Thanks, Rob. Good morning, and welcome to the Leatt Corporation Investor Conference Call to discuss the financial results for the fourth quarter and full year 2022.

The company issued a press release today, Tuesday, March 28, 2023, at 8:00 a.m. Eastern and also filed its report with the SEC.

The press release is posted on Leatt's website at leatt-corp.com. This call is being broadcast live and may be accessed on the company's website.

An audio replay of this call will be available for 7 days and may be accessed from North America by calling 1-844-512-2921 or 1-412-317-6671 for international callers. The replay PIN number is 13737398.

A replay of the webcast will be available immediately following this call and will continue for 7 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 March 28, 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 MacDonald, CEO of Leatt Corporation.

Sean, good afternoon to you in Cape Town.

Good morning, and thank you, Mike, and thank you all for joining us today. Many important measures, 2022 was the best year in our company's history.

Total global revenues were $76.3 million, a 5% increase over a very strong 2021 and which was an 88% increase over 2020. International sales grew by $6.68 million or 13%, despite some challenging global market dynamics.

Sales of some of our most innovative products, including helmets, footwear and technical apparel, all increased by double digits over 2021. These products showcased the ability of our engineering team to build exceptional products that appeal to large addressable global markets.

We believe that our success in these critical competitive product areas is a great platform for further growth. During the fourth quarter of 2022, we entered into a difficult period for the MTB and MOTO industries worldwide.

COVID supply chain issues, global geopolitical dynamics, the strengthening of the U.S. dollar, inflation and the result of moderation in consumer demand all resulted in overstocked inventory across brands by distributors and dealers worldwide.

Our own distributors and dealers have had to alter their buying patterns to digest elevated stock levels before they can return to the buying levels that spurred our growth over the last several years. These headwinds and elevated stock levels have begun to filter through in the 2022 fourth quarter.

And to directly affect our results for the quarter and year-end compared to 2021. Fourth quarter revenues were $10.9 million, a decrease of 53% compared to a very strong 2021.

Net loss for the fourth quarter was $1.1 million based on the decrease in revenues and a 17% increase in total operating costs, which were driven by our investments in sales, product development and the marketing of our growing product range and the development of a globally recognized consumer brand. Despite market conditions, the Leatt brand continues to gain momentum backed by cutting-edge product innovation.

We continued our year-over-year growth trajectory for the full 2022 fiscal year with record-breaking revenue of $76.3 million for the 2022 period. The sales of our flagship neck brace were down 36% compared to 2021 and upper body armor products were down 6%.

Our helmet and apparel categories showed strong sales. Net income for the year was $9.96 million, down 21% with a return on revenue of 13% and earnings per share for the full year was $1.71 per basic share.

Sales to our dealers and distributors in the United States contracted by $2.82 million or 14% when compared to the prior year increase due to domestic dealer stock congestion that influenced dealer ordering patterns. Our direct sales to customers in the U.S.

continue to show strong results, growing by 27%, $2.57 million during the 2022 period. This growth is a testament to the development of our consumer website, our brand momentum and improved domestic distribution capabilities.

We expect to continue to develop and invest in this channel as part of our multichannel sale development program. We also continue to invest heavily in our U.S.

sales, distribution and marketing capacity across the U.S. with a focus on growth areas.

The domestic selling team continues to grow as we reach and service a wider group of MOTO and MTB dealers. The employment of a team of global sales and marketing managers in some of our most important emerging and established regions outside of the U.S.

continues to be an important focus area. We are committed to continuing to grow our multichannel sales approach and leverage the tremendous momentum that the Leatt brand has gained over the last several years.

Now I'd like to tip to more details on sales of our individual product categories for the 2022 year. Sales of our flagship neck brace during the 2022 fiscal year were $5.39 million or 7% of our total revenues, down 36% compared to an especially strong 2021 in terms of neck brace sales.

In '21, neck brace sales increased by 73% over the 2020 year period. Revenues for body armor products, which are comprised of chest protectors, full upper body protectors, upper body protection vests, back protected knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes were $38.86 million, down 6% from the prior year.

The decline was primarily due to an 18% decrease in upper body armor revenue compared to 2021. Again, 2021 was an exceptional year for upper body armor sales, which increased by 85% over 2020.

Body armor products accounted for 51% of our total revenues for '22. Helmet sales were a highlight.

Revenues for the year totaled $14.48 million, a 60% increase over 2021. Helmet sales accounted for 19% of our total revenues for 2022.

We are very encouraged by the market reception of our award-winning MTB and completely redesigned MOTO helmet lineup that all contain our patented 360-degree turbine technology for head and brain protection. Full year 2022 revenues from our other products, parts and accessories category, which is comprised of goggles, hydration and apparel items, including jerseys, pants and jackets, was $17.6 million, a 28% increase over 2021.

This category accounted for 23% of our total revenues for '22. The increase is primarily due to continued strong demand for our lineup of technical apparel design for off-road motorcycle and mountain biking shoes, which increased by 35% compared to 2021.

Here is the financial summary for the fourth quarter and full year 2022. Total revenues for the fourth quarter were $10.9 million, down by 53% compared to $23.2 million for the fourth quarter of 2021.

Net loss for the fourth quarter of '22 was $1.1 million or 18% -- $0.18 per basic and $0.17 per diluted share, as compared to net income of $3.8 million or $0.68 per basic and $0.62 per diluted share for the fourth quarter of 2021. Total revenues for the full 2022 fiscal year was $76.3 million, up 5% as compared to $72.5 million for the full year of 2021.

The increase in global revenue is attributable to a 60% increase in helmet sales and a 28% increase in other products, parts and accessory sales, which were partially offset by a 36% decrease in neck brace sales and a 6% increase in body armor sales. We continue to manage expenditures efficiently in an inflationary environment, achieving a return on revenue of 13%.

Leatt continued to meet its working capital needs from cash on hand and internally generated cash flow from operations generating cash from operations of $3.1 million. And at December 31, 2022, the company had cash and cash equivalents of $7.1 million, an increase of 41% when compared to $5 million at December 31, 2021, and our current ratio was 4.25:1.

Looking ahead, the second half of '23, we'll see our expansion into new areas in the global MTB and MOTO marketplace, with well differentiated product categories that showcase innovation and our dedication to consumer engagement and adventure. These products sell to large total addressable markets, and we believe that they will appeal to a wide variety of consumers.

Our first partnership with the professional mountain biking team, Orbea Leatt Speed Racing Company marked our entry into the endurance mountain biking world. Our partner, Speed Company, is a competitive force in cross country marathon and gravel racing, and is an ideal partner for our shared vision of excellence in performance, innovation and design.

In the coming months, the team of exceptional athletes will showcase Leatt helmets and apparel as they complete in the Epic series and select UCI MTB World Cup events. We are very proud of the second place in the Cape Epic last week known as the toughest MTB race on the Earth.

Recently, our engineering and development team was thrilled to be awarded with yet another Design & Innovation Award considered the Oscars of the bike industry for our Mono Suit MTB HydraDri 5.0, and our MTB 3.0 Enduro Helmet. This is the eighth time that we have been honored for our innovative cutting-edge products designed to a wide community of riders from the best races in the world to the weekend warrior.

To summarize, due to a variety of global headwinds International deal and distributor ordering patterns changed notably in the fourth quarter of 2022, creating a difficult period for the entire industry. Since the pipeline is well stocked, distributors are initially likely to order less than in previous periods.

But we remain confident that ordering will increase in later quarters as stock is digested, fueled by righter participation. The tremendous momentum that we have achieved over the past several quarters and our expansion into new segments.

Our customers, dealers and distributors remain enthusiastic about the tremendous momentum and penetration that the Leatt brand has achieved over the past several quarters and the head-to-toe offerings of exceptional protective gear that we continue to produce. Many of our innovative products are still in their infancy in terms of market share with significant opportunities for long-term growth.

And while we are currently seeing moderation of consumer demand levels throughout the MOTO and MTB industry, consumers continue to ride and participate in outdoor activities, a trend that we expect to continue. We remain confident this will drive long-term growth once dealers and distributors digest excess inventory levels and begin to reorder strongly again.

In conclusion, while the current market dynamics are expected to continue for several quarters with varying impacts on the different markets and geographic locations that we sold to. We believe that Leatt as a company and as a brand is resilient and well positioned for future growth and increase shareholder value.

We remain focused on our strategy of bringing exceptional protective gear to a much wider rider community. As always, we'd like to thank our entire Leatt family, our dedicated employees, business partners and team riders.

We remain energized and enthusiastic about what we can achieve together. With that, I'd like to turn the call over for questions.

Operator?

Sean, Obviously, a tough quarter. But as we think ahead to this year and coming years, in the new markets you're heading into, any way to quantify how they are relative to the current markets you're in today?

Are they larger, same size, are they just niches within this market?

Chris, thanks for the question. It's a good one.

These are much larger markets that we are looking at entering. So we've had a strategy of -- on the MTB side specifically of moving down the mountain.

So at the top of the mountain, you kind of the 1%, which is the gravity rider and then you move down into Enduro and all mountain and trail and then at the bottom, you get into the Endurance Marathon cross-country area, which is really where the bulk of riders are. We've been pretty gravity focused, although we've been slowly moving down the mountain, but we now have a good lineup coming up for fantastic insurance products.

Some of those were showcased in the recent Cape Epic where our team came second, and they were absolutely thrilled with the products that we'd produced for them. So these are much bigger addressable markets than where we have participated previously.

And on the MOTO side, again, this is -- these are markets that are kind of in the crossover area between off-road and street. So there's a street element to them, though still kind of off-road dominant, but much wider total addressable market size, and I think presents a great opportunity for growth in the future.

Okay. And then can you speak to inroads your sales team has made so that when these -- when you do launch in these markets and distributors and dealers are ready to start buying again?

Should we expect you to have a pretty strong launch into these markets? Is it the same sales channel and therefore, you should be able to leverage the work you've done or is it different channels?

I mean it depends on where you are geographically. For example, if you're in Europe, it's similar channels.

There is some crossover, but we are developing new channels there to sell into in some of these new areas. In the U.S., it's more kind of common amongst the dealers that you can sell into.

So we've already got an established sales channel there. But of course, it is slightly different, you could call it a slightly different angle on the products.

And I think from what we've seen so far because we have shown some of these products to dealers and distributors at sales meetings. At the moment, although the market is constrained in terms of the current stocking congestion that is out there, new products and things that are a little bit innovative or what dealers and distributors are looking for.

So far, just with our customers that we have shown these products to, there's been a very, very good -- very, very strong response in terms of the kind of ordering patterns that they see moving forward once they are a little bit less constrained.

A few questions. First of all, what do you believe is a kind of normalized annual sales level for Leatt, if you would try to exclude the effects of destocking, restocking and corona effects?

In terms of -- I mean, Leatt is a business. Generally, we try to target a double-digit revenue growth.

We've been doing that over the last several years. And I think once things start to normalize in the market, we'd certainly like to return to those kinds of levels.

There's a bit of a correction here, obviously, that we're seeing, but we do feel that especially with the new -- some of the new products that we're now bringing to the market, we can return to at least double-digit revenue growth on a sustainable basis.

Yes. But do you believe that the 2022 sales levels are -- are you still over-earning in 2022 or not?

Because this...

I don't believe that we are over-earning. I think -- because I think what...

I don't know if you're over-earning, but if I look back towards 2019-2022, then you had the whole corona situation, and there was, of course, a lot of demand. I'm just trying to assess what is the kind of base case scenario?

And then, yes, just to see what the valuation would look like and then trying to assess the growth potential of the company going forward?

Yes, yes. I understand.

So what happened during COVID, of course, is that there are a lot more participants that came to the market. So -- and I think it still remains, from the people that I speak to out there, there are certainly more riders riding mountain bike and motorcycle than ever before.

That has -- that trend has continued. And although there has been a bit of overbuying now in the market, once that settles down, I do believe that there will be -- there will continue to be more participation, which is obviously the key and participation drives consumer demand.

The Leatt brand has gained a lot of momentum and gained a lot of market share during the COVID pandemic because of our ability to deliver. We've taken some market share away from some big players.

So my thinking is that although -- we've obviously had 2 exceptional years, I think the kind of sales that we saw in the last 2 years, I mean, we can get back to those levels based on the new participants that are in the market and also the new segments that we're going to be selling to.

Yes. Okay.

And then if I look at the gross profit margin in Q4, it came down quite a bit versus previous quarters. What are the main drivers for that?

There's a couple of things at the sales mix geographically. So if you look geographically, we had quite a lot of sales that were to international customers because sales in the U.S.

were constrained. So we make a higher margin when we sell in the U.S.

to dealers. That was one big reason.

There was some -- because of these constraints that we saw in the market in terms of stocking levels in the U.S., we did have to drop some of our margins and sell out some products, just to get products out there into the market. But that was not really widespread.

Included in there is also some inventory obsolescence. So we had a serious look at our inventory because our inventory obviously been a bit higher than what it was previously, and we quite aggressively looked at how we could get our inventory position into a kind of a more prudent state.

And so we went through our stock and we wrote-off some stock, and that's obviously included in the cost of sales. So I think those are the main factors that affected our gross profit percentage.

But it's not at the kind of level that we are going to be targeting on a sustainable basis. Gross profit should return to higher levels in the future now.

Yes. I think before you stated that it should be above the 40% level.

Is that still the ambition?

Correct. That is absolutely correct.

We should not be below 40%. This is a one-off quarter where we had some write-offs.

Yes. Okay.

And then moving to the working capital situation. So the inventory levels remain pretty high at your end.

What is the main reason for that? And then on the other hand, the accounts payable, they dropped quite a bit in Q4.

What is the reason for that?

Yes. So inventory is pretty stable.

Obviously now we have plenty of inventory at Leatt USA that we're going to be selling into the market over the next few periods. And because we had a constrained selling environment with inventory that we had already on the water coming into stock for new product, we've now got that inventory in stock, and we can now sell it out.

So we're now busy selling through that inventory. Of course, it's also a factor of the fact that we have added a lot of new products we've got a lot of that inventory is brand-new stock that we are now going to be selling.

We've increased our SKU count significantly. If you look at the model year '23 compared to '22, we've got a lot more SKUs now because we've got much wider apparel line, we've got more helmets, we've got -- we head-to-toe on the MTB side.

We've got more shoes. We've got more boots.

So a big reason for the increase in inventory is just the fact that we've got more product to sell, which is obviously positive. As I said, we had a look at our inventory.

Our inventory is now at a very prudent level in terms of valuation. I think we took a deep look at inventory during Q4.

So this is all fresh stock that we have available to be able to sell into the market. So -- of course, we have the ability to look at our reordering levels in order to make sure that our inventory does not get out of control.

And I think over time now, you should start seeing inventory dropping as we move into the next few quarters as we sell the inventory that we have. So that's inventory.

In terms of accounts payable, we had a decrease in accounts payable, and that is just a function of the fact that because we've got inventory to sell, we are not placing orders on the factories that are as large as what they were last year when we had a full channel that we needed to supply to Leatt USA and Leatt South Africa. So our accounts payable would then be lower.

Yes. Okay.

And then in terms of destocking effects, what is your best guess in terms of quarters that you need to digest the trends?

To adjust the trend, I think it's going to take a few quarters. I mean it depends very much, it's very different geographically.

And I have different geographical areas and not all areas react over the same amount of time. I mean the industry has -- most people that I speak to in the industry have said that it's going to take several quarters.

They don't know whether this is 8 months or 12 months. But we are certainly looking forward to -- we're going to carry on pushing.

We're developing new products. We've got some great products in the pipeline, and we're certainly looking forward to being able to return to the kind of stocking levels that we've been able to achieve in previous quarters.

So this is going to take a few quarters to be digested. It is an industry-wide phenomenon.

I think some of our peers that have reported would have reported some other things. So this is across brands.

It is very encouraging for us on Leatt side to hear from a lot of our dealers and distributors that the Leatt brand is still pretty strong. But of course, they have limited amount of inventory that they can purchase in terms of their working capital.

So that all needs to filter through. It is going to take some time, but we do feel that we will return to solid growth as soon as possible.

Yes. Okay.

Okay. And then the final question I have is on your market share.

So in 2022, the sales was up 5%. But how would you split up the sales flows coming from market share gains versus the market decline?

Any views on that?

I mean it's quite difficult to quantify that with precision. However, what I would say is that looking at some of the industry, the commentary that I see from the industry, there are many categories where we are still in our infancy 3% to 4% to 5% kind of market share.

We've seen -- we think that we've had solid market share growth over the last 2 years because of the fact that we have had the ability to supply on a consistent basis and some of our peers have not been able to do so. So we've had pretty solid market share growth.

I would say the 5% to 6% area is probably where we're at. I think there's a large portion, it could be 20% of our sales over the last 24 months that have come from really aggressively being in a position to get more shelf space in dealers, online and brick-and-mortar, which is obviously taking some market share from our competitors.

And I think that bodes well for the future because we still have a good position in the dealerships and at the distributors, they have a certain amount of inventory of Leatt stock, but they do feel that they will sell that out within a reasonable amount of time.

Three questions for you today. First to just follow-up on a prior question on gross margins.

Of course, there's been a lot of discounting industry-wide right now, especially on the bicycle side and have been seeing even current year product seems to be heavily discounted, especially in Europe. I'm sure there must be a balance between supporting dealers in a tough sales environment while also maintaining long-term integrity of the brand.

I'm just curious, broadly speaking, how do you think about pricing discipline in this environment?

Absolutely. So Leatt has tried to balance all of that out very, very carefully, which is the reason.

I mean, we certainly could have pushed a lot more inventory on to dealers than what we have. But we feel that brand equity is really important moving forward.

And although there is some congestion in the marketplace now, that is going to carry out and ordering is going to return to the kind of levels that we've seen previously. And when we do get there, we want to be in a position where we've put the so much hard work into building the Leatt brand into a globally recognized consumer brand that is respected for quality that we do not want to be seen as having discounted heavily in the market.

So we're trying to balance that out as much as possible. It's something which is extremely important to us.

Okay. I appreciate that.

And secondly, as we move through this period of high inventory levels, I'm wondering if you could comment a bit on what you're seeing in terms of sell-in versus sell-through? For example, I see that the consumer direct revenues, which I believe to be mostly your U.S.

e-commerce sales, were up pretty strong for the year and even in this otherwise soft fourth quarter. I know you commented that consumer demand has moderated a bit, but I'm curious how much of the current revenue softness you'd attribute to moderating demand versus simply inventory drawdowns in the channel?

That's a great question. And I think a lot of it has got to do with the inventory.

And it's not specifically Leatt inventory. This is industry-wide inventory.

And as you said, if you look at on actual bicycle sales on the bicycle side and you look at bicycle inventory levels, I mean, there's a huge overstocking position. As I was referring to earlier, dealers have got a certain working capital level that they can manage.

And of course, they've got to respect their bicycle brands and they've got to invest in certain areas. And the feedback that we've been getting from distributors and dealers is an actual fact.

The Leatt brand has been selling well through their channel. And which means that hopefully, because the brand is strong because we've got a much better market position than we have pre-COVID, it means, hopefully, that we will be able to return to an ordering position from a lot of our dealers, a significant ordering position as soon as possible.

But a large amount of the constraint is more on the supply side, being able to supply into a congested inventory environment has been very challenging. In terms of demand, we are getting positive feedback from our e-comm dealers and [indiscernible], it's the U.S.

e-comm site that you see has been consumer direct. And I mean we've had really good growth there and a lot of interest from end consumers.

So on the demand side, I think the demand is still there. And the participation is certainly also still there.

So it's -- I think it's less consumer demand and kind of an adjustment in consumer spending and it's more about the supply through the channels. And of course, for a business like Leatt, who -- we sell through dealers and we sell through distributors, which is also part of our working capital strategy globally.

It takes some time for it to clear through the pipeline before we get to the end consumer. But it's very encouraging to see, as you correctly pointed out, that where we do sell to the end consumer like in the U.S., we are still seeing healthy levels of growth.

Great. That's definitely good to hear.

And so lastly, there's been reports of some large players in the bike industry making some pretty significant cost reductions in recent months. Whether that be layoffs in sales and marketing or cuts in rider and event sponsorships or even renegotiating terms with suppliers and dealers.

All of these actions would seem to prioritize near-term cash flows at the potential long-term expense of industry relationships and growth. And so I guess my question is, given your long-term focus and the inherent financial health of the business, are you seeing opportunities here to maybe take advantage of this current environment and make increased strategic investments to elevate the brand long term?

The short answer is absolutely yes. I think Leatt is in quite a resilient position at the moment in order to see some of the opportunities that we're seeing in the market.

There's -- Leatt is a business that is built on people. It's really important to us to have the right people, and there's definitely some interesting resources that are becoming available.

And not only that, but as we've done many times in the past when we've been through some difficult times, I mean we always we go back to the drawing board. We carry on pushing.

We carry on developing. There's no hand break in the office here.

We are pushing harder than ever because we know that this dynamic is going to change. We know that we've got a really strong brand.

We know that we've got great products, we've got great people and that when this all plays out, we're going to be in a stronger position than when we went into this.

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