Q4 2021 Lakeland Industries Inc Earnings Call

Thank you and good afternoon to you all we appreciate your taking the time to join our fiscal 2021 fourth quarter Financial results conference call. I'm joined here today Chief Financial Officer, Alan Dillard.

Lakeland fiscal 2021 has proven to be the most complex yet. Most rewarding years since our founding in 1982.

And are nearly forty years. We have been through many Black Swan crisis situations. Never have we emerged from any of those prior events with Consolidated annual revenues in excess of one hundred million dollars and none of them could have adequately prepared us for the COVID-19 global pandemic.

Having an entire year of COVID-19 behind us. I would like to begin our fiscal 2021 year end earnings call with a brief review of the year in order to put our financial performance into context with regard to Lakeland current strategies and outlook for fiscal 2022.

At the onset of the COVID-19 outbreak we put in place a strategy dedicating our manufacturing capacity to our industrial customer base and strong nineteen Market only to the extent that we had capacity beyond the requirements of our core customers.

Knowing that Black Swan events frequently leave industrial end-users short of products. They need to carry out their work safely Lakeland sought to secure new everyday industrial customers and increase Market penetration or before pursuing sales into what we knew would be a transient COVID-19 Market.

Focusing on servicing our existing customer base first not only provides for increased Market penetration, but it ensures the capital and resources invested in expansion pack are directed toward long-term growth and not ephemeral opportunities like mask manufacturing. This was a key lesson learned from the West Africa Ebola outbreak in 2015 and 2016.

Our sales to new customers increased Market penetration with existing customers and orders for direct COVID-19 applications are large indistinguishable from one another because we sell through distribution which clouds transparency as to the end user and application in most cases.

Sales, and all three cases are related to COVID-19 either for direct use or as a result of supply issues caused by the pandemic.

Consequently, when we report the COVID-19 related sales account for 30 to 35% of our fiscal year 2021 Revenue that figure includes our increased Market penetration from new and existing customers as well as direct COVID-19 sales.

Sales to new and existing customers that increase Market penetration were our first priority precisely because these sales are stickier than direct COVID-19 sales office and therefore result in increased potential for long-term growth post COVID-19 for fiscal year 2021. Our strategy worked in clubs incredibly. Well Lakeland Book Sales to over 500 new customers both Distributors and or end users globally.

So you'll see these new new customers. We're in excess of twelve million dollars of which we believe Approximately 80% have the potential to result in ongoing promotion in business. These figures relate to new customers only and do not include increased COVID-19 related sales to our pre existing customer base that may also continue post-pandemic.

Having successfully executed our pandemic strategy. We believe that even though our COVID-19 related sales are approximately 30% to 35% of our record $159 million in revenue for fiscal year, 2021 or fiscal year 2022. Revenue will not decline proportionally to decline in COVID-19 sales in the coming year.

In fact, we believe that by focusing on the industrial Market early on in throughout the pandemic. We will emerge post COVID-19. Well positioned with a larger box business composed of fewer products, which provides ancillary benefits that improve margins and operational efficiencies.

This Outlook when combined with projections for economic growth worldwide should serve to minimize the impact of any overstocking or Price pressures that we encounter them.

All told we are relatively excited about our progress and our strengthened position in the global market.

We are grateful for the perseverance and dedication of our Global Workforce which increasing increased by nearly 10% during the year to over 2,000 personnel.

This team is led the company to unprecedented growth and Improvement in operating performance in fiscal 2021 while remaining steadfast in its efforts to provide a healthy and safe work environment in the workplace for our customers and business partners and our families after all the company slogan is off your people so it comes with the territory.

Following an unprecedented in historic year for Lakeland. We'd like to discuss how the COVID-19 pandemic provided a launching pad for the company to set itself apart within the p p p p e industry and provided us with the opportunity to create sustainable improvements in our business.

Numerous financial performance records were achieved in fiscal 2021. We reached record annual revenues gross profit operating profit and net income among other key metrics more importantly we demonstrated the resiliency of our operations our Global supply chain and the sustainability of our improved financial model which positions us well for a post COVID-19 business environment.

Revenues of $159 million for the year grew by 47% Our Consolidated revenues have increased for the fourth consecutive year with 15 20 20 being our previous record year at $107 billion dollars in revenue and fiscal 2021 far exceeding that record.

Gross margin is a percentage of sales was a record 49.8% for the year operating profit benefited from The Leverage in our business by increasing 650% for the year while operating expenses increased only marginally by 10%

Throughout the year Lakeland was able to flex its manufacturing unlike other providers in the world.

We showed how owning and operating your manufacturing facilities is a sustainable strategic advantage and the Cornerstone to build a resilient supply chain.

Having multiple manufacturing locations around the world coupled with sourcing core raw materials from a diversified base of suppliers affords Lakeland capabilities and a manufacturing resilience that cannot be matched by our competitors who use contractors.

Ruining our manufacturing provides us with the ability to rapidly scale up production to meet emergency demand.

to shift production between locations to take advantage of new trade agreements or avoid complications that may arise from trade and geopolitical disputes and to maintain the highest levels of product quality while doing so

this Superior competitive positioning was validated during the COVID-19 pandemic through this event Lakeland was able to rebalance Manufacturing in its facilities and make use of its dirty Diversified supplier Network to deliver products to his traditional customers and new customers alike without major interruption.

Importantly not only did we expand manufacturing capacity during the year through Capital Investments. We were also able to increase our output through improve efficiencies, including SKU reductions and other data-centric planning decisions. This is another lesson learned and a critical Advantage for owning your manufacturing operation.

As a result of our successful campaign during the most challenging of global business Social and Health Care scenarios that we may see in our lifetime our brand value. She has been magnified.

On this global scale, we provided high-quality garments at competitive prices through our manufacturing facilities is strategically beneficial locations dead. We experienced double-digit growth in sales in all seven of our Global sales regions with fiscal 2121 domestic revenues increasing 26% while our International sales regions increased by an impressive 70%

Our customer account grew during the year with the addition of over 500 new Distributors and or end-users most of these accounts are our traditional customers who are not ordering for pandemic defense purposes.

Our competitors who came out of the woodwork during the pandemic with low cost and low quality products did not fair as well.

The importance of owning your manufacturing is significant in terms of quality control and Supply Chain management. And this should play to our advantage given recent events a story that seems to have been kept quiet except for reporting by Bloomberg last month address the US strategic National stockpile authorities removal of total of $26 million isolation gowns from its inventory while experts determine if they meet the association for the advancement of medical instrumentation, or Amy level to standard as required.

Calling effort resulted in the purchase of more than eighty million isolation gowns.

From a variety of untested companies toward the end of 5th of 2020.

Lincoln did not jump into this Fray. So none of the garments. None of our garments were in the isolation gowns stockpile. We only recently completed our product development office this ensuring as with all Lakeland products that this product meets the required standards for both performance and ongoing quality control.

According to the report an independent health and safety organization found that half of a set of disposable hospital gowns that tested didn't meet the minimum barrier requirements specified for level two protection by Amy the decision to pull the gowns for further testing follows concerns raised over the Government Contracting processes and safety of personal protective gear critical for workers on the front lines.

With our strong Global presence and quality manufacturing will be able to replace and meet new requirements for virtually any countries stockpiling efforts. The Project's made in fiscal 2021 since the stage for Lakeland to exit the COVID-19 ERA with market share gains a strengthened domestic and international wage and and an enhanced visibility into sustainable improvements that are expected to significantly Elevate our business performance.

From what was reported prior to the pandemic on set?

The company's positive trajectory May further benefit from the data-driven and technologically enhanced culture. We have embraced. We are no longer a 100 million dollar company with billion dollar footprint.

We are now $159 million dollar companies seeking to grow into its footprint.

The mother organizational moves made during the year that facilitate long-term growth include a new post. We created in filled for the company's first executive to lead a call. She needed Global sales marketing and customer service strategy.

And we appointed our first Global Supply Chain manager to further enhance our manufacturing resilience and flexibility.

With these enhancements in additions will be better suited to address the long-term opportunities for the PPE Market as well as the near-term global pandemic, which will likely continue to impact our business for the first half of fiscal 2022. We anticipate decreased demand for direct COVID-19 applications being largely offset by continuation of increases in our core industrial businesses that began in Q2 of fiscal year 2021 this upward Trend would continue through for a fiscal year 2021.

through the second half

Q2 and through the end of the fiscal year. Our core business sales have been recovering steadily based on recent reports on economic growth and our increased Market penetration in new customers. We expect our core business sales to not only recover fully but to exceed prepay endemic levels and continue to grow through fiscal year twenty-two. We anticipate the COVID-19 related sales will continue into the first half of fiscal year twenty-two. However, not at the levels experienced in a fiscal year 2021 as demand for immediate use diminishes and gives way to stockpiling demand and increased core business sales.

While leading economic indicators suggest a relatively robust industrial Market recovery potential headwinds to revenue as we emerge from the pet demek sales including customer stockpile inventories as well as a potential decline in the oil and gas and Industrial sector and pricing pressures, but these are expected to be more than offset by growth from other vertical markets and new products increased Market penetration where we are in new products where we are progressing with proprietary high-margin PPE gear.

Additionally, we have initiated a major strategic company-wide objective to accelerate growth by marketing products and using sales tools that have proven successful in the key us and China markets to other International operations, which have traditionally more limited product offerings.

To facilitate this the company is evaluating and redeploying sales and marketing assets into regions that have seen the most significant increases in Market penetration as a result of our COVID-19 response strategy.

We have integrated the u.s. Canadian and Mexican sales teams into one coordinated unit a strategic recognition recognition that the three countries are increasingly part of a greyish North American Market with interrelated Industries and companies throughout and our sales teams are sharing opportunities with each other in fiscal year 2021. We took an installation of Salesforce CRM software to facilitate this strategy globally. Our marketing efforts are being significantly upgraded in terms of personnel technological resources, better sales collateral materials and increasingly effective use of social media.

The company plans to continue its efforts to align its Global markets in terms of sales collateral sales software and e-commerce in the coming year and Beyond.

These developments are consistent with our continued vertical alignment of our operational functions, which are intended to provide agility with in business disciplines to capitalize on Marco opportunities while yielding productivity efficiencies and generating improve returns for capacity expansions at our production facilities, each of these Focus areas, It's the others and collectively when combined with the continued of investments in our Erp system Salesforce rollout and data-centric planning processes is expected to serve as a job for continued growth while providing greater productivity efficiencies and profitability.

Much of our technology investment has only been partially implemented with the balance directed at our International operations leveraging this base our growth plans call for continued Investments to increase production capacity and Vietnam India and Mexico to the extent possible. We will be investing in near Shoring certain a manufacturing to shorten lead times add customer value and improve inventory turns all capacity expansions will be fungible between our page Mary product lines for disposable chemical and critical environment one of our more recent garment lines, which grew during the year and contributes to our efforts to increase gross profits with differentiated PPE.

And the most challenging business climate in decades. We are pleased to have exited fiscal 2021 far better position than how we entered.

We did not simply respond to the crisis. We used it to our advantage our prospects may be further bolstered by the burgeoning of a new era of institutional cleaning and a broad acceptance of PPE globally which has begun to emerge and may provide a larger permanent Market opportunity.

Now as we enter fiscal 2022 Lakeland has a road map to drive top-line growth X COVID-19 while meeting the needs of its expanding customer base optimize its manufacturing and supply chain and deployed substantial Capital base to deliver solid returns for shareholders with our cash cash position of nearly $53 million at the end of fiscal year 2021.

And our continued outlook for free cash flow generation. We are able to pursue both organic and inorganic opportunities.

Well new product introductions and increased Market penetration as a result of the pandemic. Will Position will position us. Well for organic growth the cash generated makes inorganic growth very attractive to that end Lakeland is currently in the process of adding an in-house corporate development function to suck opportunities as they emerge in a post-pandemic world.

key to this

Strategy will be identifying candidates that are not only accretive but it can be integrated without delaying or impairing our ability to continue to roll out of our technological and process development.

Additionally after the end of the year our board authorized a five million dollars a share repurchase program which leaves more than enough Capital to engage in our growth Pursuits and continued investments in our Global platforms. All of this is set the stage for an exciting fiscal 2022 with Lakeland as the new standard of Excellence for PPE manufacturer around the world.

That concludes my remarks. I will now pass the call to Allen to provide more insight into the company's Financial results.

Thank you, Charlie.

From a financial results perspective fiscal 2021 was an incredible year for the seventh consecutive quarter revenues exceeded $27 for each of the past four quarters. Our reps have been in excess of thirty five million dollars rq-4, press release and 10K will provide a detailed review of our financial performance rather than repeat that I'd like to talk today about some of the more important issues that shape the year's performance and provide the framework for the future. We believe we will exit the COVID-19 ERA with critical Mark games and then enhanced visibility into sustainable improvements collectively we envision these elevating our business performance from what was reported before the Panthers set in

One critical area has been mismanaged through Investments and Manufacturing facilities and it systems Charlie touched upon this and I'll talk further to it particularly long as it impacts inventory. We continue to diversify our raw material and component suppliers qualifying multiple suppliers, whenever possible to enable us to press for Price reductions and better payment terms as well as providing for continuity of Supply. We are sourcing raw materials and components from most of the countries in which we have operations wage order to reduce freight costs and inventory levels, the insights gained from managing the complexities brought on by the pandemic through our Erp system have proven to be extremely valuable.

We are re-engineering many products to harmonize designs to meet the requirements of multiple Global markets while reducing the raw materials used and reducing the direct labor required as often as possible. Thereby eliminating a number of SK use based on local search or preferences. The result is improved manufacturing through throughput and reduce levels disposable and chemical SK use are expected to increase by approximately 50% from code response levels as we settle into our choice food product mix strategy. The result will be a reduction in SK use of about 40%

from pre COVID-19

And benefits our inventory efficiencies sustainable improvements are being realized from these ongoing efforts early benefits were improved pricing strategies and International Market entry while more recently we have benefited from it driven decision-making consider the gross profit as a percentage of sales was 27.7% in Q4 2019 followed by 37.7% in Q4 2020. And then increasing to 49.2% in Q4 2051. That's an improvement of over 20 points in two years at present raw material supply appears to have caught up with demand. I'll be in at prices above prep COVID-19 pricing. We anticipate raw material pricing to continue at inflated levels through most of FY 22 as noted. We did experience significant price increase wage.

For fabric during FY 2021 and manage through are available manufacturing capacity to lower cost and increase pricing to meet customer demands that these higher price.

Customers responded and have to drive are record performance as we saw growth in sales for my Diversified Geographic footprint and focused product offering for the year off 26% to nearly seventy 1 million internationally UK European sales were of 80% to 16.8 million dollars off sales were up over one hundred percent to five point seven million dollars. Asia sales were up 71% to Thirty one point two million dollars a month to sales were up 42%

two thirteen point six million dollars

Latin America sales were up 45% to 12.1 million dollars and sales and other foreign markets were up 147% to nine dollars a month sales for a traditional industrial use by our mainstream customers were up from the second quarter following pandemic shutdowns of factories and also up from the third course, we have been winning business from new customers for disposable and chemical product lines when they could not get supply from other manufacturers in terms of our product mix dog vacation disposables, which continues to be our largest product group increased to nearly 108 million dollars for the year up from $53 in fiscal 2020 chemical suits sales were twenty-nine Point 1 million dollars up from $23 million dollars in the prior-year both disposables and chemical product groups.

Benefited from organic growth but the primary driver was COVID-19 related to man as businesses redirected ordinary purchasing to COVID-19 the fence related products sales and our other product categories declined but saw an improvement as the year progressed fire products declined to 6.2 million in fiscal 2021 from eight point six million in fiscal 2020 gloves were three million dollars in fiscal 2021 down from 3.1 million dollars in fiscal 2028. Hi Vis products were 4.1 million.

Which was down?

From 7.8 million in fiscal 2020 and wovens were seven point 1 million versus ten point three million in fiscal 2020 high performance where one of our newer projects lines with higher-margin contributions to the complexity of the garments contributed over one point seven million dollars in sales versus 1.6 million in the prior year operating expenses as a percentage of net sales was 22.1% for fiscal 2021 as compared to 29.7% for prior-year operating margins were 27.8% for fiscal 2021 up from 5.5% in the prior year.

With respect to our sg&a expenses, we certainly spent more in fiscal 2021 than in the prior year since sales commissions and Freight out costs increased on the money order levels. We've been actively managing our expenses and driving cost out of the business through investments in technology and process improvements.

During fiscal 2021 we entered into an agreement with Bank of America for a new borrowing facility just required to pay down of a prior facility. So we eliminated our remaining debt at one point two months during the year the V of a facility consists of a senior secured 12.5 million dollar revolving credit facility, which includes 5 million dollar letter of credit sucks sylheti and an option to convert up to five million of the facility into a Term Loan facility those silky also includes an accordion feature under which the company May request from time to time an increase in the revolving commitment of up to 5 million dollars for a total commitment of up to Seventeen and a half million. We have aligned the size of our new credit facility to reflect current capital requirements while incorporating expansion flexibility at the same time. We received improved pricing decreased Administration, and we'll have access to Bank of America's global.

New platform for cash management this facility and it's enhanced features reflect our efforts to optimize all aspects of our business and financial operations aimed at better supporting our continuing worldwide Road including being used to augment. Our financial tool box is we seek opportunities to deploy Capital to the fuel organic and inorganic growth took a substantial increase in operating profits are tax expense also increased tax income tax expense consists of federal state and foreign income taxes with an income tax rate of 19.9% in fiscal 2021. Our income tax expense was eight point seven million dollars up from

5.8 million dollars in fiscal 2020 Lakeland net operating loss for US federal tax person purposes will be fully utilized during fiscal 21. The net operating loss for State purposes is estimated to be approximately 22.7 million and January 31st, 2021 across multiple jurisdictions. Net income for fiscal 2021 was 35.3 million dollars or $4.40 per basic share and $4.83 per diluted share compared to fiscal 2020. Net income of 3.3 million dollars or $0.41 per share are no shares will repurchase during fiscal 2021 that is part of the company stock buyback program. The company did increase the amount available under this program two five million dollars, which we announced in February to increase our flexibility.

free cash flow

From operations for the year grew to a record thirty nine point four million dollars up from 3.6 million dollars in fiscal 2020 the company's cash position grew with each successive quarter and fiscal 2021 our cash balance of January 31st, 2021 was a record fifty two point six million dollars an increase of $38 million dollars from the end of the month physical year while our market capitalization doubled during the course of the Year cash per basic common share increased to approximately $6.58 on January 31st, 2021 from a dollar at $0.83 per share at the end of fiscal 2020 Lakeland is relatively asset like business with capital expenditures for fiscal 2021 of under one point seven million dollars as compared with 1 million dollars in the prior-year the majority of capital spending in the year was for investments in our technology.

New platform and Manufacturing capacity increases our capex spending is expected to continue to increase in fiscal 2022 or continuation of Our IT guy, its expansion of our sales and marketing platforms and additional manufacturing capacity. The company's future manufacturing Investments call for increases in production capacity of new product lines in Vietnam, India and Mexico. We continue to create fungibility among our production facilities for our primary product lines off disposables chemical and critical environment.

These objectives support our manufacturing resiliency and flexibility, and they also complement existing methods of factory floor efficiencies yielded by our Erp systems and Thursday Centric planning processes.

Outside of the US are Erp system deployment will continue on a country-by-country basis among our larger International operations during the next nine to Twenty-One months in a result and based on our experience to date we expect to extract even greater efficiency from our International operations, which comprises roughly half of our Consolidated revenues and will be mental to our top-line growth initiatives.

After paying off our debt and finding Capital Investments.

The increase in cash of $38 million dollars was primarily result of increased profitability improved working capital efficiencies, including AR Collections and inventory management that resulted from our investment in our it systems this led to an increase in inventory turns inventory decreased point four million during the year, even a sales grew unit volumes increase our customer base for disposable and chemical garbage group and certain of our other product lines experience lower year-over-year demand due to purchasing priorities amid, the pandemic off as mentioned. We ended the year with no debt and full availability under our borrowing facilities.

working capital

Hundred and eight million dollars it January 31st 2021 up from 66.9 million at the beginning of the fiscal year. The company's current ratio improved to 7.8 to Thursday January 31st, 26% from January 31st, 2020 more than just numerous Financial record financial performance metrics bout physical 20-21 our results demonstrate a quality of earnings and cash flow which has benefited from improvements and profitability measures Factory floor and distribution efficiencies and operating leverage as we mentioned throughout the past year COVID-19 provided us with a Proving Ground for change that will benefit Lakeland well into the future.

This concludes my remarks. I will turn the call back to the operator to open the call for questions.

At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad a confirmation to indicate your lies in the question queue. You may press start to if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the start Keys. Our first question comes to line of Alex firm with craig-hallum. Please see what your question.

Great. Thanks very much for taking my question and congratulations on a really fantastic year. You know now that things are starting to you know, see the light at the end of the tunnel and Industrial activity is starting to pick up. I I'd be curious where you're starting to see the biggest increases in green shoots in your traditional business both in terms of you know, where where in the world you're starting to see the increases as well as which which of your industry and users are are really picking up first.

Alex yeah, that that's kind of a mixed question. We still have COVID-19 sales, you know COVID-19 direct sales running in some cases in Eastern Europe. So there's kind of a game performance. Um, I think that in terms of industrial strength returning, you know, the two places that we're looking to The Bulb Store China and the US and Canada while the US China and the US are among the first countries in the world to kind of open back up and get back to normalized business. You have the first attack in the US were in Q2, you know, China was along the same line. So I think that's where we're actually seeing it. The start was a little more fitful than childbirth, you know, so we've kind of seen the stop in to start or you know a stutter but it it appears to be on track at this point in the US.

Great, that's really helpful. Thanks. And then you know, how should investors be thinking about gross margin, you know over the course of twenty Twenty-One and and just longer-term. I mean you had an incredible 50% gross. Margin it's year. Um, you know, it sounds like a lot of the improvements you've seen there in terms of efficiencies on the supply chain and reducing the number of SK user manufacturing are going to continue post-pandemic but, you know, maybe maybe some of the pricing starts to fade a little bit. So how should investors be thinking about gross margin in q1 and then for the rest of of this year

You know.

Alex we're going to see you know pricing pressures and you know, that's you know, that's for certain Alan has parsed our margins more than anyone else in the company and I'm going to let him speak in more detail do that. Yeah. There's there's three factors there Alex that we're going to see impact our margins going forward one, you know one to your point of pricing might be a bit of a headwind is Charlie discussed in his remarks, you know, we recognize there's a pricing bubble as a result of the kogan demand, but the end of the day, you know, we're very confident that pricing in the market has been elevated as a result of of COVID-19 age, you know, well beyond the post-pandemic, uh era, so we think we think we will see some settlement in the pricing side, but we think it'll shake out it levels off.

Above the pre pandemic levels similar to what we're seeing on the raw material supply side from a cost perspective the other things that we're doing our job in Inventory management and Manufacturing efficiencies, the primary the the the two things on the efficiency side have been our investment in our capacity expansions wage, which has been a significant upgrade to our processes and our equipment. But you know, probably the bigger driver there has been the consolidation of RS use that are in our normal production going forward with that reduction of you know, forty percent behind pre pandemic levels, you know, we've created stanshall improvement in our throughput ability at our facilities and then on the management side, you know, we have we we've invested in a dog

The leadership in the global supply chain area and are beginning to utilize our technology tools much better than we were doing before we're creating a visibility greater visibility into our lead times and into our inventory Cycles so that we are planning our production more efficiently going forward and we expect while margins won't settle out, you know at the levels. We enjoy free pandemic. We're definitely going to see them level substantially higher than we were enjoying immediately prepend demek.

Great that that's really helpful. Thanks Allen. Thanks Charlie.

Thank you, Alex.

And once again as a reminder, if you would like to ask questions, please press star one on your telephone keypad. Once again as a reminder. If you would like to ask question, please press star one on your telephone keypad. One moment, please.

There should be no further questions at this time. So I would like to turn the call back over to mister Robertson and closing comments.

Thank you. We appreciate your participation on Lakeland fiscal 2021 fourth-quarter Financial results conference call as we look ahead to fiscal 2022, We continue to be well positioned as the new standard of Excellence for PPE manufacturers anywhere in the world with an incredibly strong balance sheet and an optimized operating platform with further room for improvement. We are excited for the new year. Thank you again for joining us on today's conference call and have a nice day.

With that disc inclusive a teleconference human now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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