Bang & Olufsen a/s

Hello everyone and thank you for joining the call. Today we will present our Q3 results and give you an update on how we are progressing with our strategy and as usually with me today I have our CFO Nikolaj Wendelbo. we move to the next slide i will begin by going through the financial highlights of the quarter q3 and then i will share how we are progressing with our strategy nicolai will 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 as usually as well we'll open up for the q a part where you can ask questions if we move to the next slide We deliver 10% growth in local currencies. This was the seventh quarter with double digit growth, and we achieved this despite the ongoing supply chain challenges. This is showing the resilience of our people and partners and that we have managed the situation so far. Our growth was driven by both product sales and our brand partnering activities. Product sales grew by 10%, mainly driven by our stage category. The stage category products are almost exclusively sold through our monobrand network, and this performance underlies the importance of our monobrand network as a sales channel where you can experience the brand. Sellout was positive, driven especially by the EMEA and the Americas. We are pleased to see that our efforts to strengthen consumer demand is resulting in improved sellout to our customers. We also grew our customer base and saw an increase in repeat purchases. The number of customers owning two or more products was growing significantly year-to-date. We also grew our brand partnering activities primarily due to the latest partnerships. Revenue from the new partners helped to mitigate the decline in the automotive industry, which continued to be impacted by the global component scarcity. The global supply chain challenges adversely impacted our growth and increased our product-related costs. In Q3 alone, we had extra costs for components and logistics of more than 65 million. This is equivalent to a product gross margin impact of 9 percentage points. If we look at the first nine months of the financial year, it amounted to more than 150 million in additional costs for components and logistics. We maintain our outlook, but we expect the headwind from the supply and logistics challenges to continue. We therefore expect the EBIT margin before special items and free cash flow to be in the low end of the range. Since the end of February, uncertainty has increased, inflation is rising, there is war in Europe following Russia's invasion of Ukraine, and COVID-19 is spreading in China, resulting in lockdowns. This can impact our supply situation and consumer demand, and we continue to monitor this development closely. If we move to the next slide. When Russia invaded Ukraine, we immediately stopped all sales and shipments to Russia and Belarus. Therefore, we did not need to take further actions to be compliant with the sanctions that followed. We don't have any direct affiliation with Russian partners as we are not sourcing from partners in that market. A few of our production partners had minor sub-suppliers in Russia and they immediately changed to new non-Russian sub-suppliers. The sanctions against Russia can result in higher prices for some components and raw materials like aluminum and iron, but it's too early to conclude on the long-term effects. Logistics is impacted. It's not longer possible for us to use the rail freight between Europe and China as it runs through Russia and Ukraine. We have therefore moved product freight to sea and to air freight. This is not optimal from a cost or sustainability perspective, and we will continue to look for alternatives. We use gas for process heating at our aluminum factory in Struer. Following the invasion, we have decided to change this to an electric heat pump. We estimate the short-term repayment time and positive impact on our greenhouse gas emissions. The COVID-19 lockdowns in China are also adding uncertainty. If we see prolonged lockdowns, it can impact both supply chain and consumer demand. We continue to monitor the situation and making plans for how to mitigate these challenges. So please move to the next slide. We continue to progress with our strategy execution, building robustness and invest into our future. I want to highlight some key milestones for Q3 on the following pages. So if you move to the next slide. Since last summer, we have been implementing strategic changes in our markets, initially in the European and also increasingly in the Asian markets. For the core markets in both regions, we continue to see sell-out growth. In the six European core markets, sell-outs grew by 10% compared to last year, with a very strong performance from multi-brand and e-tail, which grew by 28% and 76% respectively. The reported revenue declined by 10%, mainly due to high comparables in multi-brand and supply constraints in flexible living. Last year, we onboarded new distribution partners and that resulted in a high growth in Q3 of last year. If you look at the monobrand channel in our core markets in Europe, we deliver 10% growth. e-tail was also a contributor to the growth, while our own e-com suffered from price inconsistency following our price increase in January. In Q2, we shared initial data from the Wynn London pilot. We continue to be very encouraged by the progress we see. Sellout growth from our company-owned stores grew by 80% compared to last year. We have also expanded the physical footprint with openings at Heathrow Airport and we opened a pop-up store in Shoreditch leading up to Christmas. Our plan is to roll this concept out to more locations and more cities. In the two core markets in Asia, we grew 28% in reported revenue, which was driven by most channels. Sellout was up 1% compared to last year. Sellout performance was impacted by lockdowns and by the transition to new distribution partners and timing of the Chinese New Year, which this year started earlier. Because of the New Year celebration in a period with low trading activity, we had more days with low activity in Q3 than last year. During Q2 and Q3, we transitioned to new distribution partners in China. We did that to ensure a stronger brand experience, to support sell-out and to enhance our brand protection. The new partner contracts include penalty schemes like we introduced in Europe last year for unauthorized sales. All but one of our previous distribution partners have been terminated and new partners onboarded. The transition to new partners has a temporarily negative impact on sell-out performance. If we move to the next slide. We are pleased to see that our customer base continues to grow. In the first nine months, our registered customer base grew by 25%. Just as encouraging is the increase of repeat purchases. The number of customers who own two or more products grew by 32% in the first three quarters. Throughout the year, we have had to adjust our marketing activities to fit our product availability due to the shortages of components. In Q3, we ran a global headphone campaign across our channel supported by brand ambassadors and influencers. We registered an improved sell-out performance on headphones following this campaign. This campaign also resulted in significant uptake in both reach generated and the follower base across social media platforms. We also ran a churn campaign retargeting customers who we have had not engaged with for some time, and the early results have also been positive. Finally, we have made further improvements to our e-commerce platform. A pain point for us has been the checkout functionality. Now we have added Apple Pay and Google Pay in the European markets, where we have since seen customer satisfaction improve with our website. So please move to the next page. In Q3, we also launched a new edition of our gaming headphone, BioPlay Portal for PC and PlayStation. The first edition was made for Xbox, and we have since worked to expand its features. The headphone comes with faster and improved connectivity, and compared to the first version, battery life has also been improved significantly. The initial reviews are positive, and with yet another strong gaming and PC headphone, we further strengthen our position in the fast-growing gaming market. Biosystem 7222 is part of our classic program. We created 30 limited edition Beogram 4000 turntables with matching Beolab 18 speakers and also a Beoremote Halon, and it all came in a solid wood gift box that turns into a cabinet. We have seen a strong interest in our classic program and it shows our unique capabilities and the longevity of our products. Biosystem 7222 was made exclusively for the North American market and all the 30 systems were sold out within the first day. If you please move to the next page. With our bespoke and customized product offerings, we can provide our customers with unique propositions. In Q3, we continued our work to expand and scale this proposition in the markets, including a bespoke pilot in selected markets. With significant marketing activation, we saw a consistent inflow of requests for these services in Q3. The majority of the requests were customizations, which is a mix and match of existing colors, materials or finishes, while around 5% was for bespoke solutions with our fully tailored products. This will be continued, a key differentiator for us, and we will look to expand our offerings in the future. If we move to the next page. We have added new brand licensing partners and brands. In December, Verizon launched the two soundbars to their customers in the US. Both soundbars have been audio tuned by us. Verizon has, like everybody else, also been impacted by component scarcity. Secondly, Harman onboarded the luxury car brand Genesis. Genesis is sold in Korea, the US, and Europe. In addition to the great B&O sound, we also supply the aluminum speaker covers, which we make at our factory in Struver. Finally, Sars-Emecom has onboarded Telecom Italy to their video soundbox unit that we have also audio tuned. This is the third partner onboarded this year, and it demonstrates the scalability of this partnership. And with that, I would like to turn over to you, Nicoline.

Thank you, Christian. Please turn to page 13. Our revenue grew by 10% in local currencies. Our reported growth was 11% as we had some tailwind from currency development. The growth was driven both by our product sales and brand partnering and other activities, which in local currencies grew by 10% and 9% respectively. Component scarcity remains a detractor on our growth as it impacted product availability as well as license income related to the automotive industry. As Christian said earlier, we have expanded our brand licensing base during this year and it has started to yield miserable results. In Q3, new licensing income mitigated the decline from the automotive industry. The 10% growth in product sales was driven by the status category. Growth from the flexible living category was negatively impacted by component scarcity. Growth from the on the go category was adversely impacted by high comparables in the EMEA region. The growth in EMEA was impacted by the changes we have made to our distribution partner setup last year. Last year, EMEA experienced an increase in revenue for multi-brand, driven partly by the transition to new distribution partners. We therefore had high comparables, which led to a small decline in Q3 revenue in EMEA. However, if we instead focus on sell-out performance, we experienced a solid growth compared to last year of 10%. The opposite has impacted our Asia region. Here we have been transitioning to new partners for the last couple of quarters, and we have changed all but one multi-brand and e-tail distribution partner in China, as Christian also mentioned. We have seen a steady performance on revenue growth, but our sell-out performance has been impacted by the transition and by local COVID-19 lockdowns. America's continued its strong growth trajectory delivering 32% year-on-year growth. We also saw solid sell-out performance with like-for-like sell-out growing by 18%. Please turn to the next page. Year on year, our reported product gross margin declined by 0.6 percentage points. Higher component cost is the reason for the decline, but there are several things that have offset part of the higher component cost. We have continued to see that the higher margin product categories have been accounting for a bigger part of sales. We have had less discounting compared to last year, and price increases completed since last year have also had a positive impact. We also benefited from the currency development in Q3. We have seen more products being impacted by component scarcity, especially flexible living products, which are built on earlier product platforms. The higher cost related to spot buyers of components amounted to 65 million in the quarter, which was equivalent to 9 percentage points on the product gross margin or 6.5 percentage points higher than Q3 last year. The mitigating actions we have made on logistics had a positive margin effect year on year by moving products to rail freight and relocating production between Europe and Asia. With the war in Ukraine, we can no longer use rail freight between Europe and Asia, so unfortunately we will see logistics costs increase in Q4 as some products will have to be transported by air again. Please turn to the next page. Group gross margin declined by 0.9 percentage points. On the previous page, I explained the impact on product gross margin. We also had a lower margin from brand partnering and other activities, which was driven by high activity from our aluminum factory related to production of speaker covers for the luxury car brand Genesis, which now features Bang & Olufsen speaker systems. Higher component cost had a negative effect on all three product categories. The staged and flexible living category was positively impacted by price increases that we have completed since Q3 of last year. For the staged category specifically, last year was impacted by a pass-through of screens when we launched BioVision Contour 48", and that had a negative impact on gross margin on the staged category of 2.5% at this point. The margin decline was therefore bigger than what we see here, again driven by higher component costs. The margin from the undergo category improved compared to last year. That was driven by changes in product mix within the category, as well as less discounting. Despite significant headwinds from components and logistic costs, which amounted to more than 65 million, we delivered a positive EBIT margin before special items of 0.7%. The margin development also reflects the investments we are making to build robustness into our business, which are seen in higher capacity costs. The EBIT margin is further impacted by a true-up on warranty cost in Q3, which we consider to be a one-off cost in the quarter. Excluding the one-off expense, the EBIT margin before special items would be around 2%. Please turn to the next page. Total capacity cost increased 19%. This was driven by our strategy and investments in building robustness into our business. The cost increase was mainly related to product development and sales and marketing, which are our core focus areas. On the other hand, administrative costs declined both absolutely and relatively compared with Q3 last year, as we remain focused on maintaining the improvements we achieved in last year's cost reduction program. Development costs grew by 25%, mainly due to higher depreciations and relatively lower capitalizations compared to Q3 of last year. In absolute terms, capitalizations were at the same level. The incurred development costs grew by 8%. This growth was linked directly to strategy execution. We have over the last year hired more employees to strengthen our engineering and software capabilities, and also we continue to invest in both our product roadmap and our product platforms. Distribution and marketing cost increased by 24%. The increase was related to investments in our local teams, marketing activities, and to warranty cost. The increase in warranty cost was linked to our sales growth, but in Q3, it was also impacted by the one-off cost I mentioned before. We have strengthened our local teams in our core markets in Europe and Asia as well as in the US. We can see a very clear correlation between getting the right skills onboarded and ensuring strong performance in the markets. Marketing expenses are focused on demand creation and in building the B&O brand as Christian also mentioned. Our investments in marketing activities therefore increase both in absolute terms as well as relative to revenue. It has historically been at a too low level. Please turn to the next page. Net working capital declined by 30 million in Q3. The decline was driven by lower receivables and an increase in other liabilities. The reduction in receivables is normal following the high season in Q2, and the increase in other liabilities was mainly related to employee bonuses. On the other hand, our inventory grew, mainly due to purchases of components and raw materials. Our CAPEX increased in the quarter, which again was a direct reflection of our strategic investment focus. The investment in intangible assets was related to our product and software platforms as well as IT systems to improve our core processes. The increase in tangible investments were mainly related to a retail development and expansion of the production capacity at our aluminum processing factory in Struer. Again, two important levers in our strategy. We came out of Q3 with a negative free cash flow of 14 million, significantly impacted by the increase in component costs. The negative free cash flow was of course also due to our deliberate prioritization of investing into our strategy to build the robustness we need to continue growing B&O. Our cash position remains solid at 511 million at the end of Q3. And with that I would like to hand the word back to Christian.

Thank you, Nikolaj. Please turn to the next page. We maintain our outlook for the year, but expect our EBIT margin before special items and free cash flow to be in the low end of the range. This is due to the significantly higher component and logistic costs in Q3, which we expect will continue for a while. On top of that, we see increased uncertainty related to a number of events. Inflation is rising, there is a war in Europe following Russia's invasion of Ukraine, and COVID-19 is spreading in China, resulting in more and longer lockdowns. We do see a risk of that impacting both our supply situation and global consumer demand. Please turn to the next page. So to recap, we delivered double the growth for the seventh consecutive quarter, and we delivered a positive EBIT margin despite headwind from component scarcity. Sellout was positive in all regions in Q3, underlining the good customer demand. Our customer base continued to grow. Repeat purchases grew as well, with customers owning more than two products increasing. Component costs have continued to increase, which has materially impacted our margin. Unfortunately, we expect this to continue for a while. Finally, we maintain our outlook. As mentioned, the uncertainty has increased due to higher inflation, COVID-19 and the war in Ukraine. And with that, we would like to open for questions for Nikolaj and myself.