Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings, and welcome to the Leatt Corporation Third Quarter 2020 Results 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. Thank you. You may begin.

Thanks, Melissa. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the third quarter of 2020. The company issued a press release today, Thursday, November 12, at 8:00 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 this 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, and our conference ID number,, 13712961. A replay of the webcast will be available immediately following the 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 the 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 November 12, 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 morning. Thank you, Mike, and thank you all for joining us today. We had yet another groundbreaking quarter. The best third quarter in our history in terms of revenue and profitability. And in fact, our best quarter in terms of revenue since inception. Quarter-after-quarter, we continue to grow by double digits and build our global enterprise even in the midst of the headwinds of the COVID-19 pandemic. Global revenues were $11.4 million, up by 18% over last year's third quarter and up nearly 64% sequentially over this year's second quarter. In the U.S., our largest single market, revenues grew by a remarkable 47% over last year. Net income for the quarter was $1.6 million, up 22% over last year. This quarter's growth was driven by fantastic demand for our innovative protective gear from Moto dealers, MTB dealers and ultimately by end consumers, who continue to participate strongly in outdoor activities. International sales grew by 5% as we made initial shipments of the majority of our 2021 Head to Toe product line to our customers around the world. For the first 9 months of 2020, revenues were $25.9 million, an increase of $4.8 million or 23% compared to the first 9 months of 2019. Net income for the first 9 months was $2.7 million, an increase of 89% over last year. Again, despite the turmoil caused by the pandemic, people are turning to outdoor activities, which is certainly proving to be a beneficial trend for Leatt. In terms of our individual products, we saw breakout revenue growth in our footwear, which now consists of mountain biking shoes and motorcycle boots and our expanding line of body armor and goggle product categories. A key driver of our continued success is the development of a larger and more professional sales and marketing organization in both the MTB and Moto areas and particularly in the U.S., where we now have the ability to reach more dealers around the country. We believe that our engaging marketing campaigns contribute strongly to the development of Leatt as a global consumer brand. The professional sales team, armed with product and marketing tools that are extremely attractive to dealers, is driving our momentum and contributing to our growth. These are trends that we will certainly continue to invest in. We have also worked to adjust to the new challenges brought on by the pandemic. To help bolster ourselves in marketing efforts, we are focused on e-commerce and have created a new Leatt website, designed to make it much simpler for customers to navigate and make online purchases. And of course, we continue to grow and nurture our e-commerce partnerships globally. Here are the financial details for the third quarter of 2020. Revenues for the third quarter increased to $11.4 million, up 18% compared to $9.6 million in the 2019 third quarter. The increase was driven by a 76% increase in sales of other products, parts and accessories and a 25% increase in body armor products that were partially offset by a 5% decrease in helmet sales and a 39% decrease in neck brace sales. Helmet was largest single safety product category is safety gear. Although helmet sales were down slightly overall, we have completely reengineered our line of Moto hamlets and now have a pipeline of new helmets for Moto and MTB that will ship during the next several quarters. We are very encouraged by the initial industry reviews, athlete feedback and consumer demand for our redefined helmet line. Sales of our flagship neck braces decreased by 39% during the third quarter due to orders that were placed during the initial phase of the COVID-19 pandemic and delivered during the third quarter. Those conservative buying patterns are expected to normalize over the next several quarters as our customers rebuild their stock levels. Gross profit was $4.95 million or 44% of revenues compared to $4.50 million or 47% of revenues for the same period last year as neck brace rates revenues, which continue to contribute higher gross margins when compared to our other product categories, contributed less to our sales mix. Total operating expenses increased $102,000 to $2.85 million or 4% compared to $2.75 million in the same period last year. Third quarter income from operations increased 21% to $2.1 million compared to $1.8 million for the same period last year. And net income rose 22% to $1.6 million or $0.27 per diluted share compared to $1.3 million or $0.24 per diluted share for the same period last year. Here is the category breakdown in slightly more detail. Sales of our neck braces accounted for 10% of revenues. Our neck braces continue to generate a higher gross margin than our other product categories, primarily because of our highly efficient manufacturing techniques, our intellectual property 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, offload motorcycle boots and now mountain biking shoes. The 25% increase in body armor revenues was primarily due to strong demand worldwide for our GPX 5.5 boots for motorcycle use. Body armor accounted for 51% of third quarter revenue. Our other products, parts and accessory category are comprised of our apparel line, hats, jackets, hydration kits and goggles. The 76% increase in revenues is due to continued demand for our innovative velocity line of military bullet group bottles, both in the U.S. and abroad. Other products spots and accessories accounted for 28% of third quarter revenue. Turning to the balance sheet. We have a very healthy balance sheet at this time. Cash increased by 38% or $796,000 as compared to the period ending December 31, 2019. We continue to meet our working capital needs from cash on hand and internally generated cash flow from operations. At September 30, 2020, we had cash and cash equivalents of $2.9 million, a current ratio of 2.5:1 and no significant long-term debt. To summarize, while our business model continues to show strength, we remain cautious due to the global COVID-19 pandemic. We are closely monitoring consumer buying patterns and all COVID-19-related news to plan for any economic turbulence and industry headwinds that may arise. That being said, based on our promising results to date in 2020, we are extremely optimistic. We have a strong pipeline of cutting-edge products that we expect will ship to our customers globally over the next several quarters. Recent launches of goggles, boots and other exceptional protective gear as well as our new MTB shoe line that earned positive reviews and encouraging demand levels as well as extremely good performance in the field. These products define Leatt as a premium Head to Toe brand and are testament to our team's ability to develop a full offering of innovative products that appeal to a wide rider audience. All of our products are engineered and designed by our in-house Leatt team, tested in the field by our professional riders. Along with style, what you see in these products are the kinds of technological advancements in terms of comfort, safety and quality, that Leatt is known for across the world. Finally, we continue to redefine our product offerings. And our market share potential remains exceptional in a majority of the new categories in which we compete. Our strong operating cash flow will be reinvested in our growth engine, developing innovative cutting-edge products as well as in building our global consumer brand and refining our sales channels. 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 a success that it has become. With that, I'd like to turn the call over for questions. Operator?

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

Congratulations on one more fantastic quarter here. I have a few questions for you, actually 5 questions. The first one is listening to some outdoor brands' conference call over the last couple of days, some of them have mentioned that they were out of order -- out of products and they could have sold more if they had more available for customers. Did you face similar issues in any of your product category?

It's a good question, Olivier. So in terms of delivering products from our suppliers out of China, we did not have any production issues. However, stock that was at many of our distributors around the world, including Leatt U.S.A. and in South Africa, was very low. And the reason for that is that for a lot of our distributors that were very conservative in terms of their ordering patterns, so they didn't order what they would usually order and a lot of that ordering took place in Q1. And then we did not have an opportunity to resupply them as of the end of the Q3. So there was certainly some effect of that on the numbers.

Okay. That's perfect. Then regarding -- it seems that you're discounting the helmet, the GPX 4.5, and it should be replaced in the next couple of quarters. You mentioned several times the word several during your presentation today. What does several exactly mean?

Okay. So we will start shipping the replacement for the 4.5 helmet in Q4 of 2020, and then we will continue in subsequent quarters.

Okay. Excellent. One also that I realized in the case is that -- sorry, that there is an increase in the fully diluted share count by roughly 328,000. Can you explain that, please?

Yes. So that relates to share options that were previously underwater. So the strike price of the options was higher than the share price. And of course, now that our market cap is starting to improve and we're starting to see share price increasing, those options are now viable and they now become dilutive. So they are included in the calculation of dilutive shares.

Okay. Yes. Now I get it. One more question is regarding the salary increase. So it seems that you have added some people probably in your U.S. operations over the last quarter. Is that correct? And if yes, how many people?

Correct. We've ordered -- we've increased our staff by about 3 people in the United States. We've also got a couple of new product development people that are working on our pipeline of new products. We have one based in Canada and then we have a new product development engineer that is based in Taiwan. And those numbers are, of course, included in the salaries and in the product development costs now.

Okay. Perfect. And then my last question is regarding your office rent expenses. They went up roughly by 10%. In the quarter. It seems that you have added a new warehouse to store all your products. I mean does this mean ultimately that you might be looking for another U.S. headquarter for the whole operations because, to my knowledge, it's a pretty small office there?

Another excellent question, Olivier. Of course, we are growing our product line quite aggressively, and the products that we are now adding to the line are large. Things like helmets and motorcycle boots, I mean those do take up a lot of space, which is the reason why we've rented, on a short-term basis, a warehouse which is actually in the same business park across the road from Leatt U.S.A. So currently, it is very convenient. And I would say that, that is a short-term solution. And that there certainly is a possibility that we will need to evaluate our warehouse space in the United States quite seriously in the medium term.

Our next question comes from the line of Chris Jarrous with Dunlap Equity Management.

Sean, congratulations on the all-time high quarter. Just a question on the helmets. So can you give us an idea of exactly -- not exactly, but roughly how big the helmet market is relative to your other products? And then as you've seen your new launches do well and you have a broader line of products, how does that feed into the relaunch of helmet? Do you think the helmet is a stand-alone product or should this help accelerate the launch?

No, absolutely. So currently, helmet revenues is a relatively small part of our revenue. It's about 10%. And I mean helmets as a safety item is certainly the largest safety item that is sold in the Moto and MTB industry. So we would expect helmet revenues to be a much higher percentage of our total revenues, closer to the 40% to 50% mark. And of course, now that we have a full Head to Toe lineup of products as well as a completely redefined helmet offering, it's really the full package that gives us the ability to access more dealers. So initially, dealers have the ability to just order a neck brace maybe some chest protectors. Now they can really go Head to Toe. So we already have a position in these dealers which, of course, makes it far easier to top the line off with a big safety item like a helmet. Helmets are also -- it's a very competitive area. But we think that we -- with some of the sales plans that we have, and with the new product line that we have, we'll be able to capture a decent size of the market. And certainly, just like many of our other product categories, I mean helmets are really in the infancy for us as a business, and we believe that we can do a lot better in that category.

Okay. And so as we think about -- as you just told Olivier about the stronger or rather the distributor reorders in Q4. So that, in addition to the Helmet relaunch and initial shipping and whatever new products as well, should we expect maybe a stronger than typical Q4 as you have these tailwinds helping you?

I believe that Q4 will be a strong quarter for us, yes.

Our next question comes from the line of Carter Dunlap with Dunlap Equity Management.

Sean, You would think Chris and I coordinated, but we didn't. I also wanted to ask just a more general question about the helmet market. If I'm not mistaken, your entry 2 years ago, approximately was considered sort of a functionality breakthrough leapfrog, if I recall. It has -- and you described the market as quite competitive. Have other feature functions from your competitors outstripped your offerings? And how would you describe your redesign line? Is it incrementally bringing feature function? Or is it also some sort of breakthrough?

Carter, thank you for joining the call. So I think one of the lessons that perhaps we learned from the initial launch of our helmets is that you've got to have the features, you've got to have the safety features need to be at the forefront of your offering when it comes to helmets. But one also has to have a helmet that ticks all the boxes in terms of comfort, in terms of styling, in terms of design and in terms of just the overall engineering, look and feel of the helmet. So we really went back to the drawing board, and we've got all of the technology in the new line, but we also have listened very carefully to consumer trends in terms of design and look and feel and comfort. We've added that as an absolutely key area. And it's part of Leatt growing as a company. It's really important that we listen to the end consumer and we engage with the in consumer as well as our athletes. We've spent a lot of time, we've been doing our homework on this new line of helmets for the last 3 to 4 years to make sure that we were following all of the right trends, not only in terms of safety, but also in terms of look and feel.

One last question. Is the safety functionality linked to the neck brace technology? Or do most knowledgeable riders, mix and match?

So of course, it's optimized. Our helmets are optimized for -- to be used with neck braces because neck brace technology is something that we obviously really believe in very strongly in terms of safety, but some people don't wear neck braces. So they can use our helmet or the neck brace. And of course, you can ride with our neck brace and many different helmets. There are 1 or 2 helmets that might be a bit restrictive, but most helmets out there do take neck braces into account when they do their development work.

Our next question comes from the line of Christopher Muller, private investor.

Sean, congratulations on another outstanding quarter. 3 questions for you today. First, there was fairly a wide gap between the U.S. growth rate and international growth rate this quarter. Is this mostly a result of distributors holding less stock during the pandemic? Or is it a matter of shipment timing between third and fourth quarters? Or are there other factors at play here?

Excellent question, and it is as a result of the 2 factors that you mentioned there. So just the timing of the shipments. We had some shipments of our new product line that will only ship in Q4 and we traditionally actually ship in Q3. And then also a distributor buying patterns were really conservative during Q1 in the heart of the pandemic. And when it comes to Leatt U.S.A., we have the ability there to sell all the way through to the end consumer a bit quicker than our other distributors. So we've had fantastic sales there. But our distributors are now low on stock outside of the U.S. and are waiting for shipments of the remain of the line as well as restocking shipments so that they can service the market that they operate in.

Okay. Great. That's very helpful. Second, I was wondering if you could comment a bit on apparel sales and how the new designs are being received? Financially, the apparel sales get lost within the other Products & Accessories category, but it would seem like a significant driver and indicator of brand growth?

Absolutely. So we've been -- our sales of our apparel have been strong. We are growing every year when it comes to apparel sales. And this is both on the motorcycle side -- or for a motorcycle as well as on the MTB side of things, the mountain biking side of things. And it's not a massive percentage of our overall revenues on an annual basis, but it is growing. And it is obviously really important from a brand recognition perspective. So certainly exceeded our expectations.

That's great to hear. And then finally, I saw you refreshed the website last month. Have you received any early feedback there? Are there any significant changes in the U.S. e-commerce sales as a result of this?

U.S. e-commerce sales are going extremely well. We've got some really positive feedback on the simplicity of the site and the number -- it's all about the number of clicks to making a purchase. And there's always a fine balance between performance and content. The site kind of had a bit of a slow start. There were a few teething issues because we launched the site and our new line of products. But it's now stabilizing really nicely. And e-commerce sales are continuing to grow in the U.S., direct-to-consumer. It's difficult to say whether that is because of the new site or whether that is because of the current environment that we're operating in with COVID. But sales are certainly going well on leatt.com.

Our next question comes from the line of Aaron Sallen with Merion Capital -- Road Capital Management.

Can you hear me?

I can hear you, Aaron.

Congrats on the good quarter. So just 1 more on international distributors. So can you say like how much month's inventory those distributors typically hold? And where do you think they're at right now?

So typically, if you look at our lead times, our lead times are generally about 70 days. So generally, a distributor would hold about 3 months inventory in order to make sure that they could service the market. We would estimate, and of course, this varies across all of the distributors, but we would estimate that they are really low right now. We have reached out to all of them. We're in communication with all of them. I'll say it's less than a month inventory that they have now. So they are needing inventory quite urgently, and we are working really hard on putting together actually some additional orders for them so that we can get inventory to them as soon as possible.

Got it. And then maybe a big picture, have you thought about, I guess, the benefits of more vertical integration? So in the U.S., obviously, you own the distributor. So does that make sense doing that internationally? And then also, as far as like maybe bringing manufacturing in-house, is that something that you'd ever think about?

Yes. I mean I think from a manufacturing perspective and from a vertical expansion into selling more directly to end consumers, of course, there's quite a lot of investment that will be required in order to do that. So this is something that we obviously always are evaluating. But at this point, we are -- our distributors, our international distributors are really close partners of ours. They've got great connections, great contacts, great distribution. We really have got the top-tier distributors. And they manage the working capital. They manage the distribution to the dealers really, really well. So I think in the short- to medium-term, that's not something that we'd be looking to do. When it comes to manufacturing, also, I think we certainly will look at different manufacturing locations. And we will look to -- if there are manufacturing technologies that can really benefit us moving forward, we would look to bringing that -- some of that in-house. But the bulk of our manufacturing will most likely remain with third-party manufacturers or really -- we've got we've got multiple manufacturers now. They really are top-tier as well. So I don't see that changing anytime soon. Of course, what we have done internationally is we are now selling directly to dealers that are e-commerce dealers. Those are some of our biggest customers now. So outside of the U.S., we sell to third-party distributors that sell on to brick-and-mortar and e-commerce dealers. And then we've also cherrypick the top e-commerce dealers outside of the U.S., and we do sell directly to them just because we feel that we can service them with the inventory and the marketing material that they need best. So we've actually got quite a nice mix of multi-channel selling ability at present that it is quite well balanced in terms of the margins and in terms of making sure that we can serve -- get our products out to as many customers and also, of course, in terms of the working capital management.

Okay. And then maybe just in a different vein here. As far as the stock goes, have you thought about uplisting to, let's say, like the NASDAQ? It seems like you meet most of the requirements at this point. Is that something that you guys have discussed?

Yes. I think it's something that we are continuously looking at. The benefits and the cost of some kind of an uplisting. And, I think, currently, Leatt as a business is operating organically really nicely. We don't need to raise any money in the short-term or anything like that. And, I think, if we did have a uplift thing, we would probably want to do that simultaneously with some kind of a raise of cash and right now, that's not something in the immediate future that we are looking at doing. But trying to get a fair market value and trying to improve the liquidity of the stock is something that we obviously are looking at continuously, and we will continue to do that.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. MacDonald for any final comments.

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

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