Lakeland Industries, Inc.

Good day and welcome to the Lakeland Industries Fiscal 2024 Second Quarter Financial Results Conference Call. All lines have been placed on a loose and only mode and the floor will be open for 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 or implied by such forward-looking statements. 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 earnings release. At this time, I would like to introduce you to your host for this call, Lakeland Industries Chief Executive Officer, Charlie Roberson. Mr. Roberson, the floor is yours.

Thank you, Holly. Good morning, and thank you all for joining us for our second quarter fiscal 2024 earnings call. Please note that we also have an earnings presentation posted on our IR page of our website at www.lakeland.com. Our second quarter results were very encouraging as we continued to see strong improvements and growth within our strategic product lines and markets. Lakeland delivered net sales of 33.1 million up 17.3% year-over-year. This growth was driven both organically and by Eagle Technical products, which contributed $3.4 million in revenue to our results this quarter. Notably, our fire service product category continued to see very significant growth, with sales up 202% compared to last year. This growth highlights the significant momentum Lakeland is building in our strategic product lines. And our goal, to increase penetration in high-value markets, is producing positive results. In terms of profitability, our second quarter gross margin remains strong at 42.9%. And importantly, our adjusted EBITDA grew by over 50% to $4.2 million in the quarter. Our Eagle Technical Products acquisition, which makes European standard fire services gear, produced 900,000 of EBITDA in the quarter, helping elevate Lakeland's consolidated adjusted EBITDA margin to 12.6% this quarter, compared to 9% in the prior year. With regard to our key geographic markets, We saw similar demand trends to the first fiscal quarter with strength in the US, Europe, and Latin America. The US benefited from continued strength in the oil and gas sector as refinery turnarounds continued well into Q2. Sales of turnout gear into the US market were particularly strong, as mentioned earlier, largely due to the lead time advantage that we have over our competitors as a result of our proactive raw materials planning and manufacturing efficiency improvements. Our European sales strength continued as in Q1, meeting its performance targets and on the strength of the Eagle acquisition. Latin America also experienced strong fire service sales as a result of a large order delivered during the quarter. Despite those markets, strengthen those markets, our Asian markets have been weaker than expected, primarily driven by continued weakness in China. China's economy struggled throughout our fiscal second quarter as exports were at multi-year lows and unemployment increased. China's distribution channels for PPE remain in an overstocked position. As China works through its overstock of disposables, we are focusing on new end uses to grow sales. Biopharma, semiconductors, and batteries are among our targeted applications. As I already mentioned, Eagle contributed very positively to our results during the quarter. Our integration efforts continue to generate significant cross-organizational synergies, and we expect the Eagle platform to continue to enhance our adjusted EBITDA performance going forward. EGLE's fire glove and particle blocking hood are progressing through the certification process, and we will soon be including EGLE's designers in the development of our next generation NFPA turnout gear. Additionally, samples of EGLE products have been produced in Lakeland facilities and are being used to certify those facilities to make some of EGLE's products. Shifting gears to our capacity expansion initiatives, as we have previously communicated, we currently have an expansion project underway in Monterrey, Mexico. Due to damage experienced during the second quarter at our newly leased Monterrey site, we are currently evaluating our leasehold improvement build-out schedule which may impact our go-live production timing. This evaluation is still underway. However, and importantly, we do not anticipate an adverse impact to our financial results and operations or our ability to meet our forecasts. We believe our expectations going forward are not at risk. As it relates to our strategic priorities for the remainder of the fiscal year, we remain committed to driving revenue growth in key strategic markets while executing a shift in our sales resources towards higher value products. Our shorter lead times are resulting in market gains in our fire service and woven products, and we are utilizing our core strength in disposables and chemical garments combined with our manufacturing flexibility to attract new end users to our container program and higher-value strategic products. The fact that we can supply a full range of safety and PPE products from a single manufacturing facility is attractive to our large customers. We are leveraging our core products to help our customers fill containers more easily, which increases the frequency with which they can order high-value products by container. This improves customers' planning and reduces their freight and inventory costs. Moving forward, our leadership team is committed to identifying and maintaining a robust acquisition pipeline with opportunities that enhance Lakeland's strategic product portfolio and expand our geographic reach. Our M&A efforts are focused on finding opportunities like EGLE that meet our SSQ small, strategic, and quick acquisition strategy by identifying targets that are similar in size, highly strategic, and accretive to our bottom line in a short period of time. I'll now pass the call to Roger to provide an overview of our financial results. Roger? Thanks, Charlie, and good morning, everyone. Lakeland delivered sales of $33.1 million in the second quarter into July 31st, 2023. Domestic sales were $15.2 million or 46% of total revenues and international sales were $17.9 million or 54% of total revenues. This compares with domestic sales of $11.9 million or 42% of the total and international sales of $16.3 million or 58% of the total in the second quarter of fiscal 2023. As we noted in our earnings press release issued yesterday afternoon, we continue to see very strong growth within our fire service product category with sales up 202% year over year. In terms of product mix for the quarter, fire service increased to 27% of sales for the quarter, up from 11% in the same quarter of last fiscal year. As a reminder, our fire service product category was up 101% last quarter. Disposables continued to decrease as a percentage of Lakeland sales and represented 38% of total revenues compared to 45% 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've discussed in prior calls. From a segment reporting standpoint, Lakeland saw strong sales growth in our U.S., European, and Latin American markets. This growth was partially offset by softer Asian sales, particularly in China, which is a continuation of what we saw last quarter. Gross profit as a percentage of net sales was 42.9% for the fiscal 2024 second quarter, as compared with 41.3% a year ago. As Charlie already highlighted, our gross margin improvement has been driven primarily by a deliberate sales focus on strategic products, supported by manufacturing efficiencies that have resulted in reduced lead times, as well as decreases in transportation costs. Lakeland reported operating profit of $3.7 million in Q2-24 as compared to $1.8 million in the second quarter of last year. As a result, operating margins were 11.3% in the second quarter, up from 6.4% in the second quarter of last year. Our operating profit benefited from improved gross margins resulting from our product mix shift and operating leverage resulting from higher revenue, as previously discussed. This was partially offset by an increase of approximately $600,000 in operating expenses compared to last year. The increase in OpEx is attributable to currency fluctuations, one-time expenses related to severance and startup cost, increased depreciation and amortization and OpEx related to the EGLE acquisition, and year-over-year labor costs increase. Currency fluctuations, primarily related to the Chinese Yuan and Argentinian Peso, totaled approximately $600,000. One-time expenses related to severance and startup costs were approximately $500,000, and increased DNA and OpEx related to Eagle totaled approximately $300,000. These increases were partially offset by a reduction of $700,000 in the earn-out consideration accrual related to the EGLE acquisition, which was recorded as a reduction in operating expenses. Lakeland delivered net income of $2.5 million or 33 cents per basic share and 32 cents per diluted share during the quarter. This compares to a net loss of $900,000 or 11 cents for basic and diluted share in the prior year period. Adjusted EBITDA was $4.2 million in Q2-24 compared to $2.5 million in Q2-23. Lakeland delivered operating cash flow during the quarter of approximately $200,000. Our robust balance sheet provides us with significant flexibility as we continue to explore acquisition opportunities organic growth investments, and returning capital to our shareholders. Lakeland ended the quarter with cash and cash equivalents of approximately $24.3 million compared to our FY23 year-ended cash balance of $24.6 million. The company continued to have no debt at the end of the quarter and has up to $25 million available from bank credit facilities. Capital expenditures for the three months into July 31, 2023, were $400,000. For the full fiscal year, we now expect capital expenditures to be approximately $2 million, down from our previous estimate of $3 million, as we replace existing equipment in the normal course of operations and pause the Monterey expansion to assess the damage to our leased building, as Charlie previously discussed. We expect to fund capital expenditures from our cash flow from operations. Inventories declined slightly quarter over quarter from $57.9 million to $57.4 million at the end of the second quarter of fiscal 2024. Raw materials inventory increased by $990,000, while finished goods inventories decreased by approximately $360,000. The increase in raw material inventory is driven by growth in our higher value strategic products as we continue to strategically position ourselves to take market share from competitors. More specifically, much of our success in these end markets can be attributed to having more favorable lead times versus our competition and having raw materials on hand is key to the strategy. While the overall decrease in inventory during the quarter was minimal, We remain committed to accelerating the reduction of our finished goods inventory this year, as previously communicated. We are aggressively pursuing additional sales channels, marketing programs, and price deviations on excess inventory to drive these reductions. We expect these efforts to accelerate in the second half of this fiscal year. With that overview, I'd now like to turn the call back over to the operator to open up for questions.

Certainly. At this time, we will 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. Your first question for today is coming from Jerry Sweeney at Ross Capital.