Earnings Transcript for LEAT - Q1 Fiscal Year 2023

Operator: Greetings, and welcome to the Leatt Corporation First Quarter 2023 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. Thank you, Michael. You may begin.

Michael Mason: Thanks, Devin. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the first quarter 2023. The company issued a press release today, Thursday, May 11, 2023 at 8

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 13738621. A replay of the webcast will be available immediately following this call and will continue for 7 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 May 11, 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 joining us today. The first quarter of 2023 was both challenging and promising for Leatt. Although the wider MOTO and MTB industry continues to experience post COVID stocking dynamics and macroeconomic factors that, of course, constrained buying activity at dealer and distributor level, direct-to-consumer demand for Leatt products remains encouraging as we begin to see a return to strong rider participation around the world following some colder spring weather. First quarter revenues decreased by 46% year-over-year in the context of a global inflationary environment and a particularly difficult comparative. The first quarter of 2022 was the strongest quarter in our company's history.

Revenues grew by 88% in a quarter that is traditionally our slowest quarter. Despite the year-over-year drop in revenues, we earned $1 million in net income and generated $5.3 million of cash from operations with $11.4 million in cash and equivalents on hand at March 31, 2023. We remain optimistic that the arrival of the spring riding season will continue to increase consumer participation in outdoor activities, which will, in turn, stimulate growth and the digestion of inventory at dealer and distributor level so that restocking can intensify.:

Our team is enthusiastic about the future of our brand and our company as we work diligently towards a strong return to our track record of delivering double-digit growth and shareholder value. Reflecting on the financials in a bit more detail. Total revenues for the first quarter were $13.1 million, a decrease of 46% compared to the first quarter of 2022. International revenues were $9.2 million, a decrease of 52% when compared to the remarkable 166% growth in international sales in the 2022 first quarter over the 2021 period. Sales in the U.S. were $3.9 million, a 26% decrease year-over-year.:

U.S. dealers continue to manage elevated stocking levels and adjust ordering patterns accordingly. And we continue to actively grow and invest in our team of U.S. sales reps to reach a wider base of both MOTO and MTB dealers throughout the country. Gross profit as a percentage of sales increased to 44% in the first quarter, a result of improved supply chain and logistics costs and our focus on maintaining margins and strong brand positioning. Net income in the first quarter was $1 million, a decrease of 76% compared to the exceptionally strong growth in the prior year period.:

Net income per common share was USD 0.17. Total operating expenses increased by 8% as we were able to control costs despite the strong global inflationary environment. The cash flow generated from operations was $5.3 million as our team continues to focus on managing working capital and cash flow. We believe that our ability to generate cash flow during this challenging period is a testament to the resilience of our business model and our team and positions Leatt well for future growth.:

We were particularly encouraged by the increased activity in our consumer direct channels and those other international e-commerce partners. Leatt.com site activity and consumer purchasing continued to grow during the first quarter with consumer direct sales increasing by 10%, representing 5% of our total global revenues. Our team of sales and brand managers covering key established and emerging global markets are working closely with our distribution partners to facilitate a strong Leatt presence at the dealer level and react to fluid market conditions.:

We continue to focus on building and refining a strong multichannel sales organization that has the ability to leverage our head-to-toe offering of exceptional products. Unlike some of our competitors who have contracted their teams and cost centers, we are investing in talent and actively growing our sales channels in a sustainable manner. Now I'll turn to more details on sales of our product categories for the first quarter of 2023.:

Sales of our flagship neck brace for the first quarter of '23 were $780,000 or 6% of our total revenues for the quarter, a 49% decrease year-over-year. The decrease was primarily attributable to a 51% decrease in the volume of neck braces sold. Body armor sales were $6.37 million in the quarter or 49% of our revenues, a 49% decrease year-over-year.:

The decrease in revenues was primarily the result of a 42% decrease in upper body armor revenues and a 76% decrease in the volume of motorcycle boots sold when compared to the exceptionally strong first quarter of '22 and body armor sales increased by 69% over 2021. Body armor products now include upper body protection pieces, knee braces, limb guards, off-road motorcycle boots and mountain biking shoes.:

Helmet sales were $3.13 million or 24% of our revenues for the first quarter of 2023, a 45% decrease compared to the strong first quarter of '22 for MTB helmet sales. MTB helmet sales in the first quarter of '22 were up 357% over the first quarter of 2021. Sales of other products, parts and accessories for the first quarter were $2.8 million or 21% of our total revenues, a 38% decrease year-over-year.:

The decrease is primarily attributable to a 41% decrease in revenues from our MOTO and MTB technical apparel designed for off-road and mountain biking use compared to the exceptional first quarter of 2022. Apparel revenues for the first quarter of 2022 were up 171% over the prior year period. To summarize the key financial details for the first quarter of 2023. Total revenues for the first quarter were $13.1 million, a decrease of 46% compared to $24.2 million for the first quarter of 2022, which was an exceptional quarter for the company.:

The decrease in global revenues is attributable to a $6.12 million decrease in body armor sales, a $2.56 million decrease in helmet sales and a $1.72 million decrease in other products, parts and accessories sales and a $750,000 decrease in neck brace sales. The impact of an exceptionally strong comparative quarter was compounded by industry-wide stocking dynamics that continue to affect distributor and dealer ordering levels. Income from operations for the first quarter of '23 was $1.4 million, down 75% compared to $5.6 million for the first quarter of '22.:

Net income for the first quarter was $1 million or 17% -- $0.17 per basic and $0.16 per diluted share, down by 76% as compared to net income of $4.22 million or $0.73 per basic and $0.68 per diluted share for the first quarter of 2022. Leatt continued to meet its working capital needs from cash on hand and internally generated cash flow from operations. And at March 31, 2023, the company had cash and equivalents of $11.4 million and a current ratio of 5.6: 1. Looking ahead, despite the post COVID stocking and macroeconomic challenges, we continue to push hard and to invest in the areas that will position Leatt for future growth and that we can influence.

Strong brand building, a global multichannel sales organization, a pipeline of exceptional products, a plan to reach a much wider rider audience and continued financial resilience. We are encouraged by the increased activity in sales on leatt.com and through our e-commerce partners internationally. Consumer direct sales now represent 5% of global revenues, a testament to the brand momentum that we have experienced over the past several years. Our online global dealers continue to report that consumer demand and resultant sell-through of our product categories remain healthy and well positioned for future growth.:

We continue to invest in our strategy of developing innovative cutting-edge products. Our design and engineering team in collaboration with our team riders continues to deliver an exceptional product pipeline and product offerings that are recognized throughout the industry. We believe that this continued focus on excellence in product innovation will allow us to gain additional market share. We are especially excited about our first partnership with the professional endurance mountain biking team, the Orbea Leatt Speed Company Racing team.:

This is an ideal partnership for us as we advance our shared vision of excellence in performance, innovation and design and as we move into much larger rider communities in the mainstream mountain biking segment. Throughout the coming year, team riders will be protected by Leatt helmet and apparel as they compete in the Epic series [ Select ] UCI MTB World Cup events and more. To summarize, although the MTB and MOTO industries continue to face post COVID dynamics that have constrained ordering at dealer and distributor level, Leatt brand momentum and activity in a consumer direct level continues.:

Rider participation levels are ramping up as the spring season kicks off properly, and we believe that elevated stock levels will be digested. Many of our existing product categories are still in their infancy with significant market share opportunities, and we are investing in our team, in our products and in growing our market share to intensify our positioning for long-term growth and shareholder value. We remain focused and committed to returning to our track record of double-digit sustainable growth. As always, we'd like to thank our entire Leatt family of dedicated employees, business partners and team riders for their continued strong support. And with that, I'd like to turn the call over for questions. Operator? :

Operator: [Operator Instructions] Our first question is from the line of Olivier Colombo, with a private investor.

Olivier Colombo: I guess we're all very happy to see that Q1 is now behind us as it was your toughest comp you have ever faced.

Sean MacDonald: That is correct.

Olivier Colombo: I just would like to highlight 2 points that I think are pretty interesting in your quarter. I think the most important is the cash provided by operations, which is at $5.3 million. This is a huge increase from what you had before. And then putting Q1 '23 in comparison, a lot of outdoor brands are always comparing 2019 as a starting point for them to grow again. And if we look at your Q1 numbers in 2019 versus the one reported today, you're up 115% today. And if you compare that to the Q1 numbers 2020, you're up 73%. So I think this is quite remarkable.

Sean MacDonald: Yes, absolutely correct, Olivier. You've got your numbers quite right there.

Olivier Colombo: I have 4 questions for you, if you allow me to ask them.

Sean MacDonald: Yes, no problem.

Olivier Colombo: Okay. The first one is, how long do you think the stocking issue will persist? And when do you think you could get back to double-digit growth?

Sean MacDonald: So it's a very good question, Olivier. And of course, this is something which we discuss all the time with our partners, with our distributors, with dealers and internally at management level. And I think there's obviously several factors at play here. I mean the big question is how quickly can the stock that is out there that is slightly elevated get digested by the market and what will the macroeconomic conditions look like over the next 6 to 12 months. So I think in different segments, there are going to be different time frames. I think different geographical areas will have different time frames. And of course, Leatt being a multichannel business, the different channels also have different time frames. What we generally see is that the closer you get to the end consumer, the closer you get to what the true trends are.

So of course, in Leatt's case, with leatt.com, we started to see some growth there already. If you look at our dealer sales, our dealer direct sales, which are mainly through Leatt USA and Leatt South Africa, we were selling directly to dealers and not through a distributor. You'll see that the decrease in the U.S. was lower than what we saw on the international side. And of course, since international is the furthest way really that we sell to end consumers, you saw that the stocking levels there haven't quite caught up to the sales that we're seeing to consumers and also to dealers.:

So I think there's different time frames that are at play here. And the closer we get to the end consumer, the closer we get to the true demand trend, which is, of course, really important because that is where a stock is going to get consumed and that is where stock is going to get digested. It is difficult Olivier to give an exact date as to when we think this is all going to play through the market. It's a little bit fluid. We are certainly hoping that within the next 6 to 12 months, we can return to double-digit revenue growth. :

Olivier Colombo: My second question would be, can you tell us more about the key emerging markets you're going after? And what are the size of those markets, in particular, in MOTO and mountain bike?

Sean MacDonald: Yes. Sure. So another good question. So in terms of these new markets that we're looking at now, I mean, I think without getting into too much detail, if you look at the speed company racing team that we sponsored, there was a strategic move to support a great team, obviously. And also to support a team that was outside of the traditional gravity, endurance, or mountain kind of segment, which is what we call the top of the mountain, that's the kind of 5% of the market. We're trying to get to a much wider community of mountain bike riders.

And if you look at the kind of racing that speed company team participate in, which is more mainstream endurance mountain biking, some gravel riding and some trail riding. Those are the kinds of markets that we're looking at. So I would say that it's difficult to say the exact size of those markets. But what I will say is that the total addressable market size there is much bigger by multiples of the bicycle markets that we've currently been selling to. So that's on the MTB side.:

And then looking to the MOTO side, some of you might have noticed that we recently launched a new Instagram site, which is leatt_adv. And we are now working really hard on a product level, on a brand level, on a marketing level, partnering with the right influencers to bring a great adventure riding gear, a full lineup of adventure riding gear to the market. So again, this is a -- the adventure market is a market that in many geographical areas around the world we haven't reached yet. There is some crossover between off-road, MOTO and commuter riding.:

Typically, this is the guys that are on BMW GS bikes. It's a huge market around the world again. Difficult to quantify the exact size. What I can say is that it certainly is bigger than motocross, than supercross and then enduro riding. So it's very exciting for the business, and we're really looking forward to getting those products out into the market as soon as possible. :

Olivier Colombo: That's excellent. My third question would be, you said you're actively investing and growing the U.S. sales team, which is exactly the opposite of what competitor is doing, and I'd like to hear that. Can you please tell us how many sales you have hired in the U.S. in this quarter? How many you have today? And how much do you plan to hire? And then another question on that as well is how hard is it to find the correct salesperson?

Sean MacDonald: Okay. So I think -- I think a valuable time frame to look at Olivier is maybe just over the last year. So if we look at over the last year, we've added -- we've nearly got 25 employee reps now in the U.S. And in the last year, we've added 8 or 9. So we've added quite a few. And I think we're going -- we plan to add more as different regions become viable in terms of covering the cost and generating enough revenue. We plan to add more. We do have less independent reps now.

We find that our employee reps that are completely dedicated to the Leatt brand, when we employ them, we do see growth in the regions that they sell to. So this is something that we are planning on expanding. And as you said, some of our peers are currently contracting some of their sales teams and looking at ways to cut costs. But for Leatt, that has never really been the Leatt way when there's opportunities to get the right people on board, we like to take those opportunities.:

And it's one of the opportunities that have come out of the market turmoil that we've seen. So we are actively looking for sales reps, for sales managers, for marketing people that we feel will add to the Leatt story and to Leatt revenues and growth moving forward. At the moment, of course, you always have to be selective. But because there is a trend in the market that some good people are getting let go of, we have some opportunities there. :

Olivier Colombo: And my last question would be on the leatt.com website, which today represents 5% of your overall sales. What are you doing exactly today to increase customer visits on that site?

Sean MacDonald: So I mean various different things. We've got a lot of digital campaigns that we put in place. This includes newsletters, e-mail campaigns and, of course, traditional Google search campaigns that we run in order to get people to the site to improve our site traffic. And also, we're optimizing the sites all the time. We've got a professional team that is focused on leatt.com from a sales perspective and also from a content perspective so that we can drive more traffic to the site. And then, of course, so that we can close more sales. It really is an art these days to make sure that you've got your SEO in place, to make sure that cards are not left open. And this is a focus area of our team. In fact, in Cape Town and in a few places around the world, we are building digital teams as we speak because we realize that, of course, B2C business is getting more and more important and we need to be in a position where we can leverage and optimize those kinds of channels.

Operator: Our next question comes from the line of [ Chris Brown ] with Milwaukee Capital.

Unknown Analyst: I wanted to focus a little bit on your international business. Sales growth there has been very impressive over the last 5 years. Can you hear me okay?

Sean MacDonald: I can hear you perfect, yes.

Unknown Analyst: So sales growth internationally has been very impressive over the last, say, 5 years or so and quite a bit stronger than in dealer direct. I just wanted to know if you could talk about some of the different -- what's driving the difference in performance. And if you just kind of look internationally, is it a matter of, hey, we're rolling out new product lines? Is it -- we're extending the number of retail doors? Is it something else? Would love to hear your thoughts there.

Sean MacDonald: Sure. I think it's a really good question. And absolutely, last 5 years on the international side has been fantastic. And what we've really focused on there is working with distribution partners that are best-in-class and that are really, really focused on building great dealer relationships, really, really focused on marketing the brand along with Leatt and are well split between MOTO dealers and MTB dealers. We've also embarked on employing brand and sales managers in the key geographical areas, which has been very successful for us because what it's meant really is that you get the benefit of working with the distributor that has the distribution network in place.

They have a great catalog of many products that dealers are buying from. But with the sales and brand manager that is Leatt -- is a Leatt employee, you get the attention of the dealers that are out there. So it's a combination really of direct to dealer sales through strong distribution channels, along with having Leatt employees in place that can really focus those dealers on the Leatt story and on the Leatt products. In the U.S., it's slightly different because, of course, we're selling to -- we're selling direct to dealers and we have a full investment in the inventory and the receivables which we carry ourselves.:

And I mean, I think some of the reason for the fact that we've had this great growth on the international side got to be the geographical kind of diversification that we have in those areas. Obviously, the U.S. is quite dependent on what's happening domestically in the U.S. and on some construction numbers and some macroeconomic issues. But I mean, we have been growing on the U.S. side. I think the latest steps that we've taken, where we're less dependent now on independent sales reps and we're more dependent on company employed sales reps is going to bear fruits when the tide turns now.:

So I think that's one area where we will be able to leverage growth. I also think that we're working really hard in the U.S. to build an MTB -- a proper MTB distribution network. And when we're working on the international side, of course, we go with big MTB distributors that really have all the relationships with the dealers upfront. And in the U.S., it's taken some time for us to really build that out. And it's because we traditionally have been more MOTO focused in the U.S. from the beginning.:

I mean that was how Leatt was founded. But now we're working really hard at turning on Leatt as an MTB brand and with strong MTB distribution in the U.S. It's one of our key strategic areas that we are focusing on. It's taken us a bit longer than what we expected. Unfortunately, as we were kind of starting to get some momentum, we had the stocking dynamics that particularly affected the MTB industry. But I feel quite confident that as we move ahead now, the domestic situation will start picking up and we'll start seeing that domestic sales also returning to a higher percentage of our revenues moving forward. :

Unknown Analyst: Sure. Makes sense. And then just to follow up on one point there. So I know you gave disclosure in your quarterly filings about the number of active distributors you have in the U.S. and in South Africa. So we can see how those have trended over time. But do you have -- can you give us any kind of color on how the number of kind of retail doors has changed internationally? Are those roughly flat? Is it growing significantly. What's the right way to think about it? [Technical Difficulty]

Operator: One moment. It appears our speaker line has just disconnected. Give me one moment. We apologize for the inconvenience. Our speakers have rejoined us.

Sean MacDonald: Okay. Sorry, I apologize. I'm not sure how we lost you, but we seem to last you, [ Chris ], if you could just repeat the question, I didn't hear you.

Unknown Analyst: Sure. Yes, no worries. Thanks so much for rejoining. Let's see, so just to follow up on one point. So you gave some disclosure in your 10-K and in your quarterly filings on the number of active distributors that you have in the U.S. and in South Africa. So we can see how those have trended over time. But just curious, internationally, how has the number of retail doors changed over the last several years? Are they -- are you selling in the -- it sounds like a roughly flat number of doors? Is it growing steadily? What's the right way to think about it?

Sean MacDonald: I would say it's growing steadily. There are some emerging areas where we've started opening a lot more doors, areas like South America where we traditionally, we didn't have full coverage. But again, since we employed a sales and brand manager in that area, he's been able to get us the correct distribution partners to open a lot of doors. So in some areas, we've seen a dramatic increase in the number of doors that we're selling to. I think a big factor here is our product mix. So previously, before we were a head-to-toe brand, sometimes it was difficult to open retail doors because you don't have a full offering to get into the retailer. But now that we are a full head-to-toe brand on MOTO and MTB, it is a lot easier to get into new doors. So I would say that the number of doors that we are selling to now has steadily increased. And that all obviously remains in place and when the tide turns, which it will, we'll have a lot more doors to sell to.

Operator: Our next question comes from the line of [ Christopher Muller ], a private investor.

Unknown Attendee: Just 2 or 3 questions for you today. First, to follow up on the prior questions regarding the U.S. sales team count. Could you maybe speak a bit more about the differences there in MOTO versus MTB distribution in the U.S.? Is there an opportunity to build out an in-house bicycle sales team as you've done on the MOTO side? Or do the structural differences between those industries just leave you more reliant on distributors in MTB?

Sean MacDonald: No, absolutely. There's a big opportunity to build out a stronger team of MTB sales representatives in the U.S. There are some structural differences like, for example, a lot of MTB business in the U.S. is done with call-out desks. So you're literally taking orders on the phone and you're calling out to dealers. But I mean, one of our -- the areas that we are focusing on now with razor-sharp focus is trying to get our MTB distribution in the U.S. to be stronger. We do have external distributors that we work with there as well in order to get to some of the smaller areas and in order to help us to get to the dealers that are currently out there, but we are building a team inside Leatt USA, as we speak, to strengthen our MTB distribution, and that means sales reps, that means marketing people, everything that's needed in order to really penetrate the market better. As I spoke to earlier, there obviously is currently some attrition from our peers, and that creates an opportunity to pick up some really good talent, particularly on the MTB side.

Unknown Attendee: Good to hear. And I saw on your filing that you set up a subsidiary last year, Leatt Prop Ltd. It wasn't clear to me whether this was established to purchase your currently leased space in Cape Town or whether this was for something else altogether. Could you maybe speak to what the intention of that is as well as its current status?

Sean MacDonald: Yes, absolutely. So I mean, the intention at the time was to set up an entity in order to purchase our leased building in South Africa. There is an opportunity to purchase the building and there's ongoing discussion as to the timing and the quantum of that.

Unknown Attendee: Okay. All right. Very well. And finally, could you help me understand the deferred revenues? I believe you had $2.5 million at 2022 year-end, most of which was then recognized here in the first quarter. I just don't recall any large revenue deferrals in the past. So I'm wondering whether this is related to an accounting policy change or maybe there was a specific large order that was subject to different revenue recognition standards?

Sean MacDonald: Yes. I'm sorry, it's a great question. And you're 100% correct that we have not had deferred revenue in our financial statements previously. And I guess there's 2 reasons why this has now appeared in our financials. The first is that there is an accounting standard ASC 606. And although the standard has been around for quite a long time, the interpretation of the standard, like many new standards, the interpretation of the standard has taken some time to really filter through and to gain clarity. And basically, there are some areas of the standard, which do affect us.

You need to be -- have reasonable assurance that you are with a very high level of probability that you are going to receive the funds from certain revenue transactions. So it's a revenue recognition standard and quite correct, we had 1 or 2 customers at the end of last year where because of the economic conditions out there, because of the fact that macroeconomically and also in terms of stock holding, we didn't have full assurance that we were going to receive the funds. That meant that there was potentially not a complete contract of sale in place.:

And we treated this quite prudently and quite conservatively because, of course, we want to make sure that our financial reporting is in line with latest U.S. accounting standards, and we had to defer some revenue. And then when it became clear that we had reasonable assurance that we would be in a position to record a complete contract of sale, we then -- we removed that from deferred revenue and released that to revenue and some of that happened during Q1 of '23.:

So that's why you'll see we had a deferred revenue balance, the deferred asset balance at the end of 2022, and some of that was released to the income statement to revenues in the first quarter of 2023. And this is something which, of course, we'll be monitoring now. This will be fluid because there are times when things do ship, and then you need to make an assessment based on changes in the environment, which we've obviously learned through the COVID period, can happen quite quickly. It can be quite fluid. And we need to make this assessment. I don't expect this to affect our revenues moving forward significantly in any way, but it is something that we do need to consider. :

Operator: There are no further questions at this time. I'd like to turn the floor back over to Sean for closing comments.

Sean MacDonald: Thank you all for joining us today on this conference call. We look forward to our next call to review the results of the 2023 second quarter.

Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.