Q1 2022 Lakeland Industries Inc Earnings Call
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Number of uncertainties that are for.
<unk> debt to the company's filings with the Securities and Exchange Commission.
General economic and business conditions, the business opportunities that may be presented for you and pursued by the company changes in law or regulations and other factors many of which are beyond the control of the company.
Listeners are cautioned that these statements are not guarantees.
Factor performance and that actual results or developments may differ materially from those projected in any forward looking statements. All subsequent forward looking statements attributed to the company or persons acting on his behalf are expressly qualified in their entirety by the cautionary statements.
At this.
For the future I'd like to introduce your host for this call Lakeland Industries, Chief Executive Officer, Charles Roberson, Mr. Robertson the floor is yours.
Thank you and good afternoon.
Im joined here today by Lakeland, Chief Financial Officer Allen Dillard.
We appreciate you taking.
The time to join our fiscal 2022 first quarter financial results Conference call.
After a tremendous fiscal 2021, the sustainability of our financial performance was on display as we delivered very strong results in the first quarter of fiscal 2022 ended April 32.
<unk> 2021.
We're now beginning to see the impact of the improvements made to our business over the past year as COVID-19 demand subsides.
Business process improvements accelerated due to COVID-19.
And we believe that our first quarter fiscal year 'twenty 2.
Results demonstrate the durability and magnitude of these improvements.
In fact, while there is no question that COVID-19 pandemic had a positive impact on our performance through the entirety of fiscal year 'twenty, 1 and into the first quarter of fiscal year 'twenty 2.
We believe it is also.
Largely masked the value we derive from the significant operational and process improvements we have made.
Only now in the second.
Consecutive quarter of declining pandemic sales does the significance of our improvements become apparent.
Through my formal remarks on today's.
<unk> conference call I'd like to provide some perspective on our progress and strategy for a post COVID-19 business environment.
Later, Alan will review, our financial results for the quarter and related developments in more detail.
Prior to the onset of the global pandemic, we began a business.
<unk> transformation and put in place a 5 year growth plan that assumed successful implementation of our development plans.
<unk> 19 accelerated the pace of progress by approximately 1 year and.
And in the process elevated our cash balance to over.
$60 million today.
We expect continued free cash free cash flow generation for the foreseeable future, which factors in the elimination of all COVID-19 demand as early as the end of the present quarter.
The critical elements of our plan include the strengthening of.
Our leadership team investing in capacity expansion and higher margin product development and focusing on profit enhancement initiatives led by our new data centric approach to planning and supporting our addressable markets.
During the past several quarters we.
We made additions to our leadership team that will allow us to maximize our investments grow organically at rates in excess of global industry rates and now to grow inorganically as well.
Most recently, we added our first vice president for corporate development.
This.
As intended for Lakeland to put its sizable cash position to work increasing shareholder value.
The actionable elements of our plan are to utilize our manufacturing operations and data centric culture as the cornerstone of our ongoing success as we seek.
Moving market opportunities and synergies in our corporate development opportunities.
Lakeland is always owned its manufacturing operations and in this way we're fairly unique.
In the PPE industry.
Manufacturing is 1 of our critical Differentiators since no.
New player in the industry possesses similar capabilities on a global scale.
Sure we can make mask, it's easy to do that in.
And there are virtually no barriers to entry as we saw last year, even automotive manufacturers and home furnishings companies were able to jump into that arena virtually overnight.
Because Lakeland industries has a 40 year history of manufacturing protective apparel.
We remained focused on what we do best.
Manufacturing high quality highly specified garments for customers, who value the safety of their employees.
Furthermore, in the past few years.
No other we significantly improved and expanded our global capacity in India, Vietnam and China.
Our expansions are largely directed at higher growth niche markets with significant barriers to entry.
Specifically, our critical environment and high performance electrical utility product lines.
As a.
When the pandemic hit.
We were reluctant to chase, what we knew to be short term gains at the expense of a growth strategy that we believe to be sound with long term sustainable performance improvement.
This drove our decision to focus on the industrial market during the pandemic.
Our results our first quarter fiscal year 'twenty 2 results validate this decision as our revenues are significantly higher than pre pandemic revenues.
As our gross margin and income from operations Alan will provide more color on the contrast between licensed pre and post pandemic performance.
<unk> remarks.
Last year fiscal year 'twenty 1.
As we focused on the industrial market.
And our higher margin niche products during the pandemic, we saw a temporary pause in the growing demand for these specialized products as customers under.
<unk> favored Covid defense spending over other high end PPE purchases and as other customers were locked down or operating under curtailed production schedules.
Now for more than the past 2 quarters, we've been we have seen.
And his increasing industrial spending on PPE as the global economy emerges from the pandemic.
This is the future of Lakeland.
And while we have sustainability in our financial performance today, we see the potential for meaningful improvement in market penetration.
As we seek to retain as many of.
Our over 500, new industrial customers developed during the pandemic as we can.
Q1 fiscal year 'twenty 2 data is encouraging on this front, we estimate that 68% of these new customers placed re.
Reorders in Q1 alone.
On the strength of this performance we are optimistic that we will attain a 75% to 80% retention rate as fiscal year 'twenty 2 progresses.
And expanding our manufacturing capacity in support of our pre pandemic growth forecast.
We have.
Shown that with under $2 million in capital investments for production capacity expansions.
We were able to increase revenues by approximately $50 million.
Again owning our manufacturing makes this possible.
Lakeland had has tremendous operating leverage.
And we have learned how to utilize it to accelerate growth during black Swan events and to sustain a higher level of performance afterward.
Overall, our ERP installation has only been a factor for our U S operations, which are now less than 50% of our revenues.
As we implement this system globally, we expect incremental benefits from the balance of our business.
The timing of our investment could not have been better.
The current forecast for economic growth and the return of industrial demand in most major markets around the world.
Bodes well for Lakeland to realized post pandemic gains from increased market penetration.
Rationalization of our product lines and our emphasis on higher margin specialized protective apparel.
Lakeland is already elevated its profitability levels, where we have fixed overhead.
<unk>, enabling us to flex production for even greater returns as variable expenses are limited primarily to success based sales commissions and freight costs.
This is further confirmation of how actively managing expenses and driving costs out of our business.
Through investments in technology and process improvements results in sustainability of our performance in a post COVID-19 business environment.
Our first quarter sales performance indicates in large part the decreased demand for direct COVID-19 applications is largely being.
Offset by continuing increases in our core industrial businesses.
Leading economic indicators suggest a relatively robust industrial market recovery, although potential headwinds exist and excess supply chain inventories and ongoing freight challenges.
Being we've discussed absent COVID-19 demand other recovery pressures are expected to be more than offset by growth from our diversified and expanded global reach and other vertical markets.
We use COVID-19 to our advantage as a catalyst for transformation.
As we at the end of the first quarter of fiscal 2022.
We have demonstrated resiliency in our operations and sustainability of our financial performance.
Continued investments in our it systems and data centric planning processes, along with organic growth are expected.
<unk> and to drive ongoing improvements in productivity efficiencies and profitability.
These aspects of our business should be complemented by the inorganic growth opportunities that we are now pursuing the key to this strategy, we will be identifying candidates that are not only accretive.
But can be integrated without delaying or impairing our ability to continue the rollout of our technological and process development and are synergistic with our manufacturing and sales platforms.
These are quite exciting times in the PPE industry.
That concludes my.
My remarks, I'll pass the call to Alan to provide more insight into the company's financial results.
Thank you Charlie.
From a financial results perspective fiscal 2022 first quarter showed consistency based on the progress made to improve our performance as key measures track to expectations.
<unk> and our balance sheet strength and prune.
For each of the past 5 quarters, our revenues have been in excess of $34 million.
We are indeed winding down from Covid related sales and are benefiting from a strong resurgence in traditional industrial demand, while we also tap into certain opportunities in the healthcare segment.
For non pandemic related needs that historically, we would not have attempted to enter.
For all of fiscal 'twenty 'twenty, 1 COVID-19 related sales accounted for 30% to 35% of consolidated revenues.
In Q1, 'twenty, 2 we estimate 13% of sales.
Segment related to Covid as Charlie mentioned, we expect to continue to see decreases in net and this demand from the current quarter since most regions have sufficient supply.
India, which is still experiencing outbreaks.
<unk> in demand that may outpace the traditional availability of PPE.
<unk> for them the health care supply chain.
We reiterate that our fiscal year 2022 revenue will not decline proportionally to declines in COVID-19 sales.
By focusing on the industrial market early on and throughout the pandemic. We believe we have set the stage to emerge post COVID-19.
Hi team well positioned with a larger book of business that targets, a much larger and faster growing overall market.
Our first quarter results indicate our successful execution of this strategy thus far.
Due to the scaling back in most major markets for COVID-19 related.
Product, our first quarter sales or disposables and chemicals were down 30% as compared with our first quarter 'twenty, 1 sales, which represented our highest level of COVID-19 sales.
As we have already rapidly emerge from the Covid impacted sales periods 1 of our more recent current.
Garment lines known as high performance wear grew last year and was up nearly 200% in the first quarter of fiscal 2022 as compared to the prior year period.
At nearly 900000 in first quarter 'twenty 2 sales revenues were more than half of all high performance wire sales.
In fiscal 2021, $1.7 million in fiscal $2021.6 million.
Yes.
Of course, as we noted last year, we saw a curtailment in spending on non pandemic related PPE purchases. So the year over year comparison is a bit uneven as many economies are returning.
Turning to traditional industrial purchasing.
High performance, where fire apparel and woven all increased in the first quarter of fiscal 2022 as compared to the prior year. While all of these garment lines typically have higher margins than disposables high performance wear in particular contributes to our F.
Increased gross profit over the long term with differentiated PPE.
I'll speak more to our gross margin improvements in a moment.
On a consolidated basis for the first quarter of fiscal 'twenty 'twenty 1 day.
<unk> sales were $15.7 million or 46% of total revenues and.
And international sales were $18.4 million or 54 per cent of total revenues.
This compares with domestic sales of $23.1 million or 51% other total.
And international sales of 22 point.
$5 million or 49% other total and the same per.
<unk> fiscal 2020.
While fourth quarter 2021, domestic sales were $16 million or <unk>, 43% of total revenues and international sales were $20.9 million or 57% of total revenues as these numbers show our international revenues have remained in excess of our domestic revenues.
<unk> for the past 2 quarters, while we believe we have been taking industrial market share in the U S. Our growth prospects overall are far more compelling and the higher growth International Arena.
This place or strength on the manufacturing side of the business.
Our growth plans from a manufacturing perspective.
Paul for continued investments to increase production capacity.
In Vietnam, India, and Mexico to.
To the extent possible, we will be investing and near shoring certain manufacturing to shorten lead times add customer value and improve inventory turns particularly for our.
Domestic business.
All capacity expansions will be fungible between our primary product lines for our disposable chemical and critical environment.
Efforts to improve gross margins involve the manufacturing of far fewer products and we had offered in the past which provides ancillary.
Larry benefits through operational efficiencies and reduced inventory.
We also continue to diversify our raw material and component suppliers.
<unk> multiple suppliers whenever possible to enable us to press for price reductions and better payment terms as well as providing for continuity of supply.
<unk>, we are sourcing raw materials and components from most other countries in which we have operations in 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 at.
At the end of the first.
Quarter, we had reduced our targeted SKU reduction of about 40% from pre COVID-19 levels.
We are benefiting from these gross margin improvement strategies, which have a lot in large part on our I T driven decision making.
First quarter 'twenty to gross margin as a percentage of.
It was 42, 2%.
That's down about 48, 5% in Q1 'twenty to 'twenty, 1 when sales were 25% higher for further reflection, our gross profit as a percentage of sales.
It was 36% in Q1 fiscal 'twenty versus 42.2.
Sales this year for an improvement of nearly 12 points in 2 years. So we have been and continue to focus on improvements in terms of supply chain efficiencies pricing strategies, SKU reductions and product mix variations price.
Pricing in the PV market has been elevated as a result of Covid.
And we believe we will continue to see pricing above the pre pandemic era, even after certain settlement on the pricing side that we've already experienced through the first quarter of this year for.
For fiscal 'twenty 'twenty 1.
The company's operating leverage was elevated on the higher revenues driven.
Covid with demand and gross margins, which more than offset increases in sales commissions and freight out and.
In the first quarter of fiscal 'twenty 2.
With more Mark normalized revenue and gross profit levels Lifeline reported operating profit of $6.2 million as compared to $12.4 million for the <unk>.
By co period.
Operating margins were 18, 3% for the 3 months ended April 32021 down from 27, 1% for the first quarter other prior fiscal year, but substantially higher than the negative 1.3% in the fiscal 2020 period when we.
Prior year, along with our ERP implementation.
And 9.9% in the fiscal 2019 first quarter.
As we had lower variable costs from the lower sales as compared with heavier COVID-19 sales impact for periods operating expenses of $8.1 million in Q1, 'twenty, 2 where day.
Were struck $9.8 million in Q1, 'twenty, 1 and $8.8 million in Q4 'twenty 1.
Income tax expense consists of federal state and foreign income taxes with an income tax rate of approximately 25% in first quarter 'twenty to our income tax expense was $1.6.
<unk> million down from $3.7 million in fiscal 2020.1 period.
<unk> net operating loss for U S. Federal tax purposes was fully utilized during fiscal 'twenty 'twenty 1 however.
However, the company had at the beginning of this fiscal year, approximately $22.7 million and net operating losses.
Losses for state purposes across multiple jurisdictions.
Net income of $4.6 million or 58 cents per basic common share in Q1, 'twenty 2 was down from $8.6 million or $1.8 per share in Q1 'twenty 1 on the 25 per cent reduction in sales.
And <unk> 46 per cent reduction in net income, we generated $8.3 million in cash flow from operations down by only 19%.
Or $10.3 million from the prior year period.
Amid our flexing.
Our production in fiscal 'twenty, and 'twenty, 1 to record levels.
Lakeland remain a relatively asset light business <unk>.
Capital expenditures for fiscal 'twenty 'twenty, 2 are targeted at $2 million with only 100000 spend in the first quarter.
This annual level is relatively consistent with the spending last year of $1.7 million yet we have shown how we can.
Ramp production.
Meanwhile, the majority of our spending this year will be on the I T and technology investments to further expand these data driven solutions to the balance of our global business in turn similar to the benefits we have experienced already for our domestic operations, we will look forward to cost.
Cost savings and efficiencies at our higher growth and now larger international operations.
These objectives support our manufacturing resiliency and flexibility while complementing the existing methods.
Victor for efficiencies yielded by our ERP systems and data centric planning.
Moving to the balance sheet working capital was $112.7 million at April 30th 'twenty 'twenty, 1 up from $108.2 million at the beginning of the fiscal year and $66.9 million at the beginning of fiscal 2021.
The company's current ratio at the end of the first quarter remained.
7.8 to 1 from the beginning of the year cash.
Cash of $60.3 million at April 32021 was up by 7.7 million or 15% from the beginning of the fiscal year.
The company had no debt at the end of the first quarter and has up to $17.5.
It's an and available borrowings from its current bank facilities all of which is currently available.
As Charlie mentioned during his remarks, we intend to use these financial resources to pursue strategic acquisitions.
That provide accelerated access to higher margin products or where our manufacturing capabilities.
5 million lead to other synergies or an even greater incrementally accretive addition to our business.
During the first quarter, our board authorized a $5 million share repurchase program, which leaves more than enough capital to engage in our growth pursuits and continued investments in our global platforms no shares.
These repurchase under this program during the first quarter.
This concludes my remarks, I'll turn the call back to the operator for questions.
Thank you.
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Our first question comes from Alex Fuhrman with Craig Hallum Capital Group. Please state your question.
Great guys. Thanks for taking my question and congratulations on a very nice start to the year.
Wanted to ask about the breakdown of revenue.
Between the Covid and non Covid.
They did bid net it sounds like you had about $30 million of non COVID-19 related revenue here in the first quarter.
Thinking about that as sort of the baseline that youre going to be growing off of as industrial production starts to pick up or is it maybe a little bit higher at customers start making more.
Reloaded purchases and you start to bring some FCA us back.
Okay.
Alex I don't think that debt that we have seen.
The economic recovery in the industrial market come to fruition, yet so I don't think that.
$30 million is the new base.
Non blind industrial sales number for us it would be a little bit higher than mall.
Yeah.
Okay. That's that's helpful. Thanks.
And then on the M&A, Brian It looks like you guys made a great hire operating Josh on board he talked a little bit more about what you're seeing out there.
Based firms of opportunities are there any particular product categories or distribution channel that you have in mind that you're targeting.
We're not quite that far down the road with Josh yet.
Alex.
Right now we're still.
Making sure that we.
<unk> in Berlin objectives and.
You know the potential.
Benefits that we would be interested in acquiring we're still in that defining process.
He is also working to put in place the processes and procedures internally that we'll use for evaluation.
That said we have seen.
Some opportunities come our way in and you know were starting a funnel already.
We are aware of the challenges that an acquisition brings given our current multiple.
And what that might mean for.
For us so we are quite quite cognizant of the fact that we need to look for acquisitions that are gonna be synergistic as well.
And you know that's that's.
That's kind of what we're working for as to how we define those synergies from where they might be.
Okay. Thanks that makes sense.
And and then I'd love to ask about the 500, new customers that that you brought on and in the past year I mean, it sounds like you're on you're on a path to retain you know something close to 80% of those customers can you give us a little bit more sense of who these new customers or are there.
Or any particular industries that they grab it sort take towards and then you know just.
Thinking about the Covid demand that you saw last year end and the $4 million in change of Covid demand that you saw in Q1, how much of that demand was coming from those 500 new customers.
Quantifying.
Net because of a lack of transparency is pretty difficult.
We estimated earlier in Q at the end of Q4.
I believe we Alan we put there their sales revenue at between 10 and $12 million.
I can't remember exactly what it was 10 million for $12 million, but it was in that range.
As to what kind of customers. They are are they largely resemble our existing customer base. Alex you know, we we were had our sales team focused on taking orders.
For industrial applications before we took COVID-19 application. So they are not.
Pretty readily.
Yeah, distinguishable well, what I will say about them.
As you know.
75% of those or on the order of that our international new customers and that's reflected of course in our revenue distribution.
Basic and international sales. So that's also why we keep referring to our increased market penetration internationally is that's where we were most successful.
Okay. That's really helpful. Thanks, Thanks, guys.
Thank you Sir.
Thank you and our next question comes from Cam Johnson with Phoenix Capital Management. Please state your question.
Hi, Thanks for taking the call can you discuss the newer products for the portfolio, what they're made from where the raw material sourced from and to.
A little bit about the gross margin profile and how it relates.
Relates to the rest of the business.
Our cash.
I could talk about the raw materials pretty pretty readily as there's no issues with the competitors there.
Want to get too deep into.
Details on our margins other than to say that.
They typically run about 10% to 15% above.
Sure.
Our target margin.
So which as you know.
We've said repeatedly we expect to emerge from Covid with a gross margin and that begins with a for.
Probably in the lower half.
For the forties.
As for the fabrics.
They are actually laminated constructions.
The.
Raw materials for which its a Mike polyethylene microporous film on Spunbonded polypropylene.
Sourced in China, but easily source a bullet.
In India or anywhere in the world.
These are products that are largely used by the diaper business. So anywhere they have disposable diapers, we can source it.
<unk>.
B.
Barrier to entry the hard part of this market is validation of your clean.
Clean manufacturing process and product.
Product sterility.
At a minimum for the 6 month long process and requires a.
That you conform to statistical process control, which means you have to make a full run let at age for 3 months to grow bio burden and you may fail. It and if you do you've got a whole.
Trash.
Okay. Thanks, 1 other question I had is can you discuss the near shoring strategy, you've mentioned and the benefits it brings to your competitive positioning and cost basis.
Sure we are watching the U S Congress very closely.
The U S stockpiling efforts have.
Got it for lack of a better word of gone dormant for the last.
Month for 6 weeks.
That has been predicated by the rejection of $25 million or 26 million garments source for the stockpile.
<unk> bio that didn't meet.
The.
Amy standards for isolation gowns.
As a result, they are not rushing out to replace those products right. Now Congress is in the process of writing what it means what made in how made in USA is defined.
For the USA PPE Act.
All of the variations of that legislation that we've seen to date starts off with.
With a at least a berry amendment or made in USA, if U S grown our sourced materials.
And then provides.
Exceptions.
Should pricing quality ore availability not.
B.
Be a problem.
For you to go to a tier 2 which is a foreign made a U S product.
Tier and failing that if they still have unmet.
Band It is foreign made a foreign raw materials. So what we're looking to do is to come in where we can enter into that tier 2 level, which would be foreign made of U S. Raw materials, which makes manufacturing in the Caribbean Basin, Canada, or Mexico very attractive.
We are not looking we do not believe that we can be successful long term manufacturing in the United States. While initial stockpiling orders will be huge they will only turned 20% of that stockpile every year, so and year to your volume falls to 20, 20% of that level.
It's just not sustainable for our continuing operation and it is highly unlikely that the private sector, we will pay the price as the government's gonna have to pay to get made in USA.
Thank you.
Yes.
Thank you there are no further questions at this time I will turn it back to management for closing remarks.
Okay. Thank you.
We appreciate your participation in Lakeland fiscal 2022 first quarter financial results Conference call.
As we look ahead to the balance of fiscal 2022, we continue.
And then he well positioned as the new standard of excellence for PPE manufacturers anywhere in the world.
With an even stronger balance sheet from the beginning of the year and an outlook for continued free cash flow for the foreseeable future our data centric operating culture is enabling sustainable.
<unk> performance to unlock additional growth opportunities.
We're excited for what lies ahead and look forward to sharing our story at the Sidoti Virtual Investor Conference on June the 24th.
Thank you again for joining us on today's conference call and have a nice day.
Thank you.
And with that this concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.