Earnings Call: Q2 2019

Jul 23, 2019

And welcome to MiP's Quarterly Results Presentation. My name is Max Stambits, and I am the CEO of NIPS. And I will take you through the quarterly results. As you have seen, it is quite an exciting quarter for Mids with a lot of activities, as you have seen in the news flow. If we start with the sales development, we saw a continued good performance in the quarter with a sales increase of 49% and organic growth of 38% in the quarter. We did also see a strong increase in adjusted EBIT margin to 46%, up versus 39% in the year before. And it is good to see that we actually, if you look on a 12 month rolling period, we see an adjusted EBIT for the first time exceeding our long term ambition of EBIT margin above 40%. We did 2 exciting entries into new categories for MIPs in the quarter, which is something I will come back to later in the presentation. And we also did our first 2 complementary acquisitions, which is also something I will tell you a little bit more later in the presentation. And we feel that the quarter took us one step further towards our long term goals. If you then turn page, and I will then be on Page number 3, when it comes to net sales development, like I said, good growth in the quarter with 49%, organic growth of 38%. Important to note that when we talk about organic growth, we do adjust for currency effect. As you know, we are selling in both U. S. Dollar and also in yuan RMB. So any effect of that is adjusted for. And we also adjust for structural changes that might be. And in this case, it's relating for acquisition. If you look at the tables at the far down left, you see that there is very limited impact from structure changes, but of course, that will have a small impact as we go forward. We did the acquisitions late in the quarter, and therefore, it didn't have any real effect. It is the largest quarter so far in MiP's history with SEK 83,000,000 in net claims. And we see good performance in our categories, and it was mainly driven by very strong performance in the snow categories. And the key growth came from growing with the existing customers that we have on board. If you look at year to date performance, we saw a net sales increase of 61% and a 48% organic growth, So very strong growth trajectory. If we then turn to next page, I will go into Page 4. And like I said in the beginning, we did enter into new categories in the quarter, the first one being in the industry category. And we did actually launch our 1st industry helmet equipped with NIPS BPS. The helmet was launched together with a Swedish startup company named Guardio Safety that manufactures and sell safety helmets And it is our first step in expanding into the industry safety category. It was actually planned as a domestic launch to start with, but we get we got quite good international publicity also and a lot of international interest, which is, of course, good to see. And it is a very interesting launch for MiP in a very large category. As you know, the industry helmet is mainly around the traditional plastic hard hats, which I'm sure you have seen. But recent year, there has been a development of a new type of industry helmet, which is manufactured in more durable material. And there, MIPs can actually be implemented and make a difference for the workers. That industry market is, of course, huge, but that is mainly relating to the hard half, which I referred to earlier. And we will present the addressable part of the industry helmet market when we update our strategy in October. So there is an interesting market for us, but we, of course, cannot address the whole industry safety market. If you then turn to Page number 5, our second category entry was the launch of the first hockey helmet equipped with mid BPS. As you know, we had quite a long legal dispute with Bauer Hockey. And when that was settled last year, we started to try to enter to the category. And we announced that we partner with a brand called True, True Hockey, which has previously been focusing on sticks and skates within the ice hockey category, and they have quite a lot of NHL players using their equipment. And they have now decided also to go into helmet, which, of course, the MIP safety story fits well also with their product offering. The brand is originating from 2 Tempur Sports, which is the world leading brand in Gold Shaft. The helmet will be available in store in November 2019. There is a limited impact for 2019, but of course, a very interesting category permit. And we also play to say that we can now starting making a difference also for the hockey athletes. If you then turn to next page, I will go into Page number 6. And as I also said, we did 2 acquisitions in the quarter. The first one was the acquisition of the Fluid Technology, where we acquired patents, also some customer agreements and the trademark relating to the Fluid Technology. The sellers were Oblique Technology and University of Ottawa. It actually looks like it was only one transaction, but it was actually 2 transactions because we acquired a whole patent portfolio. It was actually 2 transactions in 1. The purchase price amounted to USD 3,300,000 and there is a potential earn out element of another USD 2,000,000 based on the future sales performance. And the key reason for the acquisition was that we wanted to acquire the patents. They are complementary to the mix patterns that we have on board already. And it's also a good opportunity for us to strengthen the relationship with the University of Ottawa and to increase our knowledge also in team sport. We do also get the access to the customer's GCM, which is a very interesting Aizocchi brand, which we can also continue to collaborate. The complementary, MIPs, ADIS, MIPs, ADIS complementary to the MIPs technology and it will be marketed under the MIPs brand. However, limited impact on 2019 EBIT. If we then turn to next page, the second acquisition that we did was the acquisition of the Glargue technology and that is a technology that we acquired in May and the sellers were Tamarac, havalibitation technology and the purchase price amounted to US1 $1,000,000 and that is actually a technology which MiPS has used before. If you search their website, you see that they have been mainly focusing on skin protection solutions and they have actually been granted an 8 year royalty free license for the use of that technology within certain medical areas. And we have mainly been developing that technology for our products within leaf category. But of course, we wanted to explore that opportunity also within other areas and therefore, we wanted to acquire that technology. And we see benefit both from performance, but also from a cost point of view. And the technology will be marketed under the Mips brand. There's limited impact on 2019 EBIT, but of course, long term, it is important. And then as we are closing in on our 2020 ambition, we have also started to look at the long term strategy, which is something we will present at the Capital Market Day on the 20th September, where we will present our long term targets and also our long term financial ambition. The Capital Market Day is targeting investors, financial analysts and media, and there is information on how to register on the website. The presentation appear will also be available on our website during the same day if you cannot attend. And then before I go into the financials, first of all, let me update you on our current financial targets. The first one being net sales exceeding SEK 400,000,000 by the year 2020. And then we also have an EBIT margin exceeding 40% also by the year of 2020. If we go into the Q2 development, I'm now on Page number 10. First of all, net sales increased with 49%. We did see an organic growth of 38%. Like I explained before, Gross profit was up in the quarter, which did see an increase of 100 basis points in the quarter. OpEx, we did increase our spend in OpEx continue to invest for future growth. Adjusted EBIT, SEK 38,000,000 with an EBIT margin of 46%. And we also did have a strong cash flow in the quarter with 24,200,000 in operating cash flow, up versus 5,900,000 in the quarter before. So in terms of our key financial metrics in the quarter, very good growth with 38% organic growth, strong adjusted EBIT margin with 46%, and then we also saw a good operating cash flow with SEK 24 point 2,000,000 in the quarter. If we look at gross profit and gross margin development, gross profit was up 51 percent to SEK 61,600,000 in the quarter, up 100 basis points, and we managed to achieve a gross margin of 74.6%. And the key reason for the increase in the margin is the benefit that we saw in the sales mix. And if you look at the year to date, it's up 50 basis points, so good development also in gross margin. When we look at adjusted EBIT and adjusted EBIT margin development, I'm now on Page number 12. EBIT increased by SEK 15,100,000 to SEK 36,800,000. We do adjust for cost and effect relating to the acquisitions that we did in the quarter. In total, that was SEK 1,200,000. So therefore, you come to an adjusted EBIT of SEK 38,000,000 in the quarter with a margin of 46%. And the increase that we have seen is mainly driven by higher sales. We also do see positive effects from currency from the weakening of the Swedish krona. We did have litigation costs in the prior year comparator. And since we have a very scalable model, that was partly offset by our investments in strengthening in the organization, and we also continue to invest behind marketing and R and D. And also important to note this that there is a SEK 3,000,000 negative impact from our current currency derivatives in the quarter relating to, of course, the strengthening on the dollar. So we do see a benefit on top line, but there is a negative impact on the bottom line from our currency derivatives since we are hedging 50% of our projected cash flow in U. S. Dollar. With that, I turn into Page number 13 when it comes to the balance sheet and the cash flow. We did see a good cash flow from operating activities with SEK 24,200,000. That was mainly driven by an increase in profit, partly offset by increase in accounts receivable and the fact that we also start paying income tax. Cash and cash equivalents at the end of the quarter was SEK 166,600,000 and that is despite the fact that we actually have paid a dividend of SEK 63,200,000 in the quarter and we also invested SEK 41,200,000 in acquisitions, so more than SEK 100 SEK of outflow from those. And despite that, we have still quite a strong cash position with an equity ratio of 79%. If you then turn the page and just summarizing the quarter for what we felt was a very strong quarter, organic growth of 38% and adjusted EBIT margin of 46% in the quarter, and it's actually the first time we exceed our EBIT target in a rolling 12 months period. We do continue to focus on growing with our existing customers, but you have seen we have also started to expand into new categories. We are investing for future growth, both in organization, in product development behind the MIPS brand and that we now also started to do complementary acquisition. And we feel that the quarter was a very good progress against our 2020 plan. With that, I open up for questions. Thank you. Our next question is from Magnus Rohmmer from Handelsbanken. My first question relates to the addressable market in the professional category where you lump together the leaf category, the military category, construction, etcetera. I mean in relation to the or in conjunction with the IPO, you estimate that this the all these categories put together to be around 10,000,000 helmets of addressable market for you as a company. But if you would do the dissect these categories a bit more carefully and look at the potential for each category, for example, the leaf, construction, military, isn't it fair to assume that the addressable market for mix, when you have come closer to product launches and also made product launches within these subcategories that they together make up a larger addressable market for MIPs? Yes, I think thank you. Good morning, Magnus. First of all, I think it's important to point out that we did mention leaf as part of our addressable market. And at that point, of course, we stated it at 10,000,000 units. The industry helmet and actually at that point, there was not a lot of launch of those more durable helmets. We didn't include that in our helmet universe, and we didn't also consider that to be an addressable market. And so that actually is an addressable market outside what we have already communicated during the IPO as an addressable market. So that will come on top. And that's what I meant with how big that addressable market is, is something we will explain in combination with our strategy day or Capital Markets Day in September. But you're right, that will come on top. Okay. And if you would take all categories outside bicycle and snow and just put them into one collective other category, do you expect that category to have any material effect on your top line in the next year 2020? Or does that lie further up in time? Yes. I mean, you talked about bike and snow. We have a strategic priority, of course, to continue to grow in motorcycle, which is an important category for us. We are today addressing 7 different categories, and all of them are delivering growth and will continue to deliver growth in the year 2019 2020. And the areas that we will address outside that is also something that we will explain during the strategy. But the 7 categories we are in is the ones that will benefit in net sales for the 2 coming years. Right. But I assume that the 2 categories, bicycle and snow, account for a vast majority of your total top line produced this year as opposed to the 2 categories that you have had commercial breakthroughs in. So just looking into 2020, do you think that, that would change in any way? Or does that lie further out in time? No, not materially. That lies further out in terms of the growth momentum. So the key growth momentum today and also during next year will come from snow and bike. That's right. Great. That's helpful. And then now a few months have passed since Schuhockey's launch of their novel innovation. What reactions have you got from CCM and Bauer? No, I think I mean, overall, we got quite a lot of interest from the industry. And of course, this is the first helme with mitts included. So Bauer, we haven't heard anything on. CCM, we do actually now have on board after the Fluid acquisition. So we are working closely with them and also trying to get the best solution for them. So we went from having no presence in the category to have 2 very good customers in the category. That sounds really encouraging. But the fluid technology that CCM have licensed, does that make out anything more than just a minor part of their total sales as of today? Yes. There is today, there is a small part of their total portfolio. But like we do with all, our customer will normally start small, and then we try to penetrate, of course, their whole range. Great, great. Just a final one from me on the financials. You mentioned here in the quarter that, that mix effect is accretive to gross margin that drove 100 bps year on year. But I guess you sold a lot in the snow category this quarter. And perhaps the 2 coming quarters are more bicycle dense, so to speak. So is it fair to assume that we will see a slightly lower gross margin sequentially in the second half of this year? No, it was indeed I mean, we don't do any forward looking statement. And indeed, it was a strong margin quarter when it comes to that. But it's also important to say that when it comes to gross margin, there is a lot of different things impacting gross margin. Of course, it depends on which solution that you sell and also to which customer you are selling to. That can have an effect on gross margin. This quarter, it was favorable. If you look at the last quarters that we have behind us, those have been unfavorable. Of course, we are trying to address lower price points and so on, and they could put a bit on pressure on margins. But like I said, we don't give any forward looking statement. All right. Thank you. Thank you. And our next question is from Daniel Thorson from ABG. Please go ahead. Your line is open. Thank you very much. I start with a question on the Motor segment. Can you give us a short update on the production there? Yes. Good morning, Daniel. Yes, we have, as we have said before, quite a lot of interest in terms of MX, where we today have more than 15 brands on board. So we have quite a lot of interest in the MX category. And we have started to address also the road bike category in terms of motorcycle, which is the traditional full face helmet. We start to get a bit of traction there, but the volume starts to have been rather small. The category has been growing quite fast, but it's still from small numbers. So we do see a lot of interest in the category, and we're also preparing for the coming big fair of Eitma in Milan in November. And there, of course, we start to see a lot more launches when it comes to MIPS and also the motorcycle category. So yes, we do have good fractions, but do remember it's still from quite small numbers. Okay. That's helpful. In terms of M and A, what can we expect there going forward? Are there other interesting products and patents out there to capture as well? Yes. We are always scanning the market for different kind of complementary techniques. Like I said, when it relates to the Fluid technology, that was very much a tactical acquisition because they had patents that was complementary to the Mips technology. Mips is working with a slip plane technology and they are working with a sharing technology. So of course, we wanted to have patents also addressing that. At the moment, there is nothing that we are working on, but we are constantly scanning the market if there is things that could either be from a tactical point of view or that can complement our offering. The second technology that we bought, the Glidewear technology, there we saw that we got access to a technology that could both complement our offering in terms of performance and also from a cost point of view, enabling entry into also other categories than meat. So if we can find acquisitions with similar characteristics to that, of course, we would be interesting. But at the moment, there is nothing that we know about. But we are constantly scanning the market for anything that makes our offering better. Okay. That's good. A question related to fluid specifically. By marketing those products under the brand, isn't that creating a confusion risk for customers that relate the brand today to your specific technology and product solutions? Or will the Fluent technology be limited to only target the team sport category and not, for example, snow and bike in the future? Yes. And of course, we have just bought it. So we're still developing a bit on the marketing strategy. What we have decided so far is that we don't want to entertain the 2 brand strategy. And when we say it's complementary, it can also act in combination with the mix technology. So we do not believe it's confusing. When it comes to mix, we have always said that we will always try to do the product better when it comes to rotation and motion protection. And as long as we do that, we don't think that it is confusing to the consumers and so on. But the long term strategy is something that we need to update you on going forward. Okay. Do you have any plans to offer the fluid product to the bike and snow category, for example? Like I said, we just bought it. So we are working on product development to make sure that we have something that is as scalable as our other solutions. As you see and also have seen, the company has been quite small. They haven't put a lot of money in terms of having solutions that are easy to scale up and so on. So key focus for us coming 6 months is really to develop the technology into something that becomes as scalable as our other products because if you remember, they are only a fraction of our total sales. And in 2018, we sold 3,800,000 pieces. And for us, it is important to have a very scalable product, which can be easily integrated into all different kinds of solution. So there is still a bit of work to do that before you have something that is really commercially ready. Okay. That's clear. A question on the OpEx side going forward. What are you looking for in terms of recruitments? Now you have a CFO in place. Are you looking for any key salespeople or any R and D people at the moment? Yes. I think it's 2 things. Of course, we have a very scalable business model. So the size of the organization will do not need to grow in line with the net sales growth. But also, MiPS is becoming a bigger company, and it is about scaling up. You can scale up in 2 ways, either get more people or you also strengthen and improve the organization. For us, it's a lot about doing both, get more people on board in the sales area, but also to get more senior people on board that can take mix also to the next level when it comes to performance and so on. And we are becoming a bigger company. And then also, the functions need to improve. So I would say it's a bit of both strengthening but also upgrading the organization we have. Okay. Is it too aggressive to assume that you could add a handful of people in the next 12 months? Is that too much? No, I think that's probably a fair assumption. Okay. Excellent. Just a final question for me related to the upcoming CMD. Have you said anything or can you say something about the time frame of the upcoming targets and if they will be constructed as of today, I. E, a sales figure and the margin targets? Yes. I mean, the details, of course, will be presented during the day. But we are a long term company, so you could assume a long term target. And I don't think it's any very dramatic communication to say that it will probably be about growth and EBIT. So long term target is probably aiming for that, but that's what I can say at the moment. Okay. Yes, that was all from me for today. Thank you. Yes. Thank you. Our next question is from Fredrik Mokgaard from Pareto Securities. Please go ahead. Your line is open. Good morning, everybody. To start off, just a quick question on Fluid. Could you tell us something about how Fluid compares to the MIPS BPS in terms of selling price? Yes. So in terms of good morning, Frederik. In terms of the selling price, it is a different composition of material. It is a different product. So it is a bit more expensive when it comes to cost of goods sold. And then, of course, the license fee depends on which customer you're trying to address. They don't have a lot of customers or they didn't have a lot of customers before. So of course, the future pricing strategy wouldn't be in line with the MiP strategy. So I wouldn't see any major difference going forward. Okay. So then it could be fair to assume, I guess, that it will be product targeting the more, so to speak, higher end helmet categories, moto and team sports perhaps? Yes. Or complementary to the MIPS dilution in higher price points. Okay. And speaking about Moto, what challenges are you facing mostly in penetrating that market? Yes. I think it is first of all, it is a very traditional market when it comes to MX. Like I said, we have 15 brands on board already. And those riders, they know that they will probably fall when they go out riding. When it comes to the more traditional motorbike category, a lot of the riders, they don't even want to have a helmet. And if they want to have a helmet, it's probably more to look cool. And they are not that worried about falling. They have probably been riding their bike for about 20 years without an accident. So it is a very traditional category, and they don't really want to talk about safety. So for us, it's really about making sure that we can get the brand on board, which can also or where we can configure a good safety story. And that takes time. We started to address the category for quite some years ago, but now we start to get some traction. And also when they start to understand that they can actually also price up integrating Nipps into the solution, Of course, they also see the traction that we have had in the other categories. So yes, we do see some interest in the category, but it has taken a lot more time and the category has proven to be a lot more traditional than the other categories we have addressed. Okay, I see. And since you had a few road helmets on the market at the moment, do you have any feedback from those brands about what their customers are saying about those NIPT equipped helmets? Yes. I mean, the feedback has been that, of course, in the beginning, they normally test with a couple of helmets and so on. And the ones that have launched have come back and integrating the MiP solution in more helmets and claim that it actually works and also that the consumers understand the safety story and the inclusion of the MiX technology in the helmet, which is, of course, important. We have also looked at a little bit the brand awareness in the motorcycle category, and it does do increase. But of course, we still have more jobs to do in that category. Okay. That's very helpful. Thank you. And our next question is from Christian Leidre from Danske Bank. Please go ahead. Your line is open. Hello, and thanks for taking my questions. I have a couple of questions. On the marketing side, you said that you have increased expenses on marketing. Can you tell me a little bit about in which categories you're channeling your marketing efforts since you talk about getting a lot of incoming calls as well on existing the most penetrated category? Yes. When it comes to our marketing strategy, first of all, we don't do any end consumer marketing. Our marketing investment is very much focusing on educating the brands, making sure that they have templated material that they can bring to the market. And it's also about educating retail and the distributor how to explain mix in the best possible way. We do invest quite a lot of money in PR to make sure that journalists and media can explain how the mid technology works. So that's normally where we start. We have focused a lot of our activities around the key categories such as bike and also in snow. And if you also scan the motorcycle magazines, you see that we're also doing a lot of activities there. So I would say that's where we primarily have been focusing. But as we are in 7 different categories, of course, we try to address them. But it's not that we do any end consumer marketing. And then, of course, that's a different business model. So for us, it's very much about education, making sure that the mix and message is understood in the correct way. All right. And then can you say something about where you're going to land or move in terms of marketing to sales? So we're talking about 5% to 7%. Is it possible to be a bit more detailed on that going forward, please? No. And I mean, 5% to 7% is quite detailed. If you look at last year, we spent a bit more than 5%, and we will continue to invest behind the Nipps brand. For us, it's important that everyone started for looking for the yellow dot in the back of the helmet and so on. And we our desire is for the brand to become as strong as the patent. So we will continue to invest behind that, and we'll continue to invest with the momentum we have of somewhere around 5% to 7%. All right. Thanks. That's all for me. Yes. Thank you. And there seems to be no further questions at this point. I will hand the word back to the speakers for any final comments. So thanks, operator, and thank you from you for a very good quarter and close again and see you next quarter. And the ones that are joining for our Capital Markets Day, please make sure that you register. The registration notification is available on the website. Have a lovely summer and speak to you soon.