Welcome to the Bang & Olufsen Company update. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. I will now hand the word over to CEO Kristian Teär. Please begin.
Hello everyone, and thank you for joining the call. With me I have our CFO Nikolaj Wendelboe. On Friday we released the preliminary Q3 numbers and adjusted our financial outlook for the full year based on the expected impact from COVID-19. In the same announcement we said that we would accelerate the cost reduction program, which we have worked on since December last year, and provide more details in due course. With the company announcement released this morning we can now provide more details on our cost reduction program. Please note that we will still publish our financial report covering the third quarter as planned on April 2nd. So let's move to slide number 3. Overall Q3 was as we had expected. China was the first country to be impacted by COVID-19, and we did see an impact in the last part of the quarter related to in-store traffic.
Online sales and business-to-business was as expected throughout the quarter. Product availability from production partners was only marginally impacted by COVID-19 in Q3. The EBIT margin before special items was positive with 0.3% in the quarter, which is encouraging. Likewise we delivered a positive free cash flow for the quarter. Cash flow was impacted by both the development in EBITDA as well as supported by a reduction in net working capital, among others driven by a reduction in inventory. So as I mentioned in the beginning, based on preliminary numbers our Q3 performance was in line with what we had expected. What we could not anticipate was the world being impacted by a global pandemic. This is expected to have a significant impact on our Q4 performance.
We are now guiding for revenue to decline between 20%-29% compared to our previous outlook where we expected revenue to decline between 13%-18%. EBIT before special items is now expected to be between -10% to 15% where we previously guided -4% to 9%. And lastly, free cash flow is expected to be negative DKK 200 million-DKK 350 million compared to previously negative DKK 100 million-DKK 150 million. The effects of COVID-19 on our financials are very hard to predict at this point, and the wide range on our outlook parameters reflects the uncertainty. We are being prudent in all respects of our business. Our partners in China have restarted production, but due to the now global impact of the COVID-19 we are being cautious with our production planning to retain our flexibility to scale if to changes in demand for the coming period.
We have also postponed our Capital Markets Day, which we had planned for April 3rd. With the restrictions on travel that we currently see, it would not be possible to host a Capital Markets Day. More importantly, we had to shift to more short-term focuses compared to what we had planned to address on April 3rd. In connection with our Q3 report, we will provide some more details on our 12-month initiatives as well as the strategic direction that we are working with. Even before the COVID-19 outbreak, our financial performance dictated that we had to change our way of operating. Therefore, since December, we have been working on a cost reduction program as we saw a potential in doing things more efficiently. As things have developed, we do however need to accelerate this work.
The cost reduction program that we have announced today will not have any significant effects this financial year. We have made a provision for restructuring costs totaling DKK 30 million, of which DKK 3 million has been included in our Q3 financial figures. I will now turn over to Nikolaj who will go through some of the elements of the cost reduction program.
Thank you Kristian. Please turn to page 4. As Kristian mentioned we have since December 2019 been working on a cost reduction program where we are investigating potential savings in Bang & Olufsen. The cost reduction program is one of several initiatives aimed at improving the company's financial performance through streamlining operations and investing in product development, sales, and marketing. We have had a thorough process to assess where we could become leaner, simplify tasks, and prioritize our resources better to help strengthen the profitability of Bang & Olufsen in the future. We have engaged with experts on this task to ensure that we cover all the potential savings compared to best practice. Based on this analysis we are targeting annual savings of DKK 175 million, which we expect will be phased in during the next financial year with full effect in 2021-22.
In the financial year 2020-21 we expect a large part of the program to take effect. The first phase of the program is what we announced today. We have here identified several savings, which we have divided into three groups: lean administration, organizational simplification, and savings on non-product-related spend. Lean administration is about streamlining our operations and administrative functions such as finance, IT, HR, and support functions across the company. This includes a thorough evaluation of how the work in these functions is organized and will also include potential outsourcing of certain processes and services. We have also identified several areas where we have work done in parallel across the organization. We therefore see opportunities in merging similar functions and scope reductions as well as removal of selected non-critical units. As part of this process we are de-layering the organization to make it flatter and more effective.
Finally we have been looking at non-product-related spend. Here we have identified spend areas where we believe we can reduce our spending. Further we have implemented new travel policy and we are installing video conferencing equipment in all venues to reduce the need for travel as well. To complete the program we have decided to make a restructuring provision for around DKK 30 million, which will be included in this financial year's annual report on the special items. And with that I will turn it back to Kristian.
Thank you Nikolaj. The first phase of this program unfortunately means saying goodbye to valued colleagues. In total we will reduce the workforce with approximately 115 employees. The staff reductions are primarily within support functions and primarily in Denmark. We have had a thorough process the last couple of months and it is on the back of that work that we are making the announcement today. I'm also conscious about the fact that implementing the cost reduction program in a situation where employees, Bang & Olufsen, and the rest of the world are faced with uncertainty due to the coronavirus is not ideal. We will now work hard to ensure that the organization continues to be motivated and fully focused on the key priorities while implementing the leaner organization.
At the same time we will do our best to help the affected colleagues to move on and into their next job. And with that we'll open up for questions.
If you have a question for the speakers, please press 01 on your telephone keypad. If your question has already been answered, you can retract your question by pressing 02 on your telephone keypad. Please hold while we register incoming questions. The first question is from Poul Jessen from Danske Bank. Please go ahead, your line is now open.
Thank you guys. I have a few questions. First, the restructuring program, the non-recurring items, can you say how much will be cash and non-cash? I assume it's severance payments, so most should be cash, but can you confirm that? Then, on the cost reductions, do you have any idea or indication on how it's split between R&D, sales and marketing, and admin? That was another question. Then, on phase I and phase II, what's the sizes of those? So, how much has been specified of the 175 and how much still has to be specified? And then, the final question on the restructuring, taking out 150 employees, that's about some 15% of total employees.
When I recall back I think 2 years or so, 2 or 3 years it was mentioned, it was talk in town and it was also mentioned in annual report that the organization at that time was very stretched because of a huge workload. How do you see that going forward? Will you have the resources actually to grow the business again when corona is gone? Thank you.
So thank you Poul. This is Kristian. I will start and then I will pass on to Nikolaj. As we said in the announcement this is mainly affecting administration across the organization and so we will of course continue to build products and we will continue to sell our products. So it's mainly in the administration area where we do the cost reductions. And with regard to the stress level in the organization before we had geared, as you know, the company to grow for this financial year and we're now giving new guidance which is of course then -20%-29%. So the amount of work is going to be reduced versus what we had originally planned for.
But we will of course continue to make sure and work with to make sure that our employees are motivated and for their well-being and make sure we have a good atmosphere. It's difficult times, it's uncertain times. And we feel of course for the people that are leaving us but also we need to take care of the people that are staying with us and we aim to do both. I'll hand over to Nikolaj who will take the financial questions.
Yeah. So thank you, Poul. On the cash versus non-cash on the restructuring provision, you can say so the restructuring provision consists basically of two chunks. One chunk is consultancy cost for the program that we are running and the other chunk is severance pay for the people that will become redundant. And for the consultancy cost, some of it will have cash impact this financial year. The rest will have cash impact next financial year when invoices are due. On the restructuring cost, there will be no specific cash impact this year. Or on the severance pay cost, there will be no specific cash impact this year as we expect cash impact will happen over notice period of the individual employees. So that was on that one.
Then you ask into the split around R&D, sales, marketing versus admin, and as Kristian said, we don't have any concrete plans to cut costs on R&D and sales. But we are, as a second phase of the program, looking into the effectiveness of these functions. Meaning that we will look at the opportunity to sort of make better use of our spend in these categories, make better use of our cost base in these categories, and that can ultimately lead to two decisions: get more out of the resources that we have today or have a decision to save some costs because we can actually do what we're doing today with less resources. But that is up for further analysis. Then you had a last question on how much of the DKK 175 million that has already been specified, and that is more than half at the moment.
I have a short follow-up on the cash and non-cash. For the restructuring costs, will it be taken in the first half of the year DKK 30 million?
The first half of next year?
Yeah.
I would assume that most of it will be cash in the first half of next year. Yes.
Okay. I have some comments to operations as well but I can see if there are others then I'll come back.
Our next question is from André Thormann from ABG. Please go ahead.
Thanks a lot for taking my question. So I just need to understand this on the restructuring costs as well. Can you give any indication of how big a chunk is the consultancy cost? That's my first question. Can you hear me?
That's roughly one-third. One-third is roughly consultancy costs. Two-thirds is severance pay.
Okay. And then just for my understanding why do you make a provision for this instead of just waiting for when the cost hit for consultancy?
Under the accounting principles that we are adhering to, we can make a restructuring provision also for consultancy costs when it is related to the restructuring program as such, which is the case with this, the case here. Also, giving us the opportunity to create a better baseline from a cost perspective going into next year.
Okay. And then in terms of the phase I and phase II just to understand what is the difference and what will phase II include? Just to understand.
Phase I is the initiatives within the three categories: lean administration, organizational simplification, and non-product-related spend that we have worked with since December and where we have identified very concrete actions that we implemented implementing now. We will continue of course to work on non-product-related spend also in a phase II because as a company you always have to work on that. That's part of our daily business of course to make sure we spend in the right way.
But we will also start looking into areas of the organization where you can say you cannot talk about making quick wins but where we need to think more thoroughly around how we are operating and how we are spending our costs when it comes to creation of products, production of products, logistic costs, and a wide range of costs that is more embedded in the core value chain of the business. So that's what's in phase II.
Okay. Thanks a lot. Then on the DKK 175 million just to be completely sure that's an annual potential, right?
Full annual potential for the entire phase I and phase II program.
Okay. So, okay. And then you say that a big share of the DKK 175 million that you will already achieve in 2020, 2021?
Yes. A large share of the 175 we will aim to achieve next year. That's correct. Next financial year.
Okay. Okay. And then on the 115 people I mean does phase II also include further employee reduction?
Yeah. So let me take that. We have not planned for that at this point in time.
Okay. Okay. Yeah. And I also have some questions in terms of operations but I will just jump back into queue after Poul. Thanks.
We have a follow-up question from the line of Poul Jessen from Danske Bank. Please go ahead.
Thank you. Just to be certain about the DKK 175 million that's run rate of about DKK 40 million plus per quarter. Should we assume that to be the full impact in the fourth quarter of the next financial year? That's question one.
Poul, it's a good question. Since we have not identified in detail all the actions that will get us to the 175, it's difficult to say with certainty. But it is definitely our aim that we will be there by Q4 next year.
Okay. Then we come to the third quarter. I don't know how much you want to say of this. I just want to hear if you would comment on the product launches you made in the second quarter. That means the Harmony and the Stage, how they have performed. And when it comes to the Stage, if you can say something if it's only offline sales or if it's also online. The reason is, when you look into the coming quarter, I guess online will be the biggest sales channel as stores close down. Then, also, do you have an idea if we still are in a position where sell-in and sell-out has balanced? And then some on the cash flow. Previously you gave a spread on the full year cash flow of DKK 50 million from DKK 100 million-DKK 150 million.
Now you give a guidance of DKK 150 million on the cash flow despite only having a spread of DKK 60 million in the fourth quarter on the EBIT level. What's the difference or what's the reason why you have that huge difference between the EBIT and the cash flow guidance for the full year? And then can you say something about the full year guidance or the Q4 guidance? What's the assumptions you have put in for the zero growth and what's the assumptions for the -40% which is inclusive in the fourth quarter? Thank you.
So thank you Poul. I'll start and then also hand over to Nikolaj then. So we launched the products that we promised to launch in quarter three so I think that was a good achievement and we did that with good quality and on time. Then we have, as you may have noted, in Denmark we have beefed up our marketing around Stage. Because obviously we believe we could sell more of that product than we have done and we're also now beefing up our marketing around Harmony. That's all that I will say in respect to their performance. I think we can sell more of them than we have currently done.
When it comes to online, obviously in these difficult times in quarter four, more and more sales are going online, and we saw that already in China when they were coming into the difficulties in terms of the COVID-19, and we expect that to continue to be the case. We have seen in the stores that we have, as expected and everybody has, less frequency. But we also still convert in stores, so even we have less frequency the business goes on, and we're monitoring it of course on a daily basis to see how it develops. But business is still running.
Yeah. So Poul on guidance for cash flow and the spread that you are talking about is absolutely correct. That is quite a spread in the -200 to -350 DKK. I think it reflects the knowledge that we had Friday and the uncertainty of the world Friday trying to provide an outlook for the last quarter. We are in a situation where we only have two and a half months left of the year. And because of that we know that you require that we say something pretty concrete which is extremely difficult to be honest at the moment given the situation with the coronavirus which have developed even further since Friday. So the reason why we have chosen a quite wide range spread is there's a number of certainties in your cash flow. One is of course sales and the other one is production.
But the third one is that we try to factor into some extent in the lower range of our guidance is also consequences for our partners and our monobrand Network in terms of their ability to pay us on time. So that's why you see a wider range on cash flow guidance than you do on EBIT guidance.
In the low end you take more receivables from the balance sheet?
Correct. In the low end we assume to have a higher share of overdue payments.
That was my next question, that given that you may have about DKK 400 million+ in receivables and given that franchisees might see revenues collapse in the coming months, do you see a risk of a significant write-down on those receivables? Or do you have bank guarantees or any insurance on the money?
Yeah. At this point in time we can't say whether we see any additional risk. We do have credit insurance on some of our partners. Not on all but on some. We can't predict that at the moment. It's too early to say.
That then ends up in my final question. Looking at an estimated gross cash position of DKK 70 million-DKK 200 million based on the cash flow guidance you've given and we move into a Q1 and Q2 which at least historically has been having negative cash flows, are you willing to comment on what kind of considerations you have had on bridging that liquidity requirement that potentially might arise?
So let me give you a generic answer Poul. We're working with all type of contingencies given the uncertainty in the world and that includes all financial parameters at this point in time. I think that's all that we will say on this matter. But of course we are looking into and turning all stones to see on how we can have a good contingency planning for our business.
Okay. Thank you and good work during summer. Unfortunately it came up a quarter where I believe you actually were coming back on track, so yeah.
Well, thank you, Poul.
Thank you.
Thank you. Much appreciated. Thanks.
As a reminder if you have a question for the speakers please press zero, one on your telephone keypad. It doesn't seem like we have any more questions so I will hand.
Okay. Thank you much everybody and see you next quarter here.