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spk02: and welcome to the LIAC Corporation third quarter 2020 results call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Mason, Investor Relations for LIAC Corporation. Thank you. You may begin.
spk03: Thanks, Melissa. Good morning and welcome to the Liat Corporation Investor Conference call to discuss the financial results for the third quarter of 2020. The company issued a press release today, Thursday, November 12, at 8 a.m. Eastern, and also filed its report with the SEC. The press release is posted on Liat's website at liat-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 1-844-512-2921 or 1-412-317-6671 for international callers. Enter conference ID number 13712961. A replay of the webcast will be available immediately following the 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 the call. The corporation does not undertake any obligation to update such statements made in the call. Please refer to the complete cautionary statement regarding forward-looking statements in today's press release dated November 12, 2020. 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, CEO of LIAC Corporation. Good afternoon to you in Cape Town, Sean.
spk01: Good morning. Thank you, Mike, and thank you all for joining us today. We had yet another groundbreaking quarter, the best third quarter in our history in terms of revenue and profitability, and in fact, our best quarter in terms of revenue since inception. Quarter after quarter, we continue to grow by double digits and build our global enterprise, even in the midst of of the headwinds of the COVID-19 pandemic. Global revenues were $11.4 million, up by 18% over last year's third quarter, and up nearly 64% sequentially over this year's second quarter. In the US, our largest single market, revenues grew by a remarkable 47% over last year. Net income for the quarter was $1.6 million, up 22% over last year. This quarter's growth was driven by fantastic demand for our innovative protective gear from motor dealers, MTB dealers, and ultimately our end consumers, who continue to participate strongly in outdoor activities. International sales grew by 5% as we made initial shipments of the majority of our 2021 head-to-toe product line to our customers around the world. For the first nine months of 2020, revenues were $25.9 million, an increase of $4.8 million, or 23%, compared to the first nine months of 2019. Net income for the first nine months was $2.7 million, an increase of 89% over last year. Again, despite the turmoil caused by the pandemic, people are turning to outdoor activities, which is certainly proving to be a beneficial trend for Liat. In terms of our individual products, we saw breakout revenue growth in our footwear, which now consists of mountain biking shoes and motorcycle boots, and our expanding line of body armor and goggle product categories. A key driver of our continued success is the development of a larger and more professional sales and marketing organization in both the MTB and motor areas, and particularly in the US, where we now have the ability to reach more dealers around the country. We believe that our engaging marketing campaigns contribute strongly to the development of Liat as a global consumer brand. A professional sales team armed with products and marketing tools that are extremely attractive to dealers is driving our momentum and contributing to our growth. These are trends that we will certainly continue to invest in. We have also worked to adjust to the new challenges brought on by the pandemic. To help bolster our sales and marketing efforts, We have focused on e-commerce and have created a new Leit website designed to make it much simpler for customers to navigate and make online purchases. And of course, we continue to grow and nurture our e-commerce partnerships globally. Here are the financial details for the third quarter of 2020. Revenues for the third quarter increased to $11.4 million, up 18% compared to $9.6 million in the 2019 third quarter. The increase was driven by a 76% increase in sales of other products, parts, and accessories and a 25% increase in body armor products that were partially offset by a 5% decrease in helmet sales and a 39% decrease in neck brace sales. Helmets are the largest single safety product category in safety gear. Although helmet sales were down slightly overall, we have completely re-engineered our line of motor helmets and now have a pipeline of new helmets for Moto and MTB that will ship during the next several quarters. We are very encouraged by the initial industry reviews, athlete feedback, and consumer demand for our redefined helmet line. Sales of our flagship neck braces decreased by 39% during the third quarter due to orders that were placed during the initial phase of the COVID-19 pandemic and delivered during the third quarter. Those conservative buying patterns are expected to normalize over the next several quarters as our customers rebuild their stock levels. Gross profit was $4.95 million, or 44% of revenues, compared to $4.50 million, or 47% of revenues, for the same period last year. As next race revenues, which continue to contribute higher gross margins when compared to our other product categories, contributed less to our sales mix. Total operating expenses increased $102,000 to $2.85 million or 4% compared to $2.75 million in the same period last year. Third quarter income from operations increased 21% to $2.1 million compared to $1.8 million for the same period last year. And net income rose 22% to $1.6 million or 27 cents per diluted share, compared to $1.3 million, or 24 cents per diluted share, for the same period last year. Here is the category breakdown in slightly more detail. Sales of our neck braces counted for 10% of revenues. Our neck braces continue to generate a higher gross margin than our other product categories, primarily because of our highly efficient manufacturing techniques, our intellectual property, and our position as industry leader. Our body armour products include our range of chest protectors, body protectors and vests, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and now mountain biking shoes. The 25% increase in body armour revenues was primarily due to strong demand worldwide for our GPX 5.5 boots for motorcycle use. Body armour accounted for 51% of third quarter revenue. Our other products, parts, and accessory category are comprised of our apparel line, hats, jackets, hydration kits, and goggles. The 76% increase in revenues is due to continued demand for our innovative Velocity line of military standard bulletproof goggles, both in the US and abroad. Other products, parts, and accessories accounted for 28% of third quarter revenue. Turning to the balance sheet. We have a very healthy balance sheet at this time. cash increased by 38% or $796,000 as compared to the period ending December 31, 2019. We continue to meet our working capital needs from cash on hand and internally generated cash flow from operations. At September 30, 2020, we had cash and cash equivalents of $2.9 million, a current ratio of 2.5 to 1, and no significant long-term debt. To summarize, while our business model continues to show strength, we remain cautious due to the global COVID-19 pandemic. We are closely monitoring consumer buying patterns and all COVID-19 related news to plan for any economic turbulence and industry headwinds that may arise. That being said, based on our promising results to date in 2020, we are extremely optimistic. We have a strong pipeline of cutting edge products that we expect will ship to our customers globally over the next several quarters. Recent launches of goggles, boots, and other exceptional protective gear, as well as our new MTB shoe line, have earned positive reviews and encouraging demand levels, as well as extremely good performance in the field. These products define Lears as a premium head-to-toe brand and are testament to our team's ability to develop a full offering of innovative products that appeal to a wide rider audience. All of our products are engineered and designed by our in-house Lear teams, tested in the field by our professional riders. Along with style, what you see in these products are the kinds of technological advancements in terms of comfort, safety, and quality that Lear is known for across the world. Finally, we continue to redefine our product offerings. and our market share potential remains exceptional in a majority of the new categories in which we compete. Our strong operating cash flow will be reinvested in our growth engine, developing innovative cutting edge products, as well as in building our global consumer brand and refining our sales channels. As always, we'd like to thank our entire Deert family, our dedicated employees, business partners, and team riders for their continued strong efforts and support in making Lear the success that it has become. With that, I'd like to turn the call over for questions. Operator?
spk02: Thank you. At this time, I'll be conducting a question and answer session. If you'd 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'd like to remove 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 poll for questions. Thank you. Our first question comes from the line of Olivier Colombo, private investor. Please proceed with your question.
spk05: Good afternoon, Sean. Hello, Olivier. How are you? Very well, thank you. Congratulations on one more fantastic quarter here. I have a few questions for you, actually five questions. The first one is, listening to some outdoor brands' conference call over the last couple of days, some of them have mentioned that they were out of order recently. out of products and they could have sold more if they had more available for customers. Did you face similar issues in any of your product category?
spk01: That's a good question, Olivier. In terms of delivering products from our suppliers out of China, we did not have any production issues. The stock that was at many of our distributors around the world, including Liat USA and in South Africa, was very low. The reason for that is that for a lot of our distributors that were very conservative in terms of their ordering patterns, So they didn't order what they would usually order. And a lot of that ordering took place in Q1. And then we did not have an opportunity to resupply them as of the end of Q3. So there was certainly some effect of that on the numbers.
spk05: Okay, that's perfect. Thank you very much. Then regarding, it seems that you're discounting the helmet, the GPX 4.5. and it should be replaced in the next couple of quarters. You mentioned several times the word several during your presentation today. What does several exactly mean?
spk01: Okay, so we will start shipping the replacement for the 4.5 helmet in Q4 of 2020, and then we will continue in subsequent quarters. Okay, excellent.
spk05: Thank you. One also that I realized in the case that there is an increase in the fully diluted share kind by roughly 328,000. Can you explain that, please?
spk01: Yes. So that relates to share options that were previously underwater. So the strike price of the options was higher than the share price. And, of course, now that our market cap is starting to improve and we're starting to see the share price increasing, those options are now viable and they now become dilutive. So they are included in the calculation of dilutive shares. Okay.
spk05: Yeah, now I get it. Thank you very much. One more question is regarding the salary increase. So it seems that you have added some people probably in your U.S. operations over the last quarter. Is that correct? And if yes, how many people?
spk01: Correct. We've increased our staff significantly. by about three people in the United States. We've also got a couple of new product development people that are working on our pipeline of new products. We have one based in Canada, and then we have a new product development engineer that is based in Taiwan. And those numbers are of course included in the salaries and in the product development costs now. Okay, perfect.
spk05: Thank you. And then my last question is regarding your office rent expenses. They went up roughly by 10%. In the quote, it seems that you have added a new warehouse to store all your products. I mean, does this mean ultimately that you might be looking for another U.S. headquarter for the whole operations? Because to my knowledge, it's a pretty small office there.
spk01: Another excellent question, Olivia. Of course, you know, we are growing our product line quite aggressively, and the products that we are now adding to the line are large. Things like helmets and motorcycle boots, I mean, those do take up a lot of space, which is the reason why we've rented on a short-term basis a warehouse, which is actually in the same business park across the road from Liat USA, so currently it is very convenient, and I would say that that is a short-term solution, and that there certainly is a possibility that we will need to evaluate our warehouse space in the United States quite seriously in the medium term.
spk05: Okay, perfect. Thank you very much. Those were all the questions that I had, and once more, congratulations on a fantastic quarter. Thank you.
spk01: Thank you, Olivia. Great. Okay. Talk soon.
spk02: Thank you. Our next question comes from the line of Chris Saru with Dunlop Equity Management. Please proceed with your question.
spk06: Hey, Sean. Congratulations on the all-time high quarter. Just a question on the helmet. So can you give us an idea of exactly, not exactly, but roughly how big the helmet market is relative to your other products and then As you've seen your new launches do well and you have a broader line of products, how does that feed into the relaunch of the helmet? Do you think that the helmet just is a standalone product or should this help accelerate the launch?
spk01: No, absolutely. So currently, helmet revenues is a relatively small part of our revenues, about 10%. And I mean, helmets as a safety item is certainly the largest safety item that is sold in the motor and MTB industry. So we would expect helmet revenues to be a much higher percentage of our total revenues, closer to the 40% to 50% mark. And of course, now that we have a full head-to-toe lineup of products, as well as a completely redefined helmet offering, You know, it's really the full package that gives us the ability to access more dealers. So, you know, initially dealers had the ability to just order a neck brace from Liat and maybe some chest protectors. You know, now they can really go head to toe. So we already have a position in these dealers, which, of course, makes it far easier to top the line off um with a big safety item like a helmet now helmets are also um you know it's a very competitive area um but we think that we um with some of the sales plans um that we have um and with the with the new product line that we have uh we'll be able to capture a decent size of the market um and certainly just like many of our other product categories You know, I mean, helmets are really in the infancy for us as a business, and we believe that we can do a lot better in that category.
spk06: Okay. And so as we think about, as you just told Olivier about the stronger or rather the distributor reorders in Q4, so that in addition to the helmet, in addition to the helmet relaunch and initial shipping and, you know, whatever new products as well, Should we expect maybe a stronger than typical Q4 as you have these tailwinds helping you?
spk01: I believe the Q4 will be a strong quarter for us, yes.
spk06: Okay. Okay, great. Thank you. That's it.
spk01: Good. Thank you, Chris. Nice chatting.
spk02: Thank you. Our next question comes from the line of Carter Dunlop with Dunlop Equity Management. Please proceed with your question.
spk08: Hi, Sean. Thank you for the call. And you would think Chris and I coordinated, but we didn't. I also wanted to ask just a more general question about the helmet market. If I'm not mistaken, your entry two years ago, approximately, was considered a sort of a functionality breakthrough leapfrog, if I recall. And you described the market as quite competitive. Have other feature functions from your competitors outstripped your offerings, and how would you describe your redesigned line? Is it incrementally bringing feature function, or is it also some sort of breakthrough?
spk01: Hi, Carter. Thank you for joining the call. So I think one of the lessons that perhaps we learned from the initial launch of our helmets is that you've got to have the features, you've got to have the safety features need to be at the forefront of your offering when it comes to helmets. But one also has to have a helmet that ticks all the boxes in terms of comfort, in terms of styling, in terms of design, and in terms of just the overall engineering look and feel of a helmet. So we really went back to the drawing board And we've got all of the technology in the new line, but we also have listened very carefully to consumer trends in terms of design and look and feel and comfort. We've added that as an absolutely key area, and it's part of Liat growing as a company. You know, it's really important that we listen to the end consumer and we engage with the end consumer as well as our athletes. We've spent a lot of time doing our homework on this new line of helmets for the last three to four years to make sure that we were following all of the right trends, not only in terms of safety, but also in terms of look and feel.
spk08: One last question. Is the safety functionality linked to the neck brace technology, or do most knowledgeable riders mix and match?
spk01: So, of course, it's optimized. Our helmets are optimized to be used with neck braces because neck brace technology is something that we obviously really believe in very strongly in terms of safety. But some people don't wear neck braces. So they can use our helmet with other neck brace. And, of course, you can ride with our neck brace and many different helmets. There are one or two helmets that might be a bit restrictive, but most helmets out there do take neck braces into account when they do their development work.
spk08: Okay.
spk01: Thank you very much. Thank you, Carter.
spk02: Thank you. Our next question comes from the line of Christopher Muller, private investor. Please proceed with your question.
spk04: Hi, Sean. Congratulations on another outstanding quarter.
spk01: Hi, Christopher. Nice to hear from you.
spk04: Nice to speak with you. Three questions for you today. Yep. First, there was a fairly wide gap between the U.S. growth rate and international growth rate this quarter. Is this mostly a result of distributors holding less stock during the pandemic? Or is it a matter of shipment timing between third and fourth quarters? Or are there other factors at play here?
spk01: Excellent question. And it is as a result of the two factors that you mentioned there. So just the timing of the shipments. We had some shipments of our new product line that will only ship in Q4 and would traditionally actually ship in Q3. And then also distributor buying patterns were really conservative during Q1 in the heart of the pandemic. And, you know, when it comes to Lear USA, we have the ability there to sell all the way through to the end consumer a bit quicker than our other distributors. So we've had fantastic sales there. But our distributors are now low on stock outside of the U.S. and are waiting, you know, for shipments of the Remainer. as well as restocking shipments so that they can service the market that they operate in.
spk04: Okay, great. That's very helpful. Second, I was wondering if you could comment a bit on apparel sales and how the new designs are being received. Financially, the apparel sales get lost within the other products and accessories category, but it would seem like a significant driver and indicator of brand growth.
spk01: Absolutely. So we've been, our sales of our apparel have been strong. We are growing every year when it comes to apparel sales. This is both on the motorcycle side, for a motorcycle, as well as on the MTB side of things, the mountain biking side of things. And it's not a massive percentage of our overall revenues on an annual basis, but it is growing. And it is obviously really important from a brand recognition perspective. So certainly exceeded our expectations.
spk04: That's good to hear. And then finally, I saw you refresh the website last month. Have you received any early feedback there? Are there any significant changes in the U.S. e-commerce sales as a result of this?
spk01: U.S. e-commerce sales are going extremely well. We've got some really positive feedback on the simplicity of the site. It's all about the number of clicks to making a purchase, and there's always that fine balance between performance and content. The site kind of had a bit of a slow start. There were a few teething issues because we launched the site and our new line of products, but it's now stabilizing really nicely. and e-commerce sales are continuing to grow in the U.S., direct-to-consumer. It's difficult to say whether that is because of the new site or whether that is because of the current environment that we're operating in with COVID, but sales are certainly going well on Leo.com.
spk04: That's good to hear as well. All right, well, thanks, Sean. Stay safe, and we'll talk next quarter. Yeah, chat soon. Cheers.
spk02: Thank you. Our next question comes from the line of Aaron Salen with Marion Road Capital Management. Please proceed with your question.
spk07: Hey, can you hear me? I can hear you. Hey, Aaron. Great. Hey, thanks for taking the question. Congrats on a good quarter. So just one more on international distributors. So can you say, like, how much months inventory those distributors typically hold and, you know, where you think they're at right now?
spk01: So typically, if you look at our lead times, our lead times are generally about 70 days. So generally, a distributor would hold about three months inventory in order to make sure that they could service the market. And we would estimate, and of course, this varies across all of the distributors, but we would estimate that they are really low right now. We have reached out to all of them. We're in communication with with all of them. I'll say it's less than a month's inventory that they have now. So they are needing inventory quite urgently and we are working really hard on putting together actually some additional orders for them so that we can get inventory to them as soon as possible.
spk07: Got it. And then maybe big picture, have you thought about, I guess, the benefits of more vertical integration? So in the US, obviously, you own the distributor. So does that make sense doing that internationally? And then also, as far as, like, maybe bringing manufacturing in-house, is that something that, you know, you would ever think about?
spk01: Yes, I mean, I think from a manufacturing perspective and from a vertical expansion into selling more directly to end consumers, you know, of course, there's quite a lot of investment that would be required in order to do that. So this is something that we obviously always are evaluating. But at this point, we are Our distributors, our international distributors are really close partners of ours. They've got great connections, great contacts, great distribution. We really have got the top tier distributors. They manage the working capital. They manage the distribution to the dealers really, really well. I think in the short to medium term, that's not something that we'd be looking to do. When it comes to manufacturing also, I think we certainly will look at different manufacturing locations. If there are manufacturing technologies that can really benefit us moving forward, we would look to bringing some of that in-house, but the bulk of our manufacturing will most likely remain with third-party manufacturers. We've got multiple manufacturers now that really are top-tier as well. So I don't see that changing anytime soon. Of course, what we have done internationally is we are now selling directly to dealers that are e-commerce dealers, and those are some of our biggest customers now. So outside of the U.S., we sell to third-party distributors that sell on to brick-and-mortar and e-commerce dealers. And then we've also cherry-picked the top e-commerce dealers outside of the U.S., and we do sell directly to them just because we feel that we can service them with the inventory and the marketing material that they need best. So we've actually got quite a nice mix of multi-channel... selling ability at present that is quite well balanced in terms of the margins and in terms of making sure that we can get our products out to as many customers and also, of course, in terms of the working capital management.
spk06: Okay.
spk07: And then maybe just in a different vein here, As far as the stock goes, have you thought about uplisting to, let's say, like the NASDAQ? It seems like you meet most of the requirements at this point. Is that something that you guys have discussed?
spk01: Yeah, you know, I think it's something that we are continuously, you know, looking at, you know, the benefits and the costs of some kind of an uplisting. And I think currently Liat as a business is operating organically really nicely. We don't need to raise any money in the short term or anything like that. And I think if we did ever do an uplisting, we would probably want to do that simultaneously with some kind of a raise of cash. And right now that's not something in the immediate future that we are looking at doing. But, you know, trying to get a fair market value and trying to improve the liquidity of the stock is something that we obviously are looking at continuously and we will continue to do that.
spk05: Great. All right. Thank you.
spk01: Aaron, thanks a lot. Thanks for the question. Nice chatting. Talk soon.
spk02: Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. McDonald for any final comments.
spk01: Thank you for joining us today. We look forward to speaking with you again to recap the fourth quarter and year of 2020.
spk02: Thank you. This concludes today's conference. You may disconnect your lines at this time.
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