“The second quarter showed growth of 5.5 per cent compared to the same quarter last year driven mainly by Automotive and new products in B&O PLAY. The AV segment declined for the following three reasons: Firstly, the success of Bang & Olufsen’s new generation of innovative products has slowed down sales of older products. Secondly, our decision to transition from a master dealer set-up to direct distribution in selected BRIC markets has caused a decline in revenue. Thirdly, a detailed analysis of the performance of Bang & Olufsen’s network of independent retailers shows a significant under-performance of a group of retailers compared to the rest of the network. To accelerate the optimisation of our store network we have decided to proactively terminate up to 125 low-performing stores mainly in Europe. The above has had an adverse impact on our topline and our expectations to the financial results of the 2012/13 financial year. We remain focused on the execution of our strategy, “Leaner, Faster, Stronger”, and continue to believe in the full potential of Bang & Olufsen”, says CEO Tue Mantoni.
The Group’s revenue was DKK 819 million for the second quarter of the 2012/13 financial year compared to revenue of DKK 776 million in the same period last year.
The B2C business recorded revenue of DKK 635 million in the second quarter of the 2012/13 financial year compared to DKK 617 million in the same period last year. The B2B business recorded revenue of DKK 182 million in the second quarter of the 2012/13 financial year compared to revenue of DKK 163 million in the same period last year.
B2C revenue in Europe increased by 12 per cent in the second quarter driven by the launches of new, innovative products. North America increased by 2 per cent whereas B2C revenue in the Rest of World decreased by 22 per cent mainly due to later introduction of new products. Revenue in the BRIC markets declined by 22 per cent mainly due to on-going negotiations regarding the acquisition of the activities from the master dealers in mid-China and in Brazil. A letter of intent has been finalised with the master dealer in mid-China, and an agreement has been made with the master dealer in Brazil after the end of the reporting period which means, that Bang & Olufsen is expected to assume direct control of the distribution in these two strategically important markets.
The Group’s gross margin for the second quarter of the 2012/13 financial year improved to 43.7 per cent from 40.8 per cent in the first quarter and remained on par with the gross margin of 43.8 per cent in the same period last year. The improvement is due to an improved margin in the B&O PLAY segment and in Automotive.
As expected, amortisation charges were DKK 13 million higher than last year and capitalised development costs were down by DKK 9 million compared to the same quarter last year. This has had an adverse impact on earnings before tax of DKK 22 million explaining the drop from DKK 41 million last year to DKK 23 million in the second quarter of this year.
Free cash flow in the second quarter was negative at DKK 208 million compared to positive DKK 17 million in the same period last year. The Group’s net working capital was DKK 927 million at the end of the second quarter of the 2012/13 financial year, compared to DKK 533 at the end of the second quarter of the 2011/12 financial year. This is mainly due to high trade receivables and continued high inventories which is mainly a consequence of lower than expected revenue in the second quarter. It is expected that net working capital will be reduced in the second half of the 2012/13 financial year.
The Group’s total revenue for the first half of the 2012/13 financial year was DKK 1,419 million against DKK 1,374 million last year, or a growth of 3 per cent. Earnings before tax for the first half of the 2012/13 financial year were negative DKK 41 million against positive DKK 8 million last year. Free cash flow in the first half of the 2012/13 financial year was negative at DKK 352 million compared to negative DKK 120 million last year.
During the second quarter, Bang & Olufsen has performed a strategic review of the ”Leaner, Faster, Stronger” strategy. The must-win battles in general are progressing as planned, which is illustrated by the many successful product launches during 2012, which have also been better timed and more impactful, as well as with improved quality. However, the third and fourth must-win battles, “Optimise Retail Network” and “Grow BRIC” are not progressing with the pace set forth in the “Leaner, Faster, Stronger” strategy.
To accelerate the opening of new stores in growth markets and to improve the health of the current retail network, Bang & Olufsen will open own B1 shops in key locations and accelerate the closure of unprofitable stores in mature markets. The number of extraordinary store closings (B1 and shop-in-shops) are initially expected to exceed the number of store openings. This is a conscious strategy decision to improve the quality and sustainability of the retail network and the overall customer experience. The store closings are expected to have an adverse impact of up to DKK 100 million on 2012/13 revenue.
After the end of the reporting period Bang & Olufsen has signed a letter of intent to acquire all activities from the master dealer in mid-China (including Beijing and Shanghai). Bang & Olufsen has also acquired the master dealership in Brazil. It is expected that these initiatives will have an adverse effect on 2012/13 revenue of up to DKK 100 million.
Distribution agreements have also been made regarding B&O PLAY with 24 third party stores in Europe and in Hong Kong after the end of the reporting period.
As a consequence of the accelerated store closings, the acquisition of the master dealer operations in mid-China and Brazil and the continued macroeconomic headwind, we revise the revenue outlook to revenue exceeding the 2011/12 financial year revenue of DKK 3,008 million.
The lower revenue will adversely impact EBIT. This will be partly offset by additional efficiency measures and an increased gross margin in the 2012/13 financial year. The outlook for EBIT is revised, so that the EBIT-margin is expected to remain positive.
The EBIT guidance includes an expected adverse impact of more than DKK 100 million compared to last year from higher amortisation and lower capitalisation, while continuing a high level of product development activity.
The network restructuring is estimated to take 12-18 months, which implies that the transition phase in the “Leaner, Faster, Stronger” strategy will take one year longer than anticipated at the launch of the “Leaner, Faster, Stronger” strategy. Consequently the strategy implementation period will be extended from five to six years.
Any enquiries about this announcement can be addressed to:
CEO Tue Mantoni, tel.: +45 9684 5000
IR Manager Claus Højmark Jensen, tel.: +45 2325 1067
A webcast will be hosted on 9 January 2013 at 10.00. Access to the webcast is obtained through our homepage www.bang-olufsen.com
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