Lakeland Industries, Inc.

Good day and welcome to the Lakeland Industries Fiscal 2024 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. 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 Executive Chairman Jim Jenkins. Mr. Jenkins, the floor is yours.

Thank you, operator. Good morning, and thank you all for joining us. for our third quarter fiscal 2024 earnings call. I would like to begin today's call by thanking and celebrating our Lakeland team members across the company for their 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. Before turning to our third quarter 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 and is engaging an executive recruiter and has 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, 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 31.7 million, 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. Finally, we saw a significant increase in our direct-to-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 third quarter gross margins remain strong at 42.2%. And importantly, our adjusted EBITDA grew by over $300,000 or 10.8% to 3.3 million in the quarter, even with a negative impact of foreign exchange in the quarter, which Roger will discuss later. This resulted in an 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. 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. 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 continues its exceptionally strong performance for the year, as we are the market leader in several of the markets served. As has been the case for the first half of the year, our Asian markets continue to perform below expectations as a result of ongoing macroeconomic weakness and an overhang of PPE equipment from China's COVID-19 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&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. The company has a broad range of helmet models, styles, and certifications and they 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, as it enhances our product portfolio and strengthens our ability to deliver exceptional fire turnout, protection offerings to our customers worldwide. Pacific has one of the largest ranges of helmet models, 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&D team that enables it to customize and produce helmets specified to the customer's specific requirements more easily. 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 the 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. 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 on 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 and 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. As we look to the balance of 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 I previously mentioned. This will include the release of new and innovative products, additions to our global sales force, and a renewed marketing focus. 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&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? 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 $31.7 million in the third quarter ended October 31, 2021. Domestic sales were $15.1 million, or 47.6% of total revenues, and international sales were $16.6 million, or 52.4% of total revenues. This compares with domestic sales of $14 million, or 49.3% of the total, and international sales of $14.4 million, or 50.7% of the total in the third quarter of fiscal 23. As we noted at 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%. From a segment reporting standpoint, Lakeland saw strong sales growth in our US, European, Canadian, and Latin American markets. 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. were $15.1 million or 48% of total revenue, an increase of $1.1 million over the year-ago period. Latin American sales grew $1.6 million to $4.2 million 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 $122.4 million, an increase of $11.8 million, or 11%, over the trailing 12 months ended October 31, 2022. Gross profit for Q3 of this quarter was $13.4 million, an increase of $1.1 million, or 9%, over the year-ago period. Gross profit as a percentage of net sales was 42.2% for the fiscal 2024 quarter, 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 costs, manufacturing cost improvements, and the reduction of total inventory, including fully and partially reserved inventory. Lakeland reported operating profit of $3.6 million in Q3 of 24, as compared to $2.1 million in the third quarter of last year. As a result, operating margins were 11.4% in the third quarter, up from 7.6% for the third quarter of last year. Our operating profit benefited from increases in sales and lower operating expenses during the third quarter. The company evaluated the earn out consideration accrual related to the Eagle acquisition and reduced this accrual by $1.5 million, 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 sales related costs, including increases in travel and trade show expenses were realized as we continue to invest in growth initiatives across the company. Lakeland delivered net income of $2.6 million or 35 cents per basic share and 34 cents per diluted share during the quarter. This compares to net income of $1.4 million or 19 cents per basic and diluted share in the prior year period. Adjusted EBITDA was $3.3 million in Q3 of 24, an increase of 10.8% compared to $3 million in Q3 of 23. Adjusted EBITDA performance in the quarter was driven by higher sales, partially offset by the impact of 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. 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 $12.1 million is an increase of 21.2% versus the TTM adjusted EBITDA of $9.9 million as of October 31st of 2022. Now turning to the balance sheet. Lakeland ended the quarter with cash and cash equivalents of approximately $26.4 million, an increase of $1.8 million compared to our prior year in cash balance of $24.6 million. Lakeland delivered cash flow from operations during the quarter of $3.8 million, driven by profitable operations and a $2.6 million reduction of raw materials and finished goods inventory. Here to date, we have produced positive operating cash flow of $7.7 million, led by profitable operations and a $3.2 million decrease in inventory. Offsetting the operating cash flows were $3 million in investing activities split between capital equipment and additional investment in body track. Financing activities for the fiscal year to date, primarily quarterly dividends, UK bank repayments, and treasury stock purchases totaled $1.8 million. Finally, cash balances have been impacted by $1.1 million during the year to date due to currency fluctuations, primarily from the Chinese Yuan, and Argentine Peso. 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 of October 31, 2023, were $400,000 and $1.5 million year-to-date. As a reminder, we now expect CapEx to be approximately $2 million 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 million quarter over quarter. to $54.4 million from $57.4 million at the end of the second quarter of fiscal 24. We were pleased to see the acceleration of inventory reduction in the quarter, and this remains a top operating objective. During the quarter, we utilized various sales and marketing programs, as well as price deviations on reserved inventory to assist this effort, and we will continue to do so moving forward. In closing, I'd like to briefly discuss two 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 $8.5 million, 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 to $8 million of sales revenue to Lakeland in our next fiscal year and for the company to be immediately accretive to Lakeland's bottom line results. Next is the sale of the company's Brantford, Ontario warehouse. On November 27th of 2023, the company sold its office and warehouse facility in Brantford, Ontario to an unrelated party for $4.9 million. This sale will result in a pre-tax gain after selling expenses of approximately $3.8 million that will be recognized in the fourth quarter of this year. Going forward, the company will utilize third-party logistics providers for customer fulfillment in Canada. Finally, on November 30th, 2023, we entered into amendment number three to the loan agreement with Bank of America. In this third amendment, the lender consented to our acquisition of the equity interest of Pacific and to permit additional indebtedness to be made available in Pacific by its existing bank relationships. The amendment also waived Lakeland's borrowing base limitations through January 31st of 2024. With that overview, I'd now like to turn the call over to the operator to open the call 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 with Roth Capital.

Hi, Jerry. Jim, how are you guys doing?

Great.

Hey, Jerry. Just a couple quick questions. Obviously, you know, fire service is doing quite well, and there's a lot of talk about, you know, getting into distributors. I'm just curious, are the fire gear products in all your distributors that you currently want to be in? Or is there an opportunity to get into more? Meaning, if you have 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 than expanding.

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

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

Yes. You're not putting words in my mouth. I think that's right. We feel we're in the early stages of growing out this opportunity and And given the certain competitive advantages we have, certainly on our sort of captive manufacturing, the additional product lines that we offer, yeah, this is – you know, in a nine-inning game, I think we're at about the second inning.

All right. That's very helpful. And then, obviously, maybe acquisitions, right? Totally get Pacific Helmets. You know, 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, you know, just add this cross-selling opportunity.

Yeah. I mean, we, we see, we see opportunities in, 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, you know, I'm certainly, I'm certainly interested in that. And this, in terms of the pipeline, I mean, my, it, I mean, for anybody's benefit on the call, my, my background is I, I, really have been moving on a strategic plan for TransCat in the M&A circles where we have pretty much done what we're trying to do at Lakeland, right? And as I look at the two companies, there's lots of similarities there about opportunities that we can move the needle without betting the farm, right? Pacific was an $8.5 million deal. We're going to get it right. I know we're going to get it right. 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. So certainly with TransCAD. Right.

Sorry.

Yes. Go ahead.

I was going to say TransCAD, you absolutely expanded the addressable market right through the asset management side. So that's sort of what I'm seeing here. Yep. Maybe just a couple of questions on disposables. You know, where does this go in terms of percentage of revenue? I imagine there's always some component to sales for disposables, but some needs. And I'm just curious if it's less important that there's less differentiation, et cetera, 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, um, on a, maybe a constant basis. I know it's going to change over time, but I think.

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

Yep. No, absolutely. No, thank you. Hey Roger. Yeah. I would just point out that, uh, 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. Of course, I joined in February, February 1st of this year, looking at our strategies, 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. Disposables, 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 sense to compete in disposables 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 and you know a couple things specifically that come to mind and we talked about this a bit last quarter is the Clean room applications clean room. It's not just your basic run-of-the-mill low-level Disposable item we see opportunities in click in Semiconductor EV had continued in health care and in the Lakeland brand and the product there is very good the other we alluded to this event in our prepared remarks is our larger distributor direct-to-customer container program. And we saw an uptick in that this quarter. Again, our large customer sales force is doing a great job. 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 and growth percentages in fire, and especially from an M&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. Got it. Understood.

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

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

Understood. Yeah. 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 certainly value in the play for it.

We didn't take it that way. It's just you gave us a great opportunity to kind of make it clear how we think about this program.

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, the higher value, and we continue to move, we don't abandon in any way, shape, or form the disposable market, but it's just as a percentage of our portfolio, we just sort of naturally get a little bit smaller, which I don't think is a bad thing.

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, et cetera, but just curious as to what level.

Yeah, Jerry, I'll take that one as well. And again, it's, you know, what you'll need to kind of keep in mind as a caveat is that we are starting to do the purchase accounting on Pacific. We will be bringing that in, so that will affect the inventory balance. 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 working process. That said, we have been very pleased at how we were able to reduce, call it the what I roughly circled up is the $58 million of inventory down to the $54 million level. As I think about that baseline, you know, we would like to get another $2 million to $4 million out of that. Okay. So you're pretty close, yeah. 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. Got it. I appreciate it.

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, 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.

Got it. I appreciate it, guys. Thanks for taking my call.

Thanks, Gary.

Appreciate it.

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

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.

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