Bang & Olufsen a/s : Chairman's speech

SPEAKING NOTES - AGM, 17 AUGUST 2023

(In the event of any discrepancy between the oral and written version, the oral version prevails)

The financial year 2022/23 was a year characterised by headwinds due to macroeconomic challenges, the Russian invasion of Ukraine and COVID-19 developments in China as well as extraordinary costs to logistics and components. So, despite positive progress on our strategic priorities, we did not deliver on the financial guidance we presented at the beginning of the year. As a result, we are not satisfied with this year's results.

We had expected a year of great uncertainty. However, our financial results were particularly impacted by the unexpected COVID-19 developments in China, our largest single market. Regional lockdowns and travel restrictions were followed by a sudden opening of the country. That led to a huge increase in infected people, which pretty much brought all retail to a standstill. This negatively impacted sales and also meant that we had to adjust our guidance for the year in March 2023.

The financial year ended in line with the latest outlook, with revenue of DKK 2.8 billion. This was 7% lower than last year and 8% lower in terms of local currency. The EBIT margin was negative by 3.8%, while free cash flow was negative by DKK 20 million.

Overall, reported revenue in Asia decreased by 19% due to challenges in China. In EMEA, revenue fell 6%, while the Americas generated reported growth of 2%.

Despite the challenges and decline in sales, we delivered good development on some of our strategic initiatives, and we continued to have relatively stable customer demand. I will go into this in more detail later.

The revenue of DKK 2.8 billion was DKK 194 million lower than last year. The revenue level for the year was not satisfactory and at the beginning of the year, we had expected possible growth despite the macroeconomic headwinds. The development in China affected the result significantly and revenue in China thus decreased by 28% compared to last year, corresponding to DKK 166 million.

Looking back three years, revenue has increased by more than 700 million or 35% and we also generated revenue above the level of 2020/21. This underlines that we are on the right track with the transformation, and it is our clear ambition to return to the growth track.

We generated a gross margin of 44.2%, which was a decrease of 1.1 percentage points compared to last year. This slight decrease was primarily due to a change in the product mix towards lower margin products, which was partly offset by the price increases we have implemented since last year. We have a strong focus on strengthening our earnings going forward and ensuring that our product sales become more profitable. In recent years, we have significantly increased the quality of our products, just as we have added several new features and improved the technology, for example, through our new software platforms. In addition, we build products with a long service life. Until now, this has not been reflected in the price of our products and we plan to adjust the

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prices of several of our products in the future to reflect the real functional and emotional value of each product.

The component and logistics challenges we experienced in 2021/22 continued into 2022/23. This meant that we had to absorb around DKK 160 million in extraordinary costs, compared to DKK 220 million last year. In the fourth quarter of the year, we saw significant improvement as the quarter was not significantly impacted by the extraordinary costs. This meant that in the last quarter of the year, we delivered a gross margin of 51.4%.

In total, over the past three years, we have absorbed around DKK 450 million in extraordinary costs for component and logistics. Our work to make the business more robust has enabled us to do this.

Throughout the year, we also continued our work to ensure a low cost-base and balance our investments to reflect market conditions. In the autumn, we implemented a hiring freeze, which was followed by a redundancy round in February. This is part of several initiatives we have executed throughout the year to maintain a low cost-base.

The EBIT margin before special items was negative 3.8% for the year. This was a decrease of 5.6 percentage points compared to last year and was primarily due to the lower turnover as well as the change in the product mix that I mentioned before.

All in all, this meant that profit after tax was negative by DKK 141 million, which was DKK 111 million lower than last year. This was due to developments in China as well as the extraordinary costs that accompanied the macroeconomic challenges that also characterised the year. We are not satisfied with the result and, as I have said, we have therefore taken initiatives to reverse the trend. We need to improve profitability next year.

Total capacity costs amounted to DKK 1,339 million, which was an increase of 4% compared to last year. We continued to make targeted investments in the future - in line with the strategy but, due to global uncertainty, we chose to phase in our investments slowly to limit cost growth.

Development costs amounted to DKK 301 million and increased 8% compared to last year. The increase related to software platforms and additional software engineers, as well as the development of future product designs.

Distribution and marketing costs were DKK 910 million, which was an increase of 4%. These related to higher marketing costs and the hiring of sales and marketing resources to support our strategic initiatives, including our Win City concepts, which have been a great success.

Administrative expenses, on the other hand, decreased by 6% to DKK 128 million, primarily due to lower provisions for employee bonuses and advisory costs.

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Free cash flow improved by DKK 152 million compared to 2021/22 and was negative by DKK 20 million in 2022/23. In Q4, free cash flow was DKK 27 million, which was the third consecutive quarter with positive free cash flow. A strong focus on improving inventory was a primary reason for improving free cash flow during the year.

Net working capital amounted to DKK 222 million at the end of the financial year. This is DKK 113 million lower than last year, which was primarily due to lower inventories.

Investments amounted to DKK 218 million, DKK 30 million lower than last year. Investments were primarily related to capitalisation of development projects and software.

Our capital resources were DKK 384 million at the end of the year compared to DKK 421 million at the end of last year. Since the end of the third quarter, capital resources improved by DKK 56 million. This was mainly due to our credit facility being increased by DKK 50 million in May, to a total of DKK 200 million.

With the exception of China, we experienced relatively robust customer demand. We measure this by looking at sales by dealers to our end customers. While our revenue decreased by 7%, like-for- like sales to end customers only decreased by 2%.

In Asia, we saw a decline of 7%, driven primarily by the lower demand from end customers in China. EMEA fell 1% while America grew 4%. Our company-owned stores grew overall by 10%, while sales from our partner-owned monobrand stores increased by 3%. Our monobrand stores in EMEA were on par with last year; however, demand varied across countries, especially in Northern Europe, where we saw that the general uncertainty affected customer demand.

If we look at our product categories, sales to end customers in our Staged category decreased by 1%, while the Flexible Living category decreased by 12%. More positively, our On-the-go category increased by 2%.

Last year, we presented a new sustainability strategy, and set long-term goals for our work with products, climate, social responsibility, and governance.

Our products are at the heart of our strategy. This is where we, as a company, can make the biggest difference. It is clear that we and the entire consumer electronics industry need to work with the entire value chain to reduce the amount of e-waste and our climate impact. One of the global recommendations for reversing this trend is to extend the life of electronic products.

Building long-lasting, circular products is an area where we can take leadership - and inspire the rest of the industry - in reducing the negative impacts on products and supply chains alike.

We were the first consumer electronics company to have a product cradle-to-cradle certified when Beosound Level was bronze-certified back in 2021. Cradle-to-cradle is one of the world's most ambitious product circularity standards. This year, we had Beosound Emerge certified. and we are

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well on our way to reaching ten certified products by the end of the financial year 2024/25, thus achieving one of our long-term goals.

The certification is a validation of the work we do to ensure that our products have a long lifespan and are made in a responsible way. This year, we have worked intensively to integrate the principles from cradle-to-cradle throughout our design and product development process, ensuring that all future product innovations must be certified.

We also want to take responsibility for CO2 emissions across our entire value chain and this year we have worked hard to map our emissions. Against this background and, as I promised at last year's AGM, we have also set our long-term reduction targets in line with the Science Based Targets initiative. Our climate goals need to reflect this recognised global standard, which has been defined by science as the way to meet the Paris Agreement to keep global warming below 1.5 degrees.

We have a specific goal of being completely climate neutral in our supply chain by 2040. We have also set a goal to be climate neutral in our own business by 2027. We are already well on our way and today 99% of our own business is driven by renewable energy. This is partly due to the fact that last year we replaced gas with green power in our aluminium factory, introduced an electric car scheme for the entire company and ensured that our locations around the world also switched to more green power. We are not there, but we are well on our way.

We will work closely with our partners and suppliers to reduce our emissions here as well. In November, we joined the World Economic Forum's First Movers Coalition, focused on reducing emissions from aluminium, one of the hardest hit industries. This means, among other things, that we have committed to ambitious goals to reduce the climate impact of aluminium towards 2030.

In addition, we have initiated new initiatives and objectives that will contribute to strengthening diversity and inclusion in the company. A significant new initiative was that all members of global management presented progress on concrete diversity targets as part of the performance review. This will contribute to building a strong and inclusive culture at Bang & Olufsen. You can read more about our sustainability efforts in the past year in our annual report. This year, for the first time, we have produced a fully integrated annual report, which includes both our sustainability efforts and our financial performance. It also reflects that sustainability has truly become an integral part of the company's strategy.

We are in phase 2 of our strategy which is about continuing to build more resilience into the business so that we can scale and create sustainable growth going forward. Our work to build resilience in recent years has helped us to better withstand the many external shocks of recent years.

In parallel, the Board of Directors worked with management on the development of the next phase of the strategy, so that we create a future-proof B&O. In January, we therefore also announced our sharpened strategic direction. It reflects how we see Bang & Olufsen evolving and outlines our priorities.

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The strategy builds on what we have learned over the recent transformation period. During this period, our strengths and competitive advantages in the market have become clearer. Several of you have already experienced our unique strengths, such as our craftsmanship skills, when you visited factories 3 and 5 earlier today.

The strategy is also based on an analysis of developments in global macro trends that will shape the future and change both consumer electronics and the luxury industry. The availability of 5G and high-quality streaming services, increasing levels of personalisation, sustainability and the growth of global luxury consumption are just a few examples.

These trends benefit us because they allow us to exploit our strengths, competencies and, not least, our fantastic history and heritage.

We want to change how people see, hear and feel the world and we want to create magical moments, designed for life. We will create sustainable growth by directing our sales and marketing efforts towards the 200 million affluent design and music lovers, who are our target audience. We must win their hearts by positioning ourselves more strongly as a Luxury Timeless Technology brand.

We must continue to strengthen the luxury experience across both products and channels, and we must strengthen our customer focus and we must ensure that they have magical experiences wherever they meet us. We must be able to create individual solutions for all our customers so they can get exactly what they want, when they want it. Regardless of colour, shape or imagination, we must be able to create it.

We must strengthen our ability to create timeless products. We must design products to last and create icons. We will do this through modular solutions, timeless designs and technological platforms that can be replaced and upgraded. We must contribute to a more sustainable future and take leadership in creating circular products and services that inspire industry and consumers to change their behaviour.

We must strengthen our technological capabilities. We must grow our business by creating technology experiences that match and exceed the customer experience through hardware, software, content and services. We need to build on our software platforms and create a cohesive portfolio of products. It must be intuitive and at the same time a unique magical Bang & Olufsen experience to step into our product universe.

We can only succeed in this if we have the right culture in the company, which is why we also launched new core values last year: Be Entrepreneurial, Show Love and Create Magic. With our new values and ambitions, we have a solid starting point to succeed with our strategy.

I will now go into more detail about the five strategic shifts that you saw in the figure on the previous page.

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