Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings. Welcome to Leatt Corporation's Second Quarter 2021 Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I'll now turn the conference over to Michael Mason with Investor Relations. Michael, you may now begin.

Thanks, Rob, very much. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the 2021 second quarter. The company issued a press release today, Thursday, August 12, at 8 a.m. Eastern, and also filed its report with the SEC. The press release is posted on Leatt's website at www.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. The replay pin number is 13722133. 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 this call. Please refer to the complete cautionary statement regarding forward-looking statements in today's press release dated August 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. Thank you, Mike, and thank you all for joining us today. I am very pleased to report that our performance over the last several quarters continues to improve as we work to deliver a suite of exceptional award-winning protective gear and position Leatt as a global consumer brand. The second quarter of 2021 was another groundbreaking and record-setting quarter for Leatt. We had strong double-digit revenue growth across all of our head-to-toe product categories, and we grew our revenues in every major geographic area that we sold to. Global revenues more than doubled to $14.3 million for the second quarter, the strongest quarterly revenue in our company's history and an increase of 106% over the 2020 second quarter. Net income rose to $2.4 million, an increase of 257% over the 2020 second quarter. On a year-to-date basis, for the first 6 months of 2021, our revenues were $27.2 million, up 88% over the same period last year. And net income for the first 6 months was $4.5 million, up a staggering 331%. These numbers demonstrate our ability to achieve strong revenue growth while remaining operationally efficient and effective. We are all very pleased with the tremendous momentum that we are building. 2021 second quarter marked the fourth quarter in a row of record-breaking revenue, and 13 consecutive quarters of revenue growth. We believe that this period of ongoing growth is a testament to the discipline and focus on our strategy for building years into a global consumer brand by growing our product categories to anticipate and serve the needs of riders around the world. The highlighted results are certainly very encouraging. Let us now drill down a bit further to look at performance by product category. 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 46% increase during the quarter is due to continued strong demand, both in the U.S. and abroad for neck braces. Neck brace sales accounted for 11% of second 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. The 107% increase in body armor revenue is attributable to remarkable worldwide demand for our full line of upper body and limb protectors as well as our footwear category, consisting of off-road motorcycle boots and mountain biking shoes. Body armor accounted for 60% of 2021 second quarter revenue. Our helmets continue to be refined and in some cases, completely redesigned to meet the needs of a wider riding community. All Leatt helmets contain our patent a 360-degree turbine technology for brain protection. The 91% increase in helmet sales is due to strong global demand for our innovative award-winning MTB helmet line and a MOTO helmet line for off-road motorcycles. Helmets accounted for 7% of our 2021 second quarter revenue and remain an absolutely key focus area. Our other products, parts and accessory categories are comprised of our goggles, hydration bags and our apparel line of jackets, pants and jerseys. The 165% increase during the 2021 second quarter is due to continued strong demand for a line of cutting-edge MOTO and MTB apparel, designed for off-road motorcycle and mountain biking with consistent demand for our innovative velocity line of military-tested bullet-proof goggles also contributing to this growth. The other products, parts and accessories category accounted for 22% of second quarter revenue. For the last several quarters, consumer spending patterns on outdoor products have continued to increase as people around the world participate widely in outdoor activities that provide some escape from the COVID-19 pandemic. This is a trend that we do expect to continue. Now turning to the detailed financial results for the 2021 second quarter. Total revenues for the second quarter of 2021 increased to $14.3 million, up 106% compared to $6.9 million for the second quarter of 2020. Second quarter income from operations increased to $3.1 million, up 246% compared to $909,000 for the second quarter of 2020. And net income for the second quarter of 2021 was $2.4 million or $0.44 per basic and $0.39 per diluted share compared to $675,000 or $0.13 per basic and $0.12 per diluted share for the second quarter of 2020. Margins did decrease from 47% for the first 6 months of 2020 to 45% for the first 6 months of 2021, mainly due to our sales and increases in global shipping and logistics costs. We are actively managing our global supply chain in the midst of rising raw materials and shipping costs in Asia to improve margins and to create predictable and stable supply of our products. To that end, we will continue to work closely with our supply chain team around the world, particularly in Asia, where we are streamlining and optimizing our supply chain processes to mitigate rising costs. Operating costs increased by 32% when compared to the 2020 second quarter, thereby increases in salaries, commissions and general and administrative costs that are in line with our expectations as we continue to grow. We continue to build a team of sales, marketing and product development professionals. In addition, we invest in strategic global marketing campaigns and online media campaigns to increase product and brand awareness. The increase in operational costs was compounded by the company's normalizing of salaries that have been reduced as part of the cost reduction measures implemented by the company to partially mitigate the potential effects of the COVID-19 pandemic during the 2020 quarter. Now turning to the balance sheet. We are currently meeting our working capital needs through cash on hand, a revolving line of credit that is mainly used for supply chain opportunities as well as internally generated cash from operations. As of June 30, 2021, we had cash and cash equivalents of $3.75 million compared to $2.6 million on June 30, 2020. The current debt-to-equity ratio stands at 4.3:1, and we have no long-term debt. We believe that our current cash and cash equivalent balances, along with net cash generated by operations are sufficient to meet anticipated cash requirements for at least the next 12 months. We have no major plans for any capital-intensive expenditures in the next 12 months. On our last call, I made an observation that I think days repeating given this remarkable quarter. In 2006, we pioneered and produced a revolutionary single product that didn't exist. Our gold standard neck brace for a single market. Now 15 years later, we produced an impressive array of products that protect virtually every part of the body and appeal to a wide consumer base in growing consumer markets. Leatt has grown into a well-recognized consumer brand, respective for performance and cutting-edge innovation. We have certainly come a long way and we are proud of the momentum that we are boding. That being said, we remain focused and determined. In fact, we are working harder than ever and moving quickly to the next phase of gaining market share and building this incredible brand and company as well as creating long-term shareholder value. This is an exciting time for Leatt as the company and its stockholders begin to reap some of the rewards of over a decade of hard work and consistent dedication to excellence. We look forward to presenting our 2022 product line to consumers around the world in the second half of this year. 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 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.

Congratulations on the best quarter of Leatt's history. I have the impression that I repeat myself from quarter-to-quarter. I have three questions for you this afternoon, Sean. The first one is, can you please explain the 83% increase in volume for the body protection? Have you released any new products in that category during the quarter that justifies this increase?

So Olivier, it's a combination of things. The 2 biggest reasons are really just the strong demand that we've seen for our full line of body protection, upper body protection. And then also the boot line and the mountain biking line, shoe line is really taking off nicely. So we haven't actually added any major category there. It's just shipments of all of the products going out because of increased demand that we're seeing both in a distributor, dealer and a consumer level. So the volume has really increased because demand is surging.

That's perfect. Then on the helmet side, helmet represented roughly 7% of your sales during this quarter. What do you have in plans here to really push harder for this segment?

That's a good question, Olivier. Of course, the helmet segment is the single biggest safety segment industry-wide, and at 7% of our sales. So that is something which, of course, we really do want to push, we need to get that percentage higher. We do have some plans in place, both on the marketing side of things, in terms of creating awareness for the new helmets that we brought to the market. And then also on the product side, we really brought a whole new line of product of -- most type of products to the home -- to the market. And we've got some MTB helmets that are also in the pipeline that I think will be very, very exciting for consumers. We're addressing some new needs. So this is going to be a product push. This is going to be a marketing push, and this is going to be a distribution push from our side, Olivier.

Okay. So would you say that one of your priorities?

It's one of our priorities, yes. We need to increase helmet sales.

Okay. That's perfectd. And then my last question is, can you tell me what were your biggest challenges during the quarter? And I guess that might have something to do with the logistic costs that have seen pretty big increases by 2 to 3x what you used to pay in normal conditions. Some outdoor brands have recently mentioned on their conference call that they used to ship their products via containerships and now they're considering shipping by air, is this something that you have looked at?

So in terms of the challenges, yes, athlete logistics has been a major challenge for us, not only in terms of pricing -- in fact, in the last 3 weeks, if you look at the World Container Index for some of the shipping lines that we're using, it's up 350% to 400%. So there are definitely some cost increases there for 40-foot high cube containers. But it's also just availability. We're finding it more challenging to actually get containers and get them -- our products in the containers and ship them out. So that's also been a big challenge for us. There's obviously a huge amount of congestion around the world in ports because consumer goods ex China have really -- manufactured goods have really skyrocket in terms of demand. But we do expect this to normalize over time. We're looking at absolutely every avenue and every area in order to make sure that we can achieve a consistent level of supply and not increase pricing significantly. So of course, we look at air freight as well. But unfortunately, I must say that in terms of availability, airlines have also cutback massively on the flights that they are doing because people are just not flying with the continued pandemic pressure that we're seeing. So costs and availability on the airfreight side of things is also not ideal. But we're looking at all the different avenues to make sure that we can secure containers at the absolute best pricing possible.

Our next question is from the line of Christopher Muller.

Sean, congrats on another great quarter. Just have a couple of questions for you today. First, could you provide an update on the opening of the Reno office? How is that progressing?

Yes. Good question, Chris. And we'll certainly put out a release just in terms of the progress soon. So we're just about to start shipping out of Reno. We've got the business licenses and everything in place now. It's looking at really, really good there. We had a temporary warehouse that we set up in the Reno area. We've actually shipped everything out of the temporary warehouse now into the new warehouse. So we should be all systems go out of Reno in the next week or so. So it's progressing really nicely.

That's good to hear. And I saw you had a number of job postings for Reno as well as sales rep nationwide. And of course, it's been a pretty tight labor market here. So I'm just wondering how that hiring process is going.

Yes. As you said, a pretty tight labor market, and we want to make sure that we get really skilled individuals into those roles. And certainly, Reno, we've got to build a solid base there in terms of operational -- mainly in terms of operational warehouse staff. We're finding that with the labor market being so tight, it's taking a little bit longer than what we had expected to fill those roles. And I'm confident that we will be able to fill them with the right people in a reasonable time frame.

At this time, I will hand the floor back to management for further remarks.

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

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