Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings, and welcome to Leatt Corporation Third Quarter 2021 Earnings 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. Thank you. You may begin.

Thanks, Rob. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the 2021 third quarter. The company issued a press release today, Friday, November 12, at 8:00 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 the 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 137-24-984. 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 this 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 November 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. Sean, good afternoon to you in Cape Town.

Good morning, and thank you, Mike, and thank you all for joining us today. By nearly every measure, the third quarter of 2021 was an absolutely remarkable quarter for Leatt. Global revenues for the quarter increased by 94% over the 2020 third quarter to $22.1 million. Gross profit increased by 93% to $9.5 million, and net income increased by a staggering 166% to $4.3 million. Third quarter growth was led by an exceptionally strong increase in international revenues, which grew substantially to $17.8 million from $7.1 million for the 2020 third quarter as we successfully shipped our highly anticipated 2022 line of products to our customers around the world. Our global supply chain team and manufacturing partners have done incredibly well in a challenging and often dynamic environment to ensure that inventory is delivered. And we believe that we are well positioned at this time to meet customer demand levels for the upcoming holiday shopping season. We have now achieved record-breaking quarterly revenue for 5 consecutive quarters and year-over-year revenue growth for the last 14 quarters. We are successfully growing Leatt into a leading global consumer brand that is respected around the world for designing and engineering exceptional products for the sports industry. Third quarter growth was impressive across our growing Head to Toe portfolio of products. With a $6.6 million increase in body armor sales, a $1.5 million increase in neck brace sales, a $1.5 million increase in the sale of other products, parts and accessories and a $1.1 million increase in helmet sales. Let's take a look in more detail. Our body armor products are comprised of our 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 114% increase in body armor revenue is attributable to a 101% increase in the volume of upper body protection sold during the period. This demand has resulted in significant restocking orders with encouraging sales of our growing footwear category of motorcycle boots and mountain biking shoes contributing to exceed our expectations. Body armor accounted for 56% of 2021 third quarter revenue. 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. Worldwide demand for our neck braces continues to increase. Neck gross sales accounted for 12% of 2021 third quarter revenue. Our other products, parts and accessories category are comprised of our goggles and hydration bags, our apparel line of jackets and shorts and jerseys as well as our aftermarket support items. The 47% increase is due to a 189% increase in the volume of mountain biking and off-road motor apparel sold during the period as the global consumer demand for our cutting edge gear continues to surge. The other products, parts and accessories category accounted for 21% of third quarter revenue. The 93% increase in helmet sales during the third quarter is primarily due to a 149% increase in the volume of our innovative award-winning MTB and off-road motorcycle helmet lines sold globally during the 2021 period. Helmets accounted for 11% of our 2021 third quarter revenue and remain a key focus area for our company. While international revenues for the quarter grew substantially, revenues in the United States grew at a more marginal rate. This was due in part to temporary domestic port congestions and tracking delays causing a lag in the performance of domestic orders of our 2022 product line. Dealer and consumer demand for our products remains very strong in the U.S., and we have been able to deliver significant orders during the first half of the fourth quarter in time for the holiday shopping season. Our new warehouse in Reno, Nevada has 3x the storage space of our California facility, which will enable us to fulfill a higher volume of orders, a key component of our continued development in the U.S. Reflecting back on the headline financials. Total revenues for the third quarter of 2021 increased to $22.1 million, up 94% compared to $11.4 million for the third quarter of 2020. Gross profit for the third quarter increased to $9.5 million, up 93% compared to $4.9 million for the third quarter of 2020. Total operating expenses for the third quarter of 2021 increased to $3.8 million, up 54% compared to $2.9 million for the third quarter of 2020 due to increases in salaries, G&A costs and professional fees. And income from operations for the third quarter of 2020 increased to $5.8 million, up 170% compared to $2.1 million for the third quarter of 2020, with net income for the third quarter coming in at $4.3 million or $0.79 per basic and $0.69 per diluted share, up 166% compared to $1.6 million or $0.30 per basic and $0.27 per diluted share for the third quarter 2020. The extraordinary third quarter added to what is already our strongest year ever. Global revenues for the first 9 months of 2021 increased 91% to $49.3 million. Net income year-to-date increased by 251% to $8.8 million, a return on revenue of 18% and earnings of $1.61 per basic share. Turning to the balance sheet. At September 30, 2021, we had cash and cash equivalents of $2.59 million. Our coverage ratio stands at 2:1, 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 plans for any major capital intensive expenditures in the next 12 months beyond investment in molds and tooling to facilitate further expansion and refinement of our product categories. We believe that our performance for the third quarter demonstrates once again our ability to grow revenue remain operationally efficient and generate significant shareholder value. To summarize, global consumer spending, particularly on outdoor products like [indiscernible] continues to grow as people participate in outdoor activities that provide some escape from the restrictions of the COVID pandemic. This is a trend that we expect to continue. Global demand for our exceptional Head to Toe protective gear for off-road motorcycle and MTB riders continues to surge around the world. We see this through significant restocking orders that we are managing with our supply chain and distribution partners worldwide. This sustained consumer demand along with recognition from the media, our business partners and industry athletes continues to energize our entire team. While we still have a lot of work to do in order to differentiate our products, leverage our brand and manage our supply chain, we remain committed to excellence in all that we do. Our team is focused on increasing our market share and refining our already strong pipeline of innovative products that we believe will continue to attract athletes and consumers around the world. In conclusion, we continue to evolve the company and the brand through our consistent focus on developing a diverse line of products. Our growing sales and marketing efforts and the nimble resilience of our global supply chain team during these dynamic times. We believe that we are well positioned to deliver an incredible financial performance in 2021 and beyond. As always, we'd like to thank our entire Leatt family, our dedicated employees, business partners and team riders for their continued efforts and relentless support. And with that, I'd like to turn the call over for questions. Operator?

[Operator Instructions]. Our first question comes from Chris Jarrous with Dunlap Equity.

Sean, congratulations on the exceptional quarter. Yes, 2 questions. First one is you mentioned in your press release about being able to manage through supply chain issues. Obviously, some product held up in the course. But what are you guys doing? I mean as a relatively small company in a large market, how have you been able to manage the supply chain and given that you've -- you manufacture in China, what have you guys done that allowed you to execute so well?

So I think we've -- there's really 2 big drivers that we're focused on. The first is just nurturing the relationships that we've had with some of our manufacturers that we've been with for a very long time now. And also with the tremendous growth that we've seen, we've really become a very important source of business for these manufacturers, which has placed us in a favorable position in terms of manufacturing space. So that's the one side of it. And then in terms of just the actual deliveries, getting stock on to the water. I think Leatt has always been very well positioned for the kind of situation that we now see with COVID. We've got a solid supply chain setup actually in Asia. And with the limited travel that one can do now into Asia, that has really benefited us. So we drive a lot of our supply chain globally, directly inside Asia with people there that are focused on getting our inventory from the manufacturer to all of our customers around the world. And I think that has really -- has been a great strength for us in these difficult times.

Okay. So these aren't just regular brokers that anybody is using and these are people specific to Leatt?

No. These people are focusing on Leatt 24 hours a day.

Okay. That's great. Second question, kind of higher-level question. Recent interviews with manufacturers of the e-bikes have said that they've got -- their products are sold out for the next year. They've got 2 years of capacity sold through the channel already. They're just waiting to fulfill over time. And so that market is growing dramatically. And as I think about that market, I think about the different types of people that would use that as it allows us to enter the market, kids, older people, people that historically aren't your 255-year-old biker bombing down the mountain. So if that is correct in expanding to that market, I would think that those people are more interested in your types of products, innovative safety-first kinds of products. What have you seen? And is that correct? And what are e-bikes doing to the general MTB market?

Absolutely. I mean, there's obviously, there's different segments in the e-mountain biking marketplace and -- sorry, in the e-bike marketplace. And e-mountain biking is a very, very strong segment. And that has definitely benefited us in terms of consumer demand because we do sell products that are protective. You've got a lot of new entrants that are only able really to enter this market because of the fact that these are electrified bicycles, so they get to really experience some things that they never would have experienced if it was not an e-bike, if it was a general bicycle. And that has really benefited us because these are the kinds of people, either the gear is being bought by parents for youngsters that are getting onto these bikes or the less capable, maybe slightly older people that have now gained access to cycling as a sport and can get to some great places and potentially some really dangerous places actually. They are obviously very concerned about getting back to work on Monday. So for those people, the Leatt line of protection and particularly the body armor -- the surge that we've seen in body armor in demand, I believe that the e-mountain biking market has been one of the drivers around that surge demand that we've seen. And we do have products -- some products that we have now started labeling as very specific to e-mountain biking. But the vast majority of our body armor is absolutely perfect for e-mountain bike rider, which is great news because we actually have the products ready on-site to sold to these people. So that has certainly benefited us.

Our next question is from Christopher Muller with -- a private investor.

Yes. Sean, congrats to you and the team on the continued success. I have maybe 3 questions for you today. First of all, just a follow-up on the supply chain. Besides the container delays to the U.S., are you seeing any challenges there, whether it be factory shutdowns or material shortages or such that would impact your product availability or growth plan over the next few quarters?

We haven't seen anything major in terms of raw material shortages. Some of the factories that we work with have had temporary electrical shutdowns, but those are short term. So most of the kind of slowdown in manufacturing has been very short term in nature, and I don't see it affecting our ability to supply over the next several quarters.

That's great to hear. And last we spoke, you were just about to begin shipping out of Reno. How is that progressing? Is that all scaled up now in Q4?

So it's great news. We are shipping only out of Reno now, not shipping anything out of Santa Clarita anymore. Reno is now fully operational. We've been able to get some really good warehouse-specific, specialized warehouse staff in Reno. And we are -- we really are seeing and experiencing a great increase in our ability to fulfill orders quickly at the Reno warehouse. As I say, fully operational and going really guns blazing out it. So that's great news.

Got it. Great news indeed. Any significant changes in distributors or e-commerce retailers this year? Are you still finding expanded reach, particularly in the more mainstream trail riding market on the mountain bike side?

Absolutely. I think that's been something which has also been a key driver of our growth over the last several quarters is just our relationships that we built with some of our e-commerce dealers that we now are dealing with directly. We really have been able to reach a much wider rider audience. You're not only limited by what -- where the distributor has a strength, we actually are a lot closer to the end consumer. And I think that's part of the reason why we've seen some great demand for our products, just getting that one step closer to the end consumer, but still selling, obviously, through our dealer partners.

And I noticed the moto and the bike neck braces were consolidated into a single line this year. Besides the obvious benefits maybe of reduced inventory and a greater selection of colors for both markets. Where there any other either considerations or factors around that change?

Sorry, could you repeat that? I didn't fully understand that. So could you just repeat?

Yes, the moto and the bike neck brace lines, looked like they were consolidated to a single line this year, you no longer have designations on the 2 different products. And I was just wondering what factors went into that change. And what are your expectations from that?

Yes. Yes. So I mean I think there's a couple of things that obviously came into that. I mean I think the biggest reason is just that there's very little differentiation actually between those 2 product lines, and we wanted to be authentic in terms of our product offering, so that's the one angle. And then the other side of it is just in terms of the manufacturing efficiency perspective. We didn't feel that having separate lines was going to change anything in terms of consumer demand. It certainly hasn't. And also, it obviously makes us a lot more effective from a manufacturing perspective. So with demand increasing, we took the opportunity to consolidate things just a little bit. And I think that's going to work out quite well for us.

Our next question comes from Olivier Colombo, a private investor.

Do you hear me?

Yes, I can hear you.

That's perfect. Congratulations on this incredible Q3 report. What is also remarkable is this quarter alone is 10% higher than your full sales in 2017. So I think this is quite an achievement.

That's a nice thing to say, thanks Olivier.

I have 3 questions -- my pleasure. You know I like statistics. My first question is like most of the outdoor brands that I've reported so far, most of them have mentioned a slippage of some of their Q3 products into the next quarter. I guess this is the same for you. Is it possible for you to potentially quantify it eventually percentage-wise? Is it 10%, 15%, 20%, higher you think?

I think what I would say is that we probably lost a good 20% of sales in the U.S. because of the lag. And probably about 10% of sales -- when I say lost, I mean, we didn't lose them. We're still going to deliver the inventory because it's all on back order, probably about 10% on the international side that we're going to see falling now into Q4. We already started shipping a lot of that out of the U.S. warehouse because that stock has now all arrived and is now moving through the network. So about 20% in the U.S. and about 10% international.

Okay. Perfect. And the next question is regarding the professional fees, which were up 182% during the quarter due to increase in product liability litigation settlement. I guess this is probably a onetime event, and that should not repeat in the coming quarters.

Yes, that is correct. So there was a settlement of one of our trials, and we should not see that -- we certainly don't know of any other areas where we are litigating now where we can expect any settlement like that. So in Q4, I definitely do not expect to see anything like that. And hopefully, there are no further trials that come up.

That's perfect. Yes, we all hope so. And then my final question would be on your new sustainability line that you are launching the 2022. I would just like to know how long have you been working on this line? And what has been the market reception to something that I think is incredibly innovative and looks very cool.

Firstly, thank you, Olivier. We've been working on it for about 3 years now. Just planning how we're going to release it. Of course, at the moment, it is a few products that are in the line. And over time, we hope to -- we obviously have to grow that line of products. And just to become more sustainable. It's something that we do take very seriously at Leatt. We realize that we've all got a responsibility towards sustainability and becoming more eco-friendly. So step by step, we are working on increasing that. Taken about 3 years to get to where we are. But of course, now as you know, we do have the technology. We have the capabilities. We have the suppliers, who are able to expand this. And we are planning on expanding it quite quickly. We've also now have full eco packaging. So all of the packaging that we're sending around the world now is fully eco-friendly, using things like soy ink and products that are not harmful to the environment. So that is -- we've been working on this for about 2 years now. And that's been a huge change for us. Of course, a lot have to be done in order to put that in place. But we are relieved that we are now in a position where we can say that all of our packaging is eco-friendly.

Do you think this eco packaging is a higher cost for you? Or does it lower your costs on the packaging in general?

We're talking packaging. Packaging in general?

Yes, yes, just packaging.

I mean -- Yes. So it's pretty much breakeven. There might be a slight in some areas -- there might be a slight increase in cost. But generally, when you go down the eco road, you do see some cost increases, but then things become -- there's less colors, there's less -- you're limited to certain materials, which decreased your cost. So it's pretty much breakeven, maybe slightly higher in some areas.

Okay. That's perfect.

Of course. We're talking about -- Yes?

Please go on.

Oh no. I was just going to say that if you're talking about on the product side, with the sustainable materials that we are using on the product side, those are a bit more expensive. But consumers, some consumers are willing to pay a bit of a premium, knowing that they're using materials that are cutting edge like that.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Sean MacDonald for closing comments.

Thank you all for joining us today. We look forward to speaking with you about our 2021 year-over-year performance in the spring.

This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.