MIPS AB (publ)

Hi everyone, my name is Max Dramvids and I am the CEO of MIPS and with me today I also have our CFO Karin Rosenthal. We will take you through the MIPS Q2 results presentation and if we start with the first quarter and the key highlights of the quarter. We did flag already in last report that we were expecting soft demand in the second quarter. And indeed we did see soft demand in the quarter, which impacted both sales and profit in the second quarter as expected. Net sales was down with 51%. If we adjust for currency effect, we saw a development of minus 53%. We do expect a gradual increase in demand and assess that Q3 will continue to be challenging, but we see a stronger Q4 ahead of us and we do expect to deliver growth for the last six months of the year. We see a strong development in our safety category. Moto have a challenging start of the year. However, we have still full year expectation of delivering good growth in that category. We see a strong development in market shares in all our key markets. And it's really important for us that we separate what's actually happened in the market And what is the effect of having too much inventory in the different channels? When we look at all the key markets, we are continuing to increase market shares. We do see excellent performance when it comes to penetrating more brands and helmets with MIPS. of course really good when we now get out of this inventory situation and can start delivering products to the market again. We are of course believing in our long-term plan and I'm really happy that our board continue to support our ambition and that we are allowed to continue to invest behind our strategic initiatives which will position us really really well when we want to deliver future growth. We remain confident in delivering on our long-term strategy and the financial targets that we have set. If we then go to next page in bike, we see gradual recovery of the bicycle market. It was indeed a challenging quarter in sports with a decrease of net sales of 53%. The soft start of the season in bikes slowed down the inventory improvement. Sales in many geographies is still above pre-pandemic numbers. We do see softer performance in snow versus prior year in the quarter. Our customers' cash flow optimization led to more volumes in H2 versus prior years. So of course, cash is more expensive. Everyone wants to produce closer to the season. We still see good performance full year and of course, good momentum in our snow business. Retail inventory helmet or levels in helmets in bicycle are normalizing. Our customers inventory levels are still high due to the slow start of the season. but we expect to be back to normal by the end of the year. And our long-term positive outlook for bike remains. We do expect that more people will ride bikes, more people will wear helmets around the world, and we believe that we can gain market share also going forward. If we then go to the next page and we switch to the motorcycle category, Challenging quarter again in Motu. Full year ambition of good growth remains. We did see soft development in the quarter in Motu with a decrease of sales of 42%. Motu markets are indeed slower in general but not to the extent that we have seen in Byte. Major impact from the new implementation of EC2206. So a lot of retailers first want to clean out all the old stock that they have. And just as a reminder, from 1st of January, you are not allowed to produce any new helmets not complying to the new standard. So of course, a switching effect to the new standard, but not something that we see as an issue long term. And we also see some change in buying patterns. No change in outlook, strong interest in the category. We will have a lot more new customers being launched during the autumns and also significant increase in the amount of models equipped with MIPS in this category. If we then switch to next page and in safety, we continued on our strong development in line with ambitious plans we have. We are following the plan that we set up. We see strong development in the US market with a lot of tendering wins that we have seen and really start to see that we get good momentum there. But also happy to see that we have gained listings with MIPS Equip Helmet at several of the major distributors in Europe, which of course also will generate volumes going forward. We have an ambitious autumn ahead of us with the two largest fairs of the year taking place in October with NSE in the US and A plus A in Germany with great launches of both new brands and new products that will be released to the market. If we then go to next page and if we look at the development of MetSales in our categories, soft performance, in sport with a decrease of 53%, fully explained by the really soft performance that we saw in bike. In moto, we do see soft performance, but expect to be back on track by the end of the year. And in safety, still small numbers, but really strong performance in terms of sales growth. With that, I hand over to our CFO, Karin Rosenthal.

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 quarter with a decrease in net sales by 51%, and adjusting for FX due to a strong dollar versus SEC, sales decreased with 53% organically. Gross profit decreased with 53%, and we saw a gross margin of 70%. versus 73.4% last year. The decrease was due to higher share of fixed COGS as a result of decreased net sales. In OPEX, we continue to invest in our strategic priorities. We saw a negative impact of 2 million from FX under other operating costs. EBIT was down 78% to 23 million and an EBIT margin of 22.6%. If we then look at our financial KPIs, minus 53% organic growth, a 23% EBIT margin and 9 million in operating cash flow in the quarter. If we then turn to the next page and look at the development for the first six months, Net sales decreased with 45% and adjusting for FX, sales decreased 48% organically. Gross profit decreased with 47% and we had a gross margin of 70.4% versus 73% last year. Decrease due to higher share of figs, cogs as an effect of decreased net sales. In OPEX, we continue to invest in our strategic priorities, R&D and marketing. EBIT was down 77% to 38 million with an EBIT margin of 20.2%. We had a negative operating cash flow the first six months due to tax payments relating to the 2021 profit. If we look at the financial KPIs, minus 48% organic growth, 20% EBIT margin, and minus 33 million in operating cash flow. If we then turn to next page, and we are now on page 9, balance sheet and cash flow, we have a strong cash position with cash and cash equivalents of 356 million. We paid out 144 million in dividend in May, corresponding to 5.5 SEC per share. And important to remind you that MIPS don't hold any loans. Operating in the cash flow in the quarter was 9 million, and we have an equity ratio of 85%. Over to you, Max.

Thank you, Karin. So if we then summarize the quarter and the first six months of the year. Challenging times, and indeed it was a soft quarter, but our outlook remains the same. And I think it's also quite important to point out that what we are experiencing is not a lack of demand, but more effects of the COVID unwind. Like I said in the beginning, we are gaining market share across the world. We see fantastic penetration on MIPS just looking at Tour de France, which is, of course, the most prestigious bicycle race in the world, or bicycle tour. There, 71% of the riders are using MIPS equipped helmet. If we then look at the women's tour that will start soon, There they are actually at 87%, so really strong momentum and a good demonstration of the penetration on MIPS in bikes. So really happy when we are out of this COVID-19 and really can show what we are doing. We do expect a gradual recovery of the bike market, retail inventory. are normalizing. We see most markets actually already normalized in Q2 and we see that by Q3 it should be fully normalized when it comes to retail inventory. We do see, because of the slow start of the year, that some of our customers still have higher inventory than they want, but we expect that to be fully normalized by the end of the year. Higher customer interaction, significant number of new helmet models to be released when the inventory returns to normal levels. Good customer momentum. We are still doing almost one new helmet equipped with MIPS per working day, which is, of course, a fantastic number. We are investing in our business to make sure that we can deliver on strategic priorities. That's why you see higher investment ratios in both R&D and in also marketing, because of course, we want to make sure that we have the right position when things are now turning around. We do expect Q3 to remain challenging, but a stronger Q4. We do expect to gradually return to growth in the last six months of 2023. and we are confident to deliver on our long-term targets. So with that, I open up for questions.

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad.

The next question comes from Emanuel Janssen from Danske Bank. Please go ahead.

Good day Max and Karin. Thank you for taking my questions and starting maybe on the commentary regarding bike retailers and inventory, which obviously has been the big focus the past 12 months. Could you maybe shed some more light on what you have seen during the quarter both on different price segments, also geographical aspects, and also that improvements include both independent bike dealers or mainly larger retailers, etc. Thank you.

Yeah. So I think, I mean, you were also at Eurobike, so of course you got the opportunity to talk to the bike brands yourself, but indeed As we also say in the report, we have seen a gradual recovery throughout the quarter. I think everyone was a little bit surprised of the soft spot due to cold and wet weather in both Europe and US. But when the season started, it actually started quite well. We did see gradual improvement throughout the quarter and so on. And of course, that started to normalize the inventory. I think that the situation is quite patchy depending on which market you look at. But if you talk first of all, when it comes to the larger retailers, I don't know actually any of the larger retailers that have not normalized the inventory situation. They normally have access to more data. They normally quite quickly to react. So there I would say that it is much more a normal situation already now. And then when it comes to the IBD, very much depends on IBD by IBD. Most of them that we see have already returned to normal situation. And by the end of Q3, I don't see anyone carrying much more stock than normal. And I think we did see a lot of sellouts in May and also that sellout was successful. So I would say, Most of them already in Q2, and by the end of Q3, we expect everything to be normal.

Perfect. Thank you, Max. That's very clear. And also, if you maybe can shed some light on, I think it was two days ago, the e-commerce company Byke24 came out with a profit warning. on their bike segment, on weak consumer sentiment, also the e-commerce market overall, but also stating high inventory levels where they saw this trend continue into the third quarter of 2023. Could you maybe give us some flavor here or what read across we should do to their profit warnings?

Yes, indeed, Bike24 did send out a statement on more gloomy expectation going forward. They have previously guided that they saw a decline in the first six months, but they will return back to growth in the last six months of the year. And now the revised guidance from their side is a decrease of somewhere around negative five to negative 10%. And for me, that's not actually a change of reality, because if you look at the performance here today on the two key markets, which really matters, US, there we see a decrease of somewhere around 10 to 15% of the market in general. If you look at Europe, it's more towards 20% decline. So that has actually not changed. I think what they are really or did maybe bet a little bit more on was that the market will start growing again. And I don't see that anyone is betting on that for 2023. So I think it's more maybe an adaption to reality. The German market, which is, of course, the main importance for them, is quite challenging. And I understand that they continue to see a decrease. I think the difference, if you try to link that versus mix, is that we are a company that is manufacturing. And the growth that we will see in 2023 will not come from repeat orders for the 2023 season. Most of that is already gone from a MIPS point of view, because you need to manufacturing it and send it to the market. The growth that we will see is from the helmet that is produced from next season. That's why we also are more confident on Q4, because that's when most of the helmets for 2024 season is going to be manufactured. And then we expect everything to be back to a much more normal situation. Hopefully that answers your question.

Yeah, that's very clear. Thank you, Max. And maybe a last question on the bike segment here. Do you see any other risk of bike demand being postponed for the 2024 season here? Now, as you mentioned, that you sell in the 2023 season into the 2024 season when it comes to bikes. Do you see any other risk of bike demand being postponed?

No, I think, I mean, we have already... communicated a more cautious view on the second half of the year, also taking in effect a more cautious market and so on. We said that Q3 will be more challenging. We expect to see a stronger Q4. And of course, that's what we see at the moment. I think when you also look at the inventory situation and also I think the in-market performance, of course, even though it's challenging times a lot of market is still above pre-pandemic levels and of course even if we talk about sell out numbers in the market of somewhere around 10 to 20 percent of course that still requires that there is a lot of inventory that is being depleted and of course all those retailers need to have new products and so on so of course Our estimate that we have now with a softer Q3, challenging Q3, stronger Q4 remains. And that, of course, is based on the best assumption that we know.

Great, thank you. And last question from my side regarding safety segment. This is the only growing segment in the quarter. And I think year-to-date you have a turnover now of around 7 million SEC. What's your feeling there? Are you able to achieve a turnover of around 20 to 30 million by the end of 2020? Have you seen any larger impact yet from the distributors in Europe, as you mentioned in the presentation?

yeah so i think i mean you're right we have seen a nice pickup in terms of sales in the safety segment we did estimate that we will hit somewhere around 20 to 30 million and we're actually tracking exactly on that so you will see a gradual improvement of the safety category quarter by quarter so of course really happy about that development The listings that we received were mainly in May and June. And of course, we haven't seen the effect of that, but we will see that going forward. So of course, we expect some effects of that, but it has not been seen yet.

Perfect. Thank you very much, Max and Karin. That was all for me now.

Thank you. Thank you, Emanuel.

The next question comes from Adela Dashian from Jefferies. Please go ahead.

Good morning Max and Karin. Just a follow-up firstly on what you're seeing in the bike sub-segment. You mentioned this lag effect versus what the other retailers are currently experiencing. and how end users are behaving. Would you be able to give us some more granularity in what exactly that means and how far in advance how manufacturers place orders with you? And when is your expectations that you will be experiencing the same type of, I guess, pickup in sales that many other market participants such as Tula are currently reporting?

Yeah so I think that's a very good question and of course as you have seen some companies is already reporting and they report stronger sales than they have seen before and of course what is happening now is that the retail inventory in many places are back to normal when you have normal inventories then you start ordering again from the customers and That's why you see some positive indications in the industry. We, of course, know the same. We, of course, see the same. Also, our customers are talking about the same thing, that they now started to get repeated orders. The number of orders is increasing and also the size of the orders is increasing. no difference versus the company that has reported versus what our customer sees and so on. So of course, really promising to see that indication. When it comes to MIPS and what we see is normally we get an order of our product somewhere around three to six months before it will hit the market. So given that we are already in soon end of July, Even if we get an order today, it will not be into the market by earlier somewhere around November, December. So that's why we believe that the orders we will get is for next year. And next year, it means that they will be delivered somewhere around Q1 and Q2, which means that we also see a much more normal bicycle situation then.

All right, got it. And then maybe also on the profitability in Q2 and the heavy investments that you're making currently in order to facilitate growth in the future. If you were to, I guess the timing effect of that as well, how much longer are you expected to make these heavy investments And what would be the more normalized run rate, I guess, from 2024 and onwards?

Yeah, I think, I mean, that's a good question. And I will turn it around a little bit because it's actually not the investments that are wrong. We are actually following the plan that we have set up behind our strategic priorities. So we continue to invest roughly with the same pace and increase. that we have done before, because of course, we want to be able to facilitate growth. The only thing that has changed is the top line, because of course, if you invest more and the top line doesn't come, then you will have an effect of that. If you look at the quarter specifically, both in R&D and in marketing, if we isolate marketing costs from the selling expenses, both of them, or at 9%. And of course, if you decrease with 50%, you get an effect from that. So we have said long-term that we will stay at somewhere around 5% investment when it comes to R&D and closer to 7% when it comes to marketing. And when growth is normalizing again, and we are more back to historic numbers and delivering on our ambition, you see much lower ratios. I would say nothing wrong with the way we are investing or spending. We do that because, of course, it's the right thing to do. We are delivering a lot of new product innovations. We are delivering a lot of new projects to the market with new MIPS equipped helmets. And we need to do that in order to really be well positioned when things turn around. So nothing wrong on the spending. The growth just needs to come in order to have the right ratios.

That makes sense. And then finally, a question on just that your strategic targets and your 2027 net sales target. I guess many on this call would agree that at this point in time, it seems a bit too ambitious to reach it, given that you just have one year behind you of negative sales growth. 2023 will most likely also not hit the positive growth mark. How comfortable are you with that target as you prepare for it today? And at what point, I guess, would you be looking at revising it downwards? What are the big risks here?

Yeah, I think, I mean, first of all, it's really, really important to isolate what happens on the market at the moment and the COVID unwind because What is happening there is more that too much inventory, our customers is not ordering. And then, of course, you see a soft performance in our P&L. We normally go back to, first of all, has our opportunity changed? Has our outlook on the opportunities changed? And actually, it hasn't. We still see exactly the same market as we have seen before. We see exactly the same opportunity. And of course, that's what we are delivering against. When we launched our strategic targets about one year ago, a lot of people accused us from being low balling and putting too low expectations. Now we are challenged against other things. So of course, From us as a company, we constantly review if our targets are still relevant, if there is something that has changed, because of course things change. There are things that happen that either you can overshoot the target or undershoot the target. And if you remember our previous target, we saw that we could overshoot that. And of course, that's an ambition that you then need to change. If we see it relevant to change our target, we will do that. And that's a discussion we have ongoing with our board to make sure that we guide the market in the most accurate way that we see.

Okay, but just to conclude that, you are still comfortable at this point in time that you will... achieve the 2 billion target.

Yes, otherwise we will need to go out to the market and communicate something else. And I mean, the bicycle industry, we still see it as relevant. We still see the size of the market as the same as before. Nothing changed in terms of the snow industry. Motorcycle, yes, it is challenging, but we do see that we return back to the growth. And on safety, which is actually the biggest growth opportunity that we have at the moment, we're actually tracking exactly on the plan that we set up. So if there are things that we need to change, I can assure you that we will do that.

All right, that's reassuring. And then just lastly, if I may, given that you are obviously the largest player in your niche, I would assume that your competitors' alternatives Alternative technologies are experiencing the exact same headwinds that you're you currently are. Do you see yourselves coming out of this even stronger like the, I guess, the runway to get to your level has expanded even more throughout the difficulties. Or is competition catching up at any point.

Yeah, it depends on what you actually mean on competition. I have probably a little bit different view on a competitor versus what you have, but I think I can answer both of them. When I look at competitor, I look at the 94, 95% of the market that we don't have at the moment. Are we outperforming that market? Yes, we do. When it comes to what you probably refer to is products or technology that address rotational motion, or at least say that it address rotational motion, which is somewhere around 10% of our total position. Then of course, we don't see them having the same kind of traction when it comes to new customers, new products on the market, new helmets that will be equipped with their technologies. So yes, I would say we are outpacing both of them by far.

Excellent. Thank you very much.

Thank you.

The next question comes from Carl Dagenberg from Carnegie. Please go ahead.

Thank you. Good morning, guys. A couple of questions from my side. I came in a bit late here, so maybe this question was already addressed, but we'll be talking about this ambition of yours of growing your sales here fully in 2023 versus 2022. I assume given the communication here today and the numbers that this assumption of yours has maybe changed a bit. Should we use the base here, Q1, Q2, and look at your historical seasonality with that base, or how should one reason you're going into H2?

Yeah, so previously we had an ambition of delivering growth for the full year of 2023. That has now changed to growth for the last six months of the year.

Okay, thank you. And then I have to ask here on... So the overall discussion on inventories, I know we're talking about or using this terminology of normalized inventories, but sort of what's your view on normalized inventories here post the pandemic? Because I guess, or what's the comparative basis at pre-pandemic levels or Because I guess now given the working capital basis of retailers and retailers having been burnt through this whole inventory cycle area, I would assume given also now that lead times and supply chain disruptions have improved that maybe that inventory basis structurally going forward should be lower than what we've seen historically. Is that also what you're sharing or what's your view on that?

No, I think, I mean, that's a very good question. So there is a couple of things that I think is important to note is that, of course, the market is bigger than it was pre-pandemic. So if we look at the total market of bike, we expect it to be bigger than it was pre-pandemic. There were just new numbers on the number of riders in the US market, for instance. It was the highest number since 2002, when they actually started the measurement, and there were close to 50 million active riders in the US, which is, of course, a fantastic number. We see that commuting in Europe is also increasing, and we expect that the head bike helmet market will continue to grow. But, of course, we don't see that at the moment, so I think the best assumption today, for the rest of 2023, when we talk about normalized inventory levels, is going back to prehistoric, pre-pandemic number, which is 2019. And that's what every one of our partners is referencing. You are right when it comes to lead times and so on, much more back to normal. You don't have the long queue when it comes to transport and shipping and so on. That has also normalized And of course, also capacity in the factories, because there is a lot more installed capacity also after COVID, which also means that you get access quicker to production. So I think that pre-pandemic inventory levels for 2023 is probably the right number. And then, of course, as we go forward in 2024 and onwards, I do expect that inventory levels will increase a little bit.

Okay, very well. Thank you for that clarification. And then I had a question on the impact here from the EC22.6 here in Motoring Q3, as you've been talking about here on the call. Just curious if you could provide maybe any sort of guidance or your guesstimate of what the impact has been on your sales from that isolated here in Q3. I guess to compare it to base Q1, Q2 last year is quite similar in absolute numbers. So, you know, just understanding the underlying momentum here, given that sales is unchanged here Q1, Q2 this year, would be helpful.

Yeah. So, of course, you will see a double-digit effect from the EC. And what that has to do with is that Since you're not allowed to produce any new helmets, we're not complying to the new standards since 1st of January. Of course, they're only producing the new type of helmets. Inventory in the channel is still with some of the EC2205 and none of the retail, or none is a big word, but a lot of the retailers don't want to take in the new compliance standard because then no consumer wants to buy the old one and so on. So that is a clean out that needs to be done. Really difficult to pinpoint exact what was the impact of that number. But it is a double-digit effect and of course quite an impact on the comparator numbers. And then the other effect that we also saw is that normally pre-season orders are in Q2 for Molto and that's the pre-season orders that will be delivered in late 2023 and beginning of 2024. those were postponed into q3 and of course you will see an effect of that so that is not a sales missed or anything but something that actually will come back and that's why we are also a little bit more confident on that we will return to good growth also in moto okay very well thank you and i'm just finally i know you don't uh you don't want to quantify the outlook exactly on the numbers and

things like that. But, you know, given the comparative base we're facing now from Q3 and onwards and the development in Q3 last year, would it be possible to talk anything about maybe the growth that you've seen here in the first week or I should say development in the first weeks of July? You know, you're talking about growth here on the second half, but that, you know, obviously gives room for quite wide interpretations.

Yeah. No, and of course, we are up to a lot easier comps when it comes to growth numbers and so on. We will and we have, of course, not changed our policy on giving estimate or guidance. But what I can say, of course, is that given that we don't have the same comparators, it would be very surprising if we see the same numbers as we saw in Q2. But of course, we still see challenging numbers in terms of Q3, where we, of course, are facing lower comparators. But of course, we'll see a gradual improvement in the quarter. And that's, of course, also what we are seeing. And then when we come back to Q4, we will see good growth again.

Okay. Thank you very much. That was all for me. So thank you, guys. Thank you, Carl.

The next question comes from Daniel Thorson from ABG Sundal Collier. Please go ahead.

I think we have covered all or most of the questions regarding bike and inventory, so I'll skip those. First one, given your strong net cash position and that you can't really invest yourself out of the current weakness in the bike market, which relies much more to the market in your view at least, Are there other opportunities arising in the market to acquire anything out of interest and put the money to work in your view?

Thank you, Daniel. Yes, I think we are investing ourselves into the future because of course we see a really relevant market to address, but we can never invest to fight a consumer trend because of course what we're seeing at the moment has actually nothing to do with MIPS. And if you actually look versus competition, we are outperforming the market and so on. So there we more saying like, we see a long-term ambition in bike, which we share with most company in the industry. And that's what we are investing for, but that's more long-term investment. I think, I mean, we are scanning the market for acquisitions. If there is interesting things to require, of course, What you see at the moment, most of the open targets that are out there, a lot of them need refinancing and they need refinancing, of course, for a good reason. It is a challenging market. And of course, what we are looking at as a company is more something that we will complement our offering. If we find something interesting and that will complement our offering or strengthen our delivering versus the strategy we have set up. We would be really interested at the moment, but there is nothing big that we see that we can acquire at the moment that will really do that.

Okay, I see. Secondly, on recruitment, where are you targeting or trying to add more people to gain market shares? in your different verticals and also geographically? Are you looking for more salespeople in safety, for example, or are you happy with the bike organization?

Yeah, I mean, we are investing quite a lot. And if you also look at where we are today, we just passed 100 employees, which is actually up 35% versus a year ago. So we're adding a lot of resources, especially on the engineering side. Like I said, we had a really high project momentum. We need to do more mixed equipment. And of course, we need to have resources to do that. We are also expanding our R&D function to be able to deliver on our new strategy. And when it comes to the sales side, we have increased our sales organization in safety quite a lot. What we are doing at the moment is looking for additional people on the US market, because of course that's a big geography and we need to have more people on the ground there. So there you will see more people. And we also see that the European market is also really increasing for us. So there we are adding more people. On the bicycle part, there we have quite a lot of people already. We already have the key brands and it's more of a penetration game. So there we actually don't need to recruit a lot more people. But engineering really need a lot both in terms of implementing new customer projects, but also doing R&D and then on the sales side where it strategically makes sense.

Yeah, I see. I see. Thank you very much. That's it for me now. Thank you, Daniel.

The next question comes from Kari Rinta from Handelsbanken. Please go ahead.

Yeah, thanks. Thanks for taking my question. And not surprisingly, I will be asking questions about the same topics that we have discussed. Firstly, about the short-term outlook. You're saying that retailer inventories should have normalized by the end of the quarter, but your customers, the helmet manufacturers still have a higher inventory. So I'm just a bit puzzled about where will the growth, where will the new orders come from? Because in one scenario, retailers and helmet manufacturers might be perfectly happy going into next season with normal or even lower than normal inventories. given that the cost of money and the uncertainties about the consumer behavior. So who is investing into sort of building inventory ahead of 2024 season?

Yeah, I hope quite a lot, because otherwise they will not have a lot of products to sell during 2024. But I think also, as I said before, We don't bet on that we will see a lot more replenishment orders for 2023. That's why we also indicate that Q3 is softer than we expected and more challenging than we expected, because of course it was a soft start of the season and so on. When we go into 2024, then of course we expect the markets to pick up, as we said, retail inventory, is already almost back on a normalized level we expect that all the brands have cleaned out their remaining inventory and if they don't produce anything during q4 they will not have anything to sell in q1 and q2 next year so if they expect to sell nothing during q1 and q2 next year they will not place any orders for us in q4 and that of course is What we share with them, we sit down with most of the customers. What is their production plan? We talk to the factories in China. How are they staffing up in order to meet demand and so on? And that's what we base our assumption on. It's not like it's an inventory betting from us. It's more what will our customers buy and what's their view on 2024? And that's what we put into our plans.

Just to clarify, you're using the word assumption. It's not hard orders that you have in your backlog for Q4?

No, because normally we have a time of somewhere around 1 to 45 days on our product. That's why we work on a forecast. I think given the uncertain times that we have seen in bike, a forecast is still an assumption. But that's the buy plan that our customers send to the factories in China of what they plan to produce. And that's exactly the same numbers that we base on our assumption because of course the numbers is also shared by us or shared to us, sorry.

All right, that's very helpful. Then about the long-term outlook or the ambition of 2 billion sales by 2027. Backing out the safety and leaving that aside, sort of X safety, that would imply some 1.5 billion in sales in 2027. And today X safety, you have maybe 500 million run rate. So what's driving that tripling, given that, as you say, Tour de France already almost 100% penetration, and that's a very small Small target group, of course, US awareness is high. Yes. And at the same time, US commuting is never going to be a thing there. So it's pretty much the same target group that you're selling. In Europe, commuting is growing and that will be one of the structural drivers. But what other new use cases, new geographies, new pockets of growth that will drive that tripling in sales outside? outside the safety market?

Yeah, so I think that's a very good question. I think, I mean, the run rate that you see today, if you triple that, then I think you will be disappointed by just having an assumption that the run rate is the normal run rate that we see today. And of course it isn't with a 50% decrease of our sales. So it's more the effect of the inventory situation. So of course, when we look at Our sales and the assumption that we have put in, and indeed it is an assumption, is that there is a couple of things that will drive our growth going forward. The most important one is, of course, the penetration journey that we need to do in Europe. In Europe, we are only at 10% penetration, a little bit more than 10%. And of course, the first assumption is that we get it to 50% where US market is today of our addressable market. We started on that journey already a couple of years ago. We have all the customers. And before the sharp decline in bike, we were actually growing with around 100% on the bicycle market in Europe. And we expect to return to really strong numbers there. And that, of course, will generate a lot of growth. Also given that the size of the addressable market in US and Europe is very much the same. Then the second part is that, of course, we believe that we can increase the penetration rate also on the US market. Today, it's 50%. We believe that we can get it up a couple of notches. And then, of course, we also had a strategic ambition to launch products also in the lower price segment, which we call the mass market. And of course, there is a big opportunity. I don't think that we will be really dominant when it comes to the mass market, but at least we have an opportunity to get the double digit penetration there. And then, of course, there is a lot of volume to go for the snow market, even though we don't think that that will grow at all over time. We think that snow will be a sport that is restricted to few. So we believe that the market will stay unchanged, but we can still continue that penetration and that will also generate some numbers. have a good position in equestrian and there of course we had a fantastic growth rate last year and we have a fantastic growth rate also this year and see a really good opportunity even though that's only a total opportunity of two million helmets it's still something that will generate growth and then of course we have our motorcycle segment where we have three different legs in terms of pillars of that growth journey. One is, of course, to continue our penetration when it comes to MX, where we have a very strong position today. It's also to establish ourselves in street. And the third one is, of course, to also make sure that we can deliver growth when it comes to e-scooters and so on. And we have projects for all of them, and that's what's going to generate the growth going forward, if we exclude safety.

All right, that's helpful to understand the underlying assumptions. Just one observation. I mean, you're saying that about the run rate of what is the normal level of sales. I mean, it's now down 50% compared to last year organic sales. But of course, last year's numbers were elevated by this inventory buildup that was way above the run rate.

I think when you see the bump in 2024, then we can much more talk about what is the run rate of a much more normal situation. All right. Looking forward to that. Thank you very much. Thank you, Kari.

The next question comes from Carl Oscar from Burenberg. Please go ahead.

Hi, good morning everyone. To be fair, all my questions have been addressed at this point, so nothing to add from me. Thank you.

Okay, then we will just wish you a great remaining part of the summer.

There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

Yeah, so I think, I mean, we did get one question when it comes to an email and that's from John Gilmore at Martin Curry. Moving away from the short-term inventory dynamics, can you spend some time about the confidence in long-term targets? I think we have done a little bit of that. What do you regard as the key inflection point in delivering in both safety and sport? And of course, when it comes to the inflection point, I think in sports, I don't think there is a lot more things that we see needed to happen because of course, when it comes to the position on the US market, really strong position, still gaining a lot of market share. We have all the customers that we need to deliver on that journey. And when it comes to the European market, of course, we have onboarded a lot of the remaining European customers. So also there we have the customers that we need in order to deliver on that plan. So from the customer point, there is not an inflection point. It's more now we see that an inventory situation has normalized. we can deliver all the new products that have been delivered on the last year. And of course, it will be great to bring new innovations to the market and start to generate growth again in the sports category. When it comes to safety, there, of course, it's a new category. It started only three years ago. So, of course, we started from no base at all. But there, of course, we have generated a lot of interest. We have 13 brands which we are working with today. There will be more brands launching during the autumn. We have two big fairs coming up and there we really start to see that we have the traction we need in order to achieve the plan. US market is working really well for us. We have started to win a lot of the tenderings with MIPS equipped helmet and we see really that the users and the buyers are getting it. And then also in Europe, similar thing, need more brands, they are coming on board. And then we also start to see that we are really getting accepted also by the major distributors in Europe, both in the important Nordic market, but we also see the same in Germany and UK and so on. And those are important building blocks. At the moment, when it comes to safety, we are tracking on the plan that we set up and not really an infection point to be met as such. Hopefully that answers the question. Okay. No more written questions or any questions online. If not, we close this call of the second quarter and speak to you again during the Q3 results call. Have a nice summer. Thank you everyone for listening.