Mips AB (publ) (MIPS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the MIPS Q4 Report 2019. Today, I'm pleased to present CEO, Max Strandwitz. [Operator Instructions] Max, please begin.

Yes. Good morning, everyone. My name is Max Strandwitz. I am the CEO of MIPS, and I will take you through the fourth quarter results. And if we start with the key highlights of the quarter. As you have already seen, we had good growth in the fourth quarter with 41% increase of net sales. We looked at organic growth at 33%. We did see that production volumes did get back to normal after the trade tariff slowdown that we saw in the third quarter. We do see a strong expansion in terms of models and brand during the year. I will come back to that a bit later in the presentation. We also see higher trust in the MIPS brand leading to more, what we call, all-in commitments from the brands. We have completed our key recruitment, both within marketing and sales, and that is important for us to deliver on our strategic priorities. We did see a strong EBIT margin for the full year of 2019 of 41.2%, which is above our long-term ambition. The Board is proposing a dividend of SEK 3 per share, up versus SEK 2.50 in the year before, which equates to an 89% distribution on net earnings, well above our ambition of 50%. And as we had good momentum in the quarter, we also see that we have a strong platform for continued growth. So if you then flip to next page. I am now on Page #3. As I said, we are expanding our customer base in 2019. We delivered to 103 brands all over the world versus 78 in the year before. All of our top 10 customers grew with MIPS BPS during the year. We did grow in all our categories, and we also did grow in all geographies. I'm especially pleased about that we managed to deliver very strong growth in the strategic import in Europe, where we actually managed to double our sales versus the year before. During 2019, we have delivered MIPS BPS to 583 different helmet models. So also there, we are up versus 448 models in the year before. And during the year, we delivered almost 5 million MIPS BPS units, and since inception, we have delivered more than 14 million units in total. We do see good customer interest. We continue to have a high inflow of new products, and we do have a strong pipeline of new helmet models being equipped with MIPS BPS. And then I flip also to next page. I'm now on Page #4. We do also see the trust in the MIPS brand increasing. First of all, the multisport brand, Bollé; and the lifestyle brand, Nutcase, both of them have communicated that they will offer MIPS BPS in all of their helmet models. Both brands will convert their whole range, and conversion projects have already started. Bollé is actually the first brand to offer MIPS BPS in more than one subcategory. So they actually offer helmet both within snow and in the bike subcategories. So this is the first time we actually have a dual commitment, so to say. And then also when it comes to Nutcase, that is the first lifestyle brand committing to have MIPS BPS in all of their helmets. So really happy to see this phase, the commitments from these 2 brands, and I think we will also have a very successful future together. So if you then flip to next page. And we thought it was important to give you an update on the coronavirus. So first of all, before going into all the details, it is important to give you a reminder on how we operate. Both the main part of MIPS' production and the helmet manufacturers are located in China. We are, today, producing our units at around 40 different factories, both in China and outside of China, but the main part of the traction is in China. The helmet manufacturing sites are located in -- and -- or concentrated in an area which is called Guangdong. It's just outside Hong Kong, about 1,000 kilometers from the Hubei area where the virus is currently concentrated. We have seen that the factories have resumed production after the Chinese holiday, but still they are running with low capacity. They will ramp up production during coming weeks, provided, of course, that they will have no virus on the site, and they estimate if that the factory is fully up and running at the beginning of March. As factories are starting up, it is currently difficult to foresee all the effects around the virus outbreak, but we do expect that we can have phasing effects from this. As you know, now we are producing helmet aimed for the winter market, so for the snow sport helmet, mainly. And those are produced in Q1 and Q2, and they are supposed to reach the market by the end of the year. So it's still time to catch up, but there could be phasing effects between the month, and it's important to flag for this. We are following the outbreak closely on a day-to-day basis, and we'll keep you updated if we see any long-term effect. And then I flip over to the next page and go into the net sales development of the fourth quarter. I'm now on Page #6. So first of all, good performance, 41% growth, organic growth of 33%. The growth was still mainly driven by existing customers expanding their assortments with MIPS. We did see growth in all our categories. And if we look at this full year number, we see a 39% net sales increase with an organic growth of 29%. If we then go to next page, so Page #7, and if we look at the financials a bit more in detail. So first of all, the development of the fourth quarter. Net sales, up 41%; organic growth, 33%; gross profit increased with 41%, and we did see flat gross margin. However, if we adjust for effects relating to the acquisitions, we actually saw an increase of gross margin of 90 bps, which is up to 75.8%. So a very healthy gross margin, and that is mainly driven by favorable sales mix. OpEx, you do see an increase in OpEx, and we do continue to invest behind our strategic priorities. We do see a negative impact on the other operating income and expenses in the quarter, which is mainly coming from currency derivatives. As you know, we have the hedging policies. And we also saw a weakening of the U.S. dollar at the end of the quarter, which has revaluation effect. In total, we saw an effect of SEK 4.3 million in the quarter relating to this. Adjusted EBIT, SEK 39.7 million versus SEK 28.7 million in the year before. We did see an adjusted margin of 45.4%, slightly down versus the year before. And in cash flow, operating cash flow in the quarter was SEK 19.7 million, down versus SEK 23.8 million in the year before. I will come back to that a bit later in the presentation. So in terms of the key KPIs in the quarter, 33% organic growth, 45.4% adjusted EBIT margin, and we did see an operating cash flow of SEK 19.7 million. If you then flip to the next page. I'm now on Page #8. If we look at the full year number, net sales, 39% increase; organic growth of 29%. We did see a gross profit increase of 40%. Gross margin was up 20 bps. Adjusting for acquisition effects, we actually saw also there an increase of gross margin of 140 bps to 75.3%. So also a very healthy margin for the full year. If you look at OpEx, also, we continue to invest behind our strategic priorities. And also in the full year, we do see a negative impact from the currency derivatives. And here, we see a total effect of SEK 9.8 million for the full year. Adjusted EBIT was SEK 110.5 million, up versus SEK 73 million in the year before, with an adjusted EBIT margin of 41.2%. That's up versus 37.9% in the year before. So good to see that we are delivering above our long-term ambition of 40% EBIT margin. And in cash flow, for the full year, we did see an operating cash flow of SEK 63.2 million, down versus SEK 69.1 million in the year before. So in terms of key KPIs, 29% organic growth, hence the EBIT margin of 41.2% and an operating cash flow of SEK 63.2 million. And if we look a bit more in detail on the EBIT margin, the adjusted EBIT and the adjusted EBIT margin development. So first of all, if we start with the quarter. EBIT increased with SEK 10.3 million to SEK 39 million. Adjusted EBIT increased with SEK 11 million to SEK 39.7 million, with an EBIT margin just above 45%. And it's important to note that when we are talking about adjusted EBIT, the only thing that we are adjusting for is cost and effects relating to acquisitions. So nothing else. And then if we look at the drivers behind the adjusted EBIT movement is mainly explained by higher sales, we are a growth company, partly offset by investments in the organization. We do see a negative effect from currency derivatives and FX in the quarter, and that we also have increased our spend in marketing. If we look at the full year number, we see that the EBIT increased with SEK 37.5 million to SEK 110.5 million, and that was driven mainly from higher sales, partly also offset by investments in organization and negative effects from currency derivatives. And we ended the year, like I said before, on a very healthy EBIT margin of 41.2%. If we then go to next page, which is Page #10, and then look at the balance sheet and the cash flow. So first of all, you have seen, both on the quarter number and on the full year number, that we saw a slight decrease in operating cash flow. So first of all, there is 2 effects affecting that. First of all, we have strong growth numbers. Our accounts receivables has been affected of that, of course. And the second effect, which you also need to factor in, is during 2019, we actually started to pay tax. Before that, we had tax losses carryforward, and that also affects the operating cash flow. Cash and cash equivalents was SEK 191.6 million at the end of the year. We don't hold any loans. The Board is proposing to increase the dividend to SEK 3 per share, up versus SEK 2.50 in the year before. And we have an equity ratio of healthy 87%. So if we then go to Page #11 and summing up the quarter. We did have a very good performance in the fourth quarter, which ends a very successful year. We did see a significant increase, both in the number of models equipped with MIPS BPS on the market, but also on the number of brands that we have delivered to. We do see major trust in the MIPS brand and more brands or bigger brands committing to have MIPS in 100% of their models and volume. We do not see yet any major impact from the coronavirus. However, we know it will affect us, and it's difficult to predict exactly how the outcome of that will be. I don't think anyone can say that at the moment. Organization is in place to deliver on our strategic initiatives, and we are in a good position to deliver according to our long-term 2025 plan. And with that, I open up for questions.

[Operator Instructions] Currently, we have a question coming from Adela Dashian.

First of all, let me congratulate you on a very strong quarter. My first question relates to the coronavirus. You said in earlier comments that factories have resumed production but are running at a low capacity. Does that mean that some of the factories closed down as a result of the virus? Or was that just a function of the Chinese New Year?

Thank you, Adela, for the question. And I will probably explain it like this. The factories, they always goes down for a couple of weeks during the Chinese New Year. What was different this year was that it was mandatory by law to extend the holidays with 1 week, which means that the factories were starting up production with a 1-week delay. And the bigger factories, they started to produce in the beginning of the week as planned. But what is also important to know that there is a lot of guest workers that this is moving in from other parts of China. They have been home celebrating the Chinese New Year, and when they come back, they need to be cleared that they don't carry any virus. And that quarantine period can be up to 2 weeks. So even if the factories or the workers reach the factories, it can still take some time before they come -- will become fully operational. That's why you see about 2 to 3 weeks of ramp-up period.

So we should expect that, that could have some negative effect even as early as in Q1?

It could have some negative effect in Q1. And like I said, it could be some phasing effects. I don't see that it will have an effect long term. But short term, yes, most probably, it will have an effect.

Okay. And then just a follow-up on that. You combined the Asian and Australian results into one line, but it looks like the growth in those regions combined was down 22% in the quarter. So could you give us some more detail as to which region that drove the negative growth and what the reason for that was?

Yes. So first of all, if you look at full year number, that really and actually increased. And yes, you can have effect in 1 quarter versus another. That region is still quite low in volume, and the volume it's related to is actually in China. Our sales to Australia is still extremely limited. And that has to do when certain deliveries come, if they came 1 quarter earlier or 1 quarter later. So fairly small numbers. We don't see any change in our ambition to grow in China. We have interesting projects and launched our first motorcycle helmet in China, and we do see good potential there. But still, it's not very based -- or it's only based on still very low numbers.

Okay. And then just second, I have another question about your industrial helmets. You launched the first industrial helmet. I'm just wondering about what the demand is looking for, for that product. Are you ahead or in line with your expectations in total for the Safety category?

Yes. So what we did, as you said, mid-last year, we launched our first solution with MIPS BPS or equipped with MIPS BPS. We do see a lot of interest. We have met the major construction companies in Sweden. We have had really good discussions with them, having safety workshop with them, explaining why it's important to also include MIPS in their construction helmets and so on. They are very receptive to that feedback. We do see a lot of interest, and we do have a lot of discussions with a lot of different brands in that category. It will still be some time before you see really the full effect of our initiatives that we take in the Safety category.

We have another question coming from Fredrik Moregard.

First, a question on inventories. Could you update us on your view of channel inventory, specifically on the snow and bike categories at the moment?

Yes. So I think I would probably have one answer before the outbreak of the coronavirus and probably another one now. As we've seen, we have seen good momentum and good consumer interest from the MIPS products, and we do see a very good sell-through. As we know, the -- some inventories levels were challenged already in Q3. So we do not expect them to have high inventory levels. But also for us, it's very difficult because we don't have the visibility. We know the stock levels at some of the bigger brands, and -- but where the whole situation around the coronavirus will put them, I think it's impossible to speculate. But I don't expect them to be higher than they were before the coronavirus outbreak.

Sure. And I mean, over the autumn, obviously, or at least, presumably, a lot of brands needed to get out of inventory as they cut production in Q3. Have you seen any indications from your customers that they want to rebuild that inventory going forward?

Not yet. We started off, of course, only had -- Q4 is quite a big quarter in terms of production. So then the factories are normally prudent anyway. And we have run with 1 month before production were shut down for the Chinese New Year and so on. So that's still too early to say.

Okay. Fair enough. Also, one question on your current model penetration with your top customers, say, top 10 customers. If you could update us on that as well.

Yes. And as you have seen, we do see an increase in penetration with our key customers. That's also what's driving the growth. We do see more of them committing to have a higher proportion of MIPS in their assortment. There is still challenging in some geographies in the world like South America, where the awareness of MIPS is not yet there. So of course, that's also a task for us, to increase awareness also in those geographies. But overall, we see very good momentum. We see a big interest with all the major brands of increasing the penetration with MIPS in their assortment. We had Specialized last year announcing that they will have MIPS in all of their models and so on, but we also see the penetration going up also with other brands.

Okay. And is there still a lot of upside to driving model penetration with these brands? Or are you approaching, say, 70%, 80% penetration with most of them?

No. I think 70%, 80%, you will probably find in some of the bigger brands when it comes to the number of models that are -- or including MIPS. However, some of those models, they have models with MIPS and the same model without MIPS. And by far, we're not even close to 70%, 80% of the total volume range, if you understand what I mean.

Sure, sure. That's encouraging.

Model range, we are there, but in terms of volume, we don't have access. There's still a lot of penetration to go for. And if you look at our total addressable market, we have SEK 130 million, which we consider at the moment to be addressable. If you look at when we ended 2019, we had just below 4% penetration. So we still have a lot of volume to go for in the Sports category and in the new categories that we also want to address.

Yes. Very good. Just a final question on the extraordinary item that you took related to acquisitions. Is it in the admin costs where we can find that? Or where is that in the P&L?