Bang & Olufsen a/s

Welcome to the Bang & Olufsen AS Interim Report Q2 2021-22. For the first part of this call, all participants will be in listen-only mode, so there's no need to mute your own individual lines, and afterwards there'll be a question and answer session. I'll now hand the floor to speakers Christian Thier, CEO. Please begin your meetings.

Hello, everyone, and thank you for joining the call. And today we'll present our Q2 results and give an update on how we are progressing with our strategy execution. With me today is also our CFO, Nicolai Vendelboe, and also our head of product management, Kristoffer Paulsen. Due to the increase in COVID cases in Denmark, we will do this as a webcast remotely. So once again, we are not sitting together as a team. So if we look at the agenda and move to the next slide, I will begin by going through the financial highlights for the quarter. After that, I will share how we are progressing with our strategy execution. Nikolaj will then take us through the financials in more detail, and I will conclude the presentation part of the webcast by briefly going through our financial outlook. Then we will, as usually, open up for a Q&A part where Kristoffer, Nikolaj and I will answer your questions. So let's move to the next slide. Overall, we are pleased with the results and the progress we have made in the second quarter. We delivered 809 million in revenue, equivalent to 15% growth, a positive EBIT margin before special items of 3.5% and 11 million in free cash flow. We grew product sales by 22%, driven mainly by stage and flexible living and all key distribution channels contributed to this growth. In the quarter, We delivered double-digit like-for-like sellout growth that exceeded our comparable sell-in for quarter two. Continuous improvements of our sellout insights are a key priority for us, and we continue to strengthen that in quarter two by adding data from more partners. We are pleased also to report that we have added 16% more customers to our app in the first half of the year. Both revenue and margin were adversely impacted by the current scarcity of components and the increasing cost of components and raw materials. Based on our improved insights into partner inventory and sell-out data, we also detected slow-moving end-of-life products with a few multi-brand partners in Germany and Switzerland. We decided to take these products back and instead sell them through other channels. This has a negative impact on our performance in quarter two. With high uncertainty and low visibility related to component and logistic challenges, for the remainder of the financial year, we maintain our outlook. So please turn to the next page. We continue to execute diligently on our strategy, and I want to highlight some key milestones from quarter two on the following pages. So we can move to the next page again, page number six. The growth in our core six markets in Europe was 8%. When adjusting for the product returns in Germany and Switzerland that I mentioned before, the stage and flexible living categories drove the growth despite being negatively impacted by component scarcity. Like for like, we delivered double digit sellout growth in the six core European markets. This is encouraging and underlines the impact of our strong strategy execution. We saw positive results from our strategic efforts to grow customer demand in London, and I will explain a bit more on that in a minute. We need a more consistent brand experience across all customer touchpoints to realize our long-term growth potential. Therefore, we completed a thorough assessment of our European Monobrand Network in the quarter. The assessment identified partners with further growth potential and we will now work closer with these partners and invest in our joint relationship. We also identified partners where we don't see a long-term growth potential, and we have, after thorough consideration and dialogue, decided to discontinue our partnerships with a few dealers. The two core Asian markets delivered 32% revenue growth. Our team in China is in full execution mode with our new growth plan where we have strong emphasis on new go-to-market tactics, especially the flexible living category is in high demand, and this category is now the biggest product category in Asia. In quarter two, we established a customer service center in Shanghai, and this has contributed to a vastly improved customer experience score. Finally, we have expanded programmatic use of social media platforms through programs in TikTok and WeChat to reach and engage with our Chinese target audiences. The right-hand side of this page exemplifies what such programs look like. Please turn to the next page. A while ago, we decided to implement a plan to increase customer demand and driving revenue in a smaller geographical area. We chose London because it has a high density of our target audience customers represented, and we had a comparatively weak existing retail footprint our plans consist of three main pillars increasing and enhancing physical footprint establishing blended retail with strategic partners and creating events and experiences we have made a lot of progress and i want to highlight some of the activities we executed in quarter two we have increased our physical footprint with a pop-up store in shoreditch established new wall base in key london train stations opening new store openings in London airports, engaged with a lifestyle partner, and finally upgraded John Lewis stores where we have branded presence. We have also engaged with new strategic partners like interior designer Timothy Walton. Lastly, we established a partnership and affiliate program with Small Bone Kitchens, which is a renowned luxury kitchen specialist. We participated in several events, targeted high net worth individuals with partners like Delmar Whiskey and Dolce & Gabbana, We also presented BO experiences with VLUX at London Design Festival and Amazon Live at Victoria House. We managed to outgrow the market through a dedicated effort, which is initial proof of reliability of the concept and approach. Our monobrand stores in London delivered a like-for-like sellout growth of more than 170%. We want to take our learnings from London now into other key cities. Please move to the next page. Beolink Multiroom is our proprietary multiroom solution that builds on a long tradition of distributing music across rooms in our customers' home. In the previous strategy, when we started to build our new platform, it was decided to prioritize compatibility with third-party ecosystems first. As a part of the new strategy house, we decided to reintroduce Beolink, and we assigned resources to develop and test Beolink Multiroom on our new platform. The release of BeoLink MultiRoom in November was therefore an important milestone in our strategy, and it sits at the heart of our ambition to build a portfolio of products fit for the future. With BeoLink enabled on our new platform, customers can connect products from the past with products from the present and the future. It facilitates sharing of audio sources in one unified system, synchronizing sound across multiple speakers and rooms with total control and a simple user experience. It also enables us to create unique experiences for B&O customers as we're in control of the experience. Bridging previous and new platform extends the lifetime of products, and the intuitive user interface and seamless experience makes it easy and attractive for our customers to extend the system with more speakers. Our products still work with Chromecast and AirPlay, so customers have full control of their preferred solution. But we have created a proprietary B&O solution and system for our customers. Please turn to the next page. With BeoLink Multiroom, we have a solution which already now connects today's speakers with B&O products that are more than 40 years old. Product longevity has always been at the heart of B&O. And in Q2, we announced that our B&O level speaker got the highly prestigious cradle-to-cradle certification. This certification underlines our commitment to design for increasing product life cycles and reducing the environmental impact of our product systems. BioSound Level was designed with a modular approach based on refinement of our design principles of the past. The speaker is easy to maintain, service and repair, with the purpose of expanding the lifetime substantially beyond industry standards, and it features the company's new replaceable streaming module that has been front-loaded with enough processing power and connectivity technology to receive new performance updates and features for many years to come. We're the first consumer electronics company to receive the Cradle-to-Cradle certification and among the first companies to receive certification under the new Cradle-to-Cradle Certified Version 4 standard, which is the most ambitious and actionable standard for making products more sustainable. I'm proud about our strategic achievements in this quarter, and there are several that we have not mentioned here today. And with that, I would like to turn over to you, Nicolai, who will take you through the financial development in quarter two.

Thank you, Christian. Please turn to page 11. Compared to Q2 last year, revenue increased by 15% in local currencies. The growth came from a 22% growth from our product sales, while brand partnering and other activities declined by 15%. Competence scarcity impacted growth negatively, both within product sales and brand partnering. The decline in brand licensing was mainly related to PC sales. Last year, the global lockdowns resulted in demand for laptops and PCs surging. That created a peak in demand, which was not repeated this year. On the contrary, this year was adversely impacted by competence scarcity. Additionally, component scarcity had a negative impact on car manufacturing. However, last year's factories were impacted by lockdowns, and the year-on-year impact was less severe. The 22% growth from product sales was driven in particular by stage and flexible living product categories. All regions grew, but especially Asia and America experienced strong growth rates, with America's doubling compared to Q2 last year. EMEA's growth rate was particularly impacted by supply constraint. Across all regions, we experienced improved channel performance. As said, the growth rate was driven by stage and flexible living despite both categories being impacted by component scarcity. In Q2, we saw component scarcity increasingly impacting the flexible living category, which meant that we had to prioritize products between regions. The growth in the stage category came from speaker sales, where we continue to see very good demand for our new BeoLab 28. In the flexible living category, demand continues to be high for A9, especially in Asia, and flexible living is now the biggest category in Asia. We have made significant progress in our sell-out and partner inventory insights across distribution channels and are happy to report double-digit like-for-like sell-out growth in all distribution channels, regions and product categories. In fact, the sell-out growth was higher than the sell-in growth in the quarter. Based on our improved sell-out and inventory insights, we identified some slow-moving end-of-life on-the-go products with a few multi-brand partners in Germany and Switzerland. We decided to take back these products and sell them to partners with a better sell-out performance. This had a negative impact on growth in the on-the-go category. In Asia, and especially in Americas, we delivered strong growth in the on-the-go category. Please turn to the next page. Our product gross margin improved by 1.7 percentage points compared to Q2 last year and was at the same level as Q1. If gross margin on product sales is adjusted for extraordinary high component and logistic cost, we have improved the gross margin with approximately 6 percentage points since last year. The improvement has been driven by a changed product mix towards our higher margin product categories, lower impact from allocation of product-related costs, price increases completed since Q2 last year, and a better margin structure. Component and logistics cost had a negative impact of 7 percentage points, which is 4.5 percentage points more than Q2 last year. The increase was driven by spot bias of components, whereas the relative impact from logistics cost declined compared to Q2 last year. We have completed several initiatives to mitigate logistic costs. In Q1 we moved part of the production of A9 from Europe to China, and in Q2 we moved part of the production of Beosound Stage from China to Europe. We have also increased our use of rail freight for bulkier stage and flexible living products between Europe and China. In the US we have established a new distribution center. This will enable us to use Seafright when we move products from Europe and Asia to the US. Furthermore, it will improve our last mile logistics in the US. In January, we completed another adjustment to our recommended retail prices. We are impacted by price inflation on component and raw materials, and this is of course a key factor for implementing these price adjustments. However, we continuously assess our recommended retail prices based on a number of factors, which also includes demand, competitive landscape, and so on. We have on average increased prices by 8%. It doesn't impact already placed orders, and it will therefore take some months before it's fully implemented in our financials. Please turn to the next page. We delivered our fifth consecutive quarter with positive EBIT margin, despite the substantial impact from component prices and scarcity. Group gross margin declined by 0.2 percentage point due to lower revenue from brand partnering and other activities, whereas product gross margin increased by 1.7 percentage point, as I just explained. The gross margin from staged and flexible living was negatively impacted by higher component costs, which partly was offset by previous price increases. The on-the-go category improved in the quarter due to better product mix and less obsolescence. Overall, the EBIT margin before specialized items was 3.5%, which was 0.6% lower than Q2 last year and in line with our expectations, given the lower contribution from brand partnering and other activities and increased spending on sales and marketing in combination with the impact on gross margin from higher supply chain costs. Please turn to the next page. We are investing more into the business, which explains the 17% growth in capacity costs compared to last year, and we maintained a stable capacity cost ratio. The cost increase was mainly related to distribution and marketing. Our development costs were up by 8% year-on-year, whereas the cost ratio declined by 0.6% at this point to 8.3%. The absolute increase was related to higher incurred development costs, which grew by 7% to 73 million. The cost related to investments in platform upgrades and our product roadmap. We have also hired more competencies, especially within software and platform development. Distribution and marketing costs grew by 21% year-on-year, and the cost ratio increased by 1 percentage point to 28.6%. We have spent more in marketing to create demand, and we have been hiring more sales and marketing resources to fuel sales further. Finally, warranty provision increases following the revenue growth. Our administrative costs grew by 10%, which was related to HR and ESG-related initiatives. Due to the revenue growth, the cost ratio declined to 4.2%. Please turn to the next page. Free cash flow was positive with 11 million in the quarter. The decline compared to last year is related to development in working capital. Last year we worked intensively with optimizing our working capital, which yielded a positive impact of 108 million in the quarter. This year working capital increased by 26 million. The increase in net working capital was driven by higher receivables and inventory. The growth in receivables followed the revenue growth, whereas the increase in inventory was related to timing of supply and spot buys of components. Trade payables increased by 90 million, reflecting the higher production and deliveries of products. Lastly, other liabilities increased by 42 million during the quarter, due to higher provisions for employee bonuses, right of return liabilities and derivatives. Compared to last year, the net working capital ratio to revenue declined by 3.3 percentage points to 7.4%. Capital expenditure was 54 million, which was up by 15 million. The increase was mainly related to tangible assets and retail investments. Our available liquidity declined by 74 million in Q2 to 534 million. This was mainly related to purchase of treasury shares to cover our LT program and settlement of the Danish vacation fund. Combined, these amounted to 71 million. And with that, I would like to hand the word back to Christian.

Thank you, Nikolai. So please 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 the details here. As we have communicated since the summer, growth in the second half of the year will be lower than what we have delivered in the first half, as we have tougher comparable numbers to beat in the second half of the year. Components and logistic costs continue to be the biggest uncertainties at the moment, and we expect that it will impact performance throughout this financial year. Please turn to the next page. In short, we have continued to execute on our strategy with strong results. Product sales grew by 22% across regions, product categories, and distribution channels. We delivered double-digit sellout growth across all distribution channels and product categories, and we delivered like-for-like sellout growth above sell-in. Revenue and marginals still impacted negatively by component and logistics challenges. The ability to foresee the implication of this in the coming quarters has become more difficult. We maintain our outlook for the full year. And with that, I would like to open up for questions for Nikolaj, Kristoffer and myself.

Thank you. If you wish to ask a question, please dial 01 on your telephone keypads now to enter the queue. Once your name has been announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel. Our first question comes from the line of Paul Jensen of Danske Bank. Please go ahead. Your line is open.

Yes. Hello, guys. I have a few questions. First of all, about the price increases you announced. As I heard you said, it had an average impact of 8%. When fully implemented, can you given an assessment of when that is and what the impact will be for the current financial year as the first part of it. The second is more structural. Shall it be seen that the company is making a move towards more focus on as a luxury brand and also seen earlier as a premium brand? And the final one is, what have your franchisees commented when you announced price increases in the stage segment of up to nearly 30%?

Thank you, Paul Ernst. I'll let Nicolai take the first question and then I'll try to answer the two second ones. So, Nicolai.

Yeah. So on the prices increases, the average price increase is 8%. But that is sort of the unweighted price increase across the products. So it's not a revenue weighted price increase. That would be a different number, of course, depending on how the products will be selling in the future. So 8% is sort of face value price increase across all products. So that probably answers the first question. The second question is, it takes up to six months before you have fully implemented the price increases. as we do in some markets have quite a big order backlog and we are honoring older orders at the older prices at this point in time. I would expect that the second half impact or the impact from January and onwards in this financial year will only be in the range of 1-2%.

Thank you, Nikolai. The second Two questions. We continue to see strong demand for our products and we did, as you know already, some price increases. We're of course monitoring what elasticity we have on pricing and now with the market dynamics, we see the opportunity to do increase prices on some of the products. We of course do that because we have higher costs to some extent, but we also expect demand to continue to be strong From a strategy point of view, we haven't really changed anything from what we have said before. We want to do better products with higher performance and, of course, have a higher price, but also have three different price points in terms of a good, better, best type of proposition. The partners that we have shared the price increases with already, it has been predominantly positively received by also I don't think anybody has seen any issues at this point in time. But again, we will, of course, follow this closely and see how demand develops.

And the response from the franchisees?

No, all positive. So no negative comments in general. I think that everybody knows what the demand is so far.

seeing strong demand on all the products um so so we think we we are doing the right thing here okay and then the more i don't know if you can answer more conceptual question if we move back 13 years at the financial crisis after that one you did very well with very strong growth because people had huge increases in savings and House prices went up. We've seen house prices coming up this time as well. And you have a lot of people making a lot of money on equities, at least until a few weeks ago. But in case that what are you seeing as driving the demand is that the BNO product proposition improving and being more attractive to people? Or is it also corona and savings and real estate moving up? I'm just wondering if you hike the prices and fear that if things levels a little off, then you could feel a huge pain.

Yeah, so thanks for the question, Paul. When we look at the target audiences, We haven't changed those, as you know, and we still have the same four target audiences. They have all over the globe a very strong purchasing power. And from that perspective, they keep on buying the products. So we don't see that that is going to slow down based on their purchasing power, based on their desirability to have unique offerings and differentiated offerings. So on a global scale, I think there is a lot of total addressable market for us that we can continue to address with these prices and potentially even higher prices as we move forward over the long term period. Then in certain cases, I'm absolutely sure that as well, because people have maybe more available money that they haven't been able to spend on other things that you spend it on the TV or on the speaker. But I think that's marginal in our case. I think that the target audiences have enough purchasing power to continue to buy our products over time, even if the stock market or house pricing will go down.

Okay, thank you. Final question from me this round. Brand partnering. In the autumn, you have made a large number of new partnerships. Can you give any assessment that when both Verizon and SK and so on are being implemented, what kind of revenue contribution you expect from all the new agreements combined on a full year basis?

So I think you start to see already in this quarter, of course, that we get traction from our initiatives. The doubling of the revenue in the Americas is certainly a sign of that, that we work closely with Verizon and the other partners. They have announced, as I'm sure you have seen as well, the partnership that we're doing in the soundbar category. The product has been well received. by the market. And I will not be able to give you any numbers for the future, but obviously the scale of the business that they have is, and we wouldn't be doing it otherwise if we didn't see the huge potential in their installed base. The same goes for our partnership with Sachem.com where they have announced more operators coming on board. And the same thing here, all of these partnerships are addressing large scale installed basis of, I mean, in the Verizon case, they have 115 million customers and in the Vodafone cases, of course, as well with multiple of tens of millions of customers where we will bring the brand licensing in the soundbar and set-top partnerships with Slash M-Com. So I think there is a good potential and a huge potential in those as well as we also have expanded partnership with hp there's opportunity in that one as well even though there were high comparable numbers from last year with pc sales peak during the pandemics we have as you know extended that partnership and we see other opportunities together with hp as we do see together with harmon as well in the automotive industry and more to come there as well The intent for us to do these partnerships is to engage with partners where we can see scale, of course, and see substantial uplift in numbers. Otherwise, we wouldn't be entering into those partnerships. SK has the same type of logic. It's also a huge opportunity. They do take time. Before they scale, they don't go kind of from one day to the next one in a digital type of fashion, nor did the HP partnership when we started that one. But they will have, I think, a really good potential for us.

But it's fair to assume that the contribution in the second quarter was very limited from the new partnerships?

Yes.

Okay, I'll step back and come back later.

Thank you. Our next question comes from the line of Niels Leff of Carnegie. Please go ahead, your line is open.

Thank you. My first question would be about the component situation. So are you seeing any improvement in the component supply flows? And continuing along those lines, How would you expect your freight costs to develop in the second half of this fiscal year?

Maybe I'll start and then I'll pass on to Nikolaj. We are doing activities to prepare ourselves to have more agility in terms of facing potential shortages of components. But it's also a moving target. We have been working with this, as you know, for a while and we are I think we have a good mechanism in place, we have good teams in place, the task force is in place, and we're trying to increase our agility to adapt to the different changes that could occur. So far, I think we have been managing it well, but there is still, I would say, quite a bit of uncertainty on what is going to happen for the remainder of this year. And it's a little bit, yeah, it's news day by day basically as well. But we have managed so far and I think we will be able to continue to do that going forward. I'll let Nikolaj take the other part on freight cost.

Yes. On the freight cost, the expectation is that for the remainder of this financial year, freight cost is staying at the elevated level that we are experiencing at this point in time and we had in Q2 here. What we saw in Q2 was that freight cost was increasing, but it was increasing relatively less than revenue. So sort of the relative impact from freight cost was actually declining a bit compared to previous quarters. So from that perspective, relatively, there's some kind of stabilization, you can say. And the main reasons for that is not because we are seeing lower rates. It's because we have taken a number of initiatives to mitigate freight costs. So we've been moving production between Europe and China for a number of our products, as I said in the presentation. We've been using rail freight to a large extent, specifically between Europe and China. So instead of flying, we've been using rail. And then we have opened a distribution center in the US here late in Q2, allowing us to use sea freight more when we are sending products into the US from Asia and Europe. So by these initiatives, we've been able to sort of maintain freight costs at a stable level, even though at a sort of still very much higher than normal level. And that's what we expect also in the rest of the year.

Great, thanks. Could you just talk about your sales and marketing spending? It went up quite a bit in quarter two. So is the number you're recording in quarter two the run rate that we should expect from here? And then a last question from my side. Could you talk about the effect of extra sales going through Amazon in this quarter and how we should... think about Amazon sales in the next few quarters. How much is Amazon of your sales? Thank you.

Maybe I start just generally speaking about e-tail and then pass on for the detailed question to Nikolaj, but we have had good growth in e-tail and Amazon is part of that group, of course, of companies and we have strengthened our competencies and capabilities in the local markets to work closer in partnership with the different detailers and making sure that our products are well represented and found easily and that there is a lot of activation campaigns going on and that has worked well and it's something that we still haven't seen the full potential from so expect that channel to continue to grow as our own e-comm, of course, as well. Not for the full assortment, but for parts of the assortment. Maybe Nikolai, you can take the first.

Yeah, so on the number side, Amazon is definitely a growing channel for us. E-tailing as a total channel, which is of course covering more than Amazon, is also JD, Tmall and other e-tailers has also been a growing share of our revenue. I think Amazon, I'm not going to give you a precise number, but Amazon is roughly four, five percentage points of revenue in the quarter. That would be in that area.

Great. And on your sales and marketing spending,

Yeah, so on sales and marketing spending, there's, of course, a quarterly distribution of sales and marketing, but it's also related to the activities. And you spend more sales and marketing in Q2 than you do in Q1 because you have a high season, especially on the marketing part. But it's also impacted, of course, on when we do launches and have other activities in the markets. So it's not easy to say that we have done in investing more in sales and marketing because it also depends on the timing of product launches in the future, years to come, and when they will hit. So what we have said earlier is that when you look at marketing cost, and I know we are not sort of breaking marketing diffusion cost into the different subcategories, but when we look at marketing specifically, the share of marketing cost that we have will at least be stable when revenue grows. So we will grow marketing cost as revenue grow. Of course, on the sales part, we will also keep investing in more resources in our regions, but to a lesser extent, of course, than revenues growing in the future, whereas in distribution, you will see more scale effects. So that combined will of course influence the total development in the line sales and distribution cost in a quarterly report like this. So it's hard to give you a precise answer depending on these different factors, but I can say for certain our investment level in essential marketing will not go down in the future. That's for sure.

Okay, thank you.

Thank you. And we have a follow-up from Paul Jensen of Danske Bank. Please go ahead, your line is open.

yes thank you uh i was just wondering about the components also if you could say a little about where in china you're sourcing from uh i was just thinking about now the omicron has also come to shenzhen area down there which is the big manufacturing for consumer electronics so where are you actually sourcing from in china

I'll try to start and then pass on to Nikolai. From the affected areas that we see right now that we have visibility for, we don't see that we are affected whether outbreaks of corona currently. Of course, then we have Taiwan and we have a lot of sub suppliers, but we are not aware of any of the current outbreaks affecting the near term future. I can't be more specific than that. I don't know if you have or Martin has more detailed information.

We are sourcing from all over China because in reality the sourcing chain in China is quite deep. So you have many subcontractors to subcontractors and they are placed in many different parts of China. So there's not one specific area that we are exposed to in our China sourcing.

Okay, and then another question about the multi-room building that you upgraded. You mentioned the word proprietary technology on the wireless. I was just wondering, there was a ruling between Google and Sonos last week on the Chromecast. Will that in any way impact your multi-room solution?

We have seen that, Paul, as well, and we're following that. I don't think so at this point in time.

Okay, and then on the personal, I think you have about 20% of people. The last year, it's quite obvious that you hire more people, but can you give an indication of where you're hiring? What functions are these people being added to?

Yeah, so maybe Nicolai will give more specific numbers, but we added to sales and marketing, like we already said. So we're strengthening that. Then we strengthen engineering and design. That has been the two white color areas where we have increased the workforce. Then quite substantial increase on blue colors as well, because the factory has been going 24 seven basically for quite some time and we have added more capacity. in there as well. But those are the three big buckets, sales and marketing, engineering and design, and blue color.

Okay, thank you. That's all from me for now.

Thank you. Once again, if there are any further questions, please dial 01 on your telephone keypads now. Okay, there seems to be no further questions coming through, so I'll hand back to our speakers for the closing comments.

Yeah, so thank you everybody for joining for today. If you have any additional questions or information you need, feel free to reach out to our IR department with Martin, and otherwise I wish you all a fantastic day. So thank you very much.