Lakeland Industries Q3 2024 Earnings Call Transcript

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December 7, 2023

There are 4 speakers on the call.

Operator

Good day, and welcome to the Lakeland Industries Fiscal 20 24 Third Quarter Financial Results Conference Call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. During today's call, we will make statements relating to our goals and objectives for future operations, financial and business trends, business prospects and management's expectations for future performance that constitute forward looking statements under federal securities laws. Any such forward looking statements reflect management expectations based upon currently available information and are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our SEC filings. Our actual results, performance or achievements may differ materially from those expressed in or implied by such forward looking statements.

Operator

We undertake no obligation to update or revise any forward looking statements to reflect events or developments after the date of this call. During today's call, we will discuss financial measures derived from our financial statements that are not determined in accordance with U. S. GAAP, including adjusted EBITDA and adjusted EBITDA margin. A reconciliation of each of the non GAAP measures discussed on this call to the most directly comparable GAAP measure is presented in our Release.

Operator

At this time, I would like to introduce you to your host for this call, Lakeland Industries' Executive Chairman, Jim Jenkins. Mr. Jenkins, the floor is yours.

Speaker 1

Thank you, operator. Good morning and thank you all for joining us for our Q3 fiscal 2024 earnings call. I would like to begin today's call by thanking and celebrating our Lakeland team members across the company with a commitment to delivering our strategic initiatives during the quarter. These efforts have helped drive revenue growth in key strategic markets, execute a continued shift in our revenue profile towards higher value products and carry out our small, strategic and quick or SSQ acquisition strategy. As we enter the next chapter for Lakeland, I know I can speak for myself, our executive team and the Board when I say that we are excited about the company's future, supported by the strength and depth of our organization and leadership teams.

Speaker 1

Before turning to our Q3 results, I'd like to provide a brief update on our ongoing CEO search. The Board is following a very thorough vetting and selection process as engaging an executive recruiter and preliminarily identified a few candidates. We're eager to find the right leader, but we will be methodical and deliberate as we seek a candidate who will continue to drive our business strategy and culture. Lakeland has a solid foundation in place with an exciting runway for growth and the Board and I look forward to sharing more with you as the search process evolves. Now shifting gears to the quarter.

Speaker 1

Our first third quarter results our fiscal third quarter results were very positive and as we continue to see demand accelerate and growth within our key product lines and markets. Lakeland delivered net sales of 31,700,000 up 11.6% year over year. Notably, many of our high value strategic product lines saw growth in the quarter, including fire service and industrial products categories. Our fire service business continues to expand driven by our superior lead times versus our competitors, innovative designs from the Eagle team and onboarding successes with new distributors. As expected, we also continue to see strong demand from oil and gas turnaround activity, which as we discussed in previous quarters is having extended season in 2023.

Speaker 1

Finally, we saw a significant increase in our direct customer container business, which is a strategic focus for us. This growth highlights the significant momentum Lakeland is building in our high value product lines and our goal to increase penetration in high value markets is producing positive results. We believe our recently announced Pacific helmets acquisition will further enhance our fire service growth. In terms of profitability, our 3rd quarter gross margins remained strong at 42.2%. And importantly, our adjusted EBITDA grew by over were $300,000 or 10.8 percent to $3,300,000 in the quarter, even with a negative impact of foreign exchange in the quarter, which Roger will discuss later.

Speaker 1

This resulted in adjusted EBITDA margin of 10.4% compared to 10.4% last year. Adjusted for the impact of negative FX in the quarter, our adjusted EBITDA would have been approximately 14.2%. With regard to our geographic markets, we continue to see strong demand trends in North America, particularly in the U. S. And Latin America, as well as our EMEA markets to a lesser extent.

Speaker 1

We also were encouraged to see increases in our India and Australia markets for the quarter as these are potential growth markets for us. In North America, our sales teams continue to have success adding new distributors and expanding our commercial reach. Additionally, our considerably shorter manufacturing lead times as compared to many of our competitors have resulted in Lakeland gaining traction as a preferred supplier in our fire service and industrial categories. As we have discussed in past calls, we continue to see our strategically located manufacturing as a competitive advantage in enabling our favorable lead times. Finally, our Latin American business continued its exceptionally strong performance for the year as we are the market leader in several of the markets served.

Speaker 1

As has been the case for the first half of the year, our Asian markets continued to perform below expectations as a result of ongoing macroeconomic weakness and an overhang of PPE equipment from China's COVID-nineteen lockdowns. As a result, we expect our Asia Pacific business to remain below our initial projections over the last quarter of the year. Shifting gears a bit, I'd like to spend a few minutes discussing the company's small, strategic and quick M and A strategy and our overall commitment to identifying and maintaining a robust acquisition pipeline with opportunities that enhance Lakeland's high value product portfolio. Last week, we were pleased to announce the acquisition of Pacific Helmets. Pacific is a highly regarded global brand with a well established reputation for quality and innovative design and manufacturing in the growing first responder safety helmet market.

Speaker 1

The company has a broad range of helmet models, styles and certifications and have demonstrated the ability to develop new products and sell successfully around the world. The acquisition of Pacific is a significant milestone in our efforts to build Lakeland as a premier global firebrand that enhances our product portfolio and strengthens our ability to deliver exceptional fire turn up protection offerings to our customers worldwide. Pacific has one of the largest ranges of helmets, helmet model styles and certifications of any international helmet manufacturer. The company currently produces 26 plus helmet models and has a significant number of new product innovations launching in the near future. Like Lakeland, Pacific owns its own manufacturing facilities and has an in house R and D team that enables it to customize and produce helmets specified to the customers' specific requirements more easily.

Speaker 1

Pacific Helmet currently has a strong revenue and tender pipeline and global demand for safety helmets is growing. They already sell in over 40 countries and we believe the business is further scalable through the addition of new distributors, particularly in the Northern Hemisphere and emerging markets in which Lakeland already has a strong presence. We expect this acquisition to be immediately accretive to Lakeland's bottom line results and are excited about the organic and cross selling opportunities going forward. I'm excited to see our global sales team execute on this opportunity and we look forward to sharing more about the integration of the Pacific business into Lakeland platform in the future. I'd also like to welcome the Pacific team to the Lakeland family and we're very excited to have you as part of our team and the potential for the future.

Speaker 1

I also want to thank our team here at Lakeland for all their hard work recently in closing this deal. We continue to be very pleased with the performance of our Eagle acquisition and we believe Eagle is an excellent template for our SSQ acquisition model. After delivering a large tender during Q2 of this year, we expect Eagle to ship another larger order in Q4. Additionally, we are continuing efforts to integrate Eagle products into Lakeland's geographic markets as well as to accelerate the sales of Eagle gloves in particular blocking hoods. Eagle's fire gloves and particle blocking hoods are progressing through the certification process and Lakeland has leveraged Eagle's in house designers in the development of our next generation NFPA turnout gear, which is currently underway.

Speaker 1

As we look to the balance of the fiscal year and beyond, I am confident in and impressed by our current management team. I'm also encouraged by the exciting runway for growth this company has. Lakeland is focused on solidifying our foundational business and investing our resources in high growth geographies, which will include product line enhancements and the optimization of our operating and sales channels. Over the longer term, we are committed to building out a premier global firebrand, as previously mentioned. This will include the release of new and innovative products, additions to our global sales force and a renewed marketing focus.

Speaker 1

All of these efforts will benefit from the addition of Pacific to our existing platform. Finally, Lakeland is committed to expanding our products and capabilities through our small strategic and quick acquisition strategy. Continued M and A will help Lakeland's already diverse line of products, bring premier global brands onto the Lakeland platform and drive strong operating leverage through cross selling on Lakeland's vast distribution and sales network. I'll now pass the call to Roger to provide an overview of our financial results. Roger?

Speaker 2

Thank you, Jim, and hello, everyone. Before I get started with my comments on the financials, I'd like to remind everyone listening that we have posted investor slides that align with the information I'll present on our website at www.lakeland.com. Lakeland delivered sales of $31,700,000 in the Q3 ended October 31, 2023. Domestic sales were $15,100,000 or 47.6 percent of total revenues and international sales were $16,600,000 are 52.4 percent of total revenues. This compares with domestic sales of $14,000,000 or 49.3 percent of the total and international sales of $14,400,000 or 50.7 percent of the total in the Q3 of fiscal 'twenty 3.

Speaker 2

As we noted in our earnings press release issued yesterday afternoon, we delivered strong year over year sales growth and continued strong profitability. In terms of product mix for the quarter, our fire service category continues to increase as a percentage of Lakeland sales and represented 18% of the total revenue for the quarter compared to 12.5% in the year ago period. Disposables continued to decrease as a percentage of Lakeland sales and represented 38% of total revenues compared to 50% in the year ago period. This reflects the efforts we've made to shift our product mix toward higher value, higher margin and less commoditized products, as we have discussed in prior calls, as well as continued weakness for this product line in Asia. For the fiscal year to date, our fire service business is 21.4% of sales and disposables are 39%.

Speaker 2

From a segment reporting standpoint, Lakeland saw strong sales growth in our U. S, in the quarter. This growth was partially offset by softer Asian sales, particularly in China, which is a continuation of what we've seen over the last few quarters. For the current quarter, sales in the U. S.

Speaker 2

Were $15,100,000 are 48% of total revenue, an increase of $1,100,000 over the year ago period. Latin American sales grew $1,600,000 to $4,200,000 in the current quarter, an increase of 63% over Q3 of last year. All geographic regions except for Asia showed increases over the year ago period. Due to the inherent timing variability in our fire service business as a result of the timing of deliveries on large tenders, we have begun more closely tracking our trailing 12 month or TTM revenue. For the 12 months ended October 31, 2023, Our TTM revenue was $122,400,000 an increase of $11,800,000 or 11% over the trailing 12 months ended October 31, 2022.

Speaker 2

Gross profit for Q3 of this quarter was $13,400,000 an increase of $1,100,000 or 9 percent over the year ago period. Gross profit as a percentage of net sales was 42.2% for the fiscal 2024 Q3 as compared to 43.3% a year ago. Gross profit performance in the current period was driven by increased revenue during the quarter, including sales of previously reserved excess inventory, partially offset by an adjustment for intercompany profit in ending inventory. Our gross margin percentage was affected by an adjustment for intercompany profit in ending inventory and amortization of previous year adjustments to excess inventory, partially offset by improved product mix, lower freight cost, manufacturing cost improvements and the reduction of total inventory, including fully and partially reserved inventory. Lakeland reported operating profit of $3,600,000 in Q3 of 'twenty four as compared to $2,100,000 in the Q3 of last year.

Speaker 2

As a result, operating margins were 11.4% in the 3rd quarter, up from 7.6% for the Q3 of last year. Our operating profit benefited from increases in sales and lower operating expenses during the 3rd quarter. The company evaluated the earn out consideration accrual related to the Eagle acquisition and reduced this accrual by $1,500,000 which was recorded as a reduction in operating expense in the quarter. This decrease was offset by increases in currency fluctuations of $700,000 primarily related to the Argentine peso. Additionally, higher related and higher sales related costs, including increases in travel and trade show expenses were realized as we continue to invest in growth initiatives across the company.

Speaker 2

Lakeland delivered net income of $2,600,000 or $0.35 per basic share and $0.34 per diluted share during the quarter. This compares to net income of $1,400,000 or $0.19 per basic and diluted share in the prior year period. Adjusted EBITDA was $3,300,000 in Q3 'twenty four, an increase of 10.8% compared to $3,000,000 in Q3 of 'twenty three. Adjusted EBITDA performance in the quarter was driven by higher sales, partially offset by the impact to the previously mentioned negative FX impacts in operating expenses. Our adjusted EBITDA margin for Q3 of fiscal 2024 was 10.4% compared to the same number in the year ago period.

Speaker 2

Adjusted for the impact of negative FX in the quarter, our adjusted EBITDA would have been approximately 14.2% in the current quarter. On a trailing 12 month basis, Lakeland's adjusted EBITDA of $12,100,000 is an increase of 21.2% versus the TTM adjusted EBITDA of of $9,900,000 as of October 31, 2022. Now turning to the balance sheet. Lakeland ended the quarter with cash and cash equivalents of approximately $26,400,000 an increase of 1,800,000 compared to our prior year end cash balance of $24,600,000 Lakeland delivered cash flow from operations during the quarter of were $3,800,000 driven by profitable operations and a $2,600,000 reduction of raw materials and finished goods inventory. Year to date, we have produced positive operating cash flow of $7,700,000 led by profitable operations and a $3,200,000 decrease in inventory.

Speaker 2

Offsetting the operating cash flows were $3,000,000 in investing activities split between capital equipment and additional investment in Body Track. Financing activities for the fiscal year to date, primarily quarterly dividends, U. K. Bank repayments and treasury stock purchases totaled $1,800,000 Finally, cash balances have been impacted by $1,100,000 during the year to date due to currency fluctuations, primarily from with Chinese Yuan and Argentine Peso. The company continued to have no debt at the end of the quarter and has up to $25,000,000 available from bank credit facilities.

Speaker 2

Our GAAPO expenditures for the 3 months ended October 31, 2023 were $400,000 and $1,500,000 year to date. As a reminder, we now expect CapEx to be approximately $2,000,000 for the full fiscal year as we replace existing equipment in the normal course of operations. The Monterey expansion, which we discussed last quarter, remains on pause as we continue to assess weather related damage to our leased building. Inventories declined $3,000,000 quarter over quarter to $54,400,000 from $57,400,000 at the end of the Q2 of fiscal 'twenty four. We were pleased to see the acceleration of inventory reduction in the quarter and this remains a top operating objective.

Speaker 2

During the quarter, we utilized various sales and marketing programs as well as price deviations on reserve inventory to assist this effort and we will continue to do so moving forward. In closing, I'd like to briefly discuss 2 transactions that occurred subsequent to quarter end and their impact on Lakeland's financial profile. First is the acquisition of New Zealand based Pacific Helmets for $8,500,000 subject to post closing adjustments and customary holdback provisions, which Jim already covered in detail. The transaction was funded through the company's revolving credit facility and cash balances. We expect Pacific to add $7,000,000 to $8,000,000 of sales revenue to Lakeland in our next fiscal year and for the company to be immediately accretive to Lakeland's bottom line results.

Speaker 2

Next is the sale of the company's Brantford, Ontario warehouse. On November 27, 2023, the company sold its office and warehouse facility in Brantford, Ontario to an unrelated party for $4,900,000 This sale will result in a pre tax gain after selling expenses of approximately $3,800,000 that will be recognized in the Q4 of this year. Going forward, the company will utilize 3rd party logistics providers for customer fulfillment in Canada. Finally, on November 30, 2023, we entered into Amendment Number 3 to the loan agreement with Bank of America. In this 3rd amendment, the lender consented to our acquisition of the equity interest of Pacific and to permit additional indebtedness to be made available at Pacific by and its existing bank relationships.

Speaker 2

The amendment also waived Lakeland's borrowing base limitations through January 31, 2024. With that overview, I'd now like to turn the call over to the operator to open the call up for questions.

Operator

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. Your first question for today is coming from Gerry Sweeney with ROTH Capital.

Speaker 3

Good morning, Jim. How are you guys doing?

Speaker 1

Great. Hey, Jerry.

Speaker 3

Just a couple of quick questions. Obviously, fire service is doing quite well and There's a lot of talk about getting into distributors. Just curious, are the Fire Gear products in all your distributors that you currently or want to be in or is there an opportunity to get into more meaning You had some relationships with distributors, are they all in those distributors that you have relationships with, not new ones? I'm assuming sometimes it's easier to get into Existing relationships then expanding forward.

Speaker 1

Well, I think it's a combination yes, I do. I think it's a combination of both At this point, Jerry, and in particular with our North American sales team, they have done a tremendous job of developing additional distribution arrangements. And We are we've recently hired somebody in the West Coast to help further expand those relationships. So We've seen what I would consider more than modest success in developing our current distribution network, but also expanding it. And I give kudos to our North American sales team, the fire sales team in particular for that.

Speaker 1

And then of course on the Eagle front, We've inherited a lot of relationships from them as they seek Yes, bidding opportunities throughout the world. And certainly with Pacific Helmet, we'll see the We'll be beneficiary of some very strong, APAC distributor relationships that they have. And then you sort of do the cross selling with that. And now I get really excited about it because there's all kinds of opportunities that We might have had to partner with someone else to do that. Now we don't have to do that because we've got it we've got that service and product offering in house.

Speaker 3

Got it. I don't want to put words in your mouth, but sort of what I'm looking at it is distribution growth has been great. It sounds like Still opportunities there, but you take your fire, turn out gear, Eagle, Pacific Helmet, there is You can layer on additional cross selling opportunities and maybe even get into additional distributors here in different regions of the world. So Still some low hanging fruit maybe on the distributor side?

Speaker 1

Yes. Look, I remain yes, I think that's and you're not putting words out of mouth. I think that's right. And I think we feel we're in the early stages of growing out this opportunity. And given that Certain competitive advantages we have, certainly on our sort of captive manufacturing, the additional product lines that we offer.

Speaker 1

Yes, this is in a 9 inning game, I think we're at about the 2nd inning.

Speaker 3

All right. That's very helpful. And then Obviously, maybe acquisitions, right? Totally get Pacific helmets, absolutely makes sense. Are there other opportunities out there that you would be looking for that sort of add I don't know whether it's the fire gear or some other areas that just add this cross selling opportunity.

Speaker 1

Yes. I mean, we see opportunities in industrials and in fire. Being fire is where we've sort of found the low hanging fruit. We'd love to round we want to round out our fire offering with other possible products. So, I'm certainly interested in that.

Speaker 1

And in terms of the pipeline, I mean, it I mean, for anybody's benefit on the call, my background is I really have been moving on a strategic plan for Transcat In the M and A circles where we have pretty much done what we're trying to do at Lakeland, right? And As I look at the 2 companies, there's lots of similarities there about opportunities that we can move the needle without betting the farm, Right. Pacific was an $8,500,000 deal. We're going to get it right. I know we're going to get it right.

Speaker 1

But if we only get it a little right, we're going to be fine. In fact, we're going to be better than fine.

Speaker 3

Sorry, go ahead. I was going to say, Transcat, you absolutely expanded the addressable market, right, through the asset management side. So that's sort of

Speaker 1

what I'm

Speaker 3

seeing here. Okay. Yes. Maybe just a couple of quick questions on disposables. Where does this go in terms of percentage of revenue?

Speaker 3

I imagine there's always some component to sales for disposables, but some needs. And I'm just curious if it's less important There's less differentiation, etcetera, but I'm wondering where that goes longer term. And then maybe just talk about where inventory Maybe a right inventory level should be in terms of dollars on a maybe constant basis. I know it's going to change over time, but

Speaker 1

So, in the interest of not making myself a fool, I'm going to have Roger answer that one. Yes.

Speaker 3

No, absolutely no. Thank you. Hey, Roger.

Speaker 2

Yes. I would just point out that under Jim's and the Board's leadership, We have spent a lot of time and effort over the course of the summer and the fall. And of course, I joined in February 1 this year, Kind of looking at our strategy, strategic direction, how we compete and where we think we have competitive advantages. Of course, we have talked about The benefits that in house manufacturing brings. We don't want to give the message at all that we're minimizing disposables.

Speaker 2

Even though it's down to 38% or so of the total revenue, that's because other Revenue is growing in addition to, of course, the weakness in China that we've seen. But as we think about disposables, We don't want to give the message or the perspective that disposables are not strategic. Now there are some places where it does not make Since to compete in disposals where we don't think we have competitive advantage and we don't want to race to the bottom on pricing there. But as we think about What is strategic and how best to compete and where we have advantages? There are disposable products that we're very excited about and that we're going to continue to leverage.

Speaker 2

And a couple of things specifically that come to mind and We talked about this a bit last quarter is the clean room applications. Clean room is not just your basic run of the mill, low level Disposable item, we see opportunities in semiconductor, EV continued in healthcare and the Lakeland brand and the product there is very good. The other, we alluded to this a bit in our prepared remarks, is our larger distributor Direct to customer container program. We saw that tick in that this quarter. Our large customer sales force is doing a great job.

Speaker 2

And what that enables us to do is kind of strategically use certain disposable products to fill out a container that we ship directly to the customer. It's better margin and cost profile for us because we're not handling it and it results in more sales Because they can go to one place, one stop and kind of get the full range of needs that fill out The container that gets shipped to them. So, while we see the most growth, the most accelerated growth in growth percentages in fire and especially from an M and A perspective, in fire service and also industrial. The disposables, As it relates to things like critical environment, clean room and direct to customer container programs is considered highly strategic for us.

Speaker 3

Got it. Understood. And I didn't mean disposable go all the way, but that's a great overview.

Speaker 2

And again, I'll just add, it's kind of hard gotten the question, it's hard to say what you think the percentage is going to be. Yes. It gets down to what the When you see China recovering on one hand and the other hand, what the acquisitions look like because the acquisitions are going to be Typically in the fire or the higher value industrial. So that revenue channel, we just expect it to grow faster.

Speaker 3

Understood. Yes. And I'm sorry, I didn't mean to imply that it was going to absolutely go away, but I understand what you're saying. There's certain value in the marketplace. We didn't take it that way.

Speaker 3

It's just You gave us

Speaker 2

a great opportunity to kind of make it clear how we think about this.

Speaker 1

And in a lot of ways it's math, right? A lot of ways it's math, Jerry, right? I mean, as we continue to grow The higher end higher value and we continue that we and we move we don't abandon in In any way, shape or form the disposal market, but it's just as a percentage of our portfolio, which is sort of naturally get a little bit smaller, Got it. Which I don't think is a fad.

Speaker 3

Yes. What and a little housekeeping more for modeling, but where do you want to get inventory levels down? I think all things being equal, right, you're going to grow, you're continuing to grow, etcetera, but just curious as to what level

Speaker 2

Yes. Jerry, I'll take that one as well. And again, it's What we'll need to kind of keep in mind is the caveat is that we are starting to do the purchase accounting on Specific, we will be bringing that in, so that will affect the inventory balance like kind of like Eagle, like our fire products, these are made to order. So there's not going to be significant, if any, finished goods that come along with Pacific, but of course, they have The raw materials and the work in process. That said, we have been very pleased at how we were able to reduce You know, the call it the what I roughly circled up is the 58,000,000 of inventory down to the 54 level.

Speaker 2

As I think about that baseline, we would like to get another $2,000,000 to $4,000,000 out of that. Okay.

Speaker 3

So you're pretty close, yes.

Speaker 2

So now we still have it's a call we still have weekly. We have targets and programs underway and it's still very much a high priority and you can see the cash flow that's resulted in during the quarter.

Speaker 3

Got it. I appreciate that.

Speaker 1

And if I'd add, I'll just editorialize on that just briefly and that's really a testament to Roger and his team, Our COO, Helena Ahn and her team, they really have worked together on the and our sales team on forecasting And driving down that inventory number. And it's become a significant priority for us. And under Roger's leadership, we're starting to see some real encouraging results.

Operator

We have reached the end of the question and answer session. And I will now turn the call over to Jim for closing remarks.

Speaker 1

Thank you, operator. Thank you all for joining us on today's call. We appreciate your continued interest in Lakeland. The global growth opportunities for our business are robust and we look forward to building on the strong momentum Lakeland has built and sharing our successes with you in fiscal 2024. Have a great day.

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Lakeland Industries Q3 2024
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