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Edited Transcript of BO.CO earnings conference call or presentation 3-Oct-19 8:00am GMT

Q1 2020 Bang & Olufsen A/S Earnings Call

Struer Oct 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Bang & Olufsen A/S earnings conference call or presentation Thursday, October 3, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Henrik Clausen

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

* John Mollanger

Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of 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

* Jesper Ilsoe

Nordea Markets, Research Division - Analyst of Healthcare

* Poul Ernst Jessen

Danske Bank Markets Equity Research - Senior Analyst

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Presentation

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Operator [1]

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Welcome to the Bang & Olufsen interim report for the first quarter 2019/2020. (Operator Instructions)

I'll now hand the floor to CEO, Henrik Clausen. Please begin.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [2]

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Thank you very much, and good morning, everyone, and thank you for joining me in the call today. With me, I have our CFO, Nikolaj Wendelboe; and our Head of Brand & Markets, John Mollanger.

I'll start by going through the highlights of the quarter and the main drivers of development for the coming periods, and then Nikolaj will take us through the financials. I will then finish by going through our outlook for '19/'20 before opening for questions. Let's move to Slide 4.

As expected, Q1 was financially a tough quarter. Our revenues declined by 27% in local currency. Although this development on the surface may seem like a significant decline, it's largely a consequence of us driving necessary changes in the quarter to establish a more demand-driven sales model. Furthermore, sellout performance in this quarter was impacted by our decision last year to launch fewer new products and the fact that the transformation of the sales and distribution network was slower than anticipated last year.

As I outlined, in connection with our annual report in July, we want to establish a sellout-focused behavior, and short term ensure that we normalize inventories at retail level. In Q1, we succeeded with several key initiatives in that area which will benefit the business both short term and long term.

Firstly, we have been consequently promoting sellout with our partners rather than sell-in. In addition, we have significantly and consistently reduced the use of volume discounts and the use of extended credit. The latter dropped to 5% of group revenue in Q1 compared to more than 20% in Q1 last year.

Certainly, we have worked on ensuring proper contract compliance from all of our partners. We increased our monitoring efforts of the marketplace and trace products found in unauthorized channels. In Q1, this also led to the termination of some partnerships and a significant reduction of sales to others. This had an adverse impact on revenue in Q1 in isolation but will benefit us long term.

Thirdly, to ensure better product life cycle management, we have, in Q1, sold end-of-life products through dedicated channels. But in control of where these products are sold, we minimize the risk of cannibalizing our primary channels and ensure a proper transition to upcoming product launches.

With initiatives we decided to take, we already see clear indications that our business is changing to a more demand-driven sales model. Based on the first 4 months of the year, we can see that sales are developing significantly smoother compared to previous years.

Furthermore, we have seen a substantial reduction in retailer inventories across markets to such an extent that we are close to a normalization of retailer inventory levels across most multi and monobrand partners. We are, therefore, in a much better position now and are ready for the launch in our new products as well as the upgrade and expansion of our retail network. I will, on the next pages, elaborate further on both.

The seasonally small quarter combined with the revenue decline in the quarter significantly impacted profitability. The gross margin was impacted negatively by sales of end-of-life products at low margins. Furthermore, our Q1 gross margin was adversely impacted by indirect production costs which are relatively higher when revenue declines as significantly as it did in this quarter.

The free cash flow was negative DKK 206 million. This is normally negative in the first quarter due to seasonality. Free cash flow was impacted by negative earnings and the development in our net working capital. Our net working capital is still too high but we are starting to see normalization. Nikolaj will go into greater details on this when we go through the financials later in the presentation. With the progress we have seen and the plans we have in place for the rest of the year, we therefore maintain our outlook for the financial year 2019/'20.

Please turn to Slide 5. As we communicated in our annual report in July, a key focus in the first half of this financial year will be on driving retail sellout and normalizing our retail inventory, and we have already seen solid progress.

In EMEA, the sellout in monobrand declined in Q1, which was primarily related to TV sales. The sellout decline was however modest compared to the significant decline in sell-in. This implies that we've seen a significant reduction in retail inventories which is also the feedback we get from key partners.

The lower sellout in the multibrand channel was related to a rebrand executed in the channel. And we have -- as we have discussed in the past quarters, this will be addressed through a significant upgrade with the rollout of branded spaces to lift the in-store experience, which I'll get back to in a moment.

In Americas, we have seen a positive development in sellout within monobrand. Now in stores in SoHo and Madison in New York, we have seen that an enhanced retail experience has improved sellout.

Termination of the partnership with a larger consumer electronic chain impacted performance negatively in Q1 compared to last year. And sellout was furthermore impacted by sales through unauthorized channels. As mentioned earlier, we have taken steps to ensure proper contract compliance from our partners going forward.

In Asia, sellout improved in both the monobrand and multibrand channel. The improved performance has among others been driven by new stores in high traffic locations and the rollout of branded spaces. The strong performance in sellout has led to a reduction in retailer inventories especially within the multibrand channel.

In previous years, we have lacked full insight into sellout performance in inventory levels with our partners. Last year, we therefore started to get access to our partners' sellout data. As we have shown here, this work is progressing and our insight is improving month by month. As we build a more solid basis for reporting this data, we will begin to integrate these insights in our reporting to you.

Please turn to Page 6. Last year, we launched significantly fewer products than normal. This year, we are radically changing the launch tempo. In total we plan to launch new products as well as several upgrades and versions of existing products. We have already announced the new BeoVision Harmony TV and our first ever sound bar, BeoSound Stage. Both products are part of our Stage category.

Our improved ability to merchandise our products across our channels is a significant change to previous years. Our sound bar will, for instance, be available in both monobrand and multibrand stores as well as through our e-comm platform.

In the second half of the year, we will launch new products within our On-the-go and Flexible Living categories. This will also be the first products based on our new technical platforms that we have been developing since last year. All in all, we have a very comprehensive portfolio of new products to be launched. We expect the new products will account for more than 25% of group revenue in the second half of the fiscal year. This will be further supported by new models, upgrades and variants.

And please turn to Page 7, where I will elaborate on the planned development of our distribution network. We have a comprehensive pipeline of openings and upgrades of the retail network that we are currently executing. This will significantly lift the consumer experience. And we have, as we've said the year before, and we know that in particular the rollout of branded spaces in multibrand generates a substantial revenue increase.

Together with the launch of new products. The opening and upgrades of key locations will be an important revenue driver for us in the second half of the year. In monobrand, we plan to establish stores in high-traffic areas which can be through relocating existing stores or opening new stores. In total, we plan to open and upgrade more than 40 monobrand stores during the rest of the year, close to 10% of the total population of branded stores.

In EMEA, we plan to open and upgrade more than 30 stores. Part of this will be pilot stores where we will demonstrate that we, through a targeted end-to-end effort, including store design, merchandising, in-store selling, training, et cetera, can deliver a better consumer experience which will result in better financial performance than comparable stores.

In Americas, we plan to expand the network through opening of new stores. In Q1, we opened a new store in Vancouver, Canada. And in Q2, we'll open our new company owned flagship store in SoHo, New York, which since December has been operating as a pop-up store. For the rest of this year, we plan to expand our footprint with strong partners and develop both our Northwest cluster, Southern California cluster as well as Chicago and Toronto.

In Asia, we plan to open a flagship store in Tokyo before Christmas. We have seen a very strong performance from the stores we have opened in luxury malls in China last year and we are targeting more stores in luxury malls.

Within multibrand, we focus -- our focus is opening and upgrading to branded spaces, shop in shops, pop-ups and e-tailers. We plan to roll out more than 100 branded spaces in Q2 alone before the important high season.

In EMEA, we plan to roll out more than 100 branded spaces with the majority part being in the second quarter. In Americas, we have a focus on travel stores which we plan to roll out during the second and third quarter. And finally, Asia, where we have a large range of upgrades and openings designed to increase the average sellout per store we are in.

In total, we plan to open and upgrade several hundred points of sales during this financial year. It should be noted that as part of the normal assessment of the quality of our distribution network, we will see closings of both mono and multibrand stores if these are not performing satisfactorily.

Please turn to Page 8, where I'll take you through how we plan to lift revenues per store. In parallel to the launch of new products and opening and upgrading key retail locations, we are also driving a strong and coordinated effort to drive traffic to retail and ensure that traffic converts to sales.

The campaign has kicked off with the launch of the BeoSound Stage and will also encompass our new BeoVision Harmony as well as other key existing products. The campaign will run through the fall and winter, and the emphasis will be to convey the core capabilities of sound, design and craftsmanship. The campaign will be PR, digital and SoMe-driven and be supported by targeted action in other channels as well.

In key cities, we have secured strong visibility including the facade of KaDeWe in Berlin in September, a window in Harrods in London in October and the facade of BHV in Paris in November. Furthermore, we will be opening our flagship stores in SoHo, New York and Ginza in Tokyo. Both are planned to open in November. Furthermore, we had a strong presence at CEDIA in September, which is one of the world's leading home integration trade shows.

As part of our overall strengthening of the consumer experience, we are rolling out a more consistent retail design across channels to drive in-store conversion. In the multibrand channel, the campaign and launch of BeoSound Stage will spearhead the rollout of the branded spaces. Furthermore, we're also rolling out digital point of sales displays in selected multibrand stores to ensure a stronger and more consistent communication to the consumers.

Finally, across our top stores, we have hosted and will continue to host a series of in-store events so that we, in a targeted way, drive relevant traffic to our stores to show the strong product offering we now have in the market.

To sum all of this up, I believe that the combination of the product launches we have, the distribution development plan and the strong campaign effort, we are gradually gaining momentum in our business in the coming quarters.

And with that, I would like to turn it 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, Henrik. Please turn to Slide 10. As Henrik said in his opening statement, Q1 was a tough quarter. Group revenue declined by 30% or 27% in local currencies. The main driver behind this decline was monobrand in EMEA and multibrand in Asia.

As Henrik explained, we have taken deliberate steps to implement our demand-driven strategy with, among others, reduced use of discount and extended credit. In addition, governance in respect of contract compliance allowed us to reduce sales to selected partners or terminate partnerships.

Revenue was, in Q1, supported by sales of in the flag products, these were -- also the lower prices, which had an adverse impact on our gross margin. We've been selling end-of-life products through dedicated channels to reduce the risk of cannibalizing our primary channels. Hence, gross margin was down by 10.2 percentage points.

And besides the sale of end-of-life products at lower prices, Q1 gross margin was also impacted by indirect production costs, which are relatively higher in a quarter where revenue is lower. Finally, compared to last year, currency hedges accounted for 2.2 percentage points of the decline in gross margin.

The decline in gross profit obviously had a significant impact on EBIT margin, with decline from positive 0.9% last year to negative 30.8% this year. EBIT margin last year was also supported by other operating income primarily related to a legal dispute. And if we adjust for that, EBIT margin last year would have been negative with 3%.

Capacity costs were slightly lower compared to last year impacting EBIT margin positively. The decline was primarily related to distribution and marketing costs. I will elaborate a little bit further -- a little bit more in cap costs in a moment, but first, I'll take you through the development in our 4 segments. Please turn to Page 11.

So revenue in EMEA amounted to DKK 179 million, which was a decline of 37% compared to the same quarter last year. This is primarily related to the monobrand channel and the Stage category. In Q1 last year, we saw a strong sale of BeoVision Eclipse TVs, which partly resulted in the build-up of inventory with our resellers. In Q1 this year, [instead been] promoting sellout and thereby a [mutual] reduction for our retailers. Sales in multibrand was only slightly below last year and was supported by sales of end-of-life products.

This last point leads me to the gross margin development. Gross margin declined to 31.5% in the quarter. A significant part of this decline was related to the sale of end-of-life products and lower prices.

Looking at our distribution development, we opened 3 new monobrand stores and relocated a further 3. But in multibrand, we opened 33 new multibrand point of sale. However, we continue to close nonperforming stores, so we saw a combined decline in stores in Q1.

The stores we opened are high-quality in high-traffic location, [where we] closed nonperforming stores. Hence, the overall development is positive even though the total number of stores is lower compared to Q4. As presented by Henrik, we plan to further expand our footprint in EMEA in the coming quarters when we roll out more than 100 branded spaces, with the majority in the second quarter.

Let's turn to Slide 12. Revenue in Americas declined by 17%. I think it's worth mentioning that the quarterly revenue in Americas in absolute terms are relatively small and the decline was only DKK 7 million compared to last year. The revenue decline was primarily related to multibrand where we, compared to last year, have reduced our presence in the mass-market consumer electronics space. Revenue was furthermore impacted negatively by sales through unauthorized channels.

Revenue from monobrand stores also declined. However, we did see a positive development in our company-owned store. Among others, our store in SoHo in New York, was opened as a pop-up in December last year and will open as a flagship store in November. Revenue was supported by sales of end-of-life products and lower prices, which consequently impacted our gross margin negatively.

Looking at the product categories, we can see that both Staged and On-the-go declined. In Staged, the decline was primarily related to BeoLab 50 speakers, whereas On-the-go primarily related to lower sales of our E8 products, which was impacted by sales through unauthorized channels. A focus on promoting Flexible Living products resulted in a growth in this category and was dominated by higher sales Beoplay A9, BeoSound 1 and also Edge, which we launched in Q2 last year.

On channel development, we successfully opened a new monobrand store in Vancouver in a high-traffic area. The new store provides a full brand experience, and expectations are quite high compared to the previous store which was closed.

Please turn to Slide 13. In Asia, revenue declined by 34% to DKK 148 million. The decline was primarily related to multibrand and On-the-go. The decline was also seen in revenue from monobrand stores related to loss of retail margin as we, in Q1 last year, owned several monobrand stores which has since been divested. Gross margin fell to 22.9%. The decline was primarily due to the sale of end-of-life products at lower prices.

If we look at the development in our different product categories, we can see that the decline is mostly related to On-the-go products. We see the decline primarily in Bluetooth speakers, whereas revenue from both earphones and headphones increased compared to last year also supported by sale of end-of-life products. Last year, revenue was also supported by Beoplay Earset, which we discontinued in Q4.

We continue to develop our distribution channels in the region. We opened 5 new monobrand stores with our existing partners. The stores opened in China in luxury malls, and we have seen a strong traction. Within the multibrand channel, we opened 54 new points of sale. As part of the continued assessment of the quality of our network, we also closed 4 monobrand stores and 99 multibrand points of sale.

Finally, I would like to take you through our Brand Partnership (sic) [Brand Partnering] segment, so please turn to Page 14. Revenue in this segment was up by 14% to DKK 57 million. It's primarily related to Brand Partnering. The increase is related to the full year effect from revenue growth seen throughout '18/'19. Our aluminum production for third party declined slightly in Q1. The improved gross margin was primarily due to the lower margin, aluminum activities accounting for smaller share of the income in the segment.

Please turn to the next slide on capacity cost. Our development in costs were overall in line with last year. Reported development cost was down by DKK 1 million, whereas incurred development costs were up by DKK 1 million. The development costs were related to new products as well improvements to our e-comm platform.

Distribution and marketing costs were down by 10%. This reduction was primarily related to marketing cost. And in Q2, we expect marketing cost to increase as part of launching Beovision Harmony, Beovision Stage (sic) [BeoSound Stage] and the global integrated marketing campaign that Henrik was talking about. Finally, administration costs were up by DKK 1 million, reflecting our investments into the current transformation process.

Now please turn to the next page. So on CapEx, we were up by DKK 7 million compared to last year, reflecting the aforementioned investment into products and platforms and improvements in our e-commerce platform. Of the DKK 24 million in CapEx, DKK 13 million related to capitalization of development costs.

Our net working capital increased by DKK 101 million to DKK 511 million in Q1. The increase mainly relate to trade payables. I will elaborate further on development in net working capital in a moment. Because of the lower profit, our CapEx and increased net working capital, our free cash flow was negative with DKK 206 million in Q1.

The negative free cash flow impacted our net cash position. Furthermore, our net cash position was impacted by the implementation of IFRS 16 on leasing. This has added DKK 191 million in liabilities in Q1. Our net cash position therefore declined to DKK 12 million.

Adjusting for leasing liabilities, our net cash position was DKK 203 million. We maintain our target of a net cash position of DKK 500 million, but we adjusted to exclude leasing liabilities. Our cash position at the end of the quarter was DKK 275 million.

Please turn to Page 17. Our net working capital, I will start by saying that inventory declined slightly in Q1 compared to Q4 last year. So a combination of lower-than-expected sales and production obligation resulted in a buildup of inventory in the second half of 2018/'19.

During Q1, we still had some production obligation, which means that in the first part of the quarter, inventory kept growing. However, in August, we saw significant reduction in inventory following reduced production. The imbalance between production and sales in the second half of '18/'19 has resulted in skewed development in inventory of trade payables in Q1.

The production last year and beginning of Q1 has now largely been paid resulting in decline in our trade payables, while the reduced production in Q2 means that we're adding -- sorry, the reduced production in Q1 means we're adding less trade payables. Hence, getting net working capital normalized does result in a significant reduction in trade payables in Q1.

Trade receivables decreased compared to Q4 last year. The reduction was driven by a combination of low revenue in the quarter and a tighter use of extended credit. We have reduced extended credit to 5% of group revenue in Q1 compared to 22% in Q1 last year. The extended credit given in Q4 '18/'19 has impacted trade receivables negatively, whereas the limited use in Q1 '19/'20 had a positive effect.

With the initiatives we're taking on inventory and on reducing sales with extended credit, we expect to see a further normalization on our net working capital in the second half of the year.

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

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [4]

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Thank you, Nikolaj, and please turn to Page 19. We have seen a solid progress in normalizing several of the issues we've highlighted in the annual report, specifically the reduction of the retailers' inventory.

During at the first 4 months of the year, we see early indication of a healthier buying behavior from our partners. Furthermore, with the number of products we are planning to launch in combination with the rollout of the branded space and expansion of our retail network, we expect to deliver solid growth in the second half of the financial year. We therefore maintain our outlook.

For '19/'20, we still expect a single-digit revenue growth in constant currencies. Our guidance on revenue growth reflects that we still expect to see overall negative revenue growth in the first half of the year.

We expect to deliver solid growth in the second half of the financial year, supported by the planned product launches starting with Beovision Harmony and BeoSound Stage in the second quarter. For both the mono and multibrand channels, focus is on improving the distribution performance by continuing the transition to a demand-driven model, among others through upgrades to existing -- the existing network as well as expanding the network into high-traffic areas.

EBIT margin is still expected to be above the level of 2018/'19. Growth will be supported by expected higher revenue, whereas EBIT margin last year was lifted by currency hedges.

Our free cash flow is expected to be positive for the year. We're working to normalize net working capital and expect that this will have a positive effect on free cash flow in the third quarter. We still expect free cash flow to be impacted positively by our brand partnership with HARMAN, as this will become cash positive during Q2. Previously, license fees have been offset against the prepayment we received when we sold the automotive business to HARMAN.

And with that, we will open for questions. Thank you.

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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 Jesper Ilsoe of Nordea Markets.

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Jesper Ilsoe, Nordea Markets, Research Division - Analyst of Healthcare [2]

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I have a few questions from my side. I would actually like to ask the first questions to you, Nikolaj. You've now been with the company for a few more months than when we last met. And even though I know that the CEO is listening to answer, but given what you've seen so far, how do you see the state of the business at the moment and the outlook in B&O in general? And do you we feel you have the right team in place now to deliver on this strategy? Or what is the status in your financial organization?

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

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So thanks for that question. I think what I will say is that we have the plan in place, we have the team in place. As Henrik has also said previously, obviously, coming into my organization in finance, you're always assessing whether you have to buy setup on which I've always done, but I think that has nothing to do with the overall strategic trajectory of the company. So I think what we're saying today is that we have a plan for how to develop the business, putting new products out in the market and develop our channels. And this is all the plan that we are seeing that we believe firmly is the right thing for Bang & Olufsen.

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Jesper Ilsoe, Nordea Markets, Research Division - Analyst of Healthcare [4]

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Okay. Then I also have a more, let's say, financial question. So on your comment with 25% revenue in H2 coming from new products, so just to build on this information, will it be fair to assume that H2 revenue, excluding these new products, will be fairly similar to H1 revenue? So any dynamics we should take into account when looking at in H1 versus H2 of -- excluding new products?

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

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I think you know that we don't comment that specifically on development in product revenue, so we're not giving guidance on that.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [6]

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Just to add then, I think the 25%, of course, indicates that the product launches will be the key for the gearing -- the growth in the second half of the year. So I think that that's probably an adequate reflection.

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Jesper Ilsoe, Nordea Markets, Research Division - Analyst of Healthcare [7]

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Sure. But with the signs in this quarter you see coming into H2 -- Q2 and H2, is there any reason to believe or assume that H2 revenue ex new products will be lower than H1, given that you also saw a 30% decline in Q1 versus Q1 last year? So any color you can add there?

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [8]

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I don't think we will add more color. And I think that one reflection and you know there's quite a big difference between sell-in and then sellout. So of course, what you see reflected in the Q1 numbers is there's an underlying normalization of stock levels as well. And of course, that normalization, in a positive way will impact the business in second half on all existing products as well including existing TVs.

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Operator [9]

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Our next 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 [10]

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Two questions. First on the inventories in the channel. Of course, they're coming down, but do you have any indications or can you put additional comments on how much is still left or how much you expect to be cleared before you move into normal? That means how much do we still have of headwind in the revenues in the second quarter? Then you talk about opening new stores for the remainder of the year, both in monobrand and multibrand, in all regions. How much do you see that as a net number? I assume that the numbers you are giving are gross openings, but how should we see it on a net including the closures?

And then on the inventories of your own, a large part of that is finished good and now you're selling out with discounts for the end-of-life products. How do you look at the remaining inventories you have? Should we expect significant risks for or general risk for further discounting of the remaining inventory for the coming quarters?

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

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Well, Poul, let me comment on inventory and end-of-life products. So we don't disclose products going end of life sort of before they are going end of life for a lot of good commercial reasons. So right now, we have 2 products that are end of life, which is the E8 1.0 and the H9i. And they are the primary reasons for having end-of-life products sold in Q1. Some of that will also be in Q2, but we will not comment on further end of life before we are ready to announce that to the market. I think that answers the questions around end of life and also what we have on our inventory.

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

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Just to follow up, just if we take the recent quarters where you have reported and you got the same question if there were risks on discounting or write-downs and there your management were very confident that, that was not going to happen and then you take a huge impact in the following quarter. So it's just to give an impression of we should seek further discounting and thereby gross margin diluting risk on the shelves.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [13]

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I mean, Poul, since I recall the conversation that you refer to, managing end of life in a controlled way will be a part of our business. I think the channels, historically, you will not have the channels. So the control of the channels to manage that in a meaningful way. And that specifically led to quite significant write-downs on components and take back of products from channels at a much more radical level on a specific product which was the Earset. Going forward, we will manage end of life in a controlled way and say that in terms of timing, Q1, and some into Q2, you'd see slightly higher levels than you'd see going forward. But that normalization of how to handle end of life will happen within that period. And then it will be built into the expectations that we've set around margins going forward.

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

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Okay. And then the channel inventories?

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [15]

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Yes, exactly. On the channel inventories, Nikolaj, do you want to comment on that?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [16]

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Yes. On the channel inventories, I mean, what Henrik also went through a list, that we see a sort of a sellout pattern that is increasing compared to what we see in selling pattern in the first quarter, meaning that we are seeing inventories going down in retail. I think when we look at the strongest indications we have, for instance, on TV inventory, which I know has been a topic also in the past, we can see from the registrations we have on warranty compared with what we were selling in, that we -- that inventory is down to a normal level now. So that's our clear assessment at a retail level. At least in the majority part of our network inventory is at a level that is normalized.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [17]

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That supports what we've communicated earlier, that normalization would happen in the first half of this year and we've taken quite significant steps quite deliberately in Q1 to create a healthy environment when we start to launch and introduce the new products into the trade.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [18]

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Okay. And then the question about store [wanted to see] if that was gross or net?

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [19]

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Sorry, it is a gross number as referred to -- and I think Henrik mentioned that you should expect that there will be some closing as we also open, upgrade and relocate new ones. When you look at the overall gross numbers, we are currently operating at plus/minus 5,000 doors. And I think most of that is obviously our multibrand POS. You should not expect the growth to be coming from a deployment of many more stores but a change of what they are. And I think we referred to that on store design fixtures, where they are and we refer to that as saying micro locations and how we are run, operate and activate them. This is where we place our bets.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [20]

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And then maybe just to add, if you look at the overall numbers, as John said, you take everything including tail end for third-party retail. We might be approaching 4,000. But in the context of the upgrades, new deployments and relocation, we are talking about close to -- I mean 300 to 400. So we are between 5% to 10% of all point of sales being touched half of that already in first half and specifically in Q2, so it's quite massive. And there's no doubt that the performance difference between the higher tiers and the lower tiers in terms of sellout is quite dramatic. So I pause at least to deemphasize at the fact that the upgrades that are happening in the network now are significant and might be 5% to 10% of total. But in terms of impacting right doors, even more significant.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [21]

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Okay. Final one from me for now. Regarding the branded spaces that you are opening where you talk about a 3-digit number ahead of Christmas. If you look back during the periods we've been through with very poor performance, the number you are looking forward to open, is that in line with what you had planned? Or is it better or is it below the ambitions you had earlier?

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [22]

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It is in line. In line means ambitious, as you know, and I think there was a conversation 2 quarters ago on the fact that we had to start the discussions early to be ready and active on those branded space for the Christmas period, and we will be, we will be. And as a matter of fact, some are already open, so it's, again, both in-line and ambitious.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [23]

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So you have got the number of stores and then the right brand, monobrand change that you were hoping for?

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [24]

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We do, and I would to add to that, in the locations we wanted.

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Operator [25]

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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 [26]

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Maybe to start off, in terms of the sellout, I understand that this have been actually worse than in Q1 '18/'19. What's the comment on that? And should the sellout improve from here?

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [27]

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Well, I don't think the conclusion is that we've had a sellout that's been climbing and it's going to look to the monobrand stores. And we've sort of shared some insights on the year-on-year development. We see a positive development in Asia overall. We see a positive development in U.S. on the clusters that we operate. It's hard to compare year-on-year U.S. on the Southern California cluster because it was established last year, but we see healthy development here. And for Europe or EMEA, you're right. We're down compared year to year. But as Nikolaj indicated, we will see somewhat gradually -- gradual improvement now hand in hand with the efforts that we're driving on sellout. So we feel that we are moving in the right space in terms of sellout actually based on the existing portfolio now getting ready from new product introductions. We had some specifics from a TPR point of view. TPR Asia looks positive development year-on-year as indicated earlier in the presentation. Specifically on U.S., the reduction is related to the fact that we are -- that we moved out of broad-based consumer electronics which means Best Buy, and we had slightly weaker sale on Amazon there in the first quarter based on parallel. But we feel that that's normalized now. But the jump is largely based on reduction in [CA] related to Best Buy. So those will be the reflections. The last point would be on TPR EMEA. You are right that we are slightly down. I think here, it's back to what John just went through. The answer to that is the rollout now, the committed rollout of the branded spaces that goes hand in hand with the product launches, specifically Staged. So we say on the net, we see a positive move out there from a sellout point of view but with variances across.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [28]

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Okay. Maybe just a follow-up. Because this quarter, I see it as you have had a very strong focus on sellout and that you didn't have in Q1 last year. So if we just focus on EMEA, is there any reflection around that? Because I don't expect that you will have the same focus on sellout as much going forward in the year. Is that correct answer?

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [29]

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I think so to clarify, the focus on sellout is a structural focus. We definitely have the ambition to act and think more as a proper retailer and sellout is probably the name of the game when it comes to adding clean market situations to receive new product intro, favorable market conditions when it comes to branded experience at consumer level. And obviously, all that to improve not only ours but also our partners' financial position. So the sellout focus is not a moment in time. It's a deliberate and structural decision.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [30]

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Okay. Okay. Maybe then moving into another area here, because in terms of net cash, I understand that your minimum level is around this DKK 500 million. And now I understand it's around DKK 200 million. Is there any comment on that? What's the problem here? If you don't manage to get to the DKK 500 million soon, will that have any operational impact? Can you comment on that?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [31]

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I think the comment I will make is that we maintained the target, we have adjusted the definition to exclude leasing liabilities. We are guiding a positive cash flow, and that would also directly mean that we will get closer to DKK 500 million at the end of the year.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [32]

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Okay. But if you don't have the DKK 500 million within the year, does that have any operational impact or can you live with that?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [33]

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It set us a target, so we haven't set sort of a time line for reaching the target and we are not guiding on it either. So I think it's become little bit a hypothetical question.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [34]

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Yes. But it's just to understand whether -- I mean I understand the target as you -- this is the money you need to kind of operate your business. Is that correctly understood?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [35]

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No, it's the target set to ensure we always have our eyes on having the financial capital structure that we feel is prudent for our company in our business.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [36]

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Okay. And then in terms of the products that will be launched in H2 on On-the-go and Flexible Living, is it correctly understood that these will also be available for sale within this financial year?

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [37]

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That's correct. So what we've communicated without being specific which we of course will not be before we launch and communicate is that for the On-the-go category, as well as the flexible category, we will have significantly new product introductions plus model and upgrades available for sale in second half of the year. So the expectation or the overall impact of new products, 25% for second half is a reflection of the impact of Harmony, and of course, Staged and the new product introductions.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [38]

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Okay. Okay. And then maybe one last question. In terms of the branded spaces in Q2, will that have any significant increase in any cost lines?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [39]

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Well, the branded spaces will mean an investment into fixtures and fittings. That, of course, has a builder cost and some CapEx impact. Whether you would call it significant, I think, is a relative term. But of course, there a cost associated with developing our distribution channels.

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André Thormann, ABG Sundal Collier Holding ASA, Research Division - Analyst [40]

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But this is -- I mean, if we compare this action of branded spaces coming in Q2 compared to Q2 last year, this is much more than you did last year, right?

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [41]

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If you ask it from an operational point of view, that is correct. I mean, we're approaching a significant number of branded spaces. But the overall impact from a cap cost and from a CapEx point of view is reflected in the overall guidance. And as we've said, there will be some specific impacts on cap cost moving into Q2 which again is reflected in the overall numbers for the year.

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Operator [42]

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And our next question is a follow-up from Jesper Ilsoe of Nordea Markets.

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Jesper Ilsoe, Nordea Markets, Research Division - Analyst of Healthcare [43]

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It's actually also a follow-up from one of the André's questions about the sellouts. So you write in the report, and we have talked about it before, but write in the report that you focus on getting more insights into sellout performance and demand. So just to ask the questions a bit more, let's say, high level, can you elaborate a bit more on what you actually do to increase this insight? And what is the end goal, so to speak, with the plan? So how much will you actually target to be able to track? And how would that help your visibility and ability to guide the market and guide -- and look into revenue going forward?

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [44]

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So I'll start by what do we do. Technically, if I may say, we are starting with our distribution agreements and starting with software and hardware, enforcing the fact that we have access to sellout data at the point of sale. And we are being, of course, relatively methodic in that starting with our monobrand partners and then extending that to more and more of them and eventually to branded spaces. So that is what we do mechanically. What are we going to do with the data and what are we looking for in that data, it's mostly retail KPI in terms of numbers that we shared with you and what we call sellout indexes compared to sell-in, but also some more specific and granular topic by product, mixes, average selling points and so on and so on. The usage of those data is twofold. On one side, of course, there is a financial usage to better project our own and our partners' financial position and guide. And the other element is what do we do functionally to use that data to embed that in the way we brief product and marketing campaigns.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [45]

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From an investment point of view, the expectation is that we'd probably be around, say, 80% coverage within this fiscal year in terms of generating the basic insights exactly from the point of sales. So -- and we feel that that's more than enough from a significant point of view or a statistical point of view. And as John said now, as we're getting that, the process to end much more to the analytics. We have a core team now in place in the digital space that actually works the numbers now, driving the insights that John just described. So we are not perfect, but we are at a place where we now have the insights to direct the business. And as I mentioned earlier, we are improving now sort of month by month in terms of both coverage but more specifically on insights to guide the sellout activities.

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Jesper Ilsoe, Nordea Markets, Research Division - Analyst of Healthcare [46]

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Okay. So just to put it into perspective, so what did you have before that you expect to have like sales reports weekly basis or monthly basis? What is the end goal here when you say that you have it at the point of sales? So how quickly will it be able to have these sellout reports from each, I guess, wholesale retailer and all that?

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [47]

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They are part of the formal follow-up and structure now. So for us, it's more about granularity now and expanding coverage. So -- when you say where do we come from, I think we've been quite clear in that sort of historically, we have been, say, almost 100% wholesale led. And therefore, I mean the basic infrastructure in terms of contractual obligations and IT link was not established mid last year. So it's been part of rolling out the new contract agreements, both with TPRs and with our own partners, which we did last year. And then we spent the last 6 months to 3 quarters on hooking up and starting to get insights. And we're now moving in a space where we get reports on a frequent basis and then now it's about getting further sophistication. So we feel like we are in control, and Nikolaj, you can add to that as well. And it's more a question about getting more sophisticated in how you use the base and the granularity.

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [48]

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Yes, I agree. I think -- I mean, what's the important thing will be with the system we're building is that we will be able to do a sellout data on basically SKU level, which we haven't been in the past. We've always been on a very high-level sellout aggregation sort of we've got in from the stores. So that was, of course, in form much more detailed analysis of when are we doing something right, when do we need to adjust, what's the impact, how can the teams better prepare for different campaigns, what works, what doesn't work in detail on a SKU level. So overall, this would be a quite a big step forward for getting to a retail-driven business model.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [49]

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Last point, back to the question about (inaudible), the way we are going to structure to this organization is that responsibility would be within sort of the financial organization as part of the competence that we are going to strengthen now in Nikolaj's area. So it's back to your question about what's the development of the financial organization.

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Operator [50]

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And we have one further question in the queue and that's a follow-up from Poul Jessen of Danske Bank.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [51]

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Three small questions. One is technical, some of the cash flow. When you say positive cash flow for the full year, I assume that's before the leasing payments. Will it also be positive, including the leasing payments, which I think is more the real free cash flow.

Second question is if you could put a little more color on the dedicated channels you talked about for the end-of-life products going forward, what kind of channels are we talking about?

And then the final question, that's I think more for John and for Henrik. I sense that under where you communicate or otherwise you're just more structured, but I sense that you're a little more confident on the platform you stand on today than I sense earlier reportings. Is that correct that you feel you are now in a better position going forward than earlier?

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [52]

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We will start with John, so the one listed -- start with end of life and the channels that we're in and how we think versus not only channel, it's a strategy. It's part of our structured approach to the market.

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [53]

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I think, Poul, just as we are using a multitude of channels on what I would call the full price ecosystem, we are doing actually the same on the end-of-life strategies. And the main idea, of course, is to make sure that our end-of-life strategy does not interfere with our full-price, full-branded channel. So part of the channel we are using are going to be what we call private sales. Part of that is to go over your dedicated outlets -- a topic that has vastly increased recently in terms of the quality of the experience. And part of that, we'll actually need to be ad hoc B2B partners. So we are using a multitude of channels there on [our recall] regions, again, with the objective to be off the grid, if I may say, and to not clash with our full-price retailing.

Is that making sense, Poul? Can we move to...

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [54]

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Yes. I assume that an example could be bundling telecom operators, bundling with mobile phones or smartphones or whatever then.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [55]

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Yes, you could see that but there's a whole channel setup like specific outlets. So north of New York, you'll find dedicated outlets where luxury brands -- there's actually a known integrated partner in your channel structure but -- which is sort of separated from the main flow where we do full price. So you'd see us move into the space where we will actively work on those channels, not only on the B2B side, but actually on the retail side as well.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [56]

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But those premium outlets, they are typically branded.

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [57]

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Yes. Some of them are fully branded...

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [58]

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So are you planning to open stores at premium outlets?

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [59]

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It's a consideration. As I said, we have multiple options in front of us. We are happy to witness that as a channel, the branded experience has massively raised across the globe and across brands. So we are considering that among others, yes.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [60]

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And maybe just on platform, John, you can comment as well. I mean, you are right. We now feel on much more solid ground because it's a fair reflection that last year we were hit and you can call it a perfect storm. We always felt we had the right strategy but the magnitude of transition and our own readiness was not there. We've communicated that earlier, so we've been quite clear on that. And since then, our insights in terms of what to do and the team's ability and the structure that we have put in place are at a very, very different level. And of course, on top of having our game in place from a retail and distribution point of view, the confidence we get from the feedbacks from the launches of Harmony and Staged, of course, supports that and creates some robustness. Doesn't mean that we don't know -- we don't see a big task ahead over the next 2, 3 quarters but we understand the task and I think Nikolaj was on that. And we believe we had the team and the resources to execute on that. So that will be my thoughts. But John, since you are...

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [61]

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No, I have to agree to your answer, Henrik, but also Poul your question. So I think there is one component, which is the data and the information. We simply know more today than you could argue we should have known more years ago. But I think we've been transparent to you on that. There is a second component which is the planning. I remember a specific question on missing the branded space in Christmas last calendar year, and this will not happen this year simply by better planning. And the combination of planning and data, we think, makes us a better operator. So I have to agree and those are probably the 3 reasons behind it.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [62]

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So I think you have the management team, both in layer 1 and 2 in place. So I don't know it [passed] right now?

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [63]

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We think that the team is in place.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [64]

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Okay. Then you mentioned Harmony. Just a short follow-up. The stores, they are taking preordering now. The numbers you see on preordering on Harmony, are that in line with what you had looked for or higher or lower? Or how do you see the preordering level?

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [65]

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We're not going to disclose an exact number but it is in line. And I think we are -- we're probably more satisfied not only by the number itself but the structure of it since a solid share of those numbers are final consumer sales and not only what you may call displays.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [66]

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So the demand is there.

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John Mollanger, Bang & Olufsen a/s - Executive VP, President of Brand & Markets and Member of Executive Board [67]

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That's what we think.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [68]

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Okay. And the final one that was the cash flow?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [69]

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I'll comment on that. Poul, it's correct, that the adjustment to accounting on IFRS 16 has a fairly meaningful positive impact on cash flow, which we also communicated at the Q4. And our guidance to have a positive cash flow includes that effect and that's as close as we can get at this point in time.

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Poul Ernst Jessen, Danske Bank Markets Equity Research - Senior Analyst [70]

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So you can take it as free cash flow and you are not -- they are now that you could say it's also if you take comparable numbers?

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Nikolaj Wendelboe, Bang & Olufsen a/s - Executive VP, CFO & Member of Executive Management Board [71]

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I don't think I said that. I just said that the impact from IFRS 16 is included in the outlook.

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Operator [72]

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As there are no further questions, I'll hand back to our speakers for the closing comments.

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Henrik Clausen, Bang & Olufsen a/s - President, CEO & Member of Executive Management Board [73]

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Okay. Thank you very much.

I just want to round this off by sort of saying an appreciation from me and the team that you all joined the call. Thanks for good questions. And of course, we're all available afterwards and as part of a more day-to-day dialog.

So thank you very much, and have a nice day.