Bang & Olufsen A/S

CSE:BO

Welcome to Bang & Olufsen Interim Report for the third quarter 2024-2025 presentation. [Operator Instructions] This call is being recorded.

I will now hand the call over to your speakers. Please begin.

Hello, everyone, and welcome. Thank you for taking the time to join us today. Here with me is our CFO, Nikolaj Wendelboe. I will begin by outlining our key highlights and providing an overview of our business performance. Following that, Nikolaj will present a more detailed review of the financials, and I will then offer some closing remarks before we open the session for questions.

Please move to Slide 4. Let us begin by looking at our Q3 performance. We are pleased with the performance in Q3. Revenue grew by 2%, led by EMEA and a strong performance in the Americas. We also achieved a record-high gross margin of 55.4%, an EBIT margin of 3.8% and a positive free cash flow of DKK 18 million. Like-for-like sell-out grew by 15%, driven by growth of 21% in branded channels. In addition, sell-out growth for our Win cities collectively grew by a substantial 36%. We are pleased to see growth in the areas our strategy is focused on.

All in all, we are progressing as planned. And with only 2 months left of the financial year, we are narrowing the ranges within the original outlook. During the last few weeks, geopolitical uncertainties have increased in light of the recently announced tariffs and the possibility of further tariff changes. What I will also stress is that while monitoring developments closely, and if needed, we will make adjustments accordingly, we are continuing our strategic transition by investing the proceeds of our recent capital raise in future profitable growth. Nikolaj will provide further details on this. So please move to the next page, please.

In February, we launched Atelier, inviting clients to co-create custom-made products with our master artisans in Struer, Denmark. This milestone celebrates our legacy of exceptional sound and craftsmanship while enabling personal expression through unique customizable creations. A standout launch was our fifth collaboration with Saint Laurent, including 10 restored Beogram 4000 series turntables from the 1970s, each encased in solid Ziricote wood, individually numbered and finished with refined aluminum. Please move to the next page.

Moving to our channel development, where I'll take you through some of the highlights for the quarter. During the quarter, we signed agreements to open new partner stores in Milan, which opened on April 7 and a new company-owned store in Paris, expected to open in the next financial year. In London, we have agreed to expand our Harrods store and upgrade our new store -- upgraded to our new store design. And in Zurich Airport, we have launched a pop-up store. Our expansion in the U.S. is also continuing. In California, we plan to open 3 stores in the next financial year.

The Win cities collectively reported a sell-out growth of 36%, which comprises sell-out across channels in all cities. All cities reported growth. New York, London and Paris reported double-digit growth. New York was positively impacted by low comparables as one of the stores was in ramp-up phase after being closed for relocation in October 2023.

Hong Kong reported single-digit growth year-on-year. The solid growth rates underpin the planned expansions. In addition, we have initiated the first phase of the Win City concept to support and accelerate growth in Los Angeles and Tokyo. In terms of multi-brand, we continue to be more selective with our distribution. In EMEA, we decided to discontinue our cooperation with selected multi-brand partners in accordance with our efforts to optimize our presence in the channel. We are pleased to see that the channel is reporting double-digit growth despite a reduction of more than 400 doors year-on-year.

Finally, as part of the investment in future growth, we have initiated next steps towards operating Chinese Tmall, online flagship store, directly. By end of April, we will take over the online flagship store on the e-tail platform and hereby operating the 2 largest e-tail platforms in China directly.

Please move to the next page. Before I hand over to Nikolaj, let me elaborate on our recent product launches. Our Beoplay 100 launched in September and continued to perform well in Q3, while the recently launched Beoplay Eleven also got off to a good start. The Bang & Olufsen Atelier brings our luxury timeless technology strategy to life, offering clients a level of customization unmatched in the luxury audio space. Rooted in our heritage of craftsmanship and innovation, Atelier allows customers to co-create with master artisans in Struer, Denmark, blending iconic design with personal expression.

3 offerings define the Atelier experience. Atelier Bespoke for one-of-a-kind pieces made in direct collaborations with our artisans. Atelier Catalog, offering over 500,000 combinations of fabric, wood and aluminum finishes. Atelier Editions, limited runs of iconic products reimagined with exceptional detail.

The Atelier offering is commanding a price premium of 10% to 50%, which reflects the value of the true customization and craftsmanship, supporting higher margins while deepening brand desirability and loyalty.

During the quarter, the BeoLab 8 and BeoSound Theatre received Cradle to Cradle certification at Bronze level, bringing the total number of products with Cradle to Cradle certification in our product portfolio to 5. Notably, BeoSound Theatre is the first sandbar in the world to be Cradle to Cradle certified, highlighting our role in leading the movement towards more circular product designs and manufacturing.

And in March 2025, Formula 1 season began with Ferrari's new F1 car once again carrying B&O branding, a symbol of our ongoing presence in global culture and performance.

And with this, I will hand over to Nikolaj.

Thank you, Kristian. Now please move to Page #9. So before we go into the financials, I want to give you a bit of detail on how we see the current tariff levels impacting our business, bearing in mind, of course, that these days are a moving target. But we try to include also recent announcements on the tariff from China being increased to 104%, and of course, the tariff of 20% on European product that was implemented also or announced last week. So please bear in mind that these numbers are estimates, but should indicate sort of the level that we are looking at.

So year-to-date, our revenue in Americas was DKK 240 million and around 13% of total revenue. And our production spans globally with the majority of production in China, Europe and a small share in Thailand. Looking at the Americas revenue, we can estimate around 1/3 of the sale from products produced in Europe and 2/3 produced in China, which leads to an estimated cost impact of around DKK 70 million on an annual basis or around 2.5 percentage points on the gross margin. The DKK 70 million is, of course, calculated as all else being equal.

Prior to the last tariff announcement of the additional 50% on the China tariff, the estimated cost impact was around DKK 40 million or 1.5 percentage points on the gross margin. We have already mitigated some of this impact through price increases that will be implemented on May 1. And at the same time, we are looking into further price adjustments to mitigate further, but we're also considering other handles such as looking at the supply chain, logistics and our general cost structure. And just to be clear, we do not have any production in the U.S. Please move to the next page.

So let me now start by going through sell-out for Q3. Our like-for-like sell-out grew by 15% compared to last year. For branded channels, like-for-like sell-out grew 21% and for our Win Cities, sell-out grew by 36%, and we are pleased with the strong performance in sell-out. Like-for-like sell-out in EMEA grew by 18%. Branded channels all generated double-digit like-for-like sell-out growth, supported by successful campaigns. In EMEA, the monobrand channel improved inventory cycles during the quarter. Sell-out in the Americas grew by 49%. The branded channels combined reported a high double-digit increase year-on-year, driven by solid growth in all channels.

Company-owned stores were positively impacted by low comparables in Q3 last year due to ramp-up after relocation in Q2 '23-'24, while the monobrand channel was positively affected by campaigns and the execution of project sales. Also note that the like-for-like sell-out growth excludes the California stores, while they are included in the comparison figures on revenue growth.

For the APAC region, like-for-like sell-out declined by 3%, driven by a double-digit decline in the e-tail channel. The branded channels reported double-digit growth year-on-year, driven by growth across the channels. In China, like-for-like sell-out declined by 13%. This was mainly due to a decline in the e-tail channel as sell-out for the monobrand channel grew year-on-year. Excluding China, sell-out in APAC experienced single-digit growth.

Across regions, our Staged category grew by 24%, while the Flexible Living category declined by 7% and the On-the-go category grew by 19%. This mainly reflected the change in channel mix towards our branded channels as well as new launches in the On-the-go category. Now please go to the next page.

Reported revenue for the quarter was DKK 631 million. This was an increase of 2% in local currencies compared to Q3 of last year and in line with our expectations. The increase in reported revenue related to an increase in product sales of 3%, while Brand Partnering and Other Activities experienced a modest decline of DKK 1 million to DKK 70 million or minus 2% in local currencies.

Breaking product revenue down into categories, the Staged category grew by 6%. Flexible Living declined 8%. The decline was mainly due to decline in APAC across products. Revenue from the Flexible Living category grew in EMEA, and the On-the-go category increased by 7%. Growth was mainly driven by the successful launch of Beoplay H100 and Beoplay Eleven.

The modest decline to DKK 70 million in Brand Partnering and Other Activities was mainly due to an expected fall in license income from HP, partly offset by increased revenue from automotive. License revenue from TCL is ramping up as expected. Please turn to the next page.

Let me go into more details on revenue per region. Revenue from the EMEA region grew 6% in local currencies and growth reported across all branded channels in the region and across most of the European markets. Moreover, average revenue per multi-branded store increased with the channel reporting double-digit growth combined with a reduction of more than 400 doors year-on-year. The gross margin was up 1.3 percentage points to 51%.

In the Americas, a strong performance was driven by double-digit growth across all branded channels and with fewer stores in the monobrand channel year-on-year. As Kristian mentioned, we continue with our U.S. expansion plans. Revenue from the multi-brand channel was very limited in absolute value and in line with the reduced presence of the channel in the U.S. The change in channel mix also contributed to an increased gross margin of 49.6%, up from 45.9%.

Revenue in APAC was DKK 164 million, which was a decrease of 8% in local currencies. The APAC region reported negative growth mainly due to challenges in China, which declined 11% in local currencies and experienced negative growth in the e-tail channel. As Kristian mentioned, we have initiated the next step in the planned structural change of the e-tail channels and will in the near future operate the Tmall flagship store directly in the same way as we are today operating JD.com ourselves.

Revenue from our monobrand channel in China grew year-on-year. Revenue from South Korea and Taiwan grew, while Japan declined due to currency impact. Adjusted for the currency impact, revenue from Japan grew year-on-year. Overall, for the APAC region, the gross margin grew to 55.7% from 50.8%. Please move to the next page.

On group level, the gross margin rose to a record high 55.4% and was up 2.2 percentage points compared to last year. The margin was positively impacted by improved gross margins across product categories and a change in product mix towards higher-margin products. The reported gross margin has been above 50% for the past 8 executive quarters, which strengthens the financial foundation for our strategic acceleration and for navigating the geopolitical turmoil.

This quarter, the gross margin for Brand Partnering declined to 81.1% from 84.5% in Q3 of last year due to the change in mix between license and product sales. The level fluctuates across quarters depending on the underlying mix. In previous quarter, Q2, we reported a gross margin of 94.4%. EBIT margin before special items was 3.8% compared to 1.8% in Q3 last year. The improvement was driven by the higher reported revenue and gross margin and partly offset by higher capacity costs. Please turn to the next page.

Moving on to capacity cost and net working capital. Capacity costs increased by DKK 12 million (sic) [ DKK 8 million ] year-on-year. Looking at the composition of the capacity costs, development costs increased by DKK 6 million. The incurred development costs before capitalization ratio was 13.4% compared to 12% last year. Distribution and marketing costs decreased by DKK 4 million, and our marketing cost ratio was 6.5% compared to 8.6% last year. Administrative costs increased by DKK 6 million, driven by one-offs.

Net working capital increased by DKK 5 million during the quarter to DKK 255 million. Trade receivables decreased by DKK 79 million and payables decreased by DKK 105 million due to seasonality and timing. Inventories decreased by DKK 13 million during the quarter to DKK 413 million. At quarter end, we reported the lowest inventory level in more than 3 years with an improved composition and aging profile within finished goods. Please turn to the next page.

Free cash flow for Q3 was up DKK 13 million to DKK 18 million, supported by increased cash flow from operating activities. CapEx was DKK 59 million for Q3 and mainly related to new products and platforms. As mentioned before, the increased level is expected. And going forward, we expect further increases and with more retail-related CapEx in the mix. Capital resources amounted to DKK 552 million (sic) [ DKK 532 million ] at the end of Q3, of which available liquidity was DKK 372 million. This was driven by the directed issue of net DKK 217 million received in December 2024. And please turn to the next page.

To conclude, we will narrow the ranges within the outlook for the full year '24-'25. Revenue growth is expected to be in the lower end of the minus 3% to plus 3% range due to persistent challenges in APAC. EBIT margin before special items is expected to be in the mid-range, mainly due to the positive development of the gross margin. Finally, the free cash flow is expected to be in the higher end of the range, mainly due to the development in net working capital, and secondly, timing of CapEx investments.

As we have stated, '24-'25 is a transition year. With the proceeds from the capital raise, we can now initiate the investment program of our strategic execution according to our midterm plan. This means the CapEx is expected to increase to around DKK 250 million and capacity costs are expected to increase as well with around DKK 100 million compared to '23-'24.

And with those words, I will hand it back to Kristian.

Thank you, Nikolaj. Yes. To sum up, we are pleased with the quarter's performance, which was according to our plans. We grew top line. We generated record high gross margin and profit together with improved cash flow. We were also pleased to report positive momentum in terms of sell-out of our strategic focus areas. The group's double-digit sell-out growth of 15% was driven by 21% growth in branded channels. Finally, we reported sell-out growth in our Win cities of 36%.

The geopolitical situation, including the recent announced tariffs and possibly -- the possibility of further tariffs changed -- further tariff changes are increasing uncertainty. We have addressed today how we see short-term impact, and we'll continue to monitor the development closely and adjust accordingly. Despite the increasing uncertainty, we continue our strategic transition by investing the proceeds of our recent capital raise in future profitable growth.

We will now open up for questions.

[Operator Instructions] The first question is from the line of Poul Jessen from Danske Bank.

And actually, congratulations for a good Q3, then we have to see how it continues. First question on the guidance on the cash flow. Nikolaj, you say high end, that means up to 0, but still negative, meaning that you'll have a material change in the fourth quarter. Can you put a little word on that? Is that the working capital that is going to turn materially negative in the fourth quarter?

Yes. So in the fourth quarter, we expect, first of all, to continue our investments, both in OpEx and CapEx, which will impact cash flow from operations negatively. And then we are also expecting some negative development in working capital. We're expecting that inventories will build up a little bit more from the very low level that we have now, especially because we are still building up on H100 and Beoplay Eleven. H100 has been sold out on our inventory also in Q3, and we want to build up some buffer on that as well. So that's the reason why we are expecting to come up worse in Q4 than we've seen in the past 2 quarters.

Okay. And then I don't know if it's possible, about current trading, and given the uncertainty, which is in the markets in general, store traffic and so on, have you seen any material changes? And I know it's tariffs is one we go, but has your partner starting increasing inventories up to the speculation of tariffs or anything?

No, we have not seen any material changes over the past week, but it's really too early to say anything. I mean, when we woke up last -- not this morning, but yesterday morning, suddenly, we were talking about 104% for China, and the day before, it was 50%. So I think we all are going to adjust to this, and we are taking it nice and easy and slowly and making sure we are doing the right things, and we are not panicking over it. And I think our partners are looking at it in the same way.

Okay. And that's more on the strategy plan and the spending you should ramp up. I can see in the recent quarter that you have scaled down on marketing. Is that a one-off? Or are you going to be a little more slow on spending the money? Or are you keeping up on the plans if nothing has changed?

No, we are keeping our plans, especially on marketing. We are low -- spending less on marketing this year than previous years, which has been on purpose. But we are expecting us to dial up the marketing spend in next financial year as well. And right now, we don't foresee any significant changes to that. Of course, being mindful that with everything that's going on in the world, we are, of course, looking at our general cost levels as well.

Okay. And then coming to the tariffs, you have calculated the DKK 70 million that was quite close to my estimate. But the base -- just to help us looking forward when they move up and down, the cost base that we should calculate the tariffs on, the COGS, how much should we subtract from the reported COGS more or less to get the base on which we calculate it, just to help us looking forward?

Yes. But I'm probably not going to supply sort of a lot of details on that because it is not a straightforward calculation on calculating tariffs into the U.S. because it's not based on necessarily on group COGS levels. It's based on import prices into the U.S. But generally speaking, there's a lot of allocated costs into the COGS you look at, at group level. And that, of course, you have to subtract from the calculation. So it is -- yes, how can I put it? From a relative perspective, sort of in percentages, we are talking double-digit reductions in percentages in sort of the face value of COGS that we are calculating tariffs on.

Okay. And the price increases you're going to announce, or I don't know, have you announced it or which will be implemented May 1, is that going to be on the U.S. market only? Or are you doing on a broader base to not be too aggressive on the U.S. consumers?

It's -- first of all, it's been announced to our partners that it will happen 1st of May, so they are aware. And it's a global price increase because we are, as we said many times, adjusting our prices 2 times a year globally. So what we did was actually moving forward a planned price increase into May in order to mitigate some of the tariff impact. So it's globally. And on some products, we are going a little bit higher in the U.S. than the rest of the world due to tariffs.

So it's the August revision that is moved to May?

For now, it's the August revision that has moved to May. But given the latest announcements on tariffs, we're, of course, looking at whether we would want to do more on price increases just as we are looking at other handles that we have in terms of our supply chain and our partners as well. So we are not going to take the full cost of this in B&O, and preferably, we're not going to take any of the cost. So all the parties in the value chain, so to speak, they will have to pay or sort of bear their part of the burden.

The next question is from the line of Niels Leth from Carnegie.

Again, on tariffs, could you talk about the timing of when the tariff hit will come? I suppose that you have some kind of inventory or your partners would have some kind of inventory in the U.S. so that the actual tariff effect would first come a few months into your next fiscal year. Is that a correct assumption?

And secondly, when it comes to your growth plan and growth strategy, so will there be any fact at all on your growth plan from these tariffs?

So on the tariff timing, it's correct that the full impact will not be until next financial year, but there will be some impact in Q4. There are products that we will have to ship into the U.S. in the remainder of Q4, also to fulfill our revenue projections for the quarter. But that's, of course, a little bit more limited and what we can handle right now with the price increases made first and within the outlook that we have just narrowed in, of course. But there will be some minor impact in Q4 as well.

Do you want to take growth, Kristian?

Yes. So if you look further, it's too early to say how all of this will play out. And we maintain our plans currently, and we're going to execute on them. We believe we have a good plan. We have not a saturated market. On the contrary, we have a lot of potential in the market, and we expect to continue to execute that. But it's too early to say if there are any changes to the midterm plans that we're doing. So we're monitoring, of course, also alternatives if things would become more challenging.

Okay. Great. So from many other companies that I cover, you kind of get the impression that as we have moved into this year, consumer sentiment has worsened and year-on-year growth rate has worsened. So would that also be the case in your industry and for your business that February was worse than January, March is worse than February and so on?

We also hear probably the same things as you are hearing in this respect that consumer sentiment in the U.S., maybe in particular, has weakened. We have not seen, like Nikolaj also said, any signs of that in the few data points that we currently have. But, of course, we're continuously monitoring that. I think one difference for us, though, is like I alluded to, we have a huge untapped potential, and we have a low penetration probably compared to many others. So I think we have a better possibility of finding new ways to grow if we have to. But we have heard the same signals, but it's too early to say.

Great. And then just finally, you called out the change in the management of your e-tail channel. Is that going to have any effect on your price markup or your margins?

Yes, it will have a positive impact on our gross margin sort of all else being equal in the Chinese markets, as we will operate the Tmall flagship store directly. And from that perspective, we're sort of getting the full retail price in as revenue, whereas today it's a wholesale price we are getting in as our revenue, and thereby, we're also getting a higher gross margin. We will also have more cost to run the business, as we are going to run marketing and operating the platform within our own cost base. But net-net, it will have a positive impact next year in China on both growth and margin.

And I think more importantly, in reality, is that when we're operating the Tmall flagship store, which sort of is our branded e-com in China, where we're not operating b&o.com directly or we're not operating at all in China. We have the Tmall flagship store instead. Together with JD.com, they're already taking over. We have an opportunity to also work much more with price stability in the Chinese market, which is quite important for all of the channels.

So it means that you are relying less on Chinese, what you -- would you call it kind of, master distributors, so selling directly to those flagship stores, but even directly to retailers such as JD...

Yes. So JD, we've been operating for, yes, 18 months, I think, or something like that ourselves. And now we are taking over Tmall flagship, meaning that it's -- we are operating the platforms directly and not relying on a master dealer or distributor to do that. You're still reliant on some service partners because of the fulfillment system that you have in China is very different from what we know in Europe and in the U.S. But our master dealers, our partners in China will predominantly be focused on physical retail going forward.

So since you have taken over these flagship stores, I don't know how many that would be, would you then also just remind us about the number of stores that would be in the ownership of B&O?

No, but the flagship stores are -- this is 2 stores, it's JD.com with some subsites, and it's a team of flagship stores. It's basically 2 online stores, broadly speaking. Then you have some subsites, et cetera, but it's 2 online stores.

Great. So in total, including the stores that you operate directly in Europe and North America, that would be 13 stores as far as I remember.

So today, we are operating 13 physical CoCo stores, physical retail. But we don't classify this as physical retail stores. These are online stores. So this is more comparison with us having our bang&olufsen.com site in Europe, in the U.S., in South Korea and Japan. We don't have a bang&olufsen.com in China, but we have a Tmall Flagship Store. That's what it's called. It's called Tmall Flagship Store, but it's an online flagship store. And the way they are operated differs quite a lot from other e-tail stores that you would know from Europe. In a Tmall Flagship Store, you're actually operating your own branded space on the site.

Next up, we have some follow-up from Poul Jessen.

I was just lowering my hand because it was the same question I had. But just a follow-up, we're all focusing on the U.S. right now and your sales there. How do you look into China and Europe, which are getting the burden of this to some extent? Are you feeling that? Or should we just look at it as you're saying that you have a very small part of the market and your clients have less price sensitivity as the market in general? So what's your forward-looking plans for Europe and China?

So good question, Poul, a big question. It is, of course, affecting everybody globally. There's no, I think, doubt around that, but how, we don't know just yet. And the measures that we are taking, whether they are directed towards the U.S. market only or global measures, we don't know, and we will come back when we do the measures. We believe then again, though, that we have a good plan, we have a good strategy, we have a lot of things that is in our own control that we are going to continue to execute on, that really doesn't change.

And to your point as well or to my previous point and your point, we have untapped potential that we have not addressed at all that we're moving towards. And we also believe that there is a higher resilience on price increases from the target segments that we have, but it's too early to say at this point in time.

Apart from the price increases to come, so you're also talking about looking at your operational structure. So what kind of -- given that you had a lot of change in the recent year and lowered your overhead cost, what opportunities do you have from here onwards to look at your OpEx?

Yes. So what we are doing, as you know, we are focusing more and more on cities, and we know the Win City concept is working and has been, I think, most successful this quarter. So we're trying to copy that, of course, as much as we can. And one of the things is to have more resources locally in the cities that we have identified. So we are continuing with expanding our sales and marketing organization locally in order to serve our customers better, and of course, to find the opportunities because we believe and see that, that is working really, really well. So that will continue.

Obviously, as well to create more awareness, as Nikolaj also said, we're going to up our marketing as we move forward as well to create more awareness, and we're preparing for that at this point in time. When it comes to the cost and everything as well in regard to the tariffs, we are looking at Nikolaj's point as well, several handles in terms of how we manage it, our suppliers manage it, our partners are managing it and how we basically try to avoid to carry any of that on our own in our own P&L.

But it's also very difficult to say at this point in time exactly on how it will work out depending on what is happening in the world with the tariffs right now. But we believe we have still a lot of opportunity to execute on our strategy, and that's what we are mainly focusing on and then adjusting accordingly as we see things changing.

And a smaller question. You're talking about the change in the partnership with Hyundai, making order by Bang & Olufsen. Will that mean that you get a higher revenue per sold cars and you get it more integrated into your software solutions?

No, it will not mean a higher revenue per car per se. I cannot comment on the specific details of such an agreement. But in the logic and the hierarchy we have around how we are licensing our brand, audio by Bang & Olufsen is sort of the lowest tiering of our brand licensing framework. And Bang & Olufsen standing alone is the highest tier. And this is audio by Bang & Olufsen.

[Operator Instructions] It does not seem like we have any more questions from the telephone. I will hand it back to the speakers. Please go ahead.

Yes. Thank you, everybody, for joining the call today. So as always, if you have any further questions, don't hesitate to contact our IR department. Thank you.