Earnings Call: Q3 2019

Nov 8, 2019

Ladies and gentlemen, welcome to the MIPS Third Quarter Report 2019. Today, I'm pleased to present CEO, Max Strandwitz. For the first part of this call, all participants are in listen only mode. And afterwards, there will be a question and answer session. Speaker, please begin. Good morning, everyone. My name is Marc Stamitz, and I am the CEO of Med. I will take you through the results presentation of the Q3. So first, if we start with the highlights of the Q3. We do see an increased interest in the MIDS technology across all geographies and across all categories. We do have some very interesting German customers implementing the MIPs technology during the quarter, which is an important factor for us for our accelerated growth in Europe. And for the ones that has followed us, Germany has been a bit of a white spot for us. So we are very pleased to see that we're also gaining ground on the German market. We did see soft volumes in the quarter due to the trade tariffs implementation between U. S. And China. And also, as we explained during the Capital Markets Day, tariffs has been implemented for helmets in September. And as many other industries, we did see a decline before the implementation. And just for you to remember, 75% of our sales are to U. S.-based brands. And out of that, 50% is being sold in the U. S. Market. We do not see a change in consumer demand. On the contrary, there is more and more customers demanding this. For us, this is more a selling to helmet manufacturing issue and eating out of inventory rather change in underlying demand. And we do not see this impacting our ability to achieve our long term targets. I'm also very happy to announce that the innovators of the MIPs technology has been awarded the prestigious Poland prize. And also during the quarter, we did launch new strategic plans and targets to 2025, which was presented at our Capital Markets Day held in September in Stockholm. If you then flip to Page number 3, as I mentioned, we had a couple of new German brands coming on board and in August at the world's largest bike fair, Durobike 3 for MiX new key customer, Ulrex, Altina and Keb launched their first helmet with the MiX technology. And additionally, the brand Cube also launched helmet equipped with MIPS technology, which means that we now have another 4 key brands in Germany helping us to penetrate also the import and German market. We have also renewed collaboration with POC, POC, which means that they are going to launch their first helmet equipped with NIPS, which is actually a child helmet, during the summer next year. And then we will have additional helmets being launched in 2021 2022. And we do now cooperate with all the major brands in the bike and the snow category. And we are in a good position to drive further growth within the sports category. If you then go to Page number 4, like I said, I am very proud to announce that the innovators of the MIPs technology received the Poland prize. And for the ones that don't know, Poland prize is the oldest and most prestigious technical award that you can receive in Sweden. And the price was shared between Peter Helden, who is the Founder and the MIDS Science Officer, Hans Van Holst and Sven Klaven, and they received their award for the work with the MIPS technology. And this is just a further evidence of the strength of the MIPS technology and how it's perceived as a key innovation in Swedish history. If you then go to next page, and as I said in September, we hosted a Capital Markets Day in Stockholm. We did present our new long term strategy and our new financial targets. And we have built our strategy around 3 key helmet categories, being the first one being sports, the second one being motor and the third one being a SHP category. We also presented that we have seen a significant increase of our addressable markets from 43,000,000 to 130,000,000 units of an addressable market. And the reason why we see such a big increase in the addressable market is, 1st of all, if you look at the sports category, we have seen that the sports helmet market has grown, and we also, through our new product development, can address more price points. We also see a larger market in the motor category than before. First of all, we can address more geographies. We also have an opportunity to address more price points, and we also see that the underlying market has grown also in that category. And then the 3rd category, which is a bit new for us, is the safety category. And that category has grown with more than 60,000,000 units because we now also see that we can address helmets for industrial use. So very exciting market opportunity for us. And due to the increase of the addressable market, we see an opportunity to grow substantially also going forward. And therefore, we have increased our ambition to reach SEK1 1,000,000,000 by 2025. We also see that we can maintain our underlying EBIT margin of more than 40%, and we have a dividend policy of giving a dividend of more than 50% of net earnings annually. If we then go to next page, Page 6, we did have soft performance in the quarter with a 3% growth. Organic growth was down with 6%. And the key reason for the softer performance was the trade tariff implementation in the U. S. Market, as I explained before. If we look at the year to date number, we are at 38% growth with an organic growth of 28%. If you go to Slide 7, and then we start to look into the financials and the development in the Q3. Net sales, we did see an increase of 3%. Gross profit was also increased by 3% in the quarter. We did see a gross margin erosion with 10 basis points. However, if you adjust for the acquisition impact, we actually see an increase of gross margin of 170 basis points to 74.8%. OpEx, we do continue to invest behind our strategic priorities. We have a very scalable model, but we continue to invest in R and D and in marketing activities. We did see an adjusted EBIT margin in the quarter of 39.5 percent and we did see a decrease of operating cash flow to 11.6 1,000,000 for the quarter, down versus SEK31 1,000,000 the year before. So if we look at the key financial KPIs, organic growth, down 6% and as I explained, mainly due to the trade tariff implementation. We did see a healthy EBIT margin of 39.5 percent and an operating cash flow of 11.6 $1,000,000 in the quarter. If we then turn to Page 8 and look at gross profit and gross margin development in the 3rd quarter, increase of 3%, like I said, to 38,600,000 euros Gross margin adjusting for acquisitions was up 170 basis points for the quarter, so very healthy margin in the quarter. And if we look at the year to date number, we do see an increase of 30 basis points. And if we also there adjust for acquisition costs, we do see an increase of gross margin of 100 basis points. If we look at the adjusted EBIT and adjusted EBIT margin development in the Q3. I am now on Page number 9. We did see a slight decrease in EBIT with $300,000 to $20,500,000 However, if you adjust for acquisitions, EBIT was actually up with €100,000 and we did see a 39.5 percent EBIT margin. We do see positive effects on higher sales. We also have a stronger USB effect, so exchange rate effect, and we had some legal costs in the prior year comparator. That is partly offset by investments in organization, marketing and also that we continue to invest behind our R and D program. And we have continued to strengthen our organization. Mainly in legal department, we also recruited a new Chief Marketing Officer. And as we also announced, we have recruited a new CFO. If we look at the adjusted EBIT year to date, we see $70,800,000 up versus $44,300,000 in the year before and an EBIT margin of 39.2%, up versus 34% same period last year. If we look at the balance sheet and the cash flow, and I'm now on Page 10. We did see an increase in cash flow from operating or decrease in cash flow from operating activities to 11.6%. If we look at the year to date number, we are flat where we see an increase in profitability, partially being offset by the fact that we have started to pay income tax. We have a good cash position. We have a net cash position of SEK176,000,000. We don't hold any loans, and we have an equity ratio of 86%. So if we summarize the quarter, we do see strong interest for the MiX technology in all our categories and in all of our geographies. We do get or we did get interesting new customers in board in the quarter, especially at the German market. We have more helmet models than ever being implemented with Mits. Trade tariffs did impact our volumes in the quarter. We did, and I was also very proud to announce that we were recognized to the prestigious Poland award, and we are in a good position, and I'm also very confident to deliver our new 20 25 plan. And with that, I open up for questions. Thank you, sir. We have a question from Daniel Thorsten at ABG. Please go ahead. Yes. Hi, thanks. So first, a question, of course, on the volumes in the quarter. A lot of uncertainties lies around the production volumes and how this has turned out in the start of Q4. But first, looking at Q3, can you say something on the actual production volumes you saw versus the planned production volumes you had from before the summer, for example, for Q3 specifically? Yes. And thank you, Daniel. We do not give any forward looking statements, but at least I would try to shed some light on this. So tariffs were announced in the beginning or the beginning of June. So we did see some impact on volumes. First of all, there became a big hesitation around the brands and what will happen to the overall supply chain, sourcing of products and so on, which we have also seen in other industries. Did we plan for that? No, we didn't plan for that, of course. We have 6 quite strong quarters behind us. So of course, we had a good momentum, and we were a bit surprised on the impact of the tariffs. There is very little we can do about that. We can continue to do what we do best and that is to continue to implement our superior technology across as many end of the quarter and volumes starting to come back. And what effect that would have on Q4? Like I said, we don't give any forward looking statements, but we do see an increased momentum again. Okay. That's clear on Q4. But a more specific question then on Q3, the actual production volumes, how did they differ from the planned production volumes that you had ahead of the summer, for example? Were they 30% below or? Yes. If you look at our long term plan, we are a fast moving our fast growing company. We have a high growth ambition and having a negative 6% organic growth, that was not something that we planned for. Okay. Fair enough. Regarding operating costs in the quarter, they were a little bit below what I expected at least, and some of the costs were actually down sequentially, selling expenses and R and D. Is that the typical seasonal effect in Q3 Or that you actually have a more flattish OpEx base than we have seen in the last few years? Yes. So when we look at our OpEx, they were I do not know exactly because we had actually a slight increase of cost, but still given what we had in terms of our OpEx and so on, we continue to invest behind our strategic priorities. Of course, there can always be some seasonal effects. We do invest behind our key priorities, which is marketing, also strengthening the organization, and we also continue to invest behind R and D. You also had some legal costs in prior year comparators, so that also helps us in terms of the comparator. Yes, absolutely, for sure. I'll take a final one before I jump back to the queue. Did you ever think of releasing a profit warning ahead of the report? Yes. As we don't give any forward looking statements, we don't guide on individual quarters. I think we have a very exciting 2025 plan. We don't see any change in terms of our capabilities of delivering that plan. So if we would see that, then yes, of course, we would announce that. But we don't see any change to the underlying assumption. There is very little that we can do to impact tariffs. And for me, it's just to make sure, like I said, we stay competitive. We make sure that we have a superior technology that we can implement in as many price points as possible. That's what we can do and that's what we do. We are world leading. So for us, it's just to make sure that we continue the momentum guiding on individual quarters as we are a fast growing company, that's not our ambition to start with that yet. It might change in the future for us. We still hold on to a long term plan, and that is to continue to grow rapidly. Our next question is from Adela Dushyan at Handelis Banking. Please go ahead. Hi, yes. Thank you so much for taking my questions. Firstly, in terms of how the tariffs impacted your top line, could you give us some more color on how the licensee is structured? You mentioned in Protected that the amount is invoiced is based on the underlying number of units purchased. So did that cause did this close quarters cause any impact to that at all? Thank you, Adela. So you're right. We have an invoice flow, which is separated into 2 different structures. So first of all, we invoice our mix unique components through our subsidiary in China, and that's invoiced in RMB. And we invoice a license fee through Sweden in U. S. Dollar. That's not really where the impact is. The impact is that we invoice per unit sold and if there is a decrease in the underlying units sold, that's where we get the effect. So what happens when there is tariff implementation, and I'm sure you have already seen that in our categories. It's, of course, there becomes a bit of an uncertainty of the industry. Companies have started to look at their assumptions on how to structure their supply chain, where to produce and so on. And they get hesitant to hold a lot of stock. So of course, you start eating on stock. Of course, you can't do that for a long time, but you can have temporary inventory shifts that can impact that. And that is more of an effect than a change in the underlying assumptions, so to say. So if the volume goes down, our revenue is very much based on unit per or per unit sold. So if the volume doesn't come, of course, it also affects our top line. And then if I could also switch to your specific categories. Could you give us some more insight on how you're processing in the safety category, especially when it released and how much for industrial use? Yes. So if we talk about the safety categories, it is a bit of a new category to us. We see a huge potential. We do as we always do. First of all, we try to educate the industry of why it's relevant to have a NIP solution in your helmet. That we have started. We have had meetings with all the major construction companies in Sweden to make sure they understand why it's important to increase the overall safety of the helmet. That has been a very successful process. And then, of course, we also started to work with the international brand. As you know, it takes some months years to develop, so to say, the finance solutions, but I can at least say that we have good conversations with a lot of international brands within the SSP category. So good start and I have I think the category has a lot more potential. And then also on your partnership with POC, do you expect this to be a long term partnership? Or how has that developed? Yes. I hope that all our customer relationships are long term. And POC has been a previous customer to us. They launched their own solution, but then now we are back working together again. I'm very excited. They're a Swedish company. I think we can do a lot of good things. So I like I said, I hope all our customer relationships are long term. So far, they have no slip in that. So I hope that they will be in the same situation also they talk. And we have, like I said, also a model program all the way to 2022 already. Adriana. Our next question is from Frederic Mortragand at Pareto Securities. First of all, a question on consumer demand. You say in the presentation that you see strong underlying consumer demand. Is that in relation to the MIPS technology? Or is it in relation to the consumer helmet market in general? No. That is relating to the MPS technology. We continue to see increased demand for the MPS technology, both in the U. S. Market and also now especially in the European market. So the underlying demand is increasing, and we see increase of penetration also of the sellout in retail. Okay. Can you say something about how the underlying helmet market, in general, in the U. S. Particularly, has developed throughout the year and in Q3 more particularly? Yes. Of course, since we are now in 8 different categories, we did see soft performance across all categories because of the implementation of the tariffs for the U. S.-based brands, so to say. There is very different situation depending on which category it is. First of all, if we talk about the sports helmet category, if you drill down to the largest category for us, the bike industry, we have seen that they have a challenging environment in the U. S. And you heard that for from a lot of other brands. And the other categories, we actually see quite healthy retail performance. If you look into motor, we see very strong growth, especially in the emerging markets for the motorcycle industry. And if you look at the safety category, also there we see quite strong growth. So a bit of different dynamics depending on which category you look at, but especially the 2 last ones, we see quite strong growth. Okay, sure. And I mean, obviously, since production rates have been lower throughout Q3 and still, as you say, underlying market has been quite good for you at least, can you say something about where retailers and brands are with their inventories now coming into or coming into the end of this year? Yes. It's difficult to say exactly where they are in terms of their inventory levels. Of course, we know that if consumer demand, of course, we're eating out of stock. They cannot eat out of stock too long, but it's, of course, difficult for me to say exactly how long it takes to come back to original state levels. We know that Q4 from a production point of view is quite a heavy quarter for all the factories. So it's also that they cannot increase capacity that much. So it could take some time, but at least we do see a better movement going forward. Okay, sure. And also on the sales force, you're saying that you're looking into adding sales staff to broaden your scope. What sort of competencies are you looking for more particularly? And how many people are you planning to add, say, over the coming year? Yes. So like we also explained during the Capital Markets Day, for us, it's always important to have the relevant competence for the category that we are trying to address. We have hired people in the motorcycle category because it is a very important category and a strategic priority. We'll talk about a couple of heads there. And then the same for the salespeople category, that's where we're adding people. When it comes to the sports segment category, we have already the salesforce to address that category. Thank you. Our next question is from Daniel Thalston at ABG. Please go ahead. Yes. Thank you. Just a final one. And I apologize if I missed it, it was already asked. But a question regarding TruHockey and Guardio. How has the traction been in the 1st month? Have you seen anything from them and their first launches? Yes. If we start with hockey, we see a lot of interest for the hockey helmet both in the North American market, but also in the Swedish market and a lot of attempts in there because, of course, a lot of people in Sweden also knows what NIPs is. So I would say even though it's smaller volumes, the attention was a lot bigger than I was anticipated to start with. When it comes to Guardio, this was actually the first helmet being launched with NIPS. And I think all the ones that have gone into an industry retail store today, you start seeing the helmets out there. So they have received quite a good attention for the helmet, both in the Nordic countries but also abroad. So I will say also there, the relevance of mix is important, and we also see a lot of traction there. It is still small volumes, but I would say that we see big potential also in that market. So I would say both of those launches are actually above the expectation that I have to start with. Yes, very helpful. Thanks for that. Okay. Thank you. A gentle reminder? Yes. Sorry, operator, we got the question by mail. There was actually 2 questions. The first one was around the tariffs, which I think we have already answered. And then there was also, if I can shed some light on the underlying margin improvement. And yes, indeed, we had a very strong underlying margin in the quarter. We always focus on improving the margin. We have some cost reductions, and we also had a positive sales mix in the quarter. So that was driving the overall underlying margin trend. And then I got another question. If we have a good visibility of the inventory level of our customers. And there, I must say, we have some visibility on the major customers, but we have very little individual customer level on the overall or visibility on the overall inventory level of all customers. As you know, we have more than 78 customers that we are working with and therefore, it's very difficult to know exactly their inventory levels. But the big ones, yes, we have some visibility on that. Okay. And then we have a question from Christian from Danske Bank. Yes. Please go ahead. Mr. Christian Leijer, Just on the competition, I know that there has not been much traction for wave sale or have you seen anything on that, how the sales figures sort of have been, have you seen them around? And secondly, are there any other competitors on the horizon? Or anything you see can be a fierce competitor going forward? Yes. So first of all, WaveCel is in the bike industry, and they are in, so to say, premium pricing. So of course, the volumes doesn't get that big. In terms of other customers, we are not aware about any other competitor at the moment. Will there be someone? We constantly scan the market to see if there is any competitive entry. We always try to make sure that we have the superior technology. So do we know about something else coming out or something else being launched? No. There are no further questions at this time. Please go ahead, speaker. Yes. So thank you for listening in to the Nipps quarter 3 presentation. And