Leatt Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 9, 2024

Key Takeaways

  • Q2 revenues fell 18% year-over-year to CAD 10.1 million, driven by a 33% decline in distributor orders as inventory digestion continued.
  • Direct channels remained strong with consumer direct sales up 19% and dealer direct sales up 14%, reflecting growing brand recognition globally.
  • Cash and liquidity improved, with cash balances rising by CAD 1.98 million to CAD 13.33 million and operating cash flow of CAD 2.99 million for the first half of 2024 (current ratio 9.6:1).
  • Gross margins were pressured by promotional efforts to clear slow-moving inventory, but management expects margins to recover as 2025 product launches with higher margins come online.
  • Leatt introduced a new portfolio of innovative MTB components at Eurobike, with shipments of ultralight, high-end products slated to begin later this year.
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Earnings Conference Call
Leatt Q2 2024
00:00 / 00:00

There are 4 speakers on the call.

Operator

Greetings. Welcome to the Leak Corporation's 2nd Quarter 2024 Results Conference Call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

At this time, I'll turn the conference over to Michael Mason with Investor Relations. Michael, you may now begin.

Speaker 1

Thanks, Rob. Good morning, and welcome to the Leatt Corporation Investor Conference Call to discuss the financial results for the Q2 of 2024. The company issued a press release today, Friday, August 9, 2024, at 8 am Eastern and filed its report with the SEC. The press release is posted on Leatt's website at leattcorp.com. This call is being broadcast live and may be accessed on the company's website.

Speaker 1

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 1,378,296. 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.

Speaker 1

Leidt 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 August 9, 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 McDonald, CEO of Liat Corporation.

Speaker 1

Good afternoon to you in Cape Town, Sean.

Speaker 2

Good morning, Mike, and thank you all for joining us today. I am pleased to say that we are beginning to see progress in a return to sustainable growth. Sales at the consumer and dealer direct levels have started to filter through to ordering from our distributors, and we have started to see a level of growth in some key product categories. While there are still some challenging industry and economic headwinds globally, as inventory is digested, we believe that this promising uptick in ordering patterns will filter through to our results in due course and is a trend that will contribute to revenue growth over the next few periods and beyond. Total global revenues for the Q2 were CAD10 1,000,000 an 18% decrease from last year's Q2.

Speaker 2

U. S. Sales increased to $3,730,000 and international sales decreased to $6,340,000 Consumer direct sales increased by 19% and dealer direct sales increased by 14%, which we believe is a testament to strong brand recognition and the success of our drive to reach a wider group of consumers globally. Via.comandvia.co.za, our consumer direct platforms, continue to display strong sales, exceeding our expectations, while sales to our global distributors decreased by 33% as distributors continued to constrain ordering and manage industry wide stocking dynamics, we expect that current ordering patterns and the addition of some promising new distributor partnerships in the United Kingdom, Europe and Emerging Markets will filter through to our results over the next several quarters. Despite our push to invest in long term growth, cash increased by CAD1.98 million to CAD13.33 million with cash flows provided by operations of CAD2.99 million for the 6 months ended June 30, 2024.

Speaker 2

Our liquidity continues to improve and our team continues to manage working capital efficiently. On a year to date basis, despite the decrease in revenues and an increase in costs, we generated cash flows from operating activities of nearly $3,000,000 as of June 30, 2024, reflecting the robust quality of our business model. At a product level, declines in helmet sales and our other products, parts and accessories category were partially offset by increases in body armor sales and neck braces. Drilling down a bit, it was particularly encouraging to see neck brace, body and limb protection, knee braces and MTB apparel returning to growth on a global basis. We also continue to ship promising ADV apparel orders during the quarter and look forward to delivering a pipeline of innovative product categories to the growing ADB market over the next several quarters.

Speaker 2

We expect to start shipments later this year of a new innovative product category for our MTB line that was introduced at Eurobike 2024 last month. The new line boasts a portfolio of 52 top level bicycle components, including handlebars, grips and ultralight bends and pedals, ranging from medium to high price point items. Top of the line products feature a ceramic coated magnesium alloy for the main component bodies and titanium hardware. This construction technology makes our pedals and stems outstandingly light and impeccably durable. Now I will turn to more details on sales of our product categories for the Q2 compared to 2023.

Speaker 2

Sales of our flagship neck brace were $590,000 a 9% increase over the Q2 of 2024, primarily due to a 10% increase in the volume of neck braces sold. Neck braces made up 6% of our revenues for the quarter. Our body armor products are comprised of chest protectors, full upper body protectors, upper body protection vest, back protectors, knee braces, knee and elbow guards, off road motorcycle boots and mountain biking shoes. Volleyama revenues for the 2024 Q2 were $5,580,000 a 4% increase over last year. The increase was primarily due to a 45% increase in upper body and limb protection sales that was partially offset by a 49% decrease in the volume of footwear comprised of motorcycle boots and mountain biking shoes sold during the quarter as our distribution partners continue to digest inventory.

Speaker 2

Body Armour products made up 55% of our revenues for the quarter. Pharma sales were CAD1.43 million, a 59% decrease from last year, primarily attributed to a 64% decrease in the volume of motor helmets sold compared to an exceptionally strong Q2 of 2023 with helmet sales increased by 141% over the prior year. Again, our distributors continue to adjust ordering patterns as inventory levels stabilize. Homeless sales accounted for 14% of our revenues for the quarter. Our other products, parts and accessories category is comprised of goggles, hydration bags and apparel items, including jerseys, pants, shorts and jackets, as well as aftermarket support items.

Speaker 2

Revenues were $2,470,000 a 15% decrease due primarily to a 50% decrease in sales of motor technical apparel designed for motorcycle use. Sales of MTB technical apparel increased by 63% and we continue to ship orders of ADV technical apparel to our global customers. Overall, our inventory levels continue to stabilize. They decreased by $5,650,000 or 28% in the last 6 months as we continue to look for opportunities to turn over slower moving inventory. Now I will turn to more financial details for the Q2 of 2024 compared to 2023.

Speaker 2

Total revenues for the Q2 were CAD10 1,000,000 down by 18% compared to CAD12.35 million for the Q2 of 2023. The decrease in worldwide revenues is attributable to a $2,000,000 decrease in helmet sales and a $440,000 decrease in other products, parts and accessories sales that were partially offset by a $210,000 increase in body armor sales and a $50,000 increase in neck brace sales. Loss from operations for the Q2 of 2024 was CAD1.13 million down by 186 percent compared to income of CAD1.31 million for the Q2 of 2023. Net loss for the Q2 of 2024 was CAD1 1,000,000 or CAD0.17 per basic and CAD0.16 per diluted share, down by 2 36% as compared to net income of $776,000 or $0.13 per basic and $0.12 per diluted share for the Q2 of 2023. NIEF continued to meet its working capital needs from cash on hand and internally generated cash flow from operations.

Speaker 2

As 30 June 2024, the company had cash and cash equivalents of $13,330,000 and a current ratio of 9 point 6:one compared to a current ratio of 6.3:one at June 30, 2023. To summarize, although they are still from challenging industry and economic headwinds globally, inventory continues to be digested, participation remains strong and ordering patterns continue to improve and have started to filter through to our international distributors. We also continue to see encouraging growth trends at the dealer and consumer level as the demand for LEAR products continues to be encouraging. We continue to invest heavily in consumer brand recognition and building out our high performing team of sales and marketing professionals around the world. Our industry wide turbulence presents an opportunity to grow the Leatt family by adding talented team members.

Speaker 2

Although these investments typically take time to add to our financial results, we believe that investing in brand momentum and building a great team remain cornerstones of our future growth plans. In conclusion, we look forward in the coming months to what we believe will be successful global launches of our product lines for moto, MTB and ADB as our team of developers and engineers continue to strive for product excellence. As mentioned, the MTB lineup will include an exciting new category, top level innovative bicycle components. We are all very enthusiastic about the future at Leit with a strong portfolio of innovative products in the market and in the pipeline, a multichannel sales organization that is growing and developing, a passionate, cohesive team and a robust balance sheet to fuel brand and revenue growth, we remain confident that we are well positioned for future growth and shareholder value. As always, we'd like to thank our entire Liet family, our dedicated employees, business partners and team riders for their continued strong support.

Speaker 2

And with that, I'd like to turn the call over for some questions. Operator?

Operator

Thank you. We'll now be conducting a question and answer

Speaker 2

Thank

Operator

you. Our first question is from the line of Christopher Muller with Private Investor. Please proceed with your question.

Speaker 3

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

Speaker 2

Hi, Chris. Nice to hear from you.

Speaker 3

Good to speak with you. Just a few questions today. First, it looks like gross margins continue to be impacted a bit by some of the promotional efforts you're making to move older inventory. Of course, it's good to see inventories come down so significantly this year. But I guess I'm just wondering, now that we're moving toward the 2025 launches, how far along are we in this process?

Speaker 3

Is there still a significant volume of inventory subject to these promotions?

Speaker 2

Great question, Chris. Yes, we still have had some margin pressure for the promotions that we have looked to sell out some of our older inventory. And I mean the short answer is we are far down the line of selling out some of the inventory that has been a little bit slower moving. And of course, with the new line coming in, as you correctly have noted, the strong margins that we should see on sales of those products will balance out nicely any future promotional activity that we might need to enter into. But as I said, we are far down the line.

Speaker 2

We've done some pretty aggressive deals over the last two quarters in Q1 and Q2 to move that inventory and to make room really for the 25 products that needs to come in. But I feel confident that margins are going to improve, especially with the new products coming in. This is the balancing act that we currently are facing, selling out of some of the older inventory to make room for the new inventory, which has got improved margins.

Speaker 3

Great. And second, you mentioned in your remarks some weakness on the moto side, specifically it sounded like helmets and apparel. Is this still a hangover from some of the distributor consolidation that's been going on in the U. S? Or are there other factors in play there?

Speaker 2

Yes. I think it's still a hangover really from the distribution pressure that has been in Europe. There's a bit of consolidation that has happened as well. But the main reason for this is really the inventory levels that existed at the time when these orders were placed. So the primary shipments that took place by international distributors just in terms of our ordering cycle during Q2 we're motor orientated, so apparel, boots, helmets.

Speaker 2

And those orders were placed midway through last year. So the shipments that took place in Q2 this year were placed midway through last year just due to our ordering cycle. And at that time, of course, there was still a lot of pressure in the market in terms of inventory levels. What we really are excited about moving forward though is that the motor orders that we see coming in now for 2025 products are looking a lot more encouraging. So I guess it's to be expected as more inventory sold out at the dealer consumer and ultimately distributor level, Distributors need to order new inventory and that's the trend that we're starting to see coming through now.

Speaker 2

And of course, that should have an impact on the results in Q3 and Q4.

Speaker 3

Great. That's very encouraging. And switching maybe to the new components line that you've debuted at Eurobike. Is it your expectation that most of your global distributors will stop the full line in this 1st year? Or is this the case where you maybe have to demonstrate consumer demand in some select markets before you can attain full distribution?

Speaker 2

I think the majority of our distributors are really excited about the line and they will stock they might stock a conservative line, but they definitely will stock some of the line and most of them will stock most of the line. Then you see it as a unique line in terms of what we can offer to the market. And of course, they've already got the dealers and in consumer channels open to sell this line. So I think the majority of our distributors will place an initial order for the line, which should ship in the next few quarters. So also very exciting.

Speaker 3

Definitely. That's good to hear. Of course, I appreciate that this new line spans a range of materials and price points. But maybe broadly speaking, how does the margin profile on components compare to your current blended

Speaker 2

gross margin? It's similar. There are some items where the price points in the markets are very, very well established and the cost being at the manufacturers are also very well established. And you've got to have those lines obviously. You're going to have those products in your lineup in order to be a competitive components supplier and brand.

Speaker 2

But the higher end stuff, the margins are relatively healthy. I would say, I don't foresee sales of components being a major contributor to any kind of decrease in margins on in terms of Leer's top line margin. So of course, you also have to look at the net margin, which is after things like shipping and that type of thing. And you can ship a lot of components in a container. So that should certainly help margins on a net level.

Speaker 3

Okay. Well, thanks for the time, Sean. Chat again soon.

Speaker 2

Yes. Look forward to it. Cheers.

Operator

Thank you. At this time, we have reached the end of our question and answer session. I'll turn the call over to Sean McDonald for closing remarks.

Speaker 2

Thank you all for joining us today. We look forward to our next call to review the results of the 2024 Q3.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation.

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