Leatt Corp

Greetings and welcome to the LIAT Corporation first quarter 2023 results conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Michael Mason, Investor Relations for LIAT. Thank you, Michael. You may begin.

Thanks, Devon. Good morning and welcome to the Liat Corporation Investor Conference call to discuss the financial results for the first quarter 2023. The company issued a press release today, Thursday, May 11, 2023, at 8 a.m. Eastern, and also filed 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. The replay PIN number is 13738621. 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. Liat 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 May 11, 2023. 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 Liat Corporation. Good afternoon to you in Cape Town, Sean.

Good morning and thank you, Mike, and thank you all for joining us today. The first quarter of 2023 was both challenging and promising for Liat. Although the wider motor and MTB industry continues to experience post-COVID stocking dynamics and macroeconomic factors that have caused constrained buying activity at deal and distributor level, direct-to-consumer demand for Liat products remains encouraging and as we begin to see a return to strong rider participation around the world following some colder spring weather. First quarter revenues decreased by 46% year over year in the context of a global inflationary environment and a particularly difficult comparative. The first quarter of 2022 was the strongest quarter in our company's history. Revenues grew by 88% in a quarter that is traditionally our slowest quarter. Despite the year-over-year drop in revenues, we earned $1 million in net income and generated $5.3 million of cash from operations, with $11.4 million in cash and equivalents on hand at March 31, 2023. We remain optimistic that the arrival of the spring riding season will continue to increase consumer participation in outdoor activities, which will in turn stimulate growth and the digestion of inventory at dealer and distributor level so that restocking can intensify. Our team is enthusiastic about the future of our brand and our company, as we work diligently towards a strong return to our track record of delivering double-digit growth and shareholder value. Reflecting on the financials in a bit more detail, total revenues for the first quarter were $13.1 million, a decrease of 46%, compared to the first quarter of 2022. International revenues were $9.2 million, a decrease of 52% when compared to the remarkable 166% growth in international sales in the 2022 first quarter over the 2021 period. Sales in the US were $3.9 million, a 26% decrease year over year. US dealers continue to manage elevated stocking levels and adjust ordering patterns accordingly. and we continue to actively grow and invest in our team of US sales reps to reach a wider base of both motor and MTB dealers throughout the country. Gross profit as a percentage of sales increased to 44% in the first quarter, a result of improved supply chain and logistics costs, and our focus on maintaining margins and strong brand positioning. Net income in the first quarter was $1 million, a decrease of 76% compared to the exceptionally strong growth in the prior year period. Net income per common share was 17 US cents. Total operating expenses increased by 8% as we were able to control costs despite the strong global inflationary environment. The cash flow generated from operations was $5.3 million as our team continues to focus on managing working capital and cash flow. We believe that our ability to generate cash flow during this challenging period is a testament to the resilience of our business model and our team, and positions Liat well for future growth. We were particularly encouraged by the increased activity on our consumer direct channels and those of our international e-commerce partners. Liat.com site activity and consumer purchasing continued to grow during the first quarter, with consumer direct sales increasing by 10%, representing 5% of our total global revenues. Our team of sales and brand managers covering key established and emerging global markets are working closely with our distribution partners to facilitate a strong Lear presence at the dealer level and react to fluid market conditions. We continue to focus on building and refining a strong multi-channel sales organization that has the ability to leverage our head-to-toe offering of exceptional products. Unlike some of our competitors who have contracted their teams and cost centers, we are investing in talent and actively growing our sales channels in a sustainable manner. Now I'll turn to more details on sales of our product categories for the first quarter of 2023. Sales of our flagship neck brace for the first quarter of 2023 were $780,000 or 6% of our total revenues for the quarter. A 49% decrease year over year. The decrease was primarily attributable to a 51% decrease in the volume of neck braces sold. Body armor sales were $6.37 million in the quarter or 49% of our revenues. A 49% decrease year over year. The decrease in revenues was primarily the result of a 42% decrease in upper body armor revenues and a 76% decrease in the volume of motorcycle boots sold when compared to the exceptionally strong first quarter of 22, when body armor sales increased by 69% over 2021. Body armor products now include upper body protection pieces, knee braces, limb guards, off-road motorcycle boots, and mountain biking shoes. Helmet sales were $3.13 million, or 24% of our revenues for the first quarter of 2023, a 45% decrease compared to the strong first quarter of 2022 for MTB helmet sales. MTB helmet sales in the first quarter of 2022 were up 357% over the first quarter of 2021. Sales of our other products, parts and accessories for the first quarter were $2.8 million, or 21% of our total revenues, a 38% decrease year over year. The decrease is primarily attributable to a 41% decrease in revenues from our motor and MTB technical apparel, designed for off-road and mountain biking use, compared to the exceptional first quarter of 2022. Apparel revenues for the first quarter of 2022 were up 171% over the prior year period. To summarize the key financial details for the first quarter of 2023, total revenues for the first quarter were $13.1 million, a decrease of 46%, compared to $24.2 million for the first quarter of 2022, which was an exceptional quarter for the company. The decrease in global revenues is attributable to a $6.12 million decrease in body armor sales, $2.56 million decrease in helmet sales, and a $1.72 million decrease in other products, parts, and accessories sales, and a $750,000 decrease in neck brace sales. The impact of an exceptionally strong comparative quarter was compounded by industry-wide stocking dynamics that continue to affect distributor and dealer ordering levels. Income from operations for the first quarter of 23 was $1.4 million, down 75% compared to $5.6 million for the first quarter of 22. Net income for the first quarter was $1 million, or 17 cents per basic and 16 cents per per diluted share, down by 76% as compared to net income of $4.22 million, or $0.73 per basic and $0.68 per diluted share for the first quarter of 2022. Leah's continued to meet its working capital needs from cash on hand and internally generated cash flow from operations. And at March 31, 2023, the company had cash and equivalents of $11.4 million and a current ratio Looking ahead, despite the post-COVID stocking and macroeconomic challenges, we continue to push hard and to invest in the areas that will position Lear for future growth and that we can influence. Strong brand building, a global multi-channel sales organization, a pipeline of exceptional products, a plan to reach a much wider rider audience, and continued financial resilience. We are encouraged by the increased activity and sales on Lear.com and through our e-commerce partners internationally. Consumer direct sales now represent 5% of global revenues, a testament to the brand momentum that we have experienced over the past several years. Our online global dealers continue to report that consumer demand and resultant sales tree of our product categories remains healthy and well-positioned for future growth. We continue to invest in our strategy of developing innovative, cutting-edge products. Our design and engineering team, in collaboration with our team riders, continues to deliver an exceptional product pipeline and product offerings that are recognized throughout the industry. We believe that this continued focus on excellence in product innovation will allow us to gain additional market share. We are especially excited about our first partnership with the professional endurance mountain biking team. the Orbea Leard Speed Company Racing Team. This is an ideal partnership for us as we advance our shared vision of excellence in performance, innovation, and design, and as we move into much larger rider communities in the mainstream mountain biking segment. Throughout the coming year, team riders will be protected by Leard helmets and apparel as they compete in the Epic Series, select UCI MTV World Cup events, and more. To summarize, Although the MTB and motor industries continue to face post-COVID dynamics that have constrained ordering a dealer and distributor level, Lear's brand momentum and activity on a consumer direct level continues. Rider participation levels are ramping up as the spring season kicks off properly, and we believe that elevated stock levels will be digested. Many of our existing product categories are still in their infancy with significant market share opportunities. And we are investing in our team, in our products, and in growing our market share to intensify our positioning for long-term growth and shareholder value. We remain focused and committed to returning to our track record of double-digit sustainable growth. As always, we'd like to thank our entire Leard 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 questions. Operator?

Thank you. 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. 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. Our first question is from the line of

olivier colombo with a private investor please proceed with your question olivier are you there yes i'm here sorry hello how are you i'm doing fine thanks and you i'm okay thank you perfect thank you uh i guess we're all very happy to see that q1 is now behind us as it was your toughest comp you have ever faced. That is correct. I just would like to highlight two points that I think are pretty interesting in your quarter. I think that the most important is the cash provided by operations, which is at 5.3 million. This is a huge increase from what you had before. And then putting Q123 in comparison, A lot of outdoor brands are always comparing 2019 as a starting point for them to grow again. And if we look at your Q1 numbers in 2019 versus the one reported today, you're up 115% today. And if you compare that to the Q1 numbers 2020, you're up 73%. So I think this is quite remarkable.

That's absolutely correct, Olivier. You've got your numbers quite right there.

Thank you. I have four questions for you, if you allow me to ask them. Yes, no problem. Okay, the first one is, how long do you think the stocking issue will persist, and when do you think you could get back to double-digit growth?

So it's a very good question, Olivier, and of course this is something which we discuss all the time with our partners, with our distributors, with dealers, and internally at a management level. And I think there's obviously several factors at play here. I mean, the big question is how quickly can the stock that is out there that is slightly elevated get digested by the market? And what will their macroeconomic conditions look like over the next six to 12 months? So I think in different segments, you know, they're going to be different timeframes. I think different geographical areas will have different timeframes. And of course, You know, Liat being a multi-channel business, the different channels also have different timeframes. What we generally see is that the closer you get to the end consumer, the closer you get to what the two trends are. So, of course, in Liat's case, with Liat.com, we started to see some growth there already. If you look at our dealer sales, our dealer direct sales, which are mainly through Lear USA and Lear South Africa, where we are selling directly to dealers and not through a distributor, you'll see that the decrease in the U.S. was lower than what we saw on the international side. And, of course, since international is the furthest away, really, that we sell to end consumers, You saw that the stocking levels there hadn't quite caught up to the sales that we're seeing to consumers and also to dealers. So I think there's different timeframes that are at play here. And the closer we get to the end consumer, the closer we get to the true demand trend, which is, of course, really important, because that is where stock is going to get consumed and that is where stock is going to get digested. It is difficult to give an exact date as to when we think this is all going to play through the market. It's a little bit fluid. We are certainly hoping that within the next six to 12 months, we can return to double-digit revenue growth.

That's perfect. Thank you very much. My second question would be, can you tell us more about the key emerging markets you're going after, and what are the size of those markets, in particular in moto and mountain bike?

Yes. Sure. So another good question. So in terms of these new markets that we're looking at now, you know, I mean, I think without getting into too much detail, if you look at the Speed Company Racing team that we sponsored, you know, that was a strategic move to support a great team, obviously, and also to support a team that was outside of the traditional gravity, endurance, all-mountain kind of segment, which is what we call the top of the mountain, you know, that's the kind of 5% of the market. We're trying to get to a much wider community of mountain bike riders. And if you look at the kind of racing that Speed Company team participate in, which is more mainstream endurance mountain biking, some gravel riding, and some trail riding, those are the kinds of markets that we're looking at. I would say that it's difficult to say the exact size of those markets, but what I will say is that the total addressable market size there is much bigger by multiples of the bicycle markets that we've currently been selling to. So that's on the MTB side. And then looking to the motor side, some of you might have noticed that we recently launched a new Instagram site, which is liat-adv. And we are now working really hard on a product level, on a brand level, on a marketing level, partnering with the right influences to bring a great adventure riding gear, a full lineup of adventure riding gear to the market. So, again, this is a – the adventure market is a market that in many geographical areas around the world – We haven't reached yet. There is some crossover between off-road, moto, and commuter riding. Typically, this is the guys that are on BMW GS bikes. It's a huge market around the world again. Difficult to quantify the exact size. What I can say is that it certainly is bigger than then motocross, then supercross, and then enduro riding. So it's very exciting for the business, and we're really looking forward to getting those products out into the market as soon as possible.

That's excellent. My third question would be, you said you're actively investing and growing the U.S. sales team, which is exactly the opposite of what Competitor is doing, and I'd like to hear that. Can you please tell us how many sales you have hired in the U.S. in this quarter? how many you have today, and how much do you plan to hire? And then another question on that as well is how hard is it to find the correct salesperson?

Okay, so I think a valuable time frame to look at delivery is maybe just over the last year. So if we look at over the last year, we've added, we've nearly got 25 employee reps now in the U.S., and in the last year we've added eight or nine so we've added quite a few and you know I think we're going we plan to add more as different regions become viable in terms of covering the costs and generating enough revenue we plan to add more we do have less independent reps now we find that our employee reps that are completely dedicated to the Liat brand are When we employ them, we do see growth in the regions that they sell to. So this is something that we are planning on expanding. And as you said, some of our peers are currently contracting some of their sales teams and looking at ways to cut costs. But for Liat, that's never really been the Liat way. When there's opportunities to get the right people on board, We like to take those opportunities, and it's one of the opportunities that have come out of the market turmoil that we've seen. So we are actively looking for sales reps, for sales managers, for marketing people that we feel will add to the Lear story and to Lear revenues and growth moving forward. At the moment, Of course, you always have to be selective, but because there is a trend in the market that some good people are getting let go of, we have some opportunities there.

Thank you very much. And my last question would be on the Liat.com website, which today represents 5% of your overall sales. What are you doing exactly today to increase customer visits on that site?

So, I mean, various different things. We've got a lot of digital campaigns that we put in place. This includes newsletters, email campaigns, and, of course, the traditional Google search campaigns that we run in order to get people to the site to improve our site traffic. And also, we're optimizing the site all the time. We've got a professional team that is focused on Lear.com from a sales perspective and also from a content perspective so that we can drive more traffic to the site and then, of course, so that we can close more sales. It really is an art these days to make sure that you've got your SEO in place, to make sure that carts are not left open, and this is a focus area of our team. In fact, in Cape Town and in a few places around the world, we are building digital teams as we speak because we realize that, of course, B2C business is getting more and more important, and we need to be in a position where we can leverage and optimize those kinds of channels.

Okay, perfect. Thank you very much, Sean, for all those. Thank you. And I wish you all the best for Q2. Thank you very much, Olivier.

Thank you. Our next question comes from the line of Chris Brown with Milwaukee Capital. Please proceed with your question.

Hey, thanks so much for taking the question. I wanted to focus a little bit on your international business. Hey, sales growth there has been very impressive over the last five years. Can you hear me okay?

I can hear you perfect, yes.

Oh, great. So sales growth internationally has been very impressive over the last five years or so, and quite a bit stronger than in deal or direct. I just wanted to know if you could talk about some of the different, what's driving the difference in performance. And if you just kind of look internationally, is it a matter of, hey, we're rolling out new product lines? Is it we're expanding the number of retail doors? Is it something else? I'd love to hear your thoughts there.

Sure. I think it's a really good question. And absolutely, the last five years on the international side has been fantastic. And what we've really focused on there is working with distribution partners that are best in class and that are really, really focused on building great dealer relationships, So really, really focused on marketing the brand along with Liat and our well split between motor dealers and MTB dealers. We've also embarked on employing brand and sales managers in the key geographical areas, which has been very successful for us because what it's meant really is that you get the benefit of working with the distributor that has the distribution network in place, They have a great catalog of many products that dealers are buying from. But with the sales and brand manager that is a Lear employee, you get the attention of the dealers that are out there. So it's a combination really of direct to dealer sales through strong distribution channels along with having Liat employees in place that can really focus those dealers on the Liat story and on the Liat products. In the U.S., it's slightly different because, of course, we're selling direct to dealers, and we have a full investment in the inventory and the receivables, which we carry ourselves. I think some of the reason for the fact that we've had this great growth on the international side has got to be the geographical kind of diversification that we have in those areas. Obviously, the U.S. is quite dependent on what's happening domestically in the U.S. and on some construction numbers and macroeconomic issues. But, I mean, we have been growing on the U.S. side. I think, you know, the latest steps that we've taken, we're less dependent now on independent sales reps and we're more dependent on company-employed sales reps who are going to bear fruits when the tide turns now. So I think that's one area where we will be able to leverage growth. I also think that, you know, we've been working really hard in the U.S. to build an MTB a proper MTB distribution network. And when we're working on the international side, of course, we go with big MTB distributors that really have all the relationships with the dealers up front. And in the U.S., it's taken some time for us to really build that out. And it's because we traditionally have been more motor-focused in the U.S. from the beginning. I mean, that was how Liat was founded. But now we're working really hard at turning on Liat as an MTB brand and with strong MTB distribution in the U.S. It's one of our key strategic areas that we are focusing on. It's taken us a bit longer than what we expected. Unfortunately, as we were kind of starting to get some momentum, we had the stocking dynamics that particularly affected the MTB industry. But I feel quite confident that as we move ahead now, the domestic situation will start picking up and we'll start seeing that domestic sales start returning to a high percentage of our revenues moving forward.

Sure, makes sense. And then just to follow up on one point there, so I know you give disclosure in your presentations, quarterly filings about the number of active distributors you have in the U.S. and in South Africa. So we can see how those have trended over time. But do you have – can you give us any kind of color on how the number of kind of retail doors has changed internationally? Are those roughly flat? Is it growing significantly?

What's the right way to think about it?

One moment. It appears our speaker line has just disconnected. Give me one moment.

Okay, no worries.

Ladies and gentlemen, we do apologize for the inconvenience. One moment please while we reconnect our speakers.

Okay, we apologize for the inconvenience. Our speakers have rejoined us.

Okay, sorry, I apologize. I'm not sure how we lost you, but we seem to have lost you. Chris, if you could just repeat the question. I didn't hear you.

Sure. Yeah, no worries. Thanks so much for joining. Let's see. So just to follow up on one point, so you gave some disclosure in your 10-K and in your quarterly filings on the number of active distributors that you have in the U.S. and in South Africa. So we can see how those have trended over time. But just curious, internationally, how has the number of retail doors changed over the last several years? Are you selling in a roughly flat number of doors? Is it growing steadily? What's the right way to think about it?

I would say it's growing steadily. There's some emerging areas where we've started opening a lot more doors, areas like South America and where traditionally we didn't have full coverage. But again, since we employed a sales and brand manager in that area, he's been able to get us the correct distribution partners to open a lot of doors. So in some areas, we've seen a dramatic increase in the number of doors that we're selling to. I think a big factor here is our product mix. So previously, before we were a head-to-toe brand, sometimes it was difficult to open retail doors because you don't have a full offering to get into the retailer. But now that we are a full head-to-toe brand on motor and MTB, it is a lot easier to get into new doors. So I would say that the number of doors that we are selling to now has steadily increased, and that all obviously remains in place. And when the tide turns, which it will, we'll have a lot more doors to sell to.

Perfect. Thanks so much.

Thanks, Chris. Thanks for the questions. I appreciate it.

Thank you. Our next question comes from the line of Christopher Moeller, a private investor. Please proceed with your question.

Yes. Hi, Sean. I hope you're doing well today.

Hi, Chris. I'm okay. Thanks. How are you?

I'm doing well. Thanks. Just two or three questions for you today. First, to follow up on the prior questions regarding the U.S. sales team count, could you maybe speak a bit more about the differences there in moto versus MTB distribution in the U.S.? Is there an opportunity to build out in an in-house bicycle sales team as you've done on the moto side, or do the structural differences between those industries just leave you more reliant on distributors in MTB?

No, absolutely. There's a big opportunity to build out a stronger team of MTB sales representatives in the U.S. You know, there are some structural differences. Like, for example, a lot of MTB business in the U.S. is done, you know, with call-out desks. So you're literally taking orders on the phone and you're calling out to dealers. But, I mean, one of the areas that we are focusing on now with Razor Shop, you know, focus is trying to get our MTB distribution in the U.S. to be stronger. We do have external distributors that we work with there as well in order to get to some of the smaller areas and in order to help us, you know, to get to the dealers that are currently out there. but we are building a team inside Liat USA as we speak to strengthen our MTB distribution, and that means sales reps, that means marketing people, everything that's needed in order to really penetrate the market better. As I spoke to earlier, there obviously is currently some attrition from our peers, and that creates an opportunity to... you know, to pick up some really good talent, particularly on the MTB side.

Good to hear. And I saw in your filing that you set up a subsidiary last year, Liat Prop Limited. It wasn't clear to me whether this was established to purchase your currently leased space in Cape Town or whether this was for something else altogether. Could you maybe speak to what the intention of that is as well as its current status?

Yes, absolutely. So, I mean, the intention at the time was to set up an entity in order to purchase our leased building in South Africa. There's an opportunity to purchase the building, and there's ongoing discussion as to the timing and the quantum of that.

Okay. All right. Very well. And finally, could you help me understand the deferred revenues? I believe you had $2.5 million at 2022 year end, most of which was then recognized here in the first quarter. I just don't recall any large revenue referrals in the past, so I'm wondering whether this is related to an accounting policy change or maybe there was a specific large order that was subject to different revenue recognition standards.

Yes, so it's a great question, and you're 100% correct that we have not had deferred revenue in our financial statements previously. And I guess there's two reasons why this has now appeared in our financials. The first is there is an accounting standard, AC606, and although the standard has been around for quite a long time, the interpretation of the standard, like many new standards, The interpretation of the standard has taken some time to really filter through and to gain clarity. Basically, there's some areas of the standard which do affect us. You need to have reasonable assurance that you are, with a very high level of probability, that you are going to receive the funds from certain revenue transactions. It's a revenue recognition standard. And quite correct, we had one or two customers at the end of last year where because of the economic conditions out there and because of the fact that macroeconomically and also in terms of stockholding, we didn't have full assurance that we were going to receive the funds. That meant that there was potentially not a complete contract of sale in place. And we treated this quite prudently and quite conservatively because, of course, you know, we want to make sure that our financial reporting is in line with latest U.S. accounting standards. And we had to defer some revenue. And then when it became clear that we had reasonable assurance that we would be in a position to record a complete contract of sale, we then, you know, we removed that from deferred revenue and released that to revenue. And some of that happened during Q1 of 2013. So that's why you'll see we had a deferred revenue balance, deferred asset balance at the end of 2022, and some of that was released to the income statement and to revenues in the first quarter of 2023. And this is something which, of course, we'll be monitoring now. This will be fluid because there are times when things do shift, and then you need to make an assessment based on changes in the environment, which we've obviously learned through the COVID period, can happen quite quickly, it can be quite fluid, and one needs to make this assessment. I don't expect this to affect our revenues moving forward significantly in any way, but it is something that we do need to consider.

Great, I appreciate all the color there. That's it for me, so thanks again for the time, Sean. Chat soon.

Okay, I appreciate it. Thank you very much.

There are no further questions at this time. I'd like to turn the floor back over to Sean for closing comments.

Thank you all for joining us today on this conference call. We look forward to our next call to review the results of the 2023 second quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.