Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings, and welcome to the Leatt Corporation First Quarter 2021 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 first quarter of 2021. The company issued a press release today, Wednesday, May 12, at 11:00 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 our conference ID number 13719613. 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 May 12, 2021. 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 on your side, Mike, and thank you all for joining us today. I am pleased to report that our strong performance at the end of 2020 has continued into a record-breaking 2021 first quarter. First quarters have been traditionally slow, but global revenues for the 2021 first quarter were $12.9 million, up 71% compared to the 2020 first quarter. This was the best quarter in our company's history, exceeding our previous best quarter, the 2020 fourth quarter. We achieved revenue growth across our head-to-toe range of products for mountain biking and off-road motorcycle riding in North America and abroad. We believe that these results are a strong testament to the momentum that the Leatt brand continues to achieve and the effectiveness of our business model. We are very proud of the Leatt team of talented staff and riders that have contributed to our continued excellence. While we saw surging growth in most of our products during the period, we are especially proud of the increases in revenue in our body armor products. First quarter sales of body armor products, which includes our complete shoe and boot line, increased by 79% when compared to the first quarter of 2020 and accounted for $7 million or 57% of our quarterly revenue. Our revenues from neck braces were also very encouraging, up 48% over the first quarter of 2020, and helmet sales increased 109% over last year, primarily due to strong demand for our innovative, award-winning MTB helmet line and continued strong initial shipments of our completely redesigned MOTO helmet line for off-road motorcycle use. We will get to more detail on the financial results of the quarter in a moment. But some of the important headline numbers were remarkable. Net income was $2.1 million, a 469% increase compared to a year ago. Margins remained consistent with last year at 47%, which is a major achievement as we continued to actively manage manufacturing and logistics costs in the midst of rising raw materials and shipping costs in Asia. Our operating cost increased by 10%, which is in line with our expectations. As we continued to grow, we are investing in our people, increasing commissions and salaries in line with sales growth, and we are investing in more professional sales and marketing teams, which we believe will pay dividends by achieving growth now and in the future. We continue to advertise in various motor sports and bicycle magazines and online media, sponsor a number of events and sponsor professional teams and riders, who not only help us engineer and design our products, but have proven to increase products and brand awareness globally. Now I'll turn to the financial results for the first quarter in a bit more detail. Total revenues for the first quarter of 2021 increased to $12.9 million, up 71% compared to $7.5 million for the first quarter of 2020. First quarter income from operations increased to $2.8 million, up 460% compared to $491,000 for the first quarter of 2020. Net income for the first quarter of 2021 was $2.1 million or $0.38 per basic and $0.34 per diluted share compared to $362,000 or $0.07 per basic and diluted share for the 3 months ended March 31, 2020. Although I passed on some of the highlights for the vintage increases, I'll provide a further breakdown by product categories. We are very pleased with the performance of our neck brace products for the quarter, as they continue to generate a higher gross margin than our other product categories. The 48% increase during the 2021 period is due to continued strong demand both in the U.S. and abroad. Neck brace sales accounted for 15% of our first quarter revenue. Our body armor products are comprised of a range of chest protectors, body protectors and vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes. And the 79% increase in body armor revenue is attributable to strong market demand for our full-wide upper body and limb protectors as well as our footwear category of off-road motorcycle boots and mountain biking shoes, both in the U.S. and internationally. Body armor accounted for 57% of first quarter revenue. As I mentioned, our helmets continued to be refined and in some cases, completely redesigned to meet the needs of a wider riding community. All Leatt helmets contain our patented 360-degree technology for brain protection. The 109% increase in helmet sales is due to a strong demand for our innovative and award-winning MTB helmet line and strong initial shipments of our completely redesigned, redefined MOTO helmet line for off-road motorcycle use to our customers around the world. Helmets accounted for 12% of our first quarter revenue. Our other products, parts and accessory category is comprised of eye goggles, hydration bags and our apparel line of jackets, pants and jerseys, a 47% increase during the first quarter due to the continued strong demand from our cutting-edge MOTO and MTB apparel lines, both for motorcycle and mountain biking use. This other products, parts and accessories category accounted for 16% of first quarter revenue. Turning to the balance sheet. We are currently meeting our working capital needs through cash on hand, a revolving line of credit as well as internally generated cash from operations. We believe that our current cash and cash equivalent balances, along with the net cash generated by operations, are sufficient to meet anticipated cash requirements for at least the next 12 months. We have no plans for any major capital-intensive expenditures in the next 12 months beyond tooling for production of our growing product range. As of March 31, 2021, we had cash and cash equivalents of $3.79 million compared to $1 million on March 31, 2020. Our current debt-to-equity ratio stands at 2.8:1, and we have no long-term debt. In closing, this has been a truly remarkable quarter. We expect the trend in worldwide participation in outdoor activities, in spite of the COVID-19 pandemic, to continue. Our strategy of building a global consumer brand and a pipeline of award-winning, cutting-edge and innovative protective gear that appeals to a wide range of riders is working exceptionally well. We believe that our products give riders the confidence that they need to push themselves further with gear that they can rely on. We look forward to presenting our 2022 product lineup to consumers during the second half of 2021, and we are encouraged by the initial ordering sentiment from our distributor and dealers. In 2006, we produced a single product, our gold standard neck brace, for a single market. Now, 15 years later, we produce an array of products that protect virtually every part of the body and appeal to a wide rider community. Importantly, our suite of head-to-toe products has been a valuable investment for our partner dealers and distributors around the world. This is a truly exciting time for Leatt, as the company and its stockholders are finally reaping some of the rewards of over a decade of hard work and persistent dedication to excellence. As always, I would like to thank our entire Leatt family, our dedicated employees, business partners and team riders for their continued support in making Leatt the success that it has become. With that, I'll turn the call back over to the operator for a few questions. Operator?

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

I would like to congratulate you and your team for the best quarter in Leatt's history, and especially in the Q1, which is seasonally slow quarter. So congrats. I had 4 -- sorry, I had 4 questions for you. The first one is, did you face any out of stock during Q1? And if yes, in what product category was that? And the same question would apply for Q2.

Okay. So across our distribution network, demand and sales through distributors and also through dealers was a bit stronger than expected. So some of our dealers were out of stock in certain categories. And of course, now in Q2, they have replenished their stock. They do have stock to sell. So the situation is improving. There were no major categories beyond a few that were affected -- beyond a few weeks out of stock. So the situation has certainly improved, Olivier.

That's excellent to hear. And the second question is regarding -- I would like to better understand your strategy regarding the rising input cost. Do you plan to pass that over to retailers? Or to take some costs on by yourself?

So I think, on to your question, Olivier, there's a combination of things that we'll be doing. Of course, input costs have been increasing across the industry. So we are watching the situation very carefully to see what's going to happen to retail pricing on the off-road motorcycle and the bicycle side of things, because, of course, we have to respect what the realistic retail prices are. So there will be some pass on to dealers and to distributors and ultimately, in consumers if the market moves in that direction. And then some of the costs we will be absorbing ourselves in order to balance everything up. I don't expect it to be a major -- not going to effect on our margins over the next several quarters because we have managed to avoid any significant cost increases so far.

Excellent. Third question would be on the body armor sales that saw incredible increase during the quarter. Can you say that the motor boots and mountain bike shoes were ahead of management's expectations?

Yes. I can absolutely say sales of motorcycle boots and shoes have gone extremely well. But having said that, I would say that sales of our full body armor lineup exceeded our expectations. So we've got some products, of course, that have been in the lineup for many, many years and have continued to grow. They continue to sell well. So upper body armor and limb protection also exceeded our expectations.

That's excellent. And the last question is regarding the helmets, which were up also this quarter. You mentioned in your remarks that its initial shipments of the redesigned motor helmets, does that mean that some regions did not get those helmets during Q1?

They all received the helmets during Q1. There may be some [ scattered parts ] from the distributor on to the dealer. So there may be some areas that have not fully received all of their stock at the dealership level, but the vast majority of our dealers and our distributors have received stock in Q1. So we had some really strong shipments of those new motor helmets. And we hope to get really good restocking orders soon on that helmet.

Our next question comes from the line of [ Chris Jarrous ] with Leatt Corporation.

As proud as I am of you guys, I don't think I'm officially an employee yet. But that's fine.

[ We have to meet first ].

I just want to echo Olivier's sentiments on the quarter. And on that, I mean, given how strong things were, shifting back a year ago, I mean, you now sit on a cash balance that's greater than anything the company has ever had before. What are the things that you are looking to do? What is that new balance and that new level of investment ability kind of affords you guys? What do you think over the next 12, 18 months and beyond?

Yes, Chris, it's a good question. I mean of course, we'll be plowing a lot of that back into product development and back into refining the product categories that we have. Many of these product categories are still in the infancy in terms of what we can do in the market. So it's a combination of growing the product categories that we sell, refining the product categories that we sell. And I think it also gives us an opportunity to do some extensive marketing activities that will just add fuel to the cell engine and really help us to maintain the kind of momentum that we are currently seeing.

Okay. And so what are you hearing from -- to the van of continuing -- kind of pouring fuel on the fire, what are you hearing from distributors about that competitive environment? I mean is it -- I have to assume that you're one of the brands that have some strong momentum. And what are they telling you from what other brands are doing and what you're seeing in the marketplace, in regards to taking share?

Yes. So I mean the industry itself is, of course, doing really, really well because people are pushing to get outdoors and to get away from the pandemic and the horrible statistics. So as a whole, the industry is doing well. It is highly competitive. Leatt as a business took a conscious decision at the beginning of the lockdown to continue developing products, to continue selling to our distribution networks, servicing our customers and really being very, very active as much as possible during lockdown, which I think has benefited us. The feedback that we're getting from our distribution network is that there has been some consolidation and some movement in the competitive environment. And Leatt has certainly benefited from that, and we do expect that to continue as we become a much more important source of revenue for our distributors and for our dealers. We -- certainly, in certain areas, we've got a really good foot in the door now, and we plan on making sure that we maintain that moving forward.

Our next question comes from the line of [ Christopher Muller ] with -- a private investor.

Sean, congratulations on a great start to the year.

Thanks, Chris. Nice to hear from you.

Just 2 questions for you today. First, in terms of the international sales. Obviously, the time line of COVID impacts and recovery have varied widely, region to region. Maybe you could comment on what you're seeing there? Is it broad-based strength across Europe and Asia? Or some areas performing much stronger than others?

So generally, this trend towards outdoor activities and a growth in the outdoor industry is global. We don't see many areas or many major areas emerging or well-established, where there's weakness in demand. Things are surging really around the world. And looking at some of the sentiment that we've seen in some of the ordering patterns for our new lineup, the current trends that we're seeing, industry-wide, are continuing and are sustaining.

Secondly, there seems to be an increasing consumer interest in sustainability and perhaps you're already ahead of the curve there, given your reputation for product durability and longevity. But maybe you could comment on how you think about sustainability, in general, both in terms of product design and product sourcing? And are these matters that routinely come up in discussions with dealers and distributors?

Actually -- so I mean it comes up a lot with dealers, with distributors, with end consumers and also, of course, now with our manufacturers in Asia. It's something which, Leatt as a business, is very, very serious about. And we are continuously reviewing the material that we use in all of our products and -- particularly on the packaging and plastic side of things. And I think you'll see quite a big swing in the way that we deal with those areas over the next 6 to 12 months. It is something which is obviously extremely important lever of the business. Being the innovative cutting-edge business that we are, it's important to make sure that we are sustainable and that our footprint is built on a sustainable basis. So certainly, something which is very important to us, particularly, actually, in the bicycle industry, we see that, that is important -- very important to end consumers and it's a focus area for us. It's one of the pillars that we are working on in our strategy to grow moving forward.

Our next question comes from the line of [ Jason Hershman ], a private investor.

I just called just to basically to say congratulations. And it's really a tremendous quarter and was a tremendous 2020, but it's really been a fantastic journey. And I don't really have much more to say than just -- it's just amazing what you and Chris and the entire Leatt team have done. And I'm just so happy for you and everybody there for having achieved what you've done, and I'm sure there's wonderful things to come. So I really just called, basically, and woke up early in Las Vegas, just to say that actually.

Well, Jason, that's fantastic. Thank you so much for the call and for calling in...

If you don't mind, let me ask you one question, since I got you on the line anyway, right? I have to ask you a question.

Sure. Sure.

So as you continue to grow, and I know we've talked about this in the past. What do you think you can do maybe to sort of improve your, like, inventory turnover so that more money ends up on the balance sheet and cash, unless a bit percentage-wise ends up in inventory? And I know you've moved things a little bit forward. I was wondering if maybe you could discuss that a little bit then?

Yes. I think what we -- one of the big things that we are looking at now and of course, a lot of the products that we are now selling are more, you could call them, commodity base. So they move a little bit quicker. So things like gloves and apparel, there's kind of a -- I mean there's a -- I mean you can sell them 3 to 4x turnover a year. We have other products that we've traditionally sold like neck braces, it's kind of more like 1 to 2x a year. So just by nature of the products that we are now moving towards selling more of, we should see inventory turnover rates increasing. Of course, the other thing is we want to try and get more -- decrease the lead time between ordering and delivery to our distributors and to dealers and also the amount of online e-commerce selling that we do. And I think all of those things are going to contribute to a higher inventory turnover rate.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you all for joining us today. We look forward to speaking with you again to recap the second quarter of 2021.

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.