Bang & Olufsen a/s

Ladies and gentlemen, welcome to the Bang & Olufsen AS Interim Report Q1 2022-2023. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question and answer session. To ask a question, please press 5-star on your telephone keypad. This call is being recorded. Today, I am pleased to present CEO Christian Ter. Speakers, please begin.

Hello everyone and thank you for joining the call. With me today is our CFO Nikolaj Wendelbo. I will begin by going through the financial highlights for our first quarter followed by an update on how we are progressing on our strategy and how we are focusing our efforts under the current macroeconomic environment. Nikolaj will take us through the financials and I will conclude the presentation part before opening up for questions. The challenging macroeconomic environment we experienced in Q4 of last year continued into Q1. Regional lockdowns and the economic climate in China had a direct impact on our sales. Rising interest rates, the war in Ukraine and higher inflation have also affected consumer confidence across Europe. We did, however, continue to see robust demand for our products in Q1, except for China. Compared to Q1 of last year, we could see a normalization of seasonality as consumers have been traveling again. For B&O, this led to a shift in demand towards our travel and outdoor-related on-the-go products. Despite seeing a robust sellout in Q1, reported revenue declined by 8.2% or 10% in local currencies. In addition to the impact from lockdowns in China, we saw retail partners in EMEA reducing their inventories and they were more cautious on replenishing. This was driven by the challenging macroeconomic environment. These developments led to revenue from product sales declining by 16% in local currencies compared to Q1 of last year. Our brand partnering activities, on the other hand, grew by 44% in local currencies. This growth was driven by our own new partnerships, and especially our Cisco partnership contributed significantly to this growth. Our gross profit was impacted by several factors in Q1, like cost for components purchased late last financial year. And Nicolai will explain this in greater detail, but we delivered a lower gross margin than last year, which led to decline in EBIT margin and free cash flow. We maintain our outlook, but the uncertainty remains high, as was the case when we published our annual report in July. Given the usually high uncertainty that we're facing, we're adjusting to the macro environment and lower consumer confidence, and I will elaborate more on this in a minute. Please move to the next slide. Sellout declined by 9%, which was mainly driven by Asia and the lockdowns in China, specifically. Sellout in China declined by 42% compared to Q1 of last year. In the other regions in Asia, we saw positive sellout growth. For instance, our second core market in Asia, South Korea, sellout grew by 16%. In EMEA, sellout declined by 2%, and we saw a shift in product mix towards travel and outdoor related on-the-go products. This was more in line with normal seasonality and reflected that consumers in general have been traveling again this summer unlike last year. This also had an impact on channel composition where we have seen e-tailers and multi-brand stores perform much better than last year. The Monobrand network experienced a small decline, except for our company-owned stores, which delivered a solid sell-out growth. Americas continued its strong performance, and like-for-like sell-out grew 14% compared to last year. This was driven by both the stage and on-the-go categories. It was a broad-based improvement across most channels. Sell-out in the different product categories all declined, which was mainly driven by the decline in China. However, we see the biggest decline in sell-out in our flexible living category and we experience it across all three regions. In addition to the other effects, sell-out in our flexible living category was adversely impacted by our decision to stop production of BioSound Emerge and prioritize core components for other products. which has narrowed our product offering in that category compared to last year. Please move to the next slide. Strengthening our brand awareness, especially among customers in our target audience globally, has been a critical lever for us since we launched our new strategy in 2020. We continue to expand and improve in this area. It's the key for us to be able to continuously grow our registered customer base by attracting new customers to B&O, while also seeing existing customers expand their portfolio of products with us. During Q1, our registered customers base grew by 6.3% and we saw the number of customers owning two or more products growing 5.1%. In Q1, we had two product collaborations. It's a great way for us to reach new customers. The first was a limited edition of our Biosound Explore portable speaker together with the luxury brand Supreme. Supreme has a strong adoption among younger customers in our target audience. The second collaboration was with Balenciaga, which is a very successful luxury fashion house. We have worked for quite some time on this collaboration as we together with Balenciaga designed a fully functioning speaker bag. It's designed to look like the form of a Balenciaga handbag. We have crafted it in aluminum with leather from Balenciaga inside and it has been crafted in our factory five. A total of 20 speaker bags were created for the show and sold out overnight with demand for more. The speaker bag was unveiled at Balenciaga's 51st Couture Show in Paris. The speaker bag was carried by the models along the catwalk and the speaker delivered music to the audience. The Balenciaga collaboration has been one of the best performing collaborations to date, and it created significant awareness for Bang & Olufsen. So far, we have reached nearly 30 million people. Through our own social media channels, we reached more than 1 million people. We're also driving awareness through our collaborations with William Racing, brand ambassadors, celebrities, and influencers. Together with Williams Racing, we have several activations in connection with the Formula One race at Silverstone in the UK. Seven of our stores ran Formula One events, which were attended by more than 1,200 people. During the activation, we saw a rise in in-store traffic and higher sellout in all stores and on our e-commerce channel. We estimate that during Q1, we reached more than 7 million people via influencer celebrities alone. And we can see on Google search data that we drove organic reach, achieving more than 17 million organic impressions. We can measure the effects of our different activities on our e-commerce site. Compared to Q1 of last year, the traffic on our website increased by more than 25%. The quality of traffic also improved, with visitors staying on our website for longer. However, overall revenue on our e-commerce platform declined in Q1. This was due to price inconsistencies driving purchase transactions to other channels. We have seen a very good performance from our newly launched e-commerce sites in Asia, showing better than expected conversion rates. Please turn to the next page. Longevity is a core part of our strategy, and we aim at getting 10 products cradle-to-cradle certified by 2024-2025. On August 31st, we launched Biosound Theatre at IFA in Berlin. It's the fourth product built on the modularity that we introduced with Biosound Level. We will now work on getting Biosound Theatre cradle-to-cradle certified as well. For our customers, the modularity holds two valuable propositions. The soundbar is designed to fit almost any TV, making it very versatile depending on customers' preferences. It's also possible to get the complete Bang & Olufsen experience with an LG screen where we have the full integration between the screen and the soundbar. Secondly, the soundbar is designed to outlast traditional product cycles due to the upgradability as technology advances. In the first reactions we have seen, the longevity and modularity of the product has been highly praised. This on top of the praise for its impressive sound performance and design. Beosound Theatre is the most powerful soundbar in the world. Since we launched our strategy in 2020, we have continuously invested in product development and in our technical platforms. We now have our own ecosystem where we can connect across products spanning several decades, which is a key differentiator for us. We have added new capabilities as we gradually taking ownership of product development. In Q1, we opened an office in Sofia, Bulgaria, which will complement our software team in Denmark. Please turn to the next page. Due to the current uncertainty and with lower consumer confidence, war in Ukraine, rising interest rates and inflation coupled with lockdowns in China, We are adjusting to the headwinds we are facing. The adjustments are twofold. Firstly, we are adjusting our operational operations and secondly, we are prioritizing harder on our strategic initiatives. On the operational side, we have implemented a broad hiring freeze with a few exceptions. For instance, on software capabilities as this is key to unlock our growth potential. We're also facing our investments over a longer period to manage our capital resources as well as lowering our production forecast to ensure a more efficient inventory development. Finally, we are prioritizing our strategic efforts towards our activities towards key segments. Please turn to the next page and I will elaborate on the last point. Our strategy is unchanged. We are prioritizing our efforts harder. First is our WinCity strategy. In previous quarters, we have been reporting on our WinLondon project in details. London has continued to see a solid performance in Q1. Like-for-like sellout from our company-owned stores grew by 71%. WinLondon was from the beginning designed to drive brand awareness and sales as well as work as a pilot to provide us with key learnings that we could conceptualize and scale to other cities. We believe that now is the time to begin to scale it. Based on thorough analysis of external factors such as cultural and economical indicators, personal luxury spend, and density of our target audiences, we had identified to expand our city strategy to New York and Paris. By looking at target audience demographics, consumption patterns, and urban development, we'll build a stronger presence and activity where our customers live, work, shop, and socialize. Secondly, we're adding the U.S. to the list of core markets. So we now have nine core markets, EMEA, Asia, and Americas. Over the past two years, we have built a stronger presence in the US with stronger infrastructure and more partnerships. Recently, we announced our new expanded partnership with Origin Acoustics to strengthen the custom integration channel as well. Long-term, we see immense potential in the US due to a strong presence of our target audiences, and we will scale that with partners through a city-focused strategy. Including the US as a core market will also reduce our reliance on Europe and China, which are impacted by war and COVID-related lockdowns. Thirdly, we're focusing more on enterprise. Last year, we announced our collaboration with Cisco, developing a dedicated hybrid work headset designed for Cisco WebEx platform. We started to deliver the first headset to Cisco in Q4 of last year. The Bang & Olufsen Cisco 980. We have seen good development in deliveries in Q1, where we also launched the headset in a black anthracite version. We see a lot of potential in this space. We have a unique offering with multifunctional products, and we have just announced our first dedicated product, the Beocon Portal, which is a headphone certified for Zoom. We will continue to expand our portfolio and add certifications for Microsoft Teams and Google Meet. Finally, we will focus our targeting of high-net-worth individuals and JNCs, both in terms of product and marketing and sales. We know that some of our customer segments are less impacted by the current economic headwinds than others, and we will therefore refocus part of our efforts towards them. We will do that through more targeted events and campaigns. We will also continue to work on expanding our digital and service offerings, especially towards these segments. We believe that we see an untapped potential here in terms of offering unique B&O hardware and digital experiences that will drive both revenue, brand awareness, and loyalty. Individualization is a key trend across high-net-worth individuals and ENC, and few other industry players, if any, can offer the same opportunities to individualize products and experiences as we can. We will this year expand our offerings in this space and make more options available for our customers. And with that, I would like to hand over to you, Nicolai.

Thank you, Christian. Now please turn to page 12. Reported revenue declined by 8% or 10% in local currencies to 612 million. Despite the decline compared to last year, it is still substantially higher than in 1920 and 2021. The decline was driven by regional product sales, which declined by 16% in local currencies to 520 million. The decline was mainly due to the lockdowns in China, and more caution from our retail partners who have reduced their inventories during the quarter. Brand partnering and other activities grew by 51%, or 44% in local currencies. The increase was mainly driven by product sales from our partnership with Cisco, but we also saw license income grow 16% compared to Q1 of last year. Please turn to the next page. EMEA posted the biggest decline compared to last year. The decline was seen across all channels, with the biggest impact coming from the states and flexible living categories. We have seen retail partners reducing their inventories during Q1. We see this as a reaction to the general uncertainty in the market and decline in consumer confidence. The monoband network is the main channel in EMEA and the caution on inventory replenishment had a relatively larger impact on our stage category. Our company-owned stores deliver solid double-digit growth in Q1 compared to last year. Re-reported revenue in Americas grew by 4.5%, but adjusting for the currency tailwind, Americas declined by 6% in local currencies. We saw solid performance across most channels, with the stage category delivering the highest growth rates. The development in Asia reflected the lockdowns and lack of sell-out in China. Revenue was therefore 12% lower than last year, with all product categories declining. Overall, the decline was mainly seen in the states and flexible living categories, which both saw high growth rates in Q1 of last year. As Christian talked to earlier, people have been traveling again this summer, and that was reflected in our reported numbers, with the undergo category being least affected. Please turn to the next page. Gross margin declined by 7.8 percentage points, which was mainly driven by supply chain cost and the sale of a large quantity of earphones in the U.S. I will elaborate more on the different elements in a minute. The decline in gross margin and gross profit compared to last year, in combination with higher capacity cost to revenue ratio, adversely impacted the EBIT margin, which declined to minus 14.1%. Please turn to the next page. We had several factors impacting our gross margin in Q1 compared to last year. Product mix had a negative effect of 1.2 percentage points. We saw a shift towards the undergo category, which has lower margins than the state's inflexible living categories. Compared to last year, the margin has benefited from price increases completed, which has compensated for the general cost inflation we have experienced. We sold a large quantity of earphones to a US partner. The products were originally intended for the Chinese markets, but due to the lockdowns, we decided to clear most of this inventory. The sale was done at lower prices, which had a negative impact on the margin in Q1 of 1.6 percentage points. The biggest impact was due to components and logistics. We bought components at spot buys during last year, and due to lockdowns in China, we ended last year with a higher inventory of components acquired at higher prices. These components are expensed as we sell the products, and we have a negative impact on our marketing this year. Generally, we are currently spending less on spot buys, and compared to Q4, we have reduced component spot buys by around 50%. We have not been able to eliminate it altogether as there are still some components in short supply, but the development is positive. Finally, we had a negative effect from fixed cost allocations and currency developments. With declining revenue compared to last year, we were adversely impacted by the operational leverage effect from fixed cost allocation. Currency development had a minor positive effect in absolute terms, but a negative effect on margin. Please turn to the next page. Total capacity cost increased 6%. This was mainly driven by sales and marketing activities and the full-year effect of the competences and resources we have added since Q1 of last year. Development cost declined by 12%. The decline was driven by higher capitalization, whereas incurred development cost grew by 6 million. The incurred cost related to platform upgrades and investments in Biosound's theater. Distribution and marketing costs increased by 12% compared to last year. This was equivalent to a ratio of 33.5% of which 9.8 percentage points was related to marketing activities. In addition to increased marketing costs, we have also invested more in our sales organization. Administrative costs reflected resources we have added since Q1 of last year, but was in general at a stable level compared to the previous quarters. Please turn to the next page. Free cash flow was negative 81 million. Compared to Q1 of last year, free cash flow was adversely impacted by the decline in revenue and profitability in combination with higher capital expenditures. As shown on this page, Q1 is normally our weakest quarter for cash generation. Networking capital declined 10 million but remained at the elevated level we saw in Q4 of last year. We have adjusted our production forecast, but it takes some time before we see the effects on our inventory and payables. Our inventory therefore only declined by 5 million in Q1. Trade payables increased by 51 million. This increase was mainly related to timing of payments. Our capital expenditures were 32 million higher than Q1 of last year and mainly driven by intangible investments in new products and platforms. The increase also reflects that we are gradually taking more of the product development activities in-house. Finally, our capital resources, consisting of available liquidity and available drawing right on our revolving credit facility, stood at 337 million. The decline in the quarter was mainly due to the negative free cash flow. The credit facility is 150 million, of which we have used around 20 million for guarantees, while the remaining 130 million is undrawn. And with that, I would like to hand the word back to Christian.