Earnings Call: Q1 2021

Apr 29, 2021

Good morning, everyone. My name is Max Stambits, and I am the CEO of NIPS. With me today, I also have Karin Roosenthal, who is our CFO. I will take you through the Q1 interim report. And if we start with the key highlights, we did see strong performance in the quarter with 48% net sales growth, 66% organic growth if we adjust for currency effects. We continue to see a very high demand for bicycle helmets, but there is positive outlook in all the Greece that we operate in. We saw a good development in EBIT and operating cash flow. And it's good to see especially on the EBIT development. When I started in 2016, we never thought that we would make Profit in the normally smaller first quarter and showing a 47% EBIT margin is, of course, a great achievement and also a very good testimony of the scalability of our model. There is challenges in supply chain. However, they have So far been manageable. Global logistic and helmet manufacturers capacity is still challenged coming quarters. We do see high customer activities. We have more customers coming on board, and we are on track to deliver our 2025 plan. If we then turn to next page, and I'm now on Page 3. And if we start with the development in bike, there we see the strong demand continue. We see a demand increase for all type of helmets. There is a big trend in mountain bike, a lot of people mountain biking all over the world. E bike, there is a new report out that most probably somewhere between 2025 and 2030, There will be more e bikes sold than the traditional bikes, so good trend also there. And we also see that Commuting is increasing also all over the world. There is challenges for factories to produce all the bicycle helmets to meet the demand. There is not enough capacity in the industry to meet the current demand in Bicycle helmets or 4 bicycle helmets, I might say. And our assumption is therefore that we do not see that the retail channel inventory levels will normalize during this season. Just for the record, Previously, we assumed that by the end of Q2 that we would see restored inventory levels again. We don't see that happen. If we then turn to the next page and we look at the situation in snow, the situation is not as bad as We previously expected at the release of the year end report, we projected a soft ski season. The retail sellout numbers around the world varies with low and very low sales number in South and Central Europe. In North America and Nordics, which are the bigger markets for MIPS, sellout numbers are better than we previously expected, And we do not see that stock levels will hamper sales for next season to the extent that we previously anticipated. If we then turn to next page, in Motto, we do see a good Consumer demand for MIPS equipped helmets. We did actually see declining numbers in the quarter, but that's fully explained by the the hazing of helmet production in the factories. Momentum is still higher in motocross. However, we do see more brands signing up also in Street. Initiatives to continue to strengthen the awareness of MIPS And the category continues. We did sign up the Honda racing team. And we do expect good consumer demand also coming quarters. If we then turn to next page. In safety, our global expansion have started. We see good interest in the safety category from both helmet manufacturers and construction companies. We have had Several webinars and roundtable events during the quarter with great interest. We have just started our Enter into the U. S. Market, a lot of PR activities to educate the market to start with. We did launch our first helmet with Centurion in March. And those helmets are actually already available on the market. And no change to previous communications. Volumes will start to ramp up at the end of 2021. If we then go to next page, I'm now on Page number 7. The topic for any company working with consumer Products today is probably challenges in supply chain. Our ingredients brand business model has worked very well in the challenging environment around us. We do see the same issues in logistics and shortage of raw material as many other industries. Even though there is daily challenges, we have managed the situation very well. We do see An indication of cost increases, if those are material and long term, we will pass those forward. If you then go to next page and the team MiPS that is expanding, It is one of the most important areas for us to raise awareness and establish our MIPS team is one of the more important tools. We have 2 more athletes and teams joining us. The first one is Tim Geisser and the Honda racing team. He is a great athlete and the first one that actually won all the different MX classes in the World Cup. The second one is Kate Courtney and the Scott SRAM team. She is the Cross Country World Champion of 2019 and also the UCI World Champion of 20 'nineteen. And she is also going for the Olympic gold whenever the next Olympic competition will happen. The team also have the former Gold Medalist, Nino Schurter. All of these are extremely safety conscious and great ambassadors for MiPS. If we then go to the next page, another very key area for us It's sustainability. We did launch our annual report a couple of weeks ago. And there, of course, you Find our full sustainability report. We have decided to focus our work around Four different pillars. The first one and the most important one is, of course, our employees. 2nd one is product that protect users. The third one, our impact on the environment. And then, of course, Sustainability in Supply Chain. We have indicators and long term ambitions for all our pillars, and you find them also in the annual report, to structure and follow-up our work around sustainability. If you go to next page, I'm now on Page number 10, and we look at the development in our different categories. Sports, we did see a strong growth with 55%, mainly driven by the demand for bike helmets. In motor, we saw a line in the quarter fully explained by the phasing of production, still a very strong outlook and growth for the year in Motto. And in Safety, it's still early days, but now you see also that there is more brands coming on board. With that, I'm handing over to Karin. Good morning, everyone. I'm Karin Rubsental, CFO of MiP. I will take you through the financial part of the presentation. Development in the Q1. Net sales increased by 48 Percent organic growth was 66%, and the difference is fully explained by FX due to a strong SEK versus U. S. Dollar in the quarter. Gross profit up 51%. Gross margin was up 170 bps to 72.5% due to sales mix. On Pex, we continue to invest behind our strategic priorities, R and D and marketing. A strong EBIT, up 141 percent to SEK 39,000,000. EBIT margin of 47.4%, up versus 29% last year. A strong increase of operating cash flow to SEK 69,000,000. If we look at the financial KPIs, Organic growth, 66 percent EBIT margin above 47% and operating cash flow of of SEK 69,000,000. If we then turn to next page, we are now on Page 12, balance sheet and cash flow. We saw a strong improvement of cash flow from operating activities in Q1 of SEK 69,000,000, up versus SEK 16,000,000 compared to last year. We have a strong cash position with cash And cash equivalents of SEK 341,000,000. And just to remind you, we don't hold any loans. The Board proposes a dividend of SEK 3.50 per share compared to SEK 0.03 per share last year. Equity ratio of 84%. Over to you, Max. Thank you, Karin. If we then summarize the quarter. Strong start of the year, mainly from good demand in bicycle helmets. Snow, not as bad as we expected. We saw strong development in EBIT and also in operating cash flow. The strong consumer demand is expected to continue assuming no dramatic change to the current situation. We continue with high project activity, strong momentum in all our 3 different categories. We continue our activities to drive awareness of the MIPS brand. We have just finalized a recent market survey that shows that if consumer knows about us, understand what we do. They will buy us even if we are the more expensive alternative. We are on track to deliver according to our 2025 plan. And with that, we open up for questions. Over to you, operator. Thank you. And our first question comes from Adel Adashin from Handelsbanken. Please go ahead. Your line is now open. Sorry, operator, we did not hear any question. Yes. I'm just going to put Adela back to see if we can hear again. Adela, can you are your line open now? Can you hear me now? Yes. Yes. We can hear you, Adela. Perfect. Let me restate the question. So it was a question on the sales development in Q1. I noticed that there is a big deviation between the Q4 results and the Q1 results, especially for the sports category down about 40%. So do you explain this due to Q1 being a small production quarter? Or is there anything else underlying that explains this deviation? Yes, I mean, traditionally and also if you look historically, Q1 has been a smaller quarter, and it will always be a smaller quarter. You have less production dates and you also have the Chinese New Year. Like I also explained in the beginning, just being able to show profit has been an historic achievement for us. Being able to show 47% EBIT like we did shows that we are getting enough Scale also in Q1, but because of the limited amount of production days, it will never be never it's, Of course, a big word, but it will probably not be as big as the other quarters during the year. Got it. Okay. Do you view it as a risk in the future that the market for bicycle helmets becomes to maybe saturated because of the increased demand now and that typically a helmet lasts for about 5 years and that Could potentially mean that growth could be hampered in the next 3 to 4 to 5 years because of this increased massive demand? Yes. And of course, that was a risk that we reviewed and thought about quite a lot in the beginning on the pandemic situation because Like always with terrorist attacks or temporary changes in the environment around us, normally, Demand is not that sticky and then you see a demand peak and then it goes back to normal. We have had this discussion with a lot of our And if we look at their 3 year plans, they don't see demand going down because there is a couple of structure changes around the world. First of all, there is a very big mountain bike trend. People want to spend time outside and so on, and we see a good demand there. Commuting, that is something that we actually expect that will stay at least for the coming years. And there we see Quite a large amount of the projects that we are doing is in commuting helmets. So we do project together with our partners that there will be strong demand also there. And then probably the biggest trend that we are seeing is in e bikes. And e bikes requires a slightly different certification because you travel with higher velocity. They are normally a bit thicker and so on. So if you ride the e bike, probably you should have a little bit thicker bicycle helmet, and that also drives the conversion rate in a different. So I would say that at least from our side, we do see and expect that the strong demand in bio calmets will continue for at least a couple of quarters. All right. Then on the motor category, also declined sales figures. This if you compare it to last year, I understand that to be a function of bicycle helmets taking over production in factories, which leads to lower capacity for motorcycle helmet production. Is that correct? Yes, it is correct. And I mean, 1 single quarter will not change the picture for us. We do see good consumer demand. Last year, moto was our fastest growing category. There is no reason why it shouldn't be one of the fast the moving categories this year. So we still have a very positive outlook. We have some more brands coming on board and also with our existing brands, We are growing in their assortment. So no, I'm not that worried about the trend in Q1 because Like I said, when we close the year, I'm truly convinced that we have strong growth also in most of them. But at least in the near term, maybe for Q2, should we Back to similar development due to bicycle helmet demand still being extremely strong and low inventory levels for that subcategory? Yes, we normally don't give any forward looking statements, but you don't need to expect the same kind of development in Moelto for Q2. Got it. Okay. Then finally on the safety category, very nice to see the start of sales figures here With the launch of the Centurion helmet, so how should we think about growth in this category going forward? Do you expect Yes, I mean Yes, will it grow faster than it's just used to gain momentum in sports? Or Do you expect a slower penetration of this category? Yes. I mean, when we talk about 2021, for us, it's about onboarding new brands. And you will see them coming on board. Given that the roads to market and of course, Given that we are a much more sizable company, hopefully, we learned a lot during our journey. But also, I think that we found quite an effective Business model where we try to educate both the construction companies and the Hermes brands at the same time, I think that we can gain momentum a lot more efficient than we did in our more traditional category sports. Of course, we have a Thank you, Adela. Thank you. Our next question comes from Frederic Morgard from Protos Securities. Please go ahead. Your line is now open. Thank you, operator. Good morning, Max and Karl. So first off, the question on the Current is very strong. Obviously, production demand in the biochemist category with inventory replenishment going on and perhaps being prolonged into The second half of the year, retail sales clearly very strong. But how are you and your brand partners thinking about the second half of the year, Assuming that perhaps consumer demand could start to normalize at least on a year over year basis and the second half clearly being the Traditionally strong quarters for bightower production and perhaps weighing those two aspects against each other. Thank you, Fredrik. It's a very good question. And of course, we have continuous dialogues with brands. Like I also said during the last call, there is It's more capacity extension in the factory. So there is not a like for like comparator if you compare versus last year. So We do expect that factories will be extremely full for at least the end of this year and That we will see that they will run on full capacity utilization. We are converting more brands. And of course, We also see a great interest for the market. So we see also an increase of the penetration with MIPS. So still good Growth momentum expected for this year. All right. Thank you. And when it comes to the snow elements, clearly, you're seeing a Stronger consumer sellouts in the categories, especially in the Nordics and in the U. S. Do you think there's potential for the No pedigree to spillover into the second half of the year as well. I'm assuming that Kendall Brands were not perhaps too agile to ramp up Already in early Q1. Yes. Given that bicycle helmet had a lot of priority in Q1, The helmet needs to produce or be produced during some part of the year. So yes, you can expect some of the snow And a helmet is being produced also in Q3. All right. Just a final question then on your marketing strategy and marketing expenses. So I think over the past few years, you've been growing your marketing expense by 30% or so. Now you're increasing your direct to consumer marketing, you're building the MIPS teams, adding brand athletes and so on. Do you think that you're going to accelerate your marketing investments? And if so, do you think you have the organizational bandwidth Getting good return on that investment? Yes. I think, first of all, very good question. Historically, we said that we will spend And other than it's a smaller quarter, we do not adjust our marketing spend depending on if it's a bigger or smaller quarter. We have a long term plan and that we are following. In terms of the 5% to 7%, we don't see any reason to change that Spend. Our marketing organization is growing. We are becoming stronger in terms of our execution. We have a lot of different initiatives market survey to really understand, is our marketing effective? Do we drive awareness, like we said, we are going to do? And we see Very promising numbers, especially on the U. S. Market, but we also see a good pickup of awareness also for Europe, which is, of course, our next big growth geography. Sure. Any other any additional Marketing tools that you're starting to work with in addition to the brand athletes, MIPS team? Yes. I mean, there is a lot of different things. For the ones that follow us closely, you see that we have a brand new website that we launched a couple of weeks 2 go really looks fantastic, much more consumer centric, really focusing on more like a bias guide for the consumer. So if you haven't had The chance, please review it because it really looks good. Then we have also worked a lot on the in store execution and MIPS Academy, making sure that The retail staff understands and know how to sell MIPS in store. And then what is also growing very fast It's, of course, e tail. So we have a lot of e tail campaigns and also ramping up our activities there. We have A great opportunity to drive sales on e tile because, of course, all the e tailers like NIPS quite a lot because it's a perfect Opportunity for them to charge a little bit for every helmet that they sell. All right. Thank you very much, Max. Thank you, Frederic. Thank you. Okay. If there appear to be no further questions, I will turn the conference to you for any closing remarks. Yes, operator, sorry to interrupt. We saw that we got a question by e mail, and that was what are the expectation about your market share And how is competition developing? Like we said, when we closed the year, and of course, we will only disclose Those numbers annually, we had about 6% of our addressable market. Of course, we are growing faster Then the market, so you can assume that we are gaining market share and we are gaining market share. And when we look at competition, we do not really have any head to head competitors as such. So in terms of that, we do not see anything at the moment, which we are Concerned about there is a lot of discussions about wave cell. Like I said also during last call, as long as we get More customers per month than they get per year, I will still think that we can have a nice head start. And then we've got another question, also anything new on M and A. And Like we said before, we are looking to see if there is anything that can complement our offering. We are scanning the market, but there is nothing big that we're looking at, at the moment. So if no more questions, thank you for listening in and speak to you again next quarter.