Earnings Call: Q2 2021

Jul 22, 2021

Thank you, operator. Welcome to Mips Q2 result presentation. My name is Max Strandwitz, and I am the CEO of Mips. With me today, we also have our CFO, Karin Rosenthal. I will take you through the quarterly results, and if we start with the key highlights. It was a fantastic start of the year with a great quarter with an organic growth of 139%. If we look at the first 6 months, we have delivered an impressive organic growth of 107%. The growth was mainly driven by high demand for bicycle helmets, but we see strong performance in all our 3 different categories. Numbers are somewhat helped by soft prior year comparator after the start of the pandemic situation last year. We continued to see a strong improvement in EBIT and operating cash flow. Our supply chain has been challenged, but we have managed it very well, both year to date and in the quarter. We continue to see high customer activities. There is more customers coming on board, and we are fully on track to deliver according to our 2025 plans. If we then turn to next page, I'm now on page number 3, and if we start with bike. We continue to see very strong demand from Mips solutions in bike helmets. There is high demand for all types of bike helmets. There is still a challenge for the factories to produce all the bicycle helmets required to meet the demand on the market. Therefore, our assumption is that the strong demand is expected to continue at least until the end of this year. If you then turn to next page and we look at snow. Mips-equipped helmets have been performing better than the winter sport market in general, which have been struggling in some geographies after the shutdowns. There is two key reasons. First of all, we are launching with more helmet brands and there is more models on the market, so we continue to expand our market share. Then also our key geographic markets, U.S. and the Nordics, have performed better than we expected. This also means that we now expect to grow also in snow helmets for the year 2021. If we then turn to next page, I'm now on page number five. Moto there we see that the good consumer momentum continues. We did see fantastic growth in the second quarter with a 370% growth. We now have a growth number of 76% year to date. The momentum is still highest in motocross, we start to gain traction also in road motorcycle helmets. We have launched several initiatives to improve the overall awareness of Mips in the category, we do also here expect a good consumer demand also coming quarters. If we turn to next page, I'm now on page number 6. I'm very happy with the development in safety. We are expanding to new markets. In the beginning of July, we announced that we have entered also into the U.S. market with the U.S. helmet manufacturer, PIP. PIP is the global leader in hand protection, they are advancing their positions also within head protection. Of course, Mips is a very relevant offer then. We will launch with more construction helmet brands during the coming quarters, there is no change to previous communications. Volumes will start to grow and become more material at the end of 2021. If you then turn to next page. Like everyone else, we do see challenges in supply chain. I am very pleased with the way that we have handled a very challenging world around us. We do see the same issues in logistics, shortage of raw materials, and a very inflationary environment as in many other industries. We have therefore announced price increases in Q2, and they will be implemented during Q3. We do that to, of course, protect our margin and as the cost of goods sold is a small part of our portfolio. Of course, they will never become material, but it is always important to protect your margin. If we then go to next page. A very important area for us is sustainability. We have, as you know, decided to divide our work in four key pillars. First of all, our employees, our most important asset. Second, product that protect users. Third, the environmental impact. Four, sustainability in supply chain. We have put targets and key KPIs to all of them and started to craft a long-term ambition, which we are going to share with you coming quarters. We then turn to next page, I'm now on page number nine, and we look at the development in our different categories in sports, we saw very strong performance in the quarter with 106%. In moto, really strong quarter with 370% growth. In safety, it's still early days. A lot more will happen in coming quarters as I explained before. We then turn to next page, I will hand over to our CFO, Karin. Thank you, Max. Good morning, everyone. I'm Karin Rosenthal, CFO of Mips. I will take you through the financial part of the presentation. Development in the second quarter, net sales increased by 115%. Organic growth was 139%. The difference is fully explained by FX and the strong SEK versus US dollar in the quarter. Gross profit was up 114%. Gross margin of 73.8%, down 40 basis points compared to last year due to sales mix. OPEX, here we continue to invest in our strategic priorities. A strong EBIT, up 266% to $72 million compared to $20 million last year. EBIT margin of 50.7% compared to 29.7% last year. A strong increase of operating cash flow to $56 million. If we look at our financial KPIs, organic growth of 139%, EBIT margin of 51%. If we turn to next page and the development for the first six months, net sales increased by 84%. Organic growth was 107%, the difference is fully explained by FX. Gross profit was up 86%, and a gross margin of 73.3%, up 60 basis points versus last year. OPEX, we continue to invest behind our strategic priorities, R&D and marketing. A strong EBIT, up 209% to SEK 111 million compared to SEK 36 million last year. An EBIT margin of 49.5% compared to 29.4% last year. A strong increase of operating cash flow to SEK 125 million compared to SEK 38 million last year. Financial KPIs, organic growth of 107%, EBIT margin of 49%. If we turn to next page, we are now on page 12, balance sheet and cash flow. We have a strong cash position. We paid out a dividend of SEK 92 million in the quarter. We have cash and cash equivalents of SEK 302 million. Just to remind you, we don't hold any loans. We paid out dividend of 3.50 SEK per share in May, corresponding to 71% of net earnings. Equity ratio of 79%. Over to you, Max. Okay. Thank you, Karin. If we sum up a very successful quarter, we see good demand in sport and moto. We are entering into more markets in safety. We continue to improve our profitability and our operating cash flow. We do expect the good consumer demand to continue, assuming no dramatic change to the current situation. We continue to have very high project activity, strong momentum in all the 3 categories we are operating in. We are accelerating our activities in sustainability, a very important area for us, and we are fully on track to deliver according to our 2025 plan. With that, I open up for questions. Operator, over to you. Thank you. If you do wish to ask a question, please press 1 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 2 to cancel. Our first question comes from the line of Daniel Thorsson from ABG. Please go ahead. Yes, thanks. A couple of questions from me. First one, what do you estimate is the market share in bike today, given that the current market likely expanded some 50% in 2020? Yeah. It's really difficult to say because, of course, there is not really strong global market share data at the moment due to the pandemic situation. Our assessment is that we have somewhere around 20% of the addressable market today. Okay. That sounds fair. Secondly, on the changed snow guidance growth in 2021, is that also growth versus 2019? Yes, it will be. Okay, good. I take a final one before jumping into the queue again. When did you start to see the cost increases on raw material and COGS? As we have not really seen any material gross margin moves lately. Yeah expect for the gross margin based on the price increase? The gross margin or actually the impact on commodities as such, started actually to come into effect already during Q1, became more material during Q2. Of course, we are still a growing company. We have a lower share of fixed costs and so on under our cost of goods sold, so we have managed to offset them quite well. Long term, of course, we need to protect our gross margin, and therefore we take price increases. It's of course important to note that the cost of goods sold in our total P&L is quite small, so even a more material price increase will not have that material effect. Okay, we should expect relatively small price increases here, it sounds like? Yes. On adult level. Okay. I just have the final one then. Now you have actually started to use the price increases, I guess people will talk quite a lot about it. How do you see price hikes as a longer term growth option beyond volume growth? No, for me, it's always important that Mips continues to be the superior technology. If we do that, we continue to innovate. That's how we drive price increases. I don't expect that increasing the license fee, especially not when you have already fixed price positions on the market, is a long-term good strategy. For us, it's a volume game. If we get the volume, the rest of the P&L plays out quite well, and that's where our focus is. Okay, fair enough. Thank you, Daniel. The next question comes from Adela Dashian from Handelsbanken. Go ahead. Yes, good morning. This is Adela Dashian here from Handelsbanken. Let me start by congratulating you on a very strong quarter, firstly, and then on to my questions. First of all, I've seen that you're adding more brands to the safety category. That's good to see. At the same time, your sales figure was down in the category compared to Q1. Could you please start by explaining a bit more about the launch process for this category and how your new customers are acting, given that this is a brand new technology for everyone in this industry? Yeah. Thank you, Adela Dashian. A very good question, and it's of course, also good for me to explain. Entering into a new category, and just to remember, 2 years ago, we didn't even have this category as such, so it's a new category for us. When we launch a brand, that's when we communicate. We don't communicate when we actually sign a brand. We launch a brand, and then we communicate which brand it is. Which of course, makes us a little bit slower in the process. Of course, since we already know which brands we have signed, therefore, we can be a little bit more confident also saying that there will be more brands launching during the year. The biggest fair in the world in construction helmets or PPE protection in general is in Düsseldorf. It's called A+A, and that's where you will see more brands launching with Mips. How are your new customers acting or thinking about the new technology that you're bringing to the market? What kind of reactions are you getting? Overall it's very positive because, of course, the construction industry is starting to understand. We have done a big PR job, of course, before. We have had a lot of activities, especially on the U.S. market, explaining why Mips is a relevant protection also in construction helmets and so on. I think for the whole industry as such, Mips gives them an opportunity to talk about safety in a different way, but it also gives them an opportunity to price up. Because, of course, if you look at the innovation level in construction helmets, it hasn't been that great, and getting an opportunity to talk about technology, talk about the differentiation, of course, is a very relevant point also in this. They are really happy to have an opportunity to price up on the market because it has been almost commoditized, where you see high volumes but very low prices. With Mips, it gives an opportunity to price up a bit on the market. Do you feel like the American market is more, how should I phrase this, that they would appreciate the technology more than other geographical areas, or is there no difference across the geographical sphere of the different markets that you're active in? Yeah, I think that the biggest difference with the North American market is that, of course, the overall awareness of Mips is a lot higher. Already when you start talking to a customer or a construction company there, most probably they will already have Mips in their bike helmets or in their snow helmets or motorcycle helmets. That's a little bit of a head start, but I would say that the overall perception is that the receipt, especially from the construction companies, because so far we haven't met any construction company that doesn't have a Sierra in Eurovision, and then, of course, including Mips becomes quite a relevant point. I would say that the receipt in general has been quite positive all across the different geographies. Right. Okay. That makes sense. I do have 2 more questions. The first one is just a follow-up on the price increases. If you could please explain a little bit further what kind of increases we're talking about here. You explained the effect it will have on your margins, but it sounds like it won't have a longer-term negative impact. No, it won't have a longer-term negative impact. If you calculate backwards, you know that the COGS is approximately 25% of our P&L. If we would do a price increase of 10%, that would be 2.5% on total, so relatively small impact. It would not drive an increased margin to a material extent because of course you get also the same amount of cost increases. Net-net, I would expect similar number to zero. Right. Okay. I do have to ask about the competitive landscape. Obviously, as a result of the developments in the last year, do you feel like you're well ahead of your competitors at this point? Do you have a better position in the market compared to a year ago? Are we seeing more smaller competitors coming to market? Yeah, I'm very happy with the market situation we have today. In bike, we are really starting to become the expected solution, especially in the U.S. market. We see fantastic growth also on the European market. Like I said before, if you add the total amount of competition, they are less than 10%. Nothing arising that we know of at the moment, and so on. We are quite happy with the situation as it is today. Great. Thank you very much. The next question comes from the line of Henrik Mordahl from Nordea Securities. Please go ahead. Thank you very much. First off, a question on the recent launch with PIP. Is it possible to give some sort of indication of this opportunity, perhaps comparing it to Centurion? Yeah, I would say that they are a very similar size to Centurion. Okay, a small player on the U.S. market then, but perhaps with significant expansion plans, I guess. Yeah. When I say that they are a similar size, if you look at the total company, PIP, it's quite a big company as such. They are world-leading when it comes to hand protection. They have a couple of thousand employees. Of course it's not a small player as such. They have quite a strong capacity. Their entry into head protection started a couple of years ago. They also have done some acquisitions and so on. Of course, when we partner up with brands, we do it because we think it's the right brand to partner up with and a partner which we can also drive a lot of growth, and that's what we really value in PIP. Okay. Sure. When it comes to PR activities, I know you've been in the U.S., you've been in the U.K., you've been in the Nordics talking to construction companies. Have you been doing similar activities in other safety verticals? I'm thinking about industrial applications and manufacturing and so on. The key focus so far has been in construction helmets because there, of course, is where we see the bigger market. Of course, as soon as we feel it's sticky enough and that we get enough mass to drive awareness there, then we would switch over also to helmets for industrial use, mining helmets, offshore helmets and so on. There is quite a lot of things to do also there. I believe if you want to run as fast as we do, focus is important, and that's why we focus on the construction helmet, make sure that it sticks and that we do it properly there, then we will run into the other opportunities. Sure, that makes sense. Going back to the strength that you're seeing in the bike market, I think you've been alluding to some additional capacity coming on board in the market, in previous calls. Have you seen that coming on stream over the past few months? Have you seen any benefits in your growth figures from that capacity expansion in the market? Yeah, there is more capacity being installed, or it is already installed, and factories have been commissioning. We are seeing the benefits of higher volume capacity in the bike helmet markets as such. Okay, that's a benefit that you have been seeing to some extent in Q2 but perhaps accelerating into the back half of the year. That's correct. Okay. Thank you very much. We have one more question from the line of Karl Oskar Hedin from Berenberg. Please go ahead. Hi, both. Just one last question from me. On the mix, you mentioned that there's a small decline in the gross profit there of 40 basis point due to weaker mix. Can you just talk a little bit about the mix dynamics between how you produce snow helmets versus bike helmets, or what's the main driver for the small decline? Yeah, mix can be a lot of things, and of course it is quite a wide word. In us, it's depending on not so much on the sales to the different markets because there we are categories or type of helmets because we have a similar type of margin there. It's more if we do more or less projects. If we do more projects, then you also get a lot of tooling cost, and tooling normally doesn't have any margin at all. That's why you can see a slight margin erosion if you do a lot of helmet projects. Okay, that makes sense. That's all from me then. Thank you. Thanks a lot and congratulations on a very strong quarter. Thank you, Karl Oskar. As there are no further questions, I'll hand it back to the speakers. Okay. Thank you for listening in to what we think was a really fantastic quarter, and make sure to enjoy the rest of the summer and make sure that you buy a lot of our products, and speak to you again after the Q3 results announcement. Thank you all for listening in.