Welcome. This is Johan Thiel, CEO of Mips. We will present the Q1 report for 2019. Let's turn to page two and talk about the Q1 highlights. We start a very strong quarter with a strong start of the year with a 91% growth and 71% organic growth, representing SEK 44.9 million. We have also seen all categories showing positive development, led by the snow category in this Q1 quarter. That has also helped to increase the EBIT margin up to 26.3% compared to 7.6% last year's quarter, and represents SEK 11.8 million. We have still continued high inflow of projects, both from new and existing clients. You might have saw the turbulence about Bontrager's launch with a new technology, WaveCel. That is something that happened during Q1, and I will get into more details into that later on into the presentation.
So far, we see a very good progress towards our 2020 financial goals. Let's turn to the next page and talk about WaveCel. WaveCel is a material that was launched together with a bicycle brand, Bontrager, in the end of March. They have, as of what we know, an exclusive right in the bike category, for this material. It's a material developed by a company on the West Coast in the U.S. called Apex Biomedical. They've launched a honeycomb structured material that is positioned into the helmet. They had some bold claims and market claims regarding the functionality and what they did to reduce reduction of injuries, where we have some questions about that. They launched the technology in the four to five 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 claimed results from the developers of the technique. 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 six European brands launching in five brands from Europe in four brands from Europe in the snow category, being Head, Cébé, Uvex, and Slingshot and Pro-Tec. They've launched together 14 new models equipped with Mips BPS. We have also had a good exposure in the equestrian market by Charles Owen and Champion launching models equipped with Mips protection. One of Charles Owen's helmets also won the best safety product in The National Equine Show in Birmingham. So a good launch and traction in the categories where we are already stable.
If you turn to the next page, we're looking at the Q1 net sales development. As I said earlier, we had a strong growth in the quarter with 91% and organic growth of 71% being at SEK 44.9 million. 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 with last year's figures. Turn 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 million in net sales or above SEK 400 million in net sales for 2020 and an EBIT margin of about 40% for 2020. With that, I will hand over to Max Strandwitz to get further into the details of the financial figures. Max?
Yes. Good morning, everyone. My name is Max Strandwitz, and I am working as the CFO of Mips. I will go through the Q1 development a bit more in detail. If we start with net sales, as Johan Thiel explained, we saw a strong increase of 91% in the quarter. If we adjust for currency effect, we saw an organic growth of 71%. The currency effect is relating to a 16% impact of the strengthening of the US dollar versus the SEK. We also have a 3% impact from strengthening of yuan RMB, which is the Chinese currency and relating to our Chinese operations. 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. 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 11.8 million, up versus SEK 1.8 million in the same period previous year. 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 7.7 million. However, it was down versus SEK 8.4 million the year before, and that is due to a tax payment of income tax relating to 2018. If we adjust for that, we did see a strong underlying improvement also in operational cash flow.
If we look at the key financial KPIs, we saw an organic growth of 71% and EBIT margin of 26.3%, and also a good operating cash flow of SEK 7.7 million. If you then turn to next page, I am now on page number eight. Gross profit and the margin development, we did see an increase of 9% to SEK 32.7 million. Gross margin was down with 50 basis points to 72.8% in the quarter. Despite the decline, we do see a healthy margin in the quarter. 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 million in the quarter to SEK 11.8 million, EBIT margin 26.3%. 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. We also had litigation costs in our prior year comparator that is partly offset by the cost relating to strengthening of the organization. We did see a somewhat negative impact from currency derivatives. We also continue to invest behind our strategic priorities, marketing, and also behind R&D. When it comes to EBIT development in the quarter, it is a strong testament, mainly, 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 10, and in terms of the balance sheet, we did have a good operating cash flow delivery, SEK 7.7 million, despite the income tax payment that I was relating to earlier in the presentation. It is also worth to mention that we had a positive impact of SEK 400,000 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 248.7 million and an equity ratio of 85%. And with that, I hand over back to you, Johan, again.
Back to summary. As we have 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 results. 71% growth organically and an EBIT margin of 26.3%, helping the quarters and the year to move up towards our targets. We do have continuous focus on growing with our existing clients. That is the important part of making the numbers for the 2020 targets. We still have a strong position as being, we are leading in our category and the way we present our technology and bring technology to our clients. 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 us at trade shows.
With that, we do have a very good start of 2019 and a good promise to deliver according to that 2020 target and 2020 plan. With this, we are ending the presentation and are open for questions.
If you have a question for the speakers, please press 01 on your telephone keypad. We have a question from Magnus Råman , Handelsbanken. 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. Helmet appears to be a new product for them. Can you provide some more color here on their ambitions with this launch? Any details around planned production volumes ahead of the launch later this year? Thank you.
Yes, okay. True Temper is actually the mother company of True Hockey. True Temper is a company providing technology for different sports categories for more than 100 years. They have been really strong in golf shops for golf clubs. They entered into hockey with hockey sticks. They're very successful there. They also could also expand their range with customized hockey skates in a very premium segment. They've decided to enter into protection as well, having helmets into their program to this market. It is, as you say, it's their first helmet into the market. They will launch it, starting to launch it now. It will be accessible in the later autumn.
We do not have any full insight in how they are planning volume-wise. For us, it's a very important, strong partner with a very strong brand. A lot of history in presenting very good products in their markets and their categories that where they have entered into. We are happy to have them as a partner. We are happy to help them to launch the hockey helmets. For us, again, we've been wanting to get into this category for some time. 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 BPS will be integrated to this Dynamic 9 helmet?
It's one of the main platforms, the C2 platform, which you see in most of the helmets right now.
Okay. In conjunction with the IPO a few years back, you estimated the size of the team sports category to be around 3 million helmets annually.
Yeah.
Which are the largest segments in this category? Approximately what share of the category is comprised of hockey helmets?
Yeah. The 2 larger categories in the team sport in our addressable market is American football and ice hockey. Those are the major ones. Ice hockey representing around 1.2 million, 1.3 million per year. You have also lacrosse, which is a similar style helmet as ice hockey, which is also team sport, but smaller numbers. The major ones are American football and ice hockey.
Okay, that's helpful. Thank you. Can you confirm that Bauer and CCM are the two dominant players in this segment, and do you have any insight into their market shares approximately? Are there any other players worthy of mentioning here?
Yeah. CCM and Bauer is definitely the major players, they are battling it about for positions. Bauer has been the stronger player, CCM being very close behind, they are sort of depending on where they are launching product. There are other smaller brands in this category as well. We have Warrior as one example, for instance, then you have a number of other smaller ones again. It's a fairly small market, strong players, that's basically how it looks like.
Right. Can you give any detail on the average price point in the hockey helmet category compared to bicycle or snow, the approximate? Perhaps also if you have any leads to the approximate retail price for this Dynamic Pro.
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. 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.
Just, you mentioned on the WaveCel technology, the competing technology, that you had some questions, I believe you said, regarding issues with their material. 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 we have questions or would like to sort of question how they have done it. Basically, it leads back to where we are. There is 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 make happen, that it becomes an industry standard, which is then much easier for consumers to deal with the results and understand the results.
Right now, there is no standard, but the most likely standard is going to be 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. That is what we are requesting the report of the statutory results of the various 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. In the event of an accident and higher forces, is that a problem in your view that the material is with a sharp end toward the wearer's head skin?
I think it is a plastic structure, with edges and sharp edges. If I would speculate from my personal view, yes, a sharp edge in a crash would probably do something with your skin. Again, it's nothing we can confirm because that's not what we test really. We test the rotational aspects and how the brain reacts. As you say, having sharp edges close to your head, that might cause injuries, but nothing that we can confirm in that sense.
Thank you.
Thank you.
The next question is from Fredrik Moregård , Pareto Securities. Please go ahead.
Thank you very much. Good morning, everybody. A couple of questions from me, if I may. First of all, I was hoping you could comment something more about your relationship with Bontrager. 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. Bontrager is still a client of ours. They have a wide range of Mips helmets in the range and also helmets performing very good. We have still a strong relationship and a plan going forward. We don't see and expect a wind down or a decrease. We expect them to continue.
Okay. Thank you very much. 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 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 customer?
Well, making a new model is always a new model. It doesn't really matter if it's the first time or the second or third. If it is 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. Having a helmet, or starting to develop a helmet and making that helmet reach a mass production ready date, that takes a long time. That can take 18-24 months. Our part of that is not many days, but in calendar time, integrating Mips takes time. From our perspective, where we help them integrate Mips, it's just a number of days, but then it's just calendar time, having tooling made, testing performed, and so on.
That's why we sometimes talk about long development or long time from start to production ready, that's because that's how the brand's development time sets the 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 had a decline from 22 to 21. I just wanted to ask have you lost a brand here or what is going on with these numbers?
Yes. That has been two brands that we have 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. It could mean that the brand 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 of production. It's a mix, we haven't seen a declining trend. That's just the facts that have made it happen, basically.
Okay. Could you comment on what the reason was for this decline this particular year?
They were too small.
Okay. I see. A 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 into more helmet categories or what is going on there?
Gross margin is of course impacted by several different items, but when we talk about sales mix here, it is mainly relating to the solutions we sell and also to the customers that we are selling. 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. We still have a very healthy gross margin, and it was also the second highest. Yes, there could be some effect on this one.
Was relating to solutions and also to the customers that we were selling to.
Okay. 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 from me. Thanks.
The next question is from Daniel Thorsson, ABG. Please go ahead.
Yes. Hi. Thanks. Daniel here. A quick one on ISPO. The five mentioned clients, are they totally new clients for you, or are they existing clients just expanding into snow?
They're totally new. Head, Cébé, Thule, Pro-Tec, and Slingshot are new brands in the snow category for us.
Okay. You don't sell Mips 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 sort of stick to the annual average price there.
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. Then we have growth in bike and all the other categories as well. 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.
Okay. The final one on OpEx, how do you see continued growth in sales and marketing versus R&D during the year? Are you looking to add any staff?
No, Max again here. We have our 2020 plan, there we said both in marketing expenses and also in R&D expenses that we will aim to spend somewhere around 5%-7% in both of the different spend types, so to say, that's what we will continue to do. If you look at R&D expenses, we did spend 6.2% on average for the year of 2018. That was well between the 5% and 7%. We will continue to spend in that relation.
Okay. That's fair enough. That was all from me for now.
The next question is from Christian Leija, DNB. Please go ahead.
Hi there, thanks for taking my questions. Specialized has incorporated your Mips BPS in all their helmet models. Do you see other helmet producers doing the same, or is something you would flag, or what are your thoughts there? That would be my first question. Thanks.
We definitely see much more interest of sort of stepping a full face story, having Mips represented in a full line or in most of the line. If you look at Bell and Giro, 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. The overall interest is supporting our plans with penetration and making more and more models in the programs for our clients. So far, we don't have any other clients yet that presents the 100% volume as Specialized did.
Is that something you would flag if you get more clients on board with a full range?
We will press release as soon as we have such a 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. If we take China as being 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 Råman , Handelsbanken. Please go ahead.
Thank you. Magnus Råman, 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. Perhaps just to clarify there, is it fair to assume that you will be more focused on containing a gross margin that you deem to be at healthy levels than 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? 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. That could mean that we would have a lower selling price but still attract a healthy gross margin. 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 solution you are selling in. 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 work, and that's how we can achieve a 40% plus even margin.
Great. Also follow up on the questions that you got about Bontrager and your expectation of them staying on as a client. If you just looked at the example of POC, which then launched a proprietary competing technology and subsequently has, from what I know, discontinued all new development of Mips as to date. Is there any difference here that make you more encouraged to expect Bontrager to stay on with volumes on Mips?
I think it's quite a big difference. Bontrager has a majority of their model program equipped with Mips and large volumes represented by that. Our relationship is still there, and the intention for them to continue has still been shown or signaled to be there. There's a huge difference between those companies if you're to compare them in that sense.
That's very clear and good reply. Thanks. Just on understanding the dynamics a little bit in the quarters and so on. You've been clear here that snow really supported the Q1 top line growth. Look at the seasonality of the business, it should also have a positive impact at the start of Q2. The latter part of Q2 will be more driven by the scaling of bicycle volumes ahead of that upcoming season and product launches. Of course, 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 I said before, I think we still have a very good momentum in project flow. 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. We still have the growth and intention to penetrate more and widen the offering with our brands' portfolios. Again, it's just supporting the plan that we have on the 2020 targets. Work with penetration, getting more models out, getting higher volumes with the models that we are launching or they are launching.
Right. 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?
How do you mean? What we can comment is that the Q1 last year was a slow quarter. Yes, there is a soft comparison there. We also have, when we completed the 2018, we had a strong growth with over 50% growth. Yes, we had a very strong Q1 as a start. I think 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. That's what we are heading towards and that's what we are focusing on to make sure that we deliver that plan.
Okay. Thank you. Just finally, can you help providing some more color on Bengt Baron's decision to leave the Chairman position? That's all for me. Thank you.
We can't talk too much about Bengt's decisions, but I think he has been with the company for many years, has been providing us very good support in helping us through this journey. I think it's a combination of things, but it's up to Bengt to describe that and present that.
There are no further questions at this time. Please go ahead, speakers.
Okay, we are ready. Thank you very much for listening to Mips and our Q1 report. We hope to hear you next report again. Thank you very much.