Earnings Call: Q4 2019

Feb 13, 2020

Ladies and gentlemen, welcome to the MiPS Q4 Report 2019. Today, I'm pleased to present CEO, Max Stranwitz. 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 Dammit. I am the CEO of MiP, and I will take you through the 4th quarter results. And if we start with the key highlights of the quarter, As you have already seen, we had good growth in the 4th quarter with 41 percent 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 Q3. 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, and 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 2.50 in the year before, which equates to an 89 percent distribution of net earnings, well above our ambition of 50%. And as we had good momentum in the quarter, we also see that we have a strong platform for continued growth. So if you then flip to next page, I'm now on Page 3. As I said, we are expanding our customer base. In 2019, we delivered 2 0 3 brands all over the world versus 78 in the year before. All of our top 10 customers grew with Mitsubishi S 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 mixed EPS to 5 83 different helmet models. So also there, we are up versus 4.48 models in the year before. And during the year, we delivered almost 5,000,000 Nipps BPS units. And since inception, we have delivered more than 14,000,000 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 headless products being equipped with mid BPS. And then I slip also to the next page. I'm now on Page number 4. We do also see the trust in the MIPS brand increasing. First of all, the multi sport brand, Bollier, and the lifestyle brand, Nutcase, both of them have communicated that they will offer MIPS PPS in all of their helmet models. Both brands will convert their whole range and conversion projects have already started. Bollinger is actually the 1st brand to offer mid BPS in more than one subcategory. So they actually offer helmet both within snow and in the bike subcategories. So this is the first time we actually have a dual commitment, so to say. And then also when it comes to Nutskase, that is the 1st lifestyle brand committing to have knit BPS in all of their helmets. So really happy to see this safety commitment from these two brands. And I think we will also have a very successful future together. So if you then flip the next page, we thought it was important to give you an update on the coronavirus. So 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 MiP's 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 and or concentrated in an area which is called Guangdong. It's just outside Hong Kong, about 1,000 kilometers 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. And 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 helmet 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 face infest between the months, and it's important to flag for this. We are following the outbreak closely on a day to day basis and will keep you updated if we see any long term effect. And then I flip over to the next page and go into the net sales development of the 4th quarter. I'm now on Page number 6. So first of all, good performance, 41% growth, organic growth of 33%. The growth was still mainly driven by existing customers expanding their assortments with MIP. We did see growth in all our categories. And if we look at this 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 7, and if we look at the financial a bit more in detail, so first of all, the development of the 4th quarter. Net sales, up 41%, organic growth, 33%. Gross profit increased with 41%, and we did see flat gross margin. However, if we adjust for effects relating to the acquisitions, saw an increase of gross margin of 90 bps, which is up to 75.8 percent, so very healthy gross margin. And that is mainly driven by favorable sales mix. OpEx, you do see an increase in OpEx, and 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 the hedging policies. And 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 4,300,000 in the quarter relating to this. Adjusted EBIT, SEK 39,700,000 versus SEK 28 point $7,000,000 in the year before. We did see an adjusted margin of 45.4%, slightly down versus the year before. And in cash flow, operating cash flow in the quarter was SEK 19,700,000, down versus SEK 23,800,000 in the year before. I will come back to that a little later in the presentation. So in terms of the key KCIs in the quarter, 33% organic growth, 45.4% adjusted EBIT margin and we did see an operating cash flow of SEK 19,700,000. If you then flip to the next page, I'm now on Page number 8. 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 effect, we actually saw also there an increase of gross margin of 140 bps to 75.3 percent, so also very healthy margin for the full year. If we look at OpEx also, we continue to invest behind our strategic priorities. And also in the full year, we do see a negative impact from the currency derivatives. And here we see a total effect of SEK9.8 million for the full year. Adjusted EBIT was SEK110,500,000, up versus SEK 73,000,000 in the year before with an adjusted EBIT margin of 41.2%. That's up versus 37.9% in the year before. So good to see that we are delivering above our long term ambition of 40% EBIT margin. And in cash flow for the full year, we did see an operating cash flow of 63 point $2,000,000 down versus $69,100,000 in the year before. So in terms of key KPIs, 29% organic growth, healthy EBIT margin of 41.2% and an operating cash flow of SEK 63,200,000. And if we look a bit more in detail on the EBIT margin, the adjusted EBIT and the adjusted EBIT margin development. So first of all, if we start with the quarter, EBIT increased with $10,300,000 to $39,000,000 Adjusted EBIT increased with $11,000,000 to $39,700,000 with an EBIT margin just above 45%. And it's important to note that when we are talking about adjusted EBIT, the only thing that we are adjusting for is costs and effects relating to acquisitions, so nothing else. And then if we look at the drivers behind the adjusted EBIT movement, it's 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 37,500,000 to SEK 110,500,000 dollars and that was driven mainly from higher sales, partly also offset by investments in organization and negative effects from currency derivatives. And we ended the year, like I said before, on a very healthy EBIT margin of 41.2%. If we then go to next page, which is Page number 10, and then look at the balance sheet and the cash flow. So 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. So first of all, there is 2 effects affecting that. First of all, we have strong growth numbers. Our accounts receivables has been affected of that, of course. And 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 carry forward, and that also affects the operating cash flow. Cash and cash equivalent was SEK 191,600,000. At the end of the year, we don't hold any loans. The Board is proposing to increase the dividend to SEK0.03 per share, up versus SEK2.50 in the year before. And we have an equity ratio of healthy 87%. So if we then go to Page number 11 and summing up the quarter, We did have a very good performance in the 4th 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. However, 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. And with that, I open up for questions. Thank you, Max. Currently, we have a question coming from Advila Dushyan. Advila, 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. And 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 1 week, which means that the factories were starting up production with a 1 week delay. And the bigger factories, they started to produce in the beginning of the week as planned. But 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 2 weeks. So 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 2 to 3 weeks of ramp up period. So 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 effect. I don't see that it will have an effect long term, but short term, yes, most probably it will have an effect. Okay. And then just a follow-up on that. You combined the Asian and Australian results into one line, but it looks like the growth in those regions combined was down 22% in the quarter. So could you give us some more detail as to which region that drove the negative growth and what the reason for that was? Yes. So first of all, if you look at full year number, that region actually increased. And yes, you can have effect in 1 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 1 quarter early or 1 quarter later. So 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 helmet in China, and we do see good potential there. But still, it's on very base or it's on the base on still very low numbers. Okay. And then just second, I have another question about your industrial helmets. You launched the 1st 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? Yes. So what we did, as you said, mid last year, we launched our first solution with MIPS EPS or equipped with MIPS EPS. 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. Excellent. We have another question coming from Fredrik Morgard, Fredrik, please go ahead. First a question on inventories. Could you update us on your view of channel inventories, specifically on the slow and bike categories at the moment? Yes. So I think I would probably have one answer before this is the outbreak of the coronavirus and probably another one now. As we've seen, we have seen good momentum and good consumer interest from the mix products, and we do see a very good sell through. As we know, some inventories 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. I mean, 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, so then the factories are normally full anyway. And we have run with 1 month before production were shut down for the Chinese New Year and so on, so that's still too early to say. Okay. Fair enough. And also one question on your current model penetration with your top customers, say, top 10 customers, if you could update us on that as well. Yes. And 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 mix in their assortment. There is still challenging in some geographies in the world like South America where the awareness of mix is not yet there. So of course, that's also a task for us to increase awareness also in those geographies. But overall, we see very good momentum. We see a big interest with all the major brands of increasing the penetration with mix in their assortment. We had specialized last year announcing that they will have mix in all of their models and so on, but we also see the penetration going up also with other brands. Okay. And is there still a lot of up sight 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 or including MIPS. However, some of those models, they have models with MIPS and the same model without MIPS. And by far, we're not even close to 70%, 80% of the total volume range, if you understand what I mean. Sure, sure. That's encouraging. More than ranges, we are there, but in terms of volume, we don't have access. There's still a lot of penetration to go for. And if you look at our total addressable market, we have SEK 130,000,000 which we consider at the moment to be addressable. If you look at when we ended 2019, we had just below 4% penetration, So we still have a lot of volume to go for in the sport category and in the new categories that we also want to enjoy. 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 will find that? Or where is that in the P and L? There is 2 parts of it. So first of all, you have depreciation related to the patents that we acquire. Those you find on the gross margin, and that's why I talked about an adjusted gross margin. And then you also have effect relating to the acquisition as such, and that is more legal cost, advisories fees and so on, and they amounted to a little bit more than SEK 1,000,000 during the year of 2019. And those you will find under administrative costs. Okay. And those are the costs that were reported as nonrecurring items this quarter, I suppose? No. Those plus depreciation costs that you also see in, on the gross margin. Okay, okay, okay. I see. Yes. So important, just to clarify. So 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. Excellent. We have another question from Daniel Thorson. 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, in more segments or soft softer models than volumes at lower price points, so 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. And then 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 etcetera? Yes. So two things. First of all, if you look at the Multacross, we have extremely good penetration. We did have really good growth in the Multicross segment during the year. We have all the major brands in the Multicross cross 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. So 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, but still we have a lot to do in that category. And how large share of that category is road versus motocross roughly? A little bit more than 90% is road and 10% is motocross. Excellent. And final question on 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? So if you look at the number of FTEs, indeed, we are 15 total at NIPS. Onethree 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 IT. Those recruitments are included, and you see them already in the cost of 2019. Where I also mentioned in the report that we do increase our 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 for addressing those categories and so on. We will probably add a couple of more people there. If we still continue to grow with the amount of projects that we are doing with the helmet plant, it will require that we have some more CAD engineers, then we will also hire them. But I would say that you see somewhere around the handful of people that we need to add in Sweden during the year. Excellent. That was all We have another question from Carlos Garrardigan. Carlos, please go ahead. Yes. Hi. This is Carlos Gui from Berenberg. I just have a question primarily surrounding the coronavirus outbreak. So given your 2020 guidance of above SEK 400,000,000 by 2020, is this still feasible now given sort of the delayed production in China? Yes. Yes, you're right. We did have an ambition of SEK 400,000,000 by 2020. Based on what I know today, I have more communicated that I see phasing effects and no dramatic changes to the full year. That is based on what I know today. And like I said, if we see longer term effects, then we will communicate them. But so far, we are isolating this to short term effect. If it I mean, I don't have control of the virus, so I can't really control that situation, what will happen later. But based on what I know now, I don't see any dramatic changes. So that's the assumption. Okay. Also in respect to the growth opportunity within safety as the total industrial market here is significantly larger than the other core markets in which you operate. And today, a lot of the sales force that you have is primarily focused on your core markets, so primarily sports. How are we looking to sort of in terms of personnel hire over the next coming years in order to gain meaningful traction within this category? And how much sales do you expect that the safety will contribute to in 2025 in order to reach your SEK 1,000,000,000 sales target? Yes. First of all, the safety category, we have recruited more people there. We now have 2 people addressing that category. If you look at the market as such, it is mainly concentrating around 20 different helmet manufacturers. So I think that's 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 plant. Okay. And in terms of the 103 brands you delivered during 20 19, is this 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. Yes. Excellent. There are no further questions at this time. Max, please go ahead for conclusion. Okay. So thank you all for listening in. We hope to see you also next quarter. So thank you.