Leatt Q3 2024 Earnings Report

Leatt EPS Results

• Actual EPS: $0.02
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Leatt Revenue Results

• Actual Revenue: $12.14 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Leatt Announcement Details

• Quarter: Q3 2024
• Date: 10/29/2024
• Time: N/A
• Conference Call Date: Tuesday, October 29, 2024
• Conference Call Time: 10:00AM ET

Leatt (OTCMKTS:LEAT) Corporation develops, designs and markets protective equipment and related products for motocross, mountain biking, cycling and other powersports activities. The company’s product portfolio includes helmets, neck braces, body armor, knee and elbow protection, impact protection, riding apparel, gloves, footwear, goggles and hydration products.

Leatt was founded by South African physician Dr. Chris Leatt, whose work on neck protection led to the development of the company’s original neck brace for motocross riders. The business has since expanded its product range to provide integrated protection and performance gear for professional and recreational athletes.

The company markets its products internationally through dealers, distributors, specialty retailers and online channels. Its offerings are sold under the Leatt brand and are intended for customers in markets including North America, Europe, Africa, Australia and other regions with established motorcycle and cycling industries.

Leatt Q3 2024 Earnings Call Transcript

Key Takeaways

• Total global revenues returned to growth with a 1% year-over-year increase to $12.14 million and international sales up 5%, while gross margins improved 4% sequentially as old inventory was cleared.
• Net income plunged 75% to $116 000 (or $0.02/share) in Q3 2024, driven by lower margins and a $320 000 decline in other products, parts, and accessories sales.
• Footwear and apparel sales contracted notably due to aggressive competitor discounting and high inventory levels, although management expects these categories to recover as stock is digested.
• Direct-to-consumer revenues grew 12% in Q3, led by strong performance in South Africa, underscoring the growing importance of the consumer-direct platform.
• Cash and equivalents increased by $1.1 million to $12.47 million with nine-month operating cash flow of $2.98 million, supporting a robust liquidity position and a 6.5:1 current ratio.

Presentation

[Operator]

Greetings and welcome to the Third Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance for this conference, please press star zero on your telephone keypad. 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.

[Michael Mason, Head of Investor Relations at Leatt Corporation]

Thanks, Latonya. 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's website.

[Michael Mason, Head of Investor Relations at Leatt Corporation]

An audio replay of this call will be available for seven 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 seven days. Certain statements in this conference call may constitute forward-looking statements. Actual results could differ materially from those discussed in this call.

[Michael Mason, Head of Investor Relations at Leatt Corporation]

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.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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 it as a pivotal quarter as global revenues returned to growth, albeit still marginal at this early stage. Total global revenues for the quarter were $12.14 million, a 1% increase year over year.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Body armor sales were up $270,000. Sales were up $140,000, and neck brace 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 begins to filter through to our revenues. Gross profit for the third quarter was $5.17 million.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Although we continue to monitor the impact of potential economic headwinds and there are areas of inflated inventory, the start of our pivot 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.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Our margins also continue to improve on a quarterly basis, increasing by 4% sequentially over the second quarter as we manage clearing all the inventory and selling newer stock at higher margins. Our inventory levels continue to stabilize, decreasing by $4.62 million, or 23%, over the last month as we continue to seek opportunities to turn over slow-moving inventory and replenish stock levels in preparation for stronger ordering.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

We continue to ship orders for our ADV adventure apparel line, a product line designed for motorcycling 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 ADV product categories to reach the substantial market segment.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Footwear, comprising of MTB shoes and motorbike boots, contracted on a global basis during the quarter. Footwear 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 trends at the direct-to-consumer level, growing by 12% during the quarter.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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-$12.47 million, with cash flows provided by operations of $2.98 million for the nine months ended September 30, 2024. Our liquidity continues to improve as our team continues to manage working capital efficiently.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Overall, despite some constrained brick-and-mortar motor dealer sales in the U.S. during the quarter, our team remains enthusiastic about this pivotal moment in our recovery that is currently in play. We believe strongly that our investment 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 of 2024 when compared to the third quarter of 2023.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Sales of our flagship Neck Brace were $750,000, a 6% year-over-year increase, attributable primarily to a 109% increase in sales of our premium 6.5 Neck Brace, partially offset by a 37% decrease in sales of our 3.5 Neck Brace. Neck Brace sales were 6% of our total revenues for the quarter. Our Body Armor products are comprised of chest protectors, full upper body protectors, knee braces, knee and elbow guards, off-road motorcycle boots, and mountain biking shoes.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Body Armor revenues for the 2024 third quarter were $5.73 million, a 5% increase year-over-year. The increase was primarily the result of a 25% increase in sales of upper body and limb 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 Armor products were 47% of our total revenues.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Helmet sales were $3 million, a 5% increase year-over-year, due primarily to a 98% increase in the sale of our motor helmets, partially offset by a 23% decrease in sales of our MTB helmets. Helmet sales made up 25% of our revenues for the quarter. Our Other Products, Parts, and Accessories category were comprised of goggles, hydration bags, and apparel items, including jerseys and shorts and jackets, as well as aftermarket support items. Revenues were $3.65 million, an 11% decrease year-over-year.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

The decrease was partially due to a 37% decrease in MTB apparel sales as our MTB distribution partners continued 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.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Total revenues for the third quarter of 2024 were $12.14 million, up by 1%, compared to $12 million for the third quarter of 2023. This increase in worldwide revenues is primarily attributable to a $270,000 increase in body armor sales, a $140,000 increase in helmet sales, and a $40,000 increase in neck brace sales that were partially offset by a $320,000 decrease in other products, parts, and accessories sales.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Net income for the third quarter of 2024 was $116,000, or 2 cents per basic and $2 cents per diluted share, down by 75% as compared to net income of $460,000, or $8 cents per basic and $7 cents per diluted share for the third quarter of 2023. Leatt continued to meet its working capital needs from cash on hand and internally generated cash flow from operations.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

At September 30, 2024, the company had cash and cash equivalents of $12.47 million and a current ratio of 6.5 to 1. Although there are still some challenging economic headwinds globally that may impact demand to some extent, inventory continues to be digested, participation remains strong, and ordering patterns continue to improve and have started to 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.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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 sales and marketing professionals around the world as industry-wide turbulence presents an opportunity to continue growing the Leatt family by adding talent.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Although these investments typically take some time to make an impression on our results, we do believe that building out a great global team is a cornerstone of our future growth plans. In conclusion, we are all very enthusiastic about the future of Leatt, with our strong portfolio of innovative and pipeline, multi-channel sales organization that is growing and developing, and the robust energy to fuel brand and revenue growth.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

We remain confident that we are well positioned for future growth and increased shareholder value. As always, we'd like to thank our entire Leatt family, our dedicated employees, 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]

Thank you. At this time, we will conduct a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in a question queue. You may press Star 2 if you would like to remove your question from the queue.

[Operator]

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Once again, that's Star 1 to ask a question at this time. One moment while we pull for our first question. Our first question comes from Olivier Colombo with private investor. Please proceed.

[Olivier Colombo, Investor at Leatt Corporation]

Yes, good afternoon, Sean.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Hi, Olivier. How are you?

[Olivier Colombo, Investor at Leatt Corporation]

I'm doing fine. Thank you very much. Nice to see the company grow again. And hopefully, Q2 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?

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Yes, sure. I think we definitely have seen an improvement, certainly, in consumer sentiment. I mean, with inflation coming down consistently and then also with interest rates starting a descent, 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.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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, as 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.

[Olivier Colombo, Investor at Leatt Corporation]

That's perfect. Thank you very much. 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?

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

It's a good question, Olivier, and it's something which we obviously do look at internally and we're quite focused on it. There's a couple of uses. I mean, we're expecting to return, hopefully, to a position of sustainable growth, and with that, we'll come in investments in working capital in the U.S. and in South Africa, and with factory ordering as things start to intensify again. So some of the cash that we currently have on hand will go back into working capital, which is, of course, a great use of our cash.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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 bringing on some really good and strong salespeople.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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, we're always on the lookout. If there are interesting areas, categories that we can add, we will look hard at to invest our cash. So certainly something that we are thinking about.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

We do have some plans. I think investing in the Leatt brand is a smart move for us. It's certainly gained us brand momentum in the past, and building up a strong selling organization that can sell our very extensive head-to-toe product categories is also a wise use of our cash moving forward.Of course, investing in inventory, accounts receivable, and factory credits also has to be a smart move for us.

[Olivier Colombo, Investor at Leatt Corporation]

That's perfect. Thank you very much. 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?

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Oh, 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, if you compare Q3 to Q2, our revenues are up by 20%, and we managed to increase margins sequentially by 4%. That's a huge ask in the current environment where there are still some constrained areas of inventory.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

I'm very proud of the team for balancing out sell-out of some of the older inventory, converting that into cash at low margins and balancing that out with selling new inventory at high margins. I think that's been managed really, really well. Brick-and-mortar sales in the U.S. in certain regions were a little bit tough. I think we've reacted well to it.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

It's something that we are monitoring, something that we are certainly working hard on to make sure that we've got the right products, the right people involved in order to drive sales there. But all 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 that we've managed our working capital carefully, which will obviously fuel our growth moving forward.

[Olivier Colombo, Investor at Leatt Corporation]

That's perfect. Thank you very much. And I'm looking forward to the progress in the next quarter. Thank you very much. Have a nice afternoon.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Thank you, Olivier.

[Operator]

The next question comes from Nick Fisher, a private investor. Please proceed.

[Nick Fisher, General Manager at Leatt Corporation]

Good morning from the U.S., Sean. Appreciate you taking my question.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Hey, good morning, Nick. No problem.

[Nick Fisher, General Manager at Leatt Corporation]

My question really revolves around the increase in salaries over the last nine months of 30%, and then obviously the increase in marketing of 26% over the last nine months. You 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 versus just kind of your new cost structure post-COVID and with inflation and whatnot?

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Sure, no problem. So I mean, the primary salary increases are really on sales and marketing stocks. So in the U.S., we changed our model. We've now got a full employee workforce. So they are, of course, salaried, and there's also some costs that come with that in terms of travel costs and that type of thing. So that was a strategic move. We feel that there's an opportunity in the marketplace with 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.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

So you could say that that was a strategic move, which we will see paying off over the next several quarters as conditions continue to improve. On the marketing level, it is also around our ADV line. So ADV is obviously an important area for us.It's a huge addressable market, and we've had to spend funds building Leatt as an ADV brand in that area.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

And we did not want to take away anything from MTB and motor because we feel that right now investing in the Leatt brand on the motorcycle side and the mountain biking side will definitely pay off in the future. So we increased our marketing budgets towards ADV as well to bring that in to build ADV as a brand. So far, that really has been paying off nicely for us. I mean, on a year-to-date basis, ADV is 8%-10% of our sales, so that's really nice to see. So I think those investments are paying off in the current market conditions.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

That's very helpful. Thank you for the color. I appreciate it.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Fantastic.

[Operator]

The next question comes from Christopher Mueller, a private investor. Please proceed.

[Christopher Muller, Investor at Leatt Corporation]

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

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Hi, Chris. Nice to hear from you. I'm doing okay. Thank you.

[Christopher Muller, Investor at Leatt Corporation]

Great. Maybe three or four questions today. First, it's 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 motor side?

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

It would be the motor side. So we'll be shipping MTB over the next several quarters. There are some MTB sales that are included, but it's primarily motor sales, Chris.

[Christopher Muller, Investor at Leatt Corporation]

Okay. That's helpful. Thanks. And second, you commented on particular weakness in footwear and apparel offsetting gains elsewhere. Is the inventory overhang and discounting particularly notable there just 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?

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

I think just looking at footwear, I mean, when it comes to footwear, of course, you've got to have a full size range when it comes to shoes and boots. So just by nature, the investment in inventory in those areas is larger than some other areas. So that's one factor.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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 amounts of inventory on hand that they needed to move, and they were 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.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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, that means that there's a lot of inventory out there. And if they're willing to decrease pricing at the same time, it creates a kind of perfect storm scenario.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

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 with our completely dropping all of our pricing. That's certainly one of the reasons why our margins were low in Q2. We took some opportunities there to move on some boots.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

But in general, I mean, I think a lot of it has got to do 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.

[Christopher Muller, Investor at Leatt Corporation]

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

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Yeah. We've got some new partnerships that we've developed that are licensing 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 that, of course, is the increase in product royalty revenues.

[Christopher Muller, Investor at Leatt Corporation]

Okay. Good to hear. 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 six months back? And maybe more broadly, just any update on the progress in expanding dealer reach in the U.S.?

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Sure. So, of course, we have Joe Richey on board now. He's the new national sales manager on the MTB side. And he's been building a team of a mix of employee and independent sales reps in the area across the U.S. And I mean, some of those hires are relatively new. So those efforts have not really reflected in revenues yet, but we expect that to focus into revenues over the next several quarters.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

And, of course, he's going to be bringing on people that are going to intensify our selling activities on the MTB side. We do have a new MTB marketing manager in the U.S., Amanda, and she's working really closely at the moment with Joe in order to make sure that our marketing material and our branding is U.S. MTB specific. So we've definitely started to see some increase in MTB sales in the U.S.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Sales have increased quite nicely, actually, and we've started on a 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 traction, and looking forward to it.

[Christopher Muller, Investor at Leatt Corporation]

Great. That's very encouraging. Well, thanks for the time, Sean. Chat soon.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Fantastic. Thank you, Chris.

[Operator]

Thank you. There are no further questions at this time. I would like to turn the floor back to Sean MacDonald for closing remarks.

[Sean Macdonald, CEO and Board Member at Leatt Corporation]

Thank you all for joining us today. We look forward to our next quarter to review the Results of the 2024 Fourth Quarter.

[Operator]

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.

Participants

Executives

• Nick Fisher, General Manager
• Sean Macdonald, CEO and Board Member
• Olivier Colombo, Investor
• Michael Mason, Head of Investor Relations
• Christopher Muller, Investor