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

Ladies and gentlemen, welcome to MIPS Q4 Report for 2020. [Operator Instructions] Today, I am pleased to present Max Strandwitz CEO; and Karin Rosenthal, CFO. Max, please begin your meeting.

Yes. Thank you, operator. Good morning, everyone. My name is Max Strandwitz. I am the CEO of MIPS. And with me today, I also have the MIPS CFO, Karin Rosenthal. 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 MIPS brand awareness, which is a very important strategic objective for us. Next MIPS 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 active 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 7.2 million MIPS BPS units, and we have now delivered more than 20 million units since inception. At the end of 2020, we had 6% of our addressable markets, 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 helmet. Just a reminder and important to note, sales to bicycle has been the main part of the sales for the fourth quarter. The industry expectations is that inventory levels in retail were not normalized prior to mid-2021, 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, it 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 US 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. markets have a decent sell-out, I think anyone that tries to get any ski gear in Sweden today will struggle quite a lot. Soft performance in South and Central Europe. Our expectations of soft winter 2020, 2021 still remains. And with that, we turn to next page. And I'm now on Page #6. If we look at our important category motor, we continue to see strong sales, mainly through increased penetration with our existing customer. Motocross continued to be the key driver, but we are also gaining quite a lot of traction in road motorcycle. We have launched several initiatives to improve our position in motorcycle with tailor, marketing, asset and sponsoring of key events to make sure that we increase the awareness of MIPS also in the Moto category. And we do expect also good consumer demand for the 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 category 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 MIPS also in harnessed equipment -- helmet, which has not been the case before. And just for reference, a harnessed-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 angle the 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 helmet, and MIPS has previously been a B2B-focused company. The launch is another step towards a much more consumer-centric brand identity. If you then turn to next page, we are now on Page #9. We did also launch our second MIPS athlete, and that's an important program to continue to drive the awareness of the MIPS brand. It is another legend, Brandon Semenuk, 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 Harlaut, 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 a 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 Moto, it's actually our fastest-growing category, grew 79% in the fourth quarter, 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 2021. And with that, I hand over to our CFO, Karin.

Good morning. I'm Karin Rosenthal, CFO of MIPS. I will take you through the financial part of the presentation. Development in fourth 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 160 basis points to 73.3% due to sales mix with high amount of customer projects where we have a low margin and, therefore, a negative mix effect. OpEx, we continue to invest behind our strategic priorities. EBIT was up 96% to SEK 76 million, a good EBIT margin of 54.4%. Cash flow, a strong increase of operating cash flow to SEK 49 million. If we look at the financial KPIs, organic growth 77%, EBIT margin above 54%, and operating cash flow of SEK 49 million. 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, the end marketing. Adjusted EBIT was SEK 168 million 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 million. And the financial KPIs, organic growth of 43%, adjusted EBIT margin of 46%, and operating cash flow of SEK 116 million. 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 million, up versus SEK 20 million compared to last year. Cash and cash equivalents at SEK 272 million. We have a strong cash position, and just to remind you, we don't have any loans. The Board proposes a dividend of SEK 3.5 per share, 71% 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 MIPS brand, a very important strategic objective. We launched another team member of our team MIPS. And also, we restructured and reorganized our product hierarchy to become much more consumer-centric in explaining the consumer benefit of MIPS. And we are in a good position to deliver also according to our 2025 plan. And with that, I open up for questions.

[Operator Instructions] We have a question from the line of Adela Dashian from Handelsbanken.

Congratulations on a strong quarter. My first question relates to your cost base and especially as it comes to R&D expenses. You've previously guided for 5% to 7% of net sales, but it's been a bit lower than that in the last 2 quarters. Do you expect this to ramp back up again in 2021?

Yes. Thank you, Adela. Yes, we see -- 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&D is important to us. We are an IP company. We are becoming more consumer centric. 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 size? And what are your expectations for volume as we move forward into 2021 for the construction 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. U.K. market is very important to us. That's also where we have done a lot of research on the accident statistics. So I am really happy with the things that we can do together with them. We have said before that 2021 is 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 break down the difference in revenue per unit sold for each category for 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 Moto and construction is slightly lower than in sports. But over time, we expect it to level out and be no difference between the different categories.

Next question comes from the line of Fredrik Moregard from Pareto Securities.

Just a question first off on marketing. You said you're refocusing somewhat from earlier 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-focused branding 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 MIPS to become a bit more consumer-centric is, of course, if you want to be 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 MIPS in a better way. What type of solution, what's the benefit for that type of solution? Of course, we do not compromise safety. So all our solutions 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 then?

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 solution. So therefore, it may take 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 before, a typical project within MIPS 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.

[Operator Instructions] We have a question from the line of Carl-Oscar Bredengen from Berenberg.

I think most of my questions has actually been answered to an extent already. But in terms of the G&A and selling expenses, if I could touch a little bit on this, it's at the lower end of the guidance, your 5% to 7% range and you see no changes changing this. But how do we look on the ramp up in costs going out of COVID? What does 2021 look like considering if we look at improving market situation compared to what you had this year? To which extent did you have cost-mitigating measures? And what will be the additional cost? Would this be going to Eurobike? Is it for several other costs? Or because, I mean, we continuously underestimate certain cost items here considering the earnings fees. So just if you can give a little bit more flavor on potential cost ramp up in a more normalized marketing conditions, that would be great.

Yes. I mean there is 2 costs that don't occur in the P&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 affair for multicycle called ACHEMA. 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 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 MIPS 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 sections 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.