Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings. Welcome to Leatt Corporation Fourth Quarter and Year-end 2020 Results Conference Call. [Operator Instructions]. Please note, this conference is being recorded. At this time, I'll turn the conference over to Michael Mason with Investor Relations. Mr. Mason, you may begin.

Thanks, Rob. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the fourth quarter and full year ending 2020. The company issued a press release today, Wednesday, March 24, 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 1 (844) 512-2921, or 1 (412) 317-6671 for international callers, and a replay pin number 13717624. 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 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 March 24, 2021. 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 in Cape Town, Sean, please go ahead.

Thank you, Mike, and thank you all for joining us today. Well, by nearly any measure, from a performance perspective, 2020 was our strongest year ever, topped off by a fantastic fourth quarter, the best quarter in our history in terms of revenue and profitability. Global revenues for the fourth quarter were $12.7 million, an increase of $5.4 million, or 75%, compared to the fourth quarter of 2019. We saw breakout sales of our innovative products for upper body and limb protection and of our motorcycle boots and helmets for off-road motorcycle and mountain biking use. Total revenues for the 2020 year were $38.6 million, up by a staggering $10.3 million, or 36%, over 2019. In the United States, one of our key markets, revenues grew by 48%, led by a fantastic demand for our protective gear from moto dealers, MTB dealers and ultimately end consumers. International revenues continue to surge, growing by 31%. We enjoyed strong double-digit growth in all of our product categories, except for neck braces, when the COVID outbreak at the start of the year, caused some uncertainty and conservative buying patterns for some of our most established customers. We expect ordering patterns of our flagship neck brace to normalize over the next several quarters. We had breakout revenue growth in our footwear, now consisting of mountain biking shoes and motorcycle boots. Our expanding line of body armor, technical apparel, goggles and helmet product categories, helmet revenues turned particularly well, increasing by 32% during the year. Helmets are traditionally the largest single safety product category in the protective gear industry. And we have completely reengineered our line of moto helmets, including the Moto 9.5 carbon and Moto 8.5 composite helmets. We believe that this investment in our helmet designs to meet the needs of a wider group of riders will contribute to significant returns going forward. Net income for 2020 was $4.4 million, an increase of 222%. Thanks to setup work from our entire team, we only saw a 5% increase in operating costs, highlighting our ability to operate efficiently and with agility in amidst of the COVID-19 pandemic, while achieving strong revenue growth. Basic earnings per share more than tripled to $0.82 per share, up 215% compared to 2019. Our design and engineering team continue to create a strong pipeline of innovative products for both our professional team riders and our loyal customers around the world. These products are not only winning in the marketplace, they are earning rave industry reviews. In recent weeks, our X-Frame Hybrid Knee Brace and (sic) [ won] Powersports Business Nifty 50 Award for its expected marketability and demand. And a Velocity 4.0 MTB goggles won a design and innovation award, which we have previously won for our 4.0 helmets and our 3.5 neck brace. These are excellent examples of the promising future of Leatt and our ability to innovate, characteristic that the Leatt brand is known for around the world. We are also very proud of the acceptance that our products are gaining in the field among the most demanding consumers of all professional riders. We recently signed a multiyear partnership with the MotoConcepts Honda racing team, one of the leading teams in global motocross racing. Under the agreement, their riders will be outfitted in our Leatt-branded head-to-toe protective gear as they compete with the world's elite drivers in the professional racing circuit. We see this as a premium endorsement from the highest levels of the industry that our products not only keep riders safe, but also give them the confidence to push themselves to go faster, harder and further. We believe that the backing of the finest riders in the world will prove to be an important factor in our consumers' buying decisions moving forward. In February of this year, we announced that mountain biking legend, Brett Tippie, joined the Leatt riding family. Tippie, also an acclaimed snowboarder and television broadcaster, is a member of the Mountain Biking Hall of Fame. In joining us, Tippie highlighted that Leatt, and I quote, "Has a well-respected legacy and reputation." Our reputation for building exceptional high-quality products is something that remains at our core. Now I'll turn to the financial results of 2020 in a bit more detail, starting with details from the fourth quarter. Revenues for the fourth quarter were $12.7 million, up by $5.4 million, or 75%, compared to $7.3 million for the same 2019 period. Operating expenses for the 2020 fourth quarter increased by 16% to $3.4 million as our sales performance incentives were earned and settled. Income from operations for the fourth quarter was $2.3 million compared to $101,000 for the same 2019 period. Net income for the fourth quarter was $1.8 million compared to a loss of $28,000 for the same 2019 period. Moving on to more of the full year 2020 results. Again, total revenues for 2020 were $38.6 million, up by $10.3 million, or 36%, compared to $28.3 million for 2019. Gross profit was $17.4 million, or 45%, of revenues, up 34% [Audio Gap] of 6% of revenues for 2019. Total operating expenses increased by 5% in 2020 when compared to 2019 due to increases in salaries, commissions and marketing, as we continue to grow our sales force and brand position, both in the United States and abroad. Net income for 2020 was $4.4 million, up by $3.05 million, or 222%, compared to $1.4 million for 2019. Earnings per share increased 215% to $0.82 per basic share and 196% to $0.74 per diluted share from $0.26 per basic share and $0.25 per diluted share for 2019. Breaking it down a bit by product category, the 36% increase in global revenues was primarily driven by a 61% increase in body armor sales; the 34% increase in sales of other products, costs and accessories; a 52% increase in helmet sales that was offset by a 17% decrease in neck brace sales. Here is how it looks in slightly greater detail. Our body armor products are comprised of a range of chest protectors, body protectors and [ wrists ], back protectors, knee braces and knee and elbow guards. The increase in body armor revenue is attributable to strong demand for our hard and soft shale upper body and and limb protectors, as well as the highly anticipated Moto 4.5 and 5.5 off-road motorcycle boot lines, both in the United States and abroad. Body armor accounted for 58% of 2020 revenue. Our other products cost and accessories category is comprised of our goggle, hydration bags and our apparel line of jackets, pants and jerseys. The 34% increase is due to the continued strong demand for our line of technical apparel for motorcycle and mountain biking and increased sales of our Velocity 6.5 line of goggles sold to our customers in the United States and abroad. Our apparel line continues to be a strong driver of brand awareness for Leatt. The product, parts and accessories category accounted for 19% of 2020 revenue. As I mentioned, our helmet continued to be refined and all helmets maintain our patented 360 turbine technology for brain protection. The 32% increase in helmet sales is due to strong demand for the innovative award-winning MTB helmet line and encouraging shipments of our redefined and relaunched moto helmet line for off-road motorcycle use to our customers globally. Helmets accounted for 10% of our 2020 revenue. And again, neck braces ordering decreased in the initial phase of COVID-19, but we do expect these patterns to normalize over the next several quarters. Turning to the balance sheet. We are meeting our working capital needs through cash on hand as well as from internally generated cash from operations. At December 31, 2020, the company had cash and cash equivalents of $2.97 million compared to $2.07 million as of December 31, 2019. Our current ratio stands at 2.2:1, and there was no long-term debt. Based on these promising results and the momentum that we have achieved, we will continue to do what we have been doing, investing in innovative products and engaging marketing campaigns and developing a professional, multichannel sales organization. We believe that these investments are arming our dealers with the products and marketing tools that are the key contributors to the growth of Leatt as a global consumer brand. Looking ahead, we believe that the results of 2020, the encouraging levels of demand for our products from consumers and our expanding product pipeline demonstrates the resilience and agility of our business model, even amidst the turmoil brought on by the COVID-19 pandemic. While we are achieving outstanding sustained growth, we do have a long runway ahead of us. Our market share potentially is still in its infancy in the majority of categories that we sell. Today's consumers are participating in increasing numbers in outdoor activities, which is a trend that we do expect to continue. Our expanding line of products have defined Leatt as a genuine head-to-toe brand with a full offering of cutting-edge products that appeal to an increasingly wider rider audience around the world. As always, we'd like to thank our entire Leatt family, our dedicated employees, business partners and team riders for the continued effort and support in making Leatt a success. With that, I'll turn the call back over to the operator for some questions. Operator?

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

Sean, congratulations to the whole team. I have 4 questions for you today. The first one is regarding the strong helmet sales that you had in Q4, with sales roughly $1.2 million up from last year. You said in your remarks that it is mostly due to the MTB helmet, but how much of that is also due to the GPX helmets, the new 8.5 and 9.5? And were you able to sell -- to ship, sorry, those helmets until the end of last year? Or are there some shipments coming on in the first quarter?

That's a good question, Olivier. It's about 30%. So some of the -- a lot of the growth was also from the GPX side of things, the moto helmet. And we ship the majority of our shipments out to our distributors around the world by the end of December. But we do still have some helmets that we'll ship in Q1.

Okay. That's perfect. My second question would be on the freight container costs that have increased significantly over the past years. Have you been able to pass those higher costs to end customer? Or are you taking the hit internally?

Olivier, I would say it's a combination of things. I mean in China, there have been some costs across the board, so not only container increases -- cost increases. It's also some of the material costs, some of the labor costs just due to COVID have increased, with some constraints. So we've seen some small increases, and there is a balancing act. We've taken some of the costs on ourselves, but we have had to pass on a small percentage of those costs to some of our customers around the world.

Excellent. Regarding your -- the challenges that you faced in 2020, are they still there this year? Or what were the biggest challenges last year that you still see this year potentially?

I would say that what you just touched on, so logistics and freight costs, there was a big shortage of containers coming out of China to go around the world. It was certainly a very big challenge for us. We've seen that trend continuing into Q1. There is an opinion in the market that after Chinese New Year, which is really now, we should start seeing things loosening up a bit. And that's the -- I mean, some freight costs have gone up 80% to 100%. And we are expecting that to decrease moving forward now into 2021. We certainly are hoping that those costs are going to go down. So that's probably been the biggest challenge that we saw. Of course, there were some advantageous trading conditions that came out of COVID for us with a lot of end consumers really wanting to get away from all of the nasty statistics and the terrible pandemic and getting out there on their mountain bikes and on their motorcycles. So that's certainly been beneficial for us. But logistics and freight have been very, very challenging.

Okay. Perfect. And then my last question is, on what product line are you the most excited for this year?

That's an interesting question. There's so many. As I said earlier, we are really in our infancy in a lot of our different product categories. So there's potential -- so much potential for growth across the board. And I'd say that I'm probably most excited about the growth that we are seeing on the mountain biking side of things. So it's not a specific product line, but it's a overall market penetration that we're starting to see. Leatt has traditionally been an off-road motorcycle brand. And we've been working extremely hard over the last 10 years to build ourselves as the kind of dual brand on the off-road motorcycle side of things and also now on the mountain biking side of things. And to see Leatt a respected mountain biking brand not only in the shops, but also out on the trails. That is absolutely tremendously exciting, not only for myself, but for our whole team.

And maybe if I just add a question here. What is the feedback regarding the first 3 videos that you have released on the Leatt heritage?

The feedback has been absolutely fantastic. And if you go have a look at some of the media out there, if you go have a look on the mountain biking side, the pink bike, you'll see that there's been some very, very positive comments there. I think it's been a long time coming for us to get the story out to a broader consumer base. It's obviously something that we are very aware of internally at Leatt, but we're trying very hard to get the message out. And it's been a very positive response around the world.

Our next question is from the line of Christopher Miller, a private investor.

Congratulations on another great quarter. A few questions for you today. First, a follow-up regarding the supply chain and logistics. Besides the cost issues, how is this impacting product availability, both in terms of your current inventory as well as your planning for next year's line?

So, so far, we haven't had any major impacts. There are some raw material constraints, if you could call it that, but we're working very, very closely with our suppliers, and we don't expect to have any significant impact on any of our product deliveries certainly for the next several quarters.

Okay. Great. And when we last spoke, you mentioned that distributor inventory levels were running quite low. I believe you said a typical 3-month stock was down to just a few weeks. Have you seen any rebound there? Or are the stocking levels still very lean?

We've seen some really positive rebound. So they are starting to stock up really nicely. They are -- this is a new normal now, looking at some of the demand levels that our distributors are seeing, not only for the industry, but also just specifically for Leatt. Now that we're a much stronger head-to-toe brand that is gaining tremendous momentum in the marketplace, our distributors are also adjusting their buying patterns, and they are stocking up really nicely, which is really encouraging to see.

Okay. Great. Did you speak a bit about the office and warehouse lease that you mentioned in your filing in Reno? And what the role of that facility will be versus Santa Clarita going forward?

Yes, certainly. So it's a really exciting development for us. Now that we are a head-to-toe brand on Moto, and on MTB, we have a much wider pipeline of products that we need to get out there into the market. And some of these products like motorcycle boots obviously take up a certain amount of space. So we've actually outgrown our Santa Clarita warehouse. And that's the one reason why we are moving our primary warehouse space in the United States to Reno. The other reason is just from a cost perspective, it makes a lot of sense to be in Reno. And from a logistics perspective as well. We can get our products to the East Coast in 2 days now, whereas previously, it was 3 to 4 days. And as we've seen our footprint grow around the country and our demand levels grow around the country, outside of California, we realized that we really needed to spread our wings a bit. And with our new product offerings, it made sense for us to expand into an area where there were cost advantages. So we've decided to move our primary warehouse facility to Reno, Nevada. It's going to take a while for all of that to happen. We've obviously signed a lease. They're busy currently outfitting the building, getting everything ready for us to move over. And certainly, in the next few quarters, a lot of our products will be directly shipped from China into Reno, and then we will transition and sell-out from Santa Clarita. We do plan to have a small office in Santa Clarita store just because we've got some staff that live there, and there are advantages from an industry perspective. Some of the media are based there, but it just wasn't effective from a cost perspective to grow our warehouse footprint in Santa Clarita.

Great. Sounds great. And then just one last question, if I may. I saw that you continued the partnership with Shore Foot and Whistler last season. How is that going? And do you see opportunities for similar concept stores like that in any other markets?

It's going really well. At the moment, it's a kind of isolated store that we have, and we've been using it for quite a while now as a kind of test model. It has gone well. Of course, with COVID, we've had a little bit of a hand break on that kind of a model just because, of course, we've got to get people around the world and outstand consumer facing, and that's been a little bit difficult. But it's definitely something that you may see from us moving forward. Partnering with somebody, setting up a concept store, so that consumers can really touch and feel our whole head-to-toe brand. It's something that makes a lot of sense to us. And if we can partner with somebody in terms of the costs, then we are -- we're all in.

Our next question is coming from the line of Michael Davies with TT Global Equities.

Sean, congratulations on the great results. So I have a question that's more kind of a big-picture question. I was just wondering if you can comment on -- of course, that 2020 has been something of an unusual year in terms of increasing participation in a lot of these outdoor activities, like you mentioned. So I was just wondering whether you have any kind of high-level thoughts on how the market for your product has changed. And if you see that a lot of this demand, sort of, new participants in the sport are going to be there for the long run. Hope that makes sense.

Yes, it makes sense. It's a very good question. It's something that we discuss a lot, internally at Leatt and externally with our dealers and with our distributors around the world. And of course, we are hoping that all of these trends continue. It's been a few different factors that have led to the breakout growth that we've seen in 2020. I think the market trends in the industry is certainly one of the factors, and that has definitely accelerated our growth a bit. But at the same time, the Leatt brand was gaining tremendous momentum already in Q1 this year before COVID hit. So I think that was also a very important factor that as a head-to-toe brand with all of these new products that we brought out, organically without COVID, the growth is certainly there, the underlying growth is there. COVID, and the consumers need to get out there, has accelerated things a bit for us. And I must say that of the industry players that I've talked to and the industry players that I really respect, the feeling is that these trends are going to continue because a lot of lifestyle changes have been made around the world, and they've been forced on. But I think from a -- just from a health perspective and from a general lifestyle perspective and from a flexibility perspective, consumers have got a bit more time to do some of the things that they love. And I do think that the trend is going to continue. To answer your question, the short answer is, yes. I do feel it's going to continue. And certainly, the indicators that we are seeing in terms of our pipeline of orders for the next -- for the forthcoming quarters, there certainly are positive trends that are not tapering off.

At this time, I will turn the floor back to management for closing remarks.

Thanks for joining us today. We do look forward to speaking with you again to recap the first quarter of 2021.

Thank you. Thank you, everyone, who has joined us today. You may now disconnect your lines at this time, and we thank you for your participation.