Leatt - Q2 2024

Transcript

Operator (participant)

Thanks. Welcome to Leatt Corporation's second 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. If anyone today should require operator assistance during the call, please press Star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Michael Mason with Investor Relations. Michael, you may now begin.

Michael Mason (Head of Investor Relations)

Thanks, Rob. Good morning, and welcome to the Leatt Corporation Investor conference call to discuss the financial results for the second quarter of 2024. The company issued a press release today, Friday, August 9, 2024, at 8 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. 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 13748296. 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. 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 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 Macdonald, CEO of Leatt Corporation. Good afternoon to you in Cape Town, Sean.

Sean Macdonald (CEO)

Good morning, Mike, and thank you all for joining us today. I am pleased to say that we are beginning to see progress and 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 second quarter were $10 million, an 18% decrease from last year's second quarter.

U.S. sales increased to $3.73 million, and international sales decreased to $6.34 million. 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. Leatt.com and leatt.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 continue 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, c`ash increased by $1.98 million-$13.33 million, with cash flows provided by operations of $2.99 million for the six months ended June 30th, 2024. Our liquidity continues to improve as our team continues to manage working capital efficiently. On a year-to-date basis, despite a decrease in revenues and an increase in costs, we generated cash flows from operating activities of nearly $3 million 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 continued to ship promising ADV apparel orders during the quarter and look forward to delivering a pipeline of innovative product categories to the growing ADV market over the next several quarters. 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 stems 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 second quarter compared to 2023. Sales of our flagship neck brace were $590,000, a 9% increase over the second quarter 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 vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots, and mountain biking shoes. Body armor revenues for the 2024 second quarter were $5.58 million, 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 continued to digest inventory. Body Armor products made up 55% of our revenues for the quarter. Helmet sales were $1.43 million, a 59% decrease from last year, primarily attributed to a 64% decrease in the volume of Moto helmets sold, compared to an exceptionally strong second quarter of 2023, when helmet sales increased by a 141% over the prior year. Again, our distributors continue to adjust ordering patterns as inventory levels stabilize. Helmet 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. Revenues were $2.47 million, a 15% decrease, due primarily to a 30% decrease in sales of moto technical apparel designed for motorcycle use. Sales of MTB technical apparel increased by 63%, and we continued to ship orders of ADV technical apparel to our global customers. Overall, our inventory levels continue to stabilize. They decreased by $5.65 million, or 28%, in the last six months as we continue to look for opportunities to turn over slower-moving inventory. Now, I will turn to more financial details for the second quarter of 2024 compared to 2023.

Total revenues for the second quarter were $10 million, down by 18%, compared to $12.35 million for the second quarter of 2023. The decrease in worldwide revenues is attributable to a $2 million decrease in helmet sales and a $440,000 decrease in other products, parts, and accessory 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 second quarter of 2024 was $1.13 million, down by 186%, compared to income of $1.31 million for the second quarter of 2023.

Net loss for the second quarter of 2024 was $1 million, or $0.17 per basic and $0.16 per diluted share, down 236%, as compared to net income of $776,000, or $0.13 per basic and $0.12 per diluted share for the second quarter of 2023. Leatt continued to meet its working capital needs from cash on hand and internally generated cash flow from operations. At 30 June 2024, the company had cash and cash equivalents of $13.33 million and a current ratio of 9.6 to 1, compared to a current ratio of 6.3 to 1 at 30 June 2023.

To summarize, although there are still some 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 Leatt products continues to be encouraging. We continue to invest heavily in consumer brand recognition and building out a high-performing team of sales and marketing professionals around the world, as industry-wide turbulence presents an opportunity to grow the Leatt family by adding talented team members. 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 ADV, 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 Leatt. With a strong portfolio of innovative products in the market and in the pipeline, a multi-channel 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 Leatt family, our dedicated employees, business partners, and team riders for their continued strong support.

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

Operator (participant)

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question at this time, please press Star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment please, while we pull for questions. Once again, that's star one. Thank you. Thank you. Our first question is from the line of Christopher Mueller with Private Investor. Please just use your question.

Speaker 3

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

Sean Macdonald (CEO)

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

Sean Macdonald (CEO)

Great question, Chris. Yes, we still have had some margin pressure for the promotions that we have looked to sell off 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 slow moving. And of course, with the new line coming in, as you correctly have noted, you know, 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.

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?

Sean Macdonald (CEO)

Yeah, 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 are international distributors, just in terms of our ordering cycle during Q2, were Moto orientated, so apparel, boots, helmets. 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.

At that time, of course, you know, 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, the Moto orders that we see coming in now, you know, for 2025 products, are looking, a lot more encouraging. So, I guess it's to be expected, as more inventory sells out at the, at the dealer, consumer, and ultimately distributor level. Distributors need to, need to order new inventory, and that's a trend that we're starting to see, coming through now. And of course, you know, that should have an impact on the results in Q3 and Q4.

Speaker 3

Great. That's, that's very encouraging. Switching maybe to the, the new components line, that you debuted at Eurobike, is it your expectation that most of your global distributors will stock the full line, in this first year? Or is this a case where you maybe have to demonstrate consumer demand in some select markets before you can, attain full distribution?

Sean Macdonald (CEO)

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, they definitely will stock some of the line. And most of them will stock most of the line. They do 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 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. You know, and 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 your current blended gross margin?

Sean Macdonald (CEO)

It's similar. There are some items, you know, where the price points in the market are very, very well established. And the costings at the manufacturers are also very well established. And you've got to have those lines, obviously, you know, you gotta have those products in your lineup in order to be a competitive components supplier and brand. But the higher end stuff, the margins are relatively healthy. You know, I would say I don't foresee sales of components being a major contributor to any kind of decrease in margins, you know, on, in terms of Leatt's top line margin. So of course, you know, you also have to look at the net margin, which is after things like shipping and that type of thing.

You can ship a lot of components in a container. So that should certainly help margins on a net level.

Speaker 3

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

Sean Macdonald (CEO)

Yes. Look forward to it. Cheers!

Operator (participant)

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

Sean Macdonald (CEO)

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

Operator (participant)

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