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.