Earnings call: Leatt Corporation Q2 results reveal mixed performance

Leatt Corporation (LEAT), a leading developer of protective gear for motorsports and other high-velocity sports, reported mixed financial results for the second quarter of 2024. The company saw a decrease in total global revenues by 18% to $10 million compared to the same period last year. Despite the overall decline, U.S. sales rose to $3.73 million, and consumer direct and dealer direct sales saw increases of 19% and 14%, respectively.

Leatt also reported a cash increase to $13.33 million. However, helmet sales took a significant hit, dropping by 59%. The company remains optimistic about future growth and value for shareholders, underpinned by a strong product portfolio and a robust balance sheet. With plans to introduce a new product category for its mountain biking line later this year, Leatt is positioning itself for recovery and expansion.

Key Takeaways

• Global revenues declined by 18% year-over-year to $10 million.
• U.S. sales increased to $3.73 million, while international sales fell to $6.34 million.
• Consumer direct and dealer direct sales grew by 19% and 14%, respectively.
• The company’s cash position improved, with an increase of $1.98 million to $13.33 million.
• Growth was observed in sales of neck braces, body armor, knee braces, and MTB apparel.
• Helmet sales significantly decreased by 59%.
• Leatt Corporation plans to launch a new product category in its MTB line later in the year.

Company Outlook

• Leatt Corporation expects to drive future growth and increase shareholder value with a strong product portfolio and robust balance sheet.
• A new innovative product category for the MTB line is slated for launch later in the year.

Bearish Highlights

• Global revenues saw a decrease of 18% compared to the previous year.
• International sales experienced a downturn, decreasing to $6.34 million.
• Helmet sales suffered a significant decrease of 59%.

Bullish Highlights

• U.S. sales showed an increase, rising to $3.73 million.
• Both consumer direct and dealer direct sales experienced growth.
• The company’s cash reserves increased, indicating a stronger financial position.
• Sales of certain products like neck braces, body armor, and knee braces increased.

Misses

• The company acknowledged weaknesses in the motor side of their business, particularly with helmets and apparel due to inventory levels and distribution pressure in Europe.

Q&A Highlights

• Sean MacDonald highlighted aggressive inventory management to make room for products with improved margins.
• Optimism was expressed for motor orders for 2025 products, showing early promise.
• A new components line was introduced at Eurobike, with most distributors planning to stock it, some conservatively.
• The margin profile on components is expected to be in line with the current blended gross margin, with no anticipated decrease in margins due to the new line.

Leatt Corporation’s second-quarter earnings call painted a picture of a company facing challenges but also finding avenues for growth. With strategic product launches and a focus on maintaining healthy margins, Leatt aims to navigate through the current market conditions and emerge stronger in the subsequent quarters. Investors and stakeholders will be watching closely as the company moves forward with its plans for innovation and expansion.

InvestingPro Insights

Leatt Corporation’s (LEAT) latest financial results have indicated some challenges in the market, with a notable decrease in helmet sales and overall global revenue. However, the company’s strategic positioning and financial health offer a nuanced picture for investors.

InvestingPro Data shows that Leatt holds a market capitalization of $46.93 million, and despite a negative P/E ratio of -16.01, reflecting its current lack of profitability, the company’s balance sheet appears resilient. Notably, Leatt’s cash reserves are more substantial than its debt, and its liquid assets surpass short-term obligations, which could provide a cushion against market volatility and fund future growth initiatives.

The company’s gross profit margin stands at 39.1%, which is a solid figure and indicates a degree of efficiency in its operations, even as it navigates a challenging revenue landscape with a year-over-year decrease of 28.68% in revenue.

InvestingPro Tips highlight that Leatt has not been profitable over the last twelve months, which aligns with the negative P/E ratio. However, the company has demonstrated strong returns over the last month, with a 16.87% price total return, suggesting investor confidence may be improving. Over a more extended period, Leatt has also shown high returns over the last decade and the past five years, indicating its potential for long-term growth. It’s worth noting that Leatt does not pay a dividend, which could influence investment decisions for those seeking regular income from their holdings.

For investors looking for a more comprehensive analysis, InvestingPro offers additional tips on Leatt Corporation, which can be found at https://www.investing.com/pro/LEAT. These insights could be particularly valuable for shareholders and potential investors as they assess the company’s financial health and future prospects in light of its recent earnings report and market performance.

Full transcript – Leatt Corp (LEAT) Q2 2024:

Operator: Greetings. Welcome to the Leatt Corporation Second Quarter 2024 Results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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: Thanks. 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 8:00 a.m. Eastern and filed its support with the SEC. The press release is posted on Leatt’s website at leatts-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 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, see you in Cape Town, Sean.

Sean MacDonald: 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 of 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 indebtedness 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, cash increased by $1.98 million to $13.33 million, with cash flows provided by operations of $2.99 million for the six months ended June 30, 2024. Our liquidity continues to improve as 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 million as of June 30, 2024, reflecting the robust quality of our business model. At a product level, declines in armor 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 MTV 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 ADV markets 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 ultra-light stands 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 Ductanium hardware. This construction technology makes up pedals and stands outstandingly light and effectively durable. Now I will turn to more details on sales of our product categories for the second quarter compared to 2023. Sales of our flash of 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 [indiscernible] 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 contributed to that 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 motor helmet sold compared to an exceptionally strong second quarter of 2023, when helmet sales increased by 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 bag 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 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 ADB 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 accessories sales that were partially offset by a $210,000 increase in body armor sales and a $50,000 increase in net price 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 by 236% as compare net income of $776,000 or $0.13 per basic and $0.12 per diluted share for the second quarter of 2023. Leatt continue to meet its working capital needs from cash on hand and internally generated cash flow from operations as 30 June 2024, the company had cash and cash equivalents of $13.33 million and a current ratio of 9.621% compared to a current ratio of 6.321% at June 30, 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 continued to see encouraging growth trends at the dealer and consumer level as the demand for their 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. An industry-wide turbulence presents an opportunity to grow the Leatt family by adding 10 and 15 members. Although these investments typically take time to add to our financial results, we believe in 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 Motor, 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 as at with a strong portfolio of innovative products in the market and in the pipeline, a multichannel sales organization that is growing and developing, the 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. 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 session. [Operator Instructions]Thank you, our first question is from the line of Christopher Muller with — a private investor. Please proceed with your question.

Unidentified Analyst: Hi, Sean. Hope you’re doing well today.

Sean MacDonald: Hi, Chris. Love to hear from you.

Sean MacDonald: 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 here 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 towards the 2025 launches, how far along are we in this process? Is there still a significant volume of inventory subject to the promotions?

Sean MacDonald: Great question Chris. Yeah, 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 margin 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 product 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.

Unidentified Analyst: And second, you mentioned in your remarks some weakness on the motor 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: Well, 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 to international distributors just in terms of our ordering cycle during Q2, were motor-oriented, so apparel or 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. 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 a trend that we’re starting to see coming through now. And of course, that should have an impact on the results in Q3 and Q4.

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

Sean MacDonald: 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 and we 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 end consumer channels open to sell this line. So I think the majority of the dealers will place an initial order for the line, which should ship in the next few quarters. That was a very exciting.

Unidentified Analyst: Definitely, that’s good to hear. Of course, I appreciate this new line spans a range of materials and price points. But maybe broadly speaking, how does the margin profile on components compared to your current blended gross margin?

Sean MacDonald: It’s similar. There are some items where the price points in the markets are very, very well established. And the costing at the manufacturers is 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. 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 in terms of Leatt’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 the container. So that should certainly help margins on a net level.

Unidentified Analyst: Well, thanks for your time, Sean. Chat again soon.

Sean MacDonald: Yes. Look forward to it.

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 MacDonald for closing remarks.

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

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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