Leatt Corporation (PNK:LEAT) Q3 2023 Earnings Call Transcript

Leatt Corporation (PNK:LEAT) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Greetings. Welcome to Leatt Corporation Third Quarter 2023 Results Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Michael Mason, Investor Relations. Thank you. You may begin.

Michael Mason: Thanks, Sherry. Good morning. We apologize for the delay and thanks for your patience. Welcome to the Leatt Corporation investor conference call to discuss the financial results for the third quarter 2023. The company issued a press release today, Monday, November 6, 2023, at 8 a.m. Eastern and 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 seven 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 13742073. A replay of this webcast will be available immediately following this call and will continue for seven 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 the call. Please refer to the complete cautionary statement regarding forward-looking statements in today’s press release dated November 6, 2023. 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.

Sean MacDonald: Good morning, and thank you, Mike, and thank you all for your patience and for joining us today. Although the results of the third quarter of 2023 continue to exhibit constrained ordering patterns, particularly from our international distribution partners, they simply don’t reflect the current marginal uptick in sentiment that we are experiencing at the dealer and consumer level or the ongoing commitment and enthusiasm of our entire team. International MTB orders that shipped in Q3 were placed in early 2023 at the peak of overstocking dynamics. The comparative was also particularly challenging as the comparative period, Q3 of 2022, was our third best quarter ever in terms of revenue, with a boost from MTB orders placed in early 2022 at the peak of pandemic demand levels.

We remain very enthusiastic about the future and look forward to returning to a level of growth as our global distributors and dealers continue to digest stock and the latest strong participation trend continues. More recent international ordering patterns already indicates an improvement in stocking levels in key areas. On a year-to-date basis, although global revenues decreased by 43% compared to the first nine months of 2022, our gross margins increased from 42% to 43%, and net income was $2.3 million. We believe that this is a testament to our focus on retaining brand equity, supply chain management and operating efficiency despite inflationary pressures. Cash flow generated from operations for the first nine months was $6.6 million, up by 277% compared to $1.7 million for the first nine months of 2022, and we ended the quarter with $10.8 million of cash and equivalents.

Total revenues for the third quarter of ’23 were $12 million, a 48% decline compared to last year’s third quarter, one of the strongest in our company’s history. International revenues were $8.2 million, a decrease of 54% year-over-year, and sales in the United States decreased by 29% to $3.9 million. Net income for the third quarter was $460,000, a decrease of 89% compared to the strong prior year. As our dealers and distributors continue to digest the stock, the inventory overhang post pandemic, we have intensified our efforts to develop an innovative multichannel and robust selling organization that has the ability to reach a wide consumer base of riders at all levels. We continue to build a strong and talented team of product, sales and marketing professionals and have recently invested in the continued success of our MTB business.

This is an area where some of our competitors are pulling back, and we see a great opportunity to build market share. To that end, we have added two key leaders in MTB who share our infectious passion for innovation and riding and who will help us bring a new level of focus to our MTB business around the world. Our 2024 MTB launch is imminent and will include additional Head to Toe offerings with appeal to some of the fastest-growing cycling segments. We are also excited to launch our new Adventure range of gear and apparel tomorrow at EICMA, an international motorcycle show, in Milan, Italy. These products are specifically designed for motorcycle riders at all levels that seek adventure and need technical gear that enable riding in all weather conditions and overall terrains.

This is now a Head to Toe segment that should open doors at the dealer level and, more importantly, reach a wide community of riders. As always, these products, which include new boots and gloves, are developed in-house by our global design and engineering professionals and are fully tested for safety and protection at our on-site Leatt facility. We believe that our Adventure line is a testament to our team’s ability to once again develop innovative gear that appeal to a wider group of riders globally. Now I will turn to more details on sales of our product categories for the third quarter of 2023. Sales of our flagship neck brace was $710,000, accounting for 6% of our revenues, a 63% decrease from last year due primarily to the decrease in volume of neck braces sold in the U.S. and abroad.

In the third quarter of 2022, neck brace sales were $1.89 million and 8% of our revenues. Our body armor category includes chest protectors, upper body protectors, knee braces, knee and elbow guards, offroad motorcycle boots and mountain biking shoes. Body armor sales were $5.46 million, accounting for 45% of our revenues. The 48% decrease in revenue was primarily due to a 40% decrease in upper body armor sales globally. In the third quarter of 2022, body armor sales were $10.52 million and 45% of our revenues. Helmets sales were $2.87 million, a 34% decrease from the third quarter of 2022, which was an exceptionally strong quarter for helmets. The decrease was primarily due to a 43% decrease in sales of motor helmets for offroad motorcycle use.

That quarter was exceptionally strong for helmet revenues, up by 88% year-over-year. Helmets sales represent 24% of our revenues for the quarter compared to 19% for the comparative quarter. Our products, parts and accessories are comprised of goggles, hydration bags and apparel items, including jerseys, pants, shorts and jackets. Sales in this category for the quarter were $2.97 million or 25% of our revenues, a decrease of 54% due primarily to the decrease in sales volume of our MOTO and MTB technical apparel designed for offroad motorcycle and mountain biking use compared to an exceptionally strong third quarter of 2022. Technical apparel in the third quarter of ’22 had increased by 51% over the prior year. Here is the financial summary for the third quarter and first nine months of 2023.

Total revenues for the third quarter of ’23 were $12 million, down by 48% compared to $23.3 million for the third quarter of 2022. The decrease in global revenues during the third quarter is attributable to a $5.1 million decrease in body armor sales, a $3.5 million decrease in other products, parts and accessories sales, a $1.5 million decrease in helmet sales and a $1.2 million decrease in neck brace sales. Income from operations for the third quarter of 2023 was $620,000, down by 89% compared to $5.5 million for the third quarter of 2022. Net income for the third quarter was $460,000 or $0.08 per basic and $0.07 per diluted share, down by 89% as compared to net income of $4.1 million or $0.70 per basic and $0.65 per diluted share for the third quarter of 2022.

Global revenues for the first nine months were $37.4 million, down by 43% compared to the first nine months of 2022. And gross profit margins increased from 42% to 43% for the first nine months of ’23 compared to the same period of 2022. Net income was $2.3 million, down by 80% compared to the first nine months of 2022. And once again, cash flow generated from operations for the first nine months was $6.6 million, up by 277% compared to $1.7 million for the first nine months of 2022. Leatt continued to meet its working capital needs from cash on hand and internally generated cash flow from operations. And at September 30, 2023, the company had cash and cash equivalents of $10.8 million, up by 123% compared to $4.8 million for the first nine months of 2022 and a current ratio of 7.5:1.

Looking ahead, our growing talented and passionate team remains enthusiastic about our exceptional expanding product range, our outreach to new wider markets and brand momentum that positions us well for future growth and exponential gains. Although we do expect some further constrained ordering patterns internationally, particularly from our MTB partners as inventory is digested, we are well diversified in terms of market penetration and product offering, and we continue to build a multichannel sales organization to leverage products and brand momentum globally. We are encouraged by the results of our efforts to build consumer direct selling, which continues to grow, increasing by 16% year-to-date compared to the same period in 2022. Revenues on leatt.com and our consumer direct channels increased by 30% during the third quarter of 2023 when compared to the prior year period.

We believe that the growth in consumer direct sales is a testament to the momentum that our products and brands have built over the past several years. It’s also an encouraging indicator of an increase in consumer demand for our products that should further influence revenues as inventory is digested by our dealers and distributors. We are actively expanding our ability to sell and market Leatt products directly to consumers globally with our distributors as our partners. In conclusion, the first nine months of 2023 has been a challenging time for the entire industry. Elevated stock levels accumulated as a result of the pandemic-driven surge in demand, which resulted in adjusted ordering patterns at the dealer and distributor level. But we do believe that our strong commitment to growth initiatives will fuel growth as conditions continue to improve over time.

We are confident that the overstocking dynamics will resolve as stock is digested with a positive inflection point on the horizon. Participation remains strong. Of course, we continue to focus on working capital management and maintaining a robust cash flow position to fund operations and future growth initiatives. We look forward to the near future and our return to revenue growth. 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. With that, I’d like to turn the call over for any questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question is from [Christopher Muller]. Please proceed.

Unidentified Analyst: Hi Sean. I hope you’re doing well today?

Sean MacDonald: Hi Chris, nice to hear from you.

Unidentified Analyst: Good to speak with you. Just a few questions today. First, was there any material revenue associated with the new Adventure line or the upcoming Endurance line in the third quarter results? Or would those initial stocking orders primarily hit in the fourth quarter?

Sean MacDonald: Those have not shipped yet, so that will primarily be coming through in the fourth quarter of 2023 and then obviously moving forward.

Unidentified Analyst: Great. And second, it’s no secret that some distributors and large online retailers in the U.K. and European bike markets are facing some pretty uncertain financial futures at the moment. I suspect that some of these are also significant sales channels for Leatt product. So I was wondering, I realize this is a pretty fluid situation, but are there any thoughts you could share around this and maybe how you see it playing out over the next year?

Sean MacDonald: Sure. And I mean, absolutely. I mean directly, those are some of our customers. And indirectly, some of our customers sell through some of those e-commerce channels that are affected. And I think, of course, I mean, it’s not great that some of the funding was pulled by the holding company that supports some of those e-com partners. And I think in the short term, that certainly might have an impact on their ordering patterns. They remain very strong e-commerce brands and channels. And I would be surprised if they were not picked up in some way by entities that are looking for growth in the future. So I think the brands themselves, the e-commerce brands themselves will continue in the future. But of course, there is going to be some short-term pain here.

They might have to enter some kind of business rescue situation, which does affect the ordering ability at this stage. So far, what I’ve seen is that it’s business as usual. They’re continuing to sell. They haven’t closed any e-commerce shops, and they’re doing their best to get themselves out of the situation and either get a new owner or new funding in place. And as I say, fundamentally, these are strong brands on the e-commerce space. They have a very loyal and dedicated and committed consumer base that they sell to. And that, of course, remains in place, but it will take some time for them to get back to a kind of situation when they can return to significant ordering, I would imagine. So in the short term, it might affect some of the orders that we see coming through from them.

That’s number one. Number two, of course, they will be selling out some of the inventory into the market. We don’t expect that to be – have a significant impact on anything, but there might be some short-term pain there. And then as I said, in terms of the future, I think they will still remain solid partners in the market. It’s just going to take some time for them to get to that position again.

Unidentified Analyst: Great. I appreciate the color there. Lastly for me, it seems like the new Enduro helmets have been very well received. And I’ve noticed you’ve done quite a bit of marketing specific to these. Do you feel like you’re having some success maybe not only in winning share from competitors but maybe changing consumer perceptions around convertible helmets as a viable attractive category?

Sean MacDonald: Absolutely. And I mean, I think I would say that we were really very enthusiastic by the reception of the helmet at the distributor level, at the dealer level and now, of course, at the consumer level. We’ve been working very, very hard at refining that category for a very long time. We are up against some strong competitors in that area. And it’s very encouraging to see that there were some surveys done recently in Vital MTB, and our convertible helmet came up as the top helmet that people intend to purchase, which is great. It just is testament to the fact that we can develop products that do appeal to a wide range of consumers. And especially with the e-bike market that is a strong growing segment around the world, it’s the kind of helmet which has so many different applications.