Leatt Q2 2023 Earnings Call Transcript

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August 10, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Leatt Corporation's Second Quarter 2023 Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Mason.

Operator

Please go ahead.

Speaker 1

Thanks, Stacy. Good morning, and welcome to the Leatt Corporation Investor Conference Call to discuss the financial results For the Q2 of 2023, the company issued a press release today, Thursday, August 10, 2023, at 8 am Eastern And also filed its report with the SEC. The press release is located on Liet's website at liet 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-eight forty four-five twelve-two thousand nine hundred and twenty one or 1-four twelve 3176671 for international callers.

Speaker 1

The replay PIN number is 137 40,487. 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. Liet Corporation does not undertake any obligation to update such statements made in this call.

Speaker 1

Please refer to the complete cautionary statement regarding forward looking statements in Today's press release dated August 10, 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 McDonald, CEO of Leak Corporation. Good afternoon to you in Cape Town, Sean.

Speaker 2

Good morning and thank you, Mike, and thank you all for joining us today. Compared to last year, the best year in our company's history in terms of revenue, 2023 continues to be a challenging period for the entire motor and MTB industry. Current industry headwinds remain centered around post COVID stocking and sell Through Dynamics, ordering patterns displayed by our international distribution partners, particularly on the MTB side, All indicative of constrained purchasing and conservative dealer sentiment, which we believe will remain prevalent as high distributor and dealer post COVID inventory levels or digested. We are however enthusiastic about the momentum that the Leer brand continues to maintain globally and do expect the early stages of a moderate recovery in domestic consumer sales to continue to appear in our results over the next several quarters. Total global sales for the Q2 were $12,350,000 a decrease of 31% from last year's Q2.

Speaker 2

Total global revenues for the 1st 6 months of 2023 were $25,430,000 a decrease of 40% over 1st 6 months of 2022, which was an exceptionally strong period for our company. Revenues for the period increased by 55% when compared to the 20 21 comparative period. Net income after sales for the 2023 Q2 was $776,000 With year to date net income of $1,800,000 the decrease in revenues and resultant net income contraction came in the context of continued industry wide distributor and dealer adjustments to ordering patterns. We do expect this trend to be temporary as inventory levels are digested and consumer participation in outdoor sport activities remains strong. We are particularly infused by global sales of our helmets Featuring our innovative 360 degree turbine technology.

Speaker 2

Overall, helmet sales increased by 48% to 3.5 $2,000,000 over last year's Q2 and accounted for 29% of our total revenues for the Q2 of 2023. Our award winning MTB helmet lineup was a key contributor to this growth, generating a sales revenue increase of 116%, Led by initial shipments of our highly anticipated MTB 3.0 Endura Helmet, designed to reach a wide rider audience of elite and amateur athletes. The NCB 3.0 Helmet showcases unrivaled versatility and innovation with 3 levels of protection for any trail. The 3 in-one design means that it can be worn as a half shell, open face helmet for light trail riding In the jet style, with the addition of over the ear guards for added coverage or the clip can be used on the full chin guard for maximum protection. Our redesigned motor helmets are generating strong demand with sales volume increasing by 141% in the period.

Speaker 2

We also remain energized by continued growth in consumer and athlete direct sales in the U. S. And the moderate improvement in domestic dealer buying, Activity and sentiment. As inventory is digested in some key categories. Our les.

Speaker 2

Com site activity and consumer purchasing continued to grow during the Q2, increasing by 11% and now representing 7% of our global revenues on a year to date basis. Other important highlights during the 2023 period include The improvement in our gross margins from 41% to 44% year to date as global and shipping costs continue to stabilize And an increase of $5,000,000 to $12,000,000 in cash and cash equivalents, which we see as a testament to the resilience of our business model and prioritization of cash and working capital management at this time. Cash flow generated from operations was $6,800,000 The 1st 6 months of 2023 with the current ratio of 6.25:one at 30 June 2023, up from 4.25:one at 15 June 2022. We will continue to carefully manage margins in order to maintain long term brand equity and expect to see global shipping and logistics costs continue to stabilize as COVID-nineteen pandemic supply chain constraints continue to improve. International revenues for the Q2 were $8,930,000 a decrease of 36% compared to a very strong 2022 2nd quarter.

Speaker 2

Sales in the U. S. Decreased by $610,000 or 15% compared to last year. And although U. S.

Speaker 2

Dealers continue to manage some elevated stocking areas and order conservatively, We are encouraged by increased activity on our consumer direct channels and a moderate improvement in domestic dealer activity and buying sentiment. Our global team of sales and brand managers covering key established and emerging markets continue to build a strong lead presence Strong multichannel selling organization that has the ability to distribute our exceptional head to toe products to a much wider rider audience. Now I'll turn to more details on sales of our product categories for the Q2 of 2023. Sales of our flagship neck brace were $540,000 accounting for 4% of our Q2 2023 revenues, A 59% decrease due primarily to a decrease in the volume of neck braces sold in the U. S.

Speaker 2

And abroad. In the Q2 of 2022, neck brace sales were $1,300,000 7% of our revenues. Our Body Armor Products category is comprised of chest protectors, full upper body protectors, upper body protection vest, back protectors, knee braces, Me and Elbe Garde, Off Road Motorcycle Boots and Mountain Biking Shoes. BodyArmor sales were $5,380,000 Accounting for 43% of our Q2 2023 revenues, a 43% decrease due primarily to a 60% decrease in the volume of Upper body protection units sold globally. In the Q2 of 2022, body armor product sales were $9,500,000 And 53 percent of our revenues.

Speaker 2

As mentioned earlier, helmet sales were $3,520,000 accounting for 29% of our 2nd A 48% increase due primarily to a strong increase in MTB helmet sales, which increased by 116%. Additionally, motor helmet sales volumes increased by 141% due to Strong demand for our redesigned motor helmet lineup. In the Q2 of 2022, helmet sales were $2,380,000 accounting for 13% of our revenues. Our other products, parts and accessories category is items required primarily to replace worn or damaged parts through our global distribution network. Sales in this category were $2,910,000 accounting for 24% of our Q2 2023 revenues, a 59% decrease from last year.

Speaker 2

The decrease was due primarily to a 33% decrease in sales volumes of motor and MTB Technical Apparel designed for off road motorcycle and mountain biking use respectively. In the 2022 Q2, sales in this category We have $4,730,000 accounting for 27 percent of our revenues. Here is the headline financial summary for the Q2 of Total revenues for the 2nd quarter were $12,350,000 down by 31% compared to $17,940,000 for the Q2 of 2022. The decrease in global revenues is attributable To a $4,140,000 decrease in body armor sales, a $1,820,000 decrease in other products, parts and accessory sales And $770,000 decrease in necro sales that was partially offset by a 1 point $15,000,000 increase in home and sales. Despite the current global inflationary environment, total operating costs remained relatively flat And only increased by 2% or $79,000 to $4,000,000 for the 2nd quarter.

Speaker 2

Income from operations for the Q2 was $1,310,000 down by 65% compared to 3 $73,000,000 for the Q2 of 2022. And net income for the Q2 was $776,000 or $0.13 per basic and $0.12 per diluted share, down 72% as compared to net income of $2,730,000 or $0.47 per basic and $0.44 per diluted share for the Q2 of Q2. One additional item to note, we had a once off tax charge of approximately $200,000 relating to a 2021 assessment of payable in California that we received in April 2023 as a result of our move from California to Nevada, Which impacted our effective taxation percentage and our net income for the Q2. We expect that this is an extraordinary once off item. Liet continued to meet its working capital needs from cash on hand and internally generated cash flow from operations.

Speaker 2

At June 30, 2023, cash and cash equivalents of $12,000,000 and a current ratio of 6.25:one. Looking ahead, while industry wide inventory stocking dynamics remain a challenge that has caused temporary adjustments in ordering patterns, We continue to focus heavily on areas that we believe will stimulate growth and profitability moving forward. We are actively refining and building our multi Channel sales organization in established and emerging markets, building internal and partner level e commerce capabilities And investing in product launch and brand building campaigns that leverage the tremendous momentum that the Lea brand has achieved. We will also continue to focus on financial resilience and cash flow through working capital as well as margin and the management of operational expense With investments in areas that we believe will drive future growth, we continue to strive to develop exceptional product offerings to a wider rider community. Our team is focused on gaining market share through product innovation and consumer brand management and many of our categories remain in their infancy And show great potential to meet the needs of riders at all levels and contribute to exponential growth.

Speaker 2

Although we do expect international distributor purchasing levels to remain constrained, we are particularly excited about our entry into much wider MTB Motor markets in the second half of the year. Our international distributors continue to evaluate dealer purchasing patterns And they note that the Leerds brand's momentum remains positive as the riding season gains traction. We are looking forward to continued rider participation around the world, the launch of some exciting new market segment opportunities And a return to revenue growth as inventory is digested and ordering patterns return to more robust levels that reflects the tremendous brand and company momentum that we have built over the last several years. Of course, we will continue to monitor the current macroeconomic environment that influences disposable income and revenue spending globally, including worldwide geopolitical risks, The inflationary environment and the resultant currency fluctuations that impact consumer sentiment in order to adjust for any potential economic headwinds. We believe that we have built a solid foundation and are in a very strong position to gain market share and deliver long term shareholder value moving forward.

Speaker 2

As always, we'd like to thank our entire ILIA family, passionate dedicated employees, business partners and team riders for their continued dedication and support. With that, I'd like to turn the call over for any questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question First question comes from Christopher Mueller, a Private Investor. Please go ahead.

Speaker 3

Hi, Sean. Hope you're doing well today.

Speaker 2

Hey, Chris. Good. Thanks. How are you?

Speaker 3

I'm doing well. Thanks. Just two questions for you today.

Speaker 4

First, I've seen an extended presence in China this year in terms of sponsorships, trade shows, social media. Knowing that the Chinese market is one that some Western brands have failed to penetrate in a meaningful way, and I'm just curious Do you hear your thoughts around both the opportunity and your approach in China?

Speaker 2

I think there's a huge opportunity in China. And as you say, we've got distribution partners now in China that are doing a great job in terms of marketing the Liet brand To the domestic Chinese market, which obviously is quite unique in terms of the approach that is So we're looking at all channels. We're looking at the digital side of things. You'll see a social media presence. There's some really good and really strong Digital sales and e commerce platforms there that Liet is trying to turn the heat up on a little bit.

Speaker 2

So we're really going to use a multichannel approach there, Both selling through e commerce partners and through the traditional distribution channels And brick and mortar dealers. What we have done is engaged with some experts in the field in terms of getting into the Chinese Market mainly through our distribution partners. So we've been working really, really hard on that opportunity, which we think is quite significant.

Speaker 4

Great. That's good to hear. And second, I noticed that several of your distributors have launched Liet branded consumer websites recently, Australia, Canada, Brazil, etcetera. And I'd like to understand a bit more about your strategy there. I would imagine that this brings you closer to the end consumer, probably gives you greater control over brand messaging, We might open up access to a wider range of SKUs, but I would also assume that there must be Some balance in managing existing dealer relationships when you do this, particularly those already selling online.

Speaker 4

Just as well as the requirement that places on a distributor to now manage a consumer facing business. So Any thoughts you can provide around that would be helpful.

Speaker 2

Absolutely. I think this is absolutely one of our key strategic Decisions that we took with the current stocking environment that's out there at the moment at the distributor level and also at the dealer level. And we've realized that there's some really good consumer demand for certain categories, but the products are not actually able Get through to the consumer because of the constraints that are currently that our distribution partners and our dealers are facing. So we've had a lot of discussions with the distributors about this and we decided to take the step exactly as you said now just to get a little bit closer to the end consumer. It's not necessarily that we want to control the way that our distributors operate or the way that dealers operate.

Speaker 2

It's more that we want to make sure that there's a uniform Leit presence online in the various different countries and that the inventory The distributors have got is able to move through to the end consumer as soon as possible. So it really is one way that we are supporting our distributors around the world by allowing them to build These websites and of course we have got ultimate control over this. We also have the domains and everything will be uniform in In terms of the Neot brand presence around the world, of course, there's some linguistic things that we have to take care of in certain We want to make sure that consumers that the consumer engagement and communication is great. So we're working really, really hard on that. And I think this is one of the areas that the current stocking situation It has created an opportunity to address because I think although we are Fully committed to multi channel sales, selling through distributors, selling through dealers, brick and mortar dealers, e commerce dealers.

Speaker 2

We realize that there's a growing number of consumers out there that still need to get exposed to the Lear brand. And by going a little bit more direct, supporting our dealers, you obviously are in a position where they can also Support their dealers. A lot of them have decided that for certain sales, they'll do They'll still take care of the dealer in the certain areas, so that the dealers still get some form of kickback in order to make sure that they are still getting margin from online sales. But the overall strategy has indicated that we need to get close to the end consumer, number 1. Number 2, it's very, very important That the stock that is currently out there moves through to consumers that want it as soon as possible without eroding margin too much.

Speaker 2

And of course, number 3, there's a big marketing angle here because it's probably one of the most important areas that we see here because of course, We are marketing the LEAP brand around the world through our distributors with a little bit more control than what we've had before. And I think that has meant that the pie is just bigger for everybody. So dealers in areas where we have a really good web presence Are benefiting from the fact that people are walking into dealerships brick and mortar and actually asking for the Leer products. So that is obviously something that is really, really important to create a great pool of end consumers towards Liet as a brand. And if the distributors have got the stock and the consumers are out there, then this is something that we are quite committed to.

Speaker 2

And we haven't seen Much fallout from the brick and mortar dealers. They appreciate the situation that is currently in the market And they can see the benefits in terms of brand engagement.

Speaker 4

Great. That's all very good to hear.

Speaker 3

I appreciate the color. That's all I had today. So thanks for the time, Sean.

Speaker 2

Okay. Talk soon.

Operator

Thank you. I would like to turn the floor back to Sean for closing remarks.

Speaker 2

Thank you all for joining us today. We look

Operator

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

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Key Takeaways

  • Q2 2023 revenues declined 31% to $12.35 million and first-half revenues fell 40% year-over-year amid ongoing industry headwinds and conservative dealer ordering.
  • Net income dropped 72% to $0.78 million ($0.13 per share), impacted by lower sales and a one-time $0.2 million California tax charge.
  • Helmet sales surged 48% in Q2—MTB helmets up 116% and motor helmets up 141%—driven by the new 3-in-one MTB 3.0 Endura and redesigned motor helmet lineup.
  • Liquidity strengthened with cash and equivalents up by $5 million to $12 million, operating cash flow of $6.8 million, and a current ratio of 6.25:1 at June 30, 2023.
  • Management expects a recovery as elevated distributor and dealer inventory levels are digested, while accelerating direct-to-consumer and e-commerce channels.
AI Generated. May Contain Errors.
Earnings Conference Call
Leatt Q2 2023
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