Earnings Call: Q1 2020

Apr 29, 2020

Ladies and gentlemen, welcome to the MiPS P1 Report 2020. Today, I'm pleased to present CEO, Markus Stantowicz. For the first call of for the first part of this call, all participants are in a listen only mode and afterwards, there will be the opportunity to ask questions. Mr. Trondwitz, please begin. Yes. Good morning, everyone. My name is Marc Stamets, and I am the CEO of MIT. I will take you through the presentation of the Q1 Interim Report of 2020. And if we start on the first page and start with the key highlights. As you have seen in the report, we have a strong growth despite a very challenging quarter with a net sales growth of 25%, 16% organic growth in the quarter. We did have very strong improvement in EBIT and also in cash flow. And I am very pleased with the way that we have navigated through this very challenging quarter. We do see continued high activity with more Helman projects than ever. We have now performed more than 30,000 tests. We have 2 new brands coming on board in the sports category. During the quarter, we did also relocate to new office premises and the test lab, which we did mainly to increase our capabilities in the safety category. We have finalized the key recruitment in sales and marketing. Our CFO left in March, and we have an interim CSO in place, and we have initiated the long term search for the long term solution. And our long term financial ambition for 2025 remains intact. And if you then flip to next page, and I'm now on Page 3, I wanted to give you an update on the COVID-nineteen situation and the virus. We do expect a volatile market in the coming quarters. If you remember, this started very much as a supply chain challenge as 35 out of the 40 third party manufacturing units that we use in MIPs are located in China. We did see a good recovery of supply chain in China. And at the moment, all our 3rd party manufacturing units are fully up and running, and we do not have any capacity shortage as such. The sales development that we see coming quarters is fully dependent on the lockdown situation and the government restrictions around the world. We do see a strong increase in online sales channels. However, they are not mitigating shortfall in traditional sales channels. Also the shops that are open, we see a very strong sales and we get also very good demand signals, especially at lower price points, which seems to be that there is a lot of new bikers taking up biking and we do see trends of that all around the world. We are in close dialogues with our customers regarding demands from retailers, production plants and business development of new projects. We have a record high inflow of new Helmut projects, which you probably have seen in the report. We are not changing or we are not seeing any change in the long term underlying demand for NIPS product. And this also means that our strategy remains intact. We have a very strong balance sheet and we can outlive this situation for a long time. And we don't see anything that has happened on the market or in the world in the last month that makes us change that strategy. So the strategy remains intact and also our long term financial goals for 2025. If you then switch to next page, I am now on Page number 4. And during our Capital Markets Day in last year, we said that we will give you more granularity on a quarterly basis. And if we look at the development in our different categories, most important, the sports category, we did grow 23%. We have 2 more brands coming on board. If you then look in the motorcycle category, we saw good performance despite the challenging quarter with 39% growth. And in safety, it's still very early days. We have good interest. But like I said before, we will not see any large volumes until the end of the year with volumes really picking up during 2021. And in total, we have 105 buying customers at NIPS, which is up with 2 versus the quarter before. I will then switch to next page, and I'm now on Page 5. And if we look at the net sales development in the Q1, like I said, we did see good performance with 25% net sales growth in the quarter. The growth was mainly driven, as we have seen before, by our existing customer base, expanding their assortment with it. Sports category remains the key driver in absolute terms, but we also did see good performance in the motorcycle category. And if we look at the composition of the 25% net growth and the buildup, It consists of 16% organic growth. We did see an increase and strengthening of the U. S. Dollar towards the Swedish krona. That affected the sales with 8% in the quarter, and then we also had a 1% impact from structural changes. And when we talk about structural changes, that is relating to the acquisitions that we did last year. If you then switch to next page, I am now on Page 6. If we look at financials a bit more in detail and the development on in the Q1, like I said, good net sales development. Gross profit was up with 22%. We did see a decline in gross margin of 200 basis points to 70.8%. A big part of that is affected by the the acquisitions and depreciation for the acquisitions that we did. Adjusting for that, we did see a gross margin erosion of 90 bps to 71.9%. OpEx, we continue to invest in our strategic priorities, which is in marketing, R and D and sales. We get a lot of questions if we have stopped any activities. For us, since we don't see any change in underlying demand, we are continuing to as we had before and we continue to deliver on the strategy that we have set out. Adjusted EBIT, good in the quarter with $17,000,000 up versus $12,000,000 in the same quarter last year. We did have an adjusted EBIT margin of 30.1%, up versus 26.3% in the same quarter last year. You have to remember that Q1 is traditionally a smaller quarter than the rest. Cash flow, we did see an operating cash flow of $50,000,000 So if we look at the key financial KPIs, 16% organic growth, 30% EBIT margin and we did have an operating cash flow of SEK 50,000,000 If we look at the next page, which is Page 7, and if we go into the balance sheet and cash flow, we did see an increase of the cash flow from the operating activities of 9 5%, so almost managed to double our operating cash flow. We also did see quite an increase in cash flow from financing activities of SEK 52,000,000, and that is fully explained by the conversion of the long term incentive program that we have been running at NIPS that was converted during the Q1. We have a very strong cash position. At the moment, we have EUR 255,000,000 on the balance sheet, equity ratio 85% and the Board's proposal regarding dividend of SEK 3 per share for 2019 remains unchanged. If we then switch to next page, which is Page number 8, And just to reiterate the summary of the quarter, we had a very good growth in the quarter despite quite a challenging quarter. We do see a healthy profit development, good EBIT margin and a strong cash flow generation. We have a high helmet project activity, more brands coming on board. Short term, demand fluctuations slightly. Long term, we don't see any change in demand. We have relocated to new office premises and a test lab to be able to deliver on our future strategic initiatives. We have now sales and marketing organization fully in place, and we are in a very good position to deliver according to our 2025 plan. And with that, I open up for questions. I'll ask again, this operator there? Operator, can you please respond? Yes. So you would like to start the Q and A session, correct? Yes. Okay. The first question is from Frederic Mottregard, operator Securities. Your line is now open. Good morning, Max. Good morning, everyone else. A couple of questions on production plans and discussions you're having with customers. I appreciate that you say all third party manufacturing units are fully up and running and no capacity shortages. Have you seen any changes to your customers' production plans this far into April? So good morning, Fredrik. No, so far, we haven't received any cancellation of any orders. Okay. And in the event of that happening, how far ahead would you be notified? No. I mean, of course, when they are canceled, they are canceled. But there is no one reaching out to us and saying that they want to cancel production as such. When it happens, it happens. We basically receive a phone call. Normally, we have a lead time of our product of somewhere between 5 to 45 days. So that would normally be within that range, so to say. Okay. So quite a wide range then. Yes. And I was just curious, you say that you've shifted your from your location in Sweden partly to be able to address the safety category. What changes to the testing do you need to make? And how does that impact your procedures when producing new helmets or developing new products in new helmets? Yes. Thank you for the question. It's a very good question. So if you look at the testing of construction helmets, they are still tested in quite a traditional way. So they're still testing for linear impact with basically a lead bulb that is dropped into your head, which is probably not reflecting the way that accidents actually occur in a construction site. So of course, the basic capability we need to have, but for us it's also to be able to have capabilities to also introduce rotation and motion into different accident scenarios. And if you look at head related injuries, those are test capabilities is 1. Of course, the standard rotational motion test is always there, but we also want to show different accident scenarios and being able to model that. That's why we need to have new capabilities. But it also comes to when we are educating the construction industry, which we are very much been doing, why rotation and motion is important, we also need to have a much bigger facility to also have safety workshops, roundtable discussions and so on, where we invite the industry, 1st of all, to demonstrate the test lab, but also have a very educated discussion on why rotation and motion is very important to address and how we address the relevant injury criteria also in construction. So it's not only the test lab, but it's also to be able to run much bigger workshops because the sell in process in the safety area is very different versus the brand because normally you need to work hand in hand with the brand but also with the construction company. So it requires different capabilities. And of course, the technical capabilities we have and we already have, but also in terms of expanding in other areas, it's important also to that we do it in a very good way. Okay. So sort of an experienced center combined with the test lab, I get it. I think that's a very good explanation. Yes. Just finally, the extraordinary charge of SEK 1,000,000 that you had this quarter, was that part of COGS? Or were in the P and L can we find It is parts of mainly in COGS and it is relating to the depreciation of the Patent that we acquired because, of course, those are depreciated over 10 years. Your next question is from Adela Racine of Handelsbanken. Your line is now open. Hi, yes. Good morning. Firstly, just on the COVID-nineteen impact on your sales. Is it safe to assume that the store closures and subsequent impact on how the manufacturers do affect your sales immediately? Or do you expect a more gradual decline in your sales since you don't sell directly to customers? I mean, then I'm talking about the actual consumers that are using the helmets? Yes. Good morning, Adela. No, we don't expect an immediate effect because, of course, we don't sell directly to retailers. We sell to brands. But of course, I think we are cautious. We think that at the moment, there is a lot of speculation. We can't speculate what will happen regarding the COVID-nineteen and how long the lockdown will remain. That's also why we do expect a very volatile market. Like we said also before, the stores that are open are selling extremely well, much better than before. Online sales is also doing really well. But as soon as the consumers are not even allowed to go out by law, then of course, it is a major impact and that is, of course, what we don't know. If the lockdown is only very temporary, then of course the issue will be less. But if this is a long term solution, then of course, we would expect a more volatile market. Right. Do you still expect to reach your 2020 financial target that you set out during the IPO? Yes. Like I said, the coming quarters will be volatile. I don't think there is really anyone that know exactly what will happen in the coming month. More than the majority of the stores on the market that we operate is still being closed, which is, of course, not the normal situation. Models than ever. We are making interest into new types of helmets. And the demand for our product has not decreased. On the contrary, the trends are very much in our favor. We see a lot of macro trends changing in our favor. Bicycling is increasing quite dramatically. But I think it's also important to realize what is happening short term is not the normal situation. It has nothing to do with supply and demand. If stores are closed, then of course, it's difficult for our brand to sell anything. I only know that we are better equipped than ever to deliver on our long term ambition. So I can't speculate on the SEK 400,000,000 because I don't have it under my control at the moment. Are you doing anything on the online segment to drive activity and then the growth on that platform since that platform is open? And can we somewhat compensating for the decline in sales from the stores that are closed? Yes. I mean long term, I would say that we are always addressing things that we think are right to do. So anything that is long term right is something that we have addressed. We are running education programs also with online sales. We are implementing NIPS filters so they can filter on solution with and without NIPS because we have seen that that's very effective on online sales and so on. And we do see a great pickup on our online sales. So we don't act in panic and start doing a very big program, but we try to do the right things to make sure that we get online sales with us with having the right video asset explaining how MIPS works and so on. And we are constantly providing them with more materials. So we see that as a very interesting channel, and we do also invest in that. And that was also one of the reasons why we recruited the CMO, Frederic, that we did last year because he has a great experience also on online marketing. Okay, good. And then just finally, could you give us an update on how the safety category is progressing? The safety category is progressing quite well. We do see a lot of interest, and the industry is starting to understand. It's not different challenge from what we have had in the other categories. 1st, they need to understand. Then we need to explain how we are testing. Then we need to explain and look at the different injury criteria. So we have a very high interest and we have had a lot of interactions. We also now have done a couple of virtual press trips because, of course, we are able to live stream from our test lab, explain also how mix works and so on. And we do see interest in the category. Like I said before, nothing has changed. We have said before that volumes will start coming in, in Q4, and we will start to see a bigger volume pickup in 2021. So still very big interest. And so on, challenge is not different than before. We have to educate the industry and to make sure they understand why we have a relevant solution for their category. Okay, great Max. Thank you so much. Thank you. The next question is from Carlos Gabrieli from Berenberg. Please go ahead. Yes. Hi, this is Karlosku from Berenberg. The income for the motor segment 2019 appears to be quite a lot stronger and it seems that we covered close to 1 third of last year sales volumes. Can you tell a bit about sort of the acceleration and the growth within this segment? If this is something that you're seeing particularly if it's dependent on the seasonality or if it's just that you're seeing stronger increased demand over to the moto for road as opposed to just moto across? No. I think, I mean, we did already a couple of years ago launched activities to make sure that we succeed in motors still. The Motocross segment is doing extremely well, and there we have very high penetration. But we're also starting to see some more road brands coming on board. You already saw them on board last year, but we really start seeing that in the numbers. So it's a combination of both, but so far, it's still mainly driven by the motocross segment. We do expect a higher momentum in motorcycle and we do expect that it will be a big part of our total sales. I mean that's part of the initiatives that we have taken. So I'm very happy with the performance that we saw in the Q1 despite the very challenging quarter. As there are no further questions, I hand back to the speaker. Yes. So I think we also got some questions regarding on web or on e mail. So first one, we did see a question from Henrik Soderberg from SeaWorldwide on the FX impact on revenue and profit. We haven't disclosed the FX revenue or the impact on profit in detail, but it had an effect in the quarter versus last year. And if you look at the impact on revenue, as you also see in the report, in total, there was an 8% impact on net sales relating to the stronger U. S. Dollar and also the impact from the C and I the C and Y. So in total, 8% impact from ForEx. Okay. And then we also get the question from Alexander, who is asking us about the current shipment for the winter collection in 18 months now being produced our brand, playing it cautiously and lowering the order given the uncertainty. So the winter production that is being produced now is actually for the coming winter. We know that there was quite an abrupt finish of the season, especially in Europe. We still see interesting development in the snow category and we still receive quite a lot of orders. We have not seen anyone really changing the full year forecast based on the winter sport and what has happened so far. I think for us, it's not really an underlying issue of the brand. I think if the lockdown situation continues for several more months, it's probably also will restrict traveling a little bit more. So then as you also see in the CEO comments, that is probably a bigger risk than actually that there would be a short or more product on the market relating to the closure of the season a little bit earlier. And that was the question we had also by mail, if anyone wants to ask more question. There's still more questions. I have home. You say no more questions? Yes. No. So I think, I mean, thank you for listening in. Just to reiterate, we had good growth despite a very challenging situation, good increase in profit and cash flow. We have more projects than ever, quite a lot of project activity. We haven't changed anything. The office has never been closed. They're actually been up and running the whole time because we haven't been able to close due to the high project load. Of course, the safety and health of our employees is, of course, the key concern, and we have had all the precautions that's necessary. So far, all the Nipps employees that have been working has been healthy, so no issues there. And looking forward to speak to you coming weeks. And if not, let's speak at the next quarter. Thank you.