Mips AB

STO:MIPS

Earnings Call Transcript 2021-Q4

[Operator]

Welcome to the MIPS Audiocast for Teleconference Q4 2021.Today, I am pleased to present CEO Max Strandwitz and CFO Karin Rosenthal.[Operator Instructions] Speakers, please begin.

[Max Strandwitz, CEO & President]

Yes. Thank you. Good morning, everyone.My name is Max Strandwitz, and I am the CEO of MIPS. With me today, I also have our CFO, Karin Rosenthal. We will take you through the MIPS year-end results presentation.So if we start with the key highlights. Again we had a good quarter, with 41% net sales growth. If we adjust for currency effect, we saw a 35% organic growth. For the full year, the net sales number increased with 67%. If we adjust for the same FX, we saw a 72% organic growth for the full year. The performance is again mainly driven by bicycle, but we see good consumer demand in all the different categories we are in. We did see strong improvement in EBIT and operating cash flow both in the quarter and also in the year.There is a challenging supply chain in the quarter, main disruption at helmet manufacturers due to power restrictions in China.The Board of Director are proposing a dividend of SEK 5 per share, up versus SEK 3.5 in the year before, corresponding to a 51% ratio to net earnings. Our strong performance have led to the fact that we are initiating a revision of the long-term financial targets, and the outcome will be presented at the Capital Markets Day in June.If we then go to next page. Annually, we disclose a bit more details on our customer, model and volume development. And if we look on how that have developed during 2021: At the end of the year, we have launched solutions with 143 different brands, up 22 versus the year before. Since inception, there has been 883 different models with -- MIPS launched on the market, up 154. And volume increased for the year with 75%, up 5.4 million for the full year to a total of 12.6 million for the year. And if we translate that to our addressable market, we had a ratio of around 10% of our addressable market, so still a lot of growth to go for.If we then turn to next page. In bicycle, the good performance continue. There is good demand in all type of bicycle helmets. The challenge is -- for helmet factories to meet demand remains, especially in the high-end models. Inventory in retail is still low. Our assumption is that it will take at least until Q2 until the retail inventory levels are normalized. And our outlook for bike helmets is still good, and the industry is forecasting a strong market demand also for the year 2022.If we then turn to next page. I'm now on Page #5. In snow, we have been happily surprised by the performance. We saw good growth for snow helmets throughout the year despite a very soft end market in the year of 2021. We continued to outperform the market with existing and new customers rolling out MIPS in a larger part of their portfolio. And we do see good consumer demand in all regions and remain positive also for the year 2022.If you then turn to next page. In Moto, we saw soft sales in the quarter with minus 22% fully explained by bicycle helmets getting manufacturing priority over motorcycle helmets in factories. There is still a good growth of -- in orders, so this has nothing to do with market reality. We are investing to increase awareness in Moto. And we did actually during the quarter run our first-ever media campaign in MX during the fourth quarter, with great results. And we do expect good consumer demand also in this category to remain strong.If we then turn to next page. In safety, we have established a strong customer base in 2021. We have launched partnerships with 9 different helmet brands, with 8 of them already starting to supply MIPS product to the market. We are creating an organization to continue to educate the market and support sell-through with our partners. And no change versus previous communications, volumes will start to increase throughout the year.If we then turn to next page. I'm now on Page #8. We are seeing a challenging supply chain. Supply chain continued to challenge us during the year and the quarter, but so far, we have managed the situation very well. During the fourth quarter, some of the helmet factories that we work with faced power restriction, and that reduced their capacity in the quarter. This reduced the output of helmet, nothing to do with MIPS, but if the helmet is not produced, of course, there is no order for us to miss. And we do expect the challenging situation in supply chain to remain unpredictable also coming quarters.If you then turn to next page. We have continued to invest both behind the MIPS brand but also in our products. In November, at the world's largest motorcycle fair, EICMA, in Italy, we launched our new trade booth built on MIPS' new visual identity, which was greatly appreciated by both customers and also the visitors. We also launched our new concept which is Virtual Testlab, VTL, which is a tool and -- that provides our partners unique capabilities in the helmet design process and also a great expansion in our offering. That was also the fact that we in January acquired the IP rights for a technology designed to optimize the foam materials often used in helmet. The acquired technology will be a great asset to VTL to support our customers in optimizing the design of their helmets.In the quarter, we also successfully ran our first media campaign both in snow and in MX. And this is really a great way to reach a large audience and also to accelerate the awareness of MIPS. We also finalized our new MIPS academy with a 7-step educational program for our customers and store -- in-store personnel. Important to make sure that customers and retail staff understands how to sell MIPS. Our market surveys that we have done shows that, if people understand what we do, they are also prepared to pay a little bit more for a helmet equipped with MIPS technology.If you then turn to next page. The combination of the great progress that we had within sport and Moto and the new customer base in safety, along with the strong market development during the pandemic, has led to a more positive outlook for MIPS' growth opportunities. Therefore, the Board of Directors have decided to initiate a review of the financial targets and the long-term ambition. And the outcome of that review will be presented during a Capital Markets Day in June, so I hope that you all can join then.If we then turn to next page and look at the development in the different categories. In sports, we had a good quarter with 45% growth. We did see 67% growth year-to-date. In Moto, soft quarter relating to phasing of production, nothing to do with market reality. We saw a decline of 22%. For the full year, we are still up 47%. And like I said, in safety, we have established a very good base for future growth.With that, I hand over to our CFO, Karin Rosenthal.

[Karin Rosenthal, Chief Financial Officer]

Good morning. I'm Karin Rosenthal, CFO of MIPS. And I will take you through the financial part of the presentation and the development in the fourth quarter.Net sales increased by 41% and organic growth was 35%. And the difference is fully explained by FX due to a strong U.S. dollar versus SEK in the quarter. Gross profit was up 41%; and a gross margin of 73%, down 20 bps versus last year. In OpEx, we continue to invest behind our strategic priorities, R&D and marketing.EBIT was up 37% to SEK 104 million and an EBIT margin of 52.6% -- a strong increase in operating cash flow of SEK 81 million. If we look at the financial KPIs: organic growth 35%, EBIT margin 53% and operating cash flow of SEK 81 million.If we then turn to next page and development for the full year. Net sales increased by 67% and organic growth was 72%, fully explained by FX. Gross profit was up 68%; and a gross margin of 73.2%, up 50 bps versus last year due to sales mix. In OpEx, we continued to invest behind our strategic priorities.A strong EBIT, up 95% to SEK 326 million compared to SEK 167 million last year and an EBIT margin of 53.6% compared to 45.8% last year. A strong increase in the operating cash flow to SEK 277 million compared to SEK 116 million last year. Financial KPIs: organic growth of 72%, EBIT margin of 54% and operating cash flow of SEK 277 million.If we then turn to next page, we are now on Page 14, balance sheet and cash flow. We have a strong cash position with cash and cash equivalents of SEK 450 million, and we don't have any loans. The Board proposes a dividend of SEK 5 per share corresponding to 51% of net earnings compared to SEK 3.50 per share last year. And equity ratio of 76%.Over to you, Max.

[Max Strandwitz, CEO & President]

Yes. So if we then summarize a strong fourth quarter and close of a very successful year.We did see strong improvement in EBIT and operating cash flow both in the quarter and the full year. Helmet factories capacity has been challenged in the fourth quarter by power restrictions. Those power restrictions are now over, and that was relating to Q4. We do expect supply chain to remain unpredictable also coming quarter like it has been in the last 2 years. We continue to assume a strong demand also for 2022 in all the different categories we are in. And the strong performance that we had in the last 2 years have led to a review of the financial target, and the outcome of that review will be presented during a Capital Markets Day in June.And with that, I hand over to the operator and open up for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Karl Oskar Vikström of Berenberg.

[Karl Oskar Vikström, Research Analyst]

This is Karl Oskar from Berenberg. Just a few questions on my end. I guess the first one is with regards to the power restrictions. [ So you mentioned ] that, that is now sort of over, but you remain kind of cautious on the supply chains going forward. And I just wanted to put that into context. I mean you're mentioning that, this quarter, Moto kind of got left behind because focus was on bike. And you're -- now going forward, you're seeing strong demand for both Moto and then expecting to grow volumes within the safety segment. Are there any risks in your view during perhaps first quarter here or even in Q2 that you will see a similar dynamic where there are such low inventory levels in bike that it will have to be prioritized, yes? And so growth may sort of lag a bit within the Moto and safety. How should we think about that?

[Max Strandwitz, CEO & President]

Yes. I mean it depends a little bit on which side of the coin that you're looking on at. And I think, just to start with, and -- the unpredictable or unpredictability on supply chain is more around that we don't know. I think -- anyone that says that now the pandemic situation is over and everything will go back to normal, I think that's a bit bold because I don't think anyone knows exactly what's going to happen. And you are right. We don't see any effects of the power restriction. If it means that, during Q1, motorcycle helmets will not be produced, then you will instead see a very strong growth number in bikes, so in terms of absolute risks in volumes, that is not something that concerns us. We had a similar effect, if you look also to last year, in Q1, where actually motorcycle helmets in the first quarter were down a little bit more than 60% because bicycle helmets was preferred over motorcycle helmets in terms of production. The quarter after that, you saw a volume increase of 370%. So you can see these effects. Like I said, we haven't changed and seen any different view when it comes to the growth of orders received. We actually have quite good momentum in motorcycle. And when we close Q1, I'm sure that we are back to normal numbers again also in Moto.

[Karl Oskar Vikström, Research Analyst]

All right. That's very helpful. And then another aspect I was thinking of is, as you were mentioning now, growing volumes within safety. Could you just give some color on the kind of dynamics there in terms of maybe volumes within certain models? Does it differ a lot from, let's say, the bike category [ when you enter ] a new model, in terms of the absolute number of helmets within that specific model range? Do you expect kind of higher volumes, or is it kind of similar size? Is -- does that make -- do you understand my question?

[Max Strandwitz, CEO & President]

Yes, I understand your question. And the dynamics is slightly different because, if you take a big bicycle helmet brand, for instance, normally they have around 50 different helmets in their assortment addressing, of course, a lot of different types of cycling sports like mountain biking, e-bikes and so on. When you look at construction companies, even the biggest one, normally they don't have more than 5 different helmets in their assortments. You're lucky if you can get different colors and so on. Because it's very different market dynamics. Normally when you go into a sports shop, people buy the helmets because of certain looks. In safety, they more look at the performance of the helmets. A lot of them like to have the same color for all the helmets and so on. So you get access to a lot more volume in a much quicker time when you go into safety because there is just less helmets. And of course, if there is less helmets but more volume, then naturally you get access to more volume in shorter time.

[Karl Oskar Vikström, Research Analyst]

Yes. That's very helpful. And then one thing I was thinking: If we look at kind of the revenue you generate by model, it seems to increase quite a bit this year. I know you and me spoke at some point about how some of your customers have like kind of a dual setup where they have the same model, one with and without MIPS. And [ you're kind of steering ] away from that and trying to [ load on ] more MIPS. In terms of the revenue per model, is that driven mainly by kind of underlying growth, i.e., sort of the industry volumes you're seeing? Or is it also you taking a larger share within those ranges that you're currently in?

[Max Strandwitz, CEO & President]

Yes. I mean it's a combination of both. And this is a question which we often get is that people look at our [ ASP ] and say, "If it's decreasing, do I need to worry?" And I said no because, of course, as we are starting to reach down, we have technologies that enable us to reach down. The thing I would be worried is if you see that the margin or gross margin is also going down because, of course, then we are not respecting our financial model. And we can reach down also maintaining the gross margin we have. And that, of course, is part of our strategy, being able to reach down maintaining the margin structure that we have at the moment. And of course, with good innovation, you can do that.

[Karl Oskar Vikström, Research Analyst]

Yes. No, that makes perfect sense. I think that's it for me. I'll open up to the rest of the group.

[Operator]

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

[Adela Dashian, Analyst]

Yes. My first question relates to the capacity constraints that you're experiencing in China. And maybe going off of the earlier question, how should we think about growth in the near term? And according to your time line, when do you expect the Moto segment sales to be recouped?

[Max Strandwitz, CEO & President]

Yes. I think, I mean, of course, we don't give any forward-looking statements as such, but again as I said before, we do expect good consumer demand of all our categories and products. And when it comes to the motorcycle category, it's just an issue with 1 quarter, so when we close Q1, I think you will be very happy with the performance in Moto again.

[Adela Dashian, Analyst]

Okay. And then also a question on your plans when it comes to production capacity and different regions and so on in the future. I believe you have previously stated that over 80% of production currently takes place in China. And given the challenges that you've experienced in this quarter and also in earlier quarters, would it make sense to take action to kind of diversify the manufacturing landscape and maybe move productions to other places around the world?

[Max Strandwitz, CEO & President]

Yes. I mean our supply chain strategy is very simple. We try to be where the customers are, yes. We always try to produce as close to the customer for a complexity reason but also for a sustainability reason. We want to avoid transport as much as possible. Today, a lot of the helmets are still being produced in China, so that's where we also need to be then. You start to see some relocations to other parts of the world. If that happens, then we move along. We can move our tooling and equipment in a couple of weeks, so we are quite agile. And that's also how we structured our supply chain setup. I think it's extremely important to distinguish our issues from other issues. And if you look at our issues: During the whole pandemic situation, we still haven't missed one single order. So we actually have been able to delivers all the orders we had in time, which I don't think there is a lot of companies that can do. What we, of course, is seeing as an issue is, when all the helmets cannot be produced, then of course, there is no order for us to miss. And that was the fact in Q4, where some of the factories only were allowed to produce 3 or 4 days a week because they were on power restrictions and so on. And of course, that's sad, but there is very little that we can do about it. I think, over time, there will probably be a sourcing review of all the bigger brands. They will probably relocate. Some of them are already looking at Europe, yes, and so on. And we are already producing our solutions in Europe today. And we will easily move wherever our helmet brand is because we will always close -- or produce as close to their production as possible.

[Adela Dashian, Analyst]

Got it, all right. And then a quick question also on your marketing investments in the quarters to come. I believe you have some quite chunky spendings in Q4. How should we think about that going forward?

[Max Strandwitz, CEO & President]

Yes. I mean long term we said 5% to 7%. It was a bit more in Q4, but it's also relating to we ran a very successful media campaign in both MX and snow, which we haven't done before, with great results. Because, I mean, we want to accelerate the awareness of MIPS as much as we can because, like I said, if people are aware about what we do, they're also prepared to pay a little bit more. So a very important strategic initiative. And you that have been following us a little bit knows that we are not managing our performance and especially not the financial ones by quarters. We always try to do the right thing: invest long term, do the right thing. In this quarter, there was a bit more marketing investments [ that ] we have seen before. We were also participating at EICMA, where we launched our new trade booth, which also followed some investments and so on. So yes, the investments in the quarter is a little bit higher than normal, but we never look at our marketing investment from a single-quarter point of view. For us it's really, really important to do the right thing long term.

[Operator]

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

[Daniel Thorsson, Research Analyst]

Yes. So most other questions were already asked, but I have a question on the organization going into 2022. You increased number of staff quite a lot in Q2 and Q3. Now it was more flattish in Q4. How should we see that developing in 2022? Are you planning to add [ some part-time ] people? Or what's the plan?

[Max Strandwitz, CEO & President]

Yes, yes. We are adding more people because, of course, we still intend to grow. And also we are upping our capabilities. A lot of people look at our head count. And that's a relevant number, of course, but it's not always related to what's actually happened because some of the activities that we are doing when we are hiring more people were actually insourcing activities. We have worked with a lot of agencies. We have worked with a lot of advertising companies and so on around the world. And as we grow and also become a bigger company, some of these type of activities, we want to do in house. So that doesn't always mean that the total costs will increase. In the areas where we will continue to invest is in our strategic priorities. We are investing more in R&D because, of course, we think we have great opportunities there. We are also investing more in marketing. There is a lot of the insourcing activities that we talked about before. I always think that, given that marketing is one of our core strategies and a very strategic ambition for us, it's really important to have those activities in house. And that's what we are doing. And then on the sales side, we see opportunities both when it comes to safety because there, of course, we see a lot more traction. We also want to continue and also accelerate the whole educational journey we do there and also to support the sell-through. And then in Moto, we are still a little bit [ thin ] when it comes to amount of people addressing that category, which is also, of course, a great growth opportunity. So we do those activities because it's the right thing to do. The more people we are, the better difference we can make on the market.

[Daniel Thorsson, Research Analyst]

I see. A follow-up question on safety then for 2022. Should we expect sales contribution to be material?

[Max Strandwitz, CEO & President]

No. I mean long term we expect it to be, [ like ], material. We are ramping up. And we have -- when we launched our 2025 plan, safety was the smallest building block in that plan. We, of course, are a little bit more positive still, but you have to realize that we start from a lower number. We will gradually build up the volume during 2022, but I think within [ sports ] you will also see that the volumes will become more material.

[Daniel Thorsson, Research Analyst]

Excellent. Final question, on the cash position. I mean you have SEK 450 million now in a net cash position. What was the purpose to not distribute the larger share to shareholders in a dividend today? Or put it in another way: How are you planning to put this money into work in the operations really?

[Max Strandwitz, CEO & President]

Yes. I mean, if you look at our -- we have done 4 years of dividend, so far. The average number is 81%, so I think we have a reasonably high dividend ratio. I've always said that the best thing that we can do with the money is invest it into the business. Of course, we are looking at certain acquisitions, if there are things that we can do there to complement our offering and so on. So that's really what we would like to do. I still think that 51% is a large number. Last year, we did 71%; the year before 92%. And [ 3, 4 ] years ago, it was actually 112%, so I think we are still within the threshold that we set up [ to date ].

[Daniel Thorsson, Research Analyst]

But I guess that you are not supposed to use the SEK 450 million in investments in the operations. That will be...

[Max Strandwitz, CEO & President]

No, not in the operations, but sometimes you go out and you look also what happens on the external market and so on. And then it's always good to have a little bit of cash in the back pocket.

[Operator]

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

[Fredrik Moregard, Analyst]

So first off, circling back to the power restrictions that [ you have in ] Q4, is it possible to give us some sense of what that impact was? Could you quantify that in some way?

[Max Strandwitz, CEO & President]

Yes. I mean we haven't actually communicated exactly what the number is. And of course, you also have to put it into relation that not all the helmets could be manufactured, anyway, but of course, it impacted the total output. And it will also impact our sales. Otherwise, we wouldn't have included it. It's not above 10%, yes. It's lower than that, but it had an effect on our total sales.

[Fredrik Moregard, Analyst]

All right. And then when it comes to the first quarter here. I mean we got the Chinese New Year. That's always a potential source of turbulence for the manufacturing operations that you serve. Could you care to comment what you're seeing on the development in regards to the Chinese New Year? Are workers returning to the factories? Or should we expect some additional disturbances from that?

[Max Strandwitz, CEO & President]

Yes. I mean the first factory actually opened on the 7th of -- in February again. And of course, we are keeping a close look on that. This year, it seems like most people are actually returning to the factories. There doesn't seem to be a lot of turmoil in terms of that, so, so far, we haven't seen anything that we are worried about. Long term, of course, you never know, but short term, nothing that we have heard that we are worried without.

[Fredrik Moregard, Analyst]

All right, that's reassuring. And then when it comes to your comments on the inventory rebalancing possibly in Q2. Could you perhaps give us some insight as to what some sense you've been making on that when it comes to production for the first and second quarter? Have you included some substantial production headwinds and constraints to the markets? Or what sort of assumptions are behind inventories possibly rebalancing sort of in the second quarter?

[Max Strandwitz, CEO & President]

Yes. I think, I mean, inventory is, of course, always a bit complicated. And it depends also which region you are looking at. If you look at [ U.S. region ], you start to see inventory at lower price points building up. If you still look at mid-level and high-end level, the inventory -- there is no inventory basically, so there you will still see some production, which normally fits us quite well. Europe, it's actually quite low in inventory in general. And the key difference, and you already saw that in last year, is that when there is no inventory, you [ lose ] a bit of the seasonal pattern that you have seen before, which means that you will have bicycle helmets also being produced in Q2 -- [ I mean ], Q1 and Q2, sorry, similar to what we have seen also last year. I think the positive side that we also see is -- of course, in inventory is that the snow market is doing actually really well. U.S. has opened up in a great way. Nordic is opening up in a great way. And we also see very positive signals from the European market. And of course, that also relates to that we will probably see also a bit more earlier small orders than we have seen in previous years, but the main thing is really that the seasonality effect of the year is being distorted a bit.

[Operator]

And our final question comes from the line of Karl Oskar Vikström of Berenberg.

[Karl Oskar Vikström, Research Analyst]

Sorry. Me again, just one final quick question. In terms of manufacturing for safety, is that done in other factories or other geographies? Or is that kind of the -- similar to that of the other categories?

[Max Strandwitz, CEO & President]

Yes. The high-end helmets, some of them are still done in China because it requires a little bit more of manual input and so on. If you look at the really high-volume runners, they are normally spread all over the world, normally where the helmets brand have their main part of their sales. The production of those helmets are normally highly automated, and therefore the production -- or labor production cost [ is not that sensitive ]. So you have a combination of both, but if you look at the big volume, that's spread all over the world. If you look at more specific helmets, which is normally the high end, some of them are still in China.

[Operator]

Thank you. And as there are no further questions in the queue, I will hand back to our speakers for the closing comments.

[Max Strandwitz, CEO & President]

Okay. So thank you, everyone, for listening in to the call. And strong fourth quarter and a great year. Looking forward speaking to you at the next quarterly results. Also make sure that you pencil in the date of the Capital Markets Day, where we will present our new ambition and our strategies.Thank you, everyone.