Earnings Call: Q2 2020

Jul 23, 2020

Ladies and gentlemen, welcome to the MiPS Q2 Report 2020. Today, I'm pleased to present CEO, Max Strandwick. For the first part of this call, all participants will be in a listen only mode, and afterwards, there will be a question and answer session. Speaker, please begin your meeting. Yes. Thank you. Good morning, everyone. My name is Max Ramits. I am the CEO of MIDS, and I will take you through the quarterly results of MEPS. So if you move to Page number 2 and if we start with the key highlights, we did see soft performance in the quarter with a 20% net sales decline. It was indeed a very strange quarter with very weak sales in the beginning of the quarter, and all our customers pulled emergency brake. And as the countries open up, we saw strong sales in the end of the quarter. If we look a bit more into details of the different types of helmets, In snow helmets, that was the key driver of the soft performance in the quarter. We do expect a partial recovery throughout the year. In motor, we also saw soft performance in the quarter, but there, we do expect a quick recovery. In bike, we have good growth despite the lockdown situation. We do continue to have high customer implementation activity with a record number of customer projects despite a very challenging situation with a lot of our customer having reduced working time, furloughs, etcetera. We have just finalized our work with sharpening of our brand platform. We do see a strong consumer demand. We do expect a strong growth recovery in the coming quarters, and our long term financial target remains intact. If you then turn to Page 3. As we have communicated last quarter, we did expect volatile quarters ahead and an uncertainty about the situation, especially in snow. We did see weak sales in the quarter in snow, and the key reason is the major uncertainty regarding the impact of the COVID-nineteen pandemic. Key questions in the industry is, will the consumer be restricted from traveling next winter season? And if they are actually able to travel, will they prioritize and afford winter sports during next winter. This has resulted in a very late ordering pattern. We are still receiving orders for next season, which is normally not the case. And even though we expect to see some recovery in Q3 versus prior year, we anticipate a soft winter season for the year 2020, 2021. If you then turn to next page, in bikes, we have a bit of the opposite situation. I don't think anyone has missed that there is a lot of bikes being sold around the world, and there is a very high demand also for MIP solution in bike helmets. We do expect a strong recovery in volumes coming quarters. We see increases both in helmets for commuting, but also for recreational use, which is also partly supported by governmental investments in infrastructure to support the increase in bike. We see the key demand increase in both U. S. And Europe, but of course, demand is increasing globally and with all of our brands. We just received retail data for sales in retail in the American market or U. S. Market. And there, in April, sales of viechellettes were up 50% versus the same month the year before. It is important to note that NIPS is generating net sales when helmets are produced, not when they are sold in retail. Main part of the bike helmet is produced in Q3 and Q4, and that is the key reason why there is sometimes a lag between when you see retail sales and when we see the effect in our sales. If you then turn to the next page, in motor, we saw soft sales, but they are recovering. Customer acted very cautiously due to the uncertain market situation. We did have one new brand, Icon, in the quarter that launched helmet equipped with NIPS, and we do have a high customer interest in the category. Even though there were soft sales of motorcycles in the beginning of the pandemic, the market has recovered. And if you look at European data of motorcycle sales, it was actually up with 25% in June versus the same month the year before. Our view of the underlying demand for motorcycle helmets has not changed, and we do expect recovery of volume coming quarters. If you then turn to next page, safety. We had good development in the quarter. We have delivered our 1st NIP solutions strategically important for us to get momentum also within LEAF Helmet. We are also getting recognition, and that is extremely important within search and rescue because there you build a lot of credibility and brand equity delivering to search and rescue teams. Despite the very challenging quarter, we have had good dialogues with both key construction companies and also key brands within the industry. A lot of safety brands are also doing safety and respiratory equipment for health care, and the fact that we managed to get their attention during the quarter shows that there is a big interest also for Knit. If we then turn to next page, we are increasing our investments in marketing. And as we are dialing up investments, we are sharpening our brand platform. This is one of our key strategic initiatives to strengthen the MIPS brand and increase the awareness globally. MIPS should be the obvious choice when buying a helmet. We started the revision of our brand platform already in Q4 2019, and we have accelerated that work during the 1st 6 months of the year. The key outcome from the work is that, first of all, some of you have probably already noticed, we have a new logo, not much different, but a lot clearer visibility. We have a sharper brand tagline, mitts makes helmet safer. It is very important to catch the consumer attention. Previously, we have tried with longer explanation. But since you don't normally don't get that much time from the consumer, they don't want they want to know that they are getting a safer safer option, and that's what we need to communicate to them. We have developed a much more consumer engaging graphic expression, and this you also see in the presentation today. And we will roll out the new platform during the autumn. If you then turn to next page. As we agreed already in the Capital Markets Day, we have started to report progress on a more detailed level and development in our different categories. If we look at sports Emirates, we saw a soft performance with an 18% decline. The soft performance was driven by the weak snow sales. We did actually deliver growth in the bike category. In motorcycle, we saw very soft performance. And there, like I said, we do expect a quick recovery. In Safety, it's early days. We have some volume coming in, in Q4, but the real volume would be in 2021 as we have communicated before. If you then turn to next page, I'm then on Page number 9. And if we look at the details of the financials development in the Q2, we did see a net sales decrease by 20% and organic growth was 19% for the quarter. Gross profit followed the same pattern and gross profit was down with 20%. Gross margin eroded with 40 bps in the quarter to 74.2%. If we adjust for acquisition, gross margin was actually up with 70 bps to 75.3%. OpEx, we continue to invest behind our strategic priorities, which is marketing, R and D and continue to strengthen the organization. We did see a decrease of adjusted EBIT of 47% in the quarter down to 20,000,000 And the reason for that is, of course, that we saw a decrease in sales. We will also impacted negatively from FX and the fact that we continue to invest behind our priorities with unchanged pace. EBIT margin for the quarter was 30.8 percent. And cash flow, we did deliver a stable operating cash flow with CHF 23,000,000 for the quarter versus CHF 24,000,000 in the year before. If we then look at the development of the 1st 6 months, we saw a net sales decrease by 5%. Organic growth was down with 7%. Gross profit showed a similar trend, down with 6%. Gross margin is down with 130 bps year to date. If we adjust for acquisition, gross margin is down 30 bps to 73.3 percent, and the reason for the 30 bps decline is mix. OpEx, also here, we continue to invest behind our strategic priorities. We have an adjusted EBIT of SEK 37,000,000, adjusted EBIT margin of 30.5%. Cash flow, we continue to invest or increase our operating cash flow, and it was SEK 38,000,000 versus SEK 32,000,000 in the year before. If you then turn to next page, I am now on Page number 11. The balance sheet and cash flow. Cash flow, stable for the quarter versus the same period the year before. We did pay out dividend in May of SEK 79,000,000 and we have also received premium for the payment of our newly launched warrant program, which was fully subscribed. We have cash and cash equivalents of SEK 212,000,000, which is up with SEK 167,000,000 for the quarter. MiPS does not hold any loans, and we have an equity ratio of 85%. If you then turn to the next page, summarizing the quarter, we did have a soft quarter driven by weak sales in snow helmets and also in motor helmets. We expect a strong recovery during the autumn with high demand both in bike helmets and in motor. We have good momentum despite a very challenging quarter, high project activity, more brands coming on board. We have launched a new brand platform to make sure that the Brit Nipps brand becomes as strong as it can be, and we are in a good position to deliver according to our 2025 plan. And with that, I open up for questions. Thank you. The first question comes from Adela Dacian from Handelsbanken. Please go ahead. Your line is now open. Hi, good morning. This is Della Dacian from Handelsbanken. My first question, you mentioned that demand for bicycle helmets has increased as a result of the biking boom. And with Q3 and Q4 being heavily dependent on sales within this category, do you and your customers have enough production capabilities able to deliver on the increased demand? Yes. Thank you, Adele, and good questions. There is capacity in the industry to deliver part of the mix components, we do have capacity to deliver on the bike boom. So far, the industry has managed to cope with demand, but I think every factory in China is stretched at the moment. So I would say that the industry is at least ready to deliver substantial growth. Whether they can cope with the whole demand, it depends on how the situation develops coming quarters, but at least it can facilitate quite a lot of growth. And maybe then a follow-up on that. I mean, you do have increased demand for the next two quarters with the bike helmet. Is that enough to offset the declines in Q2 with the snow helmets? And what's your current view on the 2020 sales target that you set during the IPO? Yes. So I mean, if and if you assume the sales target, which is, was SEK 400,000,000, That is the stretching number, and we communicated that already before. If we were to assume that we would go or would try to reach that number, it would assume 100% growth for the remaining part of the year, which I think is a bit on the high side. We don't give any forward looking statements, but like I said before, SEK 400,000,000 is probably on the high side. Got it. And could you tell us how much of the decline in the storage category was related to sales within the snow subcategory? Sorry, can you repeat the question again? You broke up there. Yes. How much of the decline in the sports category was related to sales within the snow sub category? Yes. We a majority of the sales comes normally from the snow helmets. And snow helmets, we saw a sharp decline. The other counterpart in the, let's say, sports helmet category is bike, where we grew. So of course, by far, a majority of the decline comes from snow helmet. And was that is that just a delay into the later half of the year? Or have you seen any cancellations in order so far? And when you talk to your customers, what are their expectations for the coming winter water season, sorry? Yes. I think the general assumption in the industry is that the snow helmet market will decline with somewhere around 10% to 20% for the full year. We do have softer numbers than that, but we, of course, expect to do better than the industry. So we do expect to recover a bit, but we will still see soft snow numbers when we end the year. So no cancellations of orders as of yet? No. We did see some, what do you call it, holdings on orders when there was an uncertainty, but those orders have now been produced. Okay. That's all for me for now. Thank you very much. Thank you, Adele. Thank you. The next question comes from Daniel Thorfang from ABG. Please go ahead. Your line is now open. Yes, thanks. My first question is regarding R and D expenses. They are relatively flat year over year and only moderately up quarter over quarter despite having a very strong pipeline for H2 and 2021. Is that something that we should see an uptick in, in the coming quarters? Or are you able to handle all the current requests and tests at the current cost run rate in terms of R and D? No. I mean, you can always have shifts between quarters. Long term, we have said that we are going to invest between 5% to 7% of net sales in R and D. Last year, we were at 6%. We are continuing to investing in R and D to make sure that we have a superior technology that can address all the price points. We haven't changed that. So yes, you can have shifts between the quarter, but the long term ambition of 5% to 7% remains. And yes, we have capacity within R and D to deliver on the request that we see. Okay. Very good. In terms of employees in general, are you planning any specific recruitments in H2? Any specific positions you're looking for? Yes. And I think at Nipps, it's a long term company. We continue to invest behind our priorities. Strengthening the organization is one of them. When we ended the quarter, we were in total 55 employees. We do expect a couple of more heads to come in during H2, and then the rest of the recruitment is for next year. Okay. Excellent. And then a question regarding manufacturing for your clients. Have they moved have you seen them moving out China as a new trend that could affect any delays in the production? Or have they, to a large extent, stayed with their production within China? Yes. I think at the moment, when there is such a heavy demand in bike, I don't think anyone dares to do anything. We know that last year when we had the tariff situation, there were some brands that looked at sourcing options outside China. So far, no one has indicated that they will move. I don't see them moving short term if not happens more on the, so to say, country basis such as U. S. Putting in more restrictions. I would assume that they are staying where they are. If they would move, we can move our tooling with them and relocate within a month. So if there is any temporary relocations and so on, we can, sort of, say, facilitate that also. Okay. And then a question regarding Motor, the new regulation EC2206, have you seen if that has been voted for in June and will be implemented within 3 years? And then follow-up on that, can you elaborate on what the potential effect could have for you? Could it be the fact that helmets without NIPS, for example, won't be able to comply with the new standards on rotational motion in your view? Yes. The EC2206 has been rectified. It will be implemented that no helmets will be produced or allowed to be produced after 2022, and then you're not allowed to sell helmets 18 months later. I don't see that as a risk that the standard, because it's quite close to how we are testing headwinds today, that Nipps would deviate from that standard. And actually, the standard is addressing exactly what we are addressing, which is rotation and motion. So I see that as a very low risk. On the contrary, I'm extremely happy that the motorcycle industry is finally waking up and understanding that also rotation and motion is something that is even more important to protect your riders from. Okay. But is there a risk for the helmets without MIPS to not be comply with the new standards, you think? Yes. I think the first revision that comes out now is ECE2206, will filter out the worst performing helmets, especially around scooter helmets and so on, where they need to be upgraded and offer a better protection. And then next revision will be even stricter and filtering out even more helmets. I think it's a great way to transform an industry to become much more aware about safety, but it will be a gradual improvement of the standard over the years. Okay. Excellent. And then a final question. In terms of acquisitions, you did 2 last year. Do you see any other interesting research projects emerging within the sector that you are looking at? Or do you feel confident with your current IT portfolio and competitive position? Yes. I mean, we don't know of or we don't have any key competitor as we see it today. My key competitor that I see is all the helmets that don't have NIPS today. Or if you look at last year, we had 4% of the addressable market. So of course, that's where my focus is. We are continuing to developing our own IP. We are we do now have 8 different technologies with NIPs, and of course, we can address all the different price points. We don't know of any superior technology today. If there would be one emerging, of course, we will look at that. We are constantly scanning the market to see if there is opportunities to do complementary acquisitions and so on. But at the moment, there is nothing big on the radar screen. The next question comes from Frederic Morigold from Bordeaux Securities. Please go ahead. Your line is now open. First of all, a question on the momentum ending Q2. You said that June was materially better than the start of the quarter, which is understandable. But was that an effect of snow helmets picking up? Or was it simply the start of the bike season that produced a stronger June? No, I think it was a combination of both of them. In both April May, a lot of our customers had furloughs and reduced working times and so on. And also when they returned back to work, you also saw a lot of orders coming in and so on. So we did see a pickup in snow helmets, but we also saw a pickup in bike helmets. Okay. Okay. Just to clarify, you do expect to see some recovery or some sales from the snow category being phased from Q2 into Q3 this year then, I guess? Yes. Okay. Perfect. And also, if you could help us understand the safety category or safety market a bit better. I mean, obviously, fewer brands with a more concentrated market. Could you tell us something about how unit sales per model for those brands compare with the bike in the snow markets, which we know a bit better? Yes. If you look at the addressable market, which we look at within the safety industry, it's in total SEK 70,000,000 HELMUT, SEK 60,000,000 of those are within construction, which I think what you are alluding to. If you look at those SEK 60,000,000, it's that addressable market that we are targeting. That is based on around 20 brands, which means that the volume per brand is significantly higher than the average sports brand, so to say. And also the volume for modern is also significantly bigger. So if you take the bigger bicycle brands today, they can have up to 50 different models. If you look at a construction brand, the biggest one probably have around 3 to 5 depending on if they are covering normal construction, if there is work relating to electricity and so on. So you have a much more concentrated portfolio. And that's also when you get access to your model, you also get access to more volume. Okay. Thank you. That's very helpful. Thank you. Thank you. The next question is a follow-up question from Adela Dushyin from Handelsbanken. Please go ahead. Your line is now open. Hi, Adela Dushyin of Handelsbanken again. Could Could you give us an update on the competitive landscape at the moment? Yes. So at the moment, we don't see any major competitor. Like I said, my main competitor is all the helmet that don't have MIPS. That's why we are sharpening our brand platform to make sure that we become as consumer relevant as possible to make sure that we can get all the consumers' attention. That's where our focus is. We don't really have any head to head competition. If you take the total amount of competition during last year, they do not even add up to 10% of the Nipps volume. And therefore, I would never be arrogant. Of course, we're always keeping eye at competition. But my focus is really the true competition, and that's all the helmet that doesn't have nips at the moment. And did you add on any new brands during the quarter? And if so, how many? Yes. We added 2 new brands in the quarter despite a very challenging situation. You had 1 brand in motorcycle. And then we also had a safety brand, which is a niche brand, which is called Safe 4 You, and that's also relating to the test order that we saw during the quarter. Thank you. The next question comes from Karl Oskar Braeden from Berenberg. Please go ahead. Your line is now open. Hi, good morning. You just follow-up on the trading conditions in June. You mentioned that it was significantly improved. But are in June or the last couple of weeks in June, are we looking at flat year over year comparables? Or is it on the same level given the fact that you have also grown within your existing customer base? If you can just tell us a little bit more about the last month's trading conditions. So is the question whether we went into positive territory or that if we saw a substantial growth rate? Both, please? Yes. And it's the latter one. We did have quite strong growth in the end of June. There appear to be no further questions. I'll return the conference back to you. Yes. And do we have more questions by mail? And we have received one question from Frederik Pritsen, and that is regarding the ambitions of timings in security. And when you talk about security, then I assume that you mean safety. And like I said also in the presentation, we have good dialogues. We will see some volume coming in, in the end of the year, but the really ramp up of volumes in safety is not And then there is questions also regarding competitors about specific competitors, which is called WaveCel, and then there is one competitor that is called BrainGuard. If we see WaveSell, there is they have one brand today. They work with Bontrager. They have launched a couple of different models on the market. If you look at the Virginia Tech Test, we are outperforming all the Wavecell helmet. We do see them a bit of a niche player because they are addressing more expensive helmets and so on. And if you want to be a credible player in the industry, you need to be able to address all the different price points, exactly like we are doing. So we are still seeing us as superior technology. And then there is a solution that is called BrainGuard. They haven't launched any product. It's a technology that looks to be extremely heavy. We haven't seen anything on the market relating to them. And though they are not the ones that I'm focusing on at the moment. Okay. And then if we look at we also got one question regarding the visibility of 2021. And we have a plan that is to become a SEK1 billion,000,000 company by 2025 versus 20 or 2019, it means that we need to have a net sales growth of almost 25%. And that's what we need to deliver. And as we don't give any forward looking statements, we are tracking on that plan. We have a good visibility on our customer, and we are on track to deliver our 2020 pipeline. Okay. No further questions. Thank you for listening in. Enjoy the summer, and see you at next quarterly results. Thank you. Operator? Thank you, ladies and gentlemen. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.