Bang & Olufsen a/s

Welcome to the Bang & Olufsen AAS Interim Report Q1 2021 for 2022. 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 Tehr. Please go ahead with your meeting.

Hello, everyone, and thank you for joining the call where we will present the results of our first quarter for the year. If we move to slide number three, I will begin by going through the financial highlights and progress on our strategy execution in Q1. Our CFO, Nicolai, will then take you through the financials in more detail. Finally, I will briefly go through the outlook before opening up for questions. As usual, our head of marketing, digital and customer experience, Christian Birk, is with us and will take part in the Q&A session later. If we move to slide four, please. For the first time since the financial year 2007 and 2008, we managed to deliver positive EBIT before special items and positive free cash flow following a growth in revenue of 44% compared to last year. We're pleased with the results delivering 666 million in revenue, a positive EBIT margin before special items of 1.4% and 21 million in free cash flow. The fact that we managed to do this for the first time in 14 years is a testament to the effects of our turnaround plan, which we continue to execute on in Q1. The performance was broad-based across regions, product categories, and distribution channels, and driven by continued demand with solid double-digit sell-out growth. However, component scarcity and logistical challenges continue to impact our business negatively, and we could have delivered better results had we not been impacted by longer delivery times and higher costs. Our component sourcing and supply task force, which we established last year, has been able to secure many of the components needed to meet demand, but we still have longer delivery times on certain products and components are still bought at much higher prices than normal. We maintain our outlook for the year. There is a high uncertainty and low visibility related to component and logistical challenges for the year. So if you move to the next page, please. We have continued to execute on the second phase of our turnaround. As we said last time, we have simplified our strategy house from last year. The strategy house is constructed in three levels. The first level is a robust foundation with a focus on people, processes and profitability. The second level is developing a model for scale. And the third layer is our continued focus on growth pillars. I will, on the next pages, highlight some of the results from Q1. So if we move to the next page, please. The first level of our house is aimed for securing a strong business backbone by improving profitability and making Bang & Olufsen the best place to work for our people. On profitability we benefit from the full run rate of the cost reduction program completed last year. We also see the effects of price increases which have now been fully implemented and thus positively affecting our performance. Finally, we have been assessing the logistic setup. To improve profitability, we are now producing BioPlay A9 in EMEA and APAC to have a better alignment between where we produce and where we sell. We will continue this work on more products in the coming quarters. We continue to lift the capabilities in Bang & Olufsen, and in Q1, we hired 85 new employees. More than 60% of the new hires are within product development, particularly for our software and engineering teams. Almost 20% are new hires in our market to support our commercial growth ambitions. Please move to the next page. The second level of our house ensures we have a proven and scalable growth formula. Here we strive for the three things combined, continuously launching great product, platform and software innovations, executing impactful sales and marketing, and continue developing the go-to-market model. with a strong focus on continued to strengthen our digital ecosystem, more specifically to improve our e-commerce platform while we're making proactive use of customer data for more targeted campaigns and better customer experience. Firstly, we continue building a product portfolio that is fit for the future. In Q1, we launched three product innovations as part of our full-year roadmap. We launched a 55-inch version of BioVision Contour, which completes our TV offering. We now have three TV offerings with BioVision Contour, Eclipse and Harmony, overlapping each other in size and our soundbar, which fits all TVs. We also launched our new earphones BeoPlay EQ with adaptive active noise cancellation. This was an important update to our earphone category and they have been well received in the market. We also released a software update to our new product platform enabling stereo pairing of BeoSound Balance, Level and Emerge. The fact that we can upgrade several products on our new platform with one software update proves the strengths on our new product platforms and we're building an ecosystem where customers will be enticed to buy more and more B&O products. Finally, we released a sports collection on Biosound A1 and Bioplay E8 Sport. The sports collection was part of our sports promotion during quarter one. We brought attention and awareness to the Bang & Olufsen brand as we partnered with Strava, which is a social network for athletes on a sports challenge. More than 100,000 people participated and ran almost five million kilometers combined. We saw an increase of newsletter sign-ups following this campaign. We also partnered with Liverpool Football Club and England footballer Trent Alexander-Arnold, who showcased the benefits of using Bang & Olufsen products for sports to his 5.7 million social media followers. Trent Alexander Arnold is part of our influencer strategy. In Q1, we announced a partnership with Chinese celebrity musician Lei Zhang, who is our first global brand ambassador. The activation of this initiative was planned with the launch of Beoplay EQ in China. Lei Zhang has an impressive reach and his promotion of Beoplay EQ received more than 500 million impressions. Locally in the markets, we also work with influencers and have more than 50 influencers showcasing our products. To succeed, we need to increase our customer base and we grew this by 7.5% during the quarter. Our ambition is to grow our customer base by a double-digit figure this year and Q1 was a strong start to achieving that goal. We continued to accelerate our digital ecosystem. We managed to grow our own e-commerce platform by 20%. Late in Q1, we also launched our own e-com platform in Japan. When we did our sports campaign, we experienced a doubling of page views and also recorded visitors staying longer on our site. Finally, we made feature updates to our B&O app. For instance, we have made it easier to troubleshoot through the app if customers have issues. So let's move to the next page, please. The third level of our house is where we concentrate our go-to-market resources. Our core markets are delivering the majority part of the absolute growth to our business. The successful execution of our strategy, driving demand, traffic and executing better in our channels has been key contributors to the performance seen in our first quarter. In our six European core markets, we grew by 37% in local currencies. The stage and flexible living categories drove most of the growth. The Monobrand channel is by far the biggest distribution channel in the core European markets, and this channel delivered the biggest absolute growth. But we're also seeing good traction on our other channels, and our ETH channel more than doubled compared to Q1 last year. In multi-brand we have started to roll out our new active display concept called BioCube. This provides a significant improvement to the customer experiences as the user interface allows customers to browse and discover B&O products. Customers are able to browse and try different products on top. It provides us with data about the usage and what customers prefer. this enables us to improve the customer experience even further in our two asian core markets revenue grew by 17 last year revenue was positively affected by orders delayed from q4 of the previous year adjusting for phasing of orders last year growth would have been just over 30 percent The flexible living category continues to experience strong demand and is driving a large part of the overall growth in the two Asian core markets. And as mentioned before, the launch of Beoplay EQ together with our global brand ambassador, Lei Zhang, boosted relevance and brand awareness with the Chinese audience. We could see that the launch of Beoplay EQ in Asia had more traction than when we launched Beoplay E8 third generation, and this is very encouraging. We expanded our strategy partnerships in Q1. We continued our partnership with HP with a three-year contract with an option for two additional years. We will be adding new resources to our brand partnership department to ensure strong collaboration with our partners. We also announced our partnership with Sashemcom. We have together with Sashemcom developed a built-in loudspeaker for the new home entertainment unit, the Video Soundbox. It integrates the latest technology with video, audio and voice services and its targeted telecom and TV cable operators. It has also so far been sold to Vodafone in Spain and Total Play in Mexico. Finally, we continue the collaboration with Saint Laurent, launching a limited edition Biosound H, thereby driving awareness to our brand. So if you please move to the next page. Our success as a seller of luxury audio technology products sets high demands to the products we have in the market. In that respect, I wanted to briefly highlight some of the reviews we have received on our new AirFone Beoplay EQ. These strong reviews are again a testament to our ability to develop products that are recognized for its sound design and craftsmanship. And with that, I would like to turn over to Nikolaj, who will take you through the financial developments in Q1. Thank you, Christian.

Now please turn to page 11. Compared to Q1 last year, revenue increased by 44% in local currencies. The growth came from a 48% growth from our product sales and a 9% growth from brand partnering and other activities. Company scarcity impacted growth negatively, both within product sales and brand partnering. The 48% growth from product sales was driven by all channels, regions and product categories and led by improved channel performance. Our product category has delivered strong double digital growth with flexible living peaking at 87% growth compared to Q1 last year. Beoplay A9 continues to see high demand but also new products like Beosound Level are in high demand. The growth from the stage category was mainly driven by the speaker portfolio. The revenue from TVs was at the same level as Q1 last year, which was due to the negative impact from our transition from selling TVs including screens to selling the sound center only and having partners sourcing screens directly from LG. Adjusting for this, TV sales experienced a solid double-digit growth in Q1. In Q1, the Stage category is the category that has impacted the most by supply constraints. Portable speakers, headphones and earphones all contributed to the 48% growth in the Undergo category. Headphones more than doubled in sales driven by Beoplay H95 and Portal, which were both launched after Q1 last year. It was also a broad-based growth across the regions, with Americas nearly doubling, growing 97% in local currencies. The growth in Americas was especially driven by the partnerships with Verizon and Best Buy. Please turn to the next page. I would like to briefly talk about the development in our product gross margin. Last year, we started to talk about the negative effects on both growth and earnings. Despite the added cost for logistics and components, we have succeeded in improving the product gross margin over the past two years, as shown on this page. The main levers that have driven this development are less end-of-life sales over the period, less discounting and improved product mix with a greater share of staged and flexible living products. More recently, price increases and a better fixed cost-to-revenue ratio has contributed as well. This development has been an important contributor to improved financial performance and adjusting for the cost impact of the current global supply chain challenges, product growth margin would have been approximately 5% higher in the past two quarters. Please turn to the next page. We delivered our fourth consecutive quarter with positive EBIT margin, despite Q1 being seasonally the smallest quarter. The increase was driven by revenue growth in combination with the improved gross margin and less capacity cost relative to revenue. The gross margin improved by 2% driven by a 4.4% improved product gross margin, partly offset by brand partnering accounting for less gross profit relative to revenue. As Christian said earlier, we haven't delivered positive EBIT margin before special items in the first quarter since financial year 2007-08. Please turn to the next page. We are investing more into the business, which contributed to the 22% growth in capacity cost compared to last year. However, we are benefiting from the operational leverage of our business and our capacity cost to revenue ratio declined by almost 8 percentage points to 43.8%. Looking across the different cost categories, you can see that our development costs are up by 15% year-on-year related to investments in platform upgrades and our product roadmap. The incurred development costs thus grew by 11% to 72 million. Distribution and marketing costs grew by 29% year-on-year. This increase was related to investments in more resources, higher warranty provisions due to the revenue growth, and lastly, the costs are impacted by the full-year effect of monobrand stores that we took over during last year. Despite investing more, the cost-to-revenue ratio improved by 3.2% this point. Our administrative cost increased by 7%, whereas the cost to revenue ratio declined by 1.6% at this point. Now please turn to the next page. Q1 was also the fourth consecutive quarter with positive free cash flow. Free cash flow was positive 21 million, which was 83 million better than Q1 last year. The free cash flow was driven by the development in EBITDA, which reached 59 million of 54 million better than last year. Net working capital was overall stable, increasing 4 million in Q1. We did however see larger movements in the different working capital posts. Trade payables grew by 131 million due to higher production and we managed to increase our inventory by 84 million. This was due to timing of supply and was related to both finished goods, materials and components which we are sourcing directly in the market. Our receivables grew by 33 million, mirroring the revenue growth. Lastly, other liabilities declined by 82 million, which among others was due to payment of employee bonuses related to last year's financial performance. The net working capital ratio to revenue declined to 6.7%. Capital expenditure was 26 million, which was in line with Q1 last year and mainly related to intangible assets. Our available liquidity was at the end of August $608 million, which was a further improvement compared to May 31st. And with that, I would like to hand the word back to Christian.

Thank you, Nikolaj. So let's turn to the next page. As I said in the beginning, we maintain our outlook for the year with the same overall assumptions as we have previously communicated. So I won't go through all of the details again here. Components and logistics are the biggest uncertainties at the moment, and we expect that that will impact performance throughout this financial year. Please turn to the next page. In short, we have continued to execute on our turnaround strategy with strong results, maintaining the momentum from last year. This made it possible to deliver positive results from our operations and free cash flow for the first time in the first quarter since 2007 and 8. Our performance was broad based with revenue growing 44% across regions, channels and product categories. Component shortage had a negative effect on sales and margin, and it will for the coming quarters be the biggest uncertainty in our outlook. We have therefore maintained our outlook for the full year. And with that, we will open up for questions.

Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Once again, if you have a question for the speakers, please press 01 on your telephone keypad now.

There will be a brief pause or questions are being registered.

Our first question comes from the line of Benjamin Silverson of ABG Sindel Collier. Please go ahead. Your line is now open.

Thank you very much. Hi, Christian and Nicolai. I hope you're well, and congratulations on the strong quarter. My first question is in terms of the outlook, and then I have a follow-up question in terms of the digital ecosystem. For the first question, in terms of the outlook, how strong insight do you currently have on the demand outlook? Also, in terms of margin development, we have seen a very, very positive development on the gold margins. which is driven by less end-of-life products. So if you can sort of give an indication of how well the outlook is for demand, I think they'll be greatly appreciated to get a sense of whether or not we should expect more end-of-life for the next year. In terms of the digital ecosystem, we have seen e-commerce growing by 20% and you are now launching your own platform in Japan as well. However, 20% growth on the e-commerce in a market where I think e-commerce is growing very rapidly versus a group revenue growth of 44%. It doesn't really seem that strong. I was wondering if you could elaborate a bit about what your intentions are for the online segment and whether or not you are satisfied with the 20% growth. Thank you.

Thank you, Benjamin. Good question. So I will let Nikolaj take the first one and then Christian Birkhe will take the second one.

In terms of demand visibility and end-of-life products, we have strong demand signals in all our markets. That's why we're maintaining our outlook for the year. As I said before, in past years, we experienced more end of life products than what you would normally have and should have as a company in our sector. And we've been working diligently in controlling our lifecycle management and thereby also ensuring that end of life is of a smaller magnitude than what we've seen in the past. And this is the work we're continuing. You will always have some end of life in our industry. We will also see that this year and in the future. But it's continued to be our expectation that the magnitude of end of life will be less than what we've seen in previous years.

Well, maybe then over to Christian Birk.

Thanks for the question, Benjamin. First, on e-com growth, you have a good observation. Generally speaking, we had to make some decisions in the quarter. We had customers ready to buy, especially in our Monobrand channel, where we didn't want to disappoint them end of the day, and we moved products to satisfy those customers. which caused in a supply-constrained world, of course, a compromise. So we know that we could have driven significantly higher growth on our own e-com platform, but end of the day, we're here to serve customers and we wanted to make sure the products got to them at the end of the day. The second thing we look at, maybe on your point of demand signals, is we look at, of course, overall traffic to our stores and to our online touchpoints, but we also view overall online transactions across our regions. That entails how much online is sold through e-tail platforms, how much is sold through multi-brand online versions. And when we look at that combined, so how many online transactions or e-com transactions are made more broadly, we see very strong performance across all regions.

Thank you very much, Nikolai. Our next question comes from the line of Paul Yersin of Ansgar Bank.

Please go ahead. Your line is now open.

Yes, thank you. And congratulations to all of you. I have a few questions. First on the sourcing and the component side. Can you give a little more flavor on the visibility you have, for instance, if we look into the important current quarter? Are there any constraints to the level, for instance, versus the budgets or the ambitions you have for the quarter? And how do you look into the second half? And actually, how is it impacting your products? You also say that you have shifted production from Asia to EMEA on some products. Can you tell it out? What have you moved from Asia to EMEA?

Thank you, Paul Ernst. Maybe I start and then I'll pass on to Nicolai as well. As you know, we have been working diligently with sourcing and with different activities to ensure that we do have supply and that we can find components. We are making long-term agreements on long lead time components with our partners. We're working alongside our partners as well with the special task force buying components on the spot market. We're also redesigning for a second source of components when we find one and we're also redesigning PCBs if need be to fit in components that are more available on the market. For quarter two, I think we have a good visibility of what it looks like, but the second half of the year is more uncertain. But quarter two, I think we know where we are. And then on the A9, which is the product that we have also started to produce in EMEA, it's high demand for that product and it doesn't make much sense to ship it across back and forth in the world. So logistical costs have been going up, freight costs are going up. And therefore, it makes more sense to have an additional local production in EMEA. And we will probably also, for other products that are in high demand, also plan for producing them in EMEA as well. So that would be my answer. Nikolaj, maybe you want to add something, and if not, then pass back to Paul Ernst.

Quick add is also that we are prioritizing with our Mozart module the products where we have the highest revenue and the highest profit in order to make sure that we make the best use of the components that we can source in our P&L.

And on the backlog side, how is that compared to end of Q4? Is it up or down?

it's uh it's it's it's a little bit lower but i think the sentiment is the market is the same but it's a little bit lower than when we went into out of q4 and that's mainly in the state segment that's contributing there correct okay then a question on the royalties you may

made an extension with hp in june hp closed the transaction with hyper x which is also audio do you have any idea on if we look in the long term if if there are any risk on your hp deal or are you getting any indications if they are trying to put hybrids into the notebooks and so on That's one part. And can you comment on the Hyundai Genesis partnership recently announced?

So. Let me start with HP then. We have a really good collaboration with HP and obviously that's also why we have renewed the agreement with them. We don't foresee that HyperX or anything else will kind of deteriorate that partnership in any way and we actually see more opportunities with them that we haven't explored during the past five years that are now opening up. for the future so so we are pleased and happy with that partnership on the car side hyundai has announced it in korea and we're of course pleased to be part of another partnership with them as well and we will continue to work with different car manufacturers to expand our footprint also here

The final question is, one is on APEC where you have 41% growth and then in the two core markets you have 17% growth for the quarter. Then there must be something else that is doing very, very strongly in Asia. Can you comment on that?

First of all, as we also write in our Q1 report, the 7% growth in the true core market is impacted by Q1 last year, where we had higher than normal revenue as a spillover between quarters in the past year. So the underlying growth in the core market is actually closer to 30%. But we are seeing a strong demand in all over, APEC also outside China, South Korea, what we call Southeast Asia, the Singapore area, Australia is also seeing high demand. So it's basically high growth in the rest of Asia.

And when you mentioned Australia, is that a consequence of normalization of your situation out there? If we go back a few years, then there were huge difficulties or turmoil with partner changes in Australia. So is it demand coming back or is it normalization of your go-to market out there?

Yeah, I think it's probably a combination, but definitely we are getting our operations with the new partner to work in Australia now. We are investing more in Australia opening stores. We are also impacted by Australia having had a lot of lockdowns due to COVID, more than we've seen in Europe. But we still see good potential

in australia also in the future by by opening even more stores together with our partner thank you final question that's more a little back on the envelope map here if i look at north america you have got into 2000 new point of sales at best buy and verizon you have year over year increased your revenue by 27 million So if I take 27 million divided by 2000 point of sales and it's a revenue of about 13,000 per point of sales over three months. So I would assume that equals that you are selling on average three headsets. That's a little five headsets. That's a little more than one headset per month per point of sales. Are there any ramp up in this or how should we read? the numbers because I would actually think that you should get more out of 2000 additional point of sales.

Yeah, so it's not, I mean, you can't really do the math like that because the business model that we have with, for instance, Best Buy is not that we expect consumers to buy all the products in the physical retail. Physical retail is becoming more and more a window where you showcase things and we see actually the majority of the sell-out from Best Buy and Verizon being online sales. So this is the model that they're working on and which we are part of is to ensure that you can see the product Try the product physically, but you will do most of the transactions online. So we see this partnership in its full potential between physical and online. That's the trick and that's the way you should view it.

Okay, thank you.

Our next question comes from the line of Miels Lett of Carnegie. Please go ahead. Your line is now open.

Thank you and good morning. My first question is on your customer base, which you said grew by 7.5% in the quarter. Can you talk about how you actually measure your customer base and how big would your customer base be at this point? My second question would be on the effect of the price increases that you implemented in, I think it was in April or so earlier this year. How much was the effect of price increases on revenue and on your cross market? And are you foreseeing additional price increases in this calendar year? Thank you.

So maybe I can start. Thanks for the question, Nils. So on the customer base, how we measure, as also outlined in our annual report, we measure this on customers that have active app accounts. So you come through our app and you have a minimum of one product. That's what we consider a customer in the base, and we measure the growth and the development of such. Then you could argue that other players in the industry would force app account creation in order for a product to work. We don't do that, so we also know the actual customer base is significantly larger than what we measure because, for instance, on on-the-go products, we don't have the same take-up rate on app accounts as we do for other categories. So we see strong intake of new customers and we are very, very pleased with that. In terms of actual numbers, we don't disclose those numbers.

Great.

And on the price effect on revenue and gross margins?

So the price impact on the margin here in the quarter is one and a half percentage point. And it's of course not distributed evenly on all products, but that's the overall impact on the full portfolio. And that's based on the price increases we did here in April and we also did some over the summer. We do not have any concrete plans to do further price increases here in the short term, but naturally we are monitoring this and constantly evaluating what's the right thing to do, given, of course, increased prices on components, logistics, but also other raw materials going up in price at the moment.

Great. And could I just add one more question? So you mentioned that the staged category was negatively affected this quarter by the growth that you experienced in quarter one last year from selling TV panels. What kind of effect did it have on revenue and gross margin in this quarter compared with last year?

So the revenue impact on states will have been around 20 million Danish. And the gross margin impact would have been sort of a margin on the 20 million Danish.

Okay, that's great. Thank you very much. Thank you.

Ladies and gentlemen, once again, I remind you, if you do wish to ask a question, please press 01 on your telephone keypad now. Our next question comes from the line of Benjamin Silverstone of ABG Sandal Collier. Please go ahead. Your line is now open.

Thank you. And thank you for taking the call. I just have a quick follow-up question. um it is in terms of growth across the segments so we have seen especially the flexible living and stage in for example asia and amea performing very strongly and i was wondering if you could give just a little bit of nuance as to what you have been doing to really activate activate these segments other than the obvious launches of new products um sort of an add-on to that question as well we are seeing you guys collaborating with a a large variety of sports idols and influencers, for example, Lei Sheng. However, these tend to focus mostly on the go segment. So I was wondering if you could sort of give us the reasoning behind that as well in terms of we are seeing this huge increase in flexible living and stage, but we are seeing at least online marketing being focused mostly towards the undergo segment. Thank you.

So I'll probably let Christian start with the marketing activities and then Nikolaj can add in if need be on numbers.

Thanks for the question, Benjamin. Our work with brand ambassadors and influencers is a long-term strategy, not a short one, nor necessarily campaign related. We just came out of a summer where sport was the attention for many markets and also for our customers. With that, we promoted through our influencers and marketing in general, our sport-related categories and products, which mainly is focused around on the go, as you say, but also TVs was part of the campaign, and we also used influencers to promote our TVs, given sports is consumed on our TVs. So it's not a connection between how we use influencers to any specific categories. We'll use that to promote the Bang & Olufsen message and the Bang & Olufsen proposition, which goes across all three categories.

Yeah, I think just on the number side, on APAC, we're actually seeing equal high growth in both on the go and the stage category. In that region, flexible living is growing a bit higher. So I think what we are seeing now is that we have traditionally been very strong and on the go in APAC, but they are also spending more money on home entertainment systems and home speakers and we are benefiting from that in our monoband network as well in that region thank you very much thank you we currently have no further questions i will hand back the speakers for any remarks

thank you everybody for joining today and for your questions if you have any additional questions don't hesitate to reach out to martin and our ir department and otherwise i wish you all a fantastic day thank you