Earnings Call: Q1 2022

Oct 6, 2021

Welcome to the Bang and Olufsen AAS Interim Reports Q1 2020 1 for 'twenty 2. For the first part of this call, all participants will be in listen only mode and afterwards there will be a question and answer session. Today, I'm pleased to present Christian Theer. Please go ahead with your meeting. Hello, everyone, and thank you for joining the call Well, we will present the results of our Q1 for the year. So if we move to Slide number 3. I will begin by going through the financial highlights progress on our strategy execution in Q1. Our CFO, Nikolay, will then take you through the financials in more detail. Finally, I will briefly go through the outlook before opening up for questions. As usual, our Head of Marketing, Digital and Customer Experience, Christian Birk, is with us and will take part So if we move to Slide 4, please. For the first time since the financial year 20,07 and 'eighteen, we managed to deliver positive EBIT before special items and positive free cash flow following a growth in revenue of 44% compared to last year. We are pleased with the results delivering CHF 666 1,000,000 in revenue, A positive EBIT margin before special items of 1.4 percent and CHF21 1,000,000 in free cash flow. The fact that we managed to do this for the first time in 14 years is a testament to the effects of our turnaround plan, which we continue to execute on in Q1. The performance was broad based across regions, product categories and distribution channels and driven by continued demand with solid double digit sellout growth. However, component scarcity and logistical This has continued to impact our business negatively, and we could have delivered better results had we not been impacted by longer delivery times and higher costs. Our component sourcing and supply task force, which we established last year, has been able to secure many of the components needed to meet demand, but we still have longer delivery times on certain products and components are still bought at much higher prices than normal. We maintain our outlook for the year. Is a high uncertainty and low visibility related to component and logistical challenges for the year. So if you move to the next page, please. We have continued to execute on the 2nd phase of our turnaround. As we said last time, we have simplified our strategy house from last year. The strategy house is constructed in 3 levels. The first level is a robust foundation with a focus on people, processes and profitability. The second level is developing a model for scale, and the third layer is our continued focus on growth pillars. I will, on the next pages, highlight some of the results from Q1. So if we move to the next page, please. The first level of our house is aimed for securing a strong business backbone by improving profitability and making Bang and Olesund the best place to work for our people. On profitability, we benefit from the full run rate of the cost reduction program completed last year. We also see the effects of price increases, which have now been fully implemented and thus positively affecting our performance. Finally, we have been assessing the logistic setup. To improve profitability, we are now producing Beoplay A9 in EMEA and APAC to have a better alignment between where we produce and where we sell. We will continue this work on more products in the coming quarters. We continue to lift the capabilities in Bang and Olesen. And in Q1, we hired 85 new employees. More than 60% of the new hires are within product development, particularly for our software and engineering teams. Almost 20% are new hires in our market to support our commercial and growth ambitions. Please move to the next page. The second level of our House ensures we have a proven and scalable growth formula. Here we strive for the three things combined: Continuously launching great product, platform and software innovations, executing impactful sales and marketing and continue developing the go to market model. With a strong focus on continued to strengthen our digital ecosystem, more specifically to improve our e commerce platform while we're making proactive use of customer data for more targeted campaigns and better customer experience. Firstly, we continue building a product portfolio that is fit for the future. In Q1, we launched 3 product innovations as part of our full year road map. We launched a 55 inches version of Beovision Contour, which completes our TV offering. We now have 3 TV offerings with VeoVision Contour, Eclipse and Harmony, overlapping each other in size and our soundbar, which fits all TVs. We also launched our new earphones, Beoplay EQ, with adaptive active noise cancellation. This was an important update to our earphone category, and they have been well received in the market. We also released a software update to our new product platform, enabling stereo pairing of Beosound balance, level and emerge. The fact that we can upgrade several products on our new platform with one software update proves the strength on our new product platforms, and we're building an ecosystem where customers will be enticed to buy more and more B and O products. Finally, we released a sports collection on Beosound A1 and Beosound E8 Sport. The sports collection was part of our sports We brought attention and awareness to the Bangor Noldersen brand as we partnered with Strava, which is a social network for athletes on a sports challenge. More than 100,000 people participated and ran almost 5,000,000 kilometres combined. We saw an increase of newsletter sign ups following this campaign. We also partnered with Liverpool Football Club and England footballer Trent Alexander Arnold, who showcased the benefits of using Bang and Olufsen products for sports to his 5,700,000 social media followers. Trent Alexander Arnold is part of our influencer strategy. In Q1, we announced a partnership with Chinese celebrity musician, Lei Zhang, who is our 1st global brand ambassador. The activation of this initiative was planned with the launch of Beoplay EQ in China. Leisheng has an impressive reach And his promotion of Beoplay EQ received more than €500,000,000 impressions. Local in the markets, we also work with influencers and have more than 50 influencers showcasing our products. To succeed, we need to increase our customer base, and we grew this by 7.5% during the quarter. Our ambition is to grow our customer base by a double digit figure this year, and Q1 was a strong start to achieving that goal. We continued to accelerate our digital ecosystem. We managed to grow our own e commerce platform by 20%. Late in quarter 1, we also launched our own e com platform in Japan. When we did our sports campaign, We experienced a doubling of page views and also recorded visitors staying longer on our site. Finally, we made Feature updates to our B and O app, for instance, we have made it easier to troubleshoot through the app if customers have issues. So let's move to the next page, please. The 3rd level of our house is where we concentrate our go to market resources. Our core markets are delivering the majority part of the absolute growth to our business. The successful execution of our strategy driving demand, Traffic and executing better in our channels has been key contributors to the performance seen in our Q1. In our 6 European core markets, we grew by 37% in local currencies. The stage and flexible living categories drove most of the growth. The Monobrand channel is by far the biggest distribution channel in the core European markets, and this channel delivered the biggest absolute growth. But we're also seeing good traction on our other channels and our eton channel more than doubled compared to Q1 last year. In multi brand, we have started to roll out our new active display concept called BioCube. This provides a significant improvement to the customer experiences as the user interface allows customers to browse and discover B and O products. Customers are able to browse and try different products on top. It provides us with data about the usage and what customers prefer. This enables us to improve the customer experience even further. In our 2 Asian core markets, revenue grew by 17%. Last year, revenue was positively affected by orders delayed from Q4 of the previous year. Adjusting for phasing of orders last year, growth would have been just over 30%. The flexible living category continues to experience strong demand and is driving a large part of the overall growth in the 2 Asian core markets. And as mentioned before, the launch of Beoplay EQ together with our global brand ambassador, Leisang, boosted relevance and brand awareness with the Chinese audience. We could see that the launch of Beoplay EQ in Asia had more traction than when we launched Beoplay EA 3rd generation, and this is very encouraging. We expanded our strategy partnerships in Q1. We continued our partnership with HP with a 3 year contract with an option of for 2 additional years. We will be adding new resources to our brand partnership department to ensure strong collaboration with our partners. We also announced Our partnership with Sashamcom. We have together with Sashamcom developed a built in loudspeaker for the new home entertainment unit, The video sound box. It integrates the latest technology with video, audio and voice services and its targeted telecom and TV cable operators. It has also so far been sold to Vodafone in Spain and Total Play in Mexico. Finally, we continued the collaboration with Saint Laurent, launching a limited edition Beosound H, thereby driving awareness to our brand. So if you please move to the next page. Our success as a seller of Luxury Audio Technology Products sets high demands to the products we have in the market. In that respect, I wanted to briefly highlight some of the reviews we have received on our new AirFone Beoplay EQ. These strong reviews are again a testament to our ability to develop products that are recognized for its sound design and craftsmanship. And with that, I would like to turn over to Nikolay, who will take you through the financial developments in Q1. Thank you, Christian. Now please turn to Page 11. Compared to Q1 last year, revenue increased by 44% In local currencies, the growth came from a 48% growth from our product sales and a 9% growth from brand partnering and other activities. Component scarcity impacted growth negatively, both within product sales and brand partnering. The 48% growth from product sales was driven by all channels, regions and product categories and led by improved channel performance. Our product categories delivered strong double digit growth with flexible living peaking at 87% growth compared to Q1 last year. Beoplay A9 continues to see high demand, but also new products like Beosound Level are in high demand. The growth from Stage category was mainly driven by the speaker portfolio. The revenue from TVs was at the same level as Q1 last year, which was due to the negative impact from our transition from selling TVs, including screens, to selling the sound center only and having partners sourcing screens directly from LG. Adjusting for this, TV sales experienced a solid double digit growth in Q1. In Q1, the stage category is the category that is impacted the most by supply constraints. Portable speakers, Headphones and earphones all contributed to the 48% growth in the On the Go category. Headphones more than doubled in Sales driven by Beoplay H95 and Portal, which were both launched after Q1 last year. It was also a broad based growth across the regions, with Americas nearly doubling, growing 97% in local currencies. The growth in Americas was especially driven by the partnerships with Verizon and Best Buy. Please turn to the next page. I would like to briefly talk about the development in our product gross margin. Last year, we started to talk about the negative effects on both growth and earnings. Despite the added cost for logistics and components, we have succeeded in improving the product gross margin over the past 2 years as shown on this page. The main levers that have driven this development are less end of life sales over the period, this discounting and improved product mix with a greater share of staged and flexible living products. More recently, price increases and a better Fixed cost to revenue ratio has contributed as well. This development has been an important contributor to our improved financial performance And adjusting for the cost impact of the current global supply chain challenges, product gross margin would have been approximately 5% higher in the past two quarters. Please turn to the next page. We delivered our 4th Consecutive quarter with positive EBIT margin despite Q1 being seasonally the smallest quarter. The increase was driven by revenue growth in combination with Improved gross margin and less capacity cost relative to revenue. The gross margin improved by 2 percentage driven by a 4.4 percentage point improved product gross margin, partly offset by brand partnering accounting for less of gross profit relative to revenue. As Christian said earlier, we haven't delivered positive EBIT margin before We are investing more into the business, which contributed to the 22% growth in capacity cost compared to last year. However, we are benefiting from the operational leverage of our business and our capacity cost to revenue ratio declined by almost 8 percentage points to 43.8%. Looking across the different cost categories, you can see that our development costs are up by 15% Thus grew by 11% to CHF 72,000,000 Distribution and marketing costs grew by 29% year on year. This increase was related to investments in more resources, higher warranty provisions due to the revenue growth and lastly, The costs are impacted by the full year effect of mono brand stores that we took over during last year. Despite investing more, The cost to revenue ratio improved by 3.2 percentage point. Our administrative costs increased by 7%, whereas Cost to revenue ratio declined by 1.6 percentage point. Now please turn to the next page. Q1 was also the 4th consecutive quarter with positive free cash flow. Free cash flow was positive CHF 21,000,000, which was SEK 83,000,000 better than Q1 last year. The free cash flow was driven by the development in EBITDA, which reached $59,000,000 or $54,000,000 better than last year. Net working capital was Overall, stable increase of $4,000,000 in Q1. We did, however, see larger movements in the different working capital posts. Trade payables grew by $131,000,000 due to higher production, and we managed to increase our inventory by $84,000,000 This was due to timing of supply It was related to both finished goods, materials and components, which we are sourcing directly in the market. Our receivables grew by $33,000,000 mirroring the revenue growth. Lastly, other liabilities declined by $82,000,000 which, among others, was due to payment of employee bonuses related to last year's financial performance. The net working capital ratio to revenue declined to 6.7%. Capital expenditure was $26,000,000 which was in line with Q1 last year and mainly related to intangible assets. Our available liquidity was, at the end of August, dollars 608,000,000 which was a further improvement compared to May 31. And with that, I would like to hand the word back to Christian. So let's turn to next page. As I said in the beginning, we maintain our outlook for the year with the same overall assumptions as we have previously communicated. So I won't go through all of the details again here. Components and logistics are the biggest uncertainties And we expect that, that will impact performance throughout this financial year. If you please turn to the next page. In short, we have continued to execute on our turnaround strategy with strong results maintaining the momentum from last year. This made it possible to deliver positive results from our operations and free cash flow for the first time in the Q1 since 2,007 and 2,008. Our performance was broad based with revenue growing 44% across regions, channels and product categories. Component shortage had a negative effect on sales and margin, and it will, for the coming quarters, be the biggest uncertainty in our outlook. We have therefore maintained our outlook for the full year. And with that, we will open up for questions. 2. 2. Our first question comes from the line of Benjamin Silverstone of ABG Sundal Collier. Please go ahead. Your line is now open. Thank you very much. Hi, Christian and Nebula. I hope you're well and congratulations on the strong quarter. My first question is in terms of the outlook And then I have a follow-up question in terms of the digital ecosystem. For the first question in terms of the outlook, How strong insight do you currently have on the demand outlook? Also in terms of margin development, we have seen a very, very positive development undergo margins, which is driven by less end of life products. So if you can sort of give us an indication of how well you have and how well the outlook is demand. I think that would be greatly appreciated to get a sense of whether or not we should expect more end of life for the next year. In terms of the digital ecosystem, we have seen e commerce growing by 20% and you are now launching your own platform in Japan as well. However, 20% growth on the e commerce in a market where I think e commerce is growing very rapidly versus a group revenue growth of 44%. It doesn't really seem that strong. I was wondering if you could elaborate a bit about what your intentions are for the online segment and whether or not you are satisfied with the 20% growth? Thank you. Thank you, Benjamin. Good questions. So I will let Nicolai take the first one and then Christian Birke will take the second one. Yes. So in terms Of demand visibility and end of life products, we have strong demand signals in all our markets. That's why we're maintaining our Outlook for the year. As I said before, In past years, we experienced more end of life products than what you would normally have and should have as a company in our sector. And we have been working diligently in controlling our life cycle management and thereby also ensuring that end of life is of a Smaller magnitude than what we've seen in the past. And this is the good work we're continuing. You will always have some end of life in our industry. We will also see that this year and In the future, but it's continued to be our expectation that the magnitude of end of life will be Less than what we've seen in previous years. And maybe then over to Christian Berg. Yes. So thanks for the question, Benjamin. 1st, on e comm growth, you have a good observation. And generally speaking, we had to make Some decisions in the quarter. We had customers ready to buy, especially in our monobrand channel where we didn't want to disappoint them end of the day and we moved Products to satisfy those customers, which cause in a supply constrained world, of course, are compromised. So we know That we could have driven significantly higher growth on our own e com platform. But end of the day, we're here to serve customers, and we wanted to make sure the products got to them As at the end of the day. The second thing we look at maybe on your point of demand signals is we look at, of course, overall traffic to our stores into our online touch points, but we also view overall online transactions across our regions. That entails how much Online is sold through e tail platforms, how much is sold through multi brand online versions. And when we look at that combined, So how many online transactions or e com transactions are made more broadly? We see very strong performance across all regions. Thank you very much, Nikolay and Nikolay. Our next question comes from the line of Paul Jersson of Danske Bank. Please go ahead. Your line is now open. Yes. Thank you and congratulations to all of you. I have a few questions. First on the sourcing and the component side. Can you give a little more flavor on the visibility you have, for instance, if we look into the important current quarter? Are there any constraints on to the level, for instance, versus the budgets or the ambitions you have for the quarter? And how do you look into the second half? And actually, how is it impacting your products? You also say that you have shifted production from Asia to EMEA on some products. Can you Certainly, Laurent, what have you moved from Asia to EMEA? Yes. Thank you, Pol Ernst. Maybe I'll start and then I'll pass on to Nikolay as well. As you know, we have been working diligently with sourcing and with different activities to ensure that we do have Supply and that we can find components. We are making long term agreements on long lead time components with our partners. We're working alongside our partners as well with a special task force buying components on the spot market. We're also redesigning For a second source of components when we find 1 and we're also redesigning PCBs if need be to fit in components that are more available on the market. For quarter 2, I think we have a good visibility of What it looks like, but the second half of the year is more uncertain. But quarter 2, I think we know Where we are? And then on the A9, which is the product that we have also started to produce in EMEA, It's high demand for that product and it doesn't make much sense to ship it across back and forth in the world. So logistical costs have been going up, freight costs are going up. And therefore, it makes more sense to have an additional local production in EMEA and we will probably also for other products that are in high demand Also planned for producing them in EMEA as well. So that will be my answer. Nikolay, maybe you want to add something and if not then That's back to Paul Ernst. Yes. Quick add is also that we are prioritizing with our That module, the products where we have the highest revenue and the highest profit in order to make sure that we use Make the best use of the components that we can source in our P and How is that compared to end of Q4? Is it up or down? It's a little bit lower, But I think the sentiment is the market is the same, but it's a little bit lower than when we went into out of Q4. And that's mainly in the state segment that's contributing there? Correct. Okay. Then a question on the royalty issue may made an extension with HP. In June, HP closed the transaction with HyperX, which is also audio. Do you have any idea on if we look in the long term, if there are any risk On your HP deal or are you getting any indications if they are trying to put high brakes into the notebooks and so on? That's one part. And can you comment on the Hyundai Genesis partnership recently announced? So let me start with HP then. We have a really good collaboration with HP and obviously that's also why we have renewed the agreement with them. We don't foresee that HyperX or anything else will Kind of deteriorate that partnership in any way and we actually see more opportunities with them that we haven't explored During the past 5 years that are now opening up for the future. So we are pleased and happy with that partnership. On the car side, Hyundai has announced it in Korea and we're of course pleased to be part of another partnership with them as well. And we will continue to work with different car manufacturers to expand our footprint also here. Okay. Two final questions. One is on APAC where you have 41% growth and then in the 2 core markets you had 17% growth for the quarter. Then there must be something else that is doing very, very strongly in Asia. Can you comment on that? Yes. So first of all, as we also write in our Q1 report, the 7% Growth in the 2 core markets is impacted by Q1 last year where we had Higher than normal revenue as a spillover between quarters in the past year. So the underlying growth in the core markets is actually Closer to 30%. But we are seeing strong demand in all over APAC, also Outside China, South Korea, what we call Southeast Asia, the Singapore area, Australia It's also seeing high demand. So it's basically High growth in rest of Asia. And when you mentioned Australia, is That's a consequence of normalization of your situation out there. If we go back a few years, then there were huge Difficulties or turmoil with partner changes in Australia. So is it demand coming back or is it Normalization of your go to market out there? Yes, I think it's Probably a combination, but definitely we are getting our operations with the new partner to work in Australia now. We are investing more in Australia opening stores, we are also impacted by Australia having had a lot of lockdowns due to COVID, more than we have seen in Europe, But we still see good potential in Australia also in the future By opening even more stores together with our partner. Thank you. Final question, that's more a little Back on the envelope, Matt here. If I look at North America, you have got into 2,000 new point of sales At Best Buy and Verizon, you have year over year increased your revenue by 27,000,000 So if I take $27,000,000 divided by 2,000 point of sales and it's a revenue of about $13,000 per point of sales Over 3 months. So I would assume that equals that you are selling on average 3 headsets. That's a little 5 headsets, that's a little more than 1 headset per month per point of sales. Are there any ramp up in this? Or how should we read the numbers because I would actually think that you should get more out of 2,000 additional kind of sales? Yes. So it's not I mean, you can't really do the math like that because The business model that we have with, for instance, Best Buy is not that we expect consumers 2. To buy all the products in the physical retail. Physical retail is becoming more and more a window where you showcase things. And we see actually the majority of the sellout from Best Buy and Verizon being online sales. So this is the model that they are working on and which we are part of is to ensure that you can see the product, try the product physically, but you will do most of the transactions on So we see this partnership in its full potential between physical and online. That's the trick and that's the way you should view it. Okay. Thank you. Our next question comes from the line of Niels Leth of Carnegie. Please go ahead. Your line is now open. Thank you and good morning. My first question is on your customer base, which you said grew by 7.5% in the quarter. Can you measure can you talk about how you actually measure your customer pay base and How big would your customer base be at this point? My second question would be on the effect of the price increases that you implemented in I think it was in April or so Earlier this year, how much was the effect of price increases on revenue and on your gross margin? And are you foreseeing additional price increases in this calendar year? Thank you. So maybe I can start. Thanks for the question, Niels. So on the customer base, how we measure? As also outlined In our annual report, we measure this on customers that have active app accounts. So you come through our app and you have a minimum of 1 product. That's what we consider a customer in the base, and we measure the growth and the development of such. Then you could argue that Other players in the industry would force, have account creation in order for a product to work. We don't do that. So we also know the actual customer base is significantly larger than what we measure because, for instance, on On the Go products, We don't have the same take up rate on app accounts as we do for other categories. So we see strong intake of new customers, and we are very, very pleased with that. In terms of actual numbers, we don't disclose those numbers. Great. And on the price effect on revenue and gross margin? So the price impact on the margin here in the quarter is 1.5 percentage points. And it's of course not distributed evenly on all products, but that's the overall impact on the full portfolio. And that's based on the price increases we did here in April and we also did some over the summer. We do not have any concrete plans to do Further price increases here in the short term. But naturally, we are monitoring this And constantly evaluating what's the right thing to do given, of course, increased prices on components, Logistics, but also other raw materials going up in price at the moment. Great. And could I just add one more question? So you mentioned that the staged category was negatively affected this quarter by the growth that you experienced in quarter 1 last year from selling TV panels. What kind of effect did it have on revenue and gross margin in this quarter compared to last year? Yes. So the revenue impacts On stage, we have been around DKK20 1,000,000. And the gross margin impact Would have been sort of a margin on the DKK 20,000,000. Okay. That's great. Thank you very much. 2. Our next question comes from the line of Benjamin Silverstone of ABG I just had a quick follow-up question. It is in terms of growth across the segments. So we have seen especially the flexible living and stage in, for example, Asia and EMEA performing very strongly. I was wondering if you could give just a little bit of nuance as to what you have been doing to really activate these segments Other than the obvious launches of new products. Sort of an add on to that question as well, we are seeing you guys collaborating with A large variety of sports idols and influencers, for example, Le Sheng. However, these tend to focus Mostly on the Go segment. So I was wondering if you could sort of give us the reasoning behind that as well in terms of we are seeing this huge increase in flexible living and stage, but we are seeing the at least online marketing being focused mostly towards the On the Go segment. Thank you. So I'll probably let Christian start with the marketing activities and then Nicolai Can I add in, if need be, on numbers? Yes. So thanks for the question, Benjamin. So Our work with brand ambassadors and influencers is a long term strategy and not a short one nor necessarily campaign related. And we just came out of a summer where sport was the attention for many markets and also for our customers. And with that, we promoted through our influencers and marketing in general our sport related categories and products, which mainly is focused On the go, as you say, but also TVs was part of the campaign, and we also used influencers to promote our TVs given sports It's consumed on our TVs. So it's not a connection between how we use influencers to Any specific categories, we'll use that to promote the Bang and Ourofen message and the Bang and Ourofen proposition, which goes across all three categories. Yes. I think just on the number side, so on APAC, we're actually seeing Equal high growth in both on the go and the stage category in that region. Flexible living is growing a bit higher. So I think what we are seeing now is that we have traditionally been very strong in On the Go in APAC, but they are also Spending more money on home entertainment systems and home speakers, and we are benefiting from that in our monoband network as well in that region. Thank you very much, Durban. Very clear. Thank you. We currently have no further questions. I will hand back to the speakers for any remarks. So thank you, everybody, for joining today and If you have any additional questions, don't hesitate to reach out to Martin and our IR department. And otherwise, I wish you all a fantastic day. Thank you.