Earnings Call: Q3 2020

Oct 6, 2020

Good morning. My name is Max Damits, and I am the CEO of Mitz. I will take you through the Q3 results. And if we start with the key highlights, we did see strong performance in the quarter with 94% net sales growth. We did see an organic growth of 1 108%. And the increase in sales is mainly driven by sales to Biochemet. But you also need to remember that we had a soft comparator in prior year due to the implementation of tariffs. We continue to see high customer interaction with a large amount of new projects in all the 3 categories we operate in. We did launch our first team NIPS, First athlete out is the skier, Henrik Kallo. We do see good consumer demand, mainly driven by sales to bike helmets, good growth anticipated also coming quarters and our long term financial targets remains intact. And if we then turn to next page, I am in Page number 3. And if we start with bikes, we do have a high demand for solution in bike helmets. I don't think that anyone has missed that there is a large demand for bike and bike helmets and anyone that tried to buy a bike helmet or a bike in the quarter have struggled. Inventory in replays are very low, and we do expect to have a high demand situation that will carry over to 2021. We see an increase in bike helmets both for commuting and recreational use, and it's all over the world. It is important to note that historically, by kelmetz, volume has been concentrated in Q3 and Q4. However, due to the extreme demand situation, we do expect high production also to continue into 2021. If you then turn to next page. In snow, we did actually see some recovery in the quarter, but still soft numbers for the year. We see an improvement in sales to ski helmet manufacturers in the quarter, mainly relating to late orders due to the pandemic situation. The uncertainty of winter holiday season remains. Booking situation at ski resorts has improved versus last quarter. Infrastructure challenges at ski resorts remains. And that is, for instance, how will you manage restaurants at ski resorts and also how will ski lifts be arranged. Even if there is a strong season, there is a limited possibilities for brands to react to the sales uplift, given the heavy demand situation in bike and the limited capacity at the factories. Due to the current restrictions, the outlook for the winter season may change rapidly, and I don't think anyone can say exactly where this will end. If you then turn to next page, Motor. We did see strong sales. Volumes improved versus previous quarter as we communicated before. We do see a similar trend in motor as in bike, but of course not to the same magnitude, but people do want to avoid public transport. More brands is launching with MIPS. We did launch our first solution with BMW in the quarter. Demand is supported by the implementation of the new standard EC22 and 6, which I also started talking a little bit about last quarter, which includes rotation of motion in the test protocol, which is exactly what Nipps addressed. And this is actually the 1st official test standard that has rotation motion in the test protocol. We do see a good consumer demand, and we do expect it to continue coming quarters. If we then turn to next page, safety, we are lined up for a good 2021. We do see good interest in the safety category, both from helmet manufacturers and construction companies. There is an intensified debate and media attention around work related injuries with focus on brain traumas. MIPs will publish a scientific publication within short explaining the injury statistic and how brain injuries are overrepresented in variance accident and why it's important to address that. We do only announce new brands when first orders are delivered. And we do see an increased interest of Nipps internationally and volumes will start to ramp up in 2021. If we then turn to next page, I'm now on Page 7. I'm happy to say that we are launching the Nipps. NIPS should be the obvious choice when buying a helmet. This is a strategic initiative and to increase the awareness of the MiP's brand. We did start a revision of the brand platform, and that has been done. Several activities have been rolled out. One of them is to create the team MIPS with MIPS ambassadors. Henrik Halord, the most decorated ex skims skier in the world, is the 1st athlete to join the team. He is a great NIPS ambassador through his dedication to safety. Additional athletes will be announced coming months, and this is a great way to increase the overall awareness of the mix brand. If we then go to next page, I'm now on Page 8. And if we look at the development of the different categories that we operate in. So first of all, in sports, we saw a good growth of 91% in the quarter. We now have 102 brands in the sports category, which is up 3 versus the last quarter, 2 more brands in snow and 1 in equestrian. In Moto, we saw growth of 142%. We have one more brand in the quarter, and that's actually BMW. And in Safety, it's still early days. But as I said before, volumes will ramp up in 2021. If you then turn to next page. And if we look at the financials and the development in the 3rd quarter, We did see a net sales increase by 94%. Organic growth was 108%. We did also see a strong increase in gross profit of 91%. Gross margin was down with 80 bps in the quarter to 72 0.2%. And due to the high amount of projects that we are running, the project revenues that we have in our net sales have an impact of margins. You can sort of say it's the sales mix effect, and that's the explanation by the margin erosion. OpEx, we continue to invest in strategic priorities. EBIT was SEK 55,000,000 for the quarter, up versus SEK 20,000,000 in the year before. There is a strong EBIT margin of 53.6%, and this is actually the first time when we are above 50% EBIT margin. It shows that we have a very scalable business model. And when with the strong growth that we saw in the quarter, that becomes even more visible. And also in cash flow, we saw a strong increase of operating cash flow in the quarter. So if we look at the financial KPIs, organic growth, 108 percent EBIT margin, 53.6 percent and we did see an operating cash flow of SEK 29,000,000 in the quarter. If we then look and turn to the next page, the development of the 1st 9 months. We do have a growth of net sales of 24%, organic growth 27%. We see a similar trend in gross margin. Gross margin is down 120 basis points to 72.5%. If we adjust for acquisitions, we see a deterioration of gross margin of 60 basis points. And also here, it's an effect of the sales mix, fully explained by the high amount of project revenues that we see. OpEx, we continue to invest in our strategic priorities, which is R and D and marketing. Adjusted EBIT is NOK 92,000,000. We do see an adjusted EBIT margin of 41%. And when we talk about the adjusted margin in year to date numbers, it's to isolate the effect of the acquisitions that we did last year. We do not adjust for the cost in Q3. Cash flow, we do also on a year to date basis see a strong increase in operating cash flow to SEK 66 1,000,000. Financial KPIs, organic growth, 27 percent adjusted EBIT margin, 41% and an operating cash flow of SEK 66,000,000. So now also year to date numbers are solid, offer a rough start of the year. If we look at the balance sheet and the cash flow, we do see a strong improvement of cash flow from operating activities. Cash and cash equivalents are at SEK 233,000,000 at the end of the quarter despite paying dividend. MIP does not hold any loans, and our equity ratio is 84%. If we then start turn to the last page and the summary and summarize the largest quarter so far in MiP's history. We did see a strong quarter, mainly driven by good demand for bike helmets. The increasing demand is expected to continue into next year, assuming no dramatic change to the current situation. We did have an EBIT margin for the first time about 50% in the quarter. We continue to have high project activity, strong momentum in all the 3 categories we operate in. I'm happy with the rollout of the new brand platform, launching the team NIPS, and we are in a good position to deliver according to the 2025 plan. And with that, I open up for questions. Our first question comes from Adeelah Dashain from Handelsbanken. Your line is open. Please go ahead. Yes. Good morning. Let me start off by congratulating you on a great quarter. Good recovery from the first half of twenty twenty. As it relates to my questions, my first question is about the sports category. If you could please tell us how much of sales within this category is related to bicycle helmets versus snow helmet? Yes. So thank you, first of all, for the congratulation of the results. And when it comes to, so to say, the proportion of sales relating to bike helmets, almost all is relating to bicycle helmets in the quarter. Got it. And then secondly on the safety category, you said that we should expect to see a growth numbers in 2021, but how material will that be and will it show in your sales breakdown? And I mean, what pace do you expect the safety category to be growing at? Should we expect volume from that category to be greater than the moto category, for example, due to it being a much larger market? Yes. I think I mean, first of all, we are just starting in the category. And like I said, we do see some interest. And like I've also explained before, when we look at our long term financial target, the growth priorities are, 1st of all, grow with the customers that we already have in sports that we are doing already at the moment. The second thing is to replicate what we have done to sports also in the motor category, and that's the 2nd biggest growth driver. And in the 3rd category, which is the safety category, even though that's the biggest potential category for us, We have just started, and that's why that is the smaller part of the plan. Like I said, it will be a substantial part of our plan by 2025. Exactly how quickly that can go, I don't think anyone can answer. What we do see at the moment is that we see a good interest both from the helmet brands, but also from the construction companies. There has been a lot of articles, especially in the UK, about the severeness of brain injuries at construction sites. And of course, we are releasing the benefit of that. But do you expect 2021 to be the 1st year where it will start to show in your sales breakdown? Yes. You will start to see some numbers in the sales breakdown, but it will still be our smallest category. Got it. And then finally, could you please explain also the difference in margins, 43 categories and maybe also the difference in revenue per units sold? Yes. I think, I mean, Nipps is a small company. We try to keep it quite simple, and that's also one of the key reasons why we have a very scalable business model. So it's not a huge difference in terms of revenue or financial model for us. We do attract a high gross margin, and we do that independently of which category it is. And then we have a very scalable business model, and that's how we operate. Of course, when you look at the safety category, since we start at lower volumes and we have a volume based price model, you could assume that in the beginning, you could see higher prices. But over time, we expect it to flatten out and be comparable to what we see today. Thank you, Adela. Our next question comes from the line of Daniel Turshen from ABG. Your line is open. Please go ahead. Yes. Hi, Max. Also congratulations on a very strong quarter, of course. First question on OpEx, that was lower than I expected in Q3 and most specifically to R and D that is actually declining year over year and quarter over quarter. What is really sustainable and temporary in the OpEx here? Yes. Of course, and thank you for the congratulation of the results. I think our R and D work is extremely long term and we, of course, don't manage it on a quarterly basis. For us, it is important to have a long term R and D plan. If you look at the year to date number, we are at 5% and that is fully within 5% to 7% of the guidance that we have given in our long term ambition. So yes, you will have individual quarters that might be higher or lower depending on which projects we are running. Long term, we are still sticking to plan and the year to date number of 5% shows that. Okay. Any other temporary effects in selling expenses or admin due to less traveling or remote working or anything that you expect to come back a little bit in Q4 or Q1? No. I think I mean, of course, we are constantly adding and increasing our investment to key priorities like you already started on, which is R and D. And then in marketing, we are continuing to rolling out our brand platform, which you also start to see an effect of. There is, of course, some costs that don't happen in a quarter like Q3, for instance, the biggest bicycle fare in the world did not happen because of the pandemic situation. For us to just bank on that money, it's a little bit short term. So what we have done is, of course, continue to invest behind the brand instead. We also need to be much better at presenting ourselves in a virtual environment. So we didn't, so to say, save any of those costs, but rather reinvested them into our business. So you will see costs going up. But as you also see in our margin, we have a very scalable business model. Okay. Fair enough. CapEx in the quarter was SEK 5,000,000 versus historically basically nothing. An explanation for that? Yes. And we have just moved or actually in the beginning of January, we've moved to new facilities to be able to facilitate our growth plan and also to be able to really show that we are for real in the safety category. When we move, we also started to do a bit of refurbishment of the office. So the SEK 5,000,000 that we saw in the quarter is mainly relating to improvement of the new facility that we have moved into. So it is a one off. Okay. Excellent. A question on the negative net working capital here as well. It is obviously a result of the strong growth. But is this level a normal level based on basically 100% growth rate? And have you had any changes in payment terms either way or bad debt recently? No. We didn't have any changes in payment terms, and we actually didn't have any bad debt in the quarter. We have seen that you also see in the operating cash flow that it has improved. Of course, if you grow with almost 100% in a quarter, it will have effect on your accounts receivable. So I would say it's sort of normalized, if you can call a close to 100% growth normal. Yes. That's good. And last a technical question here, but the FX effect in the quarter seems to be minus 14%. But in my model, the USD is only down 8% year over year versus the SEK. Anything I'm missing? Yes. What you do is when you have an FX effect on growth, so if you wouldn't grow anything, you will see exactly that number that you see. But since we are growing, the comparator gets extrapolated, and that's why you see almost a double effect on the impact from FX. Excellent. That's all. Okay. Thank you, Daniel. Our next question comes from the line of Frederic Morigdorff from Paretois Securities. Your line is open. Please go ahead. Thank you. Good morning, Max, and everyone else. First off, a follow-up on Daniel's question on the cost base, coming back to R and D. If you're going to keep within the 5% to 7% of sales range for the coming years, I would assume that you need to add quite a lot of people going forward to that organization to drive costs. Can you give us some hints of where you think you need to add employees to support your growth? I mean, when we talk about our R and D costs, we have 2 different time horizons. One is our product development work and our new solutions. And as you know, we are adding new technical solutions all the time, and we are putting a lot of investments into that. We also come out with new solutions in constructions to be able to better adapt to that category. And then we also have the long term R and D work, and that's the work that is heading up by Peter. And that is what is our next steps when it comes to helmet development. There, we are increasing our investment in FE modeling to really be able to do virtual testing, experimental testing of helmets before they even exist. And that you sort of see already in the car industry, and that is something that you would never manufacture a car without actually knowing how it will perform. And we are doing similar type of investments there. So we are recruiting FE engineers to also to be able to offer that kind of service to the brands that we're operating in or with. So there is 2 things we're investing into our R and D. Short term, to develop new products. Long term, to make sure that we have the right capabilities for the future and that we always have the superior technology. Okay. Very good. On the sales teams, I guess, first of all, the sports team that you have or the selling team for the sports categories, how set do you think that is? Or do you need to grow that in order to address the sports categories even further? Or are you sort of more or less fixed with regards to that cost base and adding cost on the sales side would rather be to moto on the safety categories? Yes. I think on the sports side there, of course, we have been going into more of a penetration game, and you could probably see 1 or 2 person being added over the years, but I don't see expansion into that category. And then when it comes to motorcycle, we will probably assume that it could also be 1 or 2 heads that would be added. And then when it's into safety, it's not necessarily salespeople that we need to add. The market is quite concentrated, and it's not like there is an enormous amount of bigger brands that we operate. There, the go to market model is different, and it's much more about education. It's about co partnering with the brand to go out to construction companies and explain why you need to have MIP. So if you still add them to the sales team, yes, then you will see more people coming on board. But construction, of course, industrial helmet is quite scalable because it's a much more concentrated market than we see in the other categories. Okay. Very good. A question on the industry capacity. You say that you expect the bike boom to spill over into 2021. Are you hearing anything from customers about considering capacity expansions and so on? And how long do you think it would take to refill inventories at the current production pace? Yes. I don't know any exact number, but the view of the industry is that this will continue somewhere into mid-twenty 21 before all the stock has been replenished. There is capacity expansion. There is a couple of new factories opening up in China at the moment. We all know with factories that it takes some time to commission them and so on. But yes, there is more capacity being installed in the industry. All right. Thank you very much. Thank you, Frederik. Thank you. Our next question comes from the line of Carlos Beringden from Berenberg. Your line is open. Please go ahead. Hi, Carlos from Berenberg here. Very strong quarter, so very good to see that growth is back and then obviously Q2 was a one off. I just have a few questions on obviously, we're seeing a significant bike boom now, people restocking, as you mentioned, it continues to be strong. But this year, it was sort of weaker comps last year. So I'm not discrediting you for a very strong quarter, but there were some sort of easy comps due to the trade tariffs affecting it last year. But if we look at sort of the growth rate for Q4, which has sort of tougher comps, what should we actually expect in terms of growth? Are we more on this sort of sustainable level in terms of absolute numbers? Or should we continue to see sort of similar year over year growth as a percentage for the Q4 numbers? If you can just Yes. I think yes, I think if you look at Q3, Q3 is an exceptional quarter, partly because of the comps, but also that we saw that the bike season started earlier. Q4 is the most capacity utilized quarter in the industry of the year. So even though that you see a lot of growth, there is also a threshold that you need to meet when it comes to capacity utilization. So I think Q3, very exceptional quarter. Q4, we do see a good quarter ahead of us. We do not give any forward looking statements. Of course, we still hold on to our long term plan for 2025. But there is good momentum in the industry, so there is no secret around that. Okay. Good. Secondly, I mean, if we just look at the wider customer concentration, we can sort of derive from looking at the different websites and all the brands you work with and all the different models that there are some 25% model penetration based on how many models offered and how many of them come with mix. But can you tell us a little bit about sort of because you continue to grow a lot within your existing customer base. So how should we think about sort of the penetration and the continued growth trajectory for you just to, I mean, continue to grow really by expanding its product offering through like Bell, Giro and all the other brands? Are the we assume that the unit penetration is obviously significantly lower. So can you tell us a bit about ability to grow within the existing customer base and how that could potentially offset if we were to see a flattening curve of new customer wins? Yes. I mean it depends a little bit on which category and which type of helmets you talked about. But I assume that you mainly concentrate around bicycle helmet. And there, of course, you're right, we are the main part of the growth is coming from existing customers. And if you look at the customer concentration, we have 9 out of the 10 biggest brands in bicycle in the world. And of course, we don't only still have quite low penetration. So that's where the growth is coming from at the moment. If you look at what we have included in our long term plan, it's growth from our existing customers. Even if we get new customers, they will only have a material effect on the long term plan because we already have the big ones on board. Okay. That's very interesting. And for snow or for moto, I take you to that obviously you have still significant potential to grow in new customers as well. Yes. Okay. That concludes my question. Thank you very much. And again, congratulations on a strong quarter. Thank you, Carlos. There are no further questions at this time. Please go ahead, speaker. Yes. So thank you, everyone. We leave a solid quarter behind us. And let's speak again at Q4. Thank you.