Lakeland Industries, Inc.

Good day and welcome to the Lakeland Industries Fiscal 2024 Fourth 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 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, adjusted EBITDA margin, adjusted EBITDA excluding FX, adjusted EBITDA excluding FX margin, and gross margins excluding inventory adjustments. 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 Acting President and Chief Executive Officer and Executive Chairman, Jim Jenkins. Mr. Jenkins, the floor is yours.

Thank you, operator. Good morning, and thank you all for joining us for our fourth quarter fiscal 2024 earnings call. First, I would like to start by thanking customers and distributor partners around the world for trusting us with your lives and safety. Our mission at Lakeland is to protect the world's workers, first responders, and communities by providing quality, protective solutions for the most critical situations. Our customers are heroes, and we never take that trust for granted. I also want to thank our Lakeland team members across the company for their continued commitment and enthusiasm as we further delivered on our strategic initiatives this quarter. Our physical fourth quarter and our activities since January 31st have been very exciting and eventful as we continue to execute our previously communicated strategies and position Lakeland for profitable growth into the future. I appreciate all the hard work put in by our dedicated team. We will talk more about those results and initiatives during this call. Our fiscal year 2024 was a good year for Lakeland, but also a year of great change. We are excited about the progress we are making and the work that lies ahead as we take Lakeland to new heights. Before beginning my comments about the business, I'd like to provide a brief update on our ongoing CEO search. Our board has been methodical and deliberate in its vetting and selection process for a leader 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 expect to be in a position to make an announcement in our second fiscal quarter. As we discussed in our previous call, our team is doing an excellent job of executing our strategic plan of creating high performance culture driven by our corporate values. We are investing resources in high growth geographies and product segments, including building a premier global firebrand through product and marketing enhancements. We are also working to drive profitable growth in our other strategic product lines through product development, strategic pricing, channel diversification, and operations optimization. Finally, as we will discuss more, we are acquiring companies that improve Lakeland's competitive advantage in focused markets. On that front, we took a significant leap forward with the completion of our Pacific Helmets acquisition, which closed in Q4, and Jolly Scarpe Boots, which closed in early February. We also recently announced the signing of an agreement to acquire LHD Group of Germany's fire service business, which we expect to close in late May 2024. Along with our Pacific Helmets acquisition, the Jolly acquisition completes Lakeland's head-to-toe fire product offering, strengthens our geographic diversity, and presents exciting cross-selling opportunities with global certifications across Lakeland's existing sales and distribution channels. Jolly Scarpa manufactures and sells a premium foods product line with a global reputation for safety and design and innovation, and we are excited to add their products to the Lakeland family. LHD's fire and rescue offerings give us another premium product portfolio for fire services that complements our Eagle technical products and new Pacific and Jolly offerings. Additionally, the LHD CARES service offerings provide us with attractive recurring revenue streams and gross margins that Lakeland will work to leverage and expand. These acquisitions reflect our commitment to executing and accelerating the pace of small, strategic, and quick M&A strategy, SSQ. We still have a very attractive SSQ acquisitions pipeline, and we continue to search for opportunities that further position Lakeland to execute our broad growth strategies. We expect to continue investing strategically to broaden and diversify Lakeland's range of products and end markets. I trust everyone has had the opportunity to review the press release and Q4 and full year earnings deck we published last evening. I encourage you to follow along in the earnings presentation as Roger and I review our results. Looking at our fourth quarter and full year results, Our net sales for the fourth quarter of fiscal 2024 increased by 7.7% to 31.2 million compared to 29 million in the previous year. For the full fiscal year ended January 31, 2024, Lakeland delivered solid revenue growth of 11.8 million or 10.5% compared to last year, despite a 44% decrease in our Asia business during the year and a weaker than expected fourth quarter. We were very pleased with the growth in our U.S. and Latin American operations this fiscal year. as these important geographies grew 13% and 49% year over year. Our fire service business continues to deepen and broaden, having grown over 80% versus last fiscal year, driven by our strategic acquisitions, superior lead times from our manufacturing pipeline, and onboarding successes with new distributors. Our Eagle technical products business also had a very good year, with growth of over 103% since being acquired by Lakeland. In terms of profitability, our fourth quarter gross margin came in at 44.6%, excluding the effect of a one-time charge for inventory rightsizing in our adjusted EBITDA of $3.4 million, excluding the negative impact of foreign exchange losses, both of which Roger will discuss in more detail later. Adjusted for the impact of negative effects in the quarter, our adjusted EBITDA would have been approximately 11% versus 6%, 6.7% last year. Our gross margins in adjusted EBITDA for the quarter benefited from the improving sales mix of our higher value strategic products and improvements in our logistics and shipping operations. For the full fiscal year 2024, our revenue increased by almost 12 million or 10.5% against last year. This includes an 80% year-over-year growth in our fire services business, 8.3 million or 7.4% of our fiscal year 2024 growth came from our strategic acquisitions, while our organic business grew by 3.6% million, or 3.2%. This despite a 44% year-over-year decline in our Asia business. As I mentioned previously, our Latin American business has also experienced significant growth, up 49% year-over-year. We experienced foreign exchange volatility from a significant devaluation in the Argentinian peso this year, but we believe that the country is making improvements in its fiscal stability. We are very optimistic about Latin America, where we continue to invest and take market shares. From an earnings perspective, our fiscal year 24 net income increased by 3.6 million to 5.4 million, resulting in net income per diluted share of 72 cents compared to 24 cents in the prior year, despite the previously mentioned inventory adjustment and FX loss. Our adjusted EBITDA excluding FX loss increased by over $6 million to $15.7 million in fiscal year 24. resulting in an adjusted EBITDA margin excluding FX of 12.6%. In line with our growth trajectory and to further support our global portfolio of premium safety brands, we are gearing up to hire a new Senior Vice President of Sales this summer. Additionally, we anticipate expanding our integration team to drive operational excellence across the organization. Our commitment remains unwavering, and I'm excited to see where this coming year takes us. From here, I'd like to pass it over to Roger to cover more of the financial results for you and provide an outlook for the coming year.

Thanks, Jim, and hello, everyone. First, covering the current period, Lakeland delivered sales of $31.2 million in the fourth quarter into January 31, 2024. As noted in our earnings press release yesterday afternoon, we delivered solid year-over-year sales growth. Domestic sales were $12.7 million, or 40.6% of the total revenues. and international sales were $18.5 million or 59.4% of total revenues. This compares with domestic sales of $11.8 million or 40.8% of the total and international sales of 18.2 million or 59.2% of the total in the fourth quarter of the previous year. While our geographic mix was relatively unchanged year over year, both our domestic and international sales grew even with the 44% year-over-year decline in Asia. In terms of product mix for the fourth quarter, our fire service category continues to increase with an 18% year-over-year growth. Disposables continue to decrease as a percentage of Lakeland sales and represent 41% of total revenues compared to 48% in the year-ago period. This is a result of growth in our fire services and high performance categories and the continued weakness in the disposables product line in Asia. As we discussed in the previous quarter, we do see excellent opportunities in both our disposables and woven product categories. We're having great success with our North American direct container program, as well as with our oil and gas turnaround business, which continued into the fourth quarter. We are also very optimistic about our critical environment opportunities as our excellent sales team continues to identify and close new opportunities. Additionally, we are taking steps to bolster our North American industrial sales channels, which we will have more to discuss later in the year. As Jim mentioned, revenue for the full fiscal year 2024 increased by almost $12 million or 10.5% versus last year. For the fiscal year, our fire service business is 21.3% of sales and disposables are 39.8%. On slide 11 of our earnings presentation, we provide a comparison of our FY24 geographic and product line revenue versus FY23, as well as to perform a depiction of our geographic and product revenue, assuming we had owned Pacific Helmets, Jolly Boots, and LHD Fire and Rescue for the full year, FY24. On a full year pro forma basis with these acquisitions, our fire service business increases to 42% of revenue, the largest category, followed by disposables at 29%, chemical at 13%, and high performance at 12%. Our U.S. revenue percentages go to 32%, and Europe expands to 23%, led by Jolly and LHD. Reported gross profit was $11.2 million for the fourth quarter of fiscal 2024, an increase of 0.3 million or 3.2% compared to $10.9 million in the fourth quarter of fiscal 2023. Our reported gross profit as a percentage of net sales was 35.9% for the fourth quarter of fiscal 2024 compared to 37.5% for the fourth quarter of last year. Versus the previous year, our gross profit margin was helped by a 3.7 percentage point improvement in sales mix from higher value products and a 3.4% margin benefit in improvements from freight costs, as we show on slide 7. As Jim mentioned, gross profit performance in the current period was negatively impacted by a one-time excess and obsolete inventory adjustment of $2.7 million. Excluding the inventory adjustment, the fourth quarter gross profit would have been 44.6%. As we discussed in prior quarters, we were not pleased with the level of inventory the company was carrying coming into fiscal 2024. We took strong steps to reduce it. First, by implementing better planning and operational improvements led by our new Chief Operating Officer, Helena Ahn, and by working with sales on customer incentives for excess and reserved inventory. Those initiatives were quite successful during the fiscal year, particularly in the third quarter. During the fourth quarter, we made a decision to clean up obsolete styles and non-strategic products, resulting in a $2.7 million one-time charge for inventory rightsizing. We believe our inventory position going into fiscal year 2025 is much more aligned with the strategic focus of our business. As a reminder, fire services products are made to order, which is positive for our inventory and working capital positions. Lakeland reported an operating loss of $3.3 million for the fiscal fourth quarter of 2024 compared to an operating profit of $100,000 for the fiscal fourth quarter of fiscal 2023. The main drivers for the difference between the two periods were the previously mentioned $2.7 million one-time inventory adjustment and a $1.7 million negative impact on operating expenses caused by the currency fluctuations, primarily the devaluation in the Argentine peso. Additionally, higher SG&A costs including non-recurring acquisition, severance and restructuring costs, higher selling expenses from sales growth, acquired company operating expenses, and higher bonus expenses negatively affected SG&A and operating profit in the fourth quarter. Operating margins were minus 10.6 for the fourth quarter of fiscal 2024 compared to 0.3% for the fourth quarter of fiscal 2023. Excluding the negative impacts of the inventory adjustment, foreign exchange, severance and acquisition expenses, our operating profit would have been $2.3 million or 7.5% operating margin for the quarter. The company reported a net loss of $1 million or $0.13 per basic share and $0.13 per diluted share compared to net income of $200,000 or $0.02 per basic and diluted share last year. That income was positively impacted by a $3.8 million gain from the sale of our Canada warehouse in Q4 of 2024 and negatively impacted by an increased tax expense for the quarter, primarily driven by international jurisdictions, including the sale of our Canadian warehouse, in addition to the previously discussed inventory adjustment and FX losses. Adjusted EBITDA excluding FX losses for the fourth quarter of fiscal 2024 was $3.4 million or a margin of 11% compared to $1.9 million for the fourth quarter of fiscal 2023. Foreign currency losses of $1.7 million negatively impacted adjusted EBITDA resulting in an as reported adjusted EBITDA of $1.8 million. As shown on slide 7, our adjusted EBITDA for the quarter benefited from improvements in our higher value product sales mix and lower freight expense, partially offset by higher selling expenses related to sales growth and acquired entity OPEX, higher professional fees, and higher bonus expense, in addition to the previously mentioned foreign exchange impact. As we show on slides 8 and 9, for the full year fiscal 2024, Lakeland's adjusted EBITDA excluding FX of $15.7 million is an increase of 64% versus FY23 adjusted EBITDA of $10.7 million. Full year FX fluctuations, primarily from the Argentine peso, reduced FY24 adjusted EBITDA by $3.7 million. While sales mixed and improved freight and logistics bolstered adjusted EBITDA versus last year. Now turning to the balance sheet. Lakeland ended the year with cash and cash equivalents of approximately $25.2 million compared to our prior year ended cash balance of $24.6 million. Our focus on working capital improvements resulted in $3.2 million of cash flow from operations during the fourth quarter. $2.8 million of which was driven by accelerated reduction of raw and finished goods inventory. In FY24, we produced a positive operating cash flow of $10.9 million, led by decreases in inventory of $7.7 million to a level of $51.3 million of inventory at January 31, 2024, along with improved gross margins. Our laser focus on cash further strengthens the company's financial position, particularly our robust balance sheet and cash position, which we believe will allow us to continue pursuing organic and inorganic growth opportunities. At January 31, 2024, the company had $1 million of debt outstanding at a foreign subsidiary. As we mentioned in our press release in early February, we drew down a portion of our revolving line of credit in conjunction with the closing of our acquisition of Jolly Scarfing. In addition, on March 28th of 2024, we completed an amendment to our existing revolver to extend the facility for five years and to expand our line of credit availability to $40 million, up from $25 million previously with improved terms. Capital expenditures for the three months ended January 31, 2024, were $0.6 million and $2.1 million for the fiscal year 2024. We expect FY25 capital expenditures to be approximately $3 million as we develop additional in-house fire service manufacturing capacity and replace existing equipment in the normal course of operations. Monterey expansion, which we discussed last quarter, remains on pause as we continue to assess weather-related damage to our leased building. Finally, I'm very pleased to report that we continue making significant enhancements in the skill set and capabilities of our global finance and accounting teams, and we will continue to invest in our global finance and IT systems. This becomes even more important as we continue to expand globally. I'm particularly happy to report that we have made significant improvements in our global control environment and we were able to quickly remediate and remove the control material weakness that was identified at the end of fiscal 2023. Looking ahead to fiscal 2025, we are very pleased that for the first time Lakeland is providing forward-looking guidance for our fiscal 2025 fiscal year. Please note that these expectations include the recently announced Jolly Scarpave and Pacific Helmets acquisitions, but do not include the LHD fire business, which we expect to close in late May 2024. We are becoming more confident in our global sales platforms and earnings ability, and we see FY 2025 revenue in the range of $140 million to $150 million. Additionally, we expect FY 2025 adjusted EBITDA excluding FX to be in the range of $16.8 million to $18.5 million. We expect to update these expectations once we close the LHD transaction and as fiscal 2025 progresses. With that overview, I'd like to turn the call back over to Jim before we begin taking questions.

Thank you, Roger. Let me wrap up by taking a few minutes to talk about our ongoing strategy to emphasize the opportunities we see for our business. Our value proposition continues to be strong and unique, and we believe it will resonate in the market. We also believe our growing portfolio of product offerings in the fire space, which will soon offer total care complimentary service with our acquisition of LHD, coupled with our growing ability to effectively leverage our other brands in areas of the world like Latin America, where we once had little presence, should help drive more consistent performance over the long term. But we think there's a real opportunity to get even better, to take more market share. We also see an opportunity on the system side, which is being addressed with a concentrated effort over the next couple of years to upgrade our systems and software to drive technology as a competitive advantage. This is a longer term play. As I said on our last call, we are still in the very early innings of a nine inning game. Over time, we expect these investments to drive more productivity and efficiency. While it will not happen overnight, our confidence is high that we will see the anticipated mid- to longer-term productivity improvements and associated EBITDA margin expansion. From an acquisition strategy perspective, the fire market continues to be fragmented, and acquisitions, both making them and driving organic growth after the acquisition is completed, will be an important element of our growth strategy. Our acquisition plan is supported by healthy cash flow. We will make concerted efforts to expand our integration programs as we add expertise to effectively consolidate our growing fire services offerings. Our acquisition plan is both disciplined and strategic, and we believe we are the only company in our space actively acquiring with the end goal of comprehensive integration. We want to continue focusing on the smaller companies as we believe the integration process to be less disruptive, as exhibited by our success this year with Eagle. We see us replicating the Eagle model with Pacific Helmet, Jolly, and LHD. That means we will drive to execute the sales and cost synergies from the acquisitions we make while maintaining the brand value and key contributors from the companies we acquire. We believe that is unique in the market. I'll conclude by saying that the pipelines associated with both our organic and acquisitive growth are very strong, and we remain confident in our direction and believe we will continue to be well positioned to capitalize on future growth opportunities. We also expect to be able to continue to generate positive short-term results simultaneously to better position the company for the longer term. With that, we will now open the call for questions, operator.

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 from Jerry Sweeney with Roth MKM.

Good morning, guys. This is Brandon Rogers on for Jerry Sweeney. Thanks for taking my question. Hey, good morning, Brandon. How's it going? So I understand that there's a company-wide focus on growing the service aspects for both fire and the core business as well. How much of the current business has a service component? And then will the service component growth come organically or inorganically or both?

So on the service end, this is our first foray into the service throughout the LHD acquisition. So we do not have that offering, but we're very excited about it. You know, we've got a team sort of exploring whether that's something we might greenfield in other areas of the world. But right now, I think we're going to spend a good chunk of this year learning from LHD and how their processes work through that service component.

And Brandon, it's Roger. I'll just add that, you know, that's something that we have talked about. We've been looking for an opportunity, and the fact that LHD has such a strong, what they call LHD care program, A number of countries, I think that gives us the leg up. And, you know, also we'll have more information following the acquisition, but the gross margins for that business, as you can expect, are, you know, well above company averages.

Awesome. Awesome, thank you for that.

And then another one, can you provide just some of the details around like the value proposition and the important benefits of providing the head-to-toe fire product offering?

Well, you know, when you think about it, a lot of these are tenders, right? So they've got, in various countries, certain opportunities to win the entire bid. And having, you know, that head-to-toe offering rather than having to find a partner to join in the bid, we believe provides us with a significant competitive advantage.

Yeah, and we mentioned this at your conference recently. I mean, we've got recent, very recent anecdotal evidence of that. We had a significant bid in latam going up against much larger uh fire turnout gear providers uh and the fact that we were able to come to the tender with uh with the pacific helmets and jolly boots uh resulted in us winning that tender which was very exciting thank you and then one more for me is uh just on fx uh i know there was a

FX had a much more significant impact this year compared to last year. And is that strictly due to the devaluation of the Argentinian peso, or were there other aspects at play that had a material impact?

Yeah, so that's a great question. The FX that we called out was due almost exclusively to the Argentinian peso. So if you think about how FX impacts the global company, and we are incredibly global at this point, It can go through the balance sheet translation through OCI. It can certainly affect the top line revenue number depending on one currency versus another. That's not what we're talking about here and that's just normal part of doing business. The Argentinian situation arises, it's got a couple of distinct features. One, it arises because of the current high inflation rate in Argentina being above 100%, US GAAP requires us to carry that operating entity in a US dollar functional currency, not a local currency. What that results in is when we remeasure our assets, particularly cash and receivables, that currency impact flows through OPEX. So not only was it a headwind, it's a headwind and what I'd refer to as a bad place, and that's OPEX. That said, we do see the situation improving there. There are steps being taken to get their fiscal house much more in order. We are comprehensively reevaluating and looking at all of our functional currency designations and we'll manage that as best we can. But the reason that we called that one out is in addition to where it flows through OPEX, It was kind of compounded by the fact that unlike most currencies, there's nothing you can do about it to hedge it. It just was not hedgeable. That said, like Jim said, we were very bullish on that market. We are taking market share. It is profitable, and it's growing, and we are going to continue to invest in the Latin American market.

Thanks to you both. I appreciate you taking the questions. I'm going to take the rest offline. Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. At this time, there are no other questions in the queue.

Thank you, operator. Thank you all for joining us on today's call. We appreciate your continuous interest in Lakeland. We look forward to building on the strong momentum Lakeland has and sharing our successes with you in fiscal 2025. Have a great day.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.