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Edited Transcript of BO.CO earnings conference call or presentation 14-Jan-20 9:00am GMT

Q2 2020 Bang & Olufsen A/S Earnings Call

Struer Jan 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Bang & Olufsen A/S earnings conference call or presentation Tuesday, January 14, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Kristian Teär

Bang & Olufsen a/s - CEO, President & Member of the Executive Board

* Nikolaj Wendelboe

Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board

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Conference Call Participants

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* André Thormann

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Poul Ernst Jessen

Danske Bank Markets Equity Research - Senior Analyst

* Kristian Siedenburg;Bloomberg News

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Bang & Olufsen Interim Report Second Quarter 2019/2020. (Operator Instructions)

Today, I'm pleased to present CEO, Kristian Teär. Please begin.

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Kristian Teär, Bang & Olufsen a/s - CEO, President & Member of the Executive Board [2]

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Good morning, everyone, and thank you for joining the call today. My name is, as you heard, Kristian Teär. And with me today, I have our CFO, Nikolaj Wendelboe. I will start by going through the highlights of the quarter, and then Nikolaj will take you through the financials. I will then finish by going through our outlook for the fiscal year 2019 and '20, before opening up for questions.

So let's move to Slide #4. On December 17, we published our preliminary revenue, EBIT margin and free cash flow for the second quarter, and we subsequently adjusted our outlook for the year. As you can see on this page, final numbers for the quarter are as communicated, and we maintained the outlook given in the December announcement. We are now focused on the second half of the year, and we have already initiated several activities that will support those goals.

As I also mentioned on the webcast in December, my main focus here now is our sales and marketing execution. We will improve our sales and distribution network, our sales programs, and we will increase resources and strengthen our competencies to lift us to a higher level. Furthermore, revenue in the second half of the year will be supported by several new or upgraded products. I will get back to these activities on the following slides. As you know, we will, in April, present a 3-year strategy plan, outlining how we will ensure a stronger long-term financial performance through increased number focus, specific sales initiatives, stronger and more frequent product releases and cost optimizations.

So if we move on to Slide #5. In the previous financial year, the number of product launches was too low. The financial performance last year was impacted by this and the lack of new products in the previous quarters is still impacting our financial performance. We have set out an ambitious plan for product launches. In Q2, we launched all the products and upgrades that we had planned for. Some of the very important launches was our new TV, Beovision Harmony and our soundbar, BeoSound Stage. The Beovision Harmony was launched in October, 77-inch version, and end of November, we followed with a 65-inch version. In total, these 2 products generated around DKK 95 million in revenue in the quarter.

Furthermore, we launched a second-generation, our Beoplay H4 headphone. And in September, we came out with our Autumn/Winter collection colors for a range of On-the-go products. We will also, in the third quarter have color, material and finishes variations or CMF versions, as we call them. As part of the Chinese New Year, we already in December, launched our Stardust collection, which is only available in selected countries. During both our third and fourth quarter, we will also, as promised earlier, launch more new products. In Q3, we will launch a new speaker in our Flexible Living category. And in Q4, we have a new product in our On-the-go category. By the end of the financial year, we will have launched new products in all product categories.

Finally, we will launch upgraded versions of some of our other popular products in On-the-go category. As important as new products are for our business, products cannot stand-alone. And we, therefore, continue with upgrading the in-store experience for consumer, which I will address on the next slide. So please turn to Slide #6.

The ambition in Q2 was to open or upgrade more than 100 stores. We did, however, come in short on our plan for Q2 with 90 stores opening and upgrades. The shortfall was primarily related to a few key partners in Europe, the upgrades are not canceled, but just slightly delayed, and the plan for the full year is thus maintained compared to what was presented in Q1. In total, 165 stores have been opened or upgraded during the first 6 months of the year. One of my first observations when I started as CEO was that we need 360-degree view on the consumer experience. We will, therefore, focus on much more than just the physical layout and experience for consumers. We will look at the whole sales execution, including staff training and how we incentivize staff.

We have in Q2, established 4 pilot stores with the ambition to test both store designs and staff training. We will monitor what works from a sales perspective and then roll out the best solution to our partners. In the second quarter, we also initiated a revisit to our multi-brand network. This was done to fully understand which stores are performing. And secondly, what kind of in-store presence we have in each place. This has resulted in a downward revision of the number of multi-brand points of sale compared to Q1. But this is a more accurate representation of our network. It will also enable us to prioritize where and how we enhance the in-store performance, which is one of the top priorities. To understand what is working, what is not. We need to improve our insight into our sell-out performance, and that is the last point I will go through. So please turn to Slide 7.

We have initially focused on getting sell-out insights from our European monobrand stores. We saw a slightly lower sell-out for Q2 compared to last year, but significantly better than in Q1. It was, however, lower than what we had expected. We have our new model, where we get the data on product-by-product level. By end of Q2, 44% of revenue from European monobrand partners were captured in our new system, and that figure is continuously rising. We get data representing revenue from around 85% of all monobrand stores. But this will not be included in our analysis before we have validated the data. The data for the first half of the year shows that sell-out has been higher than sell-in. And thus, we have seen inventory depletion with retailers, which has been the ambition. And the reason why we actually anticipated revenue decline for the first half of the year. Especially in Q1, we saw that monobrand stores reduced their inventory. And with the data we now have, we can see the decline has been most significant within the stage category.

In Q2, partners increased their inventory, but this was related to the launch of Beovision Harmony and BeoSound Stage. Adjusting for these product launches, partners are also reducing inventory for Q2.

Getting data insights is critical -- is a critical part of our journey, and it's encouraging that we are progressing on this journey. We are working on getting the rest of the monobrand stores as well as the multi-brand data included. When this work has progressed further, we will have a better understanding of our performance across products, regions and partners. All combined, I think that we're seeing some important progress on a number of fronts. But I'm aware of that we have some very important work still ahead of us.

And with that, I would like to turn over to Nikolaj, who will take you through the financials for the quarter.

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [3]

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Thank you for that, Kristian. Please turn to Slide 9. As Kristian said in the beginning, Q2 revenue declined by 31% to DKK 627 million. We did expect revenue to decline, but due to the transition to demand-driven model with focus on reducing retail inventory that was built up last year, the decline was higher than expected, primarily driven by lower sell-out, as Kristian also highlighted in the previous slide. And for this reason, certain key partners still have high inventory levels. Sell-out was also impacted by sales in unauthorized channels, which especially had an effect on revenue in our On-the-go product category. In addition, we saw increased competition in the earphones markets.

On the positive side, revenue from the launch of new products supported revenue. This was also driven by sales of display units to our partners; and finally, brand partnering and other activities grew 16%. We saw the gross margin decline to 42.5% compared with 49.2% in Q2 last year. Currency hedges lifted last year's gross margin. And if we exclude the effect, gross margin declined by 4.6%. The decline was primarily related to a provision for component liabilities would had a negative impact of around 4% as well as sale of end-of-life products at lower prices.

Our EBIT margin was impacted by the decline in revenue and lower gross margin. Capacity costs were lower than last year. I will go into more details on capacity cost later. All in all, EBIT margin was negative 12.1% and 9.8%, if accrued for severance cost of DKK 15 million are excluded.

Please turn to Slide 10, we'll go through the development into 3 regions. Revenue declined in all 3 regions, but different factors in each region contributed to the decline. EMEA declined by 42% to DKK 312 million. There was a large decline in the stage category, if we exclude the product launch in Q2.

As Kristian shared earlier, monobrand stores reduced inventory in Q2, and this was expected to have a negative impact on our revenue in the quarter. Revenue from the stage category was, however, positively impacted by the launch of Beovision Harmony and BeoSound Stage, adding DKK 76 million of revenue in the quarter. We saw a decline in the Flexible Living category. Half of decline was related to Beosound Edge, a product launched in Q2 last year. Lastly, the decline in On-the-go was seen within Bluetooth speakers, headphones and earphones. Earphones was impacted by increased competition in the market.

Also, sales in unauthorized channels had a negative impact on performance. The decline in Americas was almost exclusively related to On-the-go. We saw an increase in the stage category, which was supported by the launch of new products. Flexible Living declined but part of this was related to Beosound Edge. The On-the-go category declined by 66%. This was primarily related to earphones, where revenue was impacted by sales through unauthorized channels. Reduced presence in the mass market consumer electronic channel impacted revenue as well.

Revenue in Asia declined by 13.2%. Stage grew by 58% in the quarter. The increase was driven by both sale of existing products as well as the product launches in Q2. The decline in the Flexible Living category was seen across most products, but with a small positive growth from Beoplay A9, which is the best-selling speaker in the category. The decline in On-the-go was mainly related to earphones, where we had high comparables due to higher sales of end-of-life products last year. Please turn to the next slide.

Our capacity costs declined in the quarter, which was related to the development costs and the distribution and marketing costs. Reported development costs declined by 8.9% compared to last year. The decline was related to higher capitalizations and lower amortizations and impairment losses. The incurred development costs were, however, at the same level as last year.

Distribution and marketing costs declined by 10%. The decline was, to a large extent, related to the company-owned stores in China which we since have divested. Distribution and marketing costs were also impacted by our focus on physical in-store upgrades, a part of the cost capitalized and thus part of the CapEx for the quarter rather than part of the capacity costs. The administration expenses grew by DKK 17 million. However, accruals for severance costs amounted to DKK 15 million of the increase. If we exclude these, administration costs grew by DKK 2 million. Last year, there were several vacant positions in the executive management board. These positions have now been filled, which have resulted in increased administration cost. Please turn to the next page.

The total CapEx was DKK 51 million in Q2, which was at the same level as Q2 last year. CapEx was impacted by higher investments into intangible assets, partly related to the increase in capitalization of development costs, as I mentioned before. Investments was related to new products, technology platforms and in-store fixtures. Net working capital declined by DKK 111 million to DKK 400 million, and net working capital is now reduced to a level only slightly higher than Q2 last year. I will go into the details on the next slide.

Our free cash flow was positive with DKK 32 million, mainly due to the improved net working capital position. In addition, we have sold a building which supported cash flow by DKK 14 million. Compared to last year, the implementation of IFRS 16 and leases have supported the free cash flow by DKK 9 million. Finally, the net cash position was DKK 42 million. Excluding the effect of IFRS 16, the net cash position was DKK 228 million, which is an improvement compared to Q1. By the end of the quarter, our cash position was DKK 298 million, and we, therefore, strengthened our cash position by DKK 23 million in the quarter.

Please turn to Page 13. Inventory declined further in Q2 compared to Q1, however, the level is still higher compared to last year. As revenue in Q2 was lower than expected, the decline in inventory was also lower than anticipated, and new products have also impacted inventory. Trade receivables increased slightly which mainly reflects the new products are being produced. Trade receivables grew slightly in the quarter compared to Q1, which reflects the higher sales, compared to Q2 last year, trade receivables are lower. This is a result of lower revenue compared to last year, but also the restricted use of extended credits. The increase in extended credits to 7% compared to the 5% in Q1 relates to display units for new products, where the credit terms are better as the products are not for sale in the stores, at least not for a longer period of time. In Q1, we saw an increase in overdue receivables related to a few key partners. This has largely been resolved during Q2 and has a positive impact on receivables. We still have some way to go, but we have made progress to get control of our working capital, contributing to the positive free cash flow in the quarter. And with that, I would like to hand the word back to you, Kristian.

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Kristian Teär, Bang & Olufsen a/s - CEO, President & Member of the Executive Board [4]

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Thank you, Nikolaj. So if we move on to Page #15. So before opening for questions, I would like to reiterate our outlook for the year. So revenue is expected to decline by between 13% and 18%. Revenue in the second half is expected to be positively impacted by the products that we have launched in Q2. And of course, also new products that are launching in the remaining part of the year. Furthermore, several initiatives will be launched to improve sales and marketing, including new sales programs, improved sales and distribution network, an increase in resources and competencies and a more product-focused marketing. We still expect to have issues with unauthorized sales and the need to ensure inventory reductions with certain partners is also expected to impact revenue in the second half of the year. The EBIT margin is expected to be negative 4% to 9%.

Compared to last year, we still have some headwind from currency hedges. Free cash flow for the year is expected to be negative with DKK 100 million to DKK 150 million, as the free cash flow for the first half of the year was negative DKK 174 million. We expect to deliver a positive free cash flow in the second half of the year. And with that, we'll conclude the presentation, and we open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Poul Jessen of Danske Bank.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [2]

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I have a few questions. First, on the inventories in the channel? Do you have any guesstimate or any sense of how much is left out there? And in what categories? Is it more or less only the On-the-go that is left out there? That's one question. Second is on your own inventories, which is down, but it includes this provision of 4 percent points, that's DKK 25 million. So if we adjust for that, the inventories were more or less flat. Can you say something about -- if we compare the inventories to end of the Q1, how it's performed on the products which were there at that time? And then how much is added by the new product launches on the inventory, so to give a sense of what is happening on the line with these products, which is approaching end of life.

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [3]

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Okay. Thank you, Poul. On inventory levels into channels, I will not be able to give you exact numbers of the level of inventories that is in the channels. What we can see is that inventory is depleting in all categories, but the largest depletion has been within the stage -- the stage category, which is also the category where we saw the biggest channel filling last year. But we know the European monobrand are depleting the most at the moment, where some of our partners, which you can say are more -- distributors have high inventory level still. On our own inventories and development between Q1 and Q2, what you see on the slide is actually a true comparison because the provision for component liabilities is not a provision that sits on the inventory.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [4]

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Okay. But it impacts the gross margin?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [5]

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It impacts the gross margin. It's a provision for a liability with certain of our OEMS.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [6]

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Can you then give any insight if we then say it's down DKK 28 million, how much is coming in of products which were not there in the Q1? So just to give an indication on how much of products where you have a risk of end of life, discount is coming down?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [7]

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Yes, it's a relatively minor number that is on products that is not there.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [8]

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Minor on products that is not there, what do you mean?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [9]

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Yes. So I mean -- so you're asking whether they were on products that was end of life.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [10]

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Yes.

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [11]

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Yes. And it's for -- it is for products that are going to be end of life in the foreseeable future, but they're not necessarily end of life yet. It's part of our internal planning for these products.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [12]

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Then a question on -- it relates to December. You said earlier September, October was according to plan, November was extremely weak or very weak. Can you say something, has December performed like November? Or how has that performed?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [13]

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We will not display any -- or disclose any numbers of December in the Q2 call. But we can say we see a more stable revenue development between the different months and all the quarters, which is basically a result of our changed approach towards our selling into partners.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [14]

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Okay. And then final for now. On the soundbar that was launched very late in November, and in some markets, it was shown in December. You were pleased initially with the reception of both that and the Harmony. Do you want to say anything about how the stage has been performed? Has it succeeded expectations or in line or?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [15]

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I think what we will say as now, we're still too early to sort of give a full evaluation is that both Harmony and stage is performing satisfactory to us.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [16]

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And on the Harmony, does that also accounts for the 65-inch version?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [17]

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That accounts for Harmony lower.

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Operator [18]

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Our next question comes from the line of André Thormann of ABG.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [19]

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To start off with the first question, you mentioned a bit on cost-cutting potential at the conference call after the profit warning. Do you have any further to tell about this because as I hear it, it's not like you will spend less on marketing or on R&D.

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Kristian Teär, Bang & Olufsen a/s - CEO, President & Member of the Executive Board [20]

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Kristian here. So we are reviewing holistically, all the costs that we have. And we will, like I said, as well, in December, we will invest more in certain areas. And obviously, that will mean savings in other areas. That work is going on as we speak. And like I said, we're taking a holistic view. We have some ideas, of course, where we can become more efficient. And we believe we have potential to be more fit-for-purpose as well when we do that exercise, but I don't want to specify at this point in time, where we will find a cost and how we will reprioritize it.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [21]

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Okay. Then in terms of -- now you had the first quarter with Harmony -- or selling Harmony. Have you seen any cannibalization of Eclipse on this selling or?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [22]

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No, not really, André. We still see that these 2 products actually complement each other in the stores because they have a somewhat different propositions to the customers.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [23]

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Okay. Yes. And then also a bit because I'm not sure I fully understand in terms of the question Poul also had on the inventory. I mean is there any estimate of how much inflow there was under inventory from new products after Q1?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [24]

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Well, of course, we know how much inflow we have for new products after Q1, but we are not disclosing those details in our reporting.

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Operator [25]

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And our next question comes from the line of Kristian Siedenburg of Bloomberg News.

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Kristian Siedenburg;Bloomberg News, [26]

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I have 2 questions. One of them has already been answered regarding December sales. The other one is regarding the severance costs. You're paying DKK 15 million to the former CEO and former Executive Vice President. Was -- Is that all or will it come -- be booked more on that in the following quarters? That's the question.

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Kristian Teär, Bang & Olufsen a/s - CEO, President & Member of the Executive Board [27]

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So Kristian here. This is according to the contracts that we have with them and there is no further costs coming from that.

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Operator [28]

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

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [29]

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Yes. I was thinking about the product pipeline, you had given a little more disclosure into early, you had combined Q3 and Q4 into just the H2. Has there been any changes in letting the On-the-go coming in Q4 and not in Q3? Is that original plan? Or has it been impacted by the excess inventories and all the discounting, which you want to be cleared out of the market before product comes to the market?

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Kristian Teär, Bang & Olufsen a/s - CEO, President & Member of the Executive Board [30]

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So Kristian here. So our product plan is the same as we had before. And it will be executed in the same way as we had planned.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [31]

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Okay. And then a question about Australia. There has just been news out recently that Aqipa is replacing B&O by the other products. Can you explain a little because, actually, I thought that the MJ Group had taken over distribution in Australia. So what's in the story about those changes? If you have any comments?

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Kristian Teär, Bang & Olufsen a/s - CEO, President & Member of the Executive Board [32]

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Yes. So we are working with both MJ Invest and with Aqipa, and I will not go into details on their relations in between them. But both are partners to us and MJ Invest is a strong partner for us in Australia.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [33]

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And Aqipa will be there as well in the future?

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Kristian Teär, Bang & Olufsen a/s - CEO, President & Member of the Executive Board [34]

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I will not comment on where Aqipa will do in Australia.

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Operator [35]

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(Operator Instructions) As there are no further questions at this time, I'll hand back to our speakers for the closing comments.

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Kristian Teär, Bang & Olufsen a/s - CEO, President & Member of the Executive Board [36]

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So thank you, everybody. This was the end of the presentation and the call. So thank you for joining.