Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings, and welcome to the Leatt Corporation's Second 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, Jerry. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the second quarter of 2020. The company issued a press release today, Thursday, August 13, at 8:00 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 this call will be available for 7 days and may be accessed from North America by calling (844) 512-2921 or (412) 317-6671 for international callers and our conference number 13708075. 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 on the call. Leatt Corporation does not undertake any obligation to update such statements made in this call. Please refer to the complete cautionary statement regarding forward-looking statements in today's press release dated August 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, Sean, please go.

Good morning. Thank you, Mike, and thank you all for joining us today. Before I begin the recap of the second quarter of 2020, I want to mention 2 things: firstly, I hope that you are all safe and that you, your families and colleagues remain healthy as we all face the reality of the COVID-19 pandemic together. I know that we all look forward to returning to normal times. Secondly, please mark your calendar for Friday, September 4 at 10:00 a.m. Eastern Time. We will be presenting at the LD Microcap Virtual Conference, which runs from September 1 to September 4. LD tells us that 350 companies will take part in the conference and that 20,000 participants are expected. I will make a 20-minute presentation and then will be available for one-on-one virtual meetings as scheduled. We will issue a press release with all of the details closer to the event. If you have any questions or would like to schedule a meeting, please contact Mike Mason. I hope that you will be able to join us. Turning to the second quarter of 2020. We had a remarkable quarter. The best second quarter in our company's history in terms of global revenue despite the turmoil caused by the COVID-19 global pandemic. Total global revenues for the quarter were $6.9 million, an increase of 32% over the second quarter last year. We saw revenue growth in virtually all of our head-to-toe product categories, with the exception of our flagship neck brace due to closeouts in 2019 that did not repeat in 2020. Our line of helmets and footwear, including motorcycle boots and mountain biking shoes are all trending higher, and the sustained strong demand by a wide user base that we are seeing for our body protection products is particularly encouraging. International revenues grew by 16% during the quarter, while revenues in the United States grew by a staggering 51%. These increases were led by strong e-commerce sales, including consumer direct sales through our leatt.com website, and a tremendous resurgence in demand from motor dealers, MTB dealers and ultimately, the end users of our products. For the first 6 months ended June 30, 2020, revenues were $14.5 million, an increase of 27% compared to the first 6 months of 2019. We believe that the strong demand is in part in line with the growth experienced in the outdoor industry at large as a result of consumer preference for being outdoors during the pandemic. The trend is especially noticeable in the bicycle industry, which has helped drive demand for our bicycle in mountain biking products. That said, the early days of the pandemic were an adjustment period for us. The last few weeks of the first quarter and the first part of the second quarter were extremely tough for our U.S. operations, with stay-in-place orders causing a significant contraction in sales. However, our sales, marketing and operations teams continue to work in the background, investing in social media campaigns and e-commerce capabilities to be in a position to service the riding community with our innovative protective gear that enables freedom and the confidence to get outdoors and focus on the sport. We also continue to innovate in new products and categories in the Leatt lab, led by our engineering and design teams. A great example is our mission to design the ultimate mountain biking shoe, designed for both flat pedal and clip less riding. Working closely with Aaron Chase, a legend in the world of mountain biking as a rider and course designer. We created the Aaron Chase 3.0 flat shoe, a high-performance signature model that is already generating strong demand from consumers. Among the features of the Chase model shoe, and in fact, all of our mountain biking shoes is a specialized sole made from our unique RideGrip rubber compound for ultimate bike control in all-weather conditions. Other features include ankle padding, ventilation, a waffle grip pattern in the sole and compression laces. Aaron, who is also an Editor, Director and sole maker, is an MTB pioneer of all-terrain slopestyle movement that reclaims the creative spirit of mountain biking. He is an innovator of the way people ride and the way people ride and the way riding courses and bikes are built, and we are very proud of to be working with him as part of our team. We also continue to invest heavily in our multichannel sales organization, in both the multichannel and MTB areas, and particularly in the United States, where we believe that we have the ability to reach more dealers around the country with our dedicated in-house sales professionals and managers. Leatt as a head-to-toe brand has become an important revenue driver, and a focus of the company and an increasingly lucrative brand for dealers to sell. Here are the financial details for the second quarter of 2020 in a bit more detail. Revenues for the second quarter increased to $6.9 million, up 32% compared to $5.3 million in the 2019 second quarter. The increase was driven by a 70% increase in sales of other products, parts and accessories, a 48% increase in body armor sales and an 18% increase in helmet sales that were partially offset by an 18% decrease in neck brace sales. Gross profit was $3.3 million or 47% of revenues compared to $2.6 million or 50% of revenues for the same period last year. Total operating expenses decreased by $186,000 to $2.4 million or 7% compared to $2.5 million in the same period last year. Second quarter income from operations increased 787% to $909,000 compared to $102,000 for the same period last year. And net income rose 815% to $675,000 or $0.12 per diluted share compared to $74,000 or $0.01 per diluted share for the same period last year. Here is a category breakdown in further detail. Sales of our net price accounted for 15% of revenue. Our net prices continue to generate a higher gross margin than our other product categories, primarily because of highly efficient manufacturing techniques and our position as industry leader. Our body armor products include our range of chest protectors, body protectors and vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and now mountain biking shoes. The 48% increase in body armor revenues was primarily due to strong demand worldwide for our upper body protectors for both off-road motorcycle and mountain biking that was supported by very encouraging sales of boots and shoes. Body Armor accounted for 60% of second quarter revenue. Our other products, parts and accessories category are comprised of our apparel line, hats, jacket, hydration kits and goggles. The 70% increase in revenues is due to continued demand for our innovative velocity line of military tested bullet proof goggles, both in the United States and abroad. Turning to the balance sheet. We have a very healthy balance sheet at this time. Cash increased by 27%, primarily due to working capital measures put in place to mitigate some of the effects of the pandemic. We continue to meet our working capital needs from cash on hand and internally generated cash flows from operations. And at June 30, 2020, we had cash and cash equivalents of $2.6 million, a current ratio of 3.6:1 and no significant long-term debt. In conclusion, we believe that the consumer desire to participate in exhilarating outdoor activities like riding, will continue to be an important driver for buying trends going forward. We also believe that our investments; a, in the development of innovative products that deliver on their promise to return riders home safely; b, in marketing campaigns that are engaging and contribute strongly to the development of Leatt as a global consumer brand; and c, in the development of a professional sales organization, armed with products and marketing tools that are extremely attractive to dealers have all contributed significantly to our growth this year and will continue to do so in the future. That said, we are cautiously monitoring the COVID-19 pandemic on a daily basis. We continue to plan for the possibility of future pandemic related headwinds and economic fallout into 2021 and beyond. We remain optimistic based on the success of recent launches of goggles, boots and other exceptional protective gear and now our mountain bike shoe line. Our entire team is infused by the very encouraging demand levels, great media reviews, and perhaps the most important endorsement, performance in the field by riders that both our existing and new innovative product categories are showing. Now I'd like to turn the call back over to the operator for any questions. Operator?

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

Congratulations on your best second quarter ever. This is quite remarkable, and I'm really speechless to see a 30% -- 32% increase in sales for this quarter. Honestly, I was not expecting this kind of number. So your team and you deserve all my congratulations here.

Thank you, Olivier. Appreciate the support.

I have 2 questions for you. The first one is what were the biggest challenges you faced during this quarter because of COVID? And how did you prepare your team to work remotely and still deliver these fantastic numbers?

Okay. That's a good -- it's a very good question, Olivier. I mean, I think the -- really, the biggest challenge was the lockdowns that we saw around the world. So as countries started implementing lockdowns, of course, there was a lot of uncertainty amongst the riding community. Nobody could ride for a very long time. And a lot of our distributors were not able to move any of the stock that we had -- that they had in stock, any Leatt stock. So we were very concerned about reordering patents. But as the lockdowns have lifted, that situation has improved. I think. I mentioned the word confidence. I think that was probably the biggest confidence and uncertainty. That was probably the 2 biggest areas of concern because nobody really knew what the outcome of the lockdowns were going to be. And this is, of course, unprecedented situation. So that was probably the biggest challenge. And then in terms of getting everybody ready to work remotely, I think Leatt as an international organization, we're quite used to working over Skype and over other video conferencing tools like Zoom. So certainly, from a high level exact level, we were quite comfortable working remotely. We actually had many of the systems in place already. And then we were fortunate in that the people that needed to actually be operationally at the office, were able to fulfill their duties, certainly once some of the lock down regulations were lifted. So as I said, I think we were pretty well poised to work remotely, and it certainly has changed the way that we will work now and in the future.

Okay. That's perfect. And the other question is also regarding the lock down. We've seen that once this lockdown was lifted, people wanted to go out -- outside. And demand for the bicycle industry has increased by a factor of 2 or 3. And it seems that the shortage of bikes is going to last for probably another year. How is Leatt prepared to push your back protection gear even more actively with eventually bike manufacturers directly, but also distributors?

Yes. So I mean, again, a good question. And quite correct. I think the demand on the bicycle side has certainly doubled or tripled. And many manufacturers in the East, particularly of bicycles, and some of protection, they actually had order cancellations when the pandemic started, people were expecting demand levels to be very low for a very long time. I don't think anybody really saw this increase in demand that has not come. So it was kind of a tri-factor -- a double factor because the production stopped on the one hand and at the same time, demand increased. So you had a decrease in supply, and you also had an increase in demand, which is why we're now seeing that bicycles sales are a lot -- certainly under pressure because a lot of bikes have sold fantastically well that are now sold out. In terms of what we are doing, it's the same thing that we've really been working very hard on -- for many, many years. We're working on our product categories. We're bringing new categories, exciting categories to the market and when you bring out these new categories and these new products, it's very exciting for dealers because it's new revenue that they can generate. So on the product level, we're working really hard on developing more exceptional products and categories. On the marketing side of things, and particularly on the bicycle -- the bicycle community, Leatt is becoming a respected bicycle brand because we are now head-to-toe -- we have a head-to-toe offering. So in terms of building the brand, we're working really hard on the e-commerce side of things, on social media and on the web, all things digital to continue to build Leatt as a respected bicycle brand. And then, of course, with our distributors around the world and with our dealers around the world, and particularly in the U.S., we're building a really strong sales organization that sells at different levels. We sell to dealers, we sell to distributors, we sell to end consumers through leatt.com. And that multichannel sales approach, I think, is a really important leg of our growth moving forward in order to keep up with some of the demand that we're seeing on the bicycle side. Thank you for joining us.

I'm very sorry. There are no further questions. Please go ahead, Mr. MacDonald.

Thank you. Thank you for joining us today. We look forward to speaking with you again to recap the third quarter of 2020. In the meantime, please join us at the LD Micro Conference on September 4 and please do stay safe.

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