, where we delivered 42 million in Q3. EBIT before special items was 34 million, which was 32 million better than last year. And year to date, our EBIT is positive 23 million, an improvement of 212 million compared to last year. Free cash flow was positive by 8 million. It was lower than Q3 last year, but driven by the development in working capital, which was as planned and expected. Year to date, we have improved our free cash flow by 220 million, delivering 85 million in positive free cash flow. This is a significant improvement from last year. I will talk more in detail about our outlook at the end of this presentation. Our outlook reflects increased prices and challenges with component supplies, which will have an adverse impact on our Q4 results. For that reason, we maintain our outlook for revenue and EBITDA for special items. However, with the development in our free cash flow, we have decided to narrow the free cash flow outlook to the upper end of the range and now expect it to be between zero and 100 million. So if we go to the next page, Component scarcity has been a recurrent theme this fiscal due to a combination of higher demand in consumer electronics, car industry, as well as component supply constraints. Adding to this, component supply was impacted by multiple external events ranging from power outages in Texas, drought in Taiwan, and fires in Japan. As a consequence of the component scarcity, we experienced further increases in prices of components. In March, we decided to increase our prices on several products to mitigate for the increased cost of goods sold. The challenge with getting components impacted our ability to meet demand, which means that we again have a larger backlog going out of Q3 than we would prefer. Logistics remained a challenge like in the previous quarters, and due to the supply chain pressure, we still shipped a large part of our products by air to meet demand. We have increased the use of rail freight for some bulkier products during the quarter. Finally, Q3 was impacted by lockdowns in several markets in Europe, and around 40% of our monobrand stores were closed during Q3. We did see some markets reopen again, though around 20% of the stores are still temporarily closed. Many of stores could transact and run installations despite the lockdowns, but it did, of course, impact daily operations and highlighted the importance of digital demand creation. If we move to the next page. As always, I will take the opportunity to show our strategy house and outline how we're executing on our strategy. We are still in the first phase where our focus is on fixing the basics and becoming profitable again. However, much of our strategy work is also laying the ground for the next phase where we start to build robustness. We still have a lot of work ahead of us, but I'm encouraged by the progress we have made both financially and in the underlying business, despite the challenges related to COVID-19. have made significant improvements in many areas so far this year and this quarter and we are really starting to reap the benefits of this work i will give you an update on some of those focus areas on the next couple of slides if you move to page seven um in our eight core markets six in europe and two in asia we delivered 13 and 12 respectively of growth in local currencies. If we adjust for end-of-life products last year, those eight markets delivered more than 20% revenue growth. The growth in the sixth core European market was driven by strong sales in the stage and flexible living category, the latter delivering high double-digit growth rates compared to last year. From a channel perspective, all core channels performed with multi-brand retail and own e-commerce platform as a major growth drivers. The work we completed in H1 to revamp and strengthen our multi-brand channel is now showing results as multi-brand and e-tail grew by 152% in Q3. Our monobrand channel was on par with last year, with more than 60% of our monobrand stores being temporarily closed due to the pandemic, and with the supply constraints on especially build-up speakers, I'm really pleased with this performance. Our retail partners continue to show their resilience and find creative ways to service consumers supported by our sales and marketing initiatives. In the Asian market, we continue to see high demand for home entertainment. This was driving demand for our flexible living products, which grew by 77% compared to Q3 last year, which also allowed us to maintain our momentum from Q2 as we achieved 75% year-on-year growth in that quarter. In the quarter, we also ran a successful campaign in connection with the Chinese New Year as we pre-launched our new headphone, VeoPlay H10, as part of our Chinese New Year's collection. Finally, we've made changes in the management team in Asia in December. We have since been working on onboarding several other very seasoned professionals with commercial experience within digital technology, marketing and distribution. We expect this will help to realize the growth potential we see in China and South Korea, both short and long term. So if we move to the next page. With the launch of BioSound Level and the second generation of BioVision Eclipse 65 inch, we have launched nine products this financial year, and we plan to launch more than three products in Q4. With these additions, we have a strong and diverse portfolio of products fit for the future. Biosound Level is our last flexible living speaker and the second speaker to be launched on our new product platform first introduced in the Biosound Balance last year. We are reusing the majority part of the platform from Biosound Balance, which underlines the improved product creation and scalability benefits that our new platforms offer. One of our key differentiators is our ability to make special additions in new color materials or finishes, also in collaboration with other like-minded brands. In Q3, we launched our earphones Beoplay E8 together with Saint Laurent. Saint Laurent has been a brand partner for several years, and we expect this latest collaboration to help us to drive product differentiation and brand reach. Finally, as mentioned in the previous slide, we launched a product collection in connection with the Chinese New Year. The range featured five of our core products, some shown here on this page, including our new headphone, Beoplay H10. If we move to the next slide. Our recent products have received very good reviews, and Beosound Level is no exception. The product has been praised for its design, sound performance, and not least the introduction of the new modular build, which enable us to upgrade the technology in the speaker over time. The core brand strengths of Bang & Olufsen has always been the longevity of our products. And with this new innovation, our aim is to future-proof the technology within all our future home speakers. The modular design approach will also enable easy maintenance, service and repair, and make us even more relevant to the growing number of consumers looking for more sustainable products. The launch of Biogram 4000C in Q2 as part of the classic program underlined the long lifetime of our products and longevity will be a key brand asset going forward. If we move to the next slide. During the pandemic, in-store footfall has been limited and consumers have to a large extent move purchases online. We have continuously been strengthening our digital efforts and in Q3, we further increased the volume of customers of consumer communications, improved targeting and media effectiveness. Our efforts are directly translated into our e-commerce growth as we increased our revenue from e-commerce by 127%. We were pleased to see the impact of our recent marketing efforts and new campaigns on demand creation. For the holiday season in December, we launched a campaign, Share Moments That Last. This campaign features a range of products, including the relaunch of the classic Biogram 4000C. The second campaign, Your Sound, Your Space, catered to the working from home trend, and it was launched with a particular appeal to a younger female audience. Finally, we have focused on our connected speaker proposition with speaker sets. We have historically not been good enough to explain our multi-room offers to consumers, and the growth from our flexible living category shows that we are getting that message across to consumers much more effectively today. And with that, I would like to turn over to Nicolai, who will take you through the financial development.

Thank you, Christian. And please turn to page 12. So as Christian said, we have delivered our third consecutive quarter with double-digit growth. Our 16% revenue growth in Q3 was driven by product sales. Brand partnering grew by 1% in local currencies and was positively impacted by PCE sales from HP, whereas component shortages affected car manufacturing. Supplier challenges related to company shortages impacted our growth in the quarter, but we still achieved 18% growth in revenue from our product sales. We continue to increase our like-for-like sell-out visibility. We can see that our sell-out is aligned with our sell-in in Q3, so close to 20% like-for-like seller growth in the quarter. We are very pleased with this development, and it shows that our sell-out is driving our financial performance. We saw double-digit growth in all regions, with Americas delivering the highest growth at 50%, and EMEA and Asia both growing 16% in local currencies. We see all key distribution channels performing, especially driven by multi-brand and online channels. As Christian mentioned, multi-brand benefited from the changed operating model in the core markets in Europe, where we have added more resources and new distribution partners. In EMEA, e-tail and e-commerce combined accounted for around 8% of revenue, and in Americas, the digital channels accounted for 40% of revenue. Globally, our e-commerce platform grew by 127% compared to last year. Online sales are of course supported by changed buying behavior during the pandemic, but our growth is also a result of our efforts to drive more online revenue. If we look at our product categories, we see growth driven by both existing and new products. Product launch during the last 12 months accounted for around 28% of product sales. Our flexible living category displayed the highest growth rate, maintaining the momentum from Q2 with an increase of 48% compared to Q3 last year. We saw revenue from all flexible living speakers grow, and especially Beoplay A9 continues to be one of our best-selling products. Our stage category grew by 13%, driven by televisions. Especially above loudspeakers, sales were limited by the supply challenges we are facing. Finally, our on-the-go category declined by 1%. The decline was related to our earphones, which last year were supported by sales of end-of-life products. Excluding end-of-life products, our on-the-go category displayed a solid growth driven by Bluetooth speakers and headphones, especially BeoSound A1, BeoLid 20 and BeoPlay H95 drives growth. Please turn to the next page. Q3 was the second quarter in a row with a positive EBIT. EBIT was 28 million or 34 million before special items, which is equivalent to a margin of 4.9%. This was 4.6 percentage points higher than last year. With our performance in Q2 and Q3, we have delivered positive EBIT year-to-date with a margin of 1.2%. Higher revenue combined with improved gross margin drove the margin improvement, however partly offset by higher capacity costs. Special items amounted to 6 million compared to 3 million last year. Special items were mainly related to the cost reduction program. The gross margin improved by 1% to 44.9% driven by our products. Brand partnering and other activities impact the gross margin negatively driven by a lower margin as well as accounting for a smaller share of gross profit. Our product gross margin improved by 2.3 percentage points to 39.3%. This was driven by our on-the-go category, which last year was negatively impacted by sales of Interfly products. The stage category displayed a significant decline in gross margin of 9.3% this point. The decline is related to several factors, with the main ones being high logistics and components costs, impact from BioVision Contour with pass-through of screens, retail partner bonuses, and a product mix shift towards the T-Vote portfolio intensified by supply constraints on higher-margin BioLab speakers. Pass-through of screens to retail partners is related to the launch of BioVision Contour and impacts in Q4 also. Otherwise, we have now, with the launch of BioVision Eclipse 65-inch in December, concluded our TV strategy transition where we provide integrated TV solutions while decoupling from the TV screen itself. Please turn to the next page. Excluding special items, our capacity cost increased by 4% compared to Q3 last year. The increase was, across all cost lines, mainly related to employee bonus provisions. Last year, bonuses were to a large extent cancelled due to our financial performance. With the development we have seen this year, we are provisioning for bonus payments again, which is basically a return to normal. Likewise, it is important to remember that we in Q3 last year had already launched our first cost initiatives. We started to reduce costs already from December 2019 in parallel with defining our back-in-black strategy. We are therefore at full run rate with the first cost initiatives, so we are not experiencing the same year-on-year decline we saw in previous quarters. If we instead compare Q3 to Q2, our overall capacity costs are at the same level. Development costs decreased by 4 million. The decline was related to a combination of lower amortization and higher capitalizations. The incurred development costs increased by 16 million, mainly related to upcoming and future product launches. Distribution and marketing costs increased by 18 million in the quarter. The increase was related to the before-mentioned bonus provisions as well as higher warranty costs. Last year, we only had marginal effects from COVID-19, so marketing and travel costs have declined compared to last year. Finally, we are also benefiting from the cost reduction program. Our administration costs were at the same level as last year. However, excluding special items, administration costs decreased by 1 million. This was driven by lower salaries and our cost reduction program again partly offset by bonus provisions. Our cost reduction program is progressing well. We booked 42 million in Q3, bringing us to 105 million YTD. With the cost reductions achieved in Q3, our annual run rate is at 168 million and we are close to our target at 175 million. The savings realized in Q3 was related to a reorganization we made in December, where we simplified and consolidated market support functions and also improved obsolescence costs in the supply chain. Please turn to the next page. Free cash flow was positive by 8 million, which is 31 million lower than last year, which was as planned and related to the net working capital development. Our EBITDA was 20 million higher than last year. We have in all three quarters this year delivered a positive EBITDA. Our net working capital was in line with Q2 at 247 million. Compared to Q3 last year, net working capital declined by close to 120 million, reflecting all the work we have done in our managing of the net working capital. CapEx was at the same level as Q3 last year. The investment composition was however different and our CapEx is proportionally higher on intangible assets. The investment was related to a product roadmap and continued investment in our platforms. Intangible assets are on the other hand lower than last year, which, as we saw in Q2, is related to the lower retail investments due to the pandemic. The increase compared to Q1 and Q2 was related to investments in our factory 5 in Struer, including new machinery. Our available liquidity was stable in Q3 at 573 million. Please turn to the next page. Since the pandemic outbreak, managing our working capital has been a key priority for us. Our inventories decreased slightly in Q3 compared to the first half of the year. Compared to a year ago, we have reduced our inventories with 100 million. We maintain a strong focus on managing our production against demand, but inventories are further reduced due to supply constraint. Trade payables decreased by 45 million. The decline had to do with the timing of payments to our manufacturing partners. The production ramp up in Q2 was not to be paid until Q3 and the decline is therefore as expected. Finally, our trade receivables declined by 26 million, driven by phasing of revenue in the quarter and lower overdue. Sales with extended credit relates to in-store display units. In Q3, it accounted for 7% of revenue and was also driven by BioVision Contour, which was launched late in Q2. And with that, I would like to hand it back to Christian.