Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings and welcome to the Leatt Corporation Fourth Quarter and Full Year 2019 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Mason, Investor Relations for Leatt Corporation. Thank you. You may begin.

Thanks, Doug. Good morning and welcome to the Leatt Corporation investor conference call to discuss the financial results for the fourth quarter and full year ended 2019. The company issued a press release today, Tuesday, March 24, at 11 a.m. Eastern and also filed its report with the SEC. The press release is posted on Leatt's website at leatt-corp.com. This call is being broadcast live and may be accessed on the company's website. An audio replay of the call will be available for 7 days and may be accessed from North America by calling 1 (844) 512-2921 or 1 (412) 317-6671 for international callers. Enter conference number 13700230. A replay of the webcast will be available immediately following this call and will continue for 30 days. Certain statements in this conference call may constitute forward-looking statements. Actual results could differ materially from those discussed in this call. Leatt Corporation does not undertake any obligation to update such statements made on the call. Please refer to the complete cautionary statement regarding forward-looking statements in today's press release dated March 24, 2020. The company will make a presentation on the quarterly and full year results, and then open the call to questions. I would now like to turn the call over to Mr. Sean MacDonald, CEO of Leatt Corporation. Good afternoon to you and Cape Town, Sean.

Thank you, Mike, and thank you all for joining us. I am pleased to report that 2019 was yet another record year for Leatt in terms of our financial results, our innovative product development and the increase in consumer demand for our expanding range of protective gear and apparel. These results demonstrate that the Leatt brand is gaining traction around the world. We believe that this increased demand for our products is due to the tireless work of our entire team as well as our engaging marketing campaigns and partnerships with competitive athletes who help us to promote the technology, safety and style of our exceptional gear. Sponsoring outstanding athletes not only bolds our family of loyal brand ambassadors, but also extends market recognition of the Leatt brand globally. We will discuss this exciting development further later in this presentation. Total global revenue for the year was $28.3 million, an increase of 16% over 2018, which was also a record year for our company. As we continue to focus on operating discipline and investing in areas that we believe will contribute to future growth, income before taxes for 2019 increased by 27%. Revenue for the fourth quarter was $7.3 million, an increase of 32% over the fourth quarter of 2018. While the success that we have achieved throughout 2019 has energized our entire team, we all realized that the impact of the rapidly expanding global COVID-19 virus pandemic might temporarily dampen our 2020 results and our growth trajectory moving forward. I will discuss that issue later in this presentation as well. In the United States, revenue grew by $1.1 million or 13% in 2019 as our team of in-house sales representatives continue to expand our selling footprint, adding new dealers and leveraging our position within dealers with new ranges of protective gear and apparel. International revenues also grew significantly as we continue to refine and build important relationships with our top-tier distributors that sell to both brick-and-mortar and online dealers. Our product development and engineering team continues to expand our product categories and deliver a pipeline of cutting-edge innovative protective gear to expand our reach in the global riding community. We introduced several new revolutionary products in 2019, our Velocity 6.5 goggles and a brand-new category affiliate, motorcycle boots. The new GPX 5.5 motorcycle boot is yet another example of a Leatt product that is medically proven to protect users, is designed with the input and extensive testing of athletes and is designed to be extremely comfortable from the first day of wear. Just a few weeks ago, in the first quarter of 2020, we launched our 2020 MTB shoe line, our first-line of MTB shoes for mountain bikers of all levels. Shoes are one of the key touch points when riding mountain bikes, and our shoes are designed so that there is no compromise in terms of comfort control, style and pedal efficiency. The 2020 shoe line was developed and tested extensively on terrain as varied as the deserts of the Moab and the glaciers of the Alps. We believe that these exceptional footwear products elevate the Leatt brand to what the industry calls head-to-toe coverage, a goal that we have been working on for nearly a decade. We are now in the position to offer riders exceptional products from head to toe and for varied riding styles and conditions. Revenues of our flagship neck brace grew during the 2019 period, albeit marginally, and we continued to see demand for our 3.5 neck brace that offers engineered quality protection at exceptional value to a wider rider community. Bicycle helmet sales are growing, especially our DBX 3.0 Enduro and our award-winning DBX 4.0 designed for extreme mountain biking. Although the motorcycle helmet segment is extremely competitive, we have had the most success during 2019 with the sale of our cutting-edge GPX 3.5 helmet. We believe that the unique design and technology of this helmet will ultimately lead to increased consumer demand for the Leatt motorcycle helmet range. Our line of medically proven and approved knee braces that cater to many consumer preferences continues to be a key revenue driver and a focus of our engineering team. Goggle sales continue to exceed our expectations. In particular, the bulletproof Velocity 6.5 goggle and new dealerships have been expanding the range that they hold, both in the United States and abroad. We continue to see growth in revenue from our staple of bicycle products, now being sold by a network of distributors and dealers in the United States and abroad. Now let me turn to our financial results in a bit more detail. I'll start with fourth quarter of 2019. Revenues for the fourth quarter of 2019 increased by $7.3 million, up 32% compared to $5.5 million in the fourth quarter of 2018. Operating expenses in the fourth quarter increased 13% to $2.9 million. Fourth quarter income from operations was $101,000 compared to a loss of $128,000 for the same 2018 period. However, net loss for the fourth quarter was $28,000 compared to $900 for the fourth quarter of 2018, as we continue to push to invest in areas that we believe will lead to future growth. Moving on to the full year results. Total revenue for 2019 was a record $28.3 million compared to $24.3 million for 2018. That represents a gain of $3.9 million or 16% over the same 2018 period. Net income increased 15% to $1.4 million in 2019 compared to $1.2 million for 2018. Gross profit was $13 million or 46% of revenues compared to $11.6 million or 47% of revenues for 2018. As we saw our sales mix of competitive product categories expanding, our net base revenues also continued to contribute a higher gross profit margin than the more competitive product areas, while decreasing as a percentage of their overall sales mix. Total operating costs increased 9% in 2019 as compared to 2018, with salaries and wages increasing by 16% as we continue to grow our sales force, both in the United States and abroad. We are, however, streamlining our internal sales force, and as such, commissions and consulting expenses decreased by 20%, which offsets the increase in salaries and wages, resulting in a net increase of 11.5%. Here is a breakdown by product category. The 16% increase in revenues during the 2019 period was primarily driven by a 2% increase in the sale of neck braces, a 20% increase in body armor sales and a 73% increase in the sale of other products, parts and accessories, offset by a 22% decrease in helmet sales. Here is how it looks in greater detail. The increase in neck brace sales was due to strong sales during the first quarter of 2019 for the award-winning 3.5 neck brace. Braces accounted for 21% of our 2019 revenue. Our body armor products are a range of chest protectors, body protectors and vest back protectors, knee braces, knee and elbow guards, and now, boots. The increase in body armor revenue is attributable to strong market demand for our hard shell upper body protector and knee brace lines, both in the United States and abroad. Our biomedical engineering team continues to refine our knee braces to ensure comfort while reducing serious injury. Body armor accounted for 49% of 2019 revenue. Our other products, parts and accessories category is comprised of our apparel line, jackets and hydration kits as well as goggles. 73% increase in this category during the 2019 period is due to the continued shipping of our Velocity 6.5 line of goggles to our customers as demand continues to grow in the United States and abroad. Our apparel line continues to be a strong driver of brand awareness for Leatt. Our other products, parts and accessories category accounted for 20% of 2019 revenue. Our helmets continue to be refined, and all helmets contained are patented 360 Turbine technology for brain protection. Bicycle helmet sales are growing. The DBX 3.0 Enduro and the award-winning DBX 4.0 designed for extreme mountain biking continue to gain tremendous traction. Motorcycle helmet segment is extremely competitive. Our motorcycle helmet sales are a challenging area that has caused our helmet category to show a decrease for the year. However, we have had some success with the sales of our cutting-edge GPX 3.5 helmet that we believe contains the right combination of design and technology to stimulate consumer demand in the motorcycle market. We are also refining our pipeline and offerings as well as our global marketing campaigns to increase global sales in this category. Sales of helmets accounted for 10% of our 2019 revenue. Gross profit for 2019 was $13 million or 46% of total revenues compared to $11.6 million or 47% of total revenues for 2018. As I mentioned, our neck braces continued to generate a higher gross margin than our other product categories primarily because of our high emission manufacturing techniques and our patented innovative technologies. Although operating costs have increased this year when compared to 2018, this increase was primarily attributable to increased marketing, advertising, selling and related staff costs targeted directly at building a global consumer brand and launching our exceptional products, areas that we believe will fuel our growth moving forward. We continue to focus on our favorable operating leverage. Turning to the balance sheet. Inventory and payables increased significantly towards the end of the 2019 fourth quarter, in anticipation of the annual Chinese New Year being relatively early in 2020. The company prepared and receipted inventory in China before December 31, 2019, in order to be able to ship orders to its global distributors pre-Chinese New Year in January 2020. Additionally, receivables were higher at December 31, 2019, in line with the 32% increase in revenues in the 2019 fourth quarter. We are meeting our working capital needs through cash on hand as well as from internally generated cash from operations. At December 31, 2019, the company had cash and cash equivalents of $2.1 million compared to $1.7 million as of December 31, 2018. Our current ratio stands at 2.2:1, and there was no long-term debt. As I mentioned earlier, the COVID-19 global pandemic has led to uncertainty in all lines of international business. We've built incredible momentum throughout 2019, but we have already seen conservative distributor and dealer buying patterns since the advent of the pandemic that may affect our growth trajectory moving forward. We expect to work with our distributors to develop strategies to mitigate any adverse impact on business operations through the duration of the pandemic. We had planned to come to the United States during the first half of 2020 to connect with the investment community, but we have understandably suspended international travel in response to global efforts to flatten the curve. In the meantime, we will be available for conference calls and video conferencing. Our management team is committed to working with all stakeholders to ensure that Leatt and all our partners remains safe and return to normal trading conditions on a sustainable basis as soon as physically possible. That said, an important indicator of the promise of our future has been the recent launch of our mountain bike shoes, which can only be described as a huge success. We launched the shoe line at Crankworx in Rotorua, New Zealand, along with our distributors and athletes, before an audience of film makers and photographers. The launch pushed our social media reach by more than 1,000% and increased our followers by almost 2,000 in the first 48 hours. Distributors and dealers have told us it was the best launch that they have ever seen. We are also very encouraged by our outstanding Leatt family of athletes and team riders who represent our brand at events around the world, and had an outstanding 2019. We are very proud to say that long-term Leatt athlete Ryan Sipes was named Vital MX's 2019 Person of the Year, and was the focus of General Sipes, a complete Red Bull TV video series built around his adventures and achievements. Ryan is an outstanding ambassador for Leatt. Furthermore, for the first time ever, we have elevated our brand by sponsoring a U.S. 450 Supercross team, a very exciting venture for us. Outside of the United States, we are entering year 4 of a partnership with Red Bull Factory KTM athlete, Jonny Walker of the United Kingdom. Jonny, who was slowed in 2018 by a wrist and hand injury, came back strong in 2019, achieving podiums in the World Enduro Super Series and SuperEnduro World Championship. In world championship racing, Motocross 2019 was our second year of partnership with the up and coming 3-man MX2 team F&H Kawasaki, racing from the Netherlands. This team has obtained many podiums in just 3 years of competition, has in-factory support and recognition from Kawasaki, and has added great exposure to our marketing. On the bicycle side, our bright -- our biggest achievement of the year, by far, was at Red Bull Rampage, the most watched mountain biking event in the world. Leatt athlete, Szymon Godziek, won the prestigious People's Choice Award. Szymon is a head-to-toe Leatt athlete, so this gave us amazing exposure that spiked our media channels after the contest. We are also advancing also our relationships with elite MTB athletes in Enduro and downhill and with global influences. Starting in 2020, we now have 2 downhill teams that include national champion riders. We also sponsor an elite female Enduro team from Switzerland and have signed prominent riders in the freeride team, including Clemens Kaudela of Austria. Global influencers, such as Steffi Marth of Germany and Aaron Chase of the United States, are providing us important content marketing. In terms of awards, we won prestigious recognition from the media and our press in 2019. The Leatt DBX 4.0 helmet won a Design & Innovation Award granted by a jury of bicycle industry experts in recognition of the best bicycle and products. The Leatt neck brace was honored twice. It was voted #1 neck brace by the Vital MX audience survey and won the 2019 Racer X Readers' Choice as the #1 worn neck brace. In conclusion, our strategy continues to be one of building a pipeline of exceptional protective gear and apparel in multiple categories to fuel revenue growth and continue to define Leatt as a premium head-to-toe brand. Our innovations are based on the work of our award-winning engineering and design team that makes use of the most advanced manufacturing technologies and efficient materials. As always, we'd like to thank our entire Leatt family, our dedicated employees, business partners and team riders for the continued strong efforts and support in making Leatt the success it is. We believe that the Leatt brand will continue to gain traction as we design and engineer new products, invest in aspirational marketing campaigns and sponsored teams and athletes globally. With that, I'll turn the call back over to the operator for any questions. Operator?

[Operator Instructions] Our first question comes from the line of [ Olivier Colombo ] with -- a private investor.

Congratulations on the excellent year 2019. I mean it's quite remarkable to grow 16% after growing 21% in 2018 and 23% in 2017. I think that's quite remarkable. And by the way, your Q4 here was the highest ever, so that's excellent. I have actually 4 -- sorry, I have actually 4 questions for you. The first one is regarding the virus situation. I know that you have operations in Santa Clarita in California. I just wanted to know how the team is doing there. Are they working still at that headquarter? Or are they working from home?

It's a good question, [ Olivier ], and this is obviously something that we are monitoring on a daily basis. So we sent everybody home actually about 2 weeks ago to work from home. We set everybody up with the technology to be able to work from home, except for some key warehouse staff that obviously need to be shipping out of Santa Clarita. And those staff, because they are essential in terms of logistics, are still at Santa Clarita and obviously practicing social distancing as far as possible. So everybody is at home and safe and healthy, except for a couple of key warehouse people that are still shipping. We are still getting orders at Leatt USA, and we are still shipping country-wide.

Okay. That's perfect. Nice to hear that. On the other side is regarding your manufacturers that you have in China. Do you have an update on -- if they're open for business? And how was the situation over the last 2 to 3 months?

Yes. So they are open for business. We did have, of course, a pause in any manufacturing activity that returned late from the Chinese New Year. We were fortunate in that we did ship out quite a lot of inventory before Chinese New Year took place. And I would say that currently, our manufacturers are probably operating at about 70% production capacity. So from a production perspective, everything is looking stable. They have returned now, and they are starting to build their capacity again.

Okay. That's perfect. And now on kind of operations, and particularly the neck brace, you mentioned that we saw sales increases of 2% for the whole year. But volume was up at 12.5%. So I believe that means that there was a price erosion on the GPX 5.5 and the DBX 5.5. Is that correct?

I wouldn't say price erosion. So a couple of different reasons, actually. The first reason is that we did sell quite a lot of 3.5 neck braces. And 3.5 neck brace is, of course, our entry point price level. So the pricing is going to be lower per unit. So you can sell a lot more volume, but the price per unit is a lot lower, which would cause your dollars to increase but your volume to increase at a greater rate. So that's one reason. And then in terms of the 5.5 neck brace sales, we did have some discounting. We did have some sellouts of some older 5.5 neck braces in order to make room for some new inventories. So correct, there was some discounting, particularly at Leatt U.S.A. in order to move some older GPX and DBX 5.5 stock.

Okay. That's perfect. And my last question is regarding the motorcycle boots. When were they available for purchase around the world? Because, I mean, it seems that you had some sales in Q4, but I believe that most of the sale will come in the first quarter of this year. Is that correct?

That is correct. So we shipped, and late in Q4, both Leatt U.S.A. and some of our distributors received the motorcycle boots. So there was limited sales in Q4 of 2019. But we have seen sales of motorcycle boots improving through Q1 2020.

Okay. Perfect. Please continue the good work, and of course, keep your team very safe.

Thank you, [ Olivier ]. Please keep safe.

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

Thank you again for joining us today. We look forward to speaking with you again to recap the first quarter of 2020.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.