Mips AB

STO:MIPS

Earnings Call Transcript 2021-Q1

[Max Strandwitz, CEO & President]

Good morning, everyone. My name is Max Strandwitz, and I am the CEO of MIPS. With me today, I also have Karin Rosenthal, who is our CFO. I will take you through the Q1 interim report. And if we start with the key highlights, we did see strong performance in the quarter with 48% net sales growth, 66% organic growth if we adjust for currency effects. We continue to see a very high demand for bicycle helmets, but there is positive outlook in all the 3 categories that we operate in. We saw a good development in EBIT and operating cash flow. And it's good to see, especially on the EBIT development when I started in 2016, and we never thought that we would make profit in the normally smaller first quarter and showing a 47% EBIT margin is, of course, a great achievement. And also a very good testimony of the scalability of our model. There is challenges in supply chain. However, they have so far been manageable. Global logistics and helmet manufacturers capacity is still challenged coming quarters. We do see high customer activities. We have more customers coming on board, and we are on track to deliver our 2025 plan. If we then turn to next page, and I'm now on Page #3. And if we start with the development in Bike, there, we see the strong demand continue. We see a demand increase for all type of helmets. There is a big trend in Mountain Bike, a lot of people Mountain biking all over the world. e-bike, there is a new report out that most probably somewhere between 2025 and 2030, there will be more e-bikes sold than the traditional bikes, a good trend also there. And we also see that commuting is increasing also all over the world. There is challenges for factories to produce all the bicycle helmets to meet the demand. There is not enough capacity in the industry to meet the current demand in bicycle helmets or for bicycle helmet, I might say. And our assumption is, therefore, that we do not see that the retail channel inventory levels will normalize during this season. Just for the record previously, we assume that by the end of Q2 that we would see restored inventory levels again. We don't see that happen. If we then turn to the next page and we look at the situation in snow, the situation is not as bad as we previously expected. At the release of the year-end report, we projected a soft ski season. The retail sellout numbers around the world varies with low and very low sales number in South and Central Europe. In North America and Nordics, which are the bigger markets for MIPS, sell up numbers are better than we previously expected. And we do not see that stock levels will hamper sales for next season to the extent that we previously anticipated. If we then turn to next page. In most, we do see a good consumer demand for MIPS equipped helmets. We did actually see declining numbers in the quarter, but that's fully explained by the hazing of helmet production in the factories. Momentum is still higher in motocross. However, we do see more brands signing up also in Street. Initiatives to continue to strengthen the awareness of MIPS in the category continues. We did sign up the Honda racing team. And we do expect good consumer demand also coming quarters. If we then turn to next page. In safety, our global expansion have started. We see good interest in the safety category from both helmet manufacturers and construction companies. We have had several webinars and roundtable events during the quarter with great interest. We have just started our entry into the U.S. market, a lot of PR activities to educate the market to start with. We did launch our first helmet with Centurion in March, and those helmets are actually already available on the market. And no change to previous communications. Volumes will start to ramp-up at the end of 2021. If we then go to next page. I'm now on Page #7, the topic for any company working with consumer products today is probably challenges in supply chain. Our ingredient brand business model has worked very well in the challenging environment around us. We do see the same issues in logistics and shortage of raw material as many other industries. Even though there is daily challenges, we have managed the situation very well. We do see an indication of cost increases if those are material and long term, we will pass those forward. If you then go to next page and the team MIPS that is expanding. It is one of the most important areas for us to raise awareness and establish our MIPS team is one of the more important tools. We have 2 more athletes and teams joining us. The first 1 is Tim Gajser and the Honda racing team. Hi is a great athlete and the first 1 that actually won all the different MX classes in the World Cup. The second 1 is Kate Courtney and X Ramp team. She is the Cross Country world Champion of 2019 and also the UCI world champion of 2019, and she is also going for the Olympic gold whenever the next Olympic competition will happen. The team also have the former gold Medalist and. All of these are extremely safety conscious and great ambassadors for MIPS. If we then go to the next page, another very key area for us is sustainability. We did launch our annual report a couple of weeks ago. And there, of course, you find our full sustainability report. We have decided to focus our work around 4 different pillars. The first 1 and the most important 1 is, of course, our employees. Second 1 is product that protects users. The third one, our impact on the environment. And then, of course, sustainability in supply chain. We have indicators and long-term ambitions for all our pillars, and you find them also in the annual report. To structure and follow-up our work around sustainability. If you go to next page. I'm now on Page #10, and we look at the development in our different categories. Sports, we did see a strong growth with 55% mainly driven by the demand for bike helmets, in Moto, we saw a decline in the quarter, fully explained by the phasing of production, still a very strong outlook and growth for the year in Moto. And in safety, it's still early days, but now you see also that there is more brands coming on board. With that, I'm handing over to Karin.

[Karin Rosenthal, Chief Financial Officer]

Good morning, everyone. I'm Karin Rosenthal, CFO of MIPS, I will take you through the financial part of the presentation development in the first quarter net sales increased by 48%, organic growth was 66%, and the difference is fully explained by FX due to a strong SEK versus U.S. dollar in the quarter. Gross profit, up 51%. Gross margin was up 170 bps to 72.5% due to sales mix. OpEx, we continue to invest behind our strategic priorities, R&D and marketing, a strong EBIT, up 141% to SEK 39 million. EBIT margin of 47.4%, up versus 29% last year, a strong increase of operating cash flow to SEK 69 million. If we look at the financial KPIs, organic growth, 66%; EBIT margin above 47% and operating cash flow of SEK 69 million. If we then turn to next page. We are now on Page 12, balance sheet and cash flow. We saw a strong improvement of cash flow from operating activities in Q1 of SEK 69 million, up versus SEK 16 million compared to last year. We have a strong cash position with cash and cash equivalents of SEK 341 million. And just to remind you, we don't hold any loans. The Board proposes a dividend of SEK 3.50 per share compared to SEK 0.03 per share last year. Equity ratio of 84%. Over to you, Max.

[Max Strandwitz, CEO & President]

Thank you, Karen. If we then summarize the quarter, strong start of the year, mainly from good demand in bicycle helmets, snow, not as bad as we expected. We saw strong development in EBIT and also in operating cash flow. The strong consumer demand is expected to continue, assuming no dramatic change to the current situation. We continue with high project activity, strong momentum in all our 3 different categories. We continue our activities to drive awareness of the MIPS brand, we have just signed last recent market survey that shows that if the consumer knows about us, understand what we do, they will buy us even if we are the more expensive alternative. We are on track to deliver according to our 2025 plan. And with that, we open up for questions. Over to you, operator.

[Operator]

[Operator Instructions] And our first question comes from Adela Dashian from Handelsbanken.

[Max Strandwitz, CEO & President]

Sorry, operator. We did not hear any question.

[Operator]

Yes, just going to to see if we can hear again. Adela, can you are you the line open now?

[Adela Dashian, Analyst]

Can you hear me now?

[Max Strandwitz, CEO & President]

Yes. Yes, we can hear you, Adela.

[Adela Dashian, Analyst]

Perfect. Let me restate the question. So it was a question on the sales development in Q1. I noticed that there's a big deviation between the Q4 results and the Q1 results, especially for the sports category, down about 40%. So do you explain this due to Q1 being a small production quarter? Or is there anything else underlying that explains this deviation?

[Max Strandwitz, CEO & President]

Yes. I mean, traditionally, and also, if you look historically, Q1 has been a smaller quarter, and it will always be a smaller quarter, you have less production days, and you also have the Chinese New Year. Like I also explained in the beginning, just being able to show profit has been an historic achievement for us. Being able to show 47% EBIT like we did shows that we are getting enough scale also in Q1, but because of the limited amount of production days, it will never be -- never is, of course, a big word, but it will probably not be as big as the other quarters during the year.

[Adela Dashian, Analyst]

Got it. Okay. Do you view it as a risk in the future that the market for bike helmet it comes to maybe saturated because of the increased demand now and that typically how it lasts for about 5 years, and that could potentially mean that growth could be hampered in the next 3 to 4, 5 years because of this increased massive demand?

[Max Strandwitz, CEO & President]

Yes. And of course, that was a risk that we reviewed and talked about quite a lot in the beginning on the pandemic situation because, like always, with terrorist attacks or temporary changes in the environment around us, normally, demand is not that sticky. And then you see a demand peak, and then it goes back to normal. We have had this discussion with a lot of our customers. And if we look at their 3-year plans, they don't see demand going down because there is a couple of structural changes around the world. First of all, there is a very big mountain by trend people want to spend time outside and so on, and we see a good demand there. Commuting, that is something that we actually expect that will stay, at least for the coming years. And there, we see quite a large amount of the projects that we are doing is in commuting helmets. So we do project together with our partners that there will be strong demand also there. And then probably the biggest trend that we are seeing is in e-bikes. And e-bikes requires a slightly different certification because you travel with higher velocity. They are normally a bit and so on. So if you're right, the e-bike, probably should have a little bit bigger bicycle helmet, and that also drives the conversion rate in a different. So I would say that at least from our side, we do see and expect that the strong demand in bike helmets will continue for at least a couple of quarters.

[Adela Dashian, Analyst]

All right. Then on the Moto category also declined sales figures this -- if you compare it to last year, I understand that to be a function of bicycle helmets taking over production in factories, which leads to lower capacity for motorcycle helmet production, is that correct?

[Max Strandwitz, CEO & President]

Yes, it is correct. And I mean 1 single quarter will not change the picture for us. We do see good consumer demand last year, Moto was our fastest growing category. There is no reason why it shouldn't be 1 of the faster-moving categories this year. So we still have a very positive outlook we have some more brands coming on board and also with our existing brands. We are growing in their assortment. So no, I'm not that worried about the trend in Q1 because like I said, when we close the year, I'm fully convinced that we have strong growth also in most of them.

[Adela Dashian, Analyst]

But at least in the near term, maybe for Q2, should we expect a similar development due to bicycle helmet demand still being extremely strong and low inventory levels for that subcategory?

[Max Strandwitz, CEO & President]

Yes. We normally don't give any forward-looking statement, but you don't need to expect the same kind of development in most for Q2.

[Adela Dashian, Analyst]

Got it. Okay. Then finally, on the safety category, very nice to see the start of sales figures here with the launch of the Centurion Helmet. So how should we think about the growth in this category going forward? Do you expect an? Yes, will it go faster then is just due to in a sport? Or do you expect a slower penetration of this category?

[Max Strandwitz, CEO & President]

Yes. I mean, when we talk about 2021, for us, it's about onboarding new brands, and you will see them coming on board. Given that the ropes to market. And of course, given that we are a much more sizable company, hopefully, we learned a lot during our journey. But also, I think that we found quite an effective business model where we try to educate both the construction companies and the helmet brands. At the same time, I think that we can gain momentum a lot more efficient than we did in our more traditional category sports. Of course, we have a completely also different set of resources. So no, I don't believe that it will take the same amount of time.

[Operator]

Our next question comes from Fredrik Moregard from Pareto Securities.

[Fredrik Moregard, Analyst]

On the call in. So first off, a question on the current, very strong, obviously, production demand in the bike helmet category with inventory replenishment going on and perhaps being prolonged into the second half of the year. Retail sales, clearly very strong. But how are you and your brand partners thinking about the second half of the year assuming that perhaps consumer demand could start to normalize, at least on a year-over-year basis. And the second half clearly being the traditionally strong quarters for -- production and perhaps weighing those 2 aspects against each other.

[Max Strandwitz, CEO & President]

Yes. Thank you, Fredrik. It's a very good question. And of course, we have continuous dialogues with brands. Like I also said during the last call, there is more capacity extension in the factory. So there is not a like-for-like comparator, if you compare versus last year. So we do expect that factories will be extremely full for at least the end of this year and that we will see that they will run on full capacity utilization. We are converting more brands. And of course, we also see a great interest for the market. So we see also an increase of the penetration with MIPS. So still good growth momentum expected for this year.

[Fredrik Moregard, Analyst]

All right. And when it comes to the Snow home, clearly, you're seeing a stronger consumer sell-out in the categories, especially in the Nordics and in the U.S. Do you think there's potential for snow category to spill over into the second half of the year as well? I'm assuming that 10 -- were not perhaps too agile to ramp up already in early Q1?

[Max Strandwitz, CEO & President]

Yes. Given that bicycle helmet had a lot of priority in Q1. The helmet needs to produce or be produced during some part of the year. So yes, you can expect some of snow helmets being produced also in Q3.

[Fredrik Moregard, Analyst]

All right. Just a final question then on your marketing strategy and marketing expenses. So I think over the past few years, you've been growing your marketing expense by 30% or so. Now you're increasing your direct-to-consumer marketing, you're building the MIPS teams, adding brand athletes and so on. Do you think that you're going to accelerate your marketing investments? And if so, do you think you have the organizational bandwidth getting good return on that investment?

[Max Strandwitz, CEO & President]

Yes. I think, first of all, a very good question. Historically, we said that we will spend somewhere around 5% to 7% of net sales in marketing. If you look at the specific quarter, it's 8%. There is nothing that has happened other than it's a smaller quarter. We do not adjust our marketing spend, depending on if it's a bigger or smaller quarter, we have a long-term plan. And that we are following in terms of the 5% to 7%, we don't see any reason to change that spend. Our marketing organization is growing. We are becoming stronger in terms of our execution. We have a lot of different initiatives that we are doing. But of course, the bandwidth, I'm not that worried about. Like I said also in the call presentation, we have just finalized market survey to really understand is our marketing effective. Do we drive awareness, like we said, we are going to do, and we see very promising numbers, especially on the U.S. market, but we also see a good pickup of awareness also for Europe, which is, of course, our next big growth geography.

[Fredrik Moregard, Analyst]

Sure. Any other -- any additional marketing tools that you're starting to work with in addition to the brand athletes as MIPS team?

[Max Strandwitz, CEO & President]

Yes. I mean there is a lot of different things for the ones that follow-up closely. You see that we have a brand-new website that we launched a couple of weeks ago, really looks fantastic. Much more consumer-centric, really focusing on more like a bias guide for the consumer. So if you haven't had the chance, please review it because it really looks good. Then we have also worked a lot on the in-store execution. MIPS Academy, making sure that the retail staff understands and know-how to sell MIPS in store. And then what is also growing very fast is, of course, e-tail. So we have a lot of e-tail campaigns and also ramping up our activities there. We have a great opportunity to drive sales on etail because, of course, all the etailers like MIPS quite a lot because it's a perfect opportunity for them to charge a little bit for every helmet that they sell.

[Operator]

[Operator Instructions] There appears to be no further questions. I will turn the conference to you for any closing remarks.

[Max Strandwitz, CEO & President]

Yes. Operator, sorry to interrupt. We saw that we got a question by e-mail, and that was -- what are the expectations about your market share and how is competition developing? Like we said, when we close the year, and of course, we will only disclose those numbers annually, we had about 6% of our addressable market. Of course, we are growing faster than the market. So you can assume that we are gaining market share, and we are gaining market share. And when we look at competition, we do not really have any head-to-head competitors as such. So in terms of that, we do not see anything at the moment, which we are concerned about. There is a lot of discussions about WaveCel, like I said also during last call, as long as we get more customers per month, then they get per year, I will still think that we can have a nice head start. And then we got another question also anything new on M&A. And like we said before, we are looking to see if there is anything that can complement our offering. Are scanning the market, but there is nothing big that we're looking at at the moment. So we have no more questions, thank you for listening in. And speak to you again next quarter.