Leatt Corporation (LEAT) Earnings Call Transcript & Summary

Greetings, and welcome to Leatt Corporation Fourth Quarter and Year-end 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Michael Mason, Investor Relations. Thank you.

Thanks, Rob, very much. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the fourth quarter and full year ended 2021. The company issued a press release today, Thursday, March 10, 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. The replay PIN number is 137-27-761. 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 March 10, 2022. [indiscernible][indiscernible] 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, and thank you, Mike, and thank you all for joining us today. 2021 was by virtually every measure, the most successful year in our company's history. Total global revenues for the year were $72.5 million, an increase of 88% or $53.9 million compared to 2020. Net income was $12.6 million, an increase of 184% or $8.1 million compared to 2020. Gross profit was $31.4 million, an increase of 81% compared to 2020. Basic earnings per share increasing by a multiple of more than 2.5 to $2.29, up 179% compared to $0.82 in 2020. We achieved double-digit revenue growth in all of our product categories. Again, it was an exceptional year, and I'd like to thank our entire team for their incredible persistent efforts. We closed out the year with a strong fourth quarter, the strongest quarter in our history in terms of revenue. Total revenues were $23.2 million, an 82% increase over the fourth quarter of 2020. Net income for the fourth quarter was $3.8 million, an increase of 115% over the fourth quarter of 2020. We have now achieved record-breaking revenue for 6 quarters and year-over-year revenue growth for 15 consecutive quarters. Despite some challenging trucking delays as a result of port congestion in the second half of 2021, revenues in the United States grew by $6.2 million, up 45% to $20.1 million in 2021. Continued investment in building a professional domestic sales force to reach more dealers backed with a strong product offering and well-positioned brand resulted in strong U.S. momentum. Our recent investment in relocating Leatt distribution facility to Nevada is a great step forward. It's significantly larger than our Santa Clarita, California facility with a dedicated warehouse staff and management in place to improve operational efficiency and stock turnover. This positions us to service a much wider community of riders across the U.S. with more products faster. International revenues grew by $27.7 million or 112% for 2021. Our international teams focus on building high-performing multichannel sales initiatives that are well coordinated with our distribution partners contributed to these exceptionally strong results. We continue to strive to build a highly professional and effective sales and brand management team globally. Ultimately, surge in global consumer demand for our head-to-toe product categories resulted in these fantastic growth levels which is extremely encouraging for our entire team. Not only did every single product category grow by double digits, we achieved double-digit revenue growth in every single major geographical region that we sell to, established and emerging. In terms of our sustainability efforts, late last year, we launched an important initial effort to do our part to lessen the effects of climate change and reduce industrial pollution. We introduced innovative packaging that makes use of eco-friendly materials across our entire product range and an initial range of biodegradable mountain biking high-performance apparel that are made with durable plastic-free materials containing anti-odor and moisture-working properties so that they can be used for longer periods and require less washing. The new materials include tencel lyocell, a new product made from excess tree pulp that is extremely soft, offering unmatched comfort and temperature control and yarn produced from recycled coffee grounds. Our jerseys come in a fast-drying odor control fabric made for warmth in lower temperatures. And [ scion ] a feasible fabric for low-speed temperature control with laser-cut ventilation for high-speed cooling. In more recent news, last month, we proudly announced a partnership with the Pivot Factory mountain biking racing team. The prestigious mountain biking team is raising this year with a full range of Leatt apparel and protective products. These athletes are among the best riders in mountain bike racing today. And they will not only be wearing our innovative gear but will help us continue to develop a pipeline of exceptional products. This is fantastic news for our company and yet another testament to the global acceptance of the Leatt brand. Now let me turn to more detail on our product sales breakout. Sales of our flagship neck braces continue to grow. In 2021, worldwide neck brace sales totaled $8.4 million, a 73% increase over 2020. Neck brace sales are particularly important for us because they generate a higher gross margin than our other product categories and accounted for 12% of 2021 revenue. Body armor sales totaled $41.2 million, an 85% increase over 2020. We saw breakout revenue in our footwear category, now consisting of a full line of exceptional off-road motorcycle boots and mountain biking shoes as well as our line of innovative upper body protection. Body armor products remain a key development and a refinement area for us in order to remain at the forefront of this competitive category. Body armor accounted for 57% of 2021 revenue. Helmets continue to be an important safety category, and our investments in reengineering and refining our full moto helmet lineup is starting to show encouraging returns. Helmet sales were up 134% over 2020 to $9 million, our innovative award-winning MTB helmet line and our refined motor helmets for off-road motorcycle use with the leaders in this category. Helmets accounted for 12% of 2021 revenue. In addition, our 8.5 moto helmet kit, which is an important part of our fully reengineered orphan motorcycle helmets was selected by the editors of Powersports Business for Nifty 50 award, honoring the top products and services for winter and spring of 2022. The award cited Leatt's category-defining 360-degree turbine technology that not only provides superior comfort but reduces impact to the head and brain. It is very encouraging to see the innovative work of our in-house engineering and design team gets this kind of recognition. Two of our other products were also on honored with awards. Our 4.0 Velocity goggle won a design and innovation award. And the 2021 Racer X Reader's Choice Award was given to our flagship neck brace for being the #1 worn neck brace in 2021. We are also seeing strong demand in our other products, parts and accessories category. This includes goggles, hydration bag and apparel, such as jerseys, jackets. Worldwide sales increased 82% over 2020 to $13.8 million. In particular, we see strong demand for our line of technical apparel for off-road motorcycle and mountain biking use as well as our bulletproof military-grade velocity line of goggles, which was up by 55% over the last year. The other products, parts and accessories category accounted for 19% of 2021 revenue. Now I'll turn to the financial results of 2020 in a bit more detail, starting with the details from the fourth quarter. Total revenues for the fourth quarter of 2021 increased to $23.2 million, up by 82% compared to $12.7 million for the same 2020 period. Gross profit for the fourth quarter of '21 increased to $9.7 million, up by 71% compared to $5.7 million for the same 2020 period. Income from operations for the fourth quarter increased to $5 million, up 115% compared to $2.3 million for the fourth quarter 2020. And net income for the fourth quarter of 2021 increased to $3.8 million compared to $1.8 million for the same 2020 period. Moving on to more of the full year 2021 results. Total revenues for 2021 increased to $72.5 million, up by 88% compared to $38.6 million for 2020. The increase during 2021 was driven by a 73% increase in neck brace sales and 85% increase in body armor sales, a [ 154% ] increase in helmet sales and an 82% increase in other products, parts and accessory sales. Gross profit for 2021 increased to $31.4 million, up by 81% compared to [ $70.4 ] million for 2020. Total operating expenses for '21 increased to $15 million, up by 29% compared to $11.6 million for 2020. Income from operations for 2021 increased to $16.6 million, up by 185% compared to $5.8 million for 2020. And net income for '21 increased to $12.6 million or $2.29 per basic share and $2.07 per diluted share, up by 184% compared to $4.4 million or $0.82 per basic share and $0.74 per diluted share for 2020. Leatt continued to meet its working capital needs from cash on hand and internally generated cash flow from operations. At December 31, 2021, the company had cash and cash equivalents of $5 million, up 69% compared to 2020, a current ratio of 2.4:1. Once again, to summarize, 2021 was an absolutely exceptional year for Leatt, particularly in terms of our financial performance and our global brand development. Revenue totals continued to grow and set new records. All of our product categories grew by double digits around the world, and we continue to reach a wider rider audience. Our investments in research and development is producing innovative eco-friendly exceptional award-winning products. We will continue to monitor consumer buying patterns, geographical risks, the macroeconomic inflationary environment and the COVID-19 pandemic. But our entire team is extremely optimistic about our future and the momentum that we have built in our brand. Consumer demand continues to surge as people around the world continue to participate in our 2 activities. Our new partnership with teams like the Pivot Factory Racing Team will provide a tremendous boost in exposure throughout the coming year and beyond. Our strategy and goals remain unchanged. We to continue to refine our product categories and deliver exceptional products to a wider rider community to increase our portfolio of protected intellectual property and to gain market share through product innovation and brand management in order to increase shareholder value. Many of our products have launched extremely well, but are still in the infancy and showed great potential to contribute to exponential growth. We do still have a lot of work to do to remain at the forefront of product innovation, but we are extremely proud of our team's resilience and our ability to gain market share, which we are confident will continue in 2022 and beyond. Finally, on a personal note, I'm looking forward to attending more shows and events and connecting with our friends in the industry in the coming months as COVID restrictions are lifted. Eurobike in July in Frankfurt is going to be absolutely awesome, and we plan on visiting the U.S. in the coming quarters. As always, we'd like to thank our entire Leatt family, our dedicated employees, business partners and team riders for the continued strong efforts and support in making Leatt a success it now is. With that, I'd like to turn the call over for questions. Operator?

[Operator Instructions] Our first question comes from [ Mike Andrews ], who's a Private Investor.

I wanted to just get your thoughts on a possible uplisting for the stock to increase sort of exposure and open it up to new investors. What are your thoughts there? And I guess the second part of that question is, I heard what you said about attending industry trade shows, what about investor conferences here in the U.S.?

Okay. So those are good questions, Mike. And I'll answer the first one, just in terms of uplifting. Of course, our Board is always looking at ways to get, reach more investors and to get more exposure certainly something which is a hot topic for us. And our feeling is that when the timing is right, that is certainly something that we will look to. It's not an immediate need in terms of raising capital and getting more exposure. But it's definitely something which would be on the cards at the right time. And then in terms of conferences, absolutely, part of our trips that we'll make this year will include some investor conferences, again, to increase our exposure to new investors.

Okay. We're 2 months into 2022. Are you going to provide any guidance? And how do the first 2 months of the year look so far?

Okay. So as a business at this stage, we don't provide a direct guidance, but what we do say is that we target double-digit revenue growth, and that still remains what our targets are. There are some challenges in the first 2 months. Obviously, we've got a global environment that is inflationary and probably going to become more inflationary. Some of the geopolitical risks that we're seeing have certainly affected sentiments a little bit. But the overall trends in terms of consumer demand for our kinds of products, those still remain positive.

Well, you're doing a great job, Sean, you have my support. Best of luck this year.

Thank you very much for the questions and chat soon.

Our next question comes from Chris Jarrous with Dunlap Equity.

Sean, congrats on what can only be said is a fantastic year.

Thanks very much, Chris. Nice to hear from you.

I just wanted to ask you, you mentioned your product -- a couple of questions on products. You mentioned that they are in the infancy. Can you expand on that a little bit, like how you think about that and what that could mean as we look out the next couple of years?

No, sure. So we've obviously been working really hard to become a head-to-toe brand on moto and also on MTB. So we've got some really good categories now. And although we still are looking to category expansion, I think a lot of our growth would come from refining the current categories that we have and expanding on the current categories that we have and gaining market share. So it's quite exciting for us. We see big opportunities with this -- these kinds of growth levels, 88% growth looking at some of the market shares that are published, some of the big publications. Some of these products where we've had exponential growth are still well below 5% in terms of market share. And then we've got some that are a little bit more established that have been in the market for a little bit longer, and we are able to gain 15% to 20% in a matter of years. So those are the kinds of things that we'll be working really hard on, is just to increase market share in some of these new products that we've got out there. So I think there's still a massive opportunity in a lot of our categories to increase our market share and obviously grow significantly.

Okay. And then as we think about the Pivot Team that just joined, what can they do for you that's different than maybe the opportunities you've had before?

Yes. So I think they're a team that obviously -- I mean, they do get podiums. They are results-driven, but they've got Bernard Kerr who's the kind of the main driving force behind the team, and he has an absolutely fantastic following on social media channels and just globally is a superstar. He adds, I think, a lot of credibility in terms of gaining acceptance with a much wider group of riders than what we've been selling to for a long time. Of course, we've been expanding our products, but we were selling to mainly gravity orientated riders, and he has appeal with a much wider rider audience. So I think he can really do some great promotional work for us and really be an ambassador. We're hoping to build a long-term relationship with them.

Okay. So we can expect -- I mean, I've seen some of the ads and some of the things you've done online. This is just the beginning. We expect to see a lot more from him?

Correct. correct. This is just the beginning. We just got in with him. He's obviously just got all of our gears, he's been riding in our gears, really happy with all the gears, he's comfortable. You'll start seeing quite a lot more activation with Bernard and with the rest of the team.

Our next question is from [ Christopher Muller ], a Private Investor.

Sean, congrats on a very strong finish to 2021.

Chris, thanks very much for the support.

Yes. Two questions for you today. First, I see that helmet revenues exceeded $4 million in the fourth quarter, which looks very encouraging after the years of work you put in there. Were there onetime factors involved there in the fourth quarter or are you seeing that continuing in 2022?

Sorry. Could you just repeat? I didn't hear you clearly, which revenue?

The helmet revenues in the fourth quarter.

Helmet revenues. Absolutely, yes. Yes. So really 2 -- I mean, 2 reasons. We're starting to see some great traction on our mountain biking helmets. So we've just widened the range there, brought up some key new products that are, I think, meet a lot more needs of consumers in terms of price points and also just the kinds of riders that can wear those helmets, a little bit more mainstream. So those have done really, really well for us. And we expect that to grow further. And then on the off-road motorcycle side of things with a fully reengineered line of 7.5, 8.5 and 9.5 helmets, they've got fantastic fit. They've got great reviews. Consumers really love them and award-winning now with the 8.5 helmet kit. We've seen really good consumer uptake there. And I think that, that's going to continue. Again, that's kind of helmets the kind of line that is just in its infancy. We're going to be working really, really hard. It's being a full relaunch over the last 1.5 years of our entire moto line of helmets. A big push from our side, a big investment to kind of redevelop all of those helmets to make sure that the fit was right inside and that the design elements were right outside. And so far, that's been successful. So it's -- we expect the helmet category to continue growing. It's the largest safety category of products that you have to have if you're writing pretty much anything at speed. So I mean we are expecting that to grow. And it's a key area for us that we are going to be pushing.

That's great to hear. And the second question for me. In the 10-K where you break out revenue by source, I see that the consumer and athlete direct segment is the only one that didn't show significant growth for the year. I'm assuming this is at least partly the result of limited inventory for U.S. e-commerce sales, but any color you could provide around that result and the expectations for it going forward would be helpful?

Sure. So correct. I think it's 2 reasons. Number one, if you look at the comparative in 2020, we went through numerous lockdowns of COVID-19 and our consumer direct business through our website and directly to athletes, I mean, increased massively because people could not buy stuff in stores. So one of the reasons why that didn't have the same kind of level that we had hoped is really just that the 2020 comparative was is absolutely massive. So we did see a little bit of contraction on our website with consumers, which was to be expected. And then also, as you say, I mean, inventory levels for some of the products, the very fast-moving consumer products, they just were not there, something cost which we really are working hard on. Been at some difficult times in the U.S. in terms of some delays in some of the ports with congestion, I think it's pretty well publicized. That definitely hold us back a little bit there, Chris.

That's good to know. And I guess my only other question is a much more general one. I would expect with the rapid pace of growth you've had over the last couple of years, that's probably presented some new challenges for you and the team. And whether that be supplier relationships during COVID or hiring in a tight labor market or even just managing your working capital with an [ 88% ] growth rate. So now that we're hopefully moving past the largest COVID impact for better or worse, it would be helpful to understand maybe what are your top 2 or 3 priorities or challenges over the next year that will allow you to build upon this recent success?

Well, I think -- I mean, as you've identified, I mean, we've been working really, really hard on the supplier relationships during COVID. We also do need to make sure that we fine-tune our working capital because we've grown so quickly now. And particularly where we hold inventory and we have receivables that we need to manage on a kind of daily basis. I mean it's really important that we do make sure that our working capital is managed correctly. We've got a much bigger stock holding there now. We've got a much bigger warehouse -- and we really need to focus very hard on increasing stock turnover and particularly in the U.S. and in South Africa, where we hold inventory. I think that's big enough for us, the kind of big challenges that this kind of growth level presents itself with is that we do need to act quite quickly in order to catch up on some of the opportunities that are out there. Now that we have got more cash on hand and some of it is, of course, going towards working capital. We're looking strongly at our marketing spend to see how we can kind of add some fuel to the fire to continue with these kind of growth levels, to continue gaining market share, to continue making sure that we stay at the forefront of innovation on some of our more established products categories like body armor. So it's really optimizing where we put our efforts, where we put our spend and making sure that we do make those investments as efficiently as possible. And then in the U.S., in particular, we need to build the rep force out as fast as possible. We've got the inventory to sell. We've got a great presence. We do have solid reps in certain areas, but of course, it takes time to build up those reps in some of the areas. I think one of the challenges that we are seeing, as you said, is there's a tight labor market, it's something which we're facing every single day. But it goes a bit further than that with some of the geopolitical risks that we're seeing now, we are expecting -- we really were expecting some inflationary pressures. And certainly, we did see -- we're already seeing some raw material increases in China, which we've managed to manage quite well. I think the team has done pretty well there. But hopefully, the congestion in the ports clears, it's a restart of clearing in the U.S., which is obviously encouraging. But I mean, we are very much aware of the fact that we're going to have to manage some inflationary pressures in the forms of oil price increases, fuel increases, the cost of salaries is absolutely going up in this tight labor market that we're facing. So we're going to have to manage all of that really carefully. Those are just some of the balls that are in there as of the moment. And of course, investing in innovation and sustainability is absolutely key.

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 -- excuse me, someone jumped into the queue. Our next question is from Olivier Colombo, a private investor.

Congratulations for the incredible 2021 here. Congrats to you and the team. And actually, you were hit in '21 what I had expected in '23. So it gives you an idea of how you outperformed my wisest expectation. So congratulations.

Thank you very much for the support, Olivier, and I guess you need to change your model now.

That's for sure. Sean, I had a few questions for you. The first one is coming back to Q3 of last year, you had some products that were still stuck in ports and in the supply chain, did we see something like that again in Q4?

Yes. So in Q4 and particularly in the U.S., as I said earlier, there was definitely some congestion in the ports and that certainly did affect our run rate in the U.S. I'd say if I had to estimate, and I don't have exact numbers, but if I had to estimate, I mean it certainly would be in the millions of stock that was tied up in the ports that could have been sold before the year closed out. So certainly, it was a factor. But we've got those orders on back order, and we should be able to still ship them.

Perfect. The other question is regarding the biggest challenges that you faced in '21. Are they the same you think in '22? And I'm talking here, of course, about the supply chain issues. You mentioned inflation as well. I mean, regarding inflation, does this mean that you will have to pass over price increases to the end customer?

So that's a good question, Olivier, a very good question. And I think some of these challenges we had in 2021 have improved like the supply chain. And we did increase our prices towards the end of Q3 and into Q4 in order to try to mitigate some of the huge increases in shipping costs. And that was actually pretty well received by our customers. It was kind of expected. And we weren't really looking to increase prices due to inflation at the time. Of course, we'll have to monitor inflation very carefully now because that is still going to be a challenge looking at what's happened to the oil price in the last few weeks. And just looking at general price inflation and interest rates globally, I think central banks are going to be increasing rates relatively aggressively now. So that will be a factor that will come into our business that may affect costs on various different levels. It may also affect the cost of manufacturing, raw material prices increase, certainly, potentially a challenge, if I could put it that way. And supply chain is looking a lot more positive. We still have got inflated prices there. There's no doubt about it. But the port challenges are starting to clear, which is really, really good to see. In terms of COVID, last year, the big challenge was not in China, the big challenge was outside of China where we had port congestion at the recipient ports. What we see in more this year is that China is battling -- actually it's obviously not very well publicized in the press, they're relatively private. But China is battling with some COVID outbreaks in some key areas. So that means that some areas get closed down, and that can cause congestion at the outgoing ports. So that's been a bit of a challenge so far this year. Of course, we've got supply chain people in China which has certainly helped us. But it's very difficult to move around China right now when whole cities get closed down because there's an outbreak of COVID. So COVID is certainly still in certain areas a challenge that we are having to manage on a daily basis. And I think as [ Chris Muller ] said, it is a continuous balancing act. We do need to make sure that we grow sustainably and manage our working capital and manage where we place investments and look at marketing costs and how we're going to get the best for buck that obviously always a challenge. Of course, as we're bigger now, the environment becomes a lot more competitive for us. We are playing with some bigger brands now in a big marketplace in some of these areas, areas like boots and we're becoming a much stronger helmet player now, things do become more competitive. And I mean we're up for the challenge, but it is certainly a challenge.

That's great. That's a very full answer to my question. And the last one I have is you have a pretty good cash position now, do you think you could be a bit more aggressive on marketing and advertising? And of course, you just did this deal with Pivot. I mean are you focusing mostly on the mountain bike side now rather than on the moto front?

So the short answer to your question would be yes. I think we are in a position where we can be a bit more aggressive now on our advertising and marketing spend, obviously, going to do it in an efficient way. And I mean, in terms of the teams, I mean we're looking at moto and we're looking at MTB all the time to try and get the teams that are really going to represent our brand as well as possible. So -- there's a lot of growth at the moment on the MTB side. So that is a priority. But at the same time, making sure that we have a team from our roots, which is offered motocross that really represents as well is something that we are always looking to do. So it will be across the board and we are looking at ways of -- in smart ways of adding fuel to the marketing fire.

Okay. We're at the end of the question-and-answer session. I would now like to turn the call over to Sean MacDonald for closing comments.

Thank you all for joining us today for this conference call, and I really am looking forward to presenting the results of Q1 2022.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.