Earnings Call: Q1 2019

May 3, 2019

Welcome. This is Johan Thijs, CEO of Nipps. We will present the Q1 report for 2019. So let's turn to Page 2 and talk about the Q1 highlights. We start a very strong quarter with strong start of the year with 91% growth and 71% organic growth, representing SEK 44,900,000. We have also seen all categories showing positive developments, led by the snow category in this Q1 quarter. That's also helped to increase the EBIT margin up to 26.3% compared to SEK 7.6 last year's quarter and represents SEK 11,800,000. We have still continued high inflow projects, both from new and existing clients. You might have saw the sort of the turbulence about von Schaeger's launch with a new technology wave cell. That is something that happened during Q1, and I will get into more details into that later on into the presentation. So, so far, we see a very good progress towards our 2020 financial goals. So let's turn to next page and talk about WaveCel. WaveCel is a material that was launched together with the bicycle brand, Bontrager, in end of March. They have, as what we know, an exclusive ride in the bike category for this material. It's a material developed by a company on the West Coast in U. S. Called Apex Biomedical. And they launched a kind of a honeycomb structured material that is positioned into the helmet. They had some old claims and multi claims regarding the functionality and what they did to reduce reduction of injuries, where we had some questions about that. They launched the technology in 4 to 5 models in the premium range from $150 to $300 so a limited portion of their program. We have tested the technology in the same way as the study presents, and we haven't been able to replicate the claim results from the result or solid technique. So let's then continue to the next page and talk about other successful launches that we have had in the quarter. We have had so far 6 European brands launching in 5 brands from Europe in sorry, 4 brands from Europe in the snow category, being Healthsteve, Voila and Flakta and Protec. They've launched together 14 new models equipped with Nipps, VPS. And we have also had a good exposure in the equestrian market by Charles Owen and Champion launching models equipped with NIPS production. 1 of Charles Darwin's helmets also won the best safety product in the heritage in Birmingham. So a good launch and traction in the categories where we are already stable. If you turn to the next page, looking at the Q1 net sales growth. As we said earlier, as I said earlier, we had a strong growth in the quarter with 91 percentage and organic growth of 71 percent being at SEK 44,900,000. We have the majority of that is represented by snow, but we also have all the other categories showing a strong growth in the quarter. Even if we have some of the slower or softer compared to last year's figures. Turning to the next page. Again, to focus on what we are doing, we are delivering towards our financial targets 2020. We are keeping the SEK 400,000,000 in net sales or above SEK 400,000,000 in net sales for 2020 and an EBIT margin of about 40% for 2020. And with that, I will hand over to Max Ramlicht to get further into the details of the financial figures. Max? Yes. Good morning, everyone. My name is Max Staudits, and I'm working as the CFO of Mid. I will go through the Q1 development a bit more in detail. If we start with net sales, as Johan explained, we saw a strong increase of 91% in the quarter. If we adjust for currency effect, we saw an organic growth of 71%. And the currency effect is relating to a 16% impact of the strengthening of the U. S. Dollar versus the SEK. And we also have a 3% impact from strengthening of yuan RMB, which is the Chinese currency and relating to our Chinese operations. So all in all, in total, almost 20% currency effect in the quarter. If we look at gross profit, we saw a gross profit increase in line with the net sales increase of 90%. Gross margin was down with 50 basis points in the quarter. I will come back to that a bit later in the presentation. And we did continue to increase our OpEx and continue to invest behind our growth priorities. When it comes to the EBIT, we saw a strong EBIT improvement in the quarter of SEK 11,800,000 up versus SEK 1,800,000 in the same period previous year. And we also delivered a strong EBIT margin of 26.3%, up versus 7.6% in previous year. When it comes to cash, we see a good operating cash flow of SEK 7,700,000. However, it was down versus SEK 8.4 the year before, and that is due to a tax payment of income tax relating to 2018. And if we adjust for that, we did see a strong underlying improvement also in operational cash flow. So if we look at the key financial KPIs, we saw an organic growth of 71% and EBIT margin of 26.3 percent and also a good operating cash flow of SEK 7,700,000. If you then turn to next page, I'm now on Page number 8. And gross profit and the margin development, we did see an increase of 9 percent to SEK 32,700,000. Gross margin was down with 50 basis points to 72.8% in the quarter. And despite decline, we do see a healthy margin in the quarter. And the key reason for the margin erosion that we did see in the quarter is a different sales mix versus the previous year. If we then turn to next page and go into EBIT Development. Like I said, strong improvement of SEK 10,000,000 in the quarter to SEK 11,800,000. EBIT margin, 26.3 percent and the increase that we see is mainly explained by the higher sales that we saw in the quarter. We did see positive effects from currency, and we also had litigation costs in our prior year comparator. That is partly offset by cost relating to strengthening of the organization. We did see somewhat negative impact from currency derivatives, and we also continue to invest behind our strategic priorities, marketing and also behind R and in the quarter, it is a strong test and money of our scalable business model where we can improve our EBIT margin and at the same time continue to invest for growth and especially behind our strategic priorities. If we then go to next page, Page number 10. And in terms of the balance sheet, we did have a good operating cash flow delivery, SEK 7,700,000, despite the income tax payment that I was relating to earlier in the presentation. It's also worth to mention that we had a positive impact of SEK 400 1,000 relating to the new implementation of IFRS 16, and that is impacting operational cash flow with SEK 400,000 in the quarter. If we look at our cash and cash equivalents position at the end of the quarter, we had SEK 248 point 7,000,000 and an equity ratio of 85%. And with that, I hand over back to Johan again. So that's the summary. As we've said, we have a very strong quarter. We are very happy with that, bringing Q1 up to a quarter where we could see some substantial deliveries of our results. So 70% 21% growth organically and an EBIT margin of 26.3%, helping the quarters and the year to be to move us towards our targets. We do have continuous focus on growing with our existing clients. That's the important part of making the numbers for the 2020 targets. We still have a strong position as being we're leading in our category and the way we present our technology and bring technology to our clients. So we are a leading ingredient brand in this segment. We still continue to have high momentum from our clients in new products, but also how they present the products and outs at trade shows. So with that, we do have a very good start of 2019 and a good promise to deliver according to our 2020 target and 2020 plan. So with this, we are ending the presentation and are open for questions. We have a question from Maarten Zwomann, Handelsbank. Please go ahead. Thank you. Good morning, everyone. I have a question or a few questions on ice hockey and the announced launch here. True Hockey seems to have a strong position in premium ice hockey skates, but helmet appears to be a new product for them. Can you provide some more color here on their ambitions with this launch? Perhaps any details around planned production volumes ahead of the launch later year? Thank you. Yes. Okay. The TruHockey, it's True Temper is actually the sort of another company of True Hockey. And True Temper has been a company providing technology for different sports categories for more than 100 years. They are have been really strong in golf shafts for golf clubs. They entered into hockey with hockey sticks and they're very successful there. They also then could also expand the range with customized hockey skates in a very premium segment. And they've decided to enter into protection as well having helmets into their program to this market. So it is, as you say, it's their 1st helmet into the market. They will launch it starting to launch it now and it will be accessible in the later autumn. We do not have any full insight in how they are planning volume wise. But for us, it's a very important strong partner with a very strong brand and lots of history in presenting very good products in their markets and their categories that where they have entered into. So we are happy to have them as a partner. We are happy to help them to launch the healthcare helmets. And it's for us, again, we've been wanting to get into this category for some time, and we believe that we can help a lot and make a difference in having technology to reduce those kind of injuries that the players are exposed to. Right. What version of the VPS will be integrated to this dynamic 9, Helmut? It's one of the main platforms, the C2 platform, which is the which you see in most of the helmets right now. Okay. And in conjunction with the IPO a few years back, you just made the size of the team sports category to be around 3,000,000 helmets annually. Yes. Which are the largest segments in this category? And approximately, what share of the category is comprised of hockey helmets? The larger 2 larger categories in the team sport is as in our addressable market, American Football and Italki. So those are the major ones. Italki representing around SEK 1,200,000, SEK 1,300,000 per year. But then you have also the Kopps, which is a similar style helmet as Eisokie, which is also teamsport, but smaller numbers. But the major ones are American Football and Italki. Okay. That's helpful. And can you confirm that Bauer and CCM are the 2 dominant players in this segment? And do you have any insight into their market shares approximately? Or Are there any other players worthy of mentioning here? Yes. The CCM and Bauer is definitely the major players, and they are talking about physicians. Bauer has been the stronger player, CCM being very close behind and they are sort of depending on where they are launching product. And there are other smaller brands in this category as well. We have Warrior as one example for instance. And then you have a number of others smaller ones again. But it's a fairly small market, strong players. And that's basically how it looks like. Right. And then can you give any detail on the average price points in this hockey helmet category compared to bicycle or snow, the approximate? And then perhaps also if you have any leads to the approximate retail price for this Dynamic Pro. Well, I think the range is quite wide. You have, of course, child helmets beginning at $50, $60 and then you have the premium helmets being up to $300 over $300 So there is a range, a broad range. Where we are now with True is going to be on the premium side. That's what we can talk about basically. All right. Then just you mentioned on the WaveCel technology here, the competing technology, that you had some questions, I believe you said, regarding issues with immaterial. Can you develop a little bit that? Not really with the material as such, but the way they have run the tests, the studies that represent results, that is something that they have questions over. We're back to sort of question how they have done it. And it's basically, it leads back to what where we are there's a need basically for the industry to get an industry standard. And we are wanting to sort of reach out and make sure that we are addressing it correctly and supporting and what we'd like to happen or make happen that it becomes an industry standard, which is then much easier for consumers to deal with the results and understand results. Right now, there is no standard, but the most likely standard is going to happen with the CE and the European regulatory body, which is the same style of test method, which is used by Virginia Tech and FIM and others and also the style where we are testing our helmets as well. So that is what we are sort of requesting, the report of the silage for results of the rail helmet techniques. Right. Just to add to that, I've heard that this honeycomb structure material is quite sharp in its composition, so to speak, that of course, it's covered, I guess, with some kind of padding or something for comfort. But in the event of an accident and higher forces, is that a problem in your view that the material is with a sharp end towards the wearer's head skin? I think it is a plastic structure with edges and sharp edges. So if I would speculate sort of from a life personal view, yes, a sharp edge in a crash would probably do something with your skin. Again, nothing we can confirm because that's not what we test really. We test the rotational aspects and how the brain reacts. But as you say, having sharp edges close to your head, that might cause injuries, but not talking that we can confirm in that sense. The next question is from Fredrik Morgard, Pareto Securities. Please go ahead. Thank you very much. Good morning, everybody. A couple of questions for me, if I may. First of all, I was hoping you could comment something more about your relationship with Bantrager. I mean, there's obviously been a lot of turbulence, but I was wondering, since you have a lot of or at least a few models with them at the moment, how should we think about them? Do you think that these will be retained? Or should we see them as being phased out in the future? I'll start with that one. Thanks. Yes. So Boltschgre is still a client to us. They have a wide range of mid sellouts in the range and very also have performing very good. So we have been a strong relationship and have plan going forward. So we don't see and expect a total wind down or decrease, we expect them to continue. Okay. Thank you very much. And secondly, on the development times, I was thinking about how long does it take for you to develop a second or a third model with a customer? Because I mean, developing a new model obviously takes the longest time, but what about the second or third? How easy is that compared to developing a first model with a new with a customer? It's about well, making a new model is always a new model. So it doesn't really matter if it's the first 10th or the second or third. If it's a new model, it takes roughly the same time. What is important to understand is the development time for us is not exceptionally long. We are just integrated into the development process as such. But having a helmet sort of we're starting to develop a helmet and making that helmet to reach a mass production ready date, that takes a long time. That can take 18 to 24 months. Our part of that is not many days, but in calendar time, integrating the mix takes time. But from our perspective, where we help them integrate NIPs, it's just a number of days. But then it's just calendar time having tooling made, testing performed and so on. So that's why we talk sometimes talk about long development or long time from start to production ready, but that's because that's how the brand's develop in time, set the sort of schedule for that. Okay. That's very helpful. I noticed also in the annual report where you report how many active brands you have per category that the snow category has a decline from 2022 to 2021. I just wanted to ask if that was have you lost the brand here? Or what is going on with these numbers? Yes. There has been 2 brands that we have sort of not delivered to. What's important to understand as well is that the figures we present is always based on what we actually delivered and invoiced that year. So it could mean that the brands are getting off the market because it's either been exposed to financial issues or it could also be a small brand having inventory and therefore not being needed on production. So it's a mix, but we haven't seen sort of a declining trend. There is just a fact that made it happen basically. Okay. Could you comment on what reason was what the reason was for this decline this particular year? They were too small. Okay. I see. And the final one on the gross margin. You say that there was a different sales mix that was a key reason for the lower gross margin. Could you elaborate a bit on what is causing that more in a practical sense? Are you growing in the margin? How much categories are what is going on there? Yes. I mean gross margin it's Max here. Gross margin is, of course, impacted by several different items. But when we talk about sales mix here, it's mainly relating to the solutions we sell and also to the customers that we are selling. So yes, in this quarter, we did lose 50 basis points. But still, if you look at the prior year comparative, we were up 200 basis points versus the same period that year. So we still have a very healthy gross margin, and it was also the 2nd highest. So yes, there could be some effect, and this one was relating to solutions and also to the customers that we were selling to. Okay. So there's no structural gross margin decline from growing in, say, snow, which you had a very strong growth in this quarter? No. Okay. Thank you. That's all for me. Thanks. The next question is from Daniel Tujan, LVG. Please go ahead. Yes. Hi, thanks. Daniel here. A quick one on ISPO. The mentioned clients, the 5 mentioned clients, are they totally new clients for you? Or are they existing clients just expanding into snow? They're totally new. So they are so HEZ, Zb, Voila, Protek and FLEXTA are new brands in the snow category for us. Okay. So you don't sell mix BPS in other categories for these brands? No, that's correct. Okay. That's clear. Looking at the average selling price that you report on an annual level, how did that develop in Q1 year over year? Was that flat ish? Or did we see a small decline in that? We do not comment on the individual quarters since we have sort of stick to the annual average price there. Okay. Okay. Fair enough. Could you comment on the growth rate in snow versus bike in Q1? Did they differ materially from the 91%? Or were they just ahead and just below? The snow category is the largest one and supporting the Q1 growth. And then we have growth in bike in all the categories as well. So all categories are growing, but snow being the strongest one. Okay. Was snow growing faster than motor in the quarter as well? Yes, it was. Yes, it was. Okay. And then the final one on OpEx. How do you see continued growth in sales and marketing versus R and D during the year? Are you looking to add any staff? No. And then Max again here. So we have our 2020 plan. And there, we said both in marketing expenses and also in R and D expenses that we will aim to spend somewhere around 5% to 7 percent in both of the different spend types, so to say. And that's what we will continue to do. If you look at R and D expenses, we did spend 6.2% on average for the year of 2018. So that was well between the 5% and the 7%. Then we will continue to spend in that relation. The next question is from Christian Lager, Danske. Please go ahead. Hi there, and thanks for taking my questions. So Specializ has incorporated your MIPs PPS in all their helmet models. Do you see other helmet producers doing the same? Or is it something you would flag? Or what are your thoughts there? That will be my first question. Thanks. Definitely see more much more interest of sort of stepping a full safety story, being having Lips represented in a full line or in most of the line. We do have if you look at Bell and Geo, which has been our biggest clients and a long time client, they are up close to 80% or just over 80% in their lines at the moment. So the the overall interest is supporting our plan to wind penetration and making more and more models in the programs for our clients. And so far, we haven't we don't have any other clients yet that present the 100% of Lavin as a specialized agent. Is that something you would flag if you get more clients on board with the full range? We will press release as soon as we have such commitment from someone, yes. All right. Thanks. My second and final question is on emerging markets. Do you see an interest or proper traction or any potential there in emerging markets in the short- to medium term? I think our brands, which we work with, are basically creating growth in the existing and mature markets. There will be if you take China seeing sort of seen as maybe an emerging market, we see interest there, but we haven't seen any significant growth for us or our brands yet. All right. Thanks. That was all for me. The next question is from Magnus Roman, Handelsbank. Magnus Roman, back here again with a few follow ups. Just first, there were some questions here on average selling price and also gross margin and mix effect. So perhaps just to clarify there, is it fair to assume that you will be more focused on containing a gross margin that you need to be at healthy levels, then as opposed to try to protect an average selling price of a certain size, given that capturing higher volumes could also entail gradually decreasing average selling price unit. Is that fair to assume? Yes. Magnus, it's Max here. Yes, it is a fair assumption because, of course, it will be that we are entering into lower price point. So that could mean that we would have a lower selling price but still attract a healthy gross margin. And of course, we would elaborate on those or explore those opportunities. Average selling price and especially as we entering into new verticals is quite a wide measure of something because, of course, it doesn't say which category and which solutions you are selling. And as we're also increasing the number of solutions that we have, it's not a very accurate measurement. When we look at our financial model, it's about attracting a healthy margin and then let our scalable business model works, and that's how we can achieve the 40% plus EBIT margin. Great. Then also a follow-up on the questions that you've got about Bontrager and your expectation of them staying on as a client. If you just look at the example of POC, which then launched the proprietary competing technology and subsequently has, from what I know, discontinued all new development of Midfast as to date. Is there any difference here that makes you more encouraged to expect Bontrager to stay on with volumes on mix? Yes. I think it's quite a big difference. Von Schager has a majority of their mother program equipped with mix and large volumes represented by that. So our relationship is still there and the intention for them to continue is still being shown or signaled to be there. So we there's a huge difference between those companies if you can't really compare them in that sense. That's very clear and good reply. Just on understanding the dynamics a little bit in the quarters and so on. I guess, you've been clear here that snow really supported the Q1 top line growth. And I guess that look at the seasonality of the business, it should also have a positive impact at the start of Q2. But I guess perhaps the latter part of Q2 is will be more driven by the scaling of bicycle volumes ahead of that coming upcoming season and product launches. So what is your feeling here when you look at bicycle? Do you look for a good start to the bicycle production season, so to speak? As we said before, I think we still have a very good momentum in project flow. And as we also talked about last year, having more projects coming into the company than before, that will have an effect, of course, of launching new models and new products. So we still have the growth and intention to penetrate more and widen the offering with our brands portfolios. So and again, it's just supporting the plan that we have on the 2020 targets, working with penetration, getting more models out, getting higher volumes with the models that we are launching or they are launching. Right. And sort of look at top line momentum, if we just think about the 71% local currency sales growth in Q1 and regard that and put that in perspective of the fairly easy comparison with 20% local currency growth in the comparison quarter. It's not something that you feel needed to point out that the comparison in Q2, it will be 53% instead? It's how do you mean? What we can comment is that the Q1 last year was a slow quarter. So yes, there is a soft comparison there. But we also have when we completed the 2018, we had a strong growth with over 50% growth. And yes, we had a very strong Q1 as a start. So I think we are back to our plans. We aim to hit the targets 2020. We aim and doing that, we need to grow with close to 50% year on year. So that's what we are heading towards, and that's what we are focusing on to make sure that we deliver that plan. Okay. And then just finally, can you help providing some more color on Bengt Varun's decision to leave the Chairman position? That's all for me. I can't we can't talk too much about Bengk's decision, but I think he's been with the company for many years, has been providing us very good support and making us helping us through this journey. So I think it's a combination of things, but it's up to them to describe it and present it. There are no further questions at this time. Please go ahead, speakers. Okay. Then we are ready. Thank you very much for listening to Mipsing and our Q1 report. We hope to hear you next report again. Thank you very much.