Q4 2022 Leatt Corp Earnings Call
Speaker 1: The.
The company issued a press release today Tuesday March 'twenty eight 2023 at eight a M. Eastern and also filed its report with the SEC.
The press release is posted on <unk> website at Lee at Dash Corp Dotcom.
This call is being broadcast live and maybe 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 184451 to two nine to one.
For one for 123176671 for international callers the replay pin number is 13737398 <unk>.
A replay of the webcast will be available immediately following this call and we 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 Lear 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.
At March 28, 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.
Lee at Corporation, John and good afternoon to you in Cape Town.
Good morning, and thank you, Mike and thank you all for joining us today.
Well many important measures 2022 was the best year in our company's history.
Total global revenues was $76 3 million.
The 5% increase over a very strong 2021, which was an 88% increase over 2020.
International sales grew by $6 $6 million to $8 million or.
13%, despite some challenging global market dynamics.
Sales of some of our most innovative products, including helmets footwear and technical apparel, all increased by double digits over 2021.
These products showcased the ability of our engineering team to both exceptional products.
<unk> large addressable global markets, we believe that our success in these critical competitive product areas is a great platform for further growth.
During the first quarter of 2022, we entered into a difficult period for the MTBE in nitrogen industry worldwide.
Covid supply chain issues global geopolitical dynamics, the strengthening of the U S dollar inflation and the resultant moderation in consumer demand for resulted an overstocked inventory across brands, our distributors and dealers worldwide.
Our own distributors and dealers and Thats, an ultra they buying patterns to digest elevated stock levels before they can return to the buying level that spirit outgrowth over the last several years.
These headwinds and elevated stock levels have begun to filter through into 2022 fourth quarter and to directly affect our results for the quarter and year end compared to 2021.
Fourth quarter revenues were $14 9 million, a decrease of 53% compared to a very strong 2021.
Net loss for the fourth quarter was $1 1 million.
Based on the decrease in revenues and a 17% increase in total operating costs, which were driven by our investments in sales product development and the marketing.
Growing product range and the development of a globally recognized consumer brand.
Despite market conditions. The Lee brand continues to gain momentum back about cutting edge product innovation.
We continued our year over year.
<unk> growth trajectory for the full 2022 fiscal year with record breaking revenue of $76 3 million for the 2022 period.
Sales of our flagship Nick price were down 36% compared to 2021 and upper body armor products were down 6%, our home and apparel categories showed strong sales.
Net income for the year was $9 $96 million down 21% with a return on revenue of 13% and earnings per share for the full year was $1 71 per basic share.
Sales to our dealers and distributors in the United States contracted by $2 $82 million or 14% when compared to the prior year increase due to domestic dealer stock congestion that influence dealer ordering patterns at.
Direct sales to customers in the U S continued to show strong results growing by 27% to five 7 million during the 2022 period.
This growth is a testament to the development of our consumer website, our brand momentum and improved domestic distribution capabilities. We expect to continue to develop and invest in this channel as part of our multichannel self development program.
We also continue to invest heavily in our U S sales distribution and marketing capacity across the U S. With a focus on growth areas. The domestic selling team continues to grow as we reach and service a wider group of March on MTBE dealers.
The influence of a team of global sales and marketing managers in some of our most important emerging and established regions outside of the U S continues to be an important focus area. We are committed to continuing to grow our multichannel sales approach and leverage the tremendous momentum affiliate brand has gained over the last several years.
Now I'd like to take some more details on sales of our individual product categories for the 2022, yes.
Sales of our flagship net price during the 2022 fiscal year with $5 $309 million or 7% of our total revenues down 36% compared to an especially strong 2021 in terms of next ourselves.
In 'twenty, one Nick price sales increased by 73% over 2020 year period.
Revenues for body in white products, which are comprised of chest protectors upper body protectors Upper body protection base Act protected knee prices knee and other thoughts off road motorcycle boots, and mountain biking shoes, with 38 $6 million down.
Down 6% from the prior year the.
The decline was primarily due to an 18% decrease in upper body armor revenue compared to 2021 again.
'twenty, one was an exceptional year for upper body armor sales, which increased by 85% of 2020.
<unk> products accounted for 51% of our total revenues between the two.
Total net sales were up highlights revenues for the air totaled $14 four 8 million a 60% increase over 2021.
<unk> sales accounted for 19% of our total revenues for 2022, we are very encouraged by the market reception of our award winning MTBE and completely redesigned larger helmet lineup that all contain our patent to 360 degree turbine technology will hit and Brian protection.
Full year 2022 revenues from our other product parts and accessories category, which is comprised of goggles penetration.
And apparel items, including jerseys pants, and jackets was $17 $6 million or 28% increase over 2021.
This category accounted for 23% of our total revenues between two the increase is primarily due to continued strong demand for our lineup of technical apparel designed for off road motorcycle market banking units, which increased 35% compared to 2021.
There is the financial summary for the fourth quarter and full year 2022.
Total revenues for the fourth quarter with $10 9 million down by 53% compared to $23 3 million for the fourth quarter of 21.
Net loss for the fourth quarter of 22 was $1 1 million.
18% 18 per basic and 17th.
Diluted share as compared to net income of $3 8 million or <unk> 66 per basic and <unk> 62 cents per diluted share for the fourth quarter of 2021.
Total revenues for the full 2022 fiscal year with $76 3 million.
Up 5% as compared to $72 5 million for the.
Full year of 2021.
The increase in global revenue is attributable to a 60% increase in helmet sales and a 28% increase in other products parts and accessory sales, which were partially offset by a 36% decrease in net sales and a 6% decrease in volume of cells.
We continue to manage expenditures efficiently in an inflationary environment, achieving a return on revenue of 13%.
We have continued to meet its working capital needs from cash on hand, and internally generated cash flow from operations generating cash from operations of $3 1 million.
And at December 31, 2022, the company had cash and cash equivalents of $7 1 million.
An increase of 41% and compared to $5 million at December 31, 2021.
And our current ratio was 425 to one.
<unk> ahead.
The second half of 'twenty, three we will see our expansion into new areas in the global <unk> marketplace was well differentiated product categories that showcase innovation and our dedication to consumer engagement and adventure.
These products sell to large total addressable markets and we believe that that will appeal to a wide variety of consumers.
Our first partnership with professional mountain biking team or by a net speed racing company marks our entry into the insurance market and Bakken World.
Hartner speed company as a competitive force in cross country, Madison and gravel racing and is an ideal partner for our shared vision of excellence in performance innovation and design.
In the coming months the team of exceptional athletes will strike has led helmets in apparel as they compete in the epic series and select UCI MTB World Cup events we.
We are very proud of it taking place in the case I think last week.
The toughest MTBE rifle.
Recently, our engineering and development team was trove to be awarded with yet another design and innovation award considered the Oscars of the Bakken industry for a module for a modest suit MTB Hydro drive Boston Zebra and our MTV 3.0 injury helmets. This.
Is the eighth time.
That we have been on it for our innovative cutting edge products designed for why community of artists from the best prices in the world to the weekend warrior.
To summarize due to a variety of global headwinds international dealer and distributor ordering patterns changed noticeably in the fourth quarter of 2022, creating a difficult period for the entire industry.
Since the pipeline is well stocked distributors are initially likely to order less than in previous periods, but we remain confident that <unk> will increase in later quarters.
<unk> suggested fueled our rata participation the tremendous momentum that we have achieved over the past several quarters and our expansion into new segments.
Our customers dealers and distributors remain enthusiastic about the tremendous momentum and penetration that Elliott brand has achieved over the past several quarters and the head to toe offerings.
Of exceptional protective gear that we continued to produce.
Many of them, Nevada products are still in their infancy in terms of market share with significant opportunities for long term growth.
And while we are currently seeing moderation of consumer demand levels for ophthalmology and MTV industry consumers continue to rise and participate in auto activities at <unk>.
That we expect to continue.
We remain confident this will drive long term growth once dealers and distributors digest excess inventory levels and begin to reorder strongly again.
Conclusion, all the current market dynamics are expected to continue for several quarters with varying impacts on the different markets in geographic locations that resulted we believe that <unk> is a company and as a brand is resilient and well positioned for future growth and increase shareholder value.
<unk> focused on our strategy of bringing exceptional protective gear to a much wider erotic community.
We'd like to thank our entire Dx family of dedicated employees business partners and team of items, we remain energized enthusiastic about what we can achieve together.
With that I'd like to turn the call other for questions operator.
Thank you well now be conducting a question and answer session.
If you'd like to ask a question today. Please press star one from 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 remove your question from the queue.
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One moment. Please so we pull for questions. Once again that is star one.
Yeah.
Thank you.
Our first question comes from the line of Chris <unk> with Dunlap. Please proceed with your questions.
Hey, Sean.
Obviously, a tough quarter, but as we think ahead to this.
Misfire in coming years in the new markets you are heading into any way to quantify how they are relative to their current market share and today are the larger same size are they just niches within this market.
Hey, Chris.
Thanks for the question, it's a good one.
Larger.
Our markets that we are looking at entering.
So we've had a strategy of <unk>.
<unk> saw specifically of moving down the mountain side, the top of the mountain you kind of 1% which is the.
The gravity.
Right and then you move down into in Euro and all Mountain and trail and then at the bottom you can get into the endurance Madison and cross country area, which is really where the bulk of.
Right.
We've been pretty gravity focus, although we've been slowly moving down the mountain, but we now have a good lineup coming out a fantastic insurance products. Some of those are showcased in the recent.
<unk> epic.
Our team came second and they were absolutely thrilled with the products that we produce for them.
These are much bigger addressable markets than where we are.
Have.
Participated previously and Im on the motor side.
This is these are markets that are kind of in the crossover area between off road and street side Theres a street element to them.
Although still kind of full fried.
A dominant.
Much wide.
Our total addressable market size.
And I think presents a great opportunity for growth in the future.
Okay, and then can you speak good inroads your sales team has made so that when these mark when we do launch these markets and distributors and dealers are ready to start buying again.
Should we expect you to have a pretty strong launch into these markets is the same.
Same sales channel and therefore, you should be able to leverage the work you've done or is it is it different different channels.
I mean, it depends on where you are geographically for example, if you're in Europe .
Similar channels there is some crossover, but we are developing new channels there.
To sell into and some of these some of these new areas in the U S. It's more kind of common amongst the dealers that you can sell into so we've already got an established sales general level of courses.
It is slightly different.
You could call it a slightly different angle on the products.
And I think from what we've seen so far because we have shown on some of these products.
Dealers and distributors at sales meetings.
At the moment.
Although the market is constrained in terms of the current stocking congestion that is out there.
Our new products and things that are a little bit innovative our dealers and distributors are looking for so we have so far.
Lasalle.
Customers that we have shown these products.
There has been a very very good a very very strong response in terms of the kind of ordering patterns that I see moving forward once they are a little bit less constrained.
Okay, great. Thank you that's it for me and best of luck the rest of the year.
Thanks, very much Chris Jetson.
Thank you. The next question is from the line of Emmanuel currently private Investor. Please proceed with your questions.
Yes, hi, good afternoon, a few questions.
First of all.
Hi, first of all what do you believe is a kind of normalized annual sales level for Leah if you would try to exclude.
The effects of Destocking restocking and Corona effects.
In terms of.
I mean led to the business generally we tried to targets.
It's double digits.
Revenue growth, we've been doing that over the last several years.
And I think once things start to start to normalize in the market, particularly like to return to those kinds of levels.
There's a bit of a direction now obviously that we're seeing but we do feel that.
With the new some of the new products that we that we're now bringing to the market we can return to.
At least double digit revenue growth on a sustainable basis.
Yes, but do you believe that the 2022 sales levels are.
Are you still over earning.
In 2022.
And I believe that risk that we ought to be.
I think because I think yes.
Yeah.
I don't know if you are over earning but if I look back towards 2019, 2022 that you had the whole corona situation and there was of course a little bit.
No.
Just trying to assess what is the kind of.
Base case scenario and then.
Yes, just to see what the renovation would look like and then trying to assess the growth potential of the company going forward.
Yes, yes, I understand.
What happens during part of it of course is that in a lot more participants that came to the market.
And I think it still remains.
From the people that I speak to at all.
I'll certainly more riders riding mountain bike motorcycle than ever before and that has that trend has continued.
And although.
There has been a bit of over buying now and then.
Market once that settles down I do believe that they will be they will continue to be more participation, which is obviously the key and participation drives consumer demand.
That brand has gained a lot of momentum and gained a lot of market share during the COVID-19 pandemic because of our ability to deliver and we've taken some market share away from some big players.
Our thinking is that although we've obviously had key exceptional years I think the kind of sales that we saw in the last two years I mean, we can get back to those levels.
Based on the new participants that are in the market and also the new segments that you're going to be selling to.
Okay.
And then.
If I look at the gross profit margin in Q4, it came down quite a bit versus previous quarters.
Although the main drivers for that.
There is a couple of things to sales mix geographically. So if you look geographically we had quite a lot of sales to international customers because sales in the U S. We're constrained so we make a higher margin when we sell to.
The U S in the U S to dealers that was.
One big reason.
Some because of the constraints that we saw in the market in terms of stocking levels in the U S. We don't have to drop some of our margins.
So.
Some some products just to get products into the market.
That was not really widespread.
<unk> is.
There is also some inventory obsolescence.
We had a serious look at our inventory because our inventory, obviously being a bit higher than what it was previously.
Quite aggressively looked at.
How we could.
Get our inventory positioning.
Kind of a more prudent sites. So we went through our stock and we wrote just some stock and that's obviously included in cost of sales.
So I think those are the main factors that affected our gross profit percentage, but it's not it's not.
Kind of level that we are going to be.
We're targeting on a sustainable basis.
Gross profit should return to higher levels.
In the future.
Okay.
Yes, I think before you stated that it should be above the 40% is that still the ambition.
That is absolutely correct, we shall not be below 40%. This is a once of once a quarter where we.
Had some write offs.
Yes.
And then moving to the working capital situation. So the inventory levels remain pretty high at yearend.
What is the main reason for that and then on the other hand accounts payable they dropped quite a bit in Q4, what is the reason for that.
Yeah, so inventory is pretty stable.
Obviously now we have plenty of inventory.
At least USA that we are going to be selling into the market over the next few periods and because we had a constrained selling environment with inventory that we had already on the water coming into stockpile new product with.
Now what that inventory in.
In stock and we can now sell it out so we know for the <unk>.
Selling through that inventory.
It's also the effect of the fact that we have added a lot of new products. So we've got a lot of lot of that inventory is brand new stuff that we are now going to be selling.
We've increased our SKU count significantly.
If you look at the modeling 23 compared to 22.
We've got a lot more skus now because we've got a much wider apparel line, we put more helmets. We've got we hit it on the on the MTBE side, we've gotten with shoes, we book more boots.
Fixed a big reason for the increase in inventory is just the fact that we've got more product to sell which is obviously positive.
As I said, we had to look at our inventory our inventory is now at a very prudent level in terms of valuation I think we took a deep look at inventory during Q4.
This is all free stock that we have available to be able to sell into the market.
Of course, we have the ability to look at are reordering levels in order to make sure that inventory.
It does not it does not get out of control.
Think of a time now you should start seeing inventory dropping.
As we move into the next few quarters as we saw the inventory that we have.
So thats inventory in terms of accounts payable that we had a decrease in accounts payable and that is just a function of the fact that.
Because these books inventory to sell.
We're not pricing.
Orders on our factories as.
As large.
What they were last year, when we had a full channel that we needed to supply to the HSA and ALLETE South Africa.
Our accounts payable wood with Angela.
Yeah.
Okay.
And then in terms of the scoping effects, but what is your best guess in terms of corporates that you need to digest there.
That's right.
To adjust the trend I think it's going to take a few quarters.
It depends very much it's very different.
Graphically and I have different geographical areas.
All areas are under the same.
Out of time.
I mean the industry.
It has has most people that I'll speak to the industry I would say that it's going to take several quarters.
Sure.
Whether this is eight months.
<unk> months, but we'll certainly looking forward to.
We are going to carry on pushing with developing new products. We've got some great products in the pipeline and we are certainly looking forward.
Our two.
Being able to return to the kind of stocking levels at the we've been able to achieve in previous quarters. This is going to take a few quarters to be digested.
It is an industry wide phenomenon.
I think some of our peers that have reported would have been quoted some of the things. So this is across brands is very encouraging for us.
<unk>, sorry to hear from a lot of our dealers and distributors affiliate brand is still pretty strong.
But of course.
They have limited amount of inventory that they can purchase.
In terms of the working capital so that will be used to filter through.
It is going to take some time.
We do feel that we will return to solid growth.
As soon as possible.
Okay.
Yeah, Okay. Okay and then the final question I have is.
It's only one.
Our market share so into <unk>.
<unk> sales was up 5%, but how would you split up.
Sales bodes well make from market share gains versus the market decline in.
Any views on that.
I mean, it's quite difficult to.
To quantify that with precision however, what I would say is that looking at some of the industry.
The commentary that I see from the industry.
There are many categories, where we are still in our infancy, 3% to 45% kind of market share.
We've seen we think that that.
<unk> had solid market share growth over the last two years because of the fact that knee.
Uh huh.
I have had the ability to supply on a consistent basis in some of our peers have not been able to do so.
So we've had pretty solid market share right.
I would say the 5% to 6% area is probably where we asked I think there is a launch portion it could be 20% of all.
All of them.
Sales out of the last two.
24 months.
That have come from from really aggressively being in a position to get more shelf space in dealers online and brick and mortar which is obviously taking.
Taking some market share from all.
From our competitors.
And I think that bodes well for the future because we still have a good position in the dealerships and at the distributors.
Certain amount of inventory of <unk> stock.
But I do feel that they will sell it out within a reasonable amount of time.
Okay. Thank you.
Thank you very much for the questions I'll talk to you soon thanks Emmanuel.
Our next question is from the line of Christopher Miller Private Investor. Please proceed with your questions.
Yes, good afternoon, Sean.
Great questions great today.
Hi, Chris.
Hi, Sean.
First to follow up on a prior question on gross margins.
There's been a lot of discounting industry wide right now, especially on the electrical side.
And I've been seeing even current year product tends to be heavily discounted, especially in Europe .
I'm sure there must be a balance between supporting dealers in a tough sales environment, while also maintaining long term integrity of the brand.
I'm just curious broadly speaking how do you think about pricing discipline in this environment.
Absolutely.
<unk> has tried to balance all of that at very very carefully which is the reason I mean, we we certainly could have pushed a lot more inventory onto onto dealers than what we have but we feel that brand equity is really important moving forward and although there is some congestion in the marketplace not that is going to clear out and.
<unk> is going to return to the.
The kinds of levels that we've seen previously and when we do get there.
We want to be in a position, where we've put the summit hardware into building the <unk> brand into a globally recognized consumer brands that is respected for quality that we do not want to be seen as having discounted heavily in the market. So we are trying to balance that out as much as possible, it's something which is extremely important to us.
Yeah.
Okay. Thanks, I appreciate that.
And secondly, as we move through this period of high inventory levels I'm wondering if you could.
Could comment a bit on what youre seeing in terms of.
Sell in versus sell through.
For example, I see that the consumer direct revenue, which I believe to be mostly Europe .
E Commerce sales.
<unk> were up pretty strongly for the year and even in this otherwise soft fourth quarter.
I know you've commented that consumer demand has moderated a bit but I'm curious how much of it.
The current revenue softness you'd attribute to moderating demand.
Versus simply inventory drawdowns in the channel.
That's a great question.
I think a lot of it has got to do with the inventory and it's not specifically less inventory. This is industry wide inventory and it's as you said if you look at the actual bicycle sales on the optical side. When you look at bicycle inventory levels. I mean, there is a huge overstocking position and as I was referring to earlier dealers.
And working capital.
Level that they can but they can manage and of course I've got it.
With respect the bicycle brands in that they've got to invest in certain areas and the feedback <unk> been getting from distributors and dealers is in actual fact, the Lee brand has been selling well through the channel.
Which means that hopefully because the brand is strong because we've got we've got a much better market position that we had pre COVID-19. It means hopefully that.
We will be able to return to an ordering position from a lot of our dealers are significant ordering physician.
As soon as possible.
But a large amount of this constraint is more on the supply side being able to supply into a congested inventory environment has been very challenging.
In terms of demand.
We are getting positive feedback from our E com dealers and quite good quite right. It's the U S. E Com site that you see as being as being consumer direct.
And I mean, we've had really good growth there and a lot of interest from from in consumers.
On the demand side I think the demand is still there and the participation is certainly also still there.
Its less consumer demand and.
And kind of.
And adjustment in consumer spending and it's more about the supply through the channels and of course for a business like this.
We sell through dealers and we sell through distributors, which is also a part of our working capital strategy.
Globally.
It takes some time for it to clear through the pipeline before we get to the end consumer, but it's very encouraging to see as you correctly pointed out that way, we do sell to the end consumer like in the U S.
We are still seeing healthy levels of growth.
Great.
Great that's definitely good to hear.
And lastly, maybe.
There's been reports of some large players in the bike industry, making some pretty significant cost reductions in recent months.
Whether that be layoffs in sales and marketing or cuts in rider in event sponsorships or even <unk>.
Shading terms with suppliers and dealers.
All of these actions would seem to prioritize.
Near term cash flows.
At the potential long term expense of industry relationships and growth.
So I guess my question is given your long term focus and the <unk>.
Inherent financial health of the business are you seeing opportunities here too maybe.
Take advantage of this current environment and make increased strategic investments.
To elevate the brand long term.
The short answer is absolutely, yes, I think let isn't quite a resilient position at the moment in order to to see some of the opportunities that we're seeing in the market is.
It is a business that is built on people.
It's really important desktop the right people and there's definitely some some some interesting resources that are becoming available.
Not only that but as we've done many times in the past and we've been through some difficult times I mean, we always.
We go back to the drawing board, we carry on pushing we carry on developing it.
Theres not handbrake and the office, yes, we are.
Pushing harder than ever because we know that this dynamic is going to change.
We've got a really strong brand.
Now that we've got great products, we've got great people and that when this all plays out we're going to be in a stronger position.
<unk> then when we went into this.
Okay, well, that's good to hear thanks.
Thanks again for the time Michele will speak against that.
Thanks, Chris chat you soon okay.
Thank you.
Additional questions I will turn the floor to management for any closing remarks.
Thank you all for joining US today, we look forward to our next call to review the results of the 2023 first quarter.
Okay.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.