Bang & Olufsen A/S
CSE:BO
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Bang & Olufsen A/S
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Ladies and gentlemen, welcome to Bang & Olufsen Interim Report Second quarter 2017-2018. Today, I am pleased to present Henrik Clausen, President and CEO; and Anders Aakær Jensen, CFO. [Operator Instructions] Henrik, please begin.
Yes. Thank you, and good morning, and then thank you for joining the call. I'm here with Anders and parts of his team to walk you through the quarterly results. We'll do as we typically do, as with presentation, and then leave enough time for questions in the end. I'll just kick it off by a giving a few reflections from the highlight perspective, and then would let Anders walk through more of the details.So let's kick off at Page 4, highlights.We are happy with results of the second quarter. We delivered a solid growth of 15%, so we continue the strong growth momentum that we saw in first quarter, and specifically, here at PLAY with a 30% growth, obviously, made a big difference in the second quarter.It's been good to see that growth has been strong in all region, and specifically, the key focus regions, China and U.S., have shown a strong progress, I'll come a little bit back to that later. And we have established strong local organizations in New York and then Shanghai, respectively, supporting that business.EBITDAC in the underlying business has mildly doubled since last year and reflected in a solid EBIT of DKK 70 million, driven by the growth and a successful transformation of the businesses, the model supply chain following the sale of our assembly facilities in Europe first half of last year and the instruction of the new TV, which is now entirely based on TV capabilities, competencies and production capacity with LG. So all largely in line with what we have communicated earlier, but of course, good to see that both the momentum on the top line and the efforts on the supply chain business systems is kicking in as we had expected and hoped for.Let's move to the next page and just talk a little bit about key strategic elements. On the product portfolio, we have done a few additional launches. Now we launched the M3 Beoplay with connected audio products in the PLAY business units, and we have launched a seasonal collection as part of our program for seasonal collection and color variations.On top of that, I think it's worth noticing that the products we launched early in the year, I mean, specifically, the Eclipse, the BeoLab 50 plus Shape and the E8 from PLAY has been very well received in the markets and gaining strong tractions. And the expectation is that, that will continue into second half of the year. On the brand partnering side, I think the first reflection is that the core relationships with HP and with LG and with HARMAN on its existing models has been progressing well and according to plans. And in addition to that, it's been nice to see that we've been able to launch a couple of new cars throughout the last periods, specifically Lamborghini in the last quarter, and the quarter before, the Bentley relationship. So we are expanding and building the portfolio in the car segment as we go. And in addition to that, we continue the collabs, more operational collabs with like-minded brands. Supreme has been example of a brand that we work with on the PLAY side, considered to on go over the last couple of years. But this quarter, the second quarter, we've launched collabs with Saint Laurent and David Lynch, thus emphasizing that the developments of our brands and the attractiveness of our brands and in terms of collabs is very much there, which is obviously a testament to the way we develop and the way we think our brand makes sense. And then I alluded to the fact that from a market perspective, we've seen solid growth basically across our -- all our key regions, including a European expansion, but specifically, U.S. and China, where the growth has been more than 20% in local currency in the quarter that we just surpassed.So net-net, we feel that Q2 has been a well-executed quarter, driven by solid product launches based on new supply chain, and that we are establishing strong enough local presence in the key regions to drive the business going forward in a solid way.So with that, over to you, Anders, on this for a bit of details.
Thank you very much, Henrik. What I'm going to do now, I'm going to turn to Page #7, and I'm going to walk you through the financial highlights. After that, I'll deep dive into the business units, sales developments and the channel sale development and the regions, and then explaining in more details the development of the profitability of the company here over the quarter and the first half year. So on Page 7, you will see that, as Henrik was mentioning, we have a EBIT of DKK 70 million in the second quarter, and we have an EBIT for the full year of positive DKK 5 million, which is an increase compared to where we were last year and delivering a positive EBIT for here the first half year. What is the main driver is a good combination of revenue growth of 15%, which I'll come into more details about, and at the same time, managing to keep our cost level more or less flat compared to the same period last year. And by that, increasing the gross margin and have that fully impact on our EBIT. So that's really the formula we have seen in Q1. That's the formula we have seen in Q2. And that is where we have also guided to be for the full year.In parallel, we have managed to realize a positive free cash flow of DKK 44 million against last year, which was DKK 131 million. I just want to mention, last year, we had an escrow payment from HARMAN of DKK 93 million. So when we deduct that in the equation, we are on par with positive free cash flow for the second quarter.Deep diving a little bit into the sales development, I'm turning to Page #8. You will see that Bang & Olufsen have realized a growth of 4% quarter-over-quarter compared to last year. And as Henrik was talking about, this is a good combination of the products that we have launched, but also our existing product portfolio, which we have seen good traction. And it's not good traction in just one specific area, it's good traction throughout the regions where we are represented in. In parallel with that, the big growth driver have been B&O PLAY. The business unit have a growth of 30% compared to actually a challenging quarter last year, where we also saw a very high revenue. And what we have seen here is a good growth in a lot of our product categories, A1, H5, A9, and also, very good excitement about the product that we have launched, the E8 wireless earphones.When we look into the channel here, we can see that B&O PLAY have a growth of 21% in the B1 stores that we represented in and also 35% in our TPR, and I'll come a little bit back to that part.Turning then to the next page here. You'll see that as we've communicated earlier, the importance of working with quality in our distribution setup is key, so in parallel, we're actually growing. We have reduced again here in the quarter, the number of presence where we are located by 10 here, primarily in Europe, and slightly in the Greater China region for the B1. And if we go to the TPR, you will see that we are basically on par with where we were. So the growth of the 35% is the main focus that we've been talking about, going deep into the sales channels and optimizing our relationships and being able to deliver growth on, you can say, more like-for-like basis rather than having growth through an expansion of the network. So that's a key point for us. And as we have said earlier, this is even more key when we move forward in the coming quarters.Turning to the next page. Was alluded to a little bit earlier also by Henrik that we see very good growth in all of the regions. In our big core market Europe, we see a 7% growth. What's going on in the industry? Everything. Taking into context, we're actually happy with what we see here. But even you can say more important, at least equally important is that our main growth regions where we have high focus on, we see growth in North America, up more than 30%, and close to 30% in China, which is extremely important for moving forward. In parallel, what we have done here, we have consolidated and now completed the consolidation in U.S. with a new good presence in New York. And we have here built a good competence center for the future moving -- for the future plans that we have in the North American region. So all in all, we are -- we're happy to see that growth is spread out through all the regions where we are represented in.Moving now into the profitability development of the company, starting with the gross margin. We see that we are ending here the second quarter, 41.2%, exactly spot on where we were last year. This is also what we communicated at this webcast last time. We're really spot on here in terms of the full year margin, as we talked about, around 40%, 41%. And we also expect that to be where we'll end up in terms of the full year in this range. What we have seen here is the Bang & Olufsen segment is very much on par with last year, but there's been lots of ups and downs. We have divested some of the company-owned stores in Europe, U.K., Denmark, Munich and so on, which obviously had a negative impact. And in parallel with this, we have worked very hard on optimizing the product margins in each of the different product categories, which are then compensating for this downside. So all in all, we are on par with last year. For B&O PLAY, it's good to see that we once again in a quarter increasing 1% point from 35.6% to 36.5%. And net-net, because of the, you can say, negative mix impact of B&O increasing more, we are ending up at the same level compared to last year for the second quarter and an increase year-to-date. And now we are above the 40% mark.Turning then to the next page, a little bit about the R&D model and transformation, and we have talked about this earlier and I think I just want to spend a little bit time explaining this. So basically moving into the new model, a few things is going to happen. So the development costs and the focus on the core capabilities of acoustic, design and craftsmanship is still done by Bang & Olufsen. But it means that we are moving towards a different setup where, as Henrik was talking about, now we are coming to market with the TV from LG. We are all, you can say, the development of the TV is done by them. So the incurred development cost will be decreasing over time in the strategy periods, and for the coming quarter, will be more or less on the level that we have now.In parallel with that, what obviously is then ongoing is that the cost for R&D will move into a gross margin part of that. And we believe that we will be able to compensate that, you can say, negative impact by maintaining the margins that we have and even -- or the strategy periods slightly increase the margins.In terms of capitalization, then what we will see is that capitalization will be lower in percent of total R&D costs. We are now at around level of 30%, and we expect to be around 30% in the coming quarters moving forward. And that's a good reference when looking into the R&D. So all in all, if we start to add this up and we then look at the balance sheet for where we have capitalized the development costs, we expect here in the strategy period that, that portion from the beginning of the periods to where we end is going to be more or less half of the starting points. So this is to give you a guidance on -- and a reflection on whether we believe that this will end up in the strategy period.And obviously, this, we have communicated early, have an impact, short-term early also because we have increased the, you can say, the depreciations. We have lowered the capitalization, and that will have an impact to our short-term EBIT, where we see, you can say, a positive -- you can see -- in the beginning, we see a high impact on the EBIT. But compared to where we were earlier, we have incurred less costs, and therefore, less depreciation, and we see a slightly positive income from that part here throughout the remaining part of the year. Henrik will come a little bit back to that when we close off this session.If we move then to the next part on Page 13, the net working capital, we're around 5%. If we deduct the impact from the transaction where we were selling the factory in Czech, including the net working capital, we're more or less on par with where we were last year. And we expect to be around that 5% level when we close the year for net working capital. We have a positive free cash flow, DKK 44 million in the quarter, and we do expect to remain at a positive free cash flow throughout the year.With that, I'm going to leave it over to Henrik and just close off this session with walking through the outlook for '17, '18.
Okay. So briefly, maybe back to my first comment. I mean, we had a good start to the year. And we are feeling comfortable now that the direction we've taken strategically, the focus we have on our core competencies, around acoustics, design and craft, a solid innovation process can be and has been transferred to a different way of working. So we buy now relying on partners for productions and big parts of development. We've, on top of our core capability, ensured scalability and that is positively impacting profitability short term and will, obviously, over time improve profitability even more. And that means when we look to outlook, we feel comfortable that what we communicated earlier is absolutely achievable. And we just wanted to remind you that, that translate to a growth around 10%. And as we've said, we had a good start to the year at PLAY and expectation is still a growth of about 20%. And for the Bang & Olufsen segment, the expectation is still to remain largely flat. So we had a positive growth in first part of the year, and we expect to see some impacts from the transformation on the branded retail network that is ongoing. I think Anders alluded to that, that, that's been an ongoing process, but we expect some of that to speed up in second half of the year. A part of it will be, I'd say, changes within the structure and part of it will be translation of retail to wholesale revenues. Well, obviously, it will have a short-term impact on the top line. From a brand partnering perspective, we keep the guidance of around of between DKK 160 million to DKK 200 million in year -- the year turnover. EBITDAC margin, guidance, 8% to 10%. And the EBIT, a small adjustment or clarification with what Anders just went through. We previously guided around 1% to 3%. What we'll now say largely driven by the faster transition into the new operating model. From the R&D side, we now see an EBIT margin for the year close to 3%, so it means slightly up from the 1% to 3% that we've guided previously. Free cash flow is still expected to be a positive for '17, '18 with what just -- what Anders just went through. So I think with that, we conclude some of the fast walk-through, and we leave the floor open for questions. So please.
[Operator Instructions] And as there are no questions at this time, I'll return the conference to our speakers.
Thank you. Now we'll take that as a credit for being super clear in the presentation and walk-through. But as I've said, still, thank you for joining. I know there's been quite a lot of people listening in to the call, so we appreciate that. We appreciate the sort of the growing interest in the company and wish you all a very nice day. Thank you very much.