Bang & Olufsen A/S

CSE:BO

Earnings Call Analysis

B&O's Strategic Shift Amid Revenue Decline

In the second quarter, Bang & Olufsen navigated a complex landscape, managing to deliver positive EBIT and free cash flow while grappling with a revenue decline of 16% to DKK 700 million compared to the previous year. This dip reflected strategic decisions to exit non-luxury multi-brand stores and focus on luxury branded channels and product innovations, such as the launch of Beosound Bollard, the company's first outdoor speaker. They also opened new flagship stores in London and New York. Despite the drop in revenue, the firm achieved an impressive EBIT margin of 3% and a record gross margin of 53.1%, indicating a strengthening financial foundation. The company saw a stable consumer demand with a 2% growth in like-for-like sell-out. However, brand partnering and other activities faced a steeper revenue fall of 27%, impacted by external factors like U.S. factory strikes. Bang & Olufsen continues its focus on retail excellence and brand collaborations to foster growth and brand strength.

Maintaining Outlook with Expectations Adjusted

The company has maintained its outlook for the year, although it now anticipates revenue growth to be at the lower end of its initial projection. This adjustment is due to underwhelming revenues from the Asia-Pacific region in Q2 and the postponement of a product launch slated for the latter half of the year. As a consequence, free cash flow forecasts have also been revised to the lower end. Despite these challenges, product launches are on track with two recent unveilings - the Beosound Bollard and BeoLab 8 - and the EBIT margin before special items remains unchanged, with strong performances expected to sustain a margin around 50%.

Gross Margin Increases Signal Strengthened Financial Health

The second quarter marked the third consecutive quarter where the gross margin exceeded 50%, reaching a record high of 53.1%. This indicates the company's success in strengthening its financial health. Nevertheless, there is some disappointment about revenue growth, particularly due to slower recovery in China. The company reported stable demand and growth in its customer base, underlined by higher repeat purchases. A strategic focus on the Luxury Timeless Technology proposition and channel network marked the quarter, even at the expense of short-term revenue impact from discontinuing multi-brand doors. Strategic store openings in New York and London reflect the ongoing 'Win city strategy,' which will soon expand to Hong Kong.

Phased Wind Down of HP Partnership with New Opportunities on the Horizon

The longstanding partnership with HP will not be renewed post its expiration in June of the current year, leading to a wind down process. Revenue from HP is still expected to contribute during this period. The company is actively pursuing a pipeline of new partners to present a more comprehensive offering, including integration into the B&O app and world. This strategic shift is not predicted to cause dramatic drops in revenue and is not expected to affect this year's outlook. Additionally, there is managed growth in other brand partnering sectors, which should offset short-term impacts.

Optimism for Higher Licensing Fees and Renewed Ferrari Contract

With the goal of capturing more customer data and providing an immersive brand experience, the company foresees increased licensing fees. By offering more services and experiences, the company expects its brand value and partnership revenues to rise. There is also anticipation for the renewal of the partnership with Ferrari, building on the previous year's successful collaboration and mutual satisfaction.

Retail Expansion and Ownership

The company currently owns 12 stores. Its retail strategy, particularly the ownership of stores, is an essential part of its broader market penetration plan. However, specifics on the number of stores to be taken over annually were not disclosed, indicating a prudent and opportunity-driven approach to retail expansion.

Earnings Call Transcript 2024-Q2

[Operator]

Hi, everyone, and welcome to this Bang & Olufsen's Interim Report for Q2 2023/24. Today's call is being recorded. [Operator Instructions] I would like to introduce your first speaker, CEO, Kristian Tear. Please begin.

[Kristian Teär, executive]

Hello, everyone, and thank you for joining the call. As always, I have Nikolaj Wendelboe, our CFO, with me. I will begin with the financial highlights for our second quarter, followed by an update on how we are progressing with our transition towards Luxury Timeless Technology and our key priorities. Nikolaj will take us through the financials in more detail, and I will conclude the presentation part before opening up for questions.

If we move to Slide #5. In the quarter, we delivered a positive EBIT and free cash flow despite a revenue decline of 16%. We are not satisfied with the revenue development. However, this is also partly a consequence of the deliberate strategic choices as we continue to execute in line with our Luxury Timeless Technology strategy.

Let me simplify. We exited multi-brand stores, not aligned with our strategy. We invested in our branded channels, especially with the opening of flagship stores in London and New York. We improved product quality and introduced 2 new product innovations. We increased brand awareness through our partnership with Ferrari, and we added more customers and increased the number of customers owning more than 2 products.

We are pleased to report another quarter of positive earnings with an EBIT margin of 3% and we delivered a record high gross margin of 53.1%. This is the third quarter in a row, we are delivering a gross margin above 50%. This shows that we're building a more robust company. The continuous improvement of our gross margin has also enabled an important gradual strategic shift away from non-luxury multi-brand doors towards branded channels. In our branded channels, we can showcase the breadth of our portfolio and brand and give our customers the full B&O experience as well as support better price stability and build brand equity. Over the past 12 months, we have closed more than 2,000 multi-brand doors as part of this strategic reorientation, which supports our ambition to deliver more sustainable growth.

As mentioned, we are not satisfied with revenue development in Q2, which amounted to DKK 700 million, a decline of 16% in local currencies compared to Q2 of last year. If we look at the first 6 months of our financial year, revenue declined by 8% in local currencies. We had expected negative growth for the quarter since we had a very successful launch of Theater last year, and we have exited from multi-brand and eTail doors. Overall, our branded channels continue to perform well. We did, however, continue to see more cautious replenishment of inventory from our monobrand partners.

Sales were also impacted by the slower-than-expected economic recovery in China. This is also why we report a higher negative growth than expected.

For brand partnering and other activities, revenue declined by 27% in local currencies. This was driven by several factors, but especially license income from our automated partner was impacted by factory strikes in the U.S. So despite the revenue development, we are pleased to deliver a record high gross margin and profitable quarter. This also supported the improvement of our free cash flow, which increased by DKK 23 million compared to Q2 last year.

Please turn to the next slide. We continue to see stable consumer demand in most markets with like-for-like sell-out growing 2%. Like-for-like sell-out for our company-owned stores grew by 10%.

Looking at product categories. We had a positive traction on most product categories. Our Flexible Living category grew by 6%. On-the-go category grew by 3%, while the Staged category declined by 2%.

In general, we don't see like-for-like sell-out being negatively impacted by the price increases. In EMEA, like-for-like sell-out declined by 1% year-on-year. The company-owned stores delivered solid sell-out growth driven by growth across markets, particularly in London and Paris, monobrand stores had a small sell-out decline. Sell-out in Americas declined by 6%. Negative growth was seen across all channels expecting e-commerce, which showed solid sell-out growth. Our company-owned stores reported negative growth due to the relocation of our Madison store, which was closed for a month. Our SoHo store reported double-digit sell-out growth during the quarter. In APAC, like-for-like sell-out grew 8%, mainly driven by China with a sell-out growth of 17%. Sell-out growth in China was across product categories and channels, though generated from a low comparable due to the restrictions and regional lockdowns last year. In addition, improved inventory levels had a positive effect on sell-out.

Please move to the next slide. We made progress with our strategic initiatives in the quarter. I will highlight some of our achievements across our 5 shifts. This quarter, we had a particular focus on improving the channel network and retail excellence. We have added retail capabilities to my global leadership team by hiring a new Head of Global Retail in November. She has a vast experience from retail from the luxury industry, and she will help us to take our retail experience to the next level. We know when we do retail right, with the right training of staff, with the right activations, the right merchandising, the right support from marketing, sell-out increases considerably.

Two important milestones were the opening of 2 company-owned stores. We opened a store in New York in November and our new flagship store in London in December. We continued executing structural changes in our channel network to promote and improve our branded channels. We also reduced our presence in selected multibrand and eTail stores that does not fit with our luxury positioning. This included exiting some stores, but also being more selective with the product assortment available in the remaining multi-brand and eTail stores. In Q2, we onboarded 5% new customers and grew the number of customers owning 2 or more products by 2%. The numbers show that we continue to attract customers and expand our business and loyalty with existing customers.

Our branding efforts during the quarter centered on activating our partnership with Ferrari. We had multiple activations promoting a Ferrari product collections launched in Q1. And this could reauthorize Formula One sponsorship, continue to help us build brand reach and awareness. We announced 2 new products innovations in Q2, both covering the most important use cases of our customer sound and TV ecosystems. Our new BeoLab 8 can be used as a system speaker to create an immersive home cinema setup with the compact size of a rear speaker and the beautiful design of a front speaker, it can also be used as a powerful stand-alone speaker installed on the walls, set up on floors, secured on to ceilings or placed on top of any flat surface. It is designed with product longevity in mind, which is a key customer requirement and a core value for B&O products. The speaker is designed using cradle-to-cradle principles and is pending complete certification.

The second innovation announced in Q2 was Beosound Bollard. This is our first outdoor speaker, and it's developed in collaboration with Origin Acoustics. With Beosound Bollard, we can now offer our customers a seamless Bang & Olufsen experience outdoors without compromising on quality. The speaker has been available in retail since January 2024 in selected Bang & Olufsen stores and through our customer installation partner, Origin Acoustics.

In Q2, we also introduced the beta-version of a new more intuitive and customer-friendly app interface. The improved multiroom app features makes functionality more interactive and easily accessible. The update hasn't been available since January.

Our Win City execution continued across our cities, London, Paris, and New York. In London, Q2 sell-out growth was 13%. Our 2 stores in Harrods and Selfridges delivered strong growth and had the best quarter ever. As mentioned earlier, we opened our flagship store in New Bond Street in December, and I will go more into details on that on the next slide.

In Paris, sell-out growth was 2%. Our company-owned stores reported high double-digit sell-out growth while our monobrand network was significantly challenged. Overall performance in Win Paris was not satisfactory and we are planning and making initiations to our organizational setup to enable a better execution.

In New York, sell-out declined by 10%. The quarter was impacted by one of our 2 company-owned stores being closed for a third of the quarter as it was relocated. Sell-out in our SoHo store grew double digit, driven by several strong in-store activations. In November, we relocated our store at Madison Avenue. With this new presence in the city's premier shopping district, we can deliver the full brand experience and showcase the breadth of our portfolio, including our bespoke offering.

In the second half of the fiscal year, we aim to commence a new Win City this time in Hong Kong. The city is significant wealth, high density of very high net worth individuals and history of being Asia's most prominent luxury destination, we see ample opportunity to grow our presence. Our current 3 company-owned stores in Hong Kong will serve as the foundation for reaching our Hong Kong-based target audience. In our brand partnering business, we extended our Cisco partnership with a new true wireless earphone built with enterprise-grade features and customized for professionals.

As part of our strategy to strengthen our Luxury Timeless Technology proposition, we engage in strategic partnership and brand collaborations to support the growth, brand awareness and customer acquisition.

With the expiration of the HP partnership in June 2024, we are pursuing new partnership opportunities which reinforce 1 or more of our Luxury Timeless Technology pillars and further expand the proposition of our current brand partnering and licensing model. This will be realized through proprietary software-enabled audio experiences and by leveraging our design and craftsmanship offerings. We have an exciting pipeline and we'll disclose new partnerships when possible.

If we move to the next slide. Before I hand over the word to Nikolaj, I just want to put a few words on the new store concept that we revealed with the opening of our new store on New Bond Street in London. We believe that providing superior and multisensor retail experiences are key to our strategic transition. Over the past year, we have developed and refined the new concept to enable to provide that experience to our branded channels across the world. The new concept applies principles of modern luxury and is designed to provide the ultimate listening and visual experience and showcase the full potential and brand, including a designated bespoke and event area for private and personalized customer events. This London store is a pilot of the new concept, and it is in the months to come, we will extract learnings from staff and customers. It's too early to say how it will unfold in all branded retail, but it sets the bar for how we intend to deliver experiences for our customers in key locations across the world.

All-in-all, we have made solid progress with our key priorities in the first half of '23, '24, which has contributed to a more clear positioning of our brand and more robust company.

And with that, I would like to turn over to Nikolaj.

[Nikolaj Wendelboe, executive]

Thank you, Kristian. Now please turn to Page 10. Reported revenue in Q2 was DKK 700 million and a decline of 16% in local currencies compared to Q2 of last year. Reported regional product sales decreased by 17% or 15% in local currencies. This was due to several factors, which will go more into detail with on the next slide.

In terms of channels, the decline was across most channels and especially related to the multi-brand and eTail channels. As mentioned, we are undergoing a strategic transformation in our channel network to focus more on branded channels. This means that we across regions are becoming more selective in terms of how and where our customers can experience our brand and products aiming to ensure they get the right experience. This also meant discontinuing more multi-brand stores, resulting in less overall volume into multi-branded channels in Q2.

Our brand partnering and other activities declined by 28.8% against last year, corresponding to a 26% decline in local currencies. This was mainly related to reduced license income as the automotive industry was impacted by factory strikes in the U.S., license income from HP also declined. Income from product collaboration was lower due to the ramp-up of the Cisco partnership last year. During the quarter, we expanded the partnership with Cisco, introduced Bang & Olufsen Cisco 950 ear phones. That did not affect performance in Q2 and is expected to generate revenue in the second half of the fiscal year.

Please turn to the next page. In EMEA, revenue declined 14.5% or 15% in local currencies to DKK 342 million. Company-owned stores and e-commerce delivered growth. Monobrand declined mainly due to the price increases implemented September 1, putting some demand from Q2 into Q1. For the first half of '23/'24, revenue from branded channels in EMEA increased 9% year-on-year. We continue to optimize the channel network and the number of monobrand stores were reduced by 14% year-on-year.

Revenue for multi-brand and eTail decreased significantly. As part of the strategic transformation, the number of multi-brand stores in EMEA have been reduced by 125 stores since Q2 of last year. In terms of eTail platforms, we have limited the assortment available. In Americas, reported revenue was DKK 72 million on a year-on-year decline of 31.3% or minus 27% in local currencies. In general, the loss of Beosound Theatre in Q2 of last year meant high comparables. Company-owned stores were also impacted by a store closure due to the relocation of our Madison store.

Our SoHo store reported double-digit growth during the quarter. The customer installation channel declined due to high comparables, while the monobrand channel declined partly due to an unsatisfactory performance in California. Revenue from the multibrand channel was reduced. As part of the strategic transformation, we ended the partnerships with both T-Mobile and Verizon and have consequently reduced the channel by more than 2,000 doors since Q2 of last year.

Revenue in APAC was DKK 211 million corresponding to a 15% decline of minus 10% in local currencies. Revenue from China decreased by 24.5% or minus 16% in local currencies and accounted for approximately 54% of total APAC revenue.

In China, the eTail network continues to struggle with traffic and the channel declined during the period. Multi-brand reported growth after the channel was reset over the past quarters. Excluding 1 partner with high inventory levels, our monobrand channel delivered growth during the period, reflecting the mentioned reduced sensitivity in customer behavior in this customer segment.

For the Staged category, revenue decreased by 16% to DKK 278 million. The development was mainly driven by the successful launch of Beosound Theater in Q2 of last year. The good performance continued on a more normalized level. The decline was partly offset by the launch of BoeLab8 at the end of the quarter as well as higher revenue from BeoLab 50.

For the Flexible Living category, revenue declined by 5% to DKK 135 million. Sales volumes were generally lower, reflecting a high comparable in China due to inventory replenishment in Q2 of last year. For the On-the-go category, revenue declined by 24% to DKK 212 million. Across speakers and headphones, the development was mainly driven by a few large deals on headphones and earphones in Q2 of last year as part of our efforts to reduce end-of-life inventory. In general, the optimization of the multibrand channel affected this category negatively for the quarter. The decrease was partly offset by improved average selling prices.

Please turn to the next page. Our gross margin increased to 53.1% from 44.4% in Q2 of last year. The normalization of component and logistic costs have significantly lifted the margin level for the third quarter in a row. In Q2 of last year, extraordinary costs adversely impacted the margin by approximately 6 percentage points. In addition, price increase supported an improved gross margin as well as relatively more revenue from branded channels. The strong gross margin also contributed to an EBIT margin before special items of 3% against 1.6% last year.

Please turn to the next page. Looking at the underlying development, the gross margin was favorably impacted by a change in product mix towards higher-margin products as well as price increases implemented since last year and improved channel mix, combined with a strong price focus also supported higher margin levels.

Last year, the gross margin in the On-the-go category was impacted by a few larger deals and headphones and earphones to reduce end-of-life inventories. Gross margin from partnering and other activities was 87.9% compared to 82.6% last year. The increase in gross margin was mainly due to a lower proportion of product revenue from our brand collaboration with Cisco. Last year, we ramped up our partnership with Cisco to sell the Bang & Olufsen Cisco 980 headset for hybrid work.

Please turn to the next page. Total capacity costs were DKK 355 million and 4% below Q2 of last year. Development cost was DKK 71 million against DKK 81 million last year, driven by lower incurred cost and a higher capitalization ratio compared to last year.

Distribution and marketing costs decreased by DKK 9 million to DKK 246 million. The decrease was mainly reduced related to the launch of Beosound Theatre last year and reduced warranty costs. The marketing cost ratio was 10.6% compared to 9.5% last year. Administrative expenses increased by DKK 5 million to DKK 38 million, driven by higher costs for patent protection and extraordinary amortization of IT assets. Special items were DKK 4 million against DKK 1 million last year was related to a reorganization in EMEA.

Please turn to the next page. Net working capital decreased by DKK 25 million during the quarter to DKK 286 million. Net working capital to the last 12 months revenue was 11% and slightly below last year. Inventories declined by DKK 18 million during the quarter, driven by our focus on inventory management. Since Q2 of last year, we have reduced our inventory by DKK 108 million.

Trade receivables increased by DKK 38 million to DKK 365 million. The increase was driven by higher sales in Q2 compared to Q1. Sales with extended credit accounted for 2% of revenue in the quarter compared to 1% in Q1. In Q2 of last year, extended credit was 12% of sales due to product launches. Trade payables increased by DKK 48 million to DKK 451 million, mainly related to the timing of supply.

And please turn to the next page. The free cash flow improved by DKK 23 million to DKK 24 million. The developments in last year was driven by the improved EBITDA and the positive change in net working capital. Capital expenditures were DKK 57 million, which was overall in line with last year. Investments were primarily within intangible assets and related to new products and platforms.

Finally, capital resources, consisting of available liquidity and available -- undrawn right on our revolving credit facility stood at DKK 323 million, up DKK 13 million from Q1. This was mainly due to the improved free cash flow. Our available liquidity was DKK 163 million at the end of the quarter, consisting of cash and securities offset by available transactions.

And with that, I would like to hand the word back to Kristian.

[Kristian Teär, executive]

Thank you, Nikolaj. So if you please turn to the next page. Moving to status on our outlook for '23/'24. We maintain our outlook for the year. However, revenue growth is now expected to be in the low end of the range. This is due to the lower-than-expected revenue from APAC in Q2 and the delay of a product launch we expected in second half. Consequently, this also lowers expectations for free cash flow to the low end of the range. Excluding 1 delay, our product launches are on track, and we have disclosed 2 of our product launches, namely the Beosound Bollard and BeoLab 8.

The expectations to EBIT margin before special items is unchanged and driven by a strong margin that we expect to continue around the 50% for the remainder of the year.

Please turn to the next page. So to recap, Q2 was a quarter impacted by several factors. We are pleased to see the significant increase in gross margin. This is the third quarter in a row, we are reporting a gross margin above 50%, and this quarter was record high 53.1%. This confirms that we're building a more robust company. We are not pleased with the development of revenue since we had expected a stronger recovery in China. We saw a continued stable demand for our products in most markets. Our customer base continued to grow, and we saw higher repeat purchases. We strengthened our Luxury Timeless Technology proposition in Q2 to build long-term growth with focus on the channel network, which also meant discontinuing multi-brand doors in the quarter, even though it has a short-term revenue effect.

Key strategic milestones were also the location of Madison store in New York and the opening of our new flagship store on the Bond Street in London. The latter features our brand new store concept. We continue to deliver on the Win city strategy, and we'll add the next city Hong Kong in the coming months.

Given the market environment, we continue to be prudent with our investments and cost levels. We do, however, remain confident in the direction and our insights confirm that this is a very attractive opportunity where we have a pole position. And finally, as I just said, we maintain our outlook for the year. However, revenue and free cash flow is expected to be in the low end of the range despite the lower revenue level. The expectation for EBIT margin before special items is unchanged.

And with that, we would like to open up for questions.

[Operator]

[Operator Instructions] The first question will be from the line of Niels Leth from Carnegie.

[Niels Granholm-Leth, analyst]

First question is on new partnerships to compensate for the termination of the HP contract. Could you talk about what will be the expected effect of the runout of the HP contract and is it realistic that new contracts would be able to fully compensate for the termination of this contract? Secondly, you have announced the intention to become the owner of more of your B&O stores. Could you talk about how many stores that you expect to take over per year and how you expect to finance this?

[Kristian Teär, executive]

Thank you, Niels, it's Kristian here. I'll start, and I'll pass on to Nikolaj as well. We have had a very successful partnership with HP running over many years, and this last contract expires in June this year, and it will not be renewed. We are working, of course, with an interesting funnel of partners, like I said, in brand partnering and in brand licensing. And we have also refined and developed the concept that we are offering to our brand partnering, which is now more than audio tuning and putting our name on the product. We want our brand partners to offer a complete immersive experience and get into the B&O world and get into the B&O app and become also a customer of ours, which was not the case with HP.

We will announce them when we announce them, but this opens up for new different opportunities for us that we did not have the possibility to do before. Then also, on HP is going to be -- there's a wind down process with all of this. So it doesn't end abruptly on June of this year, is going to be winded down. And Obviously, we'll have revenue during that period as well. We expect there will be some smaller drops, but we don't expect this to be dramatic, and we also expect that we will be able to announce new partnerships going forward.

Nikolaj, you want to add anything?

[Nikolaj Wendelboe, executive]

Maybe just to be a little bit more precise on some of these things. It's not a termination. I think it's very important to say once again. It is the contract is running out as has always been intended that it would at the end of '24, we have stated also when we entered the contracts. So this is not news in that respect.

Then there's a runoff period, as Kristian said, so we will still have HP revenue also in the next financial year because even though the contract is ending as long as they are selling models with our name on, we will also get revenue from that. And then we're seeing growth in other parts of the brand partnering business. So we believe the impact on the short term is manageable, and it's not impacting the outlook for this year at all.

[Kristian Teär, executive]

On your second question, Niels on, how many stores we will open, we will not disclose that, but we'll start by moving, like we said, the Win City concept to Hong Kong, where we have 3 stores currently. And again, going -- that is time to money, effort to money, probability to money, is good when we have 3 stores that we can use as a base to establish and put the same concept in place. We have a few discussions ongoing on different places and different locations and different cities where we would like to have flagship stores. We also have partners who are interested in establishing similar flagship stores like the London one in a few locations. So we will have to come back to that in -- at the right time.

[Nikolaj Wendelboe, executive]

Maybe just to add. So we know these locations. We know the 12 cities that we are turning into Win Cities over time, and we're not going to disclose a plan on that for the next years. So we are now in New York, London, Paris and the next one is Hong Kong. And then when we are ready to take the next one after Hong Kong, we will of course, disclose that as well.

[Niels Granholm-Leth, analyst]

Okay. Great. And can you just remind us how many stores do you actually own as of now?

[Kristian Teär, executive]

12.

[Operator]

The next question will be from the line of Poul Jessen from Danske Bank.

[Poul Jessen, analyst]

To follow up on those question about HP, should it be understood that you are not going just to do a [ license ] agreement, but as you said, to be more technologized, should that -- we then see it as Cisco or [indiscernible] model going forward and thereby also a lower margin on the revenue you'll get that you had on the [ Ford ] or HP contracts?

[Kristian Teär, executive]

Yes. So let me start on this one. First of all, we did -- we have done more than 100 million audio tunes on the HP labs with these customers. And in the brand partnerships going forward, we intend to capture this customer data as well and to offer them more services and more experiences and bring them in to the B&O world. And we actually expect on the contrary to what you suggested that the licensing fees will go up when we do that, because we have more services and more experiences to offer.

[Poul Jessen, analyst]

Okay. And then more or less in the same space, there was a story out last week that on Ferrari that you were not among responses for Ferrari in '24. Is that something you can confirm or reject?

[Kristian Teär, executive]

I saw the same article that you saw, and we had -- first, we had a 1-year contract with Ferrari last year. We had a very good experience from this partnership with Scuderia Ferrari and with Ferrari on the product licensing business. And they also had a good experience. So we are expecting to renew that contract. It's not done yet, but it's expected to be renewed.

[Nikolaj Wendelboe, executive]

The season hasn't started yet.

[Poul Jessen, analyst]

Okay. No, there is a month or so until you start the races.

[Nikolaj Wendelboe, executive]

Exactly.

[Poul Jessen, analyst]

About the guidance, you moved to the lower end of the range now. It's obvious that China is growing weaker than expected. But if you do the change, is it mainly China, should we see -- or what's in your model now? Are you looking at China continuing at the current rates? Or are you assuming that there should be some recovering in the second half.

[Kristian Teär, executive]

Nikolaj?

[Nikolaj Wendelboe, executive]

Yes. So on China, we're assuming that we are sort of on average on current levels also in the second half. So we are not projecting sort of major improvements in China in the second half of the year. I think, when you look at it from a growth perspective, we do hope that we will see some growth in China actually in the second half because the comparables are -- they're coming even lower. As you might recall, it was in December last year that China went from zero COVID policy to full opening, and there was a couple of months after that where everything stood still and that impacted our Q3 last year quite a lot.

So if you look at our APAC numbers last year, I think the number is down to DKK 149 million, DKK 150 million. So we do believe that we should be able to improve on that number.

But compared to where we are right now, what we've seen in Q1 and Q2, we don't see any sort of major improvements going forward. So that's an important part of the reason why the outlook is now in the low end of the range. But we also, I think, besides China, we also are, of course, mindful of macroeconomic conditions in especially Europe and how that's evolving and is following also the luxury sector in how that develops in Europe, which is generally struggling more than in the rest of the world. So we are also in our outlook, assuming that Euro will not be impacted further than what we are seeing at the moment.

[Poul Jessen, analyst]

And then on the channel inventories. If you look at the recent quarters than you had a very volatile impact from the changes in inventories, both cost in this quarter negative. How do you see or how should we look at that going forward, that revenue should not be like a sell-out or that there will be a positive or negative impact from inventories on this event?

[Nikolaj Wendelboe, executive]

So when you look at inventory in across the channels and especially in the monobrand channel, which is the channel that has the highest sort of total level of inventory because that's also where most of the revenue is. We are seeing sort of a general note inventory reductions during Q2, both in absolute numbers and also in weeks at hand. So our monobrand partners have reduced their inventory. So when you look into Q3, Q4, I don't see the inventory level impacting revenue either sort of in a positive or in a negative way. It's, of course, following sell-out. And then, of course, when we launch products, there's a temporary impact from store filling, et cetera, on inventory levels.

[Poul Jessen, analyst]

And the product delay you talked about, is that moved into next financial year? Or is that you just moved to later in this year?

[Kristian Teär, executive]

It's going to be moved into to next year.

[Operator]

The next question will be a follow-up from the line of Poul.

[Poul Jessen, analyst]

Okay. I'll continue that. About the termination of the multibrand stores, which is quite dramatic in North America. Should we see the same in Europe and Asia? Or are you making it differentiation between the strategies there? And second question is, what kind of impact should we see for the remainder of the year of not selling into the multichannel anymore? So what's the negative impact from the sales here?

[Kristian Teär, executive]

So let me start, Poul. So we have terminated multibrand partners in the Americas. We have terminated them in EMEA. We terminated 3 partners in EMEA and 2 in the U.S. We will continue with some other partners in the multi-brand channel, like I said, with a limited part of the assortment and not with a full assortment. The China situation is very different as well because we have 2 big eTail platforms that we will continue to operate with. And we will, of course, monitor this really closely so that we balance out the growth that we expect from monobrand channels to be balanced out with the reduction we have in multi-brand. So we will have to wait and see a little bit. But I think the biggest chunk has been executed already in this quarter.

Do you want to add anything, Nikolaj?

[Nikolaj Wendelboe, executive]

When you look at multi-brands sort of the physical multibrand channel, not eTail, the restructuring in China has actually, in fact, taken placed. That's also why we're actually seeing some growth in multibrand in China in this quarter, because that restructuring was done since last year. In Americas, we are there. So that has been reduced to the level. There might be actually some increases going forward in more quality doors, lifestyle multi-brand doors. And then, I think in EMEA, there might be a few adjustments still to make in the multibrand channel. So we decreased with 125 doors during this quarter, and there are still some pruning to do, but the big chunk has been taken now.

[Poul Jessen, analyst]

And that's then mainly for the On-the-go segment that we have the impact.

[Nikolaj Wendelboe, executive]

That's, of course, mainly On-the-go and some of the Flexible speakers where we have an impact. So that's correct. We -- yes, so that's correct.

[Poul Jessen, analyst]

Okay. And then Paris, where you say your reorganization, does that mean you take over the 2 partner stores?

[Kristian Teär, executive]

No, but we need to support them in a different way than what we have done so far. So we have a change of management in France, and we will reinforce with more competencies around this field. Because our own pop-up store in Paris is doing really, really well. And the partner that we have, he's also a very good partner, has been a long-term partner and he's now handing over to his son and that has had some hiccups. So we will go back there, and we're confident we will be able to fix that and get back on track without having to open our own stores there or more owned stores.

[Poul Jessen, analyst]

Okay. Okay. And 2 questions left. California, you say that you are not satisfied. What's going on over there?

[Kristian Teär, executive]

Yes. So we have 1 partner who is running several stores. And also here, the competencies and the investments have not been satisfactory. So we will have to also review that and see on how we can support him and then better and also considering taking some of the stores over that are the good stores. Of course, the potential is really big in some of these cities, and we know we have the target audiences there. But we are not -- we are doing enough in terms of marketing, in terms of activation, in terms of service and support. So we believe we will have, yes, more upside as well. But currently, it's not working to satisfaction.

[Poul Jessen, analyst]

And then my final question is about logistics now that we have the trouble down in the red sea. And you are commenting on that yesterday. On the considerations you have on changing, should we see that have a major impact on your business on the gross margin? Or how should we look at it from the [ final year? ]

[Kristian Teär, executive]

Maybe I'll start, and then Nikolaj can comment as well. But I was pitching on the picture board, but it wasn't me making any interview with them on this topic.

[Poul Jessen, analyst]

I know.

[Kristian Teär, executive]

I would have talked about the blue ocean and not the red sea, if they would have asked me this question. But nevertheless, we don't expect this to be major. We have contingency plans and we're, of course, following what is happening, and I think we all learned from the COVID, which was, I mean, completely different level than what this is. This is 2 weeks more sailing time if you have it on a boat. And of course, you can -- most of our products can be also flown or put on rail, and we have our distribution centers in different places. So little bit more costly maybe, but no major impact.

Nikolaj, you want to add?

[Poul Jessen, analyst]

No. I think, we should see at a slightly higher inventory because you have the goods on the [indiscernible] ship for longer time.

[Nikolaj Wendelboe, executive]

There could be some inventory effect, because you are 10 days more on ship, but we will also probably do some more air freight to be a little bit more effective. There will be a slight cost increase and some longer lead times, but it's nothing compared to what we saw during the COVID crisis at least not what we see at this point in time.

[Operator]

As there are no more questions, I will hand it back to the speakers for any closing remarks.

[Kristian Teär, executive]

Thank you, everybody, for joining today. And then if you have -- and thank you for your questions. If you have any additional questions, please feel free to reach out to our very capable IR department. Thank you very much.