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

Good morning, and welcome to the Mips Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Max Strandwitz. Please go ahead.

Good morning, and thank you, operator. My name is Max Strandwitz, and I am the CEO of Mips. And with me today, I also have our CFO, Karin Rosenthal, and we will present the year-end report. So if we start with the key highlights, and I'm now on the second page of the quarter. As we communicated before, we expected a soft fourth quarter and, indeed, we did see a soft quarter. Net sales in the fourth quarter was down with 46%. If we adjust for currency effect, organic growth was down with 53%. If we look at the year-to-date performance, our sales decreased with 7%. And of course, as we also explained before, Q4 is a very Bike heavy quarter. In prior year comparator, we had almost 80% sales of bikes in the quarter. So of course, with the soft bike market that we have seen in the last quarter that had a ripple effect on the results, and that's why we saw the soft performance in the quarter. If we look at the other type of elements that we also do, we saw a little bit of a different performance. We continue to see very strong performance in Snow, Moto and in Safety, and really happy with the development there. We do expect the soft demand in bike to start normalizing during the spring, as we communicated before. We remain positive on the longer-term outlook in bike with very strong trends driving the longer-term demand. Since we see this as a temporary dip, we and the Board are proposing an increased dividend to SEK 5.50 per share, which equates for 82% of net earnings. And of course, we continue to invest behind our strategic priorities to make sure that we can deliver on our long-term plan. We didn't experience any major disruption in supply chain during the quarter despite that we actually saw a significant COVID outbreak at the end of the year in China, but no major impact from that. And we remain confident in delivering on our long-term strategy and also our financial targets. If we turn page and then go to the third page. In Sports, we did see a mixed development with a very challenging bike market, but a strong snow market. We saw a decrease in sales of 50% in the quarter. Year-to-date, sales is down with 10%. Bike, as I explained before, is the main contributor with a decrease of sales of 59% in the quarter. Snow continued with a very strong performance in Q4. And if we look at the year-to-date performance, all snow, we actually managed to grow 85% in the full year of 2022. If we look at the retail inventory of bike helmets, it's still somewhat unbalanced, but we do expect it to normalize during the spring. And like we said before, the long-term positive outlook for bike remains. And despite the challenging market, we have actually performed a record number of customer implementation projects in 2022, and we did almost manage to achieve 1 new helmet project finalized per working day, which is, of course, a fantastic number. If we then turn to next page, and we'll look at Moto. In Moto, we do see good progress, and we also launched our first helmet in Moto GP. We did experience growth of 33% in the quarter, year-to-date growth is 35%, and we continue to see good development both in on and off-road helmets. We are also very happy that we have the first helmet in Moto GP launch, so Moto Grand Prix. With Kabuto during the quarter, they have a rider, which they have signed, which his name is Aleix Espargaro. He is one of the top 3 ranked in the world, and he will be riding with the helmet and, of course, with the Mips technology during the season. So really happy about that. And we continue to see good development both with existing brands, but also a significant number of new brands and models being launched. And like I said before, we do also expect that the outlook for the category to remain strong with good demand from both customers and consumers. If we look in Safety, we have established a really strong customer base. We have said before, that volume is going to increase going forward, and we actually saw good development already in Q4. We have now launched partnership with 11 brands in total. We have the organization in place to make sure that we can also drive awareness and sell-through in the category. We did also announce our partnership with -- for Mips the second global brand, Delta Plus, in the beginning of February 2023, which we are, of course, very happy with because it's always easier to drive sell-through with brands that have global reach. And with the new and the old brands, we have a strong platform to generate volumes, and 2023 is all about sell-through and to deliver volumes exactly like we communicated before. As I said, in supply chain, we didn't see any major impact from disruptions despite that we actually saw a significant COVID outbreak at the end of the year in China. And we have seen that supply chain is starting to normalize, but we still expect it to be somewhat unpredictable. We have seen that lead times is reducing drastically and also time from factory to market has reduced dramatically in the last month. But of course, supply chain is expected to remain unpredictable. And if we then turn to next page, when it comes to new product launches, we have ramped up our investments in product development during the last year, and we did actually launch 3 new technologies during the year. Air Node was launched in conjunction with Tour de France with Specialized. This is our lightest solution so far, included padding, the weight is somewhere around 19 to 20 grams, depending if you have a medium or a large version, so really, really low impact on the total weight of the helmet. And if you look at the Mips-specific solution, it's actually only 7 grams. So a great integration of Mips also into a really high performance model in road cycling and really happy about that solution. What is also great for that solution is that it will actually also be sold as an aftermarket product. So if you buy a Specialized helmet, you wear your helmet for some time. After some months, you can, of course, wash it, if you want. And when it weren't enough, then, of course, you can also replace it with a new one. And I think that's really a great way from Mips also to becoming more consumer-centric. Then we also launched our solution Integra Split, which is a fully integrated Mips solution that can be offered with dual density capability. Probably not the word that everyone use every day, but it basically means that you can manage low impact and high impact when it comes to linear impacts and so on. So really a versatile helmet and a great introduction also of the new Mips technology. That was launched with the off-road brand, FOX, in August. And then, as you saw already in the Kabuto helmet, we launched our Integra TX at the motorcycle fair at EICMA, the world's largest motorcycle fair in the world in November. And there, we also have integrated the Mips solution fully into the padding and can actually be implemented in most type of helmets with a very limited impact. All the solutions that we have done is, of course, strategically important and great additions to Mips technology platforms. we do get also questions what is the runways of this new technology and you have a runway on all the new products from 2036 until 2040. So of course, we can use those products for a long time. If we then go into next page, and I'm now on Page #8. During the year, we also launched a new graphic design. Of course, we are an ingredient brand, but we also want to make sure that we elevate the brand and the product that we are integrated in. We have, therefore, reworked our whole product portfolio with a completely geographic design, which looks fantastic and it's a real step-up in design. We will roll out this during the year and actually already started last year to all our customers in 2023. So something really to look forward and really proud about our new design. If you then turn to next page. In sustainability, which is a very important area for us, we also made a lot of progress. 2022 was really a year for us where we wanted to create a strong platform for our future work. And of course, in order to create a strong platform, you need to have a foundation. Our foundation was built around 3 different areas. So first of all, in order to make sure that we make the progress we should make, we signed up to Science Based Targets where we will be audited against the progress we make. We also signed up to the UN Global Compact 10 principles, which is, of course, something we're also proud to adhere to. And then, we also started to offer more circular product offerings. We have introduced recycled materials and sold our first products already in 2022. And this is, of course, something that we want to roll out in most of our products and offer to most of our customers. All of these are, of course, great results and very important for our long-term journey in sustainability. If you then turn to next page, and we look at the development in the different categories we're in. Sports, like I explained, soft performance, we did see a decline of around 50% in the quarter. Moto, good performance with 33% in the quarter. You have to know that it was against a little bit of a soft comparator last year, but still really happy with the long-term performance and also the performance in the quarter. And then, in Safety, we start to get some traction. And we have also communicated that numbers will go up through the year, and we are quite happy with the performance there. I will then hand over to our CFO, Karin Rosenthal, who will talk about the financial development in the quarter and the full year.

Good morning. I'm Karin Rosenthal, CFO of Mips, and I will take you through the financial part of the presentation. We saw a soft development in the fourth quarter with a decrease in net sales of 46%. Adjusting for FX, due to a strong dollar versus SEK, sales decreased with 53% organically, fully explained by the weak bike end market. Gross profit was down 47% and a gross margin of 72.3%, down 70 bps versus last year due to volume effects from decrease in net sales and product mix. In OpEx, we continue to invest in our strategic priorities. We saw a negative impact of SEK 11 million from FX, mainly driven by hedges under the operating costs in the quarter. EBIT was down 77% to SEK 24 million compared to SEK 104 million last year, an EBIT margin of 22% versus 52.6% last year due to decrease in net sales, continued investments in our strategic priorities, marketing and R&D and higher operating costs related to exchange rate effects. We saw a strong operating cash flow of SEK 47 million in the quarter. If we look at the financial KPIs, organic growth of minus 53%, and EBIT margin of 22%, and SEK 47 million in operating cash flow. If we then turn to next page and look at the development for the full year, net sales during the year decreased with 7%. Adjusting for FX due to a strong dollar versus SEK, sales decreased with 19% organically. Gross profit was down 9% and gross margin of 72.1% versus 73.2% last year. In OpEx, we continue to invest in our strategic priorities, R&D and marketing. EBIT was down 30% to SEK 229 million compared to SEK 326 million last year and an EBIT margin of 40.7% versus 53.6% last year. Operating cash flow of SEK 236 million compared to SEK 277 million last year. If we look at our financial KPIs, organic growth of minus 19%, an EBIT margin of 41% and operating cash flow of SEK 236 million. If we then turn to next page, we are now on Page 13, balance sheet and cash flow. We have a strong cash position with cash and cash equivalents of SEK 532 million. And important to point out that we don't have any loans. Cash flow in the quarter amounted to SEK 47 million. We have a strong balance sheet and, due to our positive outlook, the Board proposes a dividend payout of SEK 5.50 per share versus SEK 5 per share last year, corresponding to 82% of net earnings. Over to you, Max.

Thank you, Karin. So if we then summarize the quarter, so fourth quarter actually concludes challenging, but in many ways, also a very successful year where we saw good development in all the categories, except within bike helmets, of course. We tend to focus a lot on the bank performance, given the weight of our portfolio. But of course, we are extremely happy what we have done both in Moto, where we really start to see some traction, and also happy to see that now also our investments in Safety is starting to pay off. When it comes to the soft bike market, we expected it to remain soft into spring, as we communicated before. We said that somewhere around end Q1, beginning of Q2, we expect the market to start normalizing again. That has not changed. But it's also important to realize that as we go in, in Q1 and Q2, also the mix changes. So the [ weight ] in bicycle helmets of our total sales, of course, decreases. In Q1, we saw a mix in the year before of somewhere around 50% sales of bicycle helmets. And actually, when we go into Q2, we actually see that the main production that we have is in snow helmets. So there, of course, the importance of bike is even less. We have a good outlook in Safety and Moto for 2023, really happy with the development. We have actually, during the whole process also when you look at our investments in marketing, product development, making sure that we are as consumer relevant as we want to be continued all our strategic priorities to deliver on the long-term strategic plan. And we are confident to deliver on our long-term financial targets. We then open up for questions. Operator, over to you.

[Operator Instructions] Our first question comes from Adela Dashian with Jefferies.

A couple of questions from me. The first one relates to your visibility within bike as we enter into 2023. So there's obviously several competing theories out there about what will happen. So what are the driving forces behind your confidence in the recovery already this spring?

Yes. So I think, I mean, when we talk about recovery, we also say that the bike market will start to normalize during end Q1, beginning of Q2. We have also said that when we go into Q3 and Q4, we actually expect to start growing in bike again. Why do we do that? When we start selling to bike helmets in Q3 and Q4, we are actually doing that for the 2024 season. And by then, we really expect that the bike market will be in balance again and that we can start to deliver growth in Q3 and Q4 this year against a very soft comparator.

So I'm assuming that you're already having good discussions with your customers about the 2024 [indiscernible].

Yes. It sounds promising, at least, and a lot of brands is expecting that then we will get back to a much more normal market. And I think, I mean, when we look at the underlying trends in bike, they have actually not changed that much. There is still a lot of people that buy e-bikes. There is still growth in e-bikes. And normally when you buy an e-bike, you get a new helmet to travel with higher velocity. As I explained before, you also see that people want to come [indiscernible] people in the U.S. have started to commute and so on. High gas prices, of course, drives that behavior, and also everyone wants to do good for the environment, and also quite healthy to communicate or commute to work. And then, if you look at the outdoor trend, even though it's not as strong as it has been during the peak pandemic situation, of course, we still see good trends there. And a lot of those drivers, when you add those together, you can actually expect also that in 2024, the bike market will return back to growth again.

Got it. Great. And then, also on your outlook for Safety, I believe you've previously said that you expect sales in the range of SEK 20 million to SEK 30 million in '23. Does this figure also include the recently announced partnership with Delta Plus?

Yes. So of course, we never talk about brands that we have not launched, but now we have launched Delta Plus, and we will actually start delivering to them also probably in the end of Q1, maybe beginning of Q2. So yes, they will have an impact also on that number.

Okay. And then, finally, on your cost base then, especially as it relates to R&D expenses, do you still budget for this to be somewhere around 5% of sales going forward? I noticed that it ramps up a bit as it [ comes with ] sales during '22 compared to '21. So what should be the...

No. I mean, we have done a lot of activities when you look at 2022, we ended at 4.7%, which is, of course, a little bit shy of the 5% that we want to go for. I think that 5% is quite a good number to aim for. We have done a lot of activities during the year with our new graphic design, 3 new product launches and so on. So I really hope that we can keep that momentum, and 5% is what we'll deliver that in terms of investment. So I think that's a reasonable amount and the right amount for Mips at the moment.

Our next question comes from Daniel Thorsson with ABG.

Yes. First one on bike inventory levels. Do you see a similar development in Europe and the U.S.? Or have you started to see any kind of normalization in any of the 2 markets? Or which one do you expect to improve first?

Yes. I think -- I mean, like I also said last call, there is a little bit different dynamics and the [indiscernible] effect in the U.S. was a lot bigger. So there, of course, you saw that the retailers carried a lot more inventory. So of course, a lot more inventory to work through. At the same time, you had a much stronger consumer. And actually, if you start looking into the more premium, higher price segments and so on, they actually start to get quite low in inventory. So there, it's more to work through all the low-cost and low-priced inventory on the market, and that is starting to happening and so on. When it comes to Europe, it's much more about the consumer confidence, of course, impacted very much from the war in Ukraine and so on. So there is actually different types of drivers. You had some inventory that is starting to be reduced also in Europe. So they start from different points, but of course, in the end, the results will be the same, and we expect also Europe to become a bit more normal than we have seen during 2022.

Perfect. That's helpful. And then, secondly, if we think about the safety development here in 2023, are there any quarters that potentially can see larger or smaller volumes due to not only production seasonality but also planned production with your customers and brands or launches that could be good for us to be aware of? Or should we see a steady improvement here quarter-over-quarter throughout '23 on volumes and sales?

Yes. And of course, since we are on the growth journey, I think the best way is to assume growth quarter-over-quarter going forward because that's what we expect.

Excellent. Related to that, do you see any competition in safety or any pushback from helmet brands that do not see the reason to have Mips in helmets?

No. I mean, we have seen, of course, in any category, any category we have launched in, we have always seen people saying that Mips is not needed. And of course, that started our old discussion in safety where we really had to do our homework and really our scientific validation in Mips when it comes to construction, accidents and so on. And we are really happy to have that work in the [ back ] when we initiate the discussion, the whole scientific publication around accidents, statistics in construction site is, of course, important to have when you explain the relevance of Mips and so on. We haven't seen a lot when it comes to competition yet, but I do expect. I think it will be very, very strange if we are the only one talking about rotational motion in the construction industry. So not a lot yet, but we expect more to come. I would be surprised if we would be all along.

Yes. seems fair. Final question, more technical one. The SEK 11 million FX effect here or currency effect on EBIT in the quarter, where are we ahead? What should we expect for Q1, like directional-wise, given the spot rates we have, should it be a negative effect here as well, but not the same magnitude? Or how should we think about it?

Yes, it will be an effect also in Q1, but we don't expect it to be as much as in Q4.

Our next question comes from Karl Oskar Vikstrom with Berenberg.

I actually had a follow-up on the announced partnership with Delta Plus. I think you said in the press release that roughly sort of 4 million helmets produced per year there for them. Just in terms of the launches you're planning and sort of what's in the pipeline, how much sort of total volumes do you expect you can sort of penetrate with the Mips solutions through that partnership, and sort of a long-term view would be quite interesting to hear about. And then, maybe as well, sort of to build on Daniel's questions, so you're basically saying then a gradual increase Q-on-Q and quite stable. There won't be any sort of big launches sort of, let's say, Q3 or anything like that, that would be sort of break the trend, let's say, just to clarify that?

Yes. I mean -- so I mean, what we plan for is always growth quarter-over-quarter because normally when you do launches as you do in safety, it's not like we have seen in other types of effects where you have a big pipeline fill, you need to fill up with the retailers. It's much more a gradual growth that you expected to see, and that's also why we expect growth quarter-over-quarter. When it comes to Delta Plus, of course, we are very happy that we got them on board. Always when we talk to a brand partner, we always expect to become a bigger part of their assortment because what we have seen over time is that when Mips doesn't become a material part, they will also not do a good job with Mips. And of course, for us, it's important with our market position, but also that we have a relevant partner on the other side. So yes, longer term, we expect to have something more material coming out of this. As you also see in the press release, we start with the most premium helmets, which is the granite helmet or granite helmet that they have. And then, of course, we will look at the rest of the assortment like we do with all of the customers. But that's the first one out, and that's the real priority to put on the market.

Sure. And then, in terms of sort of ramping this up and growing volumes within this category, how does the actual manufacturing process sort of differ? Where -- is it also produced in China? Are there any kind of capacity constraints or et cetera to be aware of within safety? Or will it be sort of a scalable and flexible as it has been in sports?

Yes. We don't expect any real difference there. I think the biggest difference that you will see over time is that a lot of the construction helmets is actually produced outside China. So you see a much more broad network of production. The biggest manufacturers normally have up to 3, 4 different sites that they produce around the world. And of course, we will follow that logic. So we will ship to whatever site is required and sometimes even produce in the vicinity of that site. So we will see a change of our supply chain and also with a lot less production in China that we have seen in other types of category. When it comes to a production of the construction helmets, normally, you only have the big ones, maybe 4, 5 different types of elements, then you can also optimize in a very different way. And actually, the cost of labor doesn't become a constraint and then you can produce in a lot more places. Of course, we are ready for that. We have that in our plan, and we will not see an impact in terms of margins or other things. We will use our scalable business model. It has served us well so far, and it will continue to serve us well also going forward.

Perfect. And then, I guess, I mean, bike is quite clear sort of what you're expecting there. But maybe on the Moto side of things, you mentioned in the CDs going into scooters and expanding into new geographies, et cetera. Could you just comment a bit on what's going on there and sort of where you stand on that plan at present?

Yes. So I mean, for us, we don't want to talk too much about things that are too far out, especially when you are a growth company, people expect it to grow immediately. So when we talk about things, they are normally within reach. We are already doing work on the e-scooter and the emerging markets and so on, and we have that as our higher priority. Since we have put it into the plan, you can also expect that something will happen in that area and so on. But we will talk about that in due time.

That's clear. And then, I guess, the same then for bike sort of children by calm or sort of lower -- slightly lower price range as well. I guess it's the same answer on that.