Leatt Corp

Greetings and welcome to Liat Corporation third quarter 2021 earnings results conference call. At this time, all participants are on 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. Thank you. You may begin.

Thanks, Rob. Good morning and welcome to the LIAT Corporation Investor Conference Call to discuss the financial results for the 2021 third quarter. The company issued a press release today, Friday, 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 www.liatcorp.com. This call is being broadcast live and may be accessed on the company's website. An audio replay of the 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. The replay PIN number is 137-24984. 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. LEAD 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 12, 2021. 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 LEAC Corporation. Sean, good afternoon to you in Cape Town.

Good morning, and thank you, Mike, and thank you all for joining us today.

By nearly every measure, the third quarter of 2021 was an absolutely remarkable quarter for LEACs. Global revenues for the quarter increased by 94% over the 2020 third quarter to $22.1 million. Gross profit increased by 93% to $9.5 million, and net income increased by a staggering 166% to $4.3 million. Third quarter growth was led by an exceptionally strong increase in international revenues, which grew substantially to $17.8 million from $7.1 million for the 2020 third quarter, as we successfully shipped our highly anticipated 2022 line of products to our customers around the world. Our global supply chain team and manufacturing partners have done incredibly well in a challenging and often dynamic environment to ensure that inventory is delivered, and we believe that we are well positioned at this time to meet customer demand levels for the upcoming holiday shopping season. We have now achieved record-breaking quarterly revenue for five consecutive quarters and year-over-year revenue growth for the last 14 quarters. We are successfully growing Lear into a leading global consumer brand that is respected around the world for designing and engineering exceptional products for the sports industry. Third quarter growth was impressive across our growing head-to-toe portfolio of products. with a $6.6 million increase in body armor sales, a $1.5 million increase in neck brace sales, a $1.5 million increase in the sale of other products, parts, and accessories, and a $1.1 million increase in helmet sales. Let's take a look in more detail. Our body armor products are comprised of our range of chest protectors, body protectors, and desks, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots, and mountain biking shoes. The 114% increase in body armor revenue is attributable to a 101% increase in the volume of upper body protection sold during the period. This demand has resulted in significant restocking orders, with encouraging sales of our growing footwear category of motorcycle boots and mountain biking shoes contributing to exceed our expectations. Body armor accounted for 56% of 2021 third quarter revenue. We are very pleased with the performance of our neck brace products for the quarter as they continue to generate a higher gross margin than our other product categories. While the wide demand for our neck braces continues to increase, neck brace sales accounted for 12% of 2021 third quarter revenue. Our other products, parts and accessories category are comprised of our goggles and hydration bags, our parallel line of jackets, pants, shorts and jerseys, as well as our aftermarket support items. The 47% increase is due to a 189% increase in the volume of mountain biking and off-road moto apparel sold during the period, as the global consumer demand for our cutting edge gear continues to surge. The other products, parts, and accessories category accounted for 21% of third quarter revenue. The 93% increase in helmet sales during the third quarter is primarily due to a 149% increase in the volume of our innovative, award-winning MTB and off-road motorcycle helmet lines, sold globally during the 2021 period. Helmets accounted for 11% of our 2021 third quarter revenue and remain a key focus area for our company. While international revenues for the quarter grew substantially, revenues in the United States grew at a more marginal rate. This was due in part to temporary domestic port congestions and tracking delays causing a lag in the performance of domestic orders of our 2022 product line. Dealer and consumer demand for our products remains very strong in the U.S. and we have been able to deliver significant orders during the first half of the fourth quarter in time for the holiday shopping season. Our new warehouse in Reno, Nevada has three times the storage space of our California facility which will enable us to fulfill a higher volume of orders, a key component of our continued development in the U.S. Reflecting back on the headline financials, total revenues for the third quarter of 2021 increased to $22.1 million, up 94% compared to $11.4 million for the third quarter of 2020. Gross profits for the third quarter increased to $9.5 million, up 10%. 93% compared to $4.9 million for the third quarter of 2020. Total operating expenses for the third quarter of 2021 increased to $3.8 million, up 54% compared to $2.9 million for the third quarter of 2020 due to increases in salaries, G&A costs, and professional fees. And income from operations for the third quarter of 2020 increased to $5.8 million, up 170% compared to $2.1 million for the third quarter 2020, with net income for the third quarter coming in at $4.3 million, or 79 cents per basic, and 69 cents per diluted share, up 166% compared to $1.6 million, or 50 cents per basic, and 27 cents per diluted share for the third quarter 2020. The extraordinary third quarter added to what is already our strongest year ever, Global revenues for the first nine months of 2021 increased 91% to $49.3 million. Net income here today increased by 251% to $8.8 million, a return on revenue of 18% and earnings of $1.61 per basic share. Turning to the balance sheet, at September 30, 2021, we had cash and cash equivalents of $2.59 million, Our current ratio stands at 2 to 1, and we have no long-term debt. We believe that our current cash and cash equivalent balances, along with net cash generated by operations, are sufficient to meet anticipated cash requirements for at least the next 12 months. We have no plans for any major capital intensive expenditures in the next 12 months beyond investment in molds and tooling to facilitate further expansion and refinement of our product categories. We believe that our performance for the third quarter demonstrates once again our ability to grow revenue, remain operationally efficient, and generate significant shareholder value. To summarize, global consumer spending, particularly on outdoor products like ours, continues to grow as people participate in outdoor activities that provide some escape from the restrictions of the COVID pandemic. This is a trend that we expect to continue. Global demand for our exceptional head-to-toe protective gear for off-road motorcycle and MTB riders continues to surge around the world. We see this through significant restocking orders that we are managing with our supply chain and distribution partners worldwide. This sustained consumer demand, along with recognition from the media, our business partners and industry athletes, continues to energize our entire team. While we still have a lot of work to do in order to differentiate our products, leverage our brand, and manage our supply chain, we remain committed to excellence in all that we do. Our team is focused on increasing our market share and refining our already strong pipeline of innovative products that we believe will continue to attract athletes and consumers around the world. In conclusion, we continue to evolve the company and the brand through our consistent focus on developing a diverse line of products. our growing sales and marketing efforts, and the nimble resilience of our global supply chain team during these dynamic times. We believe that we are well positioned to deliver an incredible financial performance in 2021 and beyond. As always, we'd like to thank our entire Leard family, our dedicated employees, business partners, and team riders for their continued efforts and relentless support. And with that, I'd like to turn the call over for questions.

Operator? Thank you. At this time, we'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 to 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 call for questions. Our first question comes from Chris Jarris with Dunlap Equity. Please proceed with your question.

Hey, Sean. Congratulations on the exceptional. Thank you, Chris. I just want to ask, yeah, two questions. First one is you mentioned in your press release about being able to manage through supply chain issues, obviously some products held up in the ports. But what are you guys doing? I mean, as a relatively small company in that, large market, how have you been able to manage the supply chain, given that you manufacture in China? What have you guys done that's allowed you to execute so well?

So I think there's really two big drives that we've focused on. The first is just nurturing the relationships that we've had with some of our manufacturers that we've been with for a very long time now. And also with the tremendous growth that we've seen, we've really become a very important source of business for these manufacturers. which has placed us in a favorable position in terms of manufacturing space. So that's the one side of it. And then in terms of just the actual deliveries, getting stock onto the water, I think Lear has always been very well positioned for the kind of situation that we now see with COVID. We've got a solid supply chain set up actually in Asia. And with the limited travel that one can do now into Asia, that has really benefited us So we drive a lot of our supply chain globally, directly inside Asia with people there that are focused on getting our inventory from the manufacturer to all of our customers around the world. And I think that has really been a great strength for us in these difficult times.

Okay, so these aren't just regular brokers that anybody is using and are, you know, these are people specific to Liat?

These people are focusing on Liat's $25 a day.

Okay, that's great. Second question, kind of higher level question. Recent interviews with manufacturers of the e-bikes have said that, you know, they've got their products are sold out for the next, you know, they've got two years of capacity sold through the channel already. They're just waiting to fulfill over time. And so that market has grown dramatically. As I think about that market, I think about the different types of people that would use that. It allows us to enter the market, kids, older people, people that historically aren't your 25-year-old biker bombing down the mountain. So if that is correct in expanding to that market, I would think that those people are more interested in your types of products, innovative, safety-first kinds of products. What have you seen, and is that correct, and what are e-bikes doing to the general MTB market?

Absolutely. I mean, obviously, there's different segments in the e-mountain biking marketplace. Sorry, in the e-bike marketplace, and e-mountain biking is a very, very strong segment, and that has definitely benefited us in terms of consumer demand. Because we do sell products that are protective, you've got a lot of new entrants that are only able really to enter this market because of the fact that these are electrified bicycles. So they get to really experience some things that they never would have experienced if it was not an e-bike, if it was a general bicycle. And that has really benefited us because these are the kinds of people, either the gear is being bought by parents for youngsters that are getting onto these bikes, or the less capable, maybe slightly older people that have now gained access to cycling as a sport and can get to some great places and potentially some really dangerous places, actually. They are obviously very concerned about getting back to work on Monday For those people, the lead line of protection and particularly the body armor, the surge that we've seen in body armor demand, I believe that the e-mountain biking market has been one of the drivers around that surge of demand that we've seen. We do have some products that we have now started labeling as very specific to e-mountain biking, but The vast majority of our body armor is absolutely perfect for an e-mountain bike rider, which is great news because we actually have the products ready on site to sell to these people. So that has certainly benefited us.

Okay. Fantastic. So thank you, and best of luck in the Q4 season.

Thanks very much, Chris. Chat soon.

Our next question is from Christopher Muller with a private investor. Please proceed with your question.

Yes. Hi, Sean. Congrats to you and the team on the continued success. Thanks very much, Chris.

Nice to hear from you.

I have maybe three questions for you today. First of all, just a follow-up on the supply chain. Besides the container delays to the U.S., are you seeing any challenges there, whether it be factory shutdowns or material shortages or such? that would impact your product availability or growth plan over the next few quarters?

We haven't seen anything major in terms of raw material shortages. Some of the factories that we work with have had temporary electrical shutdowns, but those are short-term. So most of the kind of slowdown in manufacturing has been very short-term in nature, and I don't see it affecting our ability to supply over the next several quarters.

That's great to hear. And last we spoke, you were just about to begin shipping out of Reno. How is that progressing? Is that all scaled up now in Q4? Sure.

So it's great news.

We are shipping only out of Reno now. We're not shipping anything out of Santa Clarita anymore. Reno is now fully operational. We've been able to get some really good warehouse, specific specialized warehouse staff in Reno. And we really are seeing and experiencing a great, increase in our ability to fulfill orders quickly. We are fully operational and going really guns and blazing out of there. So that's great news.

Great news indeed. Any significant changes in distributors or e-commerce retailers this year? Are you still finding expanded reach, particularly in the more mainstream trail riding market on the mountain bike side?

Absolutely. I think that's been something which has also been a key driver of our growth over the last several quarters is just our relationships that we've built with some of our e-commerce dealers that we now are dealing with directly. We really have been able to reach a much wider rider audience. You're not only limited by where the distributor has a strength. We actually are a lot closer to the end consumer, and I think that's part of the reason why we've seen some great demand for our products, just getting that one step closer to the end consumer, but still selling, obviously, through our dealer partners.

I noticed the moto and the bike neck braces were consolidated into a single line this year. Besides the obvious benefits, maybe a reduced inventory and a greater selection of colors for both markets, were there any other considerations or factors around that change? Sorry, could you repeat that?

I didn't fully understand that.

Could you just repeat that? Yes, the moto and the bike neck brace lines look like they were consolidated into a single line this year. We no longer have designations on the two different products, and I was just wondering what factors went into that change. And what are your expectations from that?

Yes.

Yes. So, I mean, I think that, you know, there's a couple of things that obviously came into that. I mean, I think the biggest reason is just that there's very little differentiation, actually, between those two product lines. And, you know, we want it to be authentic in terms of our product offering. So that's the one angle. And then the other side of it is just in terms of the manufacturing efficiency perspective. We didn't feel that having separate lines was going to change anything in terms of consumer demand. It certainly hasn't. And also, it obviously makes things a lot more effective from a manufacturing perspective. So with demand increasing, you know, we took the opportunity to consolidate things just a little bit. And I think that's going to work out quite well for us.

Great to hear.

All right, well, that's all the questions I had for you. I also just wanted to give a shout-out to your design team on a very impressive 2022 line. Thanks again, Sean. I'm sure we'll talk soon. Thanks, Chris. Chat soon.

Cheers. Our next question comes from Olivia Colombo, a private investor.

Hello, did you hear me? Hi, Olivia. Yes, I can hear you. Hello, Olivia. That's perfect. Thank you very much. Congratulations on this incredible Q3 report. What is also remarkable is this quarter alone is 10% higher than your full sales in 2017. So I think this is quite an achievement. That's a nice statistic. Thanks, Olivier. My pleasure. You know I like statistics. My first question is, like most of the outdoor brands that I've reported so far, most of them have mentioned a slippage of some of their Q3 products into the next quarter. I guess this is the same for you. Is it possible for you to potentially quantify it eventually percentage-wise? Is it 10%, 15%, 20%? What do you think?

I think what I would say is that we probably lost a good 20% of sales in the U.S. because of the lag, and probably about 10% of sales, I'm going to say lost. I mean, we didn't lose them. We're still going to deliver the inventory because it's all on backorder. Probably about 10% on the international side that we're going to see falling now into Q4. We already started shipping a lot of that out of the U.S. warehouse because that stock has now all arrived and is now moving through the network. So about 20% in the U.S. and about 10% international.

Okay, perfect. Thank you very much. The next question is regarding the professional fees which were up 182% during the quarter due to increase in product liability litigation settlement. I guess this is probably a one-time event and that should not repeat in the coming quarters.

Yes, that is correct. That was a settlement of one of our trials, and we should not see that. We certainly don't know of any other areas where we are litigating now where we can expect any settlement like that. So in Q4, I definitely do not expect to see anything like that, and hopefully there are no further trials that come up.

That's perfect. Yeah, we all hope so. And then my final question would be on your new sustainability line that you are launching, the 2022. I would just like to know how long have you been working on this line and what has been the market reception to something that I think is incredibly innovative and looks very cool?

Firstly, thank you, Olivia. We've been working on it for about three years now, just planning how we're going to release it. Of course, at the moment, it is a few products that are in the line. Over time, we obviously hope to grow that line of products just to become more sustainable. It is something that we do take very seriously at Liat. We realize that we've all got a responsibility to towards sustainability and becoming more eco-friendly. So step-by-step, we are working on increasing that. It's taken about three years to get to where we are, but of course now we do have the technology, we have the capabilities, we have the suppliers. Do I also expand this? We are planning on expanding it quite quickly. We also now have full eco-packaging, so all of the packaging that we're sending around the world now is fully eco-friendly using things like soya ink and products that are not harmful to the environment. So that we've been working on this for about two years now, and that's been a huge change for us. Of course, a lot has to be done in order to put that in place, but we are relieved that we are now in a position where we can say that all of our packaging is eco-friendly.

Do you think this eco-packaging is a higher cost for you, or does it lower your costs on the packaging in general?

We're talking packaging, packaging in general.

Yes, just packaging. So it's pretty much break-even. There might be a slight, on some areas, there might be a slight increase in cost, but generally when you go down the eco-road, you do see some cost increases, but then things become, there's less colours, you're limited to certain materials. which decrease your cost. So it's pretty much break even, maybe slightly higher in some areas.

Okay, that's perfect.

Of course, if you're talking about... Yes. Please go on.

I was going to say that if you're talking about on the product side, with the sustainable materials that we are using on the product side, those are a bit more expensive. But some consumers are willing to pay a bit of a premium knowing that they're using materials that are cutting-edge like that. That's great.

Okay, so thank you very much for taking my questions today, and congratulations once more on the great work and looking forward for the rest of the year.

Thank you, Olivier. It's always a pleasure hearing from you.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Sean McDonald for closing comments.

Thank you all for joining us today.

We look forward to speaking with you about our 2021 year-over-year performance in the spring.

This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.