Q4 2023 Leatt Corp Earnings Call

Sean MacDonald: We also successfully launched an entirely new line of adventure gear designed for all weather and all terrain conditions, representing a new milestone for us and the opportunity to reach a wider global community of riders, which we'll talk about shortly. As a company and as a brand, we have always strived for design excellence and innovation in all that we do, despite the headwinds that we have experienced. Just last month, we were awarded again for those efforts. We won the 2024 Design and Innovation Award. This time for the MTB All-Mountain 5.0 jersey and All-Mountain 4.0 pants.

Sean MacDonald: This is our 10th Design and Innovation Award and testament to the competence of our global design and engineering team. Now I'll turn to some more details on sales of our product categories for the full year of 2023 compared to 2022. Sales of our flagship neck brace for 2023 were $2.75 million, representing 6% of our revenues for the year. The 49% decrease in revenues from 2022 was primarily attributable to dealers and distributors continuing to adjust ordering patterns and digest industry-wide inventory levels. Our body armor products are comprised of chest protectors, upper body protectors, knee braces, knee and elbow guards, off-road motorcycle boots, and mountain biking shoes.

Sean MacDonald: Body armour revenues were $22.58 million, representing 48% of our total revenues for the year. Unknown Attendee, Unknown Shareholder, Sean MacDonald, Unknown Shareholder, Unknown Shareholder. Helmet revenues were $11.12 million in 2023, representing 23% of our revenues for the year. Sales of our motor helmet line for off-road motorcycle use were a highlight, increasing by 45% year over year, but will be offset by a 49% decrease in MTB helmets sold in 2023. Once again, as dealers and distributors, particularly in the cycle industry, continue to cautiously manage ordering and industry-wide inventory levels. Our other products, parts, and accessories category is comprised of goggles, hydration bags, and apparel items including jerseys, pants, shorts, and jackets. Revenues for this category were $10.8 million for the 2023 year, representing 23% of our total revenues.

Sean MacDonald: The 39% decrease in revenues in this category was primarily due to a 47% decrease in global sales of technical apparel designed for off-road motorcycle and mountain biking use on a year-over-year basis. Here is the financial summary for the fourth quarter and fall of 2023. Total revenues for the fourth quarter were $9.8 million, down by 10% compared to $10.9 million for the fourth quarter of 2022. The net loss for the quarter was $1.46 or $0.24 per basic and $0.23 per diluted share compared to a net loss of $1 million or $0.18 per basic and $0.17 per diluted share for the fourth quarter of 2022. Total revenues for the 2023 full year were $47.2 million, down by 38% as compared to $76.3 million for the full year of 2022. The decrease in global revenues is attributable to a $2.64 million decrease in necrocells, a $3.36 million decrease in helmet cells, a $6.81 million decrease in other products, cloth, and accessory cells, and a $16.29 million decrease in body armor cells.

Sean MacDonald: Net income for the full year of 2023 was $803,000 or $0.13 per basic share and $0.13 per diluted share, down by 92% compared to $9.96 million or $1.71 per basic share and $1.62 per diluted share for 2022. Leatt continued to meet its working capital needs from cash on hand and internally generated cash flow from operations at December 31, 2023. The company had cash and cash equivalents of $11.35 million and a current ratio of 6 to 1. Looking ahead, we remain optimistic about the progress that we are making toward a return to sustainable growth as inventory continues to be digested and industry turbulence normalizes. Our industry is adjusting, but participation remains very strong, and our team remains energized about our future. As I mentioned earlier, the fourth quarter of 2023 represented the first signs of a recovery in our revenue performance. Although revenues decreased by 10% during the quarter, we did see revenue growth in emerging market areas in Europe, and domestic motor dealer sales in the United States increased marginally.

Sean MacDonald: Our e-commerce revenues grew by double digits, and we expect continued expansion in this area. We are very excited about the recent launch of our entirely new line of adventure gear designed for all weather and all terrain conditions. This line represents a solid growth opportunity for the company with a large total addressable market, as it is our first ever entrance into a much wider crossover motorcycle market with products designed for a diverse community of riders around the world. We have developed core competencies that create significant opportunities to build new, innovative, head-to-toe offerings. In conclusion, we are incredibly enthusiastic about the future of Vips, and participation in the industry remains very strong.

Sean MacDonald: With a strong portfolio of innovative products in the market and in the pipeline, a multi-channel sales organization that continues to grow and develop, and a robust value position, we believe 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. And with that, I'd like to turn the call over to you for questions, operator. Thank you.

Operator: We will now be conducting 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 the 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. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Christopher Muller, a private investor. Please proceed with your question.

Christopher Muller: Hi Chris, nice to hear from you. Yeah, I just have two or three questions for you today. Firstly, we've spoken before about some of the challenges in building out the US MTV dealer network. And as you've recently been hiring for a number of US sales reps, both moto and on the bike side, could you maybe provide an update on progress with respect to MTV sales and marketing efforts in the US? Absolutely, and I think it's a great question because that is a strong focus area for us currently.

Sean MacDonald: Ever since we employed Dane as our VP of Sales and Marketing on the MTD side, we've been working really hard at getting industry talent on board. It's going well; we've got a couple of new reps that we've employed; those are company employee reps, and we're looking at whether we should be bringing on some independents as well. Marketing on the MTD side is going extremely well; we've grown a team in the US on that side as well. So the distribution network continues to grow, and in fact, in Q1, we are starting to see some positive indicators of some of the areas that we've put in place to date. So to answer your question, it's going well, we're carrying on, we've still got a lot of work to do, but we think we've got some good people on board to help us get to where we need to be on the MTD side. That's good to hear. And then switching over to the international side of things.

Sean MacDonald: I see you've launched with some new distributors recently, including last week's announcement from Veda Motors with the Sportech Brazil launch. I would imagine that anytime you're changing distributors, there's an expectation for greater brand and dealer penetration. But are there any specific changes or opportunities you see with some of these new distributor relationships that you're particularly optimistic about? Yes, I think there are some big opportunities coming.

Sean MacDonald: I mean, a lot of the new distributors that we're bringing on are in emerging areas where we don't actually have strong representation. But with the sales and brand managers that we've brought on that are focusing strongly in those areas, there's a lot of opportunity for growth. So it's certainly quite correct that the new distributors that we're bringing on board are, of course, stronger financially; they are, stronger in terms of their reach to dealers and, generally, are also stronger on the marketing side and the management side. So that's the reason why we're making some changes.

Sean MacDonald: You'll also see that we will be adding new distributors that can get us into some of these new exciting channels that we are now entering, like ADB. In certain cases, a distributor can service moto dealers and can also service ADB dealers that are a little bit more crossover and, in some cases, more chain store-like, but in some areas, we'll be bringing on new ADB distributors, which will open up some really nice new doors and channels for us, and that's something that we really are excited about. Unknown Speaker Right.

Sean MacDonald: And just one last follow-up question, if I may ask you, once we get beyond this initial launch with ADB, would you expect that the majority of product sales to still be with existing Leatt Moto dealers? Or would you expect that this line would ultimately open up new sales channels and dealers that may lean more heavily on the on road or maybe even commuter side of the market? It's a great question, and ADB is one of those areas where there is a large amount of crossover with the street markets, you know, just because a lot of ADB riders need to ride on the road in order to get to some of the off-road areas that they need to access.

Christopher Muller: In some cases, and in some geographical areas, that's the same dealer, but in many areas, it's a completely different channel, so this is going to open up brand new doors for us. And ADB is a strong and growing market, you know. If you look, for example, at BMW, which is a great example of BMW motorcycles, there are about 200,000 BMW motorcycles that are sold globally around the world, and of those, the GS, which is the ADB kind of segment, 60,000 of the 200,000 are ADB GS bikes. So it's obviously a very attractive area for us to go into, and we're expecting some really good growth. If you look at the numbers for last year and for 2023, you'll see there's some apparel in there, those are the initial shipments, but there's a lot more to come. So that is certainly very exciting. Great It was all very helpful. Thanks for your time, Sean. Chat soon!

Christopher A. Jarrous: Unknown Speaker, Unknown Speaker, Our next question comes from Chris Jarrous with Dunlap Equity. Please proceed with your question.

Sean MacDonald: Unknown Speaker, Unknown Speaker, Unknown Shareholder, Unknown Shareholder, Unknown, Unknown Attendee, Unknown, Unknown Shareholder, Sean MacDonald, Olivier Colombo, Christopher Leatt, Jeffrey Guzy, Leatt Unknown Speaker With the new people you have on board, whether it's anecdotal or any data you can share, what market share looks to be given the environment and then promotional Just how would you rate promotional activity at this point in the cycle and and what are your expectations for market share are for here and beyond? So our market share is still in the 2-5% range in many areas. In terms of promotional activity, if I look at our competitors, I think there have been some handbrakes that have been snatched up. We are still pushing hard.

Sean MacDonald: We're not holding back on promoting our products. We're pushing hard in terms of getting products on the inventory side out to riders so that we can get some awareness out there to generate some sales in the future. So I would say that in the cycle right now with inflation, we've seen cuts across the board with many of our competitors and many industry players, but we are pushing hard still. We still feel strongly that there's an opportunity to invest right now for the future, so market share for us is still in the 2-5% range, depending on the product category, but we'd like to get much higher than that, and hopefully, with the gap in the market right now on the promotional side, we can push quite hard.

Sean MacDonald: Okay, and what about Unknown Speakers, Sean MacDonald, Olivier Colombo, Jeffrey Guzy, Leatt, Jeffrey Guzy, Leatt, Unknown Attendee, Unknown Shareholder, Sean MacDonald, Olivier Colombo, Jeffrey Guzy, Leatt, Unknown Shareholder, Sean MacDonald, Olivier Colombo, Jeffrey Guzy, Leatt, Unknown Shareholder, Sean We've also had to take a really hard look at our inventory levels over the last year to see any areas where we might need to improve the efficiency of inventory holding. We took a hard look at that. And despite that, we still have healthy margins.

Christopher A. Jarrous: It's certainly some promotional activity that is going on out there, but we are trying our hardest not to bite into that too much because we believe in the strength of our brand moving forward. But of course, there is a point when inventory does need to be discounted, and Leatt will do its best to retain brand equity. And we do see a lot of discounting out there in the competitive landscape. And I think we're trying to balance it out as best as possible, Chris. But, as I said, our margins did increase last year, which I think is positive in the context of the current market conditions. Okay. Fantastic. Thank you. Don't miss it.

Olivier Colombo: Thanks, Chris. Our next question comes from the line of Olivier Colombo, a private investor. Please proceed with your question. Hello Olivier.

Olivier Colombo: I just had some follow-up regarding the new adventure line. So did I understand you properly that some of the products... Unknown Attendee, Unknown Shareholder, Sean MacDonald, Olivier Colombo, Christopher Leatt, Jeffrey Guzy, Leatt, Yes, you are correct, Olivier. You understand correctly. We shipped a portion of the products out last year, and there's some hangover now of products that are going to be shipping during Q1 and Q2. And currently, Germany, Switzerland, and a few other European areas do have the full range.

Sean MacDonald: These are currently on the way to dealers, which is great, and to chain stores. We've got some big chain stores that we're selling to now in Europe, which is also great. But yes, we shipped out a portion in Q4, and we're starting to see the bulk of the shipments shipping out now during Q1. We did split some of the shipments in order to make sure that we had the CE certification for those products before they were shipped. So we got a lot of the CE certificates towards the end of Q4 and managed to ship, and now we are continuing to ship during Q1 and Q2. As I was saying to Chris earlier, this is, of course, apparel, so primarily jackets, pants, and gloves. And, of course, New York always strives to be a head-to-toe brand, so there's a lot of opportunity on the ADB side of things. And I have some questions regarding...

Sean MacDonald: Unknown Attendee, Unknown Shareholder, Sean MacDonald, Olivier Colombo, Christopher Leatt, Leatt, Unknown Speaker, Unknown Speaker, Unknown Speaker, Sean MacDonald, Olivier Colombo, Leatt, just like to know how hard it is, Bye. I mean, of course, you know, they do tend to discount some Leatt products, and we haven't had What we have done, Olivier, is we've changed some of our pricing structures when it comes to dealing with the typical e-commerce player that might, you know, look to discount deep. And we've done that in order to make sure that we protect the brand as much as possible.

Sean MacDonald: In terms of a number of the large e-commerce kinds of players that we are dealing with, that has decreased over time. And we are now looking to, as opposed to going with e-com players directly, although some of them are still good customers, and, you know, we still do work with them as a multi-channel, and we feel quite strongly that that's what we need to do in order to reach as many consumers as possible. But we are partnering with our distributors on the e-commerce side as well, in order to make sure that we not only get the Leatt brand front and center with as many consumers as possible, but we also, you know, can work with our distributors on the current inventory levels that they have and the future inventory that they're going to get, to get that inventory through the distributor and either to the dealer or to the end consumer.

Sean MacDonald: So, as I said, we see ourselves as a multi-channel business. We sell to dealers, we sell to consumers, we sell to distributors, and we sell to e-commerce players. You know, we do what needs to be done in order to get the Leatt brand into the hands of as many consumers as possible. And then my last question is related to the press. What exactly do you mean when you say first indications of recovery in? That's a good question, Olivier.

Sean MacDonald: I was really referring to some of the sales numbers that we're seeing. So looking at some areas in Europe during Q4, even though we were down by 10% in Q4, and that, of course, you could call it a narrowing of the gap in our revenues when compared to 2022, we did have to manage some credit issues. So there were some orders and stocks that we didn't ship during Q4, because for us, it's important that we make the right long-term decisions when it comes to shipping and when it comes to credit management. So if we had shipped those, the gap would have been narrower. So from our side, we're starting to see sales catching up now to prior levels.

Sean MacDonald: And if you look at motor sales, two dealers in the US, we were marginally up. It's the same in South Africa; in fact, in South Africa, we were up motorbike and MTB, so we're starting to see sales increasing in some areas, and generally, what we see is that it starts out at the consumer and dealer level. Of course, direct to consumer sales are up by 23%, which is also a great indicator for us. So we normally would see that at the consumer and at the dealer level. They're the closest to the market, obviously, so we start to see increases in sales in those areas, and then it filters through to international distributors over time.

Sean MacDonald: So these are just the first indicators; it's not all areas, Olivier, but these are some areas where we're starting to see some positive indicators, and also sentiment is just improving slightly. Obviously, we are still in a high interest rate environment; that hasn't changed yet, but I think the market perception in general is that that is also going to improve, so macroeconomic conditions seem to improve during 2024 and going into 2025, so that's also a positive indicator for us. And just in general, the feeling on our side is that we're starting to see some green shoots of a bit of an improvement in revenues in some areas. It's not across the board yet, but I think we will get there over time.

Sean MacDonald: Thank you very much for joining us. Unknown Attendee, seven. Thank you, Olivier. Thank you. Thank you. We have no further questions at this time. Mr. MacDonald, I would like to turn the floor over to you for closing comments. Thank you all for joining us today. We look forward to our next call to review the results of the 2024 first quarter. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day!