Bang & Olufsen a/s

Hello and welcome to the Bang & Olufsen AS annual report 2021 to 2022. For the first part of this call, all participants will be in a listen-only mode and afterwards there will be a question and answer session. I'll now hand the floor over to our speaker, Christian Thier, CEO. Please go ahead.

Thank you. Hello, everyone, and thank you for joining the call. And with me today, I have our CFO, Nikolaj Vendelbo. I will begin by going through the financial highlights for the year. After that, I will recap on what we have achieved the past year with our strategy. Nikolaj will take us through the financials in more detail with a focus on quarter four performance. And I will conclude the presentation part of the webcast by presenting our financial outlook for the next financial year. After that, as always, we will open up for questions. We delivered 12% growth or 10% growth in local currencies. This was the second consecutive year with double digit growth. We grew both our product sales and brand partnering activities by 10%. The growth from product sales was achieved across regions and product categories. Sellout displayed a similar development with a 13 like-for-like growth, and again we saw higher sellout across all regions and product categories as well as most channels. This was also reflected in the growth in our registered customer base, which grew by 31%. We also saw an increase in repeat purchase rate with a 37% growth in customers owning two or more Bang & Olufsen products. We managed to improve our EBIT margin before special items while absorbing 220 million in additional supply chain costs. This would not have been possible to do before we started our turnaround and I think it's a testament to the resilience we have created. Free cash flow was also impacted by the extra costs for components and by the lockdowns in China, which in addition to the lost sales following the lockdowns, also resulted in an increase in our working capital. For the new fiscal year, we are facing an even greater uncertainty looking into next year. We still have supply challenges, we still have COVID-19 lockdowns in predominantly China, and we now see an increasing risk of recession due to the increased inflation and interest rates further impacting the war in Ukraine. While we have confidence in our strategy and abilities, we see a very high uncertainty in the macroeconomy affecting us and our outlook for the new fiscal year, thus subject to very high uncertainty, which we have reflected in the guidance. Sellout grew 13% like for like. That shows that demand for our products is there and we have strengthened how we reach our target audience. We have seen that when we run campaigns, we also see an impact on sellout. This is also information that we just a few years ago didn't have. It has been a very important step in our turnaround and getting that end consumer insight. Sellout for the year was, of course, negatively impacted by the lockdowns in China, which led to lower sellout growth in Asia. And because Asia has a higher share of on-the-go, it also impacted the sellout growth in that product category. EMEA delivered 14% sellout growth, mainly related to staging on-the-go, and Americas grew sellout by 28%, which was across product categories and channels, which we're, of course, very proud of. This year, we enter the second phase of our turnaround, which is about building robustness in our business. The strategy house shown here has guided our priorities and execution through the year. More specifically, our robustness ambition has been anchored in three levels, securing a robust foundation, building a model for scale and sizing our key pillars for growth. If we move to the next page, Starting with the foundation, we have come far in securing robustness. This year we managed to improve profitability. We grew EBIT before special items by 42%, which was equivalent to a margin improvement of 0.4 points to 1.8%. This was less than we had planned for, but unfortunately we faced significantly higher supply chain costs than anticipated. Nevertheless, we managed to absorb 220 million in additional supply chain costs and still improve our gross margin and EBIT margin. We also accelerated our people agenda. Our people are the single most important enabler for reaching our strategic ambitions. Throughout the year we continuously improved our employee engagement and we onboarded net more than 100 people to ramp up our capabilities and thereby strengthening our strategy execution in important areas such as software engineering. This testifies that our employee branding activities work and that we continue to strengthen our ability to attract talent. If we move to the next page. This year, we launched five products and two important software innovations. The five products are shown here on page and besides that the launch of the 55 inch version of BioVision Contour, the product launches were on the go products. We launched BioPlay EQ and later BioPlay EX replacing the previous BioPlay E8 family of earphones. Then we launched our gaming headphone Beoplay portal in a version designed for PlayStation. We now cover most of the gaming options from Xbox and PlayStation to PC and mobile devices. Finally, we launched a Beo Cisco 980 headphone targeting hybrid work. The highlight of this year was to continue to build an ecosystem of seamlessly connected products with uncompromising customer experiences. By connecting the full portfolio of products, we have made it much easier for customers to buy and install more Bang & Olufsen products and create complete sound systems in their homes. The new software proposition, as well as continuous software upgrades for improved product experiences, have been proactively pushed to customers in our digital app-based product health center. By enabling both old and new products to be connected in our proprietary BioLink multi-room system, we're extending the life of our products. It's a milestone release from an experience and from a longevity perspective. The second software launch was stereo pairing for speakers on our new platform. This has improved the use case and incentivizes customers to expand their B&O systems with more products. Lastly, we launched several limited edition versions and products in collaboration with other luxury brands, and we launched our Bespoke program. Bespoke provides an opportunity to deliver truly unique and personalized products that we know our customers like. If we move to the next page. We are pleased to report that our customer base continues to grow. Our registered customer base grew by 31%. Just as encouraging is the increase of repeat purchases. The number of customers who own two or more products grew by 37% in the first three quarters. This year, we have focused on getting our brand known to more people in our target audiences. To support this, we have made programmatic use of ambassadors, brand partners, and influencers. We now have five brand ambassadors with Lei Zhang, Carolina Wozniacki, Fernando Alonso, Trent Alexander-Arnold, and Ryan Serhant. We entered into partnership with Williams Racing. Formula One has 1.5 billion community TV viewers. We have also worked with several influencers and celebrities, which helped us to reach 27 million people this past year. All of these brand awareness tactics have also helped us to increase our direct social media followership, which was up 68% compared to last year. Our digital ambitions have continued to be in focus and we launched our own e-commerce platform in Japan, South Korea, Singapore and Australia this year. We succeeded in increasing our website traffic, conversion rates and average basket size on our e-commerce, which proves that our digital ecosystem efforts is paying off. If we move to the next slide. We saw solid sellout growth in our six European and two Asian core markets. Our brand partnering activities also delivered solid growth. In the six European core markets, sellout grew by 14% compared to last year, with a very positive performance across most channels. Our e-commerce platform was at the same level as last year, as we have seen some of the sales migrate to e-tailers in the second half of the year due to temporary price inconsistencies. Reported growth declined by 2%, and this was mainly related to high comparables last year, together with the controlled product returns, as we explained when we reported the Q2 results. Our WinLondon project continues to deliver strong results throughout the year. Sellouts from our company-owned stores in London more than doubled, which is an amazing accomplishment. We have also tested an in-field VIP service team in France, which has yielded very positive results. Our customer satisfaction has increased and we have validated that this also holds significant incremental sales opportunities. In Denmark, we started testing service center insourcing. The first customer reviews have shown a significant uplift in customer satisfaction. We will continue to monitor the service improvements and evaluate how we can expand on those experiences. In the two core markets in Asia, sellout grew by 5%. The performance reflected the lockdowns in China in the last two months of the year, which resulted in sellout in China growing just 1% as Q4 was down 28% year on year. South Korea, on the other hand, delivered 19% sellout growth compared to last year. We have been working to improve our setup in Asia throughout the year. We have restructured our customer service with a new service center in Shanghai. It has been well received and improved our customer satisfaction in the market. We also work to strengthen our go-to-market model. We replaced three of four distribution partner and expanded our digital footprint. Our e-commerce platform was launched in South Korea and we took direct ownership of our sales to JD.com. The last growth pillar is strategic partnerships. We grew 10% on strategic partnerships and other activities. This was driven by both higher brand licensing income as well as product partnerships. We onboarded four new brand partners. Together with Cisco, we delivered our first dedicated hybrid work headphone. We see great potential for Bang & Olufsen in this space, and it is something we will focus more on in the coming years. We also entered into the sector for telecom service providers with our partnership with Sachemcom, Verizon and SK Broadband. These partners bring our brand into new living rooms and increase our brand presence. Sachemcom's solution has so far been sold to Totalplay in Mexico, Vodafone in Spain and Telecom Italia in Italy. These new partnerships come on top of our existing partnerships with HP and Harman. We extended our partnership agreement with HP in July, and together with Harman, we onboarded the Korean luxury car brand Genesis. The sound system for that car won the If Design Award for Best Car Audio System. If we move to the next page, please. We made good progress on our sustainability efforts the past year, and we achieved several milestones that underline our commitment to product longevity. In October, our speaker Biosound Level received a bronze-level Cradle-to-Cradle certification. This is the world's most ambitious product circularity standard, and we were the first consumer electronic company to receive this. We also took several longevity initiatives aimed at both past, present and future products. Among others, we introduced BioLink MultiRoom on our latest product platform. This enables our customers to connect classic products to today's products and ensure that their products stay relevant for years to come. This year we expanded our classic program and made it possible to upgrade Biogram turntables and we significantly improved our service and software support to help our customers to keep their products playing and updated. In this year's sustainability report we have for the first time a short data for our scope 1 and 2 greenhouse gas emissions. Unfortunately, they revealed that our emissions have increased. This was mainly due to increased activity of our manufacturing site, Instruver. We will work to mitigate that in line with our new long-term targets for greenhouse gas emissions. We continue to see highly motivated employees. This year, we surpassed our people engagement score target of 75 ending at 77, which is in the high end when compared to other peers. We expect COVID-19 to continue to impact our business and our people. We maintain a strong focus on supporting all colleagues in managing this while also building a strong company culture centered around our new core values, which we recently launched. Today, we presented our new sustainability strategy. Designing for longevity has always been at the heart of Bang & Olufsen, and our heritage of long-lasting, high-quality products show we understand longevity throughout their entire lifecycle. With our new strategy, we will further enhance our longevity focus to become an even more sustainable company. This is our approach to circular economy, climate action, and good corporate citizenship. We will commit to new long-term sustainability targets to help us drive change and demonstrate our progress to the world. We want to set new standards for product longevity and circularity and our target is to have at least 10 of our products cradle to cradle certified within three years. And we're also looking to future development projects and here we aim to certify all of our own new product developments from now on. We want to take responsibility for our full value chain when it comes to greenhouse gas emissions to help drive climate action. Towards 24-25, we aim to achieve 100% renewable electricity in operations. In 22-23, we will also set an emission reduction target in line with the science-based targets initiative across scope one and two and three. And we will do that based on the full scope three inventory that we will complete this year. Our aim is to continue building product icons that can last a lifetime and beyond. We will do that through groundbreaking technologies, acoustic innovation, craftsmanship and design, while at the same time taking an even bigger responsibility for the entire product ecosystem. And with that, I will turn over to you, Nikolaj.

Thank you, Christian. Now, Christian covered the full year numbers, so I will focus in on the Q4 performance. Please turn to page 14. So, in Q4, reported growth declined by 10% to 698 million, corresponding to a 12% decline in local currencies as we had some tailwind from currency development. The decline was mainly related to the lockdowns in China. We also had high comparables in Q4 last year, as we had several product launches, and we also benefited from onboarding of new distribution partners in EMEA. The EMEA region declined by 14% in local currencies, and this was to a large extent impacted by the high comparables, but also by some supply shortages on specific products based on our previous product platforms and a temporary stop for production of Beosound Emerge. The 34% decline in the Asia region was caused by the lockdowns in China that were especially severe in April and May, causing Shanghai and Beijing to be almost completely impossible to do business in. The Americas region continued the growth trajectory from previous quarters with a 35% growth rate. The lockdowns had a significant impact on the performance in all product categories, but most noticeably in the undergo category. The stage category delivered the best performance with a decline of 5% compared to last year. The decline was partly due to last year's revenue being supported by screen sales. Revenue from stage speakers delivered double-digit growth in Q4. Flexible living declined by 29%. In addition to the impact from lockdowns in China and some supply constraints, the flexible living category was impacted by a narrower product range compared to last year as we had to temporarily stop production of builds on the merch that replaced build play M3 and M5. The undergo category declined by 20% and was mostly impacted by the lockdowns in China. The lockdowns also resulted in a delayed launch of our new Earphone Beoplay EX, and it was launched in less colors than planned. Please turn to the next page. Sellout in Q4 was 1% higher than last year. Sellouts were significantly impacted by the lockdowns in China, where sellout declined by 28%, resulting in a 12% decline in the Asia region as a whole. EMEA grew by 8% in Q4, which was mainly related to the stage and undergo categories. Sell-out in America grew by 34% across all product categories. The lockdowns in China had an adverse effect on sell-out performance across product categories, but most notably in the on-the-go category. Sell-out in the flexible living category was also impacted by the narrowing of the product range and supply shortage mentioned before. We are all pleased about the sell-out performance given the major challenges of a lockdown in our largest market. Please turn to the next page. The reported product gross margin was 41%, which was 4.9 percentage points higher than Q4 of last year. Last year was lower than normal, which you can also see in the graph. We continue to see a high impact from supply chain challenges. Compared to last year, the impact was additional 3.5 percentage points, and the total impact was 9% in the quarter. This was the same level as in Q3. The effect was more than 50 million in extra cost. Last year was impacted by large B2B deals, pass-through of screens, and inventory clearing of EH3 Gen, which we did in advance of launching BeoPlay EQ. In addition here too, we have improved the margin through price increases, we have improved the use of discounts compared to last year, and we had a positive impact from obsolescence as we could lower our inventory provisions for spare parts due to our longevity focus. Finally, we also had some currency tailwind benefiting us this year. Please turn to the next page. Year-on-year, the gross margin increased by 7.2% to 48.3%. The increase was partly driven by the growth in brand partnering and other activities, whereas revenue from product sales declined. The gross margin from products increased by 4.9%. I explained the effects leading to this increase on the previous page. In addition, The increase in the stage category was also attributed to last year being impacted by a pass-through of screen revenue, which we don't have this year. The flexible living category was impacted by B2B deals last year, as I also mentioned before. Finally, the increase in the on-the-go category was due to improved margins on several products, and then, as said, last year we cleared inventory of BU Play EH13. The EBIT margin before special items declined by 0.2% this point to 1.7% in Q4. The margin was positively impacted by the improved gross profit, which was up 5% despite the decline in revenue. Please turn to the next page. The total capacity cost increased 4%. This was driven by our strategy and investments in building robustness in our business. The reported cost increase was related to distribution and marketing, with the main effect related to both global and local sales and marketing activities. Our marketing cost ratio was 10.1% of revenue, which was 2.4% higher than last year. Development costs declined by 11%. The decline was related to higher capitalizations following our product development program and incurred development costs increased by 34%. We are investing more into platform upgrades, software development, and product innovations. Administrative costs were unchanged compared to Q4 last year. Please turn to the next page. Our net working capital increased by 148 million, which was mainly related to the lockdowns in China. Our inventory increased by 83 million as we lost sales in China. The lockdowns also restricted the access to our Shanghai warehouse. Trade payables declined by 121 million. Hence, the increase in inventories had largely been paid. Development was partly offset by The development was partly offset by lower trade receivables, which followed the license. A bit with a cold. KBX. to 93 million in Q4, which was the highest level this year. The increase was mainly related to intangible assets and was again related to the higher capitalizations I talked about before. Tangible investments were at the same level as last year and was mainly related to retail development. Free cash flow was negative by 190 million in the quarter. It was naturally heavily impacted by the lockdowns in China. It was impacted our profitability, but also led to the increase in net working capital. Free cash flow was also impacted by extra costs for spot buys with shorter payment terms. The development in free cash flow also had an impact on available liquidity, which declined to $301 million. Our combined capital resources included our revolving credit facility, which was $433 million at the end of the year. We have extended our credit facility and also increased it to $150 million. Furthermore, the credit facility is now linked to some of the ESG goals that we have just published today. And with that, I would like to hand the word back to Christian.