Mips AB

STO:MIPS

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the MIPS Audiocast Teleconference Q1 2022. Today, I am pleased to present CEO, Max Strandwitz, and CFO, Karin Rosenthal. [Operator Instructions] Speakers, please begin.

[Max Strandwitz, executive]

Thank you, operator. Good morning, everyone. My name is Mark Strandwitz, and I am the CEO of MIPS. With me today, I also have our CFO, Karin Rosenthal. I will take you through the quarter 1 results presentation, and if we start with the key highlights of the first quarter.

Despite a very challenging world around us, we had a strong start of the year, with an increase of net sales of 65%. If we adjust for FX, FX we did see a 48% organic growth in the first quarter. So a very strong start. We did see good performance in all our 3 categories. We continued to deliver improvement in EBIT, mainly driven by the higher sales that we saw in the quarter. We have had challenging supply chain in the quarter, mainly related to COVID shutdowns in China, however, very limited impact on sales.

In April, we announced our first top 5 global partnership in safety with uvex safety group, and we are progressing well in terms of the review of our strategic and financial targets and the outcome of that review will be presented on the 9th of June this year.

If we then turn to next page. In bike, we continue to see good sales performance in bicycle helmets. We do see demand mainly in mid- and high-end helmets. Capacity in helmets factory is expected to be in balance again in H2 of this year. And one that follow us knows that there hasn't been enough helmet production capacity in the industry in the last 2 years.

There has been quite a lot of investments to manage capacity. And like I said, H2 it will be in balance again. And then we have also talked retail inventory, and that is expected to normalize by the end of Q2 in line with the previous communications that we have done.

So if we then turn to next page. In snow, we did see very strong growth in the first quarter, good consumer sales in all key markets. And it seems like all the geographies sold well and have very little surplus inventory for the coming season. We continue to outperform the market with existing and new customers rolling out the MIPS technology in a larger part of their assortment. And we also, here, expect to see good demand throughout the year.

If we then turn to next page, I'm now on Page #5. In Moto, we had a very strong performance in the quarter with 150% growth, partly coming from new orders, but you also know that we had a carryover of orders from previous year.

We have done several activities in retail to strengthen the awareness in Moto. We know that if consumers understand what we do, they also prepare to pay a little bit more for a helmet equipped with the MIPS BPS system. And also here, we do expect good consumer demand also in coming quarters.

In safety, we continue to see good development in the category with an even higher interest for MIPS in the category. We also announced in April, our partnership with uvex safety group, 1 of the top 5 brands in the world and, of course, the perfect partner to drive awareness of MIPS globally. We have now, in total, 10 partnerships announced in the safety category, and we have already started to deliver products in tandem. We do expect the volumes increase during this year.

If we then turn to next page. As most companies, we have seen a very challenging supply chain, and we continued to be challenged during the quarter, however, with limited impact on the sales. The key issue that we say was COVID-related shutdowns, mainly in China. Limited impact on increased raw material prices so far. But our longer-term expectation is that we will see cost inflation. And if so, of course, we will do the mitigating prices to offset those increases exactly as we did last year.

We expect supply chain to remain unpredictable, also coming quarters. But from what we know, we have managed it so far -- well so far during the pandemic situation. We haven't missed any order. I'm sure we will manage it better than a lot of companies.

If you then turn to next page, I'm now on Page #8. And if we look at the development of the different categories. We start with sports. There we see good growth, 60% in the quarter. Very strong performance in snow, but we also saw good growth in bike. Motorcycle, even though it's a smaller category still, we saw very strong growth with 150% growth growing both in MX and also in street motorcycle helmet. And in safety, it's still early days. But like I said, the volumes will be picked up during the year.

And with that, I will hand over to our CFO, Karin Rosenthal.

[Karin Rosenthal, executive]

Good morning. 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 65%. Organic growth was 48%, and the difference is fully explained by FX due to a strong U.S. dollar versus SEK in the quarter. Gross profit was up 65% and a gross margin of 72.5%, unchanged versus last year.

In OpEx, we continue to invest behind our strategic priorities, R&D and marketing. EBIT was up 57% to SEK 62 million versus SEK 39 million last year. In EBIT margin, we saw a deterioration with 2%, all related to FX. Underlying there would have been an improvement. Operating cash flow of SEK 37 million compared to SEK 69 million last year. The decrease is mainly explained by paid tax in previous years.

If we then turn to next page, balance sheet and cash flow. We have a strong cash position with cash and cash equivalents of SEK 478 million. And just to remind you, we don't have any notes, our proposed dividend of SEK 5 per share corresponding to 51% of net earnings compared to SEK 3.50 per share last year. Equity ratio of 80%.

Over to you, Max.

[Max Strandwitz, executive]

Yes. So if we then summarize the first quarter, it was a great start of the year despite a very challenging world around us. Good performance in Sports and Moto. We have announced our first top 5 global partnership in Safety. We do expect to be challenged in supply chain during the year and that it will remain unpredictable.

We foresee good consumer demand to MIPS products in all our different categories, and outcome of the financial target and strategy review will be presented in the Capital Markets Day in the 9th of June. And with that, I open up for questions.

[Operator]

[Operator Instructions] We already have 1 question coming Karl Oskar [ Vikstrom ] from Berenberg.

[Karl Vikstrom, analyst]

A few from me. I guess one of the things I was wondering about a bit on the supply issues that you mentioned, where probably also some sort of supply issues will go into H2. Is this a kind of a similar thing to what we then saw in Q4? And also, could you just remind us where in China, most of this manufacturing takes place and what provinces, et cetera? That would be quite helpful.

[Max Strandwitz, executive]

Yes. So thank you, Karl. It's not a thing because there is nothing really happening at the moment that is hitting us in terms of capacity or unpredictability. It's more that we don't know what we don't know. So no, I don't expect the same thing happen in Q4 that we saw last year, which was related to energy restriction.

It's more that in everything that is happening around us, we don't know exactly what to expect. And that's why we say that the supply chain will remain unpredictable, and unpredictabilities about things that you don't know. There is nothing going on at the moment that is hampering us in terms of sales. So of course, is more what we don't know. So hopefully an answer to that question.

And then when it comes to our production, of course, today we have manufacturing collaboration with around 83 different units around the world, 90% of those are still in China. The main part of them are still in the Shenzhen region in China, which is about 2 hours outside of Hong Kong. And it's not because us, that's where a big part of the helmets in the world are being produced. So of course, we will always stay close to our customers when it relates to production.

We do see a shift to other parts of the world. And of course, as we also enter into safety and start to see more volumes there, there is very little part of the production that is in China. Main part of the production for safety helmet is actually in Europe and in U.S. So gradually, you will see a shift of that.

[Karl Vikstrom, analyst]

Perfect. And then in terms of Sport, obviously, Snow did very well. And I think you mentioned in conjunction with the last report that you expected that volumes would come a bit earlier this year. And I appreciate that the demand outlook looks favorable throughout the year.

But could you just remind us kind of the seasonality here, how that works? And I think specifically maybe going into Q2 from last year. Is there, for example, sort of challenging comps of volumes last year that fell into Q2 that you don't expect now. Is there anything there in terms of...

[Max Strandwitz, executive]

In terms of challenging comps, if you had growth of 139% in prior year, of course that's a challenging comp. Does it mean that we still cannot grow? Of course, we can. When it comes to snow specifically, there is nothing that happened really last year that is impacting the comp as such.

What we saw last year is, of course, if you look at the total year in snow, the market actually shrank, but we still managed to deliver a 50% increase in sales in snow, so we're really happy about that. But we don't see any reason why we can't continue to grow in snow also during Q2.

We know that there have been quite strong season in snow helmet in general or in the winter sport industry in general. Even though there has not been fantastic weather conditions around the world, it still have been a really strong season, very little inventory, and we also see high demand for the coming season.

[Karl Vikstrom, analyst]

All right. And also, I was a bit -- just had a question on Moto. Obviously, you recruited some of those volumes that were lost late last year due to the issues in China. 150% growth this quarter, sort of how much of volumes within that are recuperated from last quarter, would you say? It would be interesting to just get a feel for that.

[Max Strandwitz, executive]

Yes. So of course, some of the volumes, like I said also before, is coming from the carryover, but the majority of the volume is still new orders. So we see very good momentum in motorcycle. There is a lot of things happening. We see a big interest for MIPS. So the majority of the sales is still from underlying performance, I would say.

[Karl Vikstrom, analyst]

Okay. One last one for me before I open up to someone else. But just in terms of this new collaboration with uvex, obviously, really, really exciting stuff being one of the top players.

Can you give any kind of feel for what kind of market share they have within that addressable market that you provided or in terms of -- I guess, also, you're launching 2 models now this summer, if I understand it correctly, and then you say probably more to come. How many different models are out there that could potentially use the MIPS system? That will be helpful.

[Max Strandwitz, executive]

Yes. So I mean, if you are top 5, it's a relatively consolidated market. You can assume that they have a big chunk of that market. We haven't announced a specific number, but you can assume a double-digit share of the total addressable market. So they are indeed a big player.

Like you said, they are launching 2 helmets at the moment. In total, they have about 5 helmets that would be specific for use of MIPS and so on. So of course, it's a very interesting partner. It's important to realize that all these partnerships is, of course, always long term.

We normally don't work with partners that's only doing 1 helmet and testing MIPS in the assortment, then we would not announce it like we do. So we have great potential here, but we also need to do the job of getting the sell-through, through and also convince globally that MIPS is the right technology in construction of helmets. But really excited about the partnership.

[Operator]

We have another question from Fredrik Moregard from Pareto Securities.

[Fredrik Moregard, analyst]

First of all, coming back to the lockdowns you experienced in Q1 and expectations of uncertainty, at least, for the coming quarters. Could you help us understand how you're preparing for that supply chain volatility? Are you doing scenario planning? Or how are you preparing for that uncertainty?

[Max Strandwitz, executive]

Yes. I mean this is, of course, not something new, something that we have -- I experienced more or less in the last 2 years. So first of all, what we have done, I mean MIPS has a very strong balance sheet. Why wouldn't we use our balance sheet to make sure that we can become a little bit more flexible?

When we start with the pandemic situation, we had about 1 month of stock of our key components. Today, we have 6 months of stock. Still not a material part of our balance sheet, but really important to use the leverage that we have to really make sure that we can deliver.

Then, of course, it's always a bit more complex when we talk about COVID shutdowns because we don't know exactly where it will happen. When we started, the pandemic situation, we have inventory at 1 place. Today, we have inventory at 3 places with a certain distance to make sure that if 1 area is on the shutdown, you can deliver from another area. So of course, I think we have probably taken a lot of precaution or more precaution that -- than a lot of other companies. And of course, that has served us well.

So I think from proactiveness in terms of being able to deliver, that has served us really, really well. If the whole of China is being shut down, then, of course, we see a different issue, but then it's an issue for the whole helmet industry, because still a majority of all the helmets in the world is produced in China. So we have worked with the flexibility to make sure that they can be delivered to the extent possible.

[Fredrik Moregard, analyst]

Okay. Very good to hear. Then you spoke to some extent about awareness activities, particularly in the Moto category. First of all, do you have any specific white spots in terms of brand awareness on the sports side that you're addressing? Any targeted investments on that?

And then again, when it comes to awareness activities in Moto and safety, where you are a bit behind, if I may say so, compared with the sports side, what kind of activities are you conducting to drive awareness?

[Max Strandwitz, executive]

Yes. So I think it's a very good question, Fredrik. So first of all, white spots. When we talk about white spots. For me the whole of Europe is still a bit of a white spot because there, the awareness of MIPS is significantly lower.

When we started doing our awareness measurements in Europe about 2 years ago, we had about 10% awareness to the average consumer in Europe. And when we closed last year, we are at 35%. So of course, our activities is starting to pay off, but we still have a job to get it to the same level as we have, for instance, in the North American market.

And then when you look at the penetration, today when you look at, for instance, bicycle in U.S., we are a bit more than 50% in terms of penetration of the addressable market. When it comes to Europe, we are not even at 20%. So just doing the penetration journey also from a sales point of view will enable us to drive a lot of sales and also awareness. Because when you look at size, the European market and the U.S. market is almost equal in size.

So for us, our focus in terms of white spots in -- or white spots in Europe is really Europe. And you also see that during the first quarter, we had a growth in the European region or to European-based brands of 118%. So of course, it also starts to pay off.

When it comes to motorcycle, it's a very different animal. When it comes to the much smaller part of motorcycle helmets like MX motocross, for instance, we have a fantastic penetration. We have about 25% of the addressable market. We see a lot of interest, anyone going out riding in motocross motorcycle, most that there is a big likelihood that they will have an accident, and therefore, they are very keen on wearing production -- or protection.

If you look at the Supercross league in the U.S. out of the top 40 riders, 31 of them have MIPS helmets. So I think our penetration there is fantastic. But then when it comes to the bigger chunk of the business in motorcycle, which is street motorcycle, it's much more about image, it's much more about other things. And unfortunately, that rider normally thinks that he will never have an accident, and is actually not that keen wearing a lot of protection.

So there, of course, we have an education journey to do. And if you look at our penetration in that type of helmets is not even 1%. So of course, we still need to do a big education journey. A lot of the awareness building that you do in street motorcycle is actually happening in store.

So of course, for us, it's really important that we start to educate the consumers in-store. We are having collaboration with a bigger motorcycle helmet -- or motorcycle stores in the world to make sure that we start there, really build awareness. Because one thing we know and that all our market share service shows is if the consumers are aware about MIPS, understand what we do, they're also prepared to pay a little bit more for a MIPS-equipped element.

[Fredrik Moregard, analyst]

Okay. Great. And then when it comes to the difference in penetration between the U.S. and Europe, is that an effect of U.S. brands being earlier to implement MIPS? Or is it something about the European consumers' behavior compared to the U.S.?

[Max Strandwitz, executive]

I think it's a mix of both. But the biggest reason is that if you look at the awareness of the average consumer of TBI, which is traumatic brain injuries and concussion in general, it's much higher in the U.S. U.S. have much more awareness of actually what happens when you're hitting your head into something, you have the whole discussion about American football.

MIPS launch in the U.S. really started with an article of -- in popular science about concussion in the football industry, and that has really paveed a bit of the way for MIPS in the U.S. market. So I would say that the average consumer in the North American market is probably 5 to 10 years ahead when it comes to awareness about how to protect your brain and also the issues around TBIs and so on.

So there, of course, we have a job to do. It's starting to pay off when we start to see that the consumer is getting more aware. But there is, for sure, a head start in the North American market.

[Fredrik Moregard, analyst]

Okay. Great. The last question on my side, it looks like you're stepping up hirings sequentially. I think you ended the quarter with 8 more people than you entered the quarter with. First off, any specific areas that you're staffing up?

And secondly, how should we think about the pace of hiring throughout the year? Is there sort of an outlier with more hires than we should expect going forward? Or are you deliberately ramping up your employee base?

[Max Strandwitz, executive]

Yes. I mean if you look at where we started or where we were when we started the pandemic, we were around 50 people. When we closed this quarter, we were a little bit more than 80 people. So of course, we are staffing up.

The key areas where we are increasing our headcount is, of course, in our strategic priorities, which is in R&D. We, of course, always want to continue to invest in our product to make sure that we have the most relevant consumer offering. We are also increasing our headcount in marketing. And there, of course, it's not so much of a cost increase, it's more of a headcount increase.

A lot of the work that we are in-sourcing at the moment has previously been done by agencies. But with the pace we are moving, with amount of activities we are moving, we want to have that in-house. So there, of course, if you in-source a person in marketing, it doesn't mean that the total cost will increase because it's just a shift between outsourced to in-source and so on.

Then in sales, in sales of course, our task has become -- or has become a little bit different because, especially in safety category. There, we recruited our first person in Germany for instance, we are looking into people, also in U.K. and in the U.S. market. And that more to start really educating all the construction companies and so on.

We do see a lot of interest in MIPS, but it's still very much on an education journey. So the whole ramp-up of the safety category for the right reasons is, of course, in the evolving headcount.

Will it continue to increase with the percentage increase that you have seen in the last 2 years? No, it will be slightly slower. But of course, we will not head -- or hold back in terms of investing on the right headcount to deliver according to our strategic priorities.

[Operator]

We have another question from Daniel Thorsson from ABG.

[Daniel Thorsson, analyst]

I have 2 questions. The first one is, we saw the launch of Lazer KinetiCore 4 weeks ago. So now we have 3 other kind of competing technologies also getting 5 stars in the Virginia Tech bike helmet test. Do you see any risk of these technologies being available for more than just 1 brand? I guess that Bontrager's exclusivity and WaveCel must come closer to them, for example.

[Max Strandwitz, executive]

No, I think -- I mean, first of all, the KinetiCore is, some call it, the technology. I think we have about 6 to 8 brands in our portfolio that is using a similar type of technology. However, they don't call it a technology, because this is the way a helmet has been constructed in the last 20 years, especially in motorcycle helmets.

You normally make different kind of like hollow structures in the form of the helmet in order to manage densities, in order to reduce weight and so on. So it is not really a technology as such. And therefore, of course, it's different, or difficult for me to understand why something or someone will pay for something that they already have. So that risk, at least, is very limited.

And then, of course, the whole 5-star rating of Virginia Tech is becoming maybe a little bit redundant in terms of that, because, yes, they have 5 star, they are the lowest ranked helmet in the 5 star. And out of 140 helmets or close to 150 helmets that has been tested, they hold a position between 70 to 80 in terms of the rank. So of course, yes, 5 star, but you can, of course, always do a slightly better job when it comes to address rotation.

So our other customers that is using this type of technology is not addressing it as a rotation technology. Of course, we have tested the technology. We have tested technology as such. And we don't see any superior performance in that helmet versus another helmet without MIPS.

So we know it. We have seen it and so on. When we look at competition, and I've said that before, it's actually not the brands that will launch rotation and motion technologies because today, they are still less than 10% of our total sales, and that's the total amount of competition, versus 90% of the market that we don't have as a customer today.

If we always start looking back and see what others are doing, if they are not a superior technology, and of course, we haven't found that superior technology, I think it will be slowing us down. We try to look forward. We try to run as fast as we can.

I think there will come more competition, I wouldn't be surprised. But as long as we keep the head start to make sure that we have a superior technology, we have a stronger awareness of our brand than anyone else in the industry, and the consumer preference is the MIPS, then I still think that we have a great opportunity to keep that distance.

[Daniel Thorsson, analyst]

Yes, that makes sense. Do you know -- just a round up, do you know when the exclusivity for Bontrager and WaveCel end?

[Max Strandwitz, executive]

No, I actually don't know. I mean we have seen them out in the market trying to sell the technology. We haven't seen any more brands launching. So it will probably happen, but also you have to realize that the technology as such is not that cheap. It's quite an extensive technology and so on. So when it comes to relevant competitors and so on, WaveCel is not the one that we have on our radar screen.

[Daniel Thorsson, analyst]

Yes, fair enough. My second question was related to safety here. So we saw the brand [indiscernible] they announced earlier this winter partnerships with [indiscernible] and [indiscernible], for example, with a MIPS helmets. Are these helmets now available for their employees to choose from? And have you seen that contributing to sales to any extent so far? Or are you expecting the volumes to come in the second half of the year from this specific customer, for example?

[Max Strandwitz, executive]

Yes, we have seen a little bit of availability in terms of those type of helmets. There is a lot more helmets coming in. So I would say that the main part of that contribution, we will start to see basically in Q2 and onwards.

[Daniel Thorsson, analyst]

Okay. And have you heard any first like feedback or feelings from the employees at these firms [indiscernible]?

[Max Strandwitz, executive]

Yes. I mean, yes, we have talked to some employees and so on, and we also heard from the unions that they are, of course, pushing MIPS quite a lot because, of course, they want to have relevant protection also for their union members and so on. So at least we're off to a great start.

[Operator]

We have another question from Emanuel Jansson from Danske Bank.

[Emanuel Jansson, analyst]

I think a lot of my question has already been answered, but coming back quickly to the Lazer situation with their new technology. Have you decided yet what to do about collaboration with Lazer? I mean, as it might be kind of messy being connected to several different technologies. I mean because they are also selling MIPS still, I guess.

[Max Strandwitz, executive]

Yes. I mean, from having several different technologies, I don't see that as an issue as such. I mean, Bontrager, they still use MIPS in their like road helmets, in the toddler [indiscernible] helmets and so on, and also their most sold helmets. So for us, it's not a contradiction. And I believe it's always good to have relevant comparisons in the industry. I never think it's good to have a monopoly, and that's not what we are trying to promote. I think it's always good to have relevant of things on the market.

For me, it's more a bit strange on the marketing claims and so on. So that is probably what I would object to. Of course, we would never discuss our collaborations with different brands in public. They are a small customer of ours, and they have around 1% of our total sales. So we will take the decisions that is right for MIPS and the consumers, but it hasn't been decided yet.

[Emanuel Jansson, analyst]

Okay. Perfect. That makes sense. And also coming back to the Safety division and the new collaboration with uvex. I mean the global player, they are from Germany, right? And does uvex provide a good entry point into European market? Or is it worldwide? Or how should we view it?

[Max Strandwitz, executive]

Yes. I mean uvex has mainly a presence on the European market with a very strong foothold in Germany. That's why we're really happy about the German market. And -- but they also have exposure to the whole world. They also have a subsidiary in the U.S. market that is also starting to gain some traction.

But I mean, also in terms of these type of collaborations when you are expanding your horizon and also going to new market, of course, it's always good to have something new to talk about. And then, of course, MIPS becomes a very relevant technology in that safety story.

[Emanuel Jansson, analyst]

Okay. Perfect, good. And last question from my side and giving also the supply chain and uncertainties in China, for instance. And do you have a feeling on what's the difference between the situation in Shanghai and the Shenzhen region as of now?

[Max Strandwitz, executive]

Yes. I think -- I mean, even though it's a big lockdown in the Shanghai area, I think that the main difference is probably the approach. Because what we saw in mid-March when we also announced the press release, was that they shut down a total region of around 100 million people.

Of course, when they did that, a lot of the factories starting to push the government and said that if you shut down areas like that, you need to compensate us. And then all of a sudden, 2, 3 days later, all the factories were open again and they took a little bit more selective approach.

And that's what we also see in the Shanghai area, is that they have something in the news, something which is called close -- closed-loop production, which means that you're allowed to operate your production, but still all the workers need to be kept within the factory, so to say.

It sounds a little bit horrible. But of course, that's what they do. So you make sure that you don't spread the contamination further and so on. So I would say that the key difference between Q1 and Q2 is that they are addressing it much more thoroughly and much more specific to targeted areas, rather than doing a COVID approach on the 100 million area, which, of course, is a lot easier to manage.

Thank you, everyone, for listening into the call. Do make sure that you take the opportunity to listen in or even visit us on the 9th of June when we have our Capital Markets Day. If you don't have that possibility, speak to you again after the Q2 report. Thank you, everyone, for listening in.