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Edited Transcript of MIPS.ST earnings conference call or presentation 29-Apr-20 8:00am GMT

Q1 2020 MIPS AB Earnings Call

TABY May 13, 2020 (Thomson StreetEvents) -- Edited Transcript of MIPS AB earnings conference call or presentation Wednesday, April 29, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Max Strandwitz

MIPS AB (publ) - CEO & President

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Conference Call Participants

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* Adela Dashian

Handelsbanken Capital Markets AB, Research Division - Analyst

* Carl-Oscar Bredengen

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Fredrik Moregard

Pareto Securities, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the MIPS Q1 Report 2020. Today, I'm pleased to present CEO, Max Strandwitz. (Operator Instructions)

Mr. Strandwitz, please begin.

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Max Strandwitz, MIPS AB (publ) - CEO & President [2]

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Yes. Good morning, everyone. My name is Max Strandwitz, and I am the CEO of MIPS. I will take you through the presentation of the Q1 interim report of 2020. And if we start on the first page and start with the key highlights. As you have seen in the report, we have a strong growth despite a very challenging quarter, with a net sales growth of 25%, 16% organic growth in the quarter. We did have very strong improvement in EBIT and also in cash flow. And I am very pleased with the way that we have navigated through this very challenging quarter. We do see continued high activity with more helmet projects than ever. We have now performed more than 30,000 tests. We have 2 new brands coming on board in the sports category.

During the quarter, we did also relocate 2 new office premises and the test lab, which we did mainly to increase our capability in the safety category. We have finalized the key recruitment in sales and marketing. Our CFO left in March, and we have an interim CFO in place, and we have initiated the long-term search for the long-term solution. And our long-term financial ambition for 2025 remains intact.

And if you then flip to next page, and I'm now on Page #3. I wanted to give you an update on the COVID-19 situation and the virus. We do expect a volatile market in the coming quarters. If you remember, this started very much as the supply chain challenge, as 35 out of the 40 third-party manufacturing units that we use in MIPS, are located in China. We did see a good recovery of supply chain in China. And at the moment, all our third-party manufacturing units are fully up and running, and we do not have any capacity shortage as such. The sales development that we see in coming quarters is fully dependent on the lockdown situation and the government restrictions around the world. We do see a strong increase in online sales channels, however, they are not mitigating shortfall in traditional sales channels. Also the shops that are open, we see very strong sales, and we get also very good demand signals, especially at lower price points, which seems to be that there is a lot of new bikers taking up biking, and we do see trends of that all around the world.

We are in close dialogues with our customers regarding demand from retailers, production plans and business development of new projects. We have a record high inflow of new helmet projects, which you probably have seen in the report. We are not changing -- or we are not seeing any change in the long-term underlying demand for MIPS product, and this also means that our strategy remains intact. We have a very strong balance sheet, and we can outlive this situation for a long time. And we don't see anything that has happened on the market or in the world in the last month that makes us change that strategy. So the strategy remains intact and also our long-term financial goals for 2025.

If you then switch to next page. I am now on Page #4. And during our Capital Markets Day, in last year, we said that we will give you more granularity on a quarterly basis. And if we look at the development in our different categories, most important, the sports category, we did grow 23%. We have 2 more brands coming on board. If you then look in the motorcycle category, we saw good performance despite the challenging quarter with 39% growth. And in safety, it's still very early days. We have good interest. But like I said before, we will not see any large volumes until the end of the year with volumes really picking up during 2021. And in total, we have 105 buying customers at MIPS, which is up with 2 versus the quarter before.

I will then switch to next page, and I'm now on Page #5. And if we look at the net sales development in the first quarter, like I said, we did see good performance with 25% net sales growth in the quarter. The growth was mainly driven as we have seen before by our existing customer base, expanding their assortment with MIPS. Sports category remains the key driver in absolute terms, but we also did see good performance in the motorcycle category. And if we look at the composition of the 25% net growth and the buildup, it consists of 16% organic growth. We did see an increase and strengthening of the U.S. dollar towards the Swedish krona. That affected the sales with 8% in the quarter. And then we also had a 1% impact from structural changes. And when we talk about structural changes, that is relating to the acquisitions that we did last year.

If you then switch to next page. I am now on Page #6. If we look at financials a bit more in detail and the development on -- in the first quarter, like I said, good net sales development. Gross profit was up with 22%. We did see a decline in gross margin of 200 basis points to 70.8%, a big part of that is affected by the acquisitions and depreciation for the acquisitions that we did. And adjusting for that, we did see a gross margin erosion of 90 bps to 71.9%. OpEx, we continue to invest in our strategic priorities, which is in marketing, R&D and sales. We get a lot of questions if we have stopped any activities. For us, since we don't see any change in underlying demand, we are continuing as we have before, and we continue to deliver on the strategy that we have set out.

Adjusted EBIT, good in the quarter with SEK 17 million, up versus SEK 12 million in the same quarter last year. We did have an adjusted EBIT margin of 30.1%, up versus 26.3% in the same quarter last year. You have to remember that Q1 is traditionally a smaller quarter than the rest. Cash flow, we did see an operating cash flow of SEK 15 million. So if we look at the key financial KPIs, 16% organic growth, 30% EBIT margin, and we did have an operating cash flow of SEK 15 million.

If we look at the next page, which is Page #7, and if we go into the balance sheet and cash flow, we did see an increase of the cash flow from the operating activities of 95%, so almost managed to double our operating cash flow. We also did see quite an increase in cash flow from financing activities of SEK 52 million, and that is fully explained by the conversion of the long-term incentive program that we have been running at MIPS that was converted during the first quarter. We have a very strong cash position. At the moment, we have SEK 255 million on the balance sheet. Equity ratio of 85%, and the Board's proposal regarding dividend of SEK 3 per share for 2019 remains unchanged.

If we then switch to next page, which is Page #8. And just to reiterate the summary of the quarter, we had a very good growth in the quarter, despite quite a challenging quarter. We do see a healthy profit development, good EBIT margin and a strong cash flow generation. We have a high helmet project activity, more brands coming on board. Short-term, demand fluctuation slightly. Long term, we don't see any change in demand. We have relocated to new office premises and a test lab to be able to deliver on our future strategic initiatives. We have now sales and marketing organization fully in place, and we are in a very good position to deliver according to our 2025 plan.

And with that, I open up for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Fredrik Moregard of Pareto Securities.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [2]

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A couple of questions on production plans and discussions you're having with customers. I appreciate that you say all third-party manufacturing units are fully up and running and no capacity shortages. Have you seen any changes to your customers' production plans this far into April?

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Max Strandwitz, MIPS AB (publ) - CEO & President [3]

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Fredrik, no, so far, we haven't received any cancellation of any orders.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [4]

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Okay. And in the event of that happening, how far ahead would you be notified?

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Max Strandwitz, MIPS AB (publ) - CEO & President [5]

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No. I mean, of course, when they are canceled, they are canceled, but there is no one reaching out to us and saying that they want to cancel production as such. And when it happens, it happens. We basically receive a phone call. Normally, we have a lead time of our products of somewhere between 5 to 45 days. So that would normally be within that range, so to say.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [6]

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Okay. It's a quite a wide range then.

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Max Strandwitz, MIPS AB (publ) - CEO & President [7]

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Yes.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [8]

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And I was just curious, you say that you've shifted your -- some of your locations in Sweden, partly, to be able to address the safety category. What changes to the testing do you need to make? And how does that impact your procedures when producing the helmets or developing new products or new helmets?

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Max Strandwitz, MIPS AB (publ) - CEO & President [9]

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Yes. Thank you for the question. It's a very good question. So if you look at the testing of construction helmets, they are still tested in quite a traditional way. So they're still testing for linear impact with basically a led bulb that is dropped into your head, which is probably not reflecting the way that accidents actually occur in the construction site. So of course, the basic capability we need to have. But for us, it's also to be able to have capabilities to also introduce rotation and motion into different accident scenarios. And if you look at head-related injuries, those are actually normally the more common ones. So indeed, it's very important to be able to address those. So increasing our test capabilities is one. Of course, the standard rotational motion test is always there. But we also want to show different accident scenarios and being able to model that, that's why we need to have new capabilities.

But it also comes to when we are educating the construction industry, which we are very much still doing, why rotation and motion is important, we also need to have a much bigger facility to also have safety workshops, roundtable discussions and so on, where we invite the industry, first of all, to demonstrate the test lab, but also have very educated discussion on why rotation and motion is very important to address, and how we address the relevant injury criterias also in construction. So it's not only the test lab, but it's also to be able to run much bigger workshops because the selling process in the safety area is very different versus the brand. Because normally, you need to work hand-in-hand with the brand, but also with the construction company. So it requires different capabilities. And of course, the technical capabilities we have and we already had, but also in terms of expanding in other areas, it's important to us that we do it in a very good way.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [10]

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Okay. So sort of an experience center combined with a test lab. I get it.

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Max Strandwitz, MIPS AB (publ) - CEO & President [11]

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I think that's a very good explanation.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [12]

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Yes. Just finally, the extraordinary charge of SEK 1 million that you had this quarter, was that part of COGS or was in the P&L predefined?

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Max Strandwitz, MIPS AB (publ) - CEO & President [13]

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It is parts of -- mainly in COGS, and it is relating to the depreciation of the patent that we acquired because, of course, those are depreciated over 10 years.

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Operator [14]

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Your next question is from Adela Dashian of Handelsbanken.

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Adela Dashian, Handelsbanken Capital Markets AB, Research Division - Analyst [15]

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Firstly, just on the COVID-19 impact on your sales, is it safe to assume that the store closures and subsequent impact on helmet manufacturers to affect your sales immediately? Or do you expect a more gradual decline in your sales since you don't sell directly to customers? I mean, then I'm talking about the actual consumers that are using the helmets.

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Max Strandwitz, MIPS AB (publ) - CEO & President [16]

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Yes. Adela, no, we don't expect an immediate effect because, of course, we don't sell directly to retailers, we sell to brand. But of course, I think, we are cautious. We think that, at the moment, there is a lot of speculation. We can speculate what will happen regarding the COVID-19 and how long the lockdown will remain, that's also why we do expect a very volatile market. Like we said also before, the stores that are open are selling extremely well, much better than before. Online sales is also doing really well. But as soon as the consumers are not even allowed to go out by law, then, of course, it is a major impact, and that is, of course, what we don't know. If the lockdown is only very temporary, then of course, the issue will be less. But if this is a long-term solution, then, of course, we would expect a more volatile market.

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Adela Dashian, Handelsbanken Capital Markets AB, Research Division - Analyst [17]

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Right. Do you still expect to reach your 2020 financial targets that you set out during IPO?

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Max Strandwitz, MIPS AB (publ) - CEO & President [18]

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Yes. Like I said, the coming quarters will be volatile. I don't think there is really anyone that know exactly what will happen in the coming months. More than the majority of the stores on the market that we operate is still being closed, which is, of course, not the normal situation. We do add more customers. We do add more models than ever. We are making interest into new types of helmet. And the demand for our product has not decreased, on the contrary, the trends are very much in our favor. We see a lot of macro trends changing in our favor. Bicycling is increasing quite dramatically. But I think it's also important to realize what is happening short term is not the normal situation. It has nothing to do with supply and demand. If stores are closed, then, of course, it's difficult for our brand to sell anything. I only know that we are better equipped than ever to deliver on our long-term ambition. So I can't speculate on the SEK 400 million because I don't have it under my control at the moment.

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Adela Dashian, Handelsbanken Capital Markets AB, Research Division - Analyst [19]

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Are you doing anything on the online segment to drive activity and then the growth on that platform since that platform is open and can be somewhat compensating for the decline in sales from the stores that are closed?

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Max Strandwitz, MIPS AB (publ) - CEO & President [20]

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Yes. I mean, long term, I would say that we are always addressing things that we think are right to do. So anything that is long term right is something that we have addressed. We are running education programs also with online sales. We are implementing MIPS filters so they can filter on solution with and without MIPS because we have seen that that's very effective on online sales and so on. And we do see a great pickup on our online sales. So we don't act in panic and start doing a very big program. But we try to do the right things to make sure that we get online sales with us, with having the right video assets, explaining how MIPS works and so on. And we are constantly providing them with more materials. So we see that as a very interesting challenge -- channel, and we do also invest in that. And that was also one of the reasons why we recruited the CMO, Fredrik, that we did last year because he has a great experience also on online marketing.

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Adela Dashian, Handelsbanken Capital Markets AB, Research Division - Analyst [21]

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Okay. Good. And then just finally, could you give us an update on how the safety category is progressing?

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Max Strandwitz, MIPS AB (publ) - CEO & President [22]

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The safety category is progressing quite well. We do see a lot of interest and the industry is starting to understand. It's not a different challenge from what we have had in the other categories first. They need to understand, then we need to explain how we are testing, then we need to explain and look at the different injury criteria. So we have a very high interest, and we have had a lot of interactions. We also now have done a couple of virtual press trips because, of course, we are able to live stream from our test lab, explain also how MIPS works and so on. And we do see interest in the category. Like I said before, nothing has changed. We have said before that volumes will start coming in, in Q4. And we will start to see a bigger volume pickup in 2021. So still very big interest and so on. Challenge is not different than before. We have to educate the industry and to make sure they understand why we have a relevant solution for their category.

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Operator [23]

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Next question is from Carl-Oscar Bredengen from Berenberg.

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Carl-Oscar Bredengen, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

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This is Carl-Oscar, from Berenberg. The income for Moto segment in 2019 appears to be quite a lot stronger, and it seems that we've covered close to 1/3 of last year's sales volumes. Can you tell a little bit about sort of the acceleration and the growth within this segment? If this is something that you see, particularly, if it's dependent on the seasonality? Or if this is just that you're seeing stronger increased demand over to the Moto for road as opposed to just motocross?

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Max Strandwitz, MIPS AB (publ) - CEO & President [25]

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No. I think, I mean, we did already a couple of years ago launched activities to make sure that we succeed in Moto still. The motocross segment is doing extremely well, and there we have very high penetration. But we're also starting to see some more road brands coming on board. You already saw them onboard last year, but we really start seeing that in the numbers. So it's a combination of both. But so far, it's still mainly driven by the motocross segment. We do expect a higher momentum in motorcycle, and we do expect that it will be a bigger part of our total sales. I mean that's part of the initiatives that we have taken. So I'm very happy with the performance that we saw in the first quarter despite a very challenging quarter.

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Operator [26]

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As there are no further questions, I hand back to the speaker.

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Max Strandwitz, MIPS AB (publ) - CEO & President [27]

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Yes. So I think we also got some questions regarding -- on web or on e-mail. So first one, we did see a question from Henrik Söderberg, from C Worldwide, on the FX impact on revenue and profit.

We haven't disclosed the FX revenue -- or the impact on profit in detail, but it had an effect in the quarter versus last year. And if you look at the impact on revenue, as you also see in the report, in total, there was an 8% impact on net sales relating to the stronger U.S. dollar and also the impact from the CNI -- the CNY. So in total, 8% impact from ForEx.

Okay. And then we also get a question from Alexander, who is asking us about the current shipment for the winter collection in 18 months now being produced, our brand, playing it cautiously and lowering the order given the uncertainty.

So the winter production that is being produced now is actually for the coming winter. We know that there was quite an abrupt finish of the season, especially in Europe. We still see interesting development in the snow category, and we still receive quite a lot of orders. We have not seen anyone really changing the full year forecast based on the winter sport and what is happening so far. I think, for us, it's not really an underlying issue of the brand, I think, if the lockdown situation continues for several more months, it probably also will restrict traveling a little bit more. So then, as you also see in the CEO comments, that is probably a bigger risk than actually that there will be a short or more product on the market relating to the closure of the season a little bit earlier. And that was the question we had also by mail. If anyone wants to ask more questions?

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Operator [28]

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There's no more questions via phone.

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Max Strandwitz, MIPS AB (publ) - CEO & President [29]

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So no more questions?

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Operator [30]

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Yes.

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Max Strandwitz, MIPS AB (publ) - CEO & President [31]

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No. So I think, I mean, thank you for listening in. Just to reiterate, we had good growth, despite a very challenging situation. Good increase in profit and cash flow. We have more projects than ever, quite a lot of project activity. We haven't changed anything. The offices have never been closed. They have actually been up and running the whole time because we haven't been able to close due to the high project load. Of course, the safety and health of our employees is, of course, the key concern, and we have had all the precautions that's necessary. So far, all the MIPS employees that has been working has been healthy, so no issues there.

And looking forward to speak to you coming weeks and if not, let's speak at the next quarter. Thank you.