Bang & Olufsen (Copenhagen:BO) Q3 2026 Earnings Call

0:00 Welcome to Bang and Olufsen's Interim Report for the Third Quarter of twenty twenty five-twenty six. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be in a listen only mode throughout the presentation, and afterwards there will be a question and answer session. I would now like to introduce CFO and Interim CEO, Nikolay Venelbaud. Nikolay, please begin. Hello, everyone, and thank you for joining today's webcast. I will start by taking you through the highlights of the third quarter and give an overview of the commercial developments across the business. I'll then walk through the financial performance for the quarter as well as our updated outlook for the year before we open the line for questions.

0:50 Now please move to Slide three. On March 23, we published preliminary Q3 figures and adjusted the outlook for the financial year twenty twenty five-twenty twenty six due to lower than expected Q3 sales and the expected impact from increased geopolitical tension and economic uncertainty the remainder of the financial year. We also withdrew our midterm financial ambitions towards twenty seventwenty eight. I'll come back to the outlook details later in the presentation. Despite positive like for like seller growth across the group supported by continued strong performance in our branded channels and in win cities, revenue came in lower than expected in Q3.

1:36 This was due to a significantly lower than anticipated performance of our newly launched Soundbar, BioSound Premier. As we stated in March, we are in the process of strengthening our commercial operating model specifically the coordination between marketing investments, retail execution and product launches. This is not only a near term priority. We believe this is key to unlocking Bang and Olufsen's full potential over the medium and long term. Following quarter end, we relaunched BioSound Premier with two new colorways and at a revised price point. While it's too early to conclude, we have seen improvements in the product sales since relaunch. I would also like to mention that the newly launched earpieces Bureau Grace reported good performance in line with expectations.

2:26 And last week we also added a new colorway to the portfolio, the Honeytone which is a rose gold version in addition to the natural aluminum version. During the quarter we continued to expand our retail footprint with the opening of our largest ever flagship store in San Francisco featuring the Culture Store concept as well as a new Culture Store in Tien Tsin and a new store in Hamburg's Heartland City District. Finally, Anna stated in the announcement on March 23, the CEO search is progressing as planned and the board expects to announce a permanent appointment in the coming months. Today we have no further comments regarding a new CEO. Please move to the next slide.

3:14 I would like to add some details on a few important retail openings during the quarter. As mentioned in January we reached an important milestone in December with the opening of our partner operated flagship store in Union Square in San Francisco. The store features our culture store concept and it is the largest Bang and Olufsen store globally with retail space of around three fifty square meters. In Hamburg, we opened a new two fifty square meter store in the dynamic environment Harbin City District. The store represents an upgraded retail presence in a strategically important location. We also opened our first culture store in China at the Next C Luxury Mall in Shenzhen which marks an important milestone in the evolution of our retail concept in China.

4:03 These openings reflect our continued focus on improving both the quality and relevance of our physical network and supports our ambition to elevate the brand experience in key metropolitan areas and markets globally. Please move to the next page. During the quarter we prepared the relaunch of BioSound Premier which was communicated mid March. The initial market response to BioSound Premier was significantly below our expectations. This has been an important learning and a good example of how our go to market operating model needs improvement. The launch has reinforced the need for better alignment between product launch, retail execution and marketing investments.

4:51 Premier has been repositioned at a lower price point with a price reduction of around 20% placing it more naturally within the soundbar category and in our portfolio logic. The relaunch strengthens the overall portfolio architecture with a clear separation between our vision offerings, namely the BioVision Harmony, the BioSound Theater and the BioSound Premier. Premier is now offered in two new colorways, the black anthracite and the gold tone which we expect will have a positive impact on sales. As I mentioned earlier, the sales performance of Premier has been positively affected by the launch but it's still too early to judge the success of the product.

5:37 Please move to the next slide. I'll now move into the financial performance for the quarter and the outlook for the year. So please move to the next slide. Starting with sell off, we delivered positive like for like growth of 1% at group level marking the sixth consecutive quarter of like for like sell off growth. Looking across our regions, we saw a mixed picture during the quarter. In EMEA like for like sell off declined by 8% partly due to the performance of BioSound Premier and a generally weaker consumer sentiment in larger parts of Europe. Company owned stores continued to perform well with double digit growth while e commerce and mono brand stores declined resulting in an overall slight decline across branded channels.

6:29 Multibrand and e tail reported declines which was driven by launch effects last year in addition to less promotional activities this year. In The Americas, like for like sellout declined by 16% overall. Here we are also seeing lower consumer sentiment in response to the economic uncertainty. Within branded channels performance was more resilient with a low single digit decline supported by double digit growth in company owned stores. E tail reported double digit decline as part of decreasing promotional activities. In APAC, like for like sellout increased by 28% and in general we're seeing positive momentum in the region across most markets with double digit growth across branded channels and growth in both multi brand and e tail.

7:19 Our active win cities consisting of New York, London, Paris, Hong Kong and now Tokyo and San Francisco continue to perform strongly delivering double digit seller growth for the seventh consecutive quarter driven primarily by company owned stores. Please move to the next page. Turning to group performance, revenue increased by 1.3% in local currencies while reported revenue declined by 1.7%. Biossound Premier contributed less to the top line development during the quarter than we had anticipated which in particular had an adverse effect on our mono brand channel. Within branded channels revenue grew by 1% in local currencies.

8:06 This was driven by continued double digit growth in company owned stores which more than offset softer performance in mono brand and e commerce. Looking at product categories, flexible living delivered strong performance with high single digit revenue growth across most vehicles while the stage category also grew modestly during the quarter. This was partly offset by a decline in On the Go primarily reflecting strong launch driven comparable from last year end of life sales of EX as well as decreasing promotional activities in certain channels. Gross margin continued its positive trajectory and improved to 57.5% in Q3, an increase of 2.1 percentage points year on year and 3.3 percentage points for the first nine months.

9:00 This reflects a favorable product mix and channel mix as well as continued margin expansion across categories. EBIT margin before special items was 1.9% reflecting the lower than expected revenue performance. In terms of special items, we had both positive and negative items impacting the quarter. Special items related to EBIT amounted to minus 19,000,000 mainly comprising reorganization activities and severance costs of $27,000,000 of which $21,000,000 was related to the severance package for the former CEO. In addition, 8,000,000 of proceeds received in connection with a favorable ruling on an old dispute with Danish customs authority had a positive impact.

9:49 Special items related to earnings before tax comprised an additional $38,000,000 of interest received in connection with the above mentioned ruling. This led to total special items of positive $19,000,000 Please turn to the next page. Product revenue increased by 3.1% in local currencies. In EMEA and Americas revenue declined by 1.13.2% in local currencies respectively. In APAC revenue increased by 14.3% in local currencies driven by strong momentum in China and continued growth across branded channels in the region.

10:35 Gross margin improved across regions in particular APAC supported by transition to direct operations of the Tmall flagship store. Finally, revenue from brand partnering and other activities declined year on year. This was primarily driven by decline in revenue from the Cisco partnership compared to last year. And please move to the next slide. Turning to cash flow and working capital. Free cash flow for the quarter was positive at 22,000,000 reflecting operational performance and working capital developments as well as a relatively lower level of investments during the quarter. Net working capital decreased by $19,000,000 to $270,000,000 driven primarily by reduction in inventory levels while year on year comparisons continue to reflect higher inventory and receivables earlier in the year.

11:28 Inventory declined by 36,000,000 compared to the end of Q2 reflecting lower inventories following elevated levels earlier in the financial year. Capital resources amounted to $262,000,000 at the end of the quarter compared to $267,000,000 at the end of Q2. After $262,000,000 capital resources available liquidity was $112,000,000 which is $5,000,000 lower than at the end of last quarter. Now please move to the next page. Turning to outlook for the full financial year. As communicated in our company announcement on March 23, we have adjusted our outlook for twenty fivetwenty six. This was mainly due to the weak sales performance of BioSound Premier.

12:18 In addition, armed conflicts, geopolitical tension and economic uncertainty have intensified and are expected to impact the rest of the financial year. Consequently, revenue growth in local currencies is now expected to be in the range of minus 3% to 0% compared to the previous range of 1% to 5%. EBIT margin before special items is now expected to be in the range of minus 3% to minus 1%. This reflects the adjusted revenue outlook. Free cash flow is now expected to be in the range of minus $200,000,000 to minus $150,000,000 This includes the cash flow received in March related to a favorable custom ruling, a case dating back to 2006 as well as severance costs related to the former CEO.

13:05 Excluding these items the underlying cash flow development reflects both the adjusted earnings outlook and the continued focus on inventory and working capital management during the second half of the year. Overall, while the outlook reflects a more cautious view on the remainder of the financial year, our strategic direction remains unchanged. We are focused on strengthening the commercial discipline and execution which includes ensuring that marketing investments, retail execution and product launches are better aligned going forward. In connection with the adjusted outlook we withdrew the midterm financial ambitions covering the period through twenty seventwenty eight. In the short term we are tightening the discipline around capital allocation and capacity costs.

13:54 Securing a sound financial foundation remains non negotiable. This means we are sharpening execution and prioritization across the business with clear choices and where and how we deploy capital and capacity. In our midterm ambitions we had announced the assumption that annual CapEx will increase by around 30% to 40% compared to the level in twenty four-twenty five. The current CapEx outlook for twenty five-twenty six of around $290,000,000 assumes the lower end of that range. Capacity cost was expected to increase by 100,000,000 to $200,000,000 the period, yearly during the period. The current outlook is expected to be around 100,000,000.

14:41 And with that, I will now open the session for questions. Thank The first question is from the line of Paul Yassen from Danske Bank. Please go ahead. Your line will now be unmuted. Thank you for taking my question. Just first, a very short one. When you mentioned about the CapEx investment, not CapEx, capacity investments of $100,000,000 When you look beyond the current year, are you still having 100,000,000 to 150,000,000 Or are you going to the low end for all the years or is it too early to come then?

15:40 Yes. Thanks, Paul. Well, right now our focus is to manage the sort of operating environment we are in right now and to strengthen our commercial execution and to ensure sort of a healthy balance in our financials. That's what we are focusing on. What it means for the longer term period, we can come back to at a later point in time. We will talk about the outlook for next year when we release our annual report. But other than that, I think the the main event before we start talking about the future is the appointment of a new CEO. Okay. And when you say a more proven view on strategy execution, also taking the external events into account, What areas are you holding back on spending?

16:39 Is it marketing? Is it product development? Or is it refocusing, opening of stores? Or or where where are you holding back? So, obviously, when we announced originally announced our midterm ambitions, we we laid out a investment plan for both CapEx and OpEx, which was focusing on retail investments, marketing investments, but also product investments. And given the performance of this year, that was the first year of that original plan has not materialized as expected we have to scale back on the investments in all of the areas.

17:26 The precise sort of prioritization discussion I think will not disclose in this in this forum, but, of course, it impacts it impacts our investment plan broadly. So it's across the board. Yep. Then you mentioned about the premiere launch that significantly below, you also have learnings, and it was, as I hear, the cooperation between product launch, marketing, and retail. Can you say something about what are you then changing? I would have shown this has been on the agenda for the last, yeah, several years to optimize these three dimensions. So so what failed given that you could totally misinterpret the demand for the product at the price point?

18:19 Yeah. I think what we have seen with the launch of Premier is that our commercial operating model machine is not in a good state as we want it to be in. So, this is a key focus area for us. I think the BioSound Premier is a good sort of example of what didn't work. To mention a few things, I mean the launch was late compared to hitting the right window from a market perspective. We didn't launch with full availability or in the full range of colors that we would like to offer to our clients.

19:06 The positioning or the display of the product in the store didn't tell the story around the product well enough. The marketing campaign surrounding it was not orchestrated well enough. And then finally, the price was too high. It didn't. The price point was set higher than what was in reality the intention of our portfolio structure. And that we are correcting now. That gives me an impression that it failed more or less on all areas. So do you have any idea how it could fail on all those, the delay in placing in stores and marketing and pricing?

20:00 I think right now what we are focusing on is to take the learnings from this and work on improving our go to market operating model and the execution going forward so we don't make the same mistakes twice. Final one for me at this time, not more than San Francisco. It opened, I think, was late November, so that means you had it for for three months in this week Or have you any indication on traffic success or how it's been received and so on? Are you happy with the performance? Yeah. We're happy with the performance. San Francisco is following our plans right now.

20:49 And the local team is in full swing of building up the local market in the San Francisco area. And when we open our two next stores in California in both Palo Alto, which is closer to San Francisco and then subsequently in West Hollywood, We think we have a good business opportunity in California. So that's really good. I mean, in the beginning when you open a new store, sell mostly on the go products because you get more traffic in and you're building the pipeline for selling the bigger systems, which we expect will will come into our numbers in the coming quarters. Okay. I'll step back and go back to the queue.

21:44 The next question is from the line of Neil Zedd from BNP Paribas. Please go ahead. Your line will now be unmuted. Good morning, and thank you for taking my questions. Firstly, could you talk about special items for quarter four? Would you expect any additional special items in your last quarter of this fiscal year? Secondly, can you talk about your pricing policy from here on? So should we expect that the lessons learned with the Premier product will have any overall effect on your pricing policy? And then thirdly, could you just give us a status for your brand partnering partnerships with HP, Cisco, etcetera? How far are we in the phasing out of some of these contracts?

22:48 Thank you. Yeah. So let me start with the pricing policy. So what we learned with Biossance Premier does not have any impact on our pricing strategy. Our pricing strategy is based on creating a portfolio logic where we have nice natural pricing steps between the different products in a category when you go from sort of the entry product to the core product to the high end as more dream products in the top of the pyramid. And there's a logic that we want to maintain on the price gaps between these different products and that logic was not maintained in the Premier launch. So that's why we have corrected it.

23:40 So it doesn't change our pricing policy. Generally on pricing, we are expecting to be more cautious on future price increases given the consumer sentiments at the moment. But on the other hand, there will also be, I would assume or there's a risk of seeing price increases that we will do to adjust for the increased production costs and increased input costs as geopolitical tensions will have an impact on inflation rates for for what we are procuring as well. So it'll be more be pricing in-depth sort of more tactical pricing increases we will see in the future I think, at least as the world is right now.

24:42 On special items for Q4, I mean, don't guide on special items for Q4. So, I will not comment further on that. And then finally on brand partnerships, what we see here in this financial year as we said all along is that the HP phasing out, which is phased out now, I mean, don't have any revenue on HP in Q3. It's gone. But if you look at last year versus this year and take HP and TCL together, then we are flat from last year to this year and these two contracts together. And then TCL will start creating growth in that part of our business for next year.

25:36 When you look at the brand partnering segment, this quarter the primary reason for us being lower than last year is due to Cisco, which is a product related revenue with product margin and not licensing margins. Great. Thank you. Can you just remind us if you are reliant on any memory chips in your products? Yes, we are relying on memory chips in our products. In all our products, we are relying on memory chips of different nature and of different complexity. So, I can confirm that.

26:25 So, would that so price increases on memory chips, would that be visible on your gross margin going forward? Yes. That will have an impact on our gross margin. Whether it will be significant is still too early to say. We have seen in the past quarter that specific memory chips types we have to pay more for. It's not a significant event right now and we're all reminded of what was the situation in 2021, twenty twenty two, twenty twenty three with the big microchip crisis and semiconductor prices where it had a huge impact. This is not what we're seeing right now.

27:19 We're working very closely with our supplier to secure our production lines for the coming twelve months and we have pretty good success with that. But there will be probably pockets where we will see increased prices and if it becomes sort of material to the numbers we will of course also inform the market around it. And finally, can you just remind us how much is freight cost of your total cost base of sales and how are you exposed to freight rate increases? Well, so the freight costs typically is part of our cost of goods sold, part of our landed costs in our P and L.

28:19 Yeah. It's around this is of course gonna be a little bit of the top of my head, so we probably have to come back on more precise numbers, but I think it's around $100,000,000 in freight costs that we have a year. And right now we are seeing price increases due to the situation in The Middle East and increased fuel prices that is particularly hitting freight cost on airplanes. And I think what we've seen in the last quarter is probably extra cost of it's around 500,000, maybe 1,000,000. It's not significant at this point in time, but it's, of course, a risk that it could could become worse, but it's not something we are we are seeing in the very short term.

29:17 And then to talk about The Middle East, can you just remind us of your exposure to The Middle East? Yeah. So it our Middle East revenue, we talk about the countries that are sort of in the conflict zone. So that sort of includes Israel and Saudi Arabia and The Emirates, some of the main areas for business. We are having roughly $20,000,000 per quarter in revenue. The biggest chunk of that is in The UAE, in The Emirates. And right now it's very difficult to transact in that region.

30:03 So, is impacting us here in Q4 as we also said when we did the announcement in March. We actually know there are customers who still want to buy there and we have another challenge which is more related to freight that is hard to ship to that region. So as long as this conflict persists, it will have a negative impact on our numbers. Okay. Thank you. We have a follow-up question from Paul Yersen from Danske Bank. Please go ahead. Your line will now be unmuted. Yes. Thank you. Just following up on the Middle East issue. This was the direct impact.

30:54 Yeah. Are there any indirect ones? I mean, that we see higher sales in London or Paris or wherever? Yeah. It's I mean, not measurable, probably not at the moment. I can come with some anecdotal stories around clients who normally lives in The Middle East who now are in London and who are buying more also of our products in Harrods. So there is definitely a mechanism there. But whether it would be a material positive for us, I think it's too early to conclude on. I think on the contrary, I think there'll probably be more like some negative effects on the sort of world economy and consumer sentiment and especially in Asia where the conflict is making it difficult get hold of necessities could also impact sort of the general economic environment in Asia. So we had a good quarter in Asia in Q3 but this is of course something that is worrying us a little bit how this conflict is gonna impact the world economy.

32:14 Okay. Then on tariffs, some discussions about new how they are handling the steel and aluminum content on the tariffs to The US that is changing from a barrel the value of steel and aluminum to changing to a full product value. Yeah. Do you have any thoughts on that if if that's gonna impact that you are exposed to you? I mean, we we are to our to the best of our knowledge right now, we are not impacted. The reason for that is that the tariffs always links to h h HS codes and product codes.

33:01 And so you you so before you start talking about the aluminum thing you need to be in the right HHS code to be part of that scheme that they are talking about. And it's unclear to us right now that we are part of those HHS codes but it's something that we of course following. So no impact by now? Not right now. Okay. Then US where you had a minus 16% like for like sales. Is that because of the high pace a year ago, or can you give some color on what's happening there? If you look at all the luxury brands that has reported in the recent days, US has been the strongest quarter for all of those.

33:52 Yeah. But I think that there are two things. First of all, I mean, in our cocoa stores we have done well in U. S. Our mono brand channel has had a weak quarter based on less demand and less footfall in our mono brand stores in The U. S. That are in the like for like. So that's of course excluding San Francisco. But another main point is that we are, as I said, we have as part of our strategy we're doing less and less promotional activities in the e tail channel also in The U. S. So our Amazon sales is down and that is taking the like for like sales down quite a lot that we are still detracting promotional activities in e tail to support our brand strategy.

34:53 Okay. And then the strong Chinese sales, how much is that impacted by the Tmall transition to your control? So that's that's impacting positively in China. But we have in general strong sell out in China in all the channels. So it's taking its fair share of of that growth. Okay. So it's not Tmall that is It's not Tmall that is that is doing different no. No. It's not just Tmall. Nope.

35:42 Okay. That was all from my side. As there are no further questions from the telephone, I will hand it back to you, Nicolas, for any closing remarks. Well, thank you, everyone, for your interest in Bang and Olufsen and for joining today's webcast. If you have any follow-up questions, please don't hesitate to reach out to our Investor Relations team. Thank you all and have a good day.