Mips AB

STO:MIPS

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the MIPS Q3 Report 2020. Today, I'm pleased to present to you CEO, Max Strandwitz. [Operator Instructions] Speaker, please begin.

[Max Strandwitz, CEO & President]

Yes. Good morning. My name is Max Strandwitz, and I am the CEO of MIPS. I will take you through the Q3 results. And if we start with the key highlights, we did see strong performance in the quarter with 94% net sales growth. We did see an organic growth of 108%, and the increase in sales is mainly driven by sales to bike helmets, but you also need to remember that we had a soft comparator in prior year due to the implementation of tariffs. We continue to see high customer interaction with a large amount of new projects in all the 3 categories we operate in. We did launch our first Team MIPS, and our first athlete out is the skier Henrik Harlaut. We do see good consumer demand, mainly driven by sales to bike helmets, good growth anticipated also coming quarters and our long-term financial target remains intact. And if we then turn to next page, I am on Page #3. And if we start with bike, we do have a high demand for solution in bike helmets. I don't think that anyone has missed that there is a large demand for bike and bike helmets and anyone that tried to buy a bike helmet or a bike in the quarter have struggled. Inventory in retail are very low, and we do expect to have a high-demand situation that will carry over to 2021. We see an increase in bike helmets both for commuting and recreational use, and it's all over the world. It is important to note that historically, bike helmets volume has been concentrated in Q3 and Q4. However, due to the extreme demand situation, we do expect high production also to continue into 2021.If we then turn to next page. In snow, we did actually see some recovery in the quarter but still soft numbers for the year. We see an improvement in sales to ski helmet manufacturers in the quarter, mainly relating to late orders due to the pandemic situation. The uncertainty of winter holiday season remains. Booking situation at ski resorts has improved versus last quarter. Infrastructure challenges at ski resorts remains, and that is, for instance, how would we manage restaurants at ski resorts and also how will the ski lifts be arranged. Even if there is a strong season, there is a limited possibilities for brands to react to the sales uplift, given the heavy demand situation in bike and the limited capacity at the factories. Due to the current restrictions, the outlook for the winter season may change rapidly. And I don't think anyone can say exactly when this will end. If you then turn to next page, Moto. We did see strong sales volumes improved versus previous quarter, as we communicated before. We do see a similar trend in Moto as in bike, but of course, not to the same magnitude, but people do want to avoid public transport. More brands is launching with MIPS. We did launch our first solution with BMW in the quarter. Demand is supported by the implementation of the new standard ECE 22.06, which I also started talking a little bit about last quarter, which includes rotational motion in the test protocol, which is exactly what MIPS addressed, and this is actually the first official test that has rotation motion in the test protocol. We do see a good consumer demand, and we do expect it to continue coming quarters. If we then turn to next page, safety. We are lined up for a good 2021. We do see good interest in the safety category, both from helmet manufacturers and construction companies. There is an intensified debate and media attention around work-related injuries with focus on brain traumas. And MIPS will publish a scientific publication within short, explaining the injury statistics and how brain injuries are overrepresented in serious accident and why it's important to address that. We do only announce new brands when first orders are delivered, and we do see an increased interest on MIPS internationally, and volumes will start to ramp up in 2021. If we then turn to next page. I'm now on Page #7. I'm happy to say that we are launching Team MIPS. MIPS should be the obvious choice when buying a helmet. This is a strategic initiative and to increase the awareness of the MIPS brand. We did start a revision of the brand platform, and that has been done. Several activities have been rolled out. One of them is to create the Team MIPS with MIPS ambassadors, Henrik Harlaut, the most decorated x-games skier in the world is the first athlete to join the team. He is a great MIPS ambassador through his dedication to safety. Traditional athletes will be announced coming months, and this is a great way to increase the overall awareness of the MIPS brand. If we then go to next page. I'm now on Page #8, and if we look at the development of the different categories that we operate in. So first of all, in sports, we saw a good growth of 91% in the quarter. We now have 102 brands in the sports category, which is up 3 versus the last quarter, 2 more brands in snow and one in equestrian. In Moto, we saw growth of 142%. We have one more brand in the quarter, and that's actually BMW. And in safety, it's still early days. But as I said before, volumes will ramp up in 2021. If you then turn to next page, and if we look at the financials and the development in the third quarter, we did see a net sales increase by 94%. Organic growth was 108%. We did also see a strong increase in gross profit of 91%. Gross margin was down with 80 bps in the quarter to 72.2%. And due to the high amount of projects that we are running, the project revenues that we have in our net pay has an impact of margins. You can sort of say it's the sales mix effect, and that's the explanation by the margin erosion. OpEx, we continue to invest in strategic priorities. EBIT was SEK 55 million for the quarter, up versus SEK 20 million in the year before. There is a strong EBIT margin of 53.6%, and this is actually the first time when we are above 50% EBIT margin. It shows that we have a very scalable business model. And when the -- with a strong growth that we saw in the quarter, that becomes even more visible. And also in cash flow, we saw a strong increase of operating cash flow in the quarter. So if we look at the financial KPIs: organic growth, 108%; EBIT margin, 53.6%; and we did see an operating cash flow of SEK 29 million in the quarter. If we then look and turn to the next page, the development of the first 9 months. We do have a growth of net sales of 24%; organic growth, 27%. We see a similar trend in gross margin. Gross margin is down in 120 basis points to 72.5%. If we adjust for acquisitions, we see a deterioration of gross margin of 60 basis points. And also here, it's an effect of the sales mix, fully explained by the high amount of project revenues that we see. OpEx, we continue to invest in our strategic priorities, which is R&D and marketing. Adjusted EBIT is SEK 92 million. We do see an adjusted EBIT margin of 41%. And when we talk about adjusted margin in year-to-date numbers, it's to isolate the effect of the acquisitions that we did last year. We do not adjust for the cost in Q3. Cash flow, we do also, on a year-to-date basis, see a strong increase in operating cash flow to SEK 66 million. Financial KPIs: organic growth, 27%; adjusted EBIT margin, 41%; and an operating cash flow of SEK 66 million. So now also year-to-date numbers are solid off of a rough start of the year. If we look at the balance sheet and the cash flow, we do see a strong improvement of cash flow from operating activities. Cash and cash equivalents are at SEK 233 million at the end of the quarter despite paying dividend. MIPS does not hold any loans and our equity ratio is 84%. If we then start -- turn to the last page and the summary and summarize the largest quarter so far in MIPS history. We did see a strong quarter, mainly driven by good demand for bike helmet. The increasing demand is expected to continue into next year, assuming no dramatic change to the current situation. We did have an EBIT margin for the first time, above 50% in the quarter. We continue to have high project activity, strong momentum in all the 3 categories we operate in. I'm happy with the rollout of the new brand platform, launching the Team MIPS, and we are in a good position to deliver according to the 2025 plan. And with that, I open up for questions.

[Operator]

[Operator Instructions] Our First question comes from Adela Dashian from Handelsbanken.

[Adela Dashian, Analyst]

Yes. Let me start off by congratulating you on a great quarter. It's good recovery from the first half of 2020. As it relates to my questions, my first question is about the sports category. If you could please tell us how much of sales within this category is related to bicycle helmets versus no helmet?

[Max Strandwitz, CEO & President]

Yes. So thank you, first of all, for the congratulation of the results. And when it comes to, so to say, the proportional of sales relating to bike helmets, almost all is relating to bicycle helmet in the quarter.

[Adela Dashian, Analyst]

Got it. And then secondly, on the safety category. You said that we should expect to see growth numbers in 2021. But how material will that be? And will it show in your sales breakdown? And I mean, what pace do you expect the safety category to be growing at? Should we expect volume from that category to be greater than the Moto category, for example, due to being a much larger market?

[Max Strandwitz, CEO & President]

Yes. I think, I mean, first of all, we are just starting in the category. And like I said, we do see some interest. And like I've also explained before, when we look at our long-term financial targets, the growth priorities are, first of all, grow with the customers that we already have in sports that we are doing already at the moment. The second thing is to replicate what we have done to sports also in the Moto category, and that's the second biggest growth driver. And in the third category, which is the safety category, even though that's the biggest potential category for us, we have just started, and that's why that is the smaller part of the plans. Like I said, it will be a substantial part of our plan by 2025. Exactly how quickly that can go, I don't think anyone can answer. What we do see at the moment is that we see a good interest both from the helmet brand but also from the construction companies. There has been a lot of articles, especially in the U.K. about the severeness of brain injuries at construction sites. And of course, we are reaping the benefit of that.

[Adela Dashian, Analyst]

But do you expect 2021 to be the first year where it will start to show in your sales breakdown?

[Max Strandwitz, CEO & President]

Yes, you will start to see some numbers in the sales breakdown, but it will still be our smallest category.

[Adela Dashian, Analyst]

Got it. And then finally, could you please explain also the difference in margins for the 3 categories? And maybe also the difference in revenue per unit sold?

[Max Strandwitz, CEO & President]

Yes. I think, I mean, MIPS is a small company. We try to keep it quite simple. And that's also one of the key reasons why we have a very scalable business model. So it's not a huge difference in terms of revenue or financial model for us. We do attract a high gross margin, and we do that independently of which category it is. And then we have a very scalable business model, and that's how we operate. Of course, when you look at the safety category, since we start at lower volumes and we have a volume-based price models, you could assume that in the beginning, you could see higher prices. But over time, we expect it to flatten out and being comparable to what we see today.

[Operator]

Our next question comes from the line of Daniel Thorsson from ABG.

[Daniel Thorsson, Research Analyst]

Also congratulations on a very strong quarter, of course. First question on OpEx. That was lower than I expected in Q3 and not specifically to R&D. That is actually declining year-over-year and quarter-over-quarter. What is the really sustainable and temporary OpEx here?

[Max Strandwitz, CEO & President]

Yes. Of course -- and thank you for the congratulation of the results. I think our R&D work is extremely long term, and we, of course, don't manage it on a quarterly basis. For us, it is important to have a long-term R&D plan. If you look at the year-to-date number, we are at 5%, and that is fully within 5% to 7% of the guidance that we have given in our long-term ambition. So yes, you will have individual quarters that might be higher or lower depending on which projects we are running. Long term, we are still sticking to the plan and the year-to-date number of 5% shows that.

[Daniel Thorsson, Research Analyst]

Okay. And are there temporary effects in selling expenses or admin due to less traveling or remote working or anything that you expect to come back a little bit in Q4 or Q1?

[Max Strandwitz, CEO & President]

No. I think, I mean, of course, we are constantly adding and increasing our investment, 2 key priorities like you already started on, which is R&D. And then in marketing, we are continuing to rolling out our brand platform, which you also start to see an effect of. There is, of course, some cost that don't happen in a quarter like Q3, for instance, the biggest bicycle fair in the world did not happen because of the pandemic situation. For us, to just bank on that money is a little bit short term. So what we have done is, of course, to continue to invest behind the brand instead. We also need to be much better at the sentiment, transcending ourselves in a virtual environment. So we didn't sort of say save any of those costs but rather reinvested them into our business. So you will see costs going up. But as you also see in our margins, we have a very scalable business model.

[Daniel Thorsson, Research Analyst]

Okay. Fair enough. CapEx in the quarter was SEK 5 million versus historically, basically nothing.

[Max Strandwitz, CEO & President]

Yes.

[Daniel Thorsson, Research Analyst]

An explanation for that?

[Max Strandwitz, CEO & President]

Yes. And we have just moved or actually in the beginning of January, we moved to new facilities to be able to facilitate our growth plans and also to be able to really show that we are for real in the safety category. When we move, we also started to do a bit of refurbishment of the office. So the SEK 5 million that you saw in the quarter is mainly relating to the improvement of the new facility that we have moved into. So it is a one-off thing.

[Daniel Thorsson, Research Analyst]

Okay. Excellent. A question on the negative net working capital here as well. It is obviously a result of the strong growth. But is this level a normal level based on basically 100% growth rate? And have you had any changes in payment terms either way or bad debt recently?

[Max Strandwitz, CEO & President]

No, we didn't have any changes in payment terms, and we actually didn't have any bad debt in the quarter. We have seen, as you also see in the operating cash flow, that it has improved. Of course, if you grow with almost 100% in the quarter, it will have effect on your accounts receivable. So I would say it's sort of normalized, if you can call a close to 100% core growth normal.

[Daniel Thorsson, Research Analyst]

Yes. That's good. And lastly, a technical question here, but the FX effect in the quarter seems to be minus 14%. But in my model, the USD is only down 8% year-over-year versus this year. Anything I missed out?

[Max Strandwitz, CEO & President]

Yes. What you do is when you have an FX effect on growth, so if you wouldn't grow anything, you will see exactly that number that you see. But since we are growing, the comparator gets extrapolated, and that's why you see almost a double effect on the impact from FX.

[Operator]

Our next question comes from the line of Fredrik Moregard from Pareto Securities.

[Fredrik Moregard, Analyst]

First off, a follow up on Daniel's question on the cost base. Coming back to R&D, if you're going to keep within the 5% to 7% of sales range for the coming years, I would assume that you need to add quite a lot of people going forward to that organization to drive cost. Can you give us some hints of where you think you need to add employees to support your growth?

[Max Strandwitz, CEO & President]

I mean when we talk about our R&D costs, we have 2 different time horizons. One is our product development work and our new solutions. And as you know, we are adding new technical solutions all the time, and we are putting a lot of investments into that. We also come out with new solutions in constructions to be able to better adapt to that categories.And then we also have the long-term R&D work, and that's the work that is heading up by Peter. And that is what is our next steps when it comes to helmet development. There, we are increasing our investment in FTE modeling to really be able to do virtual testing, experimental testing of helmets before they even exist. And that you sort of see already in the car industry, and that is something that you will never manufacture a car with actually knowing how it will perform. And we are doing similar type of investments there, so we are recruiting FTE engineers to also to be able to offer that kind of service to the brand that we're operating in or with. So there is 2 things that we're investing into our R&D, short term to develop new products, long term to make sure that we have the right capabilities for the future and that we always have the superior technology.

[Fredrik Moregard, Analyst]

Okay. Very good. On the sales teams, I guess, first of all, the sports team that you have or the selling team for the sports categories, how set do you think that is? Or do you need to grow that in order to address the sports categories even further? Or are you -- so it'd be more or less fixed with regards to that cost base and adding cost on the sales side would rather be to Moto on the safety categories?

[Max Strandwitz, CEO & President]

Yes. I think on the sports side, there, of course, we have been going into more of a penetration game, and you could probably see 1 or 2 person being added over the years, but I don't see a big expansion into that category. And then when it comes to motorcycle, we will probably assume that it could also be 1 or 2 heads that would be added. And then when it's been to safety, it's not necessarily salespeople that we need to add. The market is quite concentrated and it's not like there is an enormous amount of bigger brands that we operate. There, the go-to-market model is different, and it's much more about education. It's about copartnering with the brands to go out to construction companies and explain why you need helmets. So if you still add to the same thing, yes, then you will see more people coming on board. But construction or industrial helmet is quite scalable, because it's a much more concentrated market than we see in the other categories.

[Fredrik Moregard, Analyst]

Okay. Very good. Question on the industry capacity. You say that you expect the bike boom to spill over into 2021. Are you hearing anything from customers about considering capacity expansions and so on? And how long do you think it would take to refill inventories at the current production pace?

[Max Strandwitz, CEO & President]

Yes. I don't know any exact number, but the view of the industry is that this will continue somewhere into mid-2021 before all the stock has been replenished. There is capacity expansion. There is a couple of new factories opening up in China at the moment. We all know with factories that it takes some time to commission them and so on. But yes, there is more capacity being installed in the industry.

[Operator]

Our next question comes from the line of Carl-Oscar Bredengen from Berenberg.

[Carl-Oscar Bredengen]

Carl-Oscar from Berenberg here. Very strong quarter. So very good to see that growth is back and that obviously, Q2 was a one-off. I just have a few questions on -- obviously, we're seeing a significant spike through now. People restocking, as you mentioned, it continues to be strong. But this year -- it was sort of weaker comps last year, so I'm not discrediting you for a very strong quarter, but there were some sort of easy comps due to the trade tariffs affecting it last year. But if we look at sort of the growth rate for Q4, which has sort of tougher comps, what should we actually expect in terms of growth? Are we more on the sort of sustainable level in terms of absolute numbers? Or should we continue to see sort of similar year-over-year growth as a percentage for the Q4 numbers? If you can just shed some light on that.

[Max Strandwitz, CEO & President]

Yes. I think if you look at Q3, Q3 is an exceptional quarter, partly because of the comps, but also that we saw that the bike season started earlier. Q4 is the most capacity utilized quarters in the industry of the year. So even though that you see a lot of growth, if there is also a threshold that we need to meet when it comes to capacity utilization, so I think Q3, very exceptional quarter. Q4, we do see a good quarter ahead of us. We do not give any forward-looking statements. Of course, we still hold on to our long-term plan for 2025. But there is good momentum in the industry, so there is no secret around that.

[Carl-Oscar Bredengen]

Okay. Good. Secondly, I mean, if we just look at the wider customer concentration, if we can sort of derive from looking at the different websites and all the brands you work with sort of different models that there are some 25% model penetration based on how many models offered and how many of their comp we've missed. But can you tell us a little bit about sort of -- because you continue to grow a lot within your existing customer base. So how should we think about sort of the penetration and the continued growth trajectory for you just to, I mean, continue to grow really by expanding its product offering through like Bell, Giro and all the other brands. Are the -- because we assume that unit penetration is obviously significantly lower, so can you tell us a little bit about the ability to grow within the existing customer base? And how that could potentially offset if we were to see a flattening curve on new customer wins?

[Max Strandwitz, CEO & President]

Yes. I mean it depends a little bit on which category and which type of elements you talked about. But I assume that you may be concentrates around bicycle helmet. And there, of course, you are right. We are -- the main part of the growth is coming from existing customers. And if you look at the customer concentration, we had 9 out of the 10 biggest brands in bicycle in the world. And of course, we don't only still have quite low penetration. So that's where the growth is coming from at the moment. If you look at what we have included in our long-term plan, it's growth from our existing customers. Even if we get new customers, they will only have a material effect on the long-term plan, because we already have the big ones on board.

[Carl-Oscar Bredengen]

Okay. That's very interesting. And for snow or for Moto, I take that obviously you have still potential to grow in new customers as well.

[Max Strandwitz, CEO & President]

Yes.

[Operator]

[Operator Instructions] There are no further questions at this time. Please go ahead, speaker.

[Max Strandwitz, CEO & President]

Yes. So thank you, everyone. We leave a solid quarter behind us, and let's speak again at Q4. Thank you.