Mips AB

STO:MIPS

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the MIPS Audio Account Teleconference Q3 2021. Today, I'm pleased to present CEO, Max Strandwitz; and CFO, Karin Rosenthal. [Operator Instructions] Speakers, please begin.

[Max Strandwitz, CEO & President]

Thank you, operator. Good morning. My name is Max Strandwitz, I am the CEO of MIPS. And with me today, I also have the MIPS' CFO, Karin Rosenthal. I will take you through the highlights of a very strong quarter. We did see very strong development in the quarter with 82% organic growth, great given that we had a 108% prior year comparators. So we were up against a very strong comparator, but still managed to deliver very solid results. Year-to-date, organic growth is now at 95%. So the good momentum really continues. Growth is mainly attributed to a very strong demand that we see on the bicycle market. I don't think anyone has missed that there is a very strong bicycle market out there. We did continue to improve both our EBIT and operating cash flow and they more than doubled during the quarter. Our challenges in supply chain has been very well managed and this has done a fantastic job, which you also see in the numbers. We do see high customer activities, more customers launching with MIPS, and we made strong progress against our long-term ambitions. And to the right, you see the MIPS team member, MIPS AB, celebrating his fourth Red Bull Rampage win as the first cyclist ever. If you haven't seen his final run, you have really missed something because it's epic. So do take the opportunity to see his final Red Bull Rampage race because that was really a fantastic achievement. If we then turn to next page. I'm now on Page #3. We continue to see a very strong bicycle market, like I said. Extreme demand worldwide and in most types of helmet, there is still challenges for factories producing bicycle helmet to meet demand. And therefore, our current assumption is that the low inventory levels on the market will remain and that we will see a good bicycle market also during next year. If we then turn to next page. Now, we see a stronger demand than we expected. We continue to see growth in snow helmets, both in the quarter and we will also see solid growth when we close the year. We are outperforming the market in general and of course, gaining a lot of shares as the winter sport market is doing quite poorly. Still suffering from the rapid lockdowns that we saw in prior year. North America and Nordics are the key drivers of the strong performance but we also see the European brands expanding their assortment with MIPS technology in their portfolio. If you then turn to next page, and the Moto category. We continue to see very strong momentum in the Moto category. It's actually the fastest-growing category, very strong quarter with 117% growth. And year-to-date number is now at 93%. Motocross remains the key driver but we also see very traction in Street Motorcycles. We are launching a significant number of activities to deliver on our ambition to increase awareness in Moto. To the right, you see our newly-signed ambassador, Carey Hart, who is a living legend in Motocross. And then a very important tool for us to really make sure that we drive awareness in the category, and we do expect also to see good consumer demand coming quarters in Moto. If we then look at the safety category, we are really starting to deliver on the ambition. Several new partnership has been launched during the quarter. We have now announced also in connection with the biggest trade fair in construction [A + A]. Nine helmet brands in total, which have launched their partnership with MIPS. Key focus coming months is to support the sell-through with those customers and to increase awareness of mix in the safety market. No change to previous communication. 2021 is about establishing a customer base. We have done that now in 2022. It's really about growing the volumes with those customers. If we then turn to next page. As everyone else, we are facing challenges in supply chain. Supply chain continues to challenge us during the year and the quarter. But so far, we have managed the situation very well. We see issues in logistics, shortage overall material, inflationary environment and power restrictions in China as for many other companies, and we do expect the challenging situation in supply chain to remain unpredictable also coming quarters. If we then turn to next page, I'm now at Page #8. And we look at the development in the different categories. In sports, we saw strong performance, 78% growth in the quarter; 81% year-to-date. Of course, driven by a very strong performance in bike. But actually, the fastest-selling helmet type in the sports category is also equestrienne, where we are growing close to 300% year-to-date. So really happy that we are gaining market shares also in equestrienne helmet. Moto, like I said, the fastest-growing category for us. Growth at 117% in the quarter with good performance, both in Motocross and Street. And if we look at the year-to-date number, we are at 93%. If we look at safety, still early days, but a lot of new promising partnership launched in the quarter. I will then hand over to our CFO, Karin.

[Karin Rosenthal, Chief Financial Officer]

Thank you, Max. Good morning. I'm Karin Rosenthal, CFO of MIPS, and I will take you through the financial part of the presentation. Development in the third quarter. Net sales increased by 81% and organic growth was 82%. Gross profit was up 83% and gross margin of 73.3%, up 110 bps due to volume and sales mix. OpEx, we continue to invest behind our strategic priority. A strong EBIT was up 101% to SEK 110 million, an exceptional EBIT margin of 59.6% in the quarter. We saw strong increase in operating cash flow to SEK 71 million. Financial KPIs. Organic growth, 82%; EBIT margin, 60%; and operating cash flow of SEK 71 million. If we then turn to next page, development in the first 9 months. Net sales increased by 82% and organic growth was 95%, and that's fully explained by FX due to a strong SEK versus U.S. dollar in the year. Gross profit was up 85% and gross margin of 73.3%, up 90 bps due to volume and sales mix. In OpEx, we continue to invest behind our strategic priorities, marketing and R&D. A strong EBIT was at 144% to SEK 221 million compared to last year. EBIT margin of 54.1% and really strong increase in operating cash flow to SEK 196 million. Financial KPIs. Organic growth, 95%; EBIT margin, 54%; and operating cash flow of SEK 196 million. If we turn to next page. We are now on Page 11, balance sheet and cash flow. We have a strong cash position with cash and cash equivalents of SEK 371 million, and we don't hold any loans. Our equity ratio is 78% after dividend payout in Q2. Over to you, Max.

[Max Strandwitz, CEO & President]

Yes. So thank you, Karin. If we then summarize a very strong quarter, we did see very strong sales. Again, driven by high demand in bicycle market. We are gaining a lot of share. The market is growing really fast. And then, of course, that equation normally or -- give you a very growth rate. We also saw good development in Moto and Safety. Strong improvement in both EBIT and operating cash flow. The good consumer demand is expected to continue, assuming no change to current situation. We do expect challenges in supply chain to remain for the coming quarters and we did great progress on our journey towards our long-term ambition. Operator, we'll open up for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Daniel Thorsson of ABG.

[Daniel Thorsson, Research Analyst]

I start off with one related to the challenging supply chain you see. You still report extremely strong growth figures in this quarter. Did the supply chain in practice actually affect you? I thought also the growth would have been even higher without that? Or did you basically do as good as you could?

[Max Strandwitz, CEO & President]

No, I think -- thank you, Daniel. Very good question. So from our side, the MIPS side, we did actually not miss any orders. We haven't missed any orders year-to-date. So we have navigated really well. The issue on the supply chain is mainly related to the factories. If the helmet is not being produced, then of course, we will not get the order, and there is no order to miss. And at the moment, the helmet factories cannot produce enough to meet the demand of the helmet market, so to say.

[Daniel Thorsson, Research Analyst]

Yes, I see, I see. That was kind of what I meant. So if I rephrase. I mean, if they could meet the demand that they actually have, how would that affect the growth rate in this quarter? I guess that you were limited due to the manufacturing side actually couldn't source and supply...

[Max Strandwitz, CEO & President]

Yes, you would have seen -- yes, you would have seen a stronger sales growth and that's also why we indicated that the stock levels will still remain low in retail because they cannot really manage to build stock at the moment.

[Daniel Thorsson, Research Analyst]

Okay clear. And then something on the size or the expected volumes for the 9 brands you have signed and launched product in the market for safety category. Are any of those top 5 or top 10 brand in the world volume-wise? And if not, what is the main factor not having signed any of the larger ones so far?

[Max Strandwitz, CEO & President]

Yes. Thank you, Daniel. So no, they are not 1 of the top 5. Some of them are midsized players, I would say. And I think this also goes back to the history of MIPS. Normally, when you launch in the category, the fastest moving brand is always the smaller ones. They are very keen to be the first ones with new technology in the market. The bigger brands normally take a little bit longer. When they come on board, they launch wider and so on and it's exactly the same thing as we see also in this category.

[Daniel Thorsson, Research Analyst]

Okay. That makes sense. A final question on the balance sheet and the cash flow. I mean related to the capitalization of the company, you have an extremely high equity ratio. You are profitable. What could you do with that position? Are there any M&A you actually look at in the market today? Or anything else you can do without just distributing the excess cash and profits to the shareholders?

[Max Strandwitz, CEO & President]

Yes. I mean this -- bring the cash to the shareholders is, of course, the last resort. We think it's fantastic to always reinvest into our business, and we are doing that. We are not holding back on any investments even though we are delivering a fantastic cash flow. We are scanning the market for complementary technologies or things that will complement our consumer offering. Nothing concrete at the moment. But of course, if there would come something that will fit our portfolio or our ingredient brand structure, of course, we will act on that, but nothing concrete at the moment.

[Operator]

Our next question comes from the line of Adela Dashian of Handelsbanken.

[Adela Dashian, Analyst]

My first question goes back to the safety category. And it's a bit difficult to model assumptions for this category since it's so immature, but also the largest ones. So I would appreciate if you give us any kind of help here. And then to my question, do you expect the ramp-up to be faster than the initial ramp-up that you had in the other 2 categories, for example.

[Max Strandwitz, CEO & President]

Yes. Of course, we don't give any forward-looking statements, but when it comes to the momentum and the buildup of volumes, given the size of mix that we are today, given the market situation and momentum we have, of course, we can accelerate the ramp up, a lot part to them in the other categories.

[Adela Dashian, Analyst]

Got it. All right. And then my final question. I do want to touch upon competition and what you're seeing in the market. And obviously, you've experienced significant growth throughout the pandemic. So do you feel like you've gone further ahead in the race, so to say?

[Max Strandwitz, CEO & President]

Sorry, you broke up there for a little bit. But if I repeat the question. I think that first of all, you asked if there is anything on the competition side. No, nothing during the quarter that would change the picture. And then if we are -- the last part, I didn't really hear what that if we were growing ahead of our own expectation. Is that what you asked?

[Adela Dashian, Analyst]

No, more about since you've had such significant growth throughout the pandemic, do you feel like you've gained further market share or gone further in your rate than you had expected this quickly.

[Max Strandwitz, CEO & President]

Yes. I mean if you look at our long-term target when we summarized 2020, we needed to grow with an average of 23% per year. And of course, year-to-date, we are at 95%. So that's ahead of that assumption. So we are gaining market share rapidly in all the different categories we are in. So we are very happy with the performance.

[Operator]

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

[Fredrik Moregard, Analyst]

Just first off, if you could help us, to some extent, at least piece out the drivers behind the very strong organic growth. I'm thinking about market growth versus you guys seeing in more helmets, being with more customers. The market growth versus increased customer intake and then penetration in the sports category. If you could give some more flavor on that would be helpful.

[Max Strandwitz, CEO & President]

Yes. No, I mean, as we have indicated before, the general assumption of the sports helmet market and especially related to bike is that market has grown somewhere around 20%. Of course, our growth you have already seen because if we look at the sports category, by far, the majority of our sales is in bicycles and we are growing significantly faster than that. So the main part of the growth is still benefiting our brand. It's still gaining enough of the market share. If then the market is also growing, of course, that also helps out.

[Fredrik Moregard, Analyst]

All right. And then thinking just sequentially about the sports sales because in Q2 and Q3, obviously, there's some major step-up in sales in that category. At the same time, I mean, retail inventories were low even as we entered 2021. So what has really changed in the industry that has enabled the helmet brands to really ramp up volumes over the past few months.

[Max Strandwitz, CEO & President]

Yes. I mean there is a lot of things that is happening. And there is not one single answer to the question because there is a lot of different drivers of what actually drives demand. First of all, I think the whole outdoor trend, everyone wants to go out bicycling, that's happening all over the world. And of course, we see the strong effect of that. Then, of course, we also see a very strong e-bike trend. A lot of -- if you look at all the companies producing e-bikes even though they can produce what they sell, they have fantastic numbers. And normally, when you're traveling with a new bike, you travel with a little bit more velocity that requires different kind of helmet. And of course, you see a lot of demand also from that. So the e-bike trend, everyone assumes that the e-bike has won will actually exceed the sales of normal bicycle. There is reports that was published some months ago where they expect that e-bikes will be more in number of unit sales than traditional bikes somewhere between 2025 and 2030. And that, of course, is a very strong trend that we are seeing. And then the third one is the home commuting trend. That's mainly isolated in Europe because, of course, U.S. is not the commute market as such, where we see anyone just dipping out the window, you see a lot of bike commuters in every bigger cities in Europe. And of course, we see a good trend from that also.

[Fredrik Moregard, Analyst]

Sure. I appreciate the demand drivers. I think they're fairly clear. I'm mainly thinking about the factories' capacity to increase sales because at least to me, it looks like market production needs to have been up quite significantly between Q2 and Q3. And is that sort of driven by additional factories, additional capacities coming online as we discussed previously? Or is there anything else that is driving that sequential improvement?

[Max Strandwitz, CEO & President]

No. There is capacity expansion mainly in China. Three major factories have been opened, and I think all the bigger factories have also tried to expand their capacity to meet the demand.

[Fredrik Moregard, Analyst]

All right. And is there any further capacity coming on board? And is it possible to sort of size the impact of 3 additional factories coming on board. Is that sort of a 5% increase in market capacity? Is it 20%? Any ballpark figure would be helpful.

[Max Strandwitz, CEO & President]

Yes. I would say that the capacity expansion that we see in the industry in general is somewhere between 10% to 20%.

[Operator]

We currently have 1 further question in the queue. [Operator Instructions] The next person in the queue is Carl-Oscar Green of Berenberg.

[Carl-Oscar Green Bredengen]

Just a quick question on safety. Can you tell a little bit more about the seasonality for the construction of safety helmet. Obviously, H2 is heavily focused on bicycle elements and you have the snow helmets being predominantly in H1. So if you can just give us any more insights into -- in the very early days, so the safety industry here. But what the typical seasonal production pattern looks like.

[Max Strandwitz, CEO & President]

Yes. I mean if you look at the safety category, I think the great thing is that we have actually not seen any real seasonality like we see in the other types of industry. It seems to be production all year round. And here, there is also normally that a lot of the brands, they have their own production. And of course, they want to utilize the factories also all year around. So not at all the same seasonality pattern that we see in the other industry.

[Carl-Oscar Green Bredengen]

Okay. And in terms of factory production in China. Has there been any shutdowns that you're aware of in any other factors due to the resurgence of COVID over there? Throughout the quarter?

[Max Strandwitz, CEO & President]

Yes, not so much related to COVID. There has been some impact in COVID in some of the ports, but nothing at the moment. What we have seen is, of course, there's some energy restrictions. So there is a couple of factories that have been forced to close for 1 or 2 days and so on. And I think that's the only thing that's happening at the moment, which could affect us at the moment.

[Carl-Oscar Green Bredengen]

Okay. And just lastly, given sort of the tight capacity at the various plants, has there been -- or should we expect that there's a pent-up demand in Q4 or sales production volumes pushed out from Q4 into Q3 from the helmet producer's point of view?

[Max Strandwitz, CEO & President]

Yes, I would more say that given that we are now going into the biggest quarter in the industry, Q4 is already full. If you look at Q1, it's also starting to get full. So if you want to produce helmet today, you need to wait a bit of time. So I think factories are running on full capacity and they're trying to get out as many helmets as possible. If there is excess demand, like we are seeing at the moment is more pushed forward rather than that they can manage the capacity.

[Carl-Oscar Green Bredengen]

Okay. And have the sort of new capacity that's been put on line, is that starting to come through? Or is it still sort of greenfield mode?

[Max Strandwitz, CEO & President]

No, it is coming through. A lot of the ramp-up was started in the beginning of the year. In fact, we're commissioning and they are up and running.

[Operator]

And as there are no further questions on the line, I'll hand back to our speakers for the closing comments.

[Max Strandwitz, CEO & President]

No. So if no further questions, thank you. We are really happy with the quarter and also the year-to-date's performance and speak to you again next quarter.