Leatt Corporation (OTCQB:LEAT) Q3 2022 Earnings Conference Call November 9, 2022 10:00 AM ET
Company Participants
Michael Mason – IR
Sean MacDonald – CEO
Conference Call Participants
Operator
Greetings, and welcome to Leatt Corporation Third Quarter 2022 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mike Mason, Investor Relations of Leatt Corporation. Please go ahead.
Michael Mason
Thanks, Victoria. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the third quarter 2022. The company issued a press release today, Wednesday, November 9, at 8:00 a.m. Eastern and also filed its report with the SEC. The press release is posted on Leatt’s website at www.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 7 days and may be accessed from North America by calling 1-844-512-2921 or 1-412-317-6671 for international callers. The replay PIN number is 13733893. A replay of the webcast will be available immediately following this call and will continue for 30 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 November 9, 2022.
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 Capetown, Sean.
Sean MacDonald
Good morning, and thank you, Mike, and thank you all for joining us today. I am pleased to report that the third quarter of 2022 was our 18th consecutive quarter of year-over-year revenue growth. Total global revenues were $23.3 million, an increase of 5% over the third quarter of last year. Gross profit was $10.1 million, up 6% over 2021, and return on revenue was 17%, with earnings per share of $1.90 year-to-date.
This growth was particularly encouraging in light of the challenging comparative period. Q3 of 2021 was an extraordinary quarter with record-breaking revenue and growth of $10.73 million or 94%. Considering some challenging macroeconomic and geopolitical headwinds, we believe that our growth in this environment is a testament to the solid momentum and market penetration that the Leatt brand and Head to Toe offering of exceptional gear has achieved over the past several years.
It also highlights our operational efficiencies, our resilience and our ability to control costs in these challenging inflationary times. The sales traction, market penetration and brand development that we have achieved over the last several years are due to our team’s ability to develop, market and sell innovative products to wider groups of consumers all over the world. For the third quarter of 2022, operating expenses increased by 24% due largely to investments in sales and distribution channels, marketing campaigns designed to build a global consumer brand and a return to trade shows and global consumer outreach travel, all investments that we believe will fuel growth moving forward.
We continue to manage working capital needs through internally generated cash flow. That said, we are seeing these headwinds cause some moderation in the extraordinary consumer demand levels that the global MOTO and MTB industry has enjoyed over the last several quarters. This doesn’t change the overall strategy and solid fundamentals that have contributed to our success. Consumers continue to ride and participate heavily in outdoor activities, and dealers continue to digest inventory and reorder. These are trends that we expect to continue.
We were particularly pleased with our results in the U.S. for the quarter, an area where we continue to invest in our sales and distribution capacity. U.S. revenues increased by $1.1 million or 26% year-over-year, as some dealers began to restock inventory around the country. Our Reno, Nevada warehouse is now fully up and running and well stocked to ship products to customers and consumers efficiently. The U.S. sales team continues to grow substantially, as we reach and service a wider group of MOTO and MTB dealers around the country.
International revenues for the quarter grew marginally by $42,000 over an extraordinary 2021 third quarter, as our customers look to digest inventory levels of our most established product categories. Q3 2021 international revenues grew by a staggering $10.68 million or 150%. The employment of a team of global sales and marketing managers in some of our most important regions outside the U.S. continues to be an important focus area, as we aim to grow our multichannel sales approach and leverage the tremendous momentum that the Leatt brand has gained over the last several years.
For the first 9 months of 2022, global revenues were $65.4 million, up 33% over the same period of 2021. Net income for the first 9 months of the year grew to $11 million, a 26% increase over the same period of 2021. These are tremendous achievements since the first 9 months of 2021 saw revenue increasing by 91%.
On a year-to-date basis, we saw double-digit revenue growth in all of our expanding product categories with the exception of neck braces, our most established product, where sales decreased compared to an extraordinary 9-month period in 2021 when neck brace sales increased by 74%.
Sales of MOTO and MTB helmets and off-road motorcycle boots were particularly encouraging. Furthermore, because many of our innovative products are still in their infancy in terms of market share, with a significant opportunity for future gains, we believe that there is a long runway for our products and that we are well positioned to deliver long-term growth and shareholder value. Now let’s turn to some sales details on our individual product categories for the third quarter of 2022. Helmet sales were a highlight for the quarter. They increased by 88% to $4.4 million primarily due to exceptional global demand for our redesigned motor helmet line for off-road motorcycle use. Helmet sales were 19% of our total revenue for the quarter, up from 11% a year ago.
Sales of our other products, parts and accessories category, comprised of goggles, hydration bags and apparel items, were also particularly encouraging. Sales increased by 38% to $6.5 million, comprising 28% of our revenues for the quarter. The increase was primarily due to a 51% increase in the sales volume of our MOTO and MTB technical apparel design for off-road motorcycle and mountain biking use, respectively.
Sales of our flagship neck brace decreased by 30% to $1.9 million as compared to the third quarter of 2021, which was once again a particularly strong quarter for neck brace sales. Neck brace sales for the third quarter of 2021 had increased by 128% over the prior year period.
Our body armor products comprised of chest protectors,and upper body protectors as well as knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes totaled $10.52 million, a decrease of 15% year-over-year. The decrease mainly in upper body armor revenues, which were down 30% compared to a strong third quarter of 2021. Body armor product sales were 45% of our total revenues for the third quarter.
Here are the key financial results for the third quarter. Total global revenues were $23.3 million, an increase of 5% over the third quarter last year. Gross profit was $10.1 million, up 6% over 2021.
Income from operations decreased to $5.5 million, down by 5% compared to $5.8 million for the third quarter of 2021. Net income decreased to $4.1 million or $0.70 per basic and $0.65 per diluted share, down 5% compared to $4.3 million or $0.79 per basic and $0.69 per diluted share in 2021.
To summarize, where we stand year-to-date for 2022, global revenues were $65.4 million, up 33% over the same period of 2021. Net income for the first 9 months of the year grew to $11 million, a 26% increase over the same period of 2021. And as of September 30, 2022, we had cash and cash equivalents of $4.8 million and a current ratio of 3.1:1.
We continue to sustain revenue growth, despite the challenging macroeconomic and geopolitical environment that has caused currency fluctuations and may impact consumer sentiment of customers around the world. While we are seeing some moderation in global demand due to these headwinds, our overall strategy remains on track.
Consumers continue to ride and participate heavily in outdoor activities, and dealers continue to digest inventory and reorder. These are trends that we expect to continue. Our U.S. operations are well stocked for growth and well positioned to reach a wider group of dealers and consumers. Internationally, we are aggressively growing our multichannel sales approach.
We remain very proud of our operational efficiencies, our resilience and our ability to control costs, despite the challenging inflationary environment. We believe in our team’s ability to develop market and sell innovative products to wider groups of consumers all over the world.
Again, importantly, many of our innovative products are still in their infancy in terms of market share, with significant opportunity for future gains. We believe that we are well positioned to deliver long-term growth and shareholder value with solid fundamentals in place. While we will continue to monitor worldwide geopolitical and macroeconomic risks, we are focused on continuing the momentum that we have gained over the last several years, managing working capital and driving consumer demand.
As always, we’d like to thank our entire Leatt family, our dedicated employees, business partners and team riders for their continued strong efforts and support in making Leatt the success it now is.
With that, I’d like to turn the call over for any questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Emmanuel Cartier [ph], Private Investor.
Unidentified Analyst
First of all — so my first question is on the gross profit margin. So the gross profit margin is up quarter-over-quarter, despite, I think, a softer mix. Is this mainly driven by lower transportation costs? Or what is explaining that?
Sean MacDonald
Yes, that is correct. We have seen a decrease in transportation costs out of China to our customers around the world and particularly into the U.S., which has resulted in better margins.
Unidentified Analyst
Okay. And this is a trend that will continue into Q4 then, I guess, because shipping rates continue to trade lower.
Sean MacDonald
That is correct. Last year, there was a huge spike in shipping costs. We have seen the shipping market soften in quite a positive fashion over the last few quarters. So I would expect our margins — our top line margins to carry on improving.
Unidentified Analyst
Okay. Good. Then the second question is on the stock levels both at the MOTO, but also at bike. We have seen quite some listed companies worn on high stock levels, especially for the bike segment. On the other hand, you are less exposed to your type of bike products. Anyway, I would be happy to hear how you look at the stock levels.
Sean MacDonald
Yes, sure. So I think, obviously, you’ve got to look at your stock levels in terms of the different product categories that you saw. And it’s the same when it comes to bicycles themselves. Very high-end bikes are still in huge demand. The lower-end bikes, there’s less demand, and stock levels are very high.
In our case, we have different categories of stock. We have different categories of product. We have products that carry over for several seasons, like a lot of our protection products. And if you look at the kind of product mix that we have in our stock, a lot of it is carryover product.
So we’re not too concerned about the aging of that stock because we can sell it over several seasons. And of course, we need to be well stocked in order to be able to keep up with demand levels.
So I would say that we’re not overstocked. I would say that we are well stocked. We’re in a strong stock position to be able to supply the market as demand levels, hopefully, increase over time.
And it’s the same for — on the MOTO side and the MTB side. It very much is product and product category dependent. And we feel that, although there are always areas we are going to have some closeouts without doing any damage to the brand positioning, on the whole, our stock is well positioned and well aged.
Unidentified Analyst
So you don’t believe that high stock levels that your customers could be a reason for potentially a materially softer sales level in Q4 or beginning of next year.
Sean MacDonald
In terms of inventory levels at our customers, of course, I was talking particularly now about the stock level that we have, which are in 3 places: South Africa, where we own the distribution; the U.S.; and then, obviously, China.
In terms of our customers, I would say that, generally, the industry — and again, it’s the same for our customers. It depends on the product categories. There is inventory on the MOTO side and the MTB side that needs to be digested in the pipeline. And of course, we’re doing everything possible to support our customers as much as possible, so that Leatt stands out as a brand.
What we do see is that Leatt is quite well positioned in terms of Leatt inventory at our customers. But of course, our customers have got various brands, and there is quite a lot of inventory out there in the market, which will take some time to be digested.
So this is a timing thing. And I do believe that this inventory levels will decrease over time. People are still riding, and there’s more riders than ever on both sides of MOTO and MTB.
So it will take some time for this inventory to be digested, but I’m positive about the future. I think medium to long term, when some of these inventory blockages are cleared, we can return to strong growth levels.
Unidentified Analyst
Okay. And back in 2008, I think MOTO was cyclical. But on the other hand, the company cannot be compared because you had only one product and some supply chain issues, and the unemployment rate remains also pretty high. So would it be fair to say that you would expect a much less negative impact versus that period? I’m just trying to understand what the worst case outcome could be.
Sean MacDonald
I think Leatt, as a business, is a full head-to-toe business in terms of product offering on the MOTO side and the MTB side. And of course, the more diversity you have in your revenues, the lower the risk.
When we were a neck brace company only, neck braces are a kind of optional product. So there’s a double risk there, of course, because people don’t have to wear them. We, of course, encourage people to wear them because, I mean, it’s potentially catastrophic accidents that can cause catastrophic results if you are not wearing neck brace.
But if you’re going to ride, you need to have a helmet, you need to have some level of armor, you need to have mountain biking shoes. If you’re riding a mountain bike, you need to have boots, you need to have googles, you need to have apparel.
Those are must-haves, and I think that puts us in a much stronger position in terms of the diversification of our revenue streams to be able to manage the risks moving forward.
Unidentified Analyst
Yes. That’s helpful. Maybe a very final question is on the comment that you see some moderation in global demand. Could you maybe split up a little bit the last couple of months or weeks just to give us an indication if you really start to see sales coming down? Or is it just no longer growth that you see, but the kind of stabilization in the sales level?
Sean MacDonald
Yes. Look, I think it’s — as I commented in the script earlier, I think we have to always put moderation of demand into context, and I think it’s in the context of the extraordinary levels of growth and demand that we’ve seen for the last several quarters with this explosion of outdoor activity participation level.
So I think there’s certainly some moderation in the extraordinary demand levels. But as I’ve said, I think people are still riding this — and when you’re riding, you need our products. So I think that’s something, which is very positive.
In the last few weeks and months, I mean, I don’t think it’s gotten — certainly, it hasn’t gotten any worse than what we have been seeing. Of course, there are headwinds that are around, I mean, in an inflationary environment, which is — has an impact, particularly on currency fluctuations.
We do sell a large portion of our product in U.S. dollars to countries that do not sell in U.S. dollars, so that means that currency fluctuations and particularly the strength of the U.S. dollar does affect pricing levels of our products in countries outside of the U.S. So that’s another factor that we — that needs to be taken into account.
But I certainly would say that it’s a moderation. We haven’t seen demand kind of falling through the floor. We haven’t seen anything drastic. We’ve just seen a moderation in terms of demand levels in relation to the extraordinary demand that we’ve previously seen.
Operator
There are no further questions at this time. I would like to turn the floor back over to Sean MacDonald, CEO, for closing comments.
Sean MacDonald
Thank you all for joining us today. We look forward to our next call to review the results of the 2022 fourth quarter.
Operator
This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
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