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.