Ladies and gentlemen, welcome to the Mips Q4 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. Max, please begin.
Yes. Good morning, everyone. My name is Max Strandwitz. I am the CEO of Mips. I will take you through the fourth quarter results. If we start with the key highlights of the quarter. As you have already seen, we had good growth in the fourth quarter with 41% increase of net sales. We looked at organic growth at 33%. We did see that production volumes did get back to normal after the trade tariff slowdown that we saw in the third quarter. We do see a strong expansion in terms of models and brand during the year. I will come back to that a bit later in the presentation. We also see higher trust in the Mips brand, leading to more, what we call all-in commitments from the brands.
We have completed our key recruitment, both within marketing and sales, that is important for us to deliver on our strategic priorities. We did see a strong EBIT margin for the full year of 2019 of 41.2%, which is above our long-term ambition. The board is proposing a dividend of SEK 3 per share up versus SEK 250 in the year before, which equates to an 89% distribution of net earnings, well above our ambition of 50%. As we had good momentum in the quarter, we also see that we have a strong platform for continued growth. If you then flip to next page, I'm now on page number three. As I said, we are expanding our customer base. In 2019, we delivered 203 brands all over the world versus 78 in the year before.
All of our top 10 customers grew with Mips BPS during the year. We did grow in all our categories, and we also did grow in all geographies. I'm especially pleased about that we managed to deliver very strong growth in the strategic important Europe, where we actually managed to double our sales versus the year before. During 2019, we have delivered Mips BPS to 583 different helmet models. Also there, we are up versus 448 models in the year before. During the year, we delivered almost 5 million Mips BPS units, and since inception, we have delivered more than 14 million units in total. We do see good customer interest. We continue to have a high inflow of new products, and we do have a strong pipeline of new helmets models being equipped with Mips BPS. I flip also to the next page.
I'm now on page number four. We do also see the trust in the Mips brand increasing. First of all, the multi-sport brand Bollé and the lifestyle brand Nutcase, both of them have communicated that they will offer Mips BPS in all of their helmet models. Both brands will convert their whole range, and conversion projects have already started. Bollé is actually the first brand to offer Mips BPS in more than one subcategory. They actually offer helmets both within snow and in the bike subcategory. This is the first time we actually have a dual commitment, so to say. Also when it comes to Nutcase, that is the first lifestyle brand committing to have Mips BPS in all of their helmets. Really happy to see this safety commitment from these two brands. I think we will also have a very successful future together.
If you then flip to the next page. We thought it was important to give you an update on the coronavirus. First of all, before going into all the details, it is important to give you a reminder on how we operate. Both the main part of Mips production and the helmet manufacturers are located in China. We are today producing our units at around 40 different factories, both in China and outside China, but the main part of the production is in China. The helmet manufacturing sites are located in or concentrated in an area which is called Guangdong. It's just outside Hong Kong, about 1,000 km from the Hubei area, where the virus is currently concentrated. We have seen that the factories have resumed production after the Chinese holiday, but still they are running with low capacity.
They will ramp up production during coming weeks, provided, of course, that they will have no virus on the site. They estimate it that the factory is fully up and running at the beginning of March. As factories are starting up, it is currently difficult to foresee all the effects around the virus outbreak, but we do expect that we can have phasing effects from this. As you know, now we are producing helmets aimed for the winter market, so for the snow sport helmet mainly, and those are produced in Q1 and Q2, and they are supposed to reach the market by the end of the year, so it's still time to catch up, but there could be phasing effects between the months, and it's important to flag for this.
We are following the outbreak closely on a day-to-day basis, and we'll keep you updated if we see any long-term effects. I flip over to the next page and go into the net sales development of the fourth quarter. I'm now on page number six. First of all, good performance, 41% growth, organic growth of 33%. The growth was still mainly driven by existing customers expanding their assortment with Mips. We did see growth in all our categories, and if we look at the full year number, we see a 39% net sales increase with an organic growth of 29%. If we then go to next page, so page number seven, and if we look at the financial a bit more in detail. First of all, the development of the fourth quarter. Net sales up 41%, organic growth 33%.
Gross profit increased with 41%. We did see flat gross margin. However, if we adjust for effects relating to the acquisitions, we actually saw an increase of gross margin of 90 bps, which is up to 75.8%, so a very healthy gross margin. That is mainly driven by favorable sales mix. OpEx, you do see an increase in OpEx. We do continue to invest behind our strategic priorities. We do see a negative impact on the other operating income and expenses in the quarter, which is mainly coming from currency derivatives. As you know, we have a hedging policy. We also saw a weakening of the U.S. dollar at the end of the quarter, which has revaluation effect. In total, we saw an effect of SEK 4.3 million in the quarter relating to this. Adjusted EBIT, SEK 39.7 million versus SEK 28.7 million in the year before.
We did see an adjusted margin of 45.4%, slightly down versus the year before. In cash flow, operating cash flow in the quarter was SEK 19.7 million, down versus SEK 23.8 million in the year before. I will come back to that a bit later in the presentation. In terms of the key KPIs in the quarter, 33% organic growth, 45.4% adjusted EBIT margin, and we did see an operating cash flow of SEK 19.7 million. If you flip to the next page, I'm now on page number eight. If we look at the full year number, net sales 39% increase, organic growth of 29%. We did see a gross profit increase of 40%. Gross margin was up 20 bps. Adjusting for acquisition effects, we actually saw also there an increase of gross margin of 140 bps to 75.3%, a very healthy margin for the full year.
If we look at OpEx, also, we continue to invest behind our strategic priorities. Also in the full year, we do see a negative impact from the currency derivatives, and here we see a total effect of SEK 9.8 million for the full year. Adjusted EBIT was SEK 110.5 million, up versus SEK 73 million in the year before, with an adjusted EBIT margin of 41.2%. That's up versus 37.9% in the year before. Good to see that we are delivering above our long-term ambition of 40% EBIT margin. In cash flow for the full year, we did see an operating cash flow of SEK 63.2 million, down versus SEK 69.1 million in the year before. In terms of key KPIs, 29% organic growth, healthy EBIT margin of 41.2%, and an operating cash flow of SEK 63.2 million.
If we look a bit more in detail on the EBIT margin, the adjusted EBIT and the adjusted EBIT margin development. First of all, if we start with the quarter, EBIT increased with SEK 10.3 million- SEK 39 million. Adjusted EBIT increased with SEK 11 million- SEK 39.7 million with an EBIT margin just above 45%. It's important to note that when we are talking about adjusted EBIT, the only thing that we are adjusting for is cost and effects relating to acquisitions. Nothing else. If we look at the drivers behind the adjusted EBIT movement, is mainly explained by higher sales. We are a growth company, partly offset by investment in the organization. We do see a negative effect from currency derivatives and FX in the quarter, and that we also have increased our spend in marketing.
If we look at the full year number, we see that the EBIT increased with SEK 37.5 million- SEK 110.5 million, that was driven mainly from higher sales, partly also offset by investment in organization and negative effects from currency derivatives. We ended the year, like I said before, on a very healthy EBIT margin of 41.2%. If we go to next page, which is page number 10, look at the balance sheet and the cash flow. First of all, you have seen both on the quarter number and on the full year number that we saw a slight decrease in operating cash flow. First of all, there are two effects affecting that. First of all, we have strong growth numbers. Our accounts receivables have been affected of that, of course.
The second effect, which you also need to factor in, is during 2019, we actually started to pay tax. Before that, we had tax losses carried forward, and that also affects the operating cash flow. Cash and cash equivalent was SEK 191.6 million. At the end of the year, we don't hold any loans. The board is proposing to increase the dividend to SEK 3 per share, up versus SEK 250 in the year before. We have an equity ratio of healthy 87%. If we then go to page number 11 and summing up the quarter. We did have a very good performance in the fourth quarter, which ends a very successful year. We did see a significant increase both in the number of models equipped with Mips BPS on the market, but also on the number of brands that we have delivered to.
We do see major trust in the Mips brand and more brands or bigger brands committing to have Mips in 100% of their models and volume. We do not see yet any major impact from the coronavirus. We know it will affect us, and it's difficult to predict exactly how the outcome of that will be. I don't think anyone can say that at the moment. Organization is in place to deliver on our strategic initiatives, and we are in a good position to deliver according to our long-term 2025 plan. With that, I open up for questions.
Thank you, Max. Ladies and gentlemen, if you have a question for the speaker, please press zero one on your telephone keypad. We will give you a moment. Currently, we have a question coming from Adela Dashian. Adela, please take the floor.
Hi. Good morning. First of all, let me begin by congratulating you on a very strong quarter. My first question relates to the coronavirus. You said in earlier comments that factories have resumed production but are running at a low capacity. Does that mean that some of the factories closed down as a result of the virus, or was that just a function of the Chinese New Year?
Thank you, Adela, for the question. I will probably explain it like this. The factories, they always close down for a couple of weeks during the Chinese New Year. What was different this year was that it was mandatory by law to extend the holidays with one week, which means that the factories were starting up production with a one-week delay. The bigger factories, they started to produce in the beginning of the week as planned. What is also important to know that there is a lot of guest workers that is moving in from other parts of China. They have been home celebrating the Chinese New Year, and when they come back, they need to be cleared that they don't carry any virus, and that quarantine period can be up to two weeks.
Even if the factories or the workers reach the factories, it can still take some time before they come or become fully operational. That's why you see about two to three weeks of ramp-up period.
We should expect that that could have some negative effect even as early as in Q1?
It could have some negative effect in Q1, and like I said, it could be some phasing effects. I don't see that it will have an effect long term, but short term, yes, most probably it will have an effect.
Okay. Just a follow-up on that. You combined the Asian and Australian results into one line. It looks like the growth in those regions combined was down 22% in the quarter. Could you give us some more detail as to which region that drove the negative growth and what the reason for that was?
Yeah. First of all, if you look at full year number, that region actually increased. Yes, you can have effect in one quarter versus another. That region is still quite low in volume, and the volume it relates still to is actually in China. Our sales to Australia is still extremely limited, and that has to do when certain deliveries come, if they came one quarter early or one quarter later. Still small numbers. We don't see any change in our ambition to grow in China. We have interesting projects and launched our first motorcycle helmets in China, and we do see good potential there, but still it's on the base on still very low numbers.
Okay. Just second, I have another question about your industrial helmets. You launched the first industrial helmet. I'm just wondering about what the demand is looking for that product. Are you ahead or in line with your expectations in total for the safety category?
Yeah. What we did, as you said, mid last year, we launched our first solution with Mips BPS or equipped with Mips BPS. We do see a lot of interest. We have met the major construction companies in Sweden. We have had really good discussions with them, having safety workshop with them, explaining why it's important to also include Mips in the construction helmets and so on. They are very receptive to that feedback. We do see a lot of interest, and we do have a lot of discussions with a lot of different brands in that category. It will still be some time before you see really the full effect of our initiatives that we take in the safety category.
Okay, great. That was all for me. Thank you.
Excellent. We have another question coming from Fredrik Mogren. Fredrik, please go ahead.
Good morning, everybody. First, a question on inventories. Could you update us on your view of channel inventories, specifically on the snow and bike categories at the moment?
I think I would probably have one answer before the outbreak of the coronavirus and probably another one now. We have seen good momentum and good consumer interest from the Mips products, and we do see a very good sell-through. As we know, some inventory levels were challenged already in Q3, so we do not expect them to have high inventory levels, but also for us, it's very difficult because we don't have the visibility. We know the stock levels at some of the bigger brands, but where the whole situation around the coronavirus will put them, I think it's impossible to speculate, but I don't expect them to be higher than they were before the coronavirus outbreak.
Sure. Over the autumn, obviously, or at least presumably, a lot of brands needed to eat out of inventory as they cut production in Q3. Have you seen any indications from your customers that they want to rebuild that inventory going forward?
Not yet. We started up, of course, only had Q4 is quite a big quarter in terms of production, the factories are normally full anyway. We have run with one month before production were shut down for the Chinese New Year and so on, that's still too early to say.
Okay, fair enough. One question on your current model penetration with your top customers, say top 10 customers, if you could update us on that as well.
Yeah. As you have seen, we do see an increase in penetration with our key customer. That's also what's driving the growth. We do see more of them committing to have a higher proportion of Mips in their assortment. There is still challenging in some geographies in the world, like South America, where the awareness of Mips is not yet there. Of course, that's also a task for us to increase the awareness also in those geographies. Overall, we see very good momentum. We see a big interest with all the major brands of increasing the penetration with Mips in their assortment. We had Specialized last year announcing that they will have Mips in all of their models and so on, but we also see the penetration going up also with other brands.
Okay. Is there still a lot of upside to driving model penetration with these brands or are you approaching, say, 70%, 80% penetration with most of them?
No, I think 70%-80%, you will probably find in some of the bigger brands when it comes to the number of models that are including Mips. However, some of those models, they have models with Mips and the same model without Mips. By far, we're not even close to 70%-80% of the total volume range, if you understand what I mean.
Sure. That's encouraging.
More than range we are there, but in terms of volume, we don't have access. There's still a lot of penetration to go for. If you look at our total addressable market, we have 130 million, which we consider at the moment to be addressable. If you look at when we ended 2019, we had just below 4% penetration. We still have a lot of volume to go for in the sport category and in the new categories that we also want to address.
Yes, very good. Just a final question on the extraordinary item that you took related to acquisitions. Is it in the admin cost that we could find that, or where is that in the P&L?
There is two parts of it. First of all, you have depreciation related to the patents that we acquire. Those you find under gross margin, and that's why I talked about an adjusted gross margin. Then you also have effects relating to the acquisition as such, and that is more legal cost, advisory fees, and so on, and they amounted to a little bit more than SEK 1 million during the year of 2019. Those you will find under administrative costs.
Okay, those are the costs that were reported as non-recurring items this quarter, I suppose.
No, those plus the depreciation costs that you also see under gross margin.
Okay. I see.
Yeah. Important, just to clarify. If you look at adjusted gross margin, those excludes depreciation. If you look at adjusted EBIT, those only includes the cost relating to the legal fees relating to the acquisition.
Okay, very good. That was my question. Thank you very much.
Okay.
Excellent. We have another question from Daniel Thorsson. Daniel, please go ahead.
Yes, thanks. I start to follow up on the gross margin as well, the level that we saw in 2019. Do you foresee anything that could change the product mix in 2020 that should affect the gross margin materially?
No, like we said before, we do expect our gross margin to deteriorate a little bit as we go in more segment, also offer models and volumes at lower price points. That could have some effect. We don't see a dramatic decrease year-over-year, but gradually we do expect it to come down more closer to the 70% range.
Okay, excellent. A question on the motor category. You have been talking about it for quite some time. It's growing from low levels. What's happening there in terms of motor et cetera?
Two things. First of all, if you look at the motocross, we have extremely good penetration. We did have really good growth in the motocross segment during the year. We have all the major brands in the motocross sector, so there we have good penetration. Those riders, they know they will have an accident if they go riding, and they are very keen on wearing safety protection. If you look at road motorcycles, the lead time of those projects are of course longer. It has been a slow moving category for us. We do see a change in the category because of the new FIM standard that is being implemented in June this year, where they also have increased or included an element of rotation and motion protection also in the test standard.
That helps of course a lot, but still we have a lot to do in the road motorcycle category. We have some brands coming on board, like I mentioned before. We had a street helmet being launched in China with a Chinese brand, where we see a lot of good volume progression. Still we have a lot to do in that category.
How large share of that category is road versus motocross, roughly?
A little bit more than 90% is road and 10% is motocross.
Excellent. Final question in terms of personnel, what need do you have to grow that number in 2020 from the current 38 people I see that you had in Sweden at the end of Q4, and what roles are you looking for?
If you look at the number of FTEs, indeed we are 15 total at Mips. One third of that is in China, and then the rest is in Sweden. During 2019, we have recruited some of very important functions, both in legal and also in IP. Those recruitment are included, and you see them already in the cost of 2019. Where I also mentioned in the report that we do increase or strengthen our organization also in marketing and sales. There we have recruited people both in the safety category and in the motor category to make sure that we have the relevant personnel also addressing those categories and so on. We will probably add a couple of more people there.
We still continue to grow with the amount of projects that we are doing with the helmet brands, it will require that we have some more CAD engineers. We will also hire them. I would say that you see somewhere around a handful of people that we need to add in Sweden during the year.
Excellent. That was all from me.
Excellent. As a reminder, ladies and gentlemen, if you have any question for the speakers, please press zero one on your telephone keypad. We have another question from Carlos Gabaldon. Carlos, please go ahead.
Yeah. Hi, this is Carlos from Berenberg. I just have a question primarily surrounding the coronavirus outbreak. Given your 2020 guidance of above SEK 400 million by 2020, is this still feasible now given sort of the delayed production in China?
Yeah. Yes, you're right. We did have an ambition of SEK 400 million by 2020. Based on what I know today, I have more communicated that I see pacing effects and no dramatic changes to the full year. That is based on what I know today. Like I said, if we see longer-term effects, then we will communicate them. So far, we are isolating this to short-term effects. I don't have control of the coronavirus, so I can't really control that situation, what will happen later. Based on what I know now, I don't see any dramatic changes to that assumption.
Okay. In respect to the growth opportunity within safety, as the total addressable market here is significantly larger than the other core markets in which you operate, today a lot of the sales force that you have is primarily focused on your core markets, so primarily sports. How are we looking in terms of personnel hire over the next coming years, in order to gain meaningful traction within this category? How much sales do you expect that the safety will contribute to in 2025 in order to reach your SEK 1 billion sales target?
Yeah. First of all, the safety category, we have recruited more people there. We now have two people addressing that category. If you look at the market as such, it is mainly concentrating around 20 different helmet manufacturers. I think that what we see now, sufficient to address that area. We have never given any exact guidance exactly how big we expect the safety category to be, but it's a smaller proportion of the total plan.
Okay. In terms of the 103 brands you delivered during 2019, is it a net number, or have you had any departures during the year?
We have had one brand that left us during the year, and the rest of them are new recruits.
Okay. Thank you very much. That's all for me.
Yeah.
Excellent. There are no further questions at this time. Max, please go ahead for conclusion.
Thank you all for listening in. We hope to see you also next quarter. Thank you.