Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings, and welcome to the Leatt Corporation First Quarter 2020 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Mason, Investor Relations for Leatt Corporation. Please go ahead, Mr. Mason.

Thanks very much. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the first quarter of 2020. The company issued a press release today, Wednesday, May 13, at 8 a.m. Eastern and also filed its report with the SEC. The press release is posted on our 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 13703397. A replay of the webcast will be available immediately following this call and will continue for 30 days. Certain statements made 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 in the call. Please refer to the complete cautionary statement regarding forward-looking statements in today's press release dated May 13, 2020. The company will make a presentation on the quarterly 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 in Cape Town, Sean.

Good afternoon, and thank you, Mike, and thank you all for joining us today to discuss the results of the first quarter of 2020. First of all, all of us at Leatt want to wish you and your loved ones, good health and safety during this very difficult time. Although the pandemic was declared during the last few weeks of the quarter, we had a record-breaking start to 2020. Q1 2020 was the best first quarter in terms of revenue in our company's history. Total worldwide revenues were up 24% over the first quarter of 2019 to $7.5 million. Sales of our newest cutting-edge body armor products led the way with increases in sales of our off-road motorcycle boots and the initial global shipments of our mountain bike shoe line. Our body armor products, which also include chest protectors, full upper body protectors, knee braces, knee and elbow guards now make up 55% of our revenue. Worldwide body armor sales were up 69% to $4.1 million. One of the highlights of the quarter was the introduction of our mountain bike shoe line in February 2020. These durable shoes created by our in-house team and tested by our professional riders were designed to combine style and comfort with the pedal efficiency and control needed in mountain biking. One of the secrets of the shoe line lies in the shank hidden above the sole that controls the flex for different types of riding. Along with our shoe line, recent successful launches of goggles, boots, helmets and other exceptional protective gear are testament to our team's ability to develop innovative, medically proven, athlete tested products that appeal to a wide rider audience and help define Leatt as a premium Head to Toe global brand. These launches have shown very promising early consumer demand levels and have earned positive reviews for actual performance in the field. However, we are now facing the global headwinds from the COVID-19 pandemic. Our distributor buying patterns have been understandably conservative, while international revenues grew significantly in the first quarter by 39%, domestic revenues in the United States contracted by 6%, primarily as a result of the COVID-19 stay-at-home orders issued in March. The situation is extremely fluid, and we continue to navigate governmental requirements, our global consumers' buying needs and consumer buying trends and behavior extremely closely. In the immediate term, we have responded to the pandemic by looking at our operating budgets in detail, fast-tracking the development of our e-commerce abilities and reprioritizing the use of resources to ensure that marketing, product development and staff costs are optimized and sustainable. These measures include furloughing staff members who are unable to work due to lockdowns, renegotiating terms with suppliers and temporarily decreasing salaries at every single level within the company. We have also been able to participate in government funding arrangements to overcome short-term domestic personnel funding requirements in the United States. Given these short-term measures, our goal is to emerge from the pandemic poised for growth and further success. With revenue increasing by 24% and costs increasing only by 6% during Q1 2020, we believe that we can continue to build on the tremendous momentum that Leatt has achieved on a product and global consumer brand level across our core markets. As I mentioned, management has been actively developing our e-commerce abilities and key relationships in order to better reach a wide group of end consumers with our marketing and sales campaigns. The COVID-19 pandemic has resulted in an increase in e-commerce buying patterns, which have benefited us, our partners and consumers tremendously. We will continue to refine and accelerate our e-commerce partnerships and presence as a key revenue builder going forward. Let me highlight some financial details for the first quarter of 2020. Worldwide revenues for the first quarter increased to $7.5 million, up 24% compared to $6.1 million in the 2019 first quarter. International revenues were $5.6 million, up 39% compared to $4 million for the same period last year. The increase was driven by a 69% increase in body armor sales, a 4% increase in other products, parts and accessory sales that were partially offset by a 4% decrease in neck brace sales and a 25% decrease in helmet sales. Gross profit was $3.5 million or 47% of revenues compared to $2.9 million or 47% of revenues for the same period last year. Operating expenses increased $178,000 to $3 million or 6% compared to $2.9 million for the same period last year. And income before taxes was $483,000, an increase of $471,000 compared to $12,000 for the same period last year. Net income was $362,000 or $0.07 per basic and diluted share compared to $9,200 or $0.00 per basic and diluted share for the same period last year. Looking at the first quarter in greater detail. Sales of our neck brace accounted for 17% of revenue. Our neck braces continue to generate a higher gross margin than our other product categories, primarily because of our highly efficient manufacturing techniques and our position as industry leader and IP holder. Our body armor products include a range of chest protectors, body protectors and vests, back protectors, knee braces, knee and elbow guards and now footwear, motorcycle boots and mountain biking shoes. The 69% increase in body armor revenues was due to continued shipments of our highly anticipated off-road motorcycle boots and the initial shipments of our mountain bike shoe line to our customers globally. Upper body protection piece sales were also buoyant and continue to sell well. Body armor accounted for 55% of first quarter revenue. Our other products, parts and accessories category are comprised of our goggles, hydration kits and our apparel line, including hats, jackets, Jerseys and pants. The 4% increase in revenues is due to the increase in the volume of the highly anticipated and innovative Velocity 6.5 line of goggles, both in the United States and abroad. Other parts and accessories accounted for 18% of our first quarter revenue. All of our cutting-edge helmets contain our patented 360 turbine technology for brain protection. Bicycle helmet sales are growing. However, our motorcycle helmet sales are a challenging area and caused our helmet category to show a 25% decrease for the quarter. The motorcycle helmet category is extremely competitive and price sensitive. We are refining our pipeline of innovative helmets as well as our global marketing campaigns to increase global sales. Helmets accounted for 10% of first quarter revenue. Turning to the balance sheet. We continue to meet our working capital needs from cash on hand and internally generated cash flow from operations. At March 31, 2020, we had cash and cash equivalents of $1.44 million, a current ratio of 2.5:1 and no long-term debt. Looking forward, we expect these headwinds from COVID-19 to affect our revenues for the next several quarters. While we have not seen any significant material impact of COVID-19 on our results of operations for the first quarter, we do expect that the spread of the virus and resultant lockdown measures will result in a decrease in revenues for the next several quarters and could have a negative impact on our sales revenue for the remainder of 2020 and possibly beyond. But we also know that consumers are eager to return to riding. We are encouraged that our manufacturing partners in Asia are recovering well, and the production of stocking orders of our 2021 line of protective gear has commenced as planned. We are also encouraged to see key international and domestic locations in the United States and globally, slowly relaxing lockdown measures to permit some limited commercial and outdoor activities within established distancing guidelines. Finally, we will continue to invest in engaging marketing campaigns and partner with athletes and influencers and build on the tremendous momentum that the Leatt brand has achieved. As always, we'd like to thank our entire Leatt family, our dedicated employees, business partners and team riders for their continued strong efforts and support in making Leatt the success that it is. With that, I'd like to turn the call over to the operator for questions. Operator?

[Operator Instructions] We have a question from Olivier Colombo, who is a private investor.

Congratulations on the fantastic first quarter. I had 6 quick questions for you, short ones, actually. The first one is you mentioned that in the last 3 weeks of March, your business was hurt. If you had to quantify that, what would that represent revenue-wise loss that you had in that quarter?

Of course, it's quite difficult to say in terms of dollars exactly what we would have done. What I can say is that it primarily affected the United States, domestic revenues in the United States, which I said in the call. We were 6% down in the U.S. and we were on track to be about 15% up if we hadn't seen a huge slowdown in the last 3 weeks of March.

Okay, that's perfect. Then on the body Armor sales that have seen an incredible increase. This $1.7 million increase, how does that split? Do you think that the mountain bike shoes that you launched in February represented a small part of that and the bulk should still come out in the next couple of months?

Yes. It was not an insignificant amount. We did really well out of the mountain biking shoe line. Of course, this is the initial shipments. So I'd say about 30% of that increase actually was because of the initial shipments of mountain biking shoes. And of course, motorcycle boots also continued to ship really nicely. And as I said on the call, upper body protection continues to be a great revenue driver for us. So we've done really well out of that as well.

Okay. Perfect. The other question that I have is regarding what kind of -- on your business model, what kind of adjustments are you making to your business model going forward and until the end of the year?

Okay. So again, as I said in the call, we've had a look at all of our operating costs, and salaries across the company have been cut by about 20%, Olivier. So that's at every single level of the company. In the United States, we furloughed some employees in line with the regulations there. And about 6 staff members have now been retrenched. Some of them will be working for us on a freelance basis, but we needed some flexibility in our operating costs. We did retrench about 6 people. We tried our hardest not to retrench. And our strategy really was to try and decrease salaries across the board for a certain period of time in order to avoid being in a position that we had to retrench many of our team members because we do feel that we are going to emerge out of this crisis stronger than previously. So we've looked at all of our operating costs, marketing costs, product development costs. We've reallocated resources in order to make sure that anything that we invest in -- yields revenues as fast as possible. And we've also started focusing, as I said, really hard on e-commerce. It's a really important part of the business now. Consumers are understandably very concerned about being out. So they are ordering a lot online. So the business model has changed a little bit in that regard. Some of our sales are going to be direct to e-commerce distributors and some are going to be direct to consumers. So we are really developing now into a multichannel business. So operating costs very much controlled. And we've navigated this very, very carefully by making sure that we keep our core team intact so that we can emerge from the storm stronger. And also, we have taken every opportunity on a -- for governmental support. We've got the payroll protection line in the U.S., we managed to get that approved. Those funds have been transferred over, and we'll be spending that in order to try and retain our staff there so that we can increase sales in the U.S. as fast as possible.

And on the PPP loan that you share, how much you received from the government?

No.

No. Okay.

It's in excess of $200,000.

Okay. And then regarding the regions that you are reopening slowly now, which are the ones that you see the most promising today?

Okay. So obviously, this is changing all the time because the virus regions open up and then the virus seems to be surging and then they closed down a little bit. So I think the most promising so far has been Germany and Austria. There's been some fantastic opening up there. And then, of course, in the U.S., this week, California is open, and many of the states in the U.S. this week will be opening up. Of course, some states like New York, New Jersey, they won't be opening up because they still have -- they won't be opening up immediately. They might be opening up quite soon. But we do expect to see opening up of various areas and then possibly a return to some of the lockdown rules as the virus kind of start resurging. We started to see that in China a little bit as well on a limited basis. So it's a bit of a to and fro at the moment, Olivier, but the most promising so far has been Germany and Austria. Australia is also opening up, New Zealand is also opening up, really nice to see. I mean even countries like Italy and Spain are starting to open up now. The U.K., of course, has also gone down to Level 3 in terms of their lockdown rules. And I think the landscape is going to take a while to settle into regular commerce. But we will get there. We will emerge from this. It will just take some time.

Gentlemen, there are no further questions at this time. So I'd like to turn the call back over to Mr. MacDonald for closing remarks. Mr. MacDonald?

Thank you for joining us today. We look forward to speaking with you again to recap the second quarter of 2020. In the meantime, please stay safe.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.