Mips AB

STO:MIPS

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the MIPS Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would like now to turn the conference over to Max Strandwitz, CEO. Please go ahead.

[Max Strandwitz, executive]

Thank you, operator, and good morning, everyone. My name is Max Strandwitz, and I am the CEO of MIPS. And with me today, I also have our CFO, Karin Rosenthal, and we will take you through the results presentation of the Q2 2022 results.

So first of all, if we go to the second page. And if we look at the key highlights of the quarter, we had a very strong quarter with a net sales growth of 45%, 25% if we adjust for FX effect. And that, of course, is a very strong number since we were up against 139% prior year growth comparator, so really strong numbers.

If we look at the year-to-date number, we are at 53%. Of course, doing the same adjustment for FX, we see a net sales organic growth of 33%.

We saw good development in all our categories despite very challenging market conditions. We did deliver a strong improvement in EBIT, mainly from higher sales. We did not actually experience any major disruption in supply chain during the quarter. And also in June, we did announce our new strategy and financial target, which we presented at our Capital Markets Day.

And the new financial targets are, first of all, we want to grow more to more than SEK 2 billion by the end of 2027. We want to deliver an EBIT margin of more than 50% and also during the time distribute more than 50% of net earnings as dividend payout.

If you then turn to next page, and we go into the category development. First of all, if we look at our main category, which is Sports, we saw strong sales in the quarter, mainly driven by very strong sales in snow helmets. It was a good quarter in Sports with 48% growth. If we look at the year-to-date sales number, that's now at 52%. Snow continues to be the main driver of growth, but we did actually experience also growth in bike helmets during the quarter.

Retail inventory of bicycle helmets have now been restored. However, we still see unbalanced inventory with a lot of inventory in the lower price points and low amount of inventory in the higher price point. We see good momentum with high number of customer implementation projects. We do see a short-term uncertainty in bike. Longer term, the Sports category outlook remains very strong as we indicated also in our Capital Markets Day in June.

If we then turn to next page. I'm now in Page #4. In Moto, we saw good development in Moto, also there despite a very strong comparator in prior year, where we actually grew 370%. And despite the very strong growth comparator, we still managed to deliver a 14% net sales growth.

We see good development in both on- and off-road elements and the Moto sales have increased significantly during the last quarters and is becoming a much more material part of the MIPS sales. We have been very active in Moto and that, of course, starts to pay off.

If we then go to the next page, we look at the Safety category. In Safety, we still see modest sales. However, we do see that the pipeline is filling up and volume will be more material throughout the years. We have now in total 10 different helmet brands that has launched helmet with MIPS so far. We did also announce our partnership with the U.K. largest distributor, Arco, during the quarter, and the partnership is about increasing awareness about workplace-related head injuries and it's a really important project for us to drive awareness and progress for the U.K. market.

We have also started to establish an organization to drive awareness and sell through on our different markets. So we had people starting 1st of July, both in the U.S. market, but also in the very important German market. No change to the previous communication. Volume will increase during 2022.

If we then go to next page, a very short update on supply chain. We continue to see a challenging supply chain. However, we didn't see any impact on sales during the quarter. We still see limited impact from raw material cost increases. Cost inflation is expected longer term. We did increase prices, as you remember, last year. And if we see cost inflation, of course, we will take mitigating pricing to offset that.

Supply chain is expected to remain unpredictable for us also coming quarters.

If we then look at the category performance, and, of course, we organized in 3 different categories. We start with the first one, which is Sports. There we saw 48% growth in the quarter, 52% year-to-date, and, of course, driven mainly by snow, but also promising to see that we saw growth in bike during the quarter.

If we look in Moto, we did deliver 14% growth, 370% growth compared to in prior years, a really strong set of numbers. And then if we look at the year-to-date performance in Moto, we are up 56%. And in Safety, it's still early days. But like I said, volumes will come during the year and pick up as we go into next year.

With that, I hand over to our CFO, Karin?

[Karin Rosenthal, executive]

Good morning. I'm Karin Rosenthal, CFO of MIPS, and I will take you through the financial part of the presentation. We saw strong development in the second quarter with 45% net sales growth and a 25% organic growth. And the difference is fully explained by FX due to a strong SEK versus -- strong U.S. dollar versus SEK in the quarter.

Gross profit was up 45% and gross margin of 73.4%, down 40 bps versus last year due to sales mix. In OpEx, we continue to invest behind our strategic priorities, R&D and marketing. EBIT was up 48% to SEK 107 million compared to SEK 72 million last year. And EBIT margin of 51.7%, up 1 percentage point versus last year.

If we look at our financial KPIs, 25% organic growth, 52% EBIT margin, and SEK 55 million in operating cash flow.

If we then turn to next page and look at the development for the first 6 months. We had a strong development with 53% net sales growth and a 33% organic growth, fully explained by FX.

Gross profit was up 52% to SEK 250 million, with a gross margin of 73%, down 30 bps due to sales mix. In OpEx, we continue to invest behind our strategic priorities. A strong EBIT was up 62% to SEK 168 million compared to SEK 111 million last year. An EBIT margin of 49.1%, down 30 bps versus last year.

If we look at the financial KPIs. Organic growth of 33% and EBIT margin of 49% and operating cash flow of SEK 92 million.

If we then turn to next page, we are now on Page 10, balance sheet and cash flow. At the end of June, we had cash and cash equivalents of SEK 398 million. We have a very strong cash position. And important to point out that MIPS don't have any loans. We had an operating cash flow of SEK 55 million in the quarter compared to SEK 56 million last year. The cash flow has been impacted by an increase in accounts receivables due to increased net sales. We saw a record high net sales in the quarter. In May, dividend of SEK 5 per share was distributed to our shareholders, and we had an equity ratio of 74%.

Over to you, Max.

[Max Strandwitz, executive]

Thank you, Karin. So if we then summarize a very successful quarter. So first of all, record sales in the quarter with improved profitability. We see an overall good demand for MIPS product. Bike demand unpredictable short term, longer term demand is expected to remain strong. Moto and Safety will become a much more material part of the MIPS sales. We continue to have a high amount of new helmet implementation projects, strong momentum in all our 3 different categories. And in June, we did update our strategy and financial targets, and we are fully on track to deliver against those targets.

And with that, we open up for questions.

[Operator]

[Operator Instructions] The first question is from Carl Deijenberg of Carnegie.

[Carl Deijenberg, analyst]

So a couple of questions from my side. First, on the inventory levels that you're mentioning here in the bike category and the imbalance between budget and premium products. Would you say that, that is a temporary phenomenon for the U.S. in particular? Or do you see it as somewhat of a global phenomenon?

[Max Strandwitz, executive]

Yes, I think, I mean, to answer the question, it's also important what has happened during the pandemic and so on. And the issue is mainly related to the U.S. market. What has happened during the pandemic is that since there was lack of components and materials and so on during the pandemic, a lot of retailers, they bought whatever they could. And of course, when you are in a pandemic situation, it's much easier to buy low-complexity goods. So there was more availability of low-priced goods with low complexity. And of course, they bought that because they sourced what they could. Now the consumers is becoming a lot more picky on what they buy.

If you look at consumer demand in the higher price points, there is still quite high demand. In the lower price points, that has ticked off. So a lot of retailers, they are sitting with a lot of low-priced goods that needs to be cleaned out. Of course, we don't know exactly how long that will take, but we will expect 1 or 2 months, and we already start to see now that there is a lot of clean out of stock with a massive amount of sales, especially on the U.S. market and so on. So that is where our worry is.

For us, when we look at bike, and like I said, we grew in the second quarter, we are delivering on our strategic priorities. We are growing with the customers that we already have. And important to realize in bike is that we have all the key customers in the world. If you look, for instance, at the very important strategic objective for us to be able to drive penetration in Europe to the same level as the U.S. market. And the U.S. market and the European market are equal in size. We have been growing with 100% -- almost 100% the last 2 quarters there. And of course, that can still deliver growth.

So yes, there could be some short-term uncertainty in the U.S. market when it comes to inventory levels. Longer term, we are still very confident on the trends that we see. Very strong growth in e-bike. We also see commuting picking up really a lot around the world. And then, of course, we still see a trend of people wanting to stay out and a lot of vacation, especially in the higher price point. So hopefully, that answers your question.

[Carl Deijenberg, analyst]

Yes. That was very clear. And maybe following up a bit on the sort of global supply chains and component shortages on premium bikes in particular, would you say that this is sort of incremental improvement on the supply side there, just comparing at the end of Q1 versus we are today? Or is the sort of near-term visibility and uncertainty still very, very high there?

[Max Strandwitz, executive]

Yes. From our side, we actually haven't experienced any major disruption in Q2. There were some lockdowns in China. It didn't impact us dramatically and so on. So from a supply side, it actually worked out quite well. It's also important to realize that despite the whole pandemic situation, we haven't missed any orders. But of course, we know that there were some capacity issues with helmet manufacturers around the world. That has eased up a little bit and the availability of goods is now better than it has been in the last 2 years.

[Carl Deijenberg, analyst]

Okay. Perfect. And maybe a final question on that topic, because there are some sort of retailers witnessing, obviously, the visibility in the spot market on premium bikes extremely low. You don't know if you can take delivery in 3 months or in 1.5 years from now. So have you seen any -- or have you heard anything about dealers or retailers sort of canceling orders on new models on premium bikes in particular due to the high uncertainty within deliveries?

[Max Strandwitz, executive]

No. And actually, I mean, if you look at premium bicycles, there is still high demand. If you want to order a high-end gravel bike today, you probably still need to wait a good part into next year. So there is still long lead times on those. Also, if you want to have a premium road bike, there is still long lead times on those. And we haven't heard any cancellation. I think when you look at consumer confidence today, I think you need to separate the consumer in 2, even though, of course, you can't do that.

In the low-end segment, that consumer is a lot more worried than it was probably 6 months ago. When you look at the high-end consumer, we still see a very high demand, and they still want to have good products. So when you look at the consumer, I think you need to distinguish between low-end consumers and high-end consumers. And the high-end demand, if you go into any bicycle shop today, you probably will also hear that they still see good demand on bicycle products and especially on high-end products. And of course, that we also still see at MIPS.

[Operator]

The next question is from Emanuel Jansson of Danske Bank.

[Emanuel Jansson, analyst]

Thank you for a good presentation. And as well I have a couple of questions from my side. And I think if we start with the bike segment. And I wonder, can you give us some indication of how much the bike segments for mix grew in the quarter? And I suppose it continues to grow faster than the underlying market. And are you still confident that the underlying market will grow around 10% in 2022, still?

[Max Strandwitz, executive]

Yes. So of course, we grew with more than double digit in the quarter. And of course, we will grow more than the market since we are still gaining market share, we are still penetrating a lot of our customers' assortment, and we also do geographic expansion. So yes, we will grow more than the market. And when it comes to the expectation of the bicycle market, we do not expect a 10% growth for the year, but more a flat-to-negative growth of the total market. And of course, that has nothing to do with MIPS, but more the market in general. Since we are doing better than the market, you could still expect some growth in the bicycle market.

[Emanuel Jansson, analyst]

Okay. Perfect. And the growth in the quarter, was it mainly through existing customers equipping MIPS into more models or as well also implementing into new customers?

[Max Strandwitz, executive]

No, that was mainly existing customers that already had MIPS and then expanding in their assortment.

[Emanuel Jansson, analyst]

Okay. Perfect. And I think I got one more question from my side. Can you please elaborate a little bit more on the increase of accounts receivables in the quarter, which grew around 19% from last year, while sales grew around 45%, please?

[Max Strandwitz, executive]

Yes. So I mean, shortage of cash is, of course, a problem in most of the industries and so on, and we see that also. We do have very little credit losses. So far, in average, I think we had 0.09% of our total net sales, which is, of course, a small amount. All our customers are paying, and we have not someone that stopped paying and so on. But yes, we have seen the same increase as you see. We see the same numbers, of course. But from our side, we don't see any worrying trends yet. If needed, then of course, we will also tighten our accounts receivable, but so far, nothing that has forced us to do that.

[Emanuel Jansson, analyst]

Perfect. And if I may, just last question here as well. What should we expect from the upcoming Q3 report and regarding the bike segment, because I guess it's a very tough comparables?

[Max Strandwitz, executive]

No. And of course, we are up against a tough comparator. What we do now is that we will, of course, since we are gaining market share, do better than the market in general. How long exactly or how many months it will take to clean out the stock and to start reordering and so on, we don't know exactly how long that will take, and that's why we say that there is a bit of uncertainty in the market. But at least we will do better than the market. That's all I can say.

[Operator]

The next question is from Daniel Thorsson of ABG.

[Daniel Thorsson, analyst]

Yes. My first question is on the 25% organic growth in the quarter. How much was price versus volume driven here given that you raised some prices last year and you also say now that you mitigate recent cost inflation with slightly higher prices?

[Max Strandwitz, executive]

If you take an average on the net sales, it's about 2.5%.

[Daniel Thorsson, analyst]

2.5% price increases in this quarter year-over-year?

[Max Strandwitz, executive]

Yes.

[Daniel Thorsson, analyst]

Okay. Excellent. On the gross margin here ahead into the second half of the year, if we assume the bike contribution to be slightly lower than historically, Safety coming up a bit. Is there any costs coming up from inflation? Is there any reason we should expect like the 73 percentage points gross margin to differ materially in the second half of the year given the changed product mix?

[Max Strandwitz, executive]

No. I would say that around where we are today is where we expect to be also. We don't see any near major deterioration. You saw 40 bps in the quarter and that's relating to a mix effect. And what we mean with the mix effect is that we do a lot of customer projects and they are lower in margin. So of course, that can have an effect on the total margin picture, but nothing different that we see other than the 73% that you talk about.

[Daniel Thorsson, analyst]

Good. And then my last question. As an organization here, what do you see in terms of growing the organization in the second half of the year? Any empty spots you would like to fill? Or how active are you on the recruitment market, so to expect at the end of the year, roughly?

[Max Strandwitz, executive]

We are, of course, still recruiting a lot of people to make sure that we can continue to deliver on our strategic ambition. If you look at the last 2 years, we're almost doubled in headcount because, of course, it made a lot of sense to recruit more people. The areas which we are focusing on at the moment is, of course, we are putting together an organization for the safety category because there it's a lot about driving awareness. We have 2 more people coming in at the start of this quarter to make sure that we can drive awareness to the point we want. We are also investing a little bit more on the R&D side because, of course, with our strategic ambition to also do more in the helmet, we also expand that capacity and so on. So a bit here and there. We do not expect to double the amount of people that we had like we did in the last 2 years, but there will still be more recruitment.

[Operator]

The next question is from Karl Oskar Vikström of Berenberg.

[Karl Vikstrom, analyst]

Just a follow-up on 2 main points. I think most things have been addressed. But when it comes to bike growth going forward, obviously, focuses on taking further share in Europe. Could you just kind of develop on, with the existing -- are you currently with all the necessary customers you need to reach a similar level, I guess, on market share? And then also, if you could just kind of remind us your estimates of your market shares in the U.S. versus Europe?

[Max Strandwitz, executive]

So first of all, yes, we have had a strategic project a couple of years ago, where it was really to make sure that we land the key European customers and we have them. So if you look at the key German customers, because if you want to win in Europe, Germany is really important. And there we have all the 4 key customers, which is Uvex, Alpina, then you have CUBE, and you also have KED, and we have all of them on board, and they are expanding their assortment with MIPS and so on.

If you look at the penetration rate that we have had, it has been around 60% in our addressable market in U.S. But if you look at the European market, we were just a little bit more than 10%. So of course, a big opportunity to grow by just driving penetration, and that is exactly what is happening at the moment.

[Karl Vikstrom, analyst]

Yes. Okay. That's clear. And then just final from me, back to the receivables and operating cash flow. I mean, I appreciate that part of it is that you're growing a lot. But also if we look historically, last year, you grew quite significantly and cash flow held up quite a bit better. Could you just explain in a bit more detail why that's not happening this year, I guess, because year-to-date now operating cash flow is about 26%, which is a bit of a disruption?

[Max Strandwitz, executive]

No, I think it's a very good question. Normally, what you see today is that the lead times has more than doubled. So all of our customers have a lot of product at sea. The lead time from factory until you actually would be able to sell the product has more than doubled during the pandemic situation. And of course, that puts a lot of constraint on cash. We do expect that, that will normalize over time, and we will go back to much more normal lead times and so on. But of course, we are supporting them also on that. When things are normalizing, we will tighten and you will see us going back to the same cash flow again.

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Strandwitz for any closing remarks. Thank you.

[Max Strandwitz, executive]

No. So thank you for listening into a very strong quarter. I hope that you all have a nice summer and nice holidays. And of course, we will go on holidays for a couple of weeks and speak to you all again in August. Thank you all for listening in.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you.