Bang & Olufsen a/s

Welcome to the Bang & Olufsen AS Interim Report for the third quarter 2022-23. 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'm pleased to present CEO Christian Serre and CFO Neville Venable, speakers Please, again.

Hello, everyone, and thank you for joining the call. With me, as you heard, as always, I have my CFO, Nicolai Wendelbo. So I will begin with the financial highlights of our third quarter, followed by an update on how we are progressing with our strategy and our priorities. Nicolai will take us through the financials in more detail, and I will conclude the presentation part before opening up for questions. So if we please move to slide number five. Revenue declined by 18% or 20% in local currencies. We had expected impact from the current macroeconomic headwinds, but we had not foreseen the development in China after the change in COVID-19 policy in the beginning of December. The change led to a surge of COVID-19 infections across the country and affected customer behavior and demand throughout the quarter. Consequently, revenue in China declined by 65%. Overall, our product sales declined by 21.5%. Asia was heavily impacted by the development in China, and EMEA retail partners continued to be cautious in replenishment of inventory. Americas delivered growth supported by currency tailwind. Brand partnering and other activities grew by 16.7% or 11% in local currencies, driven by both license income and partnerships. All categories were impacted by the decline in China. However, several of our latest products, additions, and in particular, our newest sound bar, Biosan Theatre, still performed well. While our sales and revenue declined 18%, like-for-like sellout declined by 4%. The Asia region declined by 13% and was mainly driven by lower demand in China. EMEA declined slightly, and the Americas showed positive growth. The gross margin came in at 43.6% compared to 44% last year, despite a change in product mix towards lower margin products. Our EBIT margin was heavily impacted by the lower revenue level, mainly due to the revenue decline in China. We generated a positive cash flow of 33 million in the quarter, mainly driven by reduced inventories. We continued to see solid progress with our strategy priorities, which I will elaborate on in more detail. Despite headwinds, our turnaround is progressing, and to ensure that we stay on track and are prepared for the future, we sharpened our strategic direction in Q2 with the aim to strengthen our luxury timeless technology proposition. I will get back to this in a few minutes. Due to the lower than expected sale in China, we adjusted our outlook on March 17th. The updated outlook indicates that we expect improvements in Q4 compared to Q3. So please move to the next slide. Sellout declined by 4%, mainly impacted by low demand in China in all categories. EMEA declined by 2%. Our company-owned stores delivered solid growth of 53% with growth in all markets. Monobrand demand varied significantly across countries. In general, the northern European countries experienced lower demand, whereas we saw a positive sellout trend from the southern European countries. Combined, sellout in the six core markets declined with 2%. In the Americas, we delivered a 3% sellout growth compared to Q3 of last year. The growth was mainly driven by Monobrand and e-tail, where we saw a good momentum. The main contribution to the sellout growth in the Monobrand channel came from the high-end products in-state, category coupled with new products like Biosound Theatre and BioPly EX. In our Asia region, sellout declined 13%. The decline was across all channels except for the multibrand channel and heavily impacted by low demand in China. South Korea had a decline of 5% driven by monobrand, whereas multibrand and e-tail showed a good growth rate. We saw solid sell-out growth in Japan of 70%, driven by multi-brand and e-comm and strong growth rates across all product categories. Looking at our product categories, our stage category was flat in sell-out, whereas the flexible living category had a decline of 18%. Our on-the-go category had only a slight decline of 1%, and we saw positive trends for headphones and earphones. Overall, sell-out picked up at the end of the quarter. Please move to the next slide. Building on our learnings from the past two years, we sharpened our strategic direction in January to ensure that we stay on track to deliver profitable growth and are prepared for the future. We want to deliver on the proposition of luxury timeless technology. That means cementing our position within luxury, enhancing our focus on circularity and creating timeless products and leveraging technology to offer our customers more spatial and personalized sound. We believe this will enable us to differentiate further, help us to prioritize our investments and support our growth ambitions, even in a challenging macroeconomic environment. We have identified more than 200 million affluent design and music lovers in our core markets across our four core segments, very high net worth individuals, ENCs and young millennials, well-established and careerists. As communicated in Q1, we are refocusing our brand and marketing activities, especially towards the younger customer generations and the very high net worth individuals. Please move to the next slide. We are moving even further away from the premium consumer electronics market towards the bigger and more lucrative luxury market. Our own unrivaled heritage and the unique combination of capabilities with sound design and craft enable us to make that shift. We are defining our blue ocean in the intersection between consumer electronics and luxury products with our offering of our long-lasting iconic products portfolio that bridge the past, present and future. We are making five key strategic shifts to support our proposition of luxury timeless technology. We are reigniting our brand to become a culturally relevant luxury love brand. We are building a seamlessly connected product portfolio, bridging our past, present and future. We are creating magical moments in connected touchpoints. We are winning in key global cities and we are exploring existing and new adjacent opportunities. Please move to the next slide. We made solid progress with our strategic priorities in Q3, and I would like to highlight a few of the most important initiatives. To cement our position in luxury, we want to continue to create desirability of our products. We know that our target segments have an affinity for product customizations, and to cater for that, we launched our first B&O Atelier Limited Editions, a made-to-order collection of the award-winning Beoplay EX earphones in lime green color. B&O Atelier is our studio in Struver, which leverages our craftsmanship capabilities and the team specializes in bespoke products. In addition to meeting the demand for customization among our target group, our Atelier editions also reinforces our brand heritage and helps us to drive brand awareness. Within the first hour following our announcement, 1500 customers signed up to buy the first Atelier Edition EX and we experienced a peak in the number of newsletter subscribers post-launch. When the collection became available for sale, all units sold out almost immediately. More editions will be launched throughout 2023 in a variety of unique colors, and B&O Atelier will work with other elements of bespoke and customized offerings. In March, we introduced new generations of our iconic speaker Biosound 2 and Biosound A9. They are built on our cutting-edge technology platform Mozart. The heart of Bang & Olufsen's Mozart platform is the replaceable modules front-loaded with enough processing power to receive software updates and features for many years to come. In the connectivity and streaming technology ever becomes obsolete, the firmware is automatically updated to a connected B&O device without any need of user interaction to ensure the product is always up-to-date and receives the latest features available. Through our Win London project, we have developed a go-to-market approach that is scalable to other cities. The project has been in execution for some time, while Win Paris has gradually gone into execution and Win New York is in the planning phase and expected to go into execution in Q4. We in London activations for the quarter included Gen Z influencer events and brand collaborations yielding a reach of 1.2 million people. The activations also zoomed in on the topic of longevity and featured hosting of longevity workshops and several other initiatives. The efforts for the quarter paid off, delivered a solid sellout growth of 75% of our company-owned stores in London, specifically, and sellout growth of 14% for the UK overall. When Paris activations kicked off in the quarter, a key activation was the first edition of Écoutez and Signe, which means listening on stage, which is a planned series of listening events powered by our flagship product Biolab 90, dedicated to the discovery of album releases and re-editions with renowned artists. on the main stage of a historic concert hall in Paris. Tickets for the first event sold out immediately, and we got great PR coverage. We also co-hosted a pop-up event over five days with participation by a curated audience of Parisian target customers, journalists, and influencers. We're already seeing positive results with sell-out growth reaching 12% for our company-owned stores compared to flat overall sell-out in France for the quarter. In quarter three, we announced our partnership with Scuderia Ferrari for the 2023 Formula One season. Ferrari is one of the strongest luxury brands in the world and a perfect match for us as a company. With 445 million Formula One viewers a year, we expect this partnership to help us increase our brand awareness significantly in the coming years. Already, the partnership has attracted immense interest. Extensive media coverage brought about a combined publication audience of 2.4 billion, and our social platforms saw high level of interaction and boosted brand followers. We expect to have events and activations throughout the Formula One season and will enable more engagement with high-net-worth individual customers and bring Bang & Olufsen product experiences to Formula One and Ferrari fans globally. Please move to the next slide. For the third quarter, we have expanded our customer base by 5%. In addition, we also continue to see more repeat purchases, and the number of customers who own two or more products grew by 3%. We want our customers to build an ecosystem of Bang & Olufsen products, and we are encouraged to see that customers are growing their B&O systems. This is a result of our improved brand and marketing efforts and the improved portfolio of connected products we have built the past couple of years. We saw a positive trend in our engagement with customers. The number of newsletter subscribers increased further in Q3 and the duration of visits to our corporate website continued the positive development seen in previous quarters. The announcement of the Ferrari partnership and launch of EX Atelier Limited Edition drove traffic to our website as well. So please turn to the next page and it's time for me to hand over to you, Nikolaj. Thank you, Christian.

Now please turn to page 12. Reported revenue was 635 million, which is a decline of 18% compared to last year, or 20% in local currencies. Compared to Q3 of last year, we have benefited from currency tailwind especially related to the US dollar. The decline in reported revenue was driven by product revenue with a decline of 21.5% or 25% in local currencies. The quarter was heavily impacted by the development in China, where revenue dropped 65%. Our withdrawal from Russia and Belarus had a negative effect of approximately 2 percentage points on product revenue. In Europe, we continued to seek caution regarding inventory replenishment from our partners. However, the launch of Bioscience Theater in Q2 had a positive impact on our performance in Q3. Our brand partnering activities continued to show solid growth of 15.3%, corresponding to 11% in local currencies. The growth was driven by both our license income and our partnerships with Cisco. We expect growth from the Cisco partnership to normalize going forward. The growth in license income was driven by the automotive industry, which benefited from backlog of orders and easing supply chains for car components. Please turn to the next page. EMEA saw a 7.8% decline in revenue. Excluding the effect from our withdrawal from Russia and Belarus, revenue declined by 4%. As mentioned, our monobrand channel declined compared to last year due to caution among partners to replenish inventory. Our company-owned stores continue to deliver solid growth in the quarter as they have throughout the year. Our multi-brand channel also delivered growth, however, on the backdrop of low comparables from last year, where we took back products from a few partners that could not sell them. That decline in revenue in EMEA was across categories, yet most impacted was the flexible living category, which is the category with the highest sensitivity to consumer behavior in times of economic uncertainty. The recently launched Billson Theatre has a positive impact on reported revenue and Buplay EX also contributed positively to revenue performance. Reported revenue in America has grew by 3%. However, adjusted for the currency tailwind, America has declined 8% compared to Q3 of last year. Our expanded partnership with Origin Acoustics and Custom Installations contributed positively to revenue growth. We saw solid growth from the e-tail channel, both within flexible living and on the go. Our own e-commerce channel declined slightly, yet we saw good growth from A9 and our flagship headphone H95. The development in Asia was heavily impacted by the surge of infections in China and the backdrop of the change in COVID-19 policy. Revenue declined 46.4% of 50% in local currencies. The negative impact was across all categories, with the largest decline in the flexible living category. Generally, some retail partners have built up excess inventory during the COVID crisis, which impacts our business. On the positive side, we saw good growth in Japan. All product categories were impacted by the significant decline in sales in China. The decline was partly offset by growth in newly launched products such as Biosan Theater, which was the biggest single contributor to revenue. We also continue to see strong performance of Bioplay EX sales. In general, for all regions, the lower sales volumes were partly offset by higher average selling prices driven by the price increases that we have implemented since last year. Please turn to the next page. Gross margin was stable at 43.6% against 44% last year, despite an overall change in product mix towards lower margin products in our on-the-go category. We delivered an improved gross margin on states and flexible living, partly due to price increases implemented. The undergone margin was impacted negatively by the sale of headphones as part of our efforts to reduce inventory of products with shorter life cycles. Also, lower revenue in Q3 resulted in the fixed cost-to-revenue ratio impacting the gross margin. The gross margin from band partnering and other activities was affected by our new collaboration with Cisco, where we have started to sell the Bang & Olufsen Cisco 980 headset for hybrid work. The change in product mix with more product sales reduced the gross margin in Q3 compared to the same period last year. Currency movements, in particular the US dollar, had an adverse impact on gross margin of approximately 1.5 percentage points compared to Q3 of last year. The EBIT margin before special items was negative by 6.8% against 0.7% in Q3 of last year. The margin decline was related to the lower revenue. Currency movements had a negative impact of approximately 1 percentage point compared to last year. Please turn to the next page. Total capacity cost decreased by 1.5% to 335 million. The quarter was impacted by reversal for employee bonus of 19 million due to lowered unexpected performance, partly offset by a provision for redundancies of 14 million. I will elaborate further on redundancies and our cost focus on the next slide. Development cost increased by 16 million to 86 million and was driven by higher incurred cost in combination with a lower capitalization ratio compared to Q3 of last year. The increase in incurred cost was partly driven by the addition of more competencies, including our new office in Sofia, which is focused on software development. Distribution and marketing cost decreased by 20 million to 216 million. The decrease was mainly related to a one-off service cost relating to warranty obligations last year. The marketing cost ratio was 10.8% in Q3 compared to 8.2% in Q3 of last year and the increase was driven by higher marketing cost in the three regions as well as lower revenue. Administrative expenses were stable at 33 million against 34 million last year. Please turn to the next page. Due to the continued uncertainty, war in Ukraine, rising interest rates and inflation, coupled with recent developments in China, we are continuously adjusting to the headwinds we are facing. On the operational side, we have last year implemented a broad hiring freeze, with a few exceptions, for instance on software capabilities, as this is key to unlock our growth potential. We have since end of May 2022 reduced the number of employees by 36, despite adding strategic important competencies such as software capabilities. Following the hiring freeze, we have initiated a reorganization in February, where 35 employees were made redundant. The redundancy was made throughout the organization. We have this quarter successfully reduced our inventory level, which is also positively affected by a reduced level of spot buy components. We continue to focus on a healthy inventory composition going forward. Lastly, we are prioritizing our strategic investments to ensure the best possible balance with the economic environment we are operating in. Please turn to the next page. Net working capital decreased by 66 million in Q3. Throughout the fiscal year, we have worked on improving our working capital. The net working capital ratio to revenue was 9.6% and declined compared to the elevated level at fiscal year end of 11.4%. Inventory decreased by 69 million. The reduction in inventories was partly driven by a reduction in on-the-go products with shorter life cycles. Also at the end of Q3, no components purchased at the spot market remained on inventory. Both elements are contributing to a healthier inventory composition going into Q4. Trade receivables decreased by 118 million, driven by lower sales in Q3 compared to Q2 and focus on cash collection. The trade receivables ratio was below both last quarter and last year. Trade payables decreased by 142 million, mainly driven by low activities in the quarter and timing of payments. As communicated in Q1, we have adjusted our production plans due to the elevated inventory levels going into the fiscal year. Compared to Q3 of last year, trade payables were 196 million lower, reflecting the actions we have taken. Other liabilities decreased by 12 million during the quarter, primarily related to employee bonus. Please turn to the next page. Free cash flow was positive 33 million compared to negative 14 million last year. The improvement was mainly driven by a positive change in working capital. The capital expenditures were 43 million, which was 33 million below Q3 of last year, with a higher share of intangible investments. Intangible investments are mainly related to new products and our product platforms. Finally, capital resources consisting of available liquidity and available drawing right on our revolving credit facility stood at 328 million, up 21 million from Q2. The increase in the quarter was mainly related to the improved cash position. Available liquidity was 208 million compared to 187 million in Q2.

And with that, I would like to hand the word back to Christian. Thank you, Nicolai. Please turn to page 20. As mentioned in the beginning of the presentation, we adjusted our outlook for the year on the 17th of March. The assumptions are broadly the same as previously. The main changes is regarding the progress in China, where we expect improved market conditions in Q4, yet at a slower pace than initially expected. The visibility remains low and we continue to face an unusually high uncertainty in the world. We continue investments related to retail development as well as marketing and product development. We have in March announced the launch of A9 fifth generation and Biosound third generation. Two iconic products are now available on our Mozart platform. As listed, we expect the launch of an additional product innovation in Q4. Further, we plan to continue investments in strategy execution, but the timing and size of these investments will be adjusted based on market developments. If we move to the next page. So to recap, revenue declined by 18%, heavily impacted by decline in revenue of 65% in China, We delivered strong growth from our brand partnering activities. Gross margin level was kept despite changes in product mix towards lower margin products. We improved margins on stage and flexible living categories also as a result of price increases. Airbit margin was impacted by lower revenue. We delivered positive free cash flow, despite challenging macroeconomics. We saw relatively robust sellout demand, except for China. Sellout in America saw a positive trend. Sellout in EMEA declined by 2%. Yet our company-owned stores delivered solid growth of 53%, with growth in all markets. We continue to grow our customer base, and equally important, we see more customers expanding their Bang & Olufsen system with more products, which is a key part of our strategy. we have learned a lot from the first years with our turnaround strategy and we have now sharpened our direction and in q3 we continue the strategic progress and finally as i just said we adjusted our outlook for the year due to the situation in china and with that we are opening up for questions thank you to ask a question please press five star on your telephone keypad to withdraw a question

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We'll have a brief pause while the credits are being registered.

The first question will be from the line of Benjamin Selverstrom from ABG. Please go ahead. The line will now be unmuted.

Thank you very much. Thank you very much. Good morning, Christian. Thank you for taking my questions. I have two to begin with, if that's okay. The first one is regarding the sales in Q3. I mean, I know Q3 was a tough quarter driven by China. That is completely understandable. However, I'm just trying to sort of better understand where there is some sort of correlation to the B&O positioning, which is I get what you're saying, Kirsten, that you have a blue ocean strategy right now, trying to sort of find a space between consumer electronics and luxury goods. But with the quarter being down 18% in sales, and we saw yesterday that LVMH just recorded their Q1 with revenues being up 17%, with Asia even driving up sales 36%, I think. And then we saw Sonos in their latest quarter growing, I think, 1.2%. So I'm just trying to get a bit understanding of what dynamics can explain this material sales growth difference between your luxury audio products and that of other luxury and audio companies. It is quite difficult to see a correlation here. So if you can help with that, that would be much appreciated. And then the last question to begin with is regarding the strategy. So obviously this wind city strategy is clearly working. I mean, London saw very strong sellout growth and Paris is also growing. delivering a very solid growth, far beating the group levels. But to compare these more fairly, are you able to give us an indication of the profitability of these cities as you are likely using a higher degree of marketing spent in these cities as well? And then just a follow-up to that is, if these cities are also profitable, why not significantly ramp up faster this strategic initiative than what you're currently doing? Thank you so much.

Thanks, Benjamin. I'll start and then maybe pass on to Nikolai, depending on how it goes. But if you first start with China, China is our biggest market. So I think that is a very different situation than many of the companies that you mentioned, right? So we are China number one market. Then we are in a transition to a luxury timeless technology. We are not just there yet. I think that's another difference if you compare to many of the luxury houses. Then we also know, at least when we do our benchmark, since you mentioned it, that there are many luxury benchmarks, particularly the watch industry, that also have severe declines in China in the export of Swiss watches, for instance, to China. They are flagging big number declines. Then the third thing that is making us different from the other ones is that we have a quarter that is December, January and February, while as many of the companies have different quarters, a quarter four or a quarter one, where you have one affected month, we have two affected months. So basically in December, everybody did get sick, infected in COVID, and the ones who did not, they of course were afraid of getting affected. So there was very little traffic in the market, in the malls, in the multi-brand category overall. The other thing that affects this as well is that many, including our partners, had expected the market to rebound after Xiping's re-election in October 15. That didn't happen. So inventory levels were a bit higher than they should be. And China and Chinese partners, many of them are completely dependent on cash and it's a cash economy and they buy from us on cash as well. So therefore, of course, there is a price war immediately starting because everybody needs to deplete. their inventories in order to convert them into cash and what you don't want to do at that point in time if you're subject to that is to ship in more inventory because that will only worsen the problem and we are not the only ones having had that situation but two out of three months affected I think it's 66% basically of the time and we are down with 50% in revenue so I think there's a correlation in that. And then the other things that I mentioned, I hope helps to explain it more. Then when it comes to the Wind City Strategy, we are very positive around the results that we see and encouraged by the results that we see. Again, here it takes time and it requires money to expand in the cities. We are building our new flagship store in New Bond Street that has been unfortunately delayed due to permits, due to supply delays of material, interiors, etc. And also because we are cautious in how we spend our money and we try to take big care of our profit and loss statement and our balance sheet so we are not doing it as quickly as we could have done probably otherwise and then the same of course goes for the other cities we are doing it we know it's good we have evidence for the fact that it is working But given what we had as an impact of China, not only quarter three, but if you think about the last 10 months, we basically have had four months of the last 10 months impacted by China. a complete lockdown of our warehouse in April, May in both Shanghai and our customer, bigger customer spark and roll in Beijing in two months. And then you have December and January effects on that. So it's clear to say that our Our last 10 months have been severely impacted by the Chinese development and obviously as well our capability to invest into marketing, into retail, into product is affected by that as well and we are adjusting to those realities. And we don't have, as I'm sure you're aware of, the same balance sheet that many of the luxury houses do have as well. So they can mill on and execute on their strategies. But again, we're encouraged by the fact that it works and we will keep on doing it, albeit probably at a little bit more cautious pace. Do you want to add anything, Nicolai?

No, I'm not going to add much. We won't disclose specific profitability numbers for cities or specific stores, but I can confirm that all our cities are profitable and our cocoa stores are also profitable. So the constraining factor in building out that network is in reality Capex. And we need to make sure that we start making earning back on the investments before we are investing in more. And that's the approach we're taking. I think that's the prudent and right one to do for us right now.

Thank you very much, Christian. Nikolai, just a quick follow-up on the last part. Nikolai, when you say that the standalone stores are profitable, Is that on a standalone basis or also take into account the marketing used in these cities at large?

That's also including the higher marketing spend.

All right. Thank you so much. Thank you, Benjamin. The next question will be from Lionel Stoljesny from Danske Bank. Please go ahead. Your line will be unmuted.

Yes. Hello from my side as well. I have a follow-up, which then relates to the guidance and then also the performance of the peers you just spoke about. The difference in the quarters, that means that they have mods included. You don't. So I was just wondering, how is China performing when you take the last six weeks where you must have numbers? And now I'm talking sellout. Has that normalized as Louis Vuitton reported yesterday that they saw normalization in China?

Yeah, I take that one. So we see already from March, sorry, from February, sellout actually starting to come back. People are coming back from Chinese New Year and they are not sick anymore and they start to trade. And that trend is continuing as well into March. So we see the same trend.

Okay, because I was just thinking about the guidance that you have given implicit for the fourth quarter, where you go from continued decline to a growth, I think that's a spread of 25%. And you, in my view, should have, over the months since you gave the guidance, have more confidence, what direction you are moving the over or the lower end of the guidance given?

Yeah, we stand by the guidance and we still are not through in China, even though I think we see positive trends. There's still six, seven weeks to go before the quarter is over. So we don't want to jump the gun here.

No, and then maybe to add, Paul, sorry for jumping in, but I think one thing that we need to remember in China is also there's sell-out and then there's sell-in. And as we also said here during this call today, we do have... retail partners in China that due to the corona crisis have high inventory so they also have to sell inventory out before it translates into to sell in for us. So that's another factor in our cautiousness.

So your uncertainty to the quarter is maybe not relating to if demand is coming back it's more when partners are starting to fill inventories again?

That's one of those. And the other thing, Paul, as well, is that being a luxury timeless technology brand, we certainly want to sell at full price and we don't want to have discounting. And that is also making us more cautious in putting volume in there.

Okay. Then another way of looking at what Benjamin was talking about, the strong performance of your own stores, as you report in the quarter. Is that making you having any thoughts about your future setup with franchisees and own stores? I know that you don't have the money right now to do an in-forward integration, but is it having long-term discussions internally about the right setup?

Yeah, we would like to have more cocoa stores in the key cities. That's clear. We know it's working and we have and I think we actually said that already when we announced New York and Paris that we have a list of cities. that we have already done our due diligence on where we would like to have own stores and continue with that work and and so that's clear and that's part of the strategy the other thing that is also clear is that the learnings that we take from our own operated stores we obviously as well try to to implement in the monobrand stores and in the partner stores and many of them are also benefiting from good results when they do take that playbook and implement it But we have many as well that are from the past and that are not able to adapt to this playbook. So we will see more termination as well that has very little effect on revenue, but will certainly have an effect on the brand and the experiences that we deliver across the world. So that work with renovation of monobrand network and building on cocoa stores will go on in the pace that we can afford.

Then a question for you, Nicolai. That's the special items and the reversal of bonus, which you have in the same quarter. Bonus is part of the before special items, I guess, and special items are then outside the adjusted number. Can you tell which cost lines are being impacted here? On the bonus reversal? Special items. If you take the special items, where should we find these in the report?

Yeah, but you will find them in all the cost lines, but primarily in sales distribution and in development cost and a little bit in admin expenses.

Okay. Can you give the numbers of the distribution?

No, no, I don't have that number ready for you, Paul.

Okay. And the bonus reversal, where do we find that?

Yeah, but that's also impacting all the different lines sort of, you can say, relatively to the number of employees that we have in the different functions, right? So it goes into all lines sort of more or less relatively split out compared to the cost structure.

Okay. And then the final one for me is the cash balance, 208 million. And I know it's 300 if you take your facilities. And the cash flow in the coming quarters. How are you sleeping well at night thinking about your cash position? I guess that we should see. continued working capital support in the fourth quarter, but then we move into quarters, typically Q1 next year, which typically has negative cash flow because of the small size.

Fair question, Paul. And of course, we are monitoring cash flow and working with cash flow in a proactive way, in a diligent way. And we are also taking measures and changing things in order to change both historical patterns in cash flow. If you look at something we announced as well when it comes to a more Ferrari-like supply chain with a low volume production strategy where we don't have everything on demand and where partners will have to wait for delivery time, et cetera. So we are making changes to the operating model in that respect. Of course, some of them will take time and we are trying to be super cautious and prudent on how we spend our monies. That's all I think we would want to say at this point in time. Anders Nikolaj wants to add anything on how he sleeps at night.

No, I sleep fine at night. But as I said, of course, it's a focus area. But as we also repeated in the last many calls, we are following the plan that we've had all year. Of course, except from China and the impact that is having. But it continues, of course, to be a focus area for us.

When you monitor the franchise, do you see any risks there or defaults?

No, we do not see any risk at this point in time. And as we haven't done for the past many years, I think we actually have a quite strong partner network when it comes to sort of their financial structure. And yeah, we have had no losses in the past many years on our franchisees.

Okay, thank you.

Thanks. Thank you, Paul. As a reminder, please press bash down to ask a question. The next question will be from the line of Nils Lett from Carnegie. Please go ahead. Your line will be unmuted.

Yes, good morning. Thanks for taking my questions. First question is about your network capsule. Nikolaj, could you talk about the potential to further reduce your networking capsule in the short term? You used to operate business at around 200 million Danish kroner in networking capital. You are still at 269. So any further potential to reduce networking capsule in the short term? And secondly... Could you talk about the effect that the inventory reduction had in this quarter on your gross margin? I guess your inventories would include quite a bit of indirect production costs. So it must have had a negative effect on your gross margin in this quarter and how we should view this in the next few quarters. Thank you.

Yeah, so on net working capital, we do still see potential to reduce, especially on our own inventory situation. And I think it's always a little bit tricky to talk about net working capital as a number because of the composition and decisionality that you see. And so inventory definitely we see potentials to reduce further. We have reduced almost 200 million in the past year on our own inventory and almost 70 million in the past quarter. So the reduction rate will go down from here because it's becoming more and more healthy. And the biggest challenge we have on inventory right now is actually related to China also, where we still have too much on inventory in our own warehouse. That's where we should expect to see reductions going. When we talk about payables and receivables, especially on the receivable side, we do expect the receivables level to increase in the future as we start growing the company again. So that will have an impact. And if we go back to the overall network and capital levels we had during what I call the supply chain crisis, I think that was quite low and probably lower than what is sustainable when we are growing the business. So I will be careful around predicting overall network and capital levels going down a lot going forward, but definitely own inventory should be reduced further.

Great. And when it comes to the effect from indirect production cost on your gross margin in the quarter, how much was that and should we expect another effect here in the next quarter?

So the impact basically comes from indirect production cost and the fixed cost allocation, as we call it, into the gross margin. And it has an impact of a couple of percentage points in the quarter, which is basically driven by the lower revenue. So that's the impact we see from that.

Great, and could you talk about the effect that determination of spot purchases could have on your gross margin for the next few quarters?

Yeah, so we're seeing an easing on the component situation, and we haven't had a lot of concrete spot buys in the past quarter, meaning that we also took out the last spot buys that we had on inventory out in the P&L in Q3. So that should improve our margin not only in Q4, but also in the coming year. When you look at our guidance, maybe I should put it this way, for the full year, and you look at the indirect sort of guidance that we have for Q4, you would also see that we expect to have a positive EBIT margin before special items, even in the low range of our outlook and that is to a large extent driven by an improved gross margin due to fewer expensive components in the margin.

Great. And would you still have any ASP uplift feeding through your P&L here in the coming quarter if you compare with that of last year? And could you also elaborate on how much the ASP effect was on a group level in this quarter compared to last year?

So we would still expect to see an impact from improved average selling prices as we have done price increases here in March again. I'm not giving any details as to how much because implementation time of this is always due to inventories and etc. in the channel. Difficult to predict sort of exactly. But over the past year or so, we have definitely seen an increased ASP level. And on average, it's been 5-6%, but in some product categories, it's been up to 10-11%. But we have to remember that we've also seen increases in the general production cost of around 10% in the past year due to inflation. So it's more revenue impact than really a gross margin impact that we're seeing right now.

Great. And then just a final question for Christian, if I may. You mentioned that you have seen better sell-out data towards the end of the quarter. Would that apply to all your regions? And could you talk about where you're seeing the best performance, worst performance as we speak?

No. But my comment was specifically to China, number one. And we have, like we also say in the report, The Nordic countries seems to be much more cautious than Southern Europe countries and so it's not like a homogeneous kind of picture when we look at the sellout. Denmark for instance is very different than UK for instance as well. I would rather refrain from doing that at this point in time, but we certainly see many places and many partners having good sellout numbers. The biggest worry for us has been China and that China is picking up, given it's the biggest market. I think it's the best sign that we can see at this point in time.

Okay, thank you.

Thank you, Nils. As there are no more questions, I'll hand it back to the speakers for any closing remarks.

Thank you everybody for joining today. If you have any further questions, feel free to contact Kristina. Thank you very much.