Lakeland Industries, Inc.

Good day, and welcome to the Lakeland Fire and Safety Fiscal First Quarter 2026 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 may make statements relating to our goals and objectives for future operations, financial and business trends, business prospects, and management 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. You undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call. On this call, we will also discuss financial measures derived from our financial statements that are not determined in accordance with US GAAP, including adjusted EBITDA, excluding FX, and adjusted EBITDA, excluding FX margin, organic sales, organic gross margin, organic SG&A operating expenses, and adjusted operating expenses. A reconciliation of each of the non-GAAP measures discussed on this call to the most directly comparable gap measures is presented in our earnings release. A press release detailing these results crossed the wire this afternoon and is available in the investor relations section of our company's website, ir.lakeland.com. At this time, I would like to introduce your host for this call, Lakeland Fire and Safety's President, Chief Executive Officer and Executive Chairman, Jim Jenkins, and Chief Financial Officer and Secretary, Roger Shannon. Mr. Jenkins, the floor is yours.

Thank you, operator, and good afternoon, everyone. Thank you for joining us today to discuss the results of our fiscal 2026 first quarter and at April 30, 2025. We continue to build on the momentum from our fiscal 2025 revenue growth in the first quarter of 2026 as we focus on accelerating growth within the fragmented $2 billion fire protection sector in the largest global markets. Roger will go over the financials in more detail shortly, so I will provide you with a brief overview. We achieved record net sales of 46.7 million, representing a 29% year-over-year increase driven by a 100% increase in fire services products and the ongoing momentum from our recent acquisitions. In the U.S., our net sales increased 42% year-over-year to 22.5%. million, including organic U.S. growth of 2.1 million, or 15%. And in Europe, our net sales increased 102% year-over-year to 12.1 million. Growth profit as a percentage of net sales decreased to 33.5% from 44.6% for the comparable year-ago period. Robust growth in our organic and acquisition-driven fire services vertical in the U.S. market was partially offset by weakness in Canada and Latin America. where margins are typically above our corporate average. Additionally, as expected, lower gross margins from our recent acquisitions, including the impact of purchase accounting, continue to reduce corporate gross margins. Adjusted EBITDA, excluding FX, was 0.6 million, which was a decrease of 3.2 million compared with 3.8 million for the comparable year-ago period. SG&A, as reported, increased 6.3 million from the first quarter of fiscal 2025 while organic cash SPNA increased year-over-year by $1 million, mostly driven by labor costs and outbound freight. Capital expenditures of $1.2 million principally related to capital investment in our new enterprise resource planning system. In December, we began implementing a new company-wide SAP ERP system, which will enhance, modernize, and consolidate our disparate company-wide systems to further support our growth and profitability. The first quarter reflected the full impact of tariff uncertainty and the associated mitigation strategies we have employed to build inventory. Our diversified manufacturing footprint makes us well-equipped to adapt to shifting trade dynamics and minimize potential disruptions. This flexibility enables us to maintain stability across our supply chain and production processes, even in the face of uncertainty. Even so, we did see lower sales in Canada and a delay in expected sales in Latin America, two of our higher margin geographies due to the tariff uncertainty. Our focus remains on strengthening customer relationships, driving operational efficiency, and maintaining sound financial stewardship. Our positioning within two relatively recession-resistant sectors, industrial and fire, continues to provide us with a solid foundation. We are not entirely insulated from the uncertainty surrounding global tariff developments, but we are navigating this period with clear priorities, thoughtful planning, and strong confidence in our long-term outlook. To mitigate the effects of potential imposed tariffs, net inventory has increased by 3.1 million, totaling 85.8 million as of April 30, 2025. To comment further on our tariff mitigation measures, in North America, we employ cross-certification of Lakeland's Mexico-produced turnout gear by Viridian for production in the U.S. All Viridian turnout gear is currently manufactured in the U.S., and these facilities have the capacity to manufacture Lakeland brand of turnout gear. Our Mexico facility is also becoming certified to produce Viridian turnout gear for the Canadian LATAM markets. We have shared compliance under NFPA 1970 between our Mexico facility and Viridian with technical documentation to facilitate cross-production initiatives. It's important to note that over 90% of our Mexico-produced products, which fall under the provisions of the USMCA trade agreement, are exempt from additional tariffs. In Asia, we are exploring other lower-tariff regions for manufacturing industrial products while communicating expected price increases or surcharges to channel partners for products made in Vietnam and China. We are continuing to assess the possibility of manufacturing disposable products at our newly acquired U.S. manufacturing facilities or at other Lakeland facilities worldwide. We believe that we do not have a material risk of retaliatory tariffs from foreign entities as we manufacture only a limited set of products in the U.S. for non-U.S. countries, and only a limited range of China-produced products are imported into the U.S. We also believe that garment manufacturing is not the primary focus of the administration's tariff policies. While our revenue was close to our internal expectations, tariffs did cause regional delays in the industrial space, with additional factors affecting revenue, including currency issues, as well as the production issues and product offering updates of Pacific helmets. The tariff-related delays were most apparent in Canada and Latin America, although our outlook for these regions remains positive. We believe momentum in these markets will rebound once uncertainty around tariffs subsides. Additionally, we continue to believe that a significant Jolly Fire boots order, originally anticipated for shipment in Q2 of fiscal 25, is still likely to materialize. While timing remains subject to the Italian government's final procurement steps, we remain encouraged by ongoing engagement and the customer's reaffirmed intent to proceed. As such, we anticipate sequential growth in gross margins and adjusted EBITDA, excluding the impact of FX in the second quarter, aided by the improving global tariff environment and reduction in necessary mitigation strategies. Looking ahead into the remainder of fiscal year 2026, we remain focused on growing revenue in our fire services and industrial verticals, implementing operating and manufacturing efficiencies to achieve higher margins, significantly reducing operating expenses, and continuing to navigate tariff uncertainties. We are also continuing to execute on our strategic acquisition strategy by realizing cross-selling and operational synergy to accelerate growth while pursuing additional opportunities in the fire suit rental decontamination and services business. We maintain a robust M&A pipeline and are in active conversations to explore new opportunities for further consolidating the fragmented fire market, utilizing our strong balance sheet to support this acquisition strategy. With the four recently completed acquisitions, which added product line extensions, innovative new products, and expanded our global footprint, we are strongly positioned to grow our global head-to-toe FIRE portfolio and to generate long-term value for our shareholders. With that, I'd like to pass the call to Roger to cover our financial results.

Thank you, Jim, and hello, everyone. I'll provide a quick overview of our fiscal 2026 first quarter financials before diving into the details. Revenue for the quarter grew $10.4 million year over year to a record $46.7 million, an increase of 29% compared to the first quarter of fiscal 2025. Consolidated gross margin decreased to 33.5% from 44.6% for the first quarter of fiscal 2025. Operating expenses increased by $6.3 million, or 45%. from 14 million to 20.3 million in the first quarter of fiscal 2026, primarily due to inorganic growth, acquisition expenses, and higher organic operating expenses. Net loss was $3.9 million, or 41 cents per basic share and diluted earnings per share, for the first quarter of fiscal 2026, compared to net income of $1.7 million, or 22 cents per basic and diluted earnings per share from the first quarter of fiscal 2025. Adjusted EBITDA, excluding FX, was $0.6 million for the quarter. Cash and cash equivalents were $18.6 million on April 30, 2025, compared to $17.5 million on January 31, 2025. Looking at our first fiscal quarter of 2026, The increase in net sales was driven by 100% growth in the fire services segment, or a $10.5 million increase year over year. Sales from our recent acquisitions accounted for $9.9 million of the increase, while organic sales increased $600,000 or 2% over the prior year. Organic revenue increased $600,000 or 2% to $36.9 million, compared to $36.3 million in the first quarter of fiscal 2025 due to strong growth in the U.S. and Europe, partially offset by weakness in Latin America and Canada. Within our important U.S. market, our organic fire services business grew $1 million, or 32% year-over-year, and our U.S. industrial organic business grew $1.1 million, or 9.7%. Gross profit for the first quarter of fiscal 2026 was $15.6 million, a decrease of $.6 million, or 4%, compared to $16.2 million for the first quarter of fiscal 2025. The gross margin percentage decreased in the first quarter of fiscal 2026 due to a shift in the geographic revenue mix, combined with, as expected, lower margins in our acquired businesses, primarily due to the impacts of purchase accounting and higher manufacturing and freight costs. Margins in the acquired businesses were impacted by the amortization of the write-up and inventory as part of purchase accounting. Our organic gross margin percentage decreased to 35.9% from 44.6% in the first quarter of fiscal 2026, primarily due to lower sales in our higher margin Latin American and Canadian markets, as well as the impact of material price variance allocation. Due to systems limitations, all of our purchase price variances compared to standard costs were reflected in cost of goods sold rather than partially capitalized into inventory. We expect this impact to reverse in future quarters. Operating expenses increased by $6.3 million or 45% from $14 million for the first quarter of fiscal 2025, $20.3 million for the first quarter of fiscal 2026. Operating expenses increased due to the acquisitions of Viridian and LHD, which added $3 million to operating expenses, as well as severance costs, litigation expenses, and selling expenses. Adjusted operating expenses increased by $3.3 million, primarily due to the operating expenses of acquired companies. Operating loss was $4.6 million for the first quarter of fiscal 2026, compared to an operating profit of $2.2 million for the first quarter of fiscal 2025, primarily due to the aforementioned impacts. Operating margins were negative 9.9% for the first quarter of fiscal 2026, compared to 6.1% for the first quarter of fiscal 2025. Net loss was $3.9 million or 41 cents of earnings per diluted share for the first quarter fiscal 2026 compared to net income of $1.7 million or 22 cents of earnings per diluted share for the first quarter fiscal 2025. Adjusted EBITDA excluding FX for the first quarter fiscal year 2026 was $0.6 million, a decrease of $3.2 million, or 84%, compared with $3.8 million for the first quarter of fiscal 2025. The decrease was primarily driven by the previously mentioned materials purchase variance, as well as higher organic SG&A in year-over-year increase in profit and ending inventory, resulting from our tariff-related inventory bill during the quarter. As of quarter end, total profit and ending inventory was $1.3 million. Revenue for the trailing 12 months ended April 30th of 2025 was $177.6 million, an increase of $45.3 million, or 34%, versus the Q1 fiscal 2025 TTM revenue of $132.3 million. With our recent fire services acquisition supporting Lakeland's continued growth, Trailing 12-month adjusted EBITDA, excluding the impacts of FX, was $14.1 million compared to $16.5 million for the prior quarter's trailing 12 months. The shortfall was a direct result of the revenue falling in key high-margin regions, the impact of the purchase variance described previously, higher than expected SG&A expenses, including increased travel and trade show participation, as well as commission and incremental operating costs associated with the Viridian acquisition. Considering that we completed four major acquisitions in the past 12 months, the full integration and implementation of which does take some time, we believe those benefits will begin translating into even greater improved financial performance that will be recognized in coming quarters. Gross margin percentage decreased in the first quarter of fiscal 2026 due to geographic revenue mix coupled with lower margins in our acquired businesses, higher manufacturing, and freight costs. Margins in the acquired businesses were impacted by the amortization of the inventory write-up as part of purchase accounting. Organic gross margin percentage decreased to 35.9% from 44.6% for the first quarter of fiscal 2026, primarily due to lower sales in our higher margin Latin American and Canadian markets and the material price variance allocations. As we migrate to new systems, we expect to seamlessly ensure that purchase variances are properly identified and accounted for in alignment with inventory capitalization standards. The primary effect of this variance relates to the timing of expense recognition rather than underlying operational performance. and has introduced short-term volatility into our gross margin reporting. We anticipate a corresponding improvement in gross margins in future quarters as this timing difference normalizes. Adjusted EBITDA excluding FX for the first quarter of fiscal 2026 was $0.6 million, a decrease of $3.2 million, or 84%, compared with $3.8 million for the first quarter of fiscal 2025. The decrease was driven by this purchase variance where the full amount was expensed through COGS instead of being partially capitalized. As I noted on the prior slide, the $3.2 million decrease in adjusted EBITDA excluding FX was driven by materials purchase variance which will be reversed in subsequent quarters. We anticipate sequential growth in gross margin and adjusted EBITDA excluding FX in the second quarter. Reviewing our performance for the first quarter, our most recent acquisition, Viridian, contributed $4.4 million in revenue during the quarter. Revenues for Eagle, Pacific Helmets, Jolly, LHD, and Viridian totaled $15.6 million, and we expect these to accelerate as we fulfill open orders and capitalize on cross-selling opportunities, including Jolly's substantial fire orders that were previously delayed to the first half of fiscal 2026. Looking at our organic business, our Latin American operations decreased 12% in sales year over year, due mainly to shipment timing and the previously mentioned impact of tariffs. In Asia, however, we saw sales increase 15% year over year. We're very excited about the new sales leadership that we have put in place in Asia, and we're encouraged by the growth we're seeing in both China and the new Asian markets outside of China. Our European revenue, including Eagle, Jolly, and our recently acquired LHC business grew by $6.1 million or 102% to $12.1 million. We continue to see very good sales opportunities in Europe and are committed to its growth trajectory. Our U.S. revenue increased 42% to $22.5 million driven by continued growth in the Lakeland Fire Services business, as well as a 1.1 million or 10% increase in our U.S. industrials business. Regarding product mix for the first quarter, our fire services business grew 10.5 million or 100% versus the same period last year and represents 45% of total revenue driven by a recent LHD acquisition, a full quarter of viridian sales and organic gains in the U.S., and from EGLE as we start to see gains from our head-to-toe strategy. For our industrial product lines, disposables represented 28% of revenue for the quarter, while chemicals represented 13%. The remainder of our industrial products, including FR, AR, high-performance, and high-vis, accounted for 14% of sales. Now turning to the balance sheet. Lakeland ended the quarter with cash and cash equivalents of approximately $18.6 million and long-term debt of $24.7 million. This compares to $17.5 million in cash and $16.4 million in long-term debt as of January 31, 2025. As of April 30, 2025, we had borrowings of $19.8 million outstanding under the revolving credit facility with an additional $20.2 million of available credit under the loan agreement. We were in compliance with all credit facility covenants. Net cash used in operating activities was $4.8 million in the three months ended April 30, 2025, compared to net cash provided of $300,000 in the three months ended April 30, 2024. The increase was driven by a net loss of $3.9 million and increasing working capital of $3 million, offset by non-cash charges of $2.1 million. Capital expenditures were $1.2 million for the three months ended April 30th of 2025, primarily related to capital investment in our new ERP system. At the end of Q1, inventory was $85.8 million, up from $82.7 million at the end of Q4 of fiscal year 2025 due to inventory buildup in preparation for the forecasted increase in sales in the first half of fiscal 2026 the delayed shipment of a large boot order from Jolly, and tariff mitigation initiatives. Inventory of acquired companies totaled $15 million. Year over year, we saw an increase in our organic inventory of $14.8 million versus the quarter ended April 30th, 2024. Organic finished goods were $37.2 million in the first quarter of fiscal 2026, up $9.4 million year-over-year, and up $700,000 quarter-over-quarter. Organic raw materials were $32.2 million in the first quarter of fiscal 2026, up $4.9 million year-over-year, and up $1.2 million quarter-over-quarter. Despite margin pressure in Q1, we remain confident in our fiscal year outlook, including expected revenue between $210 to $220 million. Due to lower margins and higher operating expenses in the first quarter, we are trending toward the lower end of our previously issued FY2026 adjusted EBITDA, excluding FX, guidance of $24 to $29 million. This reflects near-term order delays and uncertainty related to tariffs. Looking further ahead, we believe our cost discipline, acquisition strategy, and operational improvements will position the company for accelerated growth over the next three to four years. With that overview, I'd like to turn the call back over to Jim before we begin taking questions.