Bang & Olufsen a/s

Hi everyone, and welcome to the Bang & Olufsen's full year and Q4 presentation. Today's call is being recorded. 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 your telephone keypad. Speakers, please begin.

Hello, everyone, and thanks for joining the call. With me today is our CFO, Nikolaj Wendelbo. As you have probably seen, we made two announcements yesterday. Along with our Q4 and full-year earnings release, we also shared our plan to accelerate our strategic execution, which includes mid-term financial ambitions. Therefore, today's agenda will be a little bit different from our normal earnings calls. I will start by taking you through our key highlights for the year and give you an update on our strategic execution. I will then turn to the introduction of our midterm ambitions and outlook for 2024-25. Nikolaj will take us through the financials in more detail, and I will conclude the presentation part before we open up for questions. So if we move to the next slide. Let us begin by looking at our Q4 and full year performance. Overall, we are pleased to see that our continued effort in building a robust financial foundation for the future is paying off. In 2024-25, we delivered a record high gross margin of 53.3% and an EBIT margin of 2.4%, which is the best in six years. We achieved this despite the fact that our revenue of 2.6 billion was lower than we originally had expected. The margin improvement underlines that we have created a more resilient business, which enable us to continue to execute our strategy despite headwinds. Looking at sellout numbers, we delivered an increase of 3% year on year. The increase was mainly driven by APAC, which came from a low base last year, while we are still seeing challenging markets in some regions. As part of our strategic transition towards luxury, we significantly reduced our presence in selected multi-brand and e-tail stores and shifted our focus more to developing our branded channels. The changes in the distribution and product mix towards high margin revenue, along with the positive effects of our pricing initiatives, were crucial to our earbit and gross margin improvements. Since we started implementing our luxury timeless technology strategy in January 2023, we have made good progress with key initiatives while also improving our company and financial robustness. This year, we extended our partnership with Scuderia Ferrari for another two years. We also partnered with Ferrari and brands such as Rivan on product collaborations to reinforce our luxury position. This is a way for us to amplify our own brand and to build brand equity, but it's also a revenue driver. In June, we announced our latest brand ambassador, Ferrari's Formula One driver, Charles Leclerc. He's one of the most popular sports stars in the world and has a large fan base, and he will help us to increase our awareness globally. Our marketing efforts to attract more customers have been a success. This year we grew our customer base by 19% and customers who own two or more products grew by 14%. We also made new additions to our portfolio and strengthened the customer experience through our proprietary software platforms and updates to the app. Among others, we introduced BioLab 8 and BioSound Bollard. Both products complement our existing portfolio extremely well, with the latter being our first outdoor proposition, which is of growing interest for our target audiences. We also launched BioSystem 9000C as part of our recreated classic program, and we presented BioConnect Core, which enables our customers to connect past, present, and future products and turn them into a modern music system. Being a champion of long-lived products and ensuring that our products can have multiple lives are important differentiators for us. That's also why we are committed to cradle-to-cradle certification of all our products. This is one of the world's most ambitious product circularity standards, and recently we had Biosound A5 certified at the bronze level, making it the third product to receive this validation. Our work to create a luxury retail experience and optimize our footprint continued. In December, we established a global retail organization to drive that effort and ensure brand consistency, and we are seeing a positive impact of that. We have improved and systemized our training and started the rollout of our new store concept. In 2023-2024, we reduced our monobrand network in EMEA region by 18 stores. And as mentioned earlier, we have significantly reduced the number of multibrand stores and e-tailers to strengthen our luxury position. We will continue to have a presence in multibrand. However, we want to be more selective about where we are and what product these retailers can carry. We strengthened our presence in our wind cities this year. We relocated a store in New York. We opened the doors to our brand new flagship store in London. And at the end of the financial year, we opened a new company-owned store in Paris. On top of that, we have started our work to implement our wind city concept in Hong Kong. If we move to slide number six. With our strategy, we are moving towards a differentiated and unparalleled position in the attractive and growing luxury audio market, where we have a huge untapped market potential. And we can see that our strategy is working. We have delivered a historically high gross margin and delivered about 50% in the last five quarters. This is an outcome of the structural changes we have made in our channel network, the WinCity concept, our luxury pricing strategy, and the investments in our product portfolio. We want to build on our momentum and strong foundation. And that is what we have decided to accelerate our strategic execution with investments that can further strengthen our position in the audio luxury market. This will enable us to deliver higher profitability and sustainable growth in the medium and long term. I will come back to some of the key elements of our strategic acceleration, but first I'll go through how to finance the investment needed for implementing the plan and to ultimately achieve the mid-term targets we announced yesterday. We plan to carry out the capital increase of up to 20% of the share capital within the first half of 2024-2025. This will be done as a directed issue and private placement without preemptive rights for existing shareholders. In order to do so, we need our shareholders' approval for the authorization to increase the share capital by 20% at the annual general meeting to be held on August 15th. The actual proposal will be included in the announcement to convene the AGM. We have strong interest from several existing and potential new investors and have a high degree of confidence that we can execute on our midterm plan. We also have the support from our main existing shareholders for our AGM proposal. Please move to the next slide. I will now go into more detail of our strategic acceleration, which will help to reinforce our luxury positioning and our plan to meet the medium term financial ambitions in the period. We want to further enhance brand awareness and brand equity through targeted marketing investments, We have made progress over the past couple of years by building partnerships with luxury brands. This has increased our global visibility and among our key target groups, especially within the high net worth individuals. We improved our e-commerce experience and systemized our CRM efforts. Collectively, these efforts have enabled us to grow our customer base since the launch of our strategy, and increasing the brand awareness is key. We might have strong brand awareness in Denmark, but globally, we still have work to do to reach our target audiences. Over the three-year period, we want to improve the brand visibility by, among others, increase advertising, increase the number of local activations, collaborations with brand ambassadors and influencers relevant to our target groups, and more targeted storytelling that reflects Bang & Olufsen's unique design, sound, and craftsmanship and heritage. Our branded channels are an important part of our growth plans. This is where we can give customers the full Bang & Olufsen experience. And we want to have stores in the right locations, in the right cities around the world where our customers are. We are still lacking being present in cities where our potential customers are. We have seen from our WinCity concept and from our key retail partners that when we do it well, we can grow the business significantly. Therefore, it will be a priority to optimize Bang & Olufsen's store network and experience. This includes closing underperforming monobrand stores, relocating and upgrading existing stores, and opening new monobrand and company-owned stores in key global cities and regions where we don't have sufficient presence today. We need to be where our customers are. They are fluent design and music lovers of which there are approximately 200 million globally. Take Miami, for example. We don't have a presence today, but it's a prime destination for our target audience, and we need to build a stronger footprint there to capture the potential. We will continue to invest in IP rights and in our timeless product portfolio. The latter will include continuous investments in our two software platforms, which will enable us to strengthen our portfolio of seamlessly connected products and bring innovative new products to the market faster. We will also expand our outdoor and recreated classics portfolio and invest in our bespoke capabilities. We will continue to leverage our product pricing power to strengthen our luxury position and improve our profitability. Finally, we will seek to grow license revenue from strategic partnerships by engaging with new partners that reinforce one or more of our luxury timeless technology pillars. Our license business not only generates revenue, but it's also a significant margin driver. And we see big opportunity to grow this further with this plan. If we move to the next slide. We believe that by building on the momentum we have and adding the right investments, we will be able to grow and strengthen our position as the world's leading luxury audio brand and realize Bang & Olufsen's growth potential in the midterm. We are aware that there are elements we are not in control of. That goes for macroeconomic development and for the uncertainty related to the timing of our retail investments, where it will be essential to get the most optimal locations for company-owned stores, as well as finding and onboarding the right partners for new monobrand stores. We have crafted a thorough plan which has led us to announce the following midterm financial ambitions. Organic revenue growth of 8% CAGR during the three-year period covering the financial years 2025-26 to 2027-28. To reach an EBIT margin before special items of 8% in 2027-28. To have free cash flow of 250 million in 2027-28. We have come a long way, and I'm confident we can achieve this. And I'm very excited about the future of B&O. With this, I will hand it over to Nikolaj.

Thank you, Christian. Now please move to the next page. Let me start by adding some more details to the mid-term ambitions from a CFO perspective. We have defined three key building blocks that will help us accelerate profitable growth. Brand awareness and pricing, channel development, and growing the product and license business. We want to increase brand awareness and brand equity and strengthen our luxury position. This requires investments in marketing. We will focus marketing spend on the things that work, and then when the timing is right, we will accelerate marketing spend and expect it to be a strong growth contributor. Increased pricing continues to be an important part of our strategy implementation to reflect the luxury position and will be a key revenue and margin driver. A large part of our investment lies within channel development. We will target CapEx towards opening of new company-owned stores and invest in upgrading our monobrand network and closing underperforming stores. In addition, we will hire staff to support this, which is expected to increase the capacity cost level. The last of our key building blocks is growing the licensed business. We will target investments towards software solution that underpins our offering, enable us to delivering a licensed business which is more than our logo on a third-party product. Products are not outlined as a specific building block on this slide. We will, however, continue to invest in our product portfolio and our software platforms. Continuing to delivering a world-class product portfolio is the foundation for succeeding with all the building blocks. And therefore, investments into our products will also increase as part of the plan. In total, the initiatives are expected to increase capex by 30 to 40% during the period compared to 2024-2025, while our capacity costs are expected to increase by 100 to 200 million per year during the period. Please go to the next page. I will now take you through the outlook for 2024-2025. The outlook for next year is based on the assumption that we are getting the capital increase approved and we can make the required investments to accelerate our strategic execution. Therefore, 2024-25 will be an investment year for us and bear in mind the effects from devaluating investments come with a delayed effect. Also, more elements of the mid-term plan is not completely within our control timing-wise. As an example, the timing of the opening of new stores will depend on finding the right location and fitting the store. We also expect that capacity cost increase will be front-loaded as we will have to hire the right competencies to help us execute on the mid-term plan. In the financial year 2024-2025, we expect to increase our capacity cost by around 100 million. In addition, CAPES is expected to be in the range of 250 to 275 million. For the financial year 2024-2025, we are therefore expecting revenue growth in local currencies from minus 3% to plus 3%, with an EBIT margin before special items of minus 2% to plus 1%, and free cash flow is expected from minus 100 million to zero. We expect our outlook for the year to follow regular seasonality, and we'd like to remind everyone that Q1 of last year was better than a normal Q1 due to the price increases we implemented in September last year. Now, please move to the next page. So now we'll take you through the Q4 financials. I'll try to be quick, as I guess the main topic today will be our midterm ambitions. So move to page 12. So I'll start by going through sellout for Q4. On group level, our like-for-like sellout declined by 2% compared to last year. APEC reported sellout growth driven by improved market demand, while sellout in EMEA and Americas declined. Last year, we also made some end-of-life deals to reduce inventory levels, and this is also reflected in the numbers. If we exclude these deals, like-for-like sellout grew compared to last year. Across regions, our stage category grew by 9%, while flexible living and on-the-go declined by 3% and 19%, respectively. This reflects the change in channel mix towards our branded channels, as well as the end-of-life deals last year that I just mentioned. If we look at the regions, like-for-like sell-out in EMEA decreased by 5% year-on-year. The monobrand channel increased slightly, while other channels declined. The stage category grew while flexible living and on-the-go declined in EMEA. Sell-out in America declined by 7% across the channels, except for our company-owned stores, where we delivered double-digit growth. The monobrand channel declined due to poor performance in a single geographical market. Like-for-like sellout in APAC increased by 6% with most channels performing. Sellout in China grew 4% with positive traction in the monobank channel and the states and flexible living categories. Japan, South Korea, and Taiwan all reported double-digit sellout growth. Please move to the next page. Reported revenue for the quarter was 655 million. This is an increase of 3% in local currencies compared to Q4 of last year, Overall, the performance was good and in the higher end relative to the expected. In terms of channels, the development was driven by reported low single-digit growth in branded channels, offset by a decline in the multi-branded channels. Our brand partnering and other activities grew by 24%. This was mainly driven by higher income from the recently launched Cisco 950 earphones. Our license income compared to last year was driven by automotive. As we have previously communicated, our HP agreement is expiring and HP income therefore declined as expected. Please turn to the next page. Looking at the split of product revenue, EMEA and America's grew revenue while revenue while APAC declined. In EMEA, Revenue grew 1% in local currencies to 311 million, with the enterprise channel performing well. In America, revenue increased 12% in local currencies to 78 million. The ramp-up of our collaboration with the Korean luxury automaker Genesis helped us to deliver double-digit growth in the enterprise channel. Revenue in APAC was 163 million, which caused funds to a decrease of 6% in local currencies. Revenue from China decreased by 2% in local currencies. However, Monobrand increased year on year despite one partner having relatively high inventory levels. The EGL channel decreased double digits as we continue to limit our presence in this channel as part of the transition towards the desired luxury positioning. All in all, the stage category increased by 27%, reflecting the change in distribution channels as well as a strong performance from enterprise. Flexible living and on-the-go declined 30% and 17% respectively. Both categories were impacted by end-of-life deals in Q4 last year. The decline in flexible living also reflected a strong launch of Biosound A5 last year. Please turn to the next page. The gross margin was 54.3%, which was a 2.9% improvement from last year's Q4 margin of 51.4%. In the first comparable quarter, without any impact from extraordinary component and logistic cost in last year's number, The improvement in Q4 was driven by increased margins across regions, price increases, and a positive change in product and channel mix. The EBIT margin before special items was 1.8%, equivalent to an EBIT margin of 2.4% for the year. We have generated a positive EBIT margin every quarter throughout the year, and we are pleased to report our highest margin in six years. Please turn to the next page. Looking at Q4, capacity cost increased 54 million, of which 36 million was special items, mainly due to a reorganization. This especially impacted the cost development in distribution and marketing. The high development cost was driven by higher incurred cost, which was partly offset by a higher capitalization ratio. Costs were mainly for software platform development and product roadmap activities. Administrative costs increased by 10 million year-on-year. The low level last year reflected that no bonuses were paid. In addition, special items drove some of the increase. Please turn to the next page. Networking capital decreased by 34 million during the quarter to 263 million. We continued our focus on inventory management, and we saw our inventory level continue to decrease, ending the year at 447 million. The decrease in receivables was driven by collection efforts, and sales with extended credit remains at a low level. Please turn to the next page. And finally, the free cash flow for Q4 was positive 43 million. The development since last year was driven by increased cash flow from operating activities, and for the full year, we reported a positive free cash flow of 11 million. CAPEX was at 48 million for Q4, totaling 280 million for the full year. As I alluded to earlier, we expect the level to increase in the coming years. Capital resources amounted to 344 million at year end, of which available liquidity was 184 million. And with that, I would like to hand the word back to Christian.