Bang & Olufsen A/S (BO) Earnings Call Transcript & Summary

Welcome to the Bang & Olufsen Company Update. [Operator Instructions] I will now hand the word over to CEO, Kristian Teär. Please begin.

Hello, everyone, and thank you for joining the call. With me, I have our CFO, Nikolaj Wendelboe. On Friday, we released the preliminary Q3 numbers and adjusted our financial outlook for the full year based on the expected impact from COVID-19. In the same announcement, we said that we would accelerate the cost reduction program, which we have worked on since December last year and provide more details in due course. With the company announcement released this morning, we can now provide more details on our cost reduction program. Please note that we will still publish our financial report covering the third quarter as planned on April 2. So let's move to Slide #3. Overall, Q3 was as we had expected. China was the first country to be impacted by COVID-19, and we did see an impact in the last part of the quarter related to in-store traffic. Online sales and business-to-business was as expected throughout the quarter. Product availability from production partners was only marginally impacted by COVID-19 in Q3. The EBIT margin before special items was positive with 0.3% in the quarter, which is encouraging. Likewise, we delivered a positive free cash flow for the quarter. Cash flow was impacted by both the development in EBITDA as well as supported by a reduction in net working capital, among others, driven by a reduction in inventory. So as I mentioned in the beginning, based on preliminary numbers, our Q3 performance was in line with what we had expected. What we could not anticipate was the world being impacted by global pandemic. This is expected to have a significant impact on our Q4 performance. We are now guiding for revenue to decline between 20% to 29% compared to our previous outlook, where we expected revenue to decline between 13% and 18%. EBIT before special items is now expected to be between minus 10% to 15%, where we previously guided minus 4% to 9%. And lastly, free cash flow is expected to be negative between DKK 200 million and DKK 350 million compared to previously negative DKK 100 million to DKK 150 million. The effects of COVID-19 on our financials are very hard to predict at this point and the wide range on our outlook parameters reflects the uncertainty. We're being prudent in all respects of our business. Our partners in China have restarted production, but due to the now global impact of the COVID-19, we're being cautious with our production planning to retain our flexibility to scale it to changes in demand for the coming period. We have also postponed our Capital Markets Day, which we had planned for April 3. With the restrictions on travel that we currently see, it would not be possible to host the Capital Markets Day. More importantly, we had to shift to more short-term focuses compared to what we had planned to address on April 3. In connection with our Q3 report, we will provide some more details on our 12-month initiatives as well as the strategic direction that we are working with. Even before the COVID-19 outbreak, our financial performance dictated that we had to change our way of operating. Therefore, since December, we have been working on a cost reduction program as we saw a potential in doing things more efficiently. As things have developed, we do however need to accelerate this work. The cost reduction program that we have announced today will not have any significant effects this financial year. We have made a provision for restructuring costs totaling DKK 30 million, of which DKK 3 million has been included in our Q3 financial figures. I will now turn over to Nikolaj, who will go through some of the elements of the cost reduction program.

Thank you, Kristian. Please turn to Page 4. As Kristian mentioned, we have since December 2019 been working on a cost reduction program, where we're investigating potential savings in Bang & Olufsen. The cost reduction program is one of several initiatives aimed at improving the company's financial performance through streamlining operations and investing in product development, sales and marketing. We have had a thorough process to assess where we could become leaner, simplify tasks and prioritize our resources better to help strengthen the profitability of Bang & Olufsen in the future. We have engaged with experts on this task to ensure that over -- or that we cover all the potential savings compared to best practice. Based on this analysis, we are targeting annual savings of DKK 175 million, which we expect will be phased in during the next financial year with full effect in 2021-'22. In the financial year 2020-'21, we expect a large part of the program to take effect. The first phase of the program is what we announced today. We have here identified several savings which we have divided into 3 groups: lean administration, organizational simplification and savings on nonproduct-related spend. Lean administration is about streamlining our operations and administrative functions, such as finance, IT, HR, and support functions across the company. This includes a thorough evaluation of how the work in these functions are organized and will also include potential outsourcing of certain processes and services. We have also identified several areas where we have work done in parallel across the organization. We, therefore, see opportunities in merging similar functions and scope reductions as well as removal of selected noncritical units. As part of this process, we are delayering the organization to make it flatter and more effective. Finally, we have been looking at nonproduct-related spend. Here, we have identified spend areas where we believe we can reduce our spending. Further, we have implemented a new travel policy, and we are installing video conferencing equipment in all venues to reduce the need for travel as well. To complete the program, we have decided to make a restructuring provision for around DKK 30 million, which will be included in this financial year's annual report under special items. And with that, I will turn it back to Kristian.

Thank you, Nikolaj. The first phase of this program unfortunately means saying goodbye to the valued colleagues. In total, we will reduce the workforce with approximately 115 employees. The staff reductions are primarily within support functions and primarily in Denmark. We have had a thorough process the last couple of months, and it is on the back of that work that we're making the announcement today. I'm also conscious about the fact that implementing the cost reduction program in a situation where employees, Bang & Olufsen and the rest of the world are faced with uncertainties due to the coronavirus is not ideal. We will now work hard to ensure that the organization continues to be motivated and fully focused on the key priorities while implementing the leaner organization. At the same time, we will do our best to help the affected colleagues to move on and into their next job. And with that, we'll open up for questions.

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

I have a few questions. First, the restructuring program, the nonrecurring items, can you say how much will be cash and noncash? I assume its severance payments somehow should be cash, but can you confirm that? Then on the cost reductions, do you have any idea or indication on how it's split between R&D, sales and marketing and admin? That was another question. Then on Phase 1 and Phase 2, what's the sizes of those? So how much has been specified of the DKK 175 million and how much still have to be specified? And then the final question on the restructuring, taking out 115 employees, that's about some 15% of total employees. When I recall back, I think, 2 years or so 2 or 3 years, it was mentioned or it was talk in the town and it was also mentioned in annual report that the organization at that time was very stretched because of a huge workload. How do you see that going forward? Will you have the resources actually to grow the business again when corona is gone?

So thank you, Poul. This is Kristian. I will start, and then I will pass on to Nikolaj. As we said in the announcement, this is mainly affecting administration across the organization. And so we will, of course, continue to build products, and we will continue to sell our products. So it's mainly in the administration area where we do the cost reductions. And with regards to the stress level in the organization before, we had geared, as you know, the company to grow for this financial year. And we're now giving new guidance, which is, of course, then minus 20% to minus 29%. So the amount of work is going to be reduced versus what we had originally planned for. But we will, of course, continue to make sure and work with to make sure that our employees are motivated and -- for their well-being and make sure we have a good atmosphere. It's difficult times. It's uncertain times. And we feel, of course, for the people that are leaving us, but also we need to take care of the people that are staying with us, and we aim to do both. I'll hand over to Nikolaj, who will take the financial questions.

Yes. So thank you, Poul. On the cash versus noncash on the restructuring provision, you can say, so restructuring provision consists basically of 2 chunks. One chunk is consultancy cost for the program that we are running. And the other chunk is severance pay for the people that will become redundant. And for the consultancy cost, some of it will have cash impact this financial year. The rest will have cash impact next financial year when invoices are due. On the restructuring cost, there would be no specific cash impact this year -- or on the -- sort of on the severance pay cost, there will be no specific cash impact this year as we expect cash impact will happen over notice period of the individual employees. So that was on that one. Then you asked into the split around R&D, sales, marketing versus admin, and as Kristian said, we don't have any concrete plans to cut cost on R&D and sales. But we are, as the second phase of the program, looking into the effectiveness of these functions, meaning that we will look at the opportunity to sort of make better use of our spend in these categories, make better use of our cost base in these categories. And that can ultimately lead to 2 decisions: get more out of the resources that we have today or have a decision to save some cost because we can actually do what we're doing today with less resources. But that is up for further analysis. Then you had a last question on how much of the DKK 175 million that has already been specified. And that is more than half at the moment.

Yes. A short follow-up on the cash -- for the restructuring cost, would it be taken in the first half of the year, the DKK 30 million?

The first half of next year?

Yes.

I would assume that most of it will be cashed in the first half of next year. Yes.

Okay. I have some comments to operations as well, but I'm going to see if there are others, then I'll come back.

And our next question is from André Thormann from ABG.

So I just need to understand this on the restructuring costs as well, how -- can you give any indication of how big a chunk is the consultancy cost? That's my first question. Can you hear me?

So that's roughly 2/3 -- oh, sorry, 1/3. Sorry, 1/3 is roughly consultancy cost, 2/3 is the severance pay.

Okay. And then just for my understanding, why do you make a provision for this instead of just waiting for when the cost hit for consultancy?

Well, under the accounting principles that we are adhering to, we can make a restructuring provision also for consultancy cost. When it is related to the restructuring program as such, which is the case here, also giving us the opportunity to create a better baseline from a cost perspective going into next year.

Okay. And then in terms of the Phase 1 and Phase 2, just to understand what is the difference? And what will phase 2 include? Just to understand.

So Phase 1 is the initiatives within the 3 categories: lean administration, organizational simplification and nonproduct-related spend that we have worked with since December and where we have identified very concrete actions that we're implementing now. We will continue, of course, to work on nonproduct-related spend also in the Phase 2 because, as a company, you always have to work on that. That's part of our daily business, of course, to make sure we spend in the right way. But we will also start looking into areas of the organization where you can say you cannot talk about making quick wins but where we need to think more thoroughly around how we are operating and how we're spending our cost when it comes to creation of products, production of products, logistic costs and a wide range of cost that is more embedded in the core value chain of the business. So that's what's in Phase 2.

Okay. And then on the DKK 175 million, that -- just to be completely sure, that's an annual potential, right?

A full annual potential for the entire Phase 1 and Phase 2 program.

Okay. So it's -- so okay. So -- and then you say that a big share of the DKK 175 million that you will already achieve in 2020, '21?

Yes. A large share of the DKK 175 million we will -- we aim to achieve next year. That's correct. Next financial year.

Okay. Okay. And then on the 115 people, I mean in -- does Phase 2 also includes further employee reduction?

Yes. So let me take that. We have not planned for that at this point in time.

Okay. Okay. Yes. And I also have some questions in terms of operations, but I will just jump back in the queue of the call.

And we have a follow-up question from the line of Poul Jessen from Danske Bank.

Just to be certain about the DKK 175 million, that's run rate of about DKK 40 million plus per quarter. Should we assume that should be the full impact in the fourth quarter of the next financial year? That's question one.

Poul, it's a good question. Since we have not identified in detail all that will -- all the actions that would get us to the DKK 175 million, it's difficult to say with certainty, but it is definitely our aim that we would be there by Q4 next year.

Okay. And then we come to the third quarter, I don't know how much you want to say with this. I just wonder if you would comment on the product launches you made in the second quarter, at least the Harmony and the Staged, how they have performed. And when it comes to the Staged, if you can say something if it's only off-line sales or if it's also online. The reason is when you look into the coming quarter, I guess, online will the biggest sales channel as stores close down. And then also do you have an idea if we still are in a position where sell-in and sell-out has balanced? And then some on the cash flow. Previously, you gave us raise on the full year cash flow of DKK 50 million from DKK 100 million to DKK 150 million. Now you give a guidance of DKK 150 million on the cash flow despite only having a spread of DKK 60 million in the fourth quarter on the EBIT level. What's the difference or what's the reason why you have that huge difference between the EBIT and the cash flow guidance for the full year? And then can you say something about the full year guidance or the Q4 guidance? What's the assumptions you have put in for the 0 growth and what's the assumptions for the minus 40%, which is increasing in the fourth quarter?

So thank you, Poul. I'll start and then also hand over to Nikolaj then. So we launched the products that we promised to launch in quarter 3. So I think that was a good achievement, and we did that with good quality and on time. Then we have -- as you may have noted in Denmark, we have beefed up our marketing around Staged because, obviously, we believe we could sell more of that product than we have done. And we're also now beefing up our marketing around Harmony. That's all that I will say in respect to their performance. I think we can sell more of them than we have currently done. When it comes to online, obviously, in these difficult times in quarter 4, more and more sales are going online. And we saw that already in China when they were coming into the difficulties in terms of the COVID-19, and we expect that to continue to be the case. We have seen in the stores that we have, as expected, and everybody has, less frequency. But we also still convert in stores because even we have less frequency, the business goes on. And we're monitoring it, of course, on a daily basis to see how it develops. But business is still running.

Yes. So Poul, on guidance for cash flow and the split that you are talking about is absolutely correct that there is quite a spread in -- to minus DKK 200 million to minus DKK 350 million. I think it reflects the knowledge that we had on Friday and the uncertainty of the world, Friday, trying to provide an outlook for the last quarter. We are in a situation where we only have 2.5 months left of the year and because that we know that you'll require that we say something pretty concrete, which is extremely difficult, to be honest, at the moment given the situation with the coronavirus, which have developed even further since Friday. So the reason why we have chosen a quite wider range split is there's a number of certainties in your cash flow. One is, of course, sales. And the other one is production. But the third one is that we try to factor in to some extent in the lower range of our guidance is also consequences for our partners and our mono-brand network in terms of their ability to pay us on time. So that's why you see a wider range on cash flow guidance than you do on EBIT guidance.

Okay. So you -- in the low end, you take more receivables on the balance sheet?

Correct. At the low end, we assume to have a higher share of overdue payments.

That was my next question that given that you may have about DKK 400 million plus in receivables and given that the franchisees might see revenues collapse in the coming months, do you see a risk of a significant write-down on those receivables? Or do you have bank guarantees or any insurance on the money?

Yes. So at this point in time, we can't say whether we say -- see any additional risk. We do have credit insurance on some of our partners, not on all but on some, but we can't predict that at the moment. It's too early to say.

And that then ends up in my final question. Looking at, I estimate, a gross cash position of DKK 70 million to DKK 200 million based on the cash flow guidance you've given and we move into Q1 and Q2, which at least historically has been having negative cash flows, are you willing to comment on what kind of considerations you have on bridging that liquidity requirement that potentially might arise?

So let me give you a generic answer, Poul. We are working with all types of contingencies given the uncertainty in the world, and that includes all financial parameters at this point in time. I think that's all that we will say on this matter. But of course, we're looking into and then turning all stones to see on how we can have a good contingency planning for our business.

Okay. Good work during summer. Unfortunately, it came after a quarter where you -- I believe you actually are coming back on track, so -- yes.

Well, thank you, Poul. Thank you. Much appreciate it. Thanks.

[Operator Instructions] It doesn't seem like we have any more questions, so I will hand [Audio Gap]

Okay. So thank you very much, everybody. And see you next quarter again.