Ladies and gentlemen, welcome to the Bang & Olufsen interim report, second quarter, 2019, 2020. For the first part of this call, all participants will be in listen-only mode, and afterwards, there'll be a question-and-answer session. Today, I'm pleased to present CEO Kristian Teär. Please begin.
Good morning, everyone, and thank you for joining the call today. My name is, as you heard, Kristian Teär, and with me today, I have our CFO, Nikolaj Wendelboe. I will start by going through the highlights of the quarter, and then Nikolaj will take you through the financials. I will then finish by going through our outlook for the fiscal year 2019 and 2020, before opening up for questions. Let's move to Slide number 4. On December 17th, we published our preliminary revenue, EBIT margin, and free cash flow for the second quarter, and we subsequently adjusted our outlook for the year. As you can see on this page, final numbers for the quarter are as communicated, and we maintain the outlook given in the December announcement.
We are now focused on the second half of the year, and we have already initiated several activities that will support those goals. As I also mentioned on the webcast in December, my main focus here and now is our sales and marketing execution. We will improve our sales and distribution network, our sales programs, and we will increase resources and strengthen our competencies to lift us to a higher level. Furthermore, revenue in the second half of the year will be supported by several new or upgraded products. I will get back to these activities on the following slides. As you know, we will in April present a three-year strategy plan outlining how we will ensure stronger long-term financial performance through increased number, focus, specific sales initiatives, stronger and more frequent product releases, and cost optimizations. So if we move on to Slide number 5.
In the previous financial year, the number of product launches was too low. The financial performance last year was impacted by this, and the lack of new products in the previous quarters is still impacting our financial performance. We have set out an ambitious plan for product launches. In Q2, we launched all the products and upgrades that we had planned for. Some of the very important launches was our new TV, Beovision Harmony, and our soundbar, Beosound Stage. The Beovision Harmony was launched in October in a 77-inch version, and end of November, we followed with a 65-inch version. In total, these two products generated around DKK 95 million in revenue in the quarter. Furthermore, we launched a second generation, our Beoplay H4 headphone, and in September, we came out with our autumn-winter collection colors for a range of On-the-go products.
We will also, in the third quarter, have color, material, and finishes variations, or CMF versions, as we call them. As part of the Chinese New Year, we already in December launched our Stardust Collection, which is only available in selected countries. During both our third and fourth quarter, we will also, as promised earlier, launch more new products. In Q3, we will launch a new speaker in our Flexible Living category, and in Q4, we have a new product in our On-the-go category. By the end of the financial year, we will have launched new products in all product categories. Finally, we will launch upgraded versions on some of our other popular products in On-the-go category. As important as new products are for our business, products cannot stand alone, and we therefore continue with upgrading the in-store experience for consumer, which I will address on the next slide.
So please turn to Slide number 6. The ambition in Q2 was to open or upgrade more than 100 stores. We did, however, come in short on our plan for Q2 with 90 stores opening and upgrades. The shortfall was primarily related to a few key partners in Europe. The upgrades are not canceled, but just slightly delayed, and the plan for the full year is thus maintained compared to what was presented in Q1. In total, 165 stores have been opened or upgraded during the first six months of the year. One of my first observations when I started as CEO was that we need 360-degree view on the consumer experience. We will therefore focus on much more than just the physical layout and experience for consumers.
We will look at the whole sales execution, including staff training and how we incentivize staff. We, having Q2, established four pilot stores with the ambition to test both store designs and staff training. We will monitor what works from a sales perspective, and then roll out the best solution to our partners. In the second quarter, we also initiated a revisit to our multi-brand network. This was done to fully understand which stores are performing, and secondly, what kind of in-store presence we have in each place. This has resulted in a downward revision of the number of multi-brand points of sale compared to Q1, but this is a more accurate representation of our network. It will also enable us to prioritize where and how we enhance the in-store performance, which is one of the top priorities.
To understand what is working and what is not, we need to improve our insight into our sell-out performance, and that is the last point I will go through. Please turn to Slide 7. We have initially focused on getting sell-out insights from our European monobrand stores. We saw a slightly lower sell-out for Q2 compared to last year, but significantly better than in Q1. It was, however, lower than what we had expected. We have our new model, where we get the data on product by product level. By end of Q2, 44% of revenue from European monobrand partners were captured in our new system, and that figure is continuously rising. We get the data representing revenue from around 85% of all monobrand stores, but these will not be included in our analysis before we have validated the data.
The data for the first half of the year shows that sell-out has been higher than sell-in, and thus we have seen inventory depletion with retailers, which has been the ambition and the reason why we actually anticipated revenue decline for the first half of the year. Especially in Q1, we saw that monobrand stores reduced their inventory, and with the data we now have, we can see the decline has been most significant within the Stage category. In Q2, partners increased their inventory, but this was related to the launch of Beovision Harmony and Beosound Stage. Adjusting for these product launches, partners are also reducing inventory for Q2. Getting data insights is critical, is a critical part of our journey, and it's encouraging that we are progressing on this journey. We are working on getting the rest of the monobrand stores, as well as the multi-brand data included.
When this work has progressed further, we will have a better understanding of our performance across product, regions, and partners. All combined, I think that we are seeing some important progress on a number of fronts, but I'm aware of that we have some very important work still ahead of us. With that, I would like to turn over to Nikolaj, who will take you through the financials for the quarter.
Thank you for that, Kristian . Please turn to Slide 9. As Kristian said in the beginning, Q2 revenue declined by 31% to DKK 627 million. We did expect revenue to decline, but due to the transition to a demand-driven model, with focus on reducing retail inventory that was built up last year, the decline was higher than expected. Primarily driven by lower sell-out, as Kristian also highlighted in the previous slide, and for this reason, certain key partners still have high inventory levels. Sell-out was also impacted by sales in unauthorized channels, which especially had an effect on revenue in our On-the-go product category. In addition, we saw increased competition in the earphones markets. On the positive side, revenue from the launch of new products supported revenue.
This was also driven by sales of display units to our partners, and finally, brand partnering and other activities grew 16%. We saw the gross margin decline to 42.5%, compared with 49.2% in Q2 last year. Currency hedges lifted last year's gross margin, and if we exclude the effect, gross margin declined by 4.6%. The decline was primarily related to a provision for component liabilities, which had a negative impact of around 4%, as well as sale of end-of-life products at lower prices. Our EBIT margin was impacted by the decline in revenue and the lower gross margin. Capacity costs were lower than last year. I will go into more details on capacity costs later.
All in all, EBIT margin was -12.1%, and 9.8% if accruals for severance cost of DKK 15 million are excluded. Please turn to Slide 10, where I will go through the development into three regions. Revenue declined in all three regions, but different factors in each region contributed to the decline. EMEA declined by 42% to DKK 312 million. There was a large decline in the Stage category if we exclude the products launched in Q2. As Kristian shared earlier, monobrand stores reduced inventory in Q2, and this was expected to have a negative impact on our revenue in the quarter. Revenue from the Stage category was, however, positively impacted by the launch of Beovision Harmony and Beosound Stage, adding DKK 76 million of revenue in the quarter. We saw a decline in the Flexible Living category.
Half of decline was related to Beosound Edge, a product launched in Q2 last year. Lastly, the decline in On-the-go was seen within Bluetooth speakers, headphones, and earphones. Earphones was impacted by increased competition in the market. Also, sales in unauthorized channels had a negative impact on performance. The decline in Americas was almost exclusively related to On-the-go. We saw an increase in the Stage category, which was supported by the launch of new products. Flexible Living declined, but part of this was related to Beosound Edge. The On-the-go category declined by 66%. This was primarily related to earphones, where revenue was impacted by sales through unauthorized channels. Reduced presence in the mass market consumer electronics channel impacted revenue as well. Revenue in Asia declined by 13.2%. Stage grew by 58% in the quarter.
The increase was driven by both sale of existing products, as well as the product launches in Q2. The decline in the Flexible Living category was seen across most products, but with a small positive growth from Beoplay A9, which is the best-selling speaker in the category. The decline in On-the-go was mainly related to earphones, where we had high comparables due to high sales of end-of-life products last year. Please turn to the next slide. Our capacity costs declined in the quarter, which was related to the development cost and the distribution and marketing cost. Reported development costs declined by 8.9% compared to last year. The decline was related to higher capitalizations and lower amortizations and impairment losses. The incurred development costs were, however, at the same level as last year. Distribution and marketing costs declined by 10%.
The decline was, to a large extent, related to the company-owned stores in China, which we since have divested. Distribution and marketing costs were also impacted by our focus on physical in-store upgrades, where part of the cost are capitalized and thus part of the CapEx for the quarter, rather than part of the capacity costs. The administration expenses grew by DKK 17 million. However, accruals for severance costs amounted for DKK 15 million of the increase. If we exclude these, administration costs grew by DKK 2 million. Last year, there were several vacant positions in the executive management board. These positions have now been filled, which have resulted in increased administration cost. Please turn to the next page. The total CapEx was DKK 51 million in Q2, which was at the same level as Q2 last year.
CapEx was impacted by higher investments into intangible assets, partly related to the increase in capitalization of development cost, as I mentioned before. Investments was related to new products, technology platforms, and in-store fixtures. Net working capital declined by DKK 111 million to DKK 400 million, and net working capital is now reduced to a level only slightly higher than Q2 last year. I will go into the details on the next slide. Our free cash flow was positive with DKK 32 million, mainly due to the improved net working capital position. In addition, we have sold a building which supported cash flow by DKK 14 million. Compared to last year, the implementation of IFRS 16 and leases have supported the free cash flow by DKK 9 million. Finally, the net cash position was DKK 42 million.
Excluding the effect of IFRS 16, the net cash position was DKK 228 million, which is an improvement compared to Q1. By the end of the quarter, our cash position was DKK 298 million, and we therefore strengthened our cash position by DKK 23 million in the quarter. Please turn to page 13. Inventory declined further in Q2 compared to Q1. However, the level is still higher compared to last year. As revenue in Q2 was lower than expected, the decline in inventory was also lower than anticipated, and new products have also impacted inventory. Trade receivables increased slightly, which mainly reflects that new products are being produced. Trade receivables grew slightly in the quarter compared to Q1, which reflects the higher sales. Compared to Q2 last year, trade receivables are lower.
This is a result of lower revenue compared to last year, but also the restricted use of extended credits. The increase in extended credits to 7% compared to the 5% in Q1 relates to display units for new products, where the credit terms are better as the products are not for sale in the stores, at least not for a longer period of time. In Q1, we saw an increase in overdue receivables related to a few key partners. This has largely been resolved during Q2 and has a positive impact on receivables. We still have some way to go, but we have made progress to get control of our working capital, contributing to the positive free cash flow in the quarter. And with that, I would like to hand the word back to you, Kristian .
Thank you, Nikolaj. If we move on to Page number 15, before opening for questions, I would like to reiterate our outlook for the year. Revenue is expected to decline by between 13% and 18%. Revenue in the second half is expected to be positively impacted by the products that we have launched in Q2, and of course, also new products that are launching in the remaining part of the year. Furthermore, several initiatives will be launched to improve sales and marketing, including new sales programs, improved sales and distribution network, an increase in resources and competencies, and a more product-focused marketing. We still expect to have issues with unauthorized sales, and the need to ensure inventory reductions with certain partners is also expected to impact revenue in the second half of the year. EBIT margin is expected to be -4%- 9%.
Compared to last year, we still have some headwind from currency hedges. Free cash flow for the year is expected to be negative, with DKK 100 million-DKK 150 million. As the free cash flow for the first half of the year was negative DKK 174 million, we expect to deliver a positive free cash flow in the second half of the year. With that, we'll conclude the presentation, and we open up for questions.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. So once again, that's zero one to ask a question, or zero two if you need to cancel. There'll be a brief pause now while we register any questions. Our first question comes from the line of Poul Ernst Jessen of Danske Bank. Please go ahead. Your line is open.
Thank you. I have a few questions. First, on the...
... inventories in the channel, do you have any guesstimate or any sense of how much is left out there, and in what categories is it? More or less only the On-the-go that is left out there. That's one question. Second is on your own inventories, which is down, but it includes this provision of four percentage points, that's DKK 25 million. So if we adjust for that, then inventories were more or less flat. Can you say something about if we compare the inventories to end of the Q1, how it's performed on the products which were there at that time? And then how much is added by the new product launches on the inventories, just to give a sense of what is happening on the line with these products, which is approaching end of life? Thank you.
Thank you, Paul. On inventory levels in the channels, I will not be able to give you exact numbers of the level of inventories that is in the channels. What we can see is that inventory is depleting in all categories, but the largest depletion has been within the Stage category, which is also the category where we saw the biggest channel filling last year. But we know that European mono brands are depleting the most at the moment, where some of our partners, which you can say are more distributors, have high inventory levels still.
On our own inventories and development between Q1 and Q2, what you see on the slide is actually a true comparison because the provision for component liabilities is not a provision that sits on the inventory.
Okay. But it impacts the gross margin?
It impacts the gross margin. It's a provision for a liability with certain of our OEMs.
Can you then give any insight, if we then say it's down DKK 28 million, how much is coming in of products which were not there end of Q1? So just to give an indication on how much of products where you have a risk of end of life discount is coming down.
Yeah, it's a relatively minor number that is on products that is not there.
Minor-
Yeah.
Number on products that is not there. What do you mean?
Yeah, so I mean, you were asking whether they were on products that was end of life?
Yeah.
Yeah. And it's for, it is for products that are going to be end of life in the foreseeable future, but they're not necessarily end of life yet. It's part of our internal planning for these products.
Then, a question on, it relates to December. You said earlier September, October was according to plan, November was extremely weak or very weak. Can you say something, has December performed like November, or, or how has that performed?
We will not display any, or disclose any numbers of December in a Q2 call. But we can say we see a more stable revenue development between the different months and over the quarters, which is basically a result of our changed approach towards our selling into partners.
Okay. Then, final for now, on the soundbar that was launched very late in November, and in some markets it was only in December. You were pleased initially with the reception of both that and the Harmony. Do you want to say anything about how the Stage has then performed? Has it succeeded expectations or in line, or?
I think what we will say, as now, we're still too early to sort of give a full evaluation, is that both Harmony and Stage is performing satisfactory to us.
On the Harmony, that also accounts for the 65-inch version?
That accounts for Harmony overall.
Okay. I will come back. Thank you.
Thank you. Our next question comes from the line of André Thormann of ABG. Please go ahead, your line is open.
Many thanks. To start off with the first question, you mentioned a bit on cost cutting potential at the conference call after the profit warning. Do you have any further to tell about this? Because as I hear it, it's not like you will spend less on marketing or on R&D... Thank you.
Also, Kristian here. So we are reviewing holistically all the costs that we have, and, we will, like I said, as well, in December, we will invest more in certain areas, and obviously, that will mean, savings in other areas. That work is going on as we speak, and, like I said, we're taking a holistic view. We have some ideas, of course, where we can become more efficient, and we believe we have potential to be more fit, for purpose as well when we do that exercise, but I don't want to specify at this point in time where we will find the cost and how we will reprioritize it.
Okay, thank you. Then in terms of, now you had the first quarter with Harmony, or selling Harmony, have you seen any cannibalization of Eclipse on this selling or?
No, not really, André. We still see that these two products actually complement each other in the stores because they have a somewhat different propositions to the customers.
Okay. Yeah, and then also a bit because I, I'm not sure I fully understand, in terms of the question Poul also had on the inventory. I mean, is there any estimate of how much inflow there was on the inventory from new products after Q1?
Well, of course, we know how much inflow we have for new products after Q1, but we are not disclosing those details in our reporting.
Okay, I will go back in the queue. Thank you.
Thank you. Our next question comes from the line of Christian Wienberg of Bloomberg News. Please go ahead. Your line is open.
Hi, I have two questions. One of them has already been answered, that was regarding December sales. The other one is regarding the severance cost. You're paying DKK 15 million to the former CEO and the former executive vice president. Well, is that all, or will there be booked more on that in the following quarters? That's the question.
So Kristian here. This is according to the contracts that we have with them, and there is no further costs coming from that.
Okay, thanks.
Thank you. We have a follow-up question from Poul Ernst Jessen of Danske Bank. Please go ahead, your line is open.
Yes, thank you. I was thinking about the product pipeline. You're giving a little more disclosure into earlier, you had combined Q3 and Q4 into just H2. Has there been any changes in letting the On the Go coming in Q4 and not in Q3? Is that original plan, or has it been impacted by the excess inventories and all the discounting, which you want to clear out of the market before products comes to the market?
So, Kristian here. So, our product plan is the same as we had before, and it will be executed in the same way as we had planned.
Okay, then a question about Australia. There's just been news out recently that Aqipa is replacing B&O by, by the other products. Can you explain a little? Because actually I thought that the MJ Invest had taken over distribution in Australia. So what's in the story about those changes?
Yeah.
If you have any comments.
Yeah, so we're working with both, MJ Invest and with Aqipa, and, I will not go into details on their relations in between them, but both are partners to us, and, MJ Invest is a strong partner for us in Australia.
Aqipa will be there as well in the future?
I will not comment on where Aqipa will do in Australia.
Okay, that's all for me.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. As there are no further questions at this time, I'll hand back to our speakers for the closing comments.
Well, so thank you, everybody. This was the end of the presentation and the call, so thank you for joining.