Bang & Olufsen a/s

Welcome to this Bang & Olufsen's conference call for Q1 2023. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question-and-answer session. To ask a question, please press 5-star on the telephone keyboard. This call is being recorded. Today, I'm pleased to present Christian Ter and CFO Nicolai Venendo. Speakers, please begin.

Hello everyone, and thank you for joining the call. With me today, as always, I have my CFO Nikolaj Wendelboe, but I have also invited our Head of Strategy, Malene Brinkland Hansen. I will begin with the financial highlights for our first quarter, followed by an update on how we are progressing on our strategic priorities. I will also share some insights about our market and structural drivers to shed more light on our strategic direction. Nikolaj will take us through the financials in more detail and I will conclude the presentation part before opening up for questions. So if we move to the first slide. We are pleased with our performance in Q1. Despite the continued macroeconomic challenges, we reported a revenue growth of 5% in local currencies. EMEA grew 28% in local currencies, while Americas continued to progress with 13% growth in local currencies. In APAC, revenue declined by 16% in local currencies, mainly due to China declining by the same value. We achieved a gross margin of 52.6%, which was significantly above last year's level of 36.6%. In the last three years, we have absorbed more than 450 million Danish kroner in extraordinary component and logistic costs. The normalization of our global supply chain has contributed to the improved margin. In addition, the quarter was positively affected by a change in product mix towards higher margin products. The price increases that we have implemented since last year also supported the improvements. Our EBIT margin improved by 16.7 percentage points and was positive 2.6%. This was driven by the improved gross margin. We also improved our free cash flow by 20 million compared to last year, which was minus 61. Please turn to the next slide. We continue to see robust consumer demand in most markets, with like-for-like sellout growing by 8%, which is higher than our revenue growth of 5%. Sellout for our company-owned stores grew by 1%, while our online channels, e-tail and e-commerce, grew by 5% and 53% respectively. The bonobron network declined by 5% and multibrand declined by 3%. Consumers focusing on travel during the summer affected demand in EMEA and sellout declined by 3%. We did, however, see significant differences in demand across markets. The decline was primarily driven by our northern European markets. Our company-owned stores delivered sellout growth of 1% and the online channel grew by 10%. The flexible living category showed good growth, whereas states and on-the-go category declined in the period. Overall demand in EMEA picked up at the end of the quarter. Sellout in Americas grew by 5%, mainly driven by our own retail channel and company-owned stores. In terms of product categories, our flexible living category had strong growth in the quarter. The stage category was on par, whereas the on-the-go declined in the period. In APAC, we saw solid growth of 29%, albeit coming from a low level due to restrictions and regional lockdowns last year. This also illustrates the imbalance we have in consumer demand versus reported revenue as some retail partners still have excess inventory from the replenishment last year. If we look at our product categories, flexible living grew across regions while growth on the go was driven by APAC. The decline in the stage category was driven by EMEA and APAC while sellout was on par in the Americas. Please move to the next slide. In January, we presented our sharp and strategic direction. With our luxury timeless technology proposition, we want to strengthen and focus our position in the luxury market. That is a much more attractive place for us to be and we want to move away from the mainstream consumer electronics industry. We want to leverage our heritage and build on the exclusivity and quality that B&O has been known for since 1925 and become a culture-relevant love brand. We have a unique monobrand network and service setup. We will use that to deliver a true luxury experience to our customers before, during and after sales and we're working to optimize our channel network to reflect that. We will leverage our design and engineering capabilities to create beautiful and modular products based on our proprietary software technology platforms. This will, among other things, enable us to build long-lasting products and extend their lifetime through service repair and technology upgrades. That also ensures a high resale value, which we know is a key value driver for many customers. With our craftsmanship capabilities, we will create bespoke and limited edition products to satisfy the growing consumer demand. We will also elevate the customer experience in our products by continuing to improve quality and push the boundaries of audio technology with next generation audio. We will leverage our exclusive limited offerings to increase pricing, create scarcity and improving our margins and profitability further. Furthermore, we see that our company-owned stores are delivering gross margins significantly above group level. We have categorized our competitive landscape into four segments. Technology and personal electronics conglomerates, mass and premium audio market providers, audio specialists, and luxury audio and TV. It's clear from our competitor analysis that no other brand in the market is better positioned to lead in luxury audio and TV than us. Our luxury timeless technology proposition and execution will secure a growing position in the market. In addition, we have underlying structural drivers that supports our execution. The insights are based on Boston Consulting Group analysis, which was finalized during July 2023. If we move to the next slide. As mentioned, we have made fundamental choices to strengthen our position as a luxury brand in the audio and TV market. The combined luxury audio and TV market has an estimated retail value of 19 billion euro in 2022. We currently hold an estimated 4% market share. The mass and premium segments of the global audio and TV market combined are larger in size with a market value of 173 billion euro in 2022, but a projected CAGR of 1%, while as the luxury audio and TV market has 16% projected CAGR towards 2028, which provides an attractive growth opportunity for us. This will double the luxury segments penetration of the total market. The positive outlook for the luxury audio and TV market is further strengthened by the expected growth in the luxury sector in general. Personal luxury items such as watches, jewelry and bags are expected to grow 6-8% in the period 2023-2026. Experiential luxury is projected to grow by 8-10% in the period. So to sum up, if we move to the next slide, we see an overall positive luxury market dynamic in the years to come. The projected growth in the overall luxury market of plus 10% CAGR in 2022-2028 is expected to be led by Gen Zs and millennials, and the number of high net worth individuals is expected to grow as much as 10% per year. We have identified these segments as our key target audiences. In addition, we are tapping into several industry trends. The preference for personalized designs in homes where audio and TV solutions are becoming a part of the decoration will increase over the coming years. We also see a growing preference for electronic products with a clearer sustainable profile made in a responsible way and a growing interest in digital advancements related to audio and TV solutions. All of these features are part of our key differentiators and underpin our strategic direction. With that, I would like to go to our strategic highlights for the quarter. So we move to the next slide, please. We made progress with our strategic initiatives in the quarter, and I will highlight some of our achievements across our five shifts. To build brand awareness and target younger consumers, we launched our campaign, See Yourself in Sound. The campaign included customer interaction through Spotify to generate automated personalized avatars and the campaign gained global reach. Our marketing and brand efforts also helped us increase the number of customers registered in our app, as well as the number of customers owning more than two products in quarter one. In the US, we announced our new partnership with LG Electronics on the large-size LG Magnit MicroLED screen, intended for taking our home cinema offerings to new heights. With this partnership, we're offering a 136-inch screen with our Biolab 90 speakers for a complete home cinema system to luxury customers. We also announced the cradle-to-cradle certification of our Biosound Emerge Wi-Fi speaker. The cradle-to-cradle certified product standard is one of the world's most trusted science-based frameworks for designing and manufacturing responsible and circular products. This is a validation of our work to build products that last and are made in a responsible way. This also supports a higher lifetime value for our products because they can be serviced, upgraded and repaired. This in turn also contributes to a higher resale value for our products, which is important for many customers. We have also strengthened our portfolio. We announced Biolab 8 and our first outdoor speaker, BioSound Bollard. Both will be available for sale in quarter two. BioPlay EX is now also certified for Microsoft Teams, expanding our offering for hybrid workers. A key launch was the product collaboration with Ferrari. This collection not only drives revenue, but also brand awareness and traffic to our website and stores. We continued to optimize our channel network. This meant that we discontinued some of our partners, especially in the US where we closed more than 700 multi-brand doors during the quarter. We're executing our Wind City concept in London, Paris, and New York. Q1 sellout growth in London landed at 1%. Throughout the quarter, our Bister Village store was challenged by staff shortages and limited stock availability, and that had an impact on our performance in London. While our Win London execution continued to drive positive results, our Q1 performance in Paris was more differentiated. With a sellout index of 68, Paris Monobrand had relatively low performance, mainly due to a high comparable with a large sale within the stage category last year. However, our CoCo and Ecom channels delivered double-digit sellout growth. In New York, our sellout growth grew 13%. We hosted various events in our company-owned stores to bring musical experiences to specially invited guests and to activate our Scuderia Ferrari sponsorship with an exclusive race-watching event. Finally, we continued our growth trajectory for our adjacent businesses. Besides the collection with Ferrari that I already mentioned, we expanded our business with Harman. We will deliver a luxury sound system to all Acura car models in the coming years. And with that, I would like to hand over to you, Nikolaj. Thank you, Christian.

Now please turn to page 13. Before I go into details, let me add some comments on China. As we had expected, the economic recovery in China is slow, despite the positive indications we saw in the spring. The economic growth will most likely be slower going forward, and we do not expect improvement in consumer spending before the second half of our fiscal year. Generally, we see a fragmentation in the market in China. The monobrand customers are showing less sensitivity towards economic slowdown than the customers in the online channels, which are leading the online platforms towards a price focus, which we generally try to avoid supporting. Please turn to the next page. Reported revenue in Q1 was 619 million and grew by 1.2% compared to last year, or 5% in local currencies. The increase in reported revenue was related to product sales, which increased by 4.3% or 8% in local currencies. I will go more into details on the next slide. Overall, revenue grew across channels, except the multi-brand channel which declined by 37%. As part of our work to improve the luxury experience, we are more selective when it comes to where consumers experience our products and brand. In Q1, this meant discontinuing more multi-brand stores and less volume in the multi-brand channel overall, which affected all regions. Our band partnering and other activities declined by 16.1% against last year, corresponding to a 13% decline in local currencies. License fee revenue declined by 3%. This was mainly due to declining income from HP. Revenue from the automotive industry had solid growth in the period, supported by a good order backlog and easing of supply chains for car components. Revenue from co-branded products declined year-on-year. This was mainly related to a high comparable last year due to the ramp-up of the Bang & Olufsen Cisco 980 headsets. Please turn to the next page. Looking at the regions, EMEA grew 26.7% or 28% in local currencies to 303 million and double-digit growth in all channels except for multi-brand. Revenue was positively impacted by replenishment by retail partners and the monobrand channel grew 36%. At the end of the quarter, we implemented price increases and selected products in the portfolio and we saw retail partners replenishing inventory and executing project sales. This was primarily within the stage category. We expect that the price increases have pulled some demand forward from Q2. As part of the strategic transformation, the number of multibrand stores in EMEA has been reduced by 204 stores since Q1 of last year. In addition, the number of monobrand stores was reduced by 23 year-on-year. This was mainly due to a quality assessment of the monobrand network and partners, where 40 stores were identified to be closed in 2022-2023. Total online sales in EMEA grew by 13% year-on-year. Revenue in Americas grew by 6.4% or 13% in local currencies to 67 million, mainly driven by growth in our company-owned stores and our CIA channel due to our partnership with Origin Acoustics. Revenue from the multi-brand channel grew despite ending the partnership with T-Mobile that reduced the number of stores by more than 700 stores during the quarter. Revenue in APAC was 172 million, corresponding to a 16% decline in local currencies. Revenue from our Chinese market declined 26% or 16% in local currencies and accounted for approximately 54% of total revenue in APAC. We are making changes to the distribution, which is affecting performance in the short term. In addition, some of our retail partners still have excess inventory from replenishment last year. Lastly, the overall economic recovery in China is slow. Those factors combined contributed to the decline in our APAC region. The efforts to change the e-tail network and multi-brand setups in APAC meant that both channels declined in the period. Also, last year, multi-brands saw high comparables. Excluding partners with high inventory levels, our monobrand channels saw growth in the period, reflecting the mentioned lower sensitivity in consumer behavior in that channel. All three regions generated growth within the stage category, and EMEA and AmeriCast saw growth in flexible living, supported by our portable speaker A5 launched in Q4. The undergo category had negative growth in all regions. This should be seen in the light of the launch of BeoPlay EX in Q1 of last year. Please turn to page 16. Gross margin increased to 52.6% from 36.6% in Q1 of last year and 51.4% in Q4. The normalization of components and logistic costs has significantly lifted the margin level since Q3 last year. In Q1 of last year, extraordinary cost adversely impacted margin by approximately 11 percentage points. The normalization also contributed to an EBIT margin before special items of positive 2.6% against negative 14.1% in Q1 of last year. Please turn to the next page. If we look at some of the underlying drivers in the gross margin, our gross margin for product sales increased by 18.8 percentage points to 47.6%. Besides normalized supply chain costs, we delivered an improved gross margin across product categories, supported by price increases implemented in last year. In addition, a change in product mix towards higher margin products favorably impacted the quarter. The gross margin from brand partnering and other activities was 87.8% up from 82.1% in Q1 of last year. The increase in gross margin was mainly related to the change in mix, as the category included a lower proportion of product revenue from a brand collaboration with Cisco. Lastly, I want to comment on a smaller change in cost allocation between our product business and our aloe business residing in the brand partnering and other segment. Due to a higher cost allocation to our aluminum production, the gross margin in brand partnering and other activities decreased by approximately 5 percentage points and product sales increased by approximately 1 percentage points, depending on the mix and seasonality. Comparable fixtures have been updated. Please turn to the next page. Total capacity costs were 309 million and on par with Q1 of last year. In the quarter, we received final adjustment of COVID-19 compensation packages, which reduced our capacity costs with 12 million. Development costs were 63 million and against 69 million last year. Lower incurred costs due to COVID-19 compensation packages were partly offset by lower capitalization compared to last year. Distribution and marketing costs increased by 10 million to 15 million. The increase was mainly related to more sales and marketing activities in full year effect of the resources added since Q1 of last year. The marketing cost ratio was 11.6% compared to 9.8% in Q1 last year. Administrative expenses declined 4 million to 31 million. This was driven by the mentioned COVID-19 compensation packages and general cost savings. And finally, we had no special items in the quarter. Please turn to the next page. Net working capital increased to 311 million during the quarter as a result of lower trade payables. We continued to improve our inventory level, and inventory decreased by 21 million compared to year end. In addition, no components purchased on the spot market remained on inventory, which contributed to a healthier inventory composition. Trade receivables decreased in the quarter and sales with extended credits was 1% compared to 6% in both Q4 and Q1 last year. Trade payables was at 403 million compared to 565 million at year end. This was driven by lower production activities in the quarter and inventory management. Compared to last year, net working capital decreased by 14 million. We continue the work on improving our working capital. The net working capital ratio to revenue was 11.3% in Q1 and on par with Q1 of last year. As you can see, the components of the net working capital are different year on year due to the work with reducing inventories. Please turn to the next page. Free cash flow improved 20 million and was negative 61 million compared to negative 81 million last year. The development since last year was driven by the improved EBITDA, offset by an expected higher net working capital level compared to Q4. The capital expenditures were 42 million, which was 16 million below Q1 of last year. Investment was primarily within intangible assets and related to new products and platforms. Finally, capital resources consisting of available liquidity and available drawing right on a revolving credit facility stood at 310 million, down 74 million from Q4. This was mainly due to the negative free cash flow. Our available liquidity was 150 million at the end of the quarter, consisting of cash and securities offset by repo transactions. With that, I would like to hand the word back to Christian.