Leatt (LEAT) 29 Oct 242024 Q3 Earnings call transcript

Greetings and welcome to the Third Quarter 2020 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 of Leatt Corporation. Thank you.

You may begin.

Thanks, Tanya. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the third quarter 2024. The company issued a press release today, Tuesday, October 29, 2024, at 8:00 a.m. Eastern and 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 website. An audio replay of this call will be available for 7 days and may be accessed from North America by calling (844) 512-2921 or (412) 317-6671 for international callers.

The replay pin number is 13749831. 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 October 29, 2024.

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, Mike, and thank you all for joining us today.

We are all very encouraged by the results of the third quarter of 2024. We see as the fiscal quarter as global revenues return to growth, albeit still marginal at this early stage. Total global revenues for the putter were $12.14 million, a 1% increase year-over-year. Farima sales were up $270,000, sales were up $140,000 a and net gross sales were up $40,000.

International sales were $8.58 million, up by 5% as inventory continues to be digested and the uptick in ordering begin to filter through to our revenues. Gross profit for the third quarter was $5.17 million.

Although we continue to monitor the impact of potential economic headwinds when there are certain areas of inflation inventory, the start of our pillar to growth is the important and encouraging point as participation remains strong and ordering patterns continue to improve.

We believe that these are trends that will continue through the coming quarters.

Our margins also continued to improve on a quarterly basis increased [ 74% ] sequentially over the second quarter as we manage carrying older inventory and selling U.S. stock at higher margins.

Our inventory levels continue to stabilize, decreasing by $4.62 million or 23% and over the last 9 months as we continue to see opportunities to turn over a slow medium inventory and repair is stock levels in preparation for stronger ordering.

We continue to ship orders for our ADB Adventure Apparel line, a product line designed for motorcycle enthusiasts, seeking comfort and safety while riding in all weather conditions and terrains. We remain confident that we have an initial distribution, track record, core competencies and talent to continue delivering a pipeline of innovative ADB product categories to reach the substantial market segment. Footwear and comprising of MTB shoes and multiple boot revenues contracted on a global basis during the quarter. Leatt has been particularly constrained in the current environment with aggressive competitive pricing and high inventory levels, causing very cautious buying at the dealer level.

We expect this area to improve as inventory is digested and ordering continues to pick up.

We continue to see very encouraging firms at the direct-to-consumer level, growing by 12% during the quarter.

Our consumer direct platform in South Africa continues to display strong sales exceeding our expectations. Despite current industry-wide conditions, reinvestment in working capital and our push to invest in long-term growth, cash increased by $1.1 million to $12.7 million with cash flows provided by operations of $2.98 million for the 9 months ended September 30, 2024.

Our liquidity continues to improve at our team continues to manage working capital efficiently. Overall, despite some constrained brick-and-mortar motor dealer sales in the U.S. during the quarter, our team remains enthusiastic about this public moments in our recovery that is currently in play. We believe strongly that our investments in talent, innovative product development and the brand as well as our distribution capabilities will fuel growth going forward.

Now I will turn to more details on sales of our product categories for the third quarter when compared to the third quarter of 2022.

[indiscernible] Flagship net rates was $750,000, a 6% year-over-year increase attributable primarily to a 109% increase in sales of our premium as partially offset by a 37% decrease in sales of our 3.5% net grows. Net pros sales were 6% of our total revenues for the quarter.

Our Body Alma product, Saanichest protectors, full upper body protectors, iBasis, Minova golds, Otomoto cycle boots and mountain biking shoes. Banarevenues for the 2024 third quarter were $5.73 million, a 5% increase year-over-year.

The increase was primarily the result of a 25% present sales of upper body and [indiscernible] protection, partially offset by a 55% decrease in sales of footwear, comprising motorcycle boots and mountain biking shoes as our distribution partners continue to digest inventory. Body Yama products were 47% of our total revenues. Armetale were $3 million, a 5% increase year-over-year here primarily to a 98% increase in the sale of our motor homes partially offset by a 23% decrease in sales of our EV homes. Home itself made up 25% of our revenues for the quarter.

Our other products, parts and accessories category is comprised of goals migration bags and apparel items, including jerseys and sorts and jackets as well as aftermarket support items, revenues were $6.5 million, an 11% decrease year-over-year. The decrease was partially due to a 37% decrease in NPV apparel sales of our MTV distribution partners continue to manage ordering as a result of stocking dynamics. Other products and parts and accessories category made up 22% of our revenues for the quarter.

Now I will turn to our financial results in a bit more detail. Total revenues for the third quarter of 2024 were $12.4 million, up 1% compared to $12 million for the third quarter of 2020. This increase in worldwide revenues is primarily attributable to a $270,000 increase in body armor cells, a $140,000 increase in home sales, a $40,000 increase in net base sales that were partially offset by 320,000 decrease in other product parts and accessories sales. Net income for the third quarter of 2024 was $116,000 or $0.02 per basic and $0.02 per united share, down by 75% as compared to net income of $460,000 or $0.08 per basic and $0.07 a diluted share for the third quarter of 2023. Net continued to meet its working capital needs from cash on hand and internally generated cash flow from operations.

At September 30, 2024, the company had cash and cash equivalents of $12.47 million and a current ratio of 6.5 -- although we saw some challenging economic headwinds globally that may impact demand to some extent, Inventory continues to be digested. -- anticipation remains strong and ordering patterns continue to improve and have statically filter through to our international distribution revenues and ultimately, our revenue position. This is a trend that we expect to continue over the next few periods and beyond.

Additionally, we have some very exciting new distributor partnerships in the United Kingdom, Europe and emerging markets, that should filter through to revenues over the next few quarters.

We will continue to optimize our selling capabilities by building a team of sale and marketing professionals around the world. as industry-wide carbides presents an opportunity to continue growing the near family by adding talent.

Although these investments typically take some time to make an impression on our results -- we do believe that building out a great global team as a cornerstone of our future growth plans. In conclusion, we are all very enthusiastic about the future years with our strong portfolio of innovation pipeline, multichannel sales organization that is growing and developing and a robust balance sheet to fuel brand and revenue growth, we remain confident but we are well positioned for future growth and increase shareholder value.

As always, I'd like to thank our entire Leatt family, our dedicated for new business partners and team riders for their continued strong support.

With that, I'd like to turn the floor over for any questions. Operator?

[Operator Instructions]

Our first question comes from Alava Colombo Private Investor.

Nice to see the company grow again. And hopefully, of this year marks the low point in this inventory cycle. I have a couple of questions for you.

The first one is it looks like Europe has stabilized and customers are coming back. Have you seen this also? And if yes, can you provide a few anecdotes

Yes, I think we definitely have seen an improvement certainly in consumer sentiments. I mean the inflation coming down, consistently. And then also with interest rates starting a decent, I think people are starting to feel a little bit more confident in terms of spending. And if you look at the latest consumer sentiment and confidence indexes, you'll see that there was an uptick in October, albeit still a marginal uptick.

I think consumers are expecting things to get better. and that is fueling a return to a level of spending. That's on the consumer side. And then, of course, with our customers in Europe, I mean you can see it in ordering Ordering is looking a lot more positive now. There's certainly an uptick that is selling through inventory. Inventory has been digested. And of course, on the business side of the cost of capital decreases, with the decrease in interest rates, things always start looking quite a lot better.

So I think we are well positioned in Europe for things to improve quite nicely.

My next question is regarding your cash, which continues to increase and is now at $12.5 million. Do you have any particular plans to use this money in the coming months?

It's a good question, Olivier, and it's something which we obviously do look at internally, and we're quite focused on it. a couple of terms, I mean, we're expecting to return, hopefully, to position of sustainable growth. And with that will come an investment in working capital in the U.S. and in South Africa and with factory ordering start to intensify again.

So some of the cash that we currently have on hand will go into back into working capital, which is, of course, a great use of our cash. I mean I think there's a couple of other things that we're looking at.

Of course, we are intensifying our spending on marketing.

And you can see that in the results. Marketing costs are up. and also in talent. I mean we're bringing on great people. We're beginning on some very good and strong sales people.

So sales and marketing are certainly an area for us where you can expect some increase in spending and particularly on the marketing side. And as we build out our sales organization around the world, there will definitely be some selling costs needed.

So cash will certainly be allocated to that.

And then, of course, any opportunities that come around. There are always on the lookout if there are interesting areas, categories that we can add, we will look at hard to invest our cash.

So it's certainly something that we are thinking about. We do have some plans.

I think investing in the Meat brand is a smart move for us. It certainly gained us brand momentum in the past.

And building up a strong selling organization that can sell our very extensive her to product categories is also a wise use of our cash moving forward. And of course, investing in inventory, accounts receivable and factory creditors also has to be smart new for us.

That's perfect. And finally, my last question is what makes you the most proud in this quarter? And what did you actually not like or will you see some kind of headwinds?

That's an interesting one.

I think, of course, we're very proud of the fact that we've returned to growth, we're very proud of the fact that if you look at our revenues on a sequential basis, just compare Q3 to Q2, our revenues are up and we managed to increase margins sequentially by focus. It's a huge ask. In the current environment, there are still some constrained areas of inventory. -- really part of the team for balancing out setup of some of the older inventory converting that into cash at lower margins and balancing that selling new inventory at higher margins.

I think that's been managed really, really well.

Brick-and-mortar sales in the U.S. in certain regions are a little bit tough I think we were active wells, something that we are monitoring, something that we are certainly working hard on to make sure that we look at the right products, the right people involved in order to drive sales there. But for in all, I'm proud of the team, I'm proud of our results, the fact that we've started to return to a level of growth and if we manage our working capital carefully, which will obviously fuel our growth moving forward.

The next question comes from Nick Fisher of Private Mesa.

My question really revolves around the increase in salaries over the last 9 months of 30% and then obviously, the increase in marketing of 26% over the last 9 months. mentioned intensifying marketing and sales efforts. But if you could provide a little bit of color just on how much of that is strategic investment does just kind of your new cost structure post COVID and with inflation and whatnot? .

Sure. No problem.

So I mean the primary salary increases already on sales and marketing stack.

So in the U.S. We changed our model. We've now got a full employee reforce -- so of course, on salaried and there's also some costs that come with that in terms of capital costs and that type of thing.

So that was a strategic move. We feel that there's an opportunity in the marketplace some of the talent that became available in the form of reps and sales managers to bring on people that are going to fuel growth moving forward.

So you can say that, that was a strategic move, which we will see Tang health over the next several quarters as conditions continue to improve.

On the marketing level, it is also around our ABD line -- so ADG is obviously an important area for us. It's a huge addressable market, and we've had to spend funding the brand in that area. And we did not want to take away anything from MTB and Moto because we feel that investing in the Lit brand on the motorcycle side and the Martin making side will definitely pay off in the future.

So we increased our marketing budgets towards ADB as well looking that in to build AV as a brand. so far that really has been paying off nicely for us. I mean, on a year-to-date basis, ABB is 8% to 10% of our sales.

So that's really nice to see.

So I think those investments are paying off in the current market conditions.

In terms of back to the salaries, we've also brought on some brand managers and sales and brand managers outside of the U.S. And I mean this is all about building out a strong sales organization that is focused on different global areas.

So there's a few areas where our sales have increased, and it makes sense for us to bring on professional salespeople that can take care of our customers in those areas again. if you look at the uptick in our ordering that we're seeing, some of that is due to the focus that we've managed to achieve in those areas.

Next question comes from Chris Muller Private Investor. .

Maybe 3 or 4 questions today.

First, it is good to see some growth again with international revenues.

For clarity, does the third quarter distributor revenue include initial stocking orders for all 2025 lines? Or is the third quarter more heavily weighted to the Moto side? .

It will be the motor side.

So we'll be shipping MTB over the next several quarters. There are some NPD sales that included, but it's primarily by ourselves, Chris.

That's helpful. And second, you commented on particular weakness in footwear and apparel offsetting gains elsewhere. Is the inventory overhang and discounting particularly notable there just to the because of the sheer number of competitors in these categories? Or is it the more discretionary nature of those product purchases -- or is there something else at play that makes those categories, especially difficult.

I think I'm just looking at footwear, I mean when it comes to food care, of course, you've got to have a full size range when it comes to shoes and boots, so just on nature, the investments in inventory in those areas is larger than some other areas.

So that's one factor. But I think the biggest factor is that many of our competitors and some of our strongest competitors and some of the strongest brands in motorcycle boots and shoes have huge amount has huge amounts of inventory on hand that they needed to move, and then we're not afraid to drop the pricing significantly on that inventory.

And of course, that creates a lot of turmoil in the market for everybody else.

If you have a leading brand, a kind of go-to brand for a certain category dropping the pricing because they're forced to because of high inventory ordering and deliveries and changes in the distribution model that they employ. And that means that there's a lot of inventory out there. And if they are willing to decrease pricing at the same time, it creates a kind of perfect storm scenario.

And that is what we found ourselves in the middle of, particularly in the U.S. and particularly with motorcycle boots, which is quite a big category for us and quite a big industry category.

So it's been quite difficult for us to trade through that.

We are completely dropping all of our pricing, that's certainly one of the reasons why our margins are we took opportunity there to move on some bits. But in general, I mean, I think a lot of it has got to deal with excess inventory that has been in the market and promotional activity that has been extremely strong by some of our competitors that are out there.

I appreciate the color there. Could you maybe comment on the product royalty income that spiked higher in recent quarters. Is there any particular new partnership or a product category that's primarily responsible for those gains?

Yes, we got some new partnerships that we developed that are licensed in some of our products on the distribution side and in some emerging markets.

So they've been licensing our products and that seems to be doing really, really well for us actually. And then, of course, the increase in port royalty revenues.

And lastly, could you provide an update on the MTB sales team in the U.S.? Has there been any additional hiring since the last announcement you made about 6 months back. And maybe more broadly, just any update on the progress and expanding dealer reach in the U.S.

Sure.

So of course, we have Joe Ritchie on board now. He's the new national sales manager on the MTB side. And he's been building a team or a mix of employee and independent sales reps in the. -- across the U.S. And I mean some of those hires are relatively new.

So those assets are not really reflected in revenues yet, but we expect that to focus through to revenues over the next several quarters. And of course, you can be bringing on people that are going to intensify our selling activities on the TV side. We do have a new MTB marketing manager in the U.S., Ananda.

And she's working very closely at the moment with Joe in order to make sure that our marketing material and our branding is U.S. NPD specific.

So we've definitely started to see some increase in MTB sales in the U.S. Sales have increased quite nicely actually. And we started on the dealer penetration uptick, you could say. We'll start to see some of that paying off a bit more strongly over the next few quarters as the new staff and the new sales reps that we brought on start to gain some gain some traction and looking forward to it.

There are no further questions at this time. I would like to turn the floor back to Sean MacDonald for closing remarks. Thank you all for joining us today. We look forward to our next call to review the results of the 20204 fourth quarter. Thank you. This does conclude today's teleconference.

You may disconnect your lines at this time. Thank you for your participation, and have a great day.