Earnings Call: Q4 2020

Feb 11, 2021

Thank you, operator. Good morning, everyone. My name is Max Stammitz. I am the CEO of MEPS. And with me today, I also have the MEPS CFO, Karin Roosenthal. I will take you through the key highlights of the year end report. We did see strong performance in the quarter with 60% net sales growth, 77% organic adjusting for currency effects. Despite the challenging start of the year, we managed to turn around the performance and deliver an organic growth of 43% for the full year. We continue to see good consumer demand in bike. We have a record amount of customer projects. We do see a strong increase of customers and models on the market equipped with MiPS. We did launch our first international customer in safety in January. We continue our journey to increase the NIPS brand awareness, which is a very important strategic objective for us. Next, NIPS team athlete is out. We did launch our new product range structure and which is another step for us to become a bit more consumer centric in our communication. Our Board is proposing a dividend of SEK 3.50 per share, which equates to 71% of net earnings, well above our ambition of 50%. And our long term financial target remains intact. So if you then turn to next page, I'm now on Page 3. I'm also happy to announce that we continue to expand our customer base. We have now 121 brands all over the world, which is an increase of 18 brands versus the same period the year before. We grew with all our key customers in all the categories we're in and in all the geographies we are present in. We have delivered MiPS BPS to 729 different helmet models. And during 2020, we delivered 7,200,000 MiPS bps units, and we have now delivered more than 20,000,000 units since inception. At the end of 2020, we had 6% of our addressable market. So there is still a lot of growth to go for. If you then turn to next page. Like I said, we continue to see a good Demand in bike, there is a high demand for MIPS solutions in bike helmets. Just a reminder and important to know, sales 2 bicycle has been the main part of the sales for the Q4. The industry expectations is that inventory levels in retail were not normalized prior to mid-twenty 21, which means that there will be bike helmets being produced also in Q1 and Q2, which is normally not the case. We do see good interest for commuter helmets, helmets for recreational use and e bike helmets. So basically, good demand in all types of helmets. If we then turn to next page And maybe a little bit the flip side of the story, Snow, we see a very different situation around the world. There is high interest for winter sports around the world, but of course, restriction limits possibilities to travel and do winter sports. Nordic and the U. S. Ski resorts are, to a large extent, open. There is still limited possibilities to ski in both South and Central Europe. The uncertainty of the winter holiday season remains. We see mixed Retail sales on different markets, Nordic and U. S. Market have a decent sellout. I think anyone that tries to get any ski gear In Sweden today, we struggled quite a lot, soft performance in South and Central Europe. Our expectations Old Soft Winter 2020, 2021 still remains. And with that, we turn to next page. And I'm now on Page number 6. If we look at our important category, Motor, we continue to see strong sales, mainly through increased penetration with our existing customer. Multocross continued to be the key driver, but we are also gaining quite a lot of traction in road motor cycle. We have launched several initiatives to improve our position in motorcycle We tailor marketing asset and sponsoring of key events to make sure that we increase the awareness of NIPS also in the motor category, and we do expect also good consumer demand also coming quarters. If you then turn to next page, now on Page 7. In Safety, I'm happy to announce that our international expansion has started. We see good interest in the safety categories from both helmet manufacturers and construction companies. We have our first larger customer on board, Centurion, which is a key PPE supplier for the U. K. Market. We have developed a new harnessed solution, which brings possibilities for NIPS also in harness equipped helmet, which has not been the case before. And just for reference, a harness equipped helmet is actually a helmet with straps inside the helmet, and we now have a technology which actually can slide on that harness system and have a possibility to mitigate angled impact also in those type of accident scenarios. No change versus previous communications. Volumes will start to ramp up in 2021. If we then turn to Page 8, our ambition is to become the expected solution. In order to do that, you need to win the consumer. We did, therefore, simplify and launch or relaunch our product range. It is a simplified product range that makes it easier to choose and Diversify Our offering. We are focusing on educating consumers, empowering them to make much more informed decisions when buying a helmet. And NIPS has previously been a B2B focused company. The launch It's another step towards a much more consumer centric brand identity. If you then turn to next page, we are now on Page number 9. We did also launch our 2nd MiPS athlete, and that's an important program to continue to drive the awareness of the MiX brand. It is another legend, Brandon Semenak, a true legend within mountain biking and is considered by many to be the best mountain biker in the world, very committed to safety. Do take the opportunity to look at some of his movies on YouTube. It's really great what he's doing. Yes, I'm also very happy that our other legend, Henrik Alor, won another gold at X Games last week. And like we said before, we will continue to launch athletes also coming months. If you then turn to next page. If we look at the little bit more Granular development of our different categories. So first of all, growth in sports category, we saw 59% growth in the quarter, and we now have 107 active brands in sports, which is up versus 11 with 11 versus the year before. In Molto, it's actually our fastest growing category. It grew 79% in the Q4, and we now have 26 brands on board. So it's up 6 brands versus the period before. And in safety, it is still early days. But like I said, more brands are launching in 20 21. And with that, I hand over to our CFO, Karin. Good morning. I'm Karin Roachtenthal, CFO of MEPS. I will take you through the financial part of the presentation, Development in 4th quarter. Net sales increased by 60%, organic growth was 77%, And the difference is fully explained by FX due to a strong SEK versus U. S. Dollar in the quarter. Gross profit, up 57% and gross margin, down 100 3 basis points to 73.3 percent due to sales mix with high amount of customer projects Where we have a low margin and therefore, negative mix effect. OpEx, we continue to invest behind our strategic priorities. EBIT was up 96 percent to SEK 76,000,000, A good EBIT margin of 54.4 percent. Cash flow, a strong increase of operating cash flow to 49,000,000. If we look at the financial KPIs, organic growth, 77% EBIT margin above 54% and operating cash flow of SEK 49,000,000. If we then turn to next page and the development for full year 2020. Net sales increased by 36%. Organic growth was 43%. Also here, we saw an impact from FX. Gross profit, up 34%, Gross margin down 130 basis points to 72.8%, again due to sales mix And a high amount of projects. Adjusting for acquisitions, gross margin was down 100 bps to 73.1%. OpEx. We continue to invest behind our strategic priorities, re and marketing. Adjusted EBIT was SEK 168,000,000 and adjusted EBIT margin, 46%. And just to remind you, we adjust for impacts from acquisitions. And as you can see in the table below, The effect from acquisitions is quite low. Cash flow, an increase in operating cash flow to SEK 116,000,000. And the financial KPIs, organic growth of 43%, Adjusted EBIT margin of 46% and operating cash flow of SEK 116,000,000. If we then turn to next page, we are now on Page 13, balance sheet and cash flow. We saw a strong improvement of cash flow from operating activities in Q4 of SEK 49,000,000, Up versus 20 compared to last year. Cash and cash equivalents at SEK 272,000,000. We have a strong cash position. And just to remind you, we don't have any loans. The Board proposes A dividend of SEK0.035 per share, 7.1 percent of net earnings compared to SEK 3 per share last year. Equity ratio was 82%. Over to you, Max. Okay. Thank you, Karin. So if we summarize the final quarter of the year, we do see A strong quarter, mainly driven by good demand for bicycle elements. The strong consumer demand is expected to continue, assuming that we see no dramatic change to the current situation around the world. We continue to have a high amount of project activity, strong momentum in all the 3 categories we operate in. We continue our activities to drive the awareness of the NIPS brand, a very important strategic objective. We launched another team member of our team, NIPS. And also, we restructured and reorganized our product hierarchy to become much more consumer centric in explaining the consumer benefits of MEPS. And we are in a good position to deliver also according to our 2025 plan. And with that, I open up for questions. Thank you. MEPS. We have a question from the line of Adela Dasyan from Handelsbanken. Please go ahead. Yes, good morning. Thank you for taking my questions and also congratulations on a strong quarter. My first question relates to your cost base and especially as it comes to R and D expenses. You've previously guided for 5% to 7 Percent of net sales, but it's been a bit lower than that in the last two quarters. Do you expect this to ramp back up again in 2021? Yes. Thank you, Adele. Yes, we see and or have an ambition of investing 5% to 7% in net sales. If you take the year 2020, which was a bit special, we were just south of that number with 4.8%. I see no reason to change that communication. Investing in R and D is important to us. We are an IP company. We are becoming more consumer trick. So no, at the moment, I don't see any reason to change that guidance. All right. And then Also on your gross margins, which have been trending lower, do you expect this to continue going forward? Yes, I mean what and also like Karin already explained is that we do see a sales mix effect when we are doing a lot of projects like we are doing at the moment, which, of course, long term is good for growth. We do those projects normally with quite low margin because it's a cost plus arrangement with the customers. So you can have a mix effect. There is no underlying trend in terms of the products that we are selling that those would deteriorate the margin. So We have a long term ambition to stay above 70%. There is nothing that has changed in the quarter or in the year that would make us change that guidance. Okay. And then on the safety category and specifically on the construction helmet subcategory, Could you please give us some more insight on the announced partnership with Centurion? Let's say, how does this customer compare to your other customers in terms of Right. In terms of size and what are your expectations for volume as we move forward into 2021 for the construction A helmet subcategory? Yes. And this is actually very much we are doing what we have said we were going to do. We are very happy with the partnership with Centurion. They are a midsized player. They are very strong on the U. K. Market. UK market is very important to us. That's also where we have done a lot of research on the accident statistics. So I'm really happy with the things that we can do together with them. We have said before that 2021 It's really the year on onboarding new customers. We will see some volume ramp up, but that we will see a more material number when we go into 2022. Okay. And then if you could also please Breakdown the difference in revenue per unit sold for each category, sport, moto and safety? Yes. And I mean, if you take our average sales price, you get to slightly above SEK 50. And Today, we have a volume based price model. If and as you can assume, Our volumes in both motor and construction is slightly lower than in sport. But over time, we expect to level out and be no difference between the different categories. All right. Thank you very much. Thank you, Adela. Our next question comes from the line of Frederic Mowreguard from Pareento Securities. Please go ahead. Thank you very much, and good morning, everyone. Just a question, first off, on marketing. It's said you're Refocusing somewhat from earlier than we're doing or mainly doing B2B marketing and now focusing on the consumers as well. Could you perhaps give us some indication of what size of investments you're looking at for the consumer focus grounding going forward? Yes. As in 2020, we have a ratio of 5.1%, so that's actually On the low side of 5% to 7%, we see no reason to change that communication. It's still in line with our expectation. And For MBS to become a bit more consumer centric is, of course, if you want to The expected solution, of course, you also need to win the consumer, like I said. And we are changing a bit on our communication to make sure that the consumer understands NIPS in a better way. What type of solution? What's the benefit with that type of solution? Of course, we do not compromise safety, so all our solution are designed to be equally safe. But when it comes to different consumer benefits like ventilation, weight and so on. We think it's very appealing to start explaining that to the consumer and also empowering them to make a much more educated choice. We don't see any reason, like I said before to change our guidance of 5% to 7%. That still holds in terms of the long term objective. Okay. So 5% to 7% total marketing spend there? Yes. And that is marketing and not the full selling expenses. So it's only the marketing spend of the selling expenses. Sure. And turning to the Centurion partnership, could you tell us something about how long it took you to Take this product to market, what was the duration of the project? And would it be reasonable to expect similar time lines for future projects in this category? We have actually been discussing with them for some time, and we looked at different solutions. We felt that it was a great partner to launch our new harness solutions. So therefore, it maybe took A little bit longer, but from start to finish in terms of development, project management and so on, I would say 6 months. And like we have indicated 4. A typical project within MEPS takes normally 12 to 18 months, and it's not because of us, because Normally, that's the launch window and time to market for an outdoor brand. We see shorter development cycles in the safety category. And today, my best estimate is somewhere around 6 to 12 months. Normally, they do not need to respect launch windows, but can actually launch when the product is ready, and that's a bit what we saw here. All right. Thank you very much. MEPS. We have a question from the line of Carlos Gabriel Deignan from Berenberg. Please go ahead. Hi, good morning, everyone. I think most of my questions actually been answered to an extent already. But In terms of the G and A and selling expenses, I'd like to touch a little bit on this. It's at the lower end of the guidance, your 5% to 7% range, and you see no Changing this. But how do we look on ramp up in costs going out for COVID? What does 2021 look like, Considering if we look at improving market situation compared to what you have this year, to which extent did you have cost mitigating measures? And what will be the additional cost? Will this be going to Eurobike? And if so, several other costs? Or because I mean, we continuously Under estimate certain cost items here, considering the earnings. So just if you can give a little bit more flavor on the end of the cost ramp ups in a more normalized market conditions. That would be great. Yes. I mean, there is 2 costs that don't occur in the P and L during the pandemic situation, which are quite clear. One of them is traveling. We haven't done a lot of traveling since March. We actually had 2 trips so far for the rest of the year if you count after March. Then, of course, you also have the fares, which are not taking place. In Q4, there were normally a normal year, there would be a fare for motorcycle called EICMA. Those that one was actually canceled. And then now in January, instead of ISPO, which is the world's biggest Winter Fair. It was a digital session. So of course, those type of costs haven't happened in the last 6 months of of the Year. Whether they will happen this year or not, I think it's very difficult to speculate. I think 5% to 7% is a reasonable guidance for us. We continue to invest in what we can to make the NIPS brand awareness as high as possible. We do not really focus on doing one activities versus the other. So for me, It's not an irrelevant question, but the guidance remains of 5% to 7% when it comes to marketing. So the only thing that I will think is going to be different looking forward is probably traveling. I don't think that we will be traveling to the same extent that we have done before. We see fantastic opportunities to do a lot of sessions virtually. We have equipped our office to do a lot of sessions virtually, and that actually works in a great way. And if not, it's a lot more sustainable doing it that way. Great. Can you just touch a little bit on the snow category? I would say that was a huge variable 2020. We saw significant adverse order volumes in Q2, Probably rightfully so. But going forward now, obviously, 2021 is still Far out, you gave a little bit of an assessment on how you look at the future outlook. But what you hear from the industry? Are people concerned that Smaller ski shops in chalets, ski resorts in France are going bankrupt. That would impact the order volumes? Or are the helmet OEMs Generally cautious about whether consumers will travel and if they can afford to buy new equipment. Yes. I mean, already going into this season, A lot of brands were already cautious. We know from the industry that the stock built was probably around 80% index versus the year before. So they went in with lower stock. I think if you look at, like I said, the U. S. Market and the Swedish market, we see decent sellout and so on. If you look at some of the sort of the smaller outlets in the French and Swiss and Austrian Alps, of course, they have a bigger problem because a lot of those resorts haven't even been opened. So of course, if your store is not open, you don't sell anything. So There could be a ripple effect on that. We have already lost at lost communication, taking quite a conservative view on snow. We said that we do expect a soft season for 2020 2021, And that also comes when it comes to production. We do see that the positive trend in bicycling are outweighing that effect or offsetting that effect. Thank you. That's very clear. That's all for me now. Our next question comes from the line of Daniel Toujan from ADT. Please go ahead. Yes. Thank you very much. So regarding bike, you stated the supply chain still has low inventory levels, and you continue to see strong demand into H1 'twenty one. What could change that picture? Could they live on that low inventory levels for quite some time, which could disappoint? Or do you think that could overshoot and maybe lap even more inventory going ahead? No, I think I mean, the challenge when it comes to inventory levels. Now I mean, factories are running on maximum capacity in China. They are also shortening break for the Chinese New Year. There is some logistic challenges for the brands. We don't have them because, of course, we are delivering directly in China. But it's also to make sure that you can ship all the goods that you manufacture. You probably have heard in some of the other calls that there is a container shortage around the world. It's not that there is not enough containers, but there is a logistic challenge of getting the containers back to China. That is influencing the lead time and could have an impact on stock level. So When I talk about mid-twenty 21, that's based on the production schedule that we see. Exactly when it lands on the market, I think it's Very difficult to speculate on. Okay. So sounds pretty promising. A question on motor then. Regarding the new regulation, have you seen any brands developing in house solutions to meet the requirements? Or do you expect to take a large share of that market yourself. Yes. I think It's been a couple of years back. Yes. And I mean, When it comes to motorcycle, the first level of the standard is quite low, and you will see some helmets passing that standard or a lot of helmet also without having any rotation and motion protection. I think for us, it's more long term To develop a motorcycle helmet can easily be 2, 3 years. And of course, what the brands are getting concerned about is how will they pass the next improvement of the standard. So of course, that's the dialogue we have. It's not about passing that standard. It's about what we can do to pass the coming standards, which will be significantly harder most likely and difficult to pass without a well functioning rotational system. And there, of course, we play an important role. So To pass this standard, you can do that also without rotation and motion protection. But long term, it's a very important step in the category which haven't been that safety conscious before. Okay. Okay. I see. Regarding snow, I mean, Q2 is a large snow element production quarter for you. When do you think you will have visibility into your production pipeline in Q2. I guess that you have some orders now, but they are pretty uncertain, both upwards and downwards. When do you think you'll have a clearer picture? Yes. I mean, what we are still seeing now is, of course, a lot of impacts of the bicycle. So that's actually who are pushing the snow orders a bit forward. So of course, we can't say the whole impact on the situation. Session. I mean, we have long term strategic plans with all our key brands. They are still positive on the season, but I think In the end, you probably need to wait until probably March, April when you know exactly how the season played out. Snow is, of course, not our biggest category. Of course, bike is the dominating category. So even if there is a decrease of 10% to 20% in snow, we could still offset that by a positive impact in bike. Okay. I see. That's good. And then the final one. I mean, you have The tremendous performance in the last 4 years. I think share is up more than 10x since we started with the IPO. But in 2020, to be frank, you actually meet your sales target of SEK 400,000,000 by some 10%. If we're looking for the next target now, SEK 1,000,000,000 in 25, what is really your confidence and the visibility in reaching, meeting, exceeding, potentially missing that target Given that we missed we actually missed the 2021. Yes. And of course, I am normally a guy that you can probably hold quite accountable. I think missing the SEK 400,000,000, of course, it's disappointing for us. We were cruising ahead of that target when we started the year. We had a 5% decrease in the 1st 6 months. I think it's very difficult as a growth company to meet your target. If you look at the last 6 months, we actually delivered 73% growth. So I think we actually recovered the situation quite well. I think when you look at the EUR 400,000,000 numbers, you probably need to look at rolling quarters ahead, and then you will probably see that, that number is not that far out. When it comes to our longer objective, which is, of course, the SEK 1,000,000,000 target, in order to reach that, we need to deliver a CAGR coming years of slightly below 23%. We have a plan. We have good visibility. I don't I'm very confident on reaching that plan. If we see any deviation upwards or downwards, we will communicate that to the market in an appropriate way. Excellent. Thanks. NIPS. We have a question from the line of Frederic Modygourd from Pareto Securities. Please go ahead. Thank you. A follow-up on the bike and the snow seasonality. I was hoping maybe you could tell us something or give an indication of the Seasonality of bike production, obviously, in the normal season, that would be heavily weighted to Q3 and Q4 With less production in Q1 and Q2. But is that ninety-ten shift? Or what could you give some indication of what that split looks like? Yes. So I mean, in Q3 and Q4, you are right, the dominating production is normally, bicycling, and it has been, to a large extent, also the same thing this year. If you look at Q1 and Q2, Q1 has been the quarter normally when you start producing ski helmets to next year. Given that you had quite a large carryover of bicycle helmets that haven't been produced in Q4, 4. You see still that bike is actually the dominating production also in Q1. And then I think in Q2, Then you probably see a mix of both of them depending on how the season will play out. So I think we have Good demand in bike. I think it will take some time to fully recover the stock. And it's all the factories in China at the moment, they are full at leased to mid-twenty 21. If there will not be snow helmets being produced, I'm sure they will fill it up with bike helmets. So It's not so much about what will be what, it's more on what is the capacity or total capacity of the factory in China. Okay. And are you seeing some additional capacity coming on board anytime soon in the industry? Yes. There is 2 new bigger helmet factories being opened actually this month in China. So there will be slightly more capacity being added to the network in China, not our factories, but of course, Helmut's factories. Okay. Thank you. Our next question is a follow-up question from Karl Osterholm from Berenberg. Please go ahead. Hi, Mike. Just a follow-up for me. What's the point on the return for the helmet OEMs? If we go now and We see through your lockdowns, you see another boom of coronavirus and your lockdowns are being imposed. What is the cancellation policy with the helmet OEMs for, let's say, no MiPS. In general, how should we think about that? Yes. I mean, with cancellation policy, normally, if The season doesn't come, they will not place the orders. Normally, we have a lead time of 45 days. So we will probably know 45 days. With the bigger brands, they would normally indicate, say, we are seeing a soft season ahead of us. Please be aware and make sure that you adjust floor capacity to manage that situation. I haven't had that call yet. Okay. Thank you. There are no further questions at this time. Please go ahead, speakers. Yes. We also have some questions online. So we had The question on the accounts receivable that they were quite high in the end of 2020. And you're right, we did grew quite quickly in the end of Q4. And therefore, of course, you see a big impact also on the accounts receivable. There is also a question on what we do expect in terms of working capital for 2021. As we have said before, we do not give any guidance on working capital. We have a strong balance sheet. We have a good cash flow generation. That's what we steer the business on. At one point, we will probably install a working total target, but it's still early days for that. And then we also got a question, Can you give us an insight on what your market share is in each of the categories and what the main competition is? I mean, we do not normally share that granularity on numbers. Like we said, we have 6% of our addressable market. If you take the total amount of competition, it's still below 10% of our total sales. So of course, we have quite a nice head start versus our competitor. Okay. So if no other questions, thank you for listening in, and I welcome you all to the next session. Stay safe. Thank you.