Q2 2023 Lakeland Industries Inc Earnings Call
Good day and welcome to the Lakeland Industries fiscal 2023 second 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 may 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's expectations based upon currently available information and are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our SEC filings.
Our actual results, performance, or achievements may differ materially from those expressed or implied by such forward-looking statements.
We undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.
During today's call, we will discuss financial measures derived from our financial statements that are not determined in accordance with the US GAAP, including EBITDA, adjusted EBITDA, EBITDA margin, and non-GAAP net income.
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'd like to introduce you to our host for this call, Lakeland Industries Chief Executive Officer, Charlie Roberson. Mr. Roberson, the floor is yours.
Thank you, operator.
Good afternoon and thank you all for joining.
I'm joined today by Lakeland's Chief Operating and Financial Officer, Alan Dillard.
As you saw in this afternoon's press release, Lakeland delivered another quarter of sequential improvement highlighted by quarter over quarter and year over year revenue growth and a gross margin of 41.3%.
We continue to execute on our strategic manufacturing and performance initiatives.
which are designed to maintain our profitability profile as we continue to grow our revenue.
Revenue for the second quarter was $28.2 million, up 3.3% sequentially, driven by increased volumes, and up 2.6% compared to the second quarter last year.
Importantly, we had continued strong profitability with another quarter of gross margin above our long-term target threshold of 40%, which is further evidence that our profit margins are sustainable as we grow the business in the post-COVID era.
While we are proud of our results and milestones achieved during the quarter, we are not satisfied.
recognizing that the developing macroeconomic headwinds held back our revenue growth potential despite our overperformance relative to overall industry trends.
Our sales performance continues to be impacted by weakening economic environment, supply chain disruptions, and labor shortages within the industrial segment.
These economic challenges have been particularly painful in our European and Asian markets, where rising energy costs and COVID lockdowns present significant headwinds that are likely to extend through at least the end of fiscal 23.
While we remain focused and confident in our ability to deliver on our long-term financial targets,
At this point, we believe we will be operating in a recessionary environment in both of these markets in the near term.
In navigating these global market complexities,
We believe it is prudent to respond to these cross-currents by accelerating the implementation of our strategic sales and operating expense initiatives.
bringing forward a focus on tightening certain general and administrative expenses to maintain the path we are on to achieve our long-term operating margin goals.
To that end, we are expediting the shift of human and technical assets from our disposable segment to our fire, high-performance, and critical environment product lines.
These market segments present the greatest opportunity for long-term sales growth and margin potential, with the added benefit in the short term that these markets are expected to provide a more stable and consistent growth environment.
Alan will provide more information on this effort and his remarks.
Clearly, the pace of global industrial recovery has been slower than we originally anticipated at the beginning of the calendar year.
the channel signs we have received.
tell us that US distribution is still burdened with high inventory levels ranging from 60 to 90 days of access.
With that said, and with the exception of the oil and gas sector, U.S. industrial and manufacturing activity is still increasing.
albeit at reduced rates from July .
There are also indications from our channel partners that China manufactured garment supply has been impacted by lockdowns or transportation issues stemming from lockdowns, which are beginning to delay deliveries to the US market.
Concurrent with this development, we anticipate increased demand for disposable garments associated with regional flooding events across the U.S.
Our current inventory levels place Lakeland in a solid position to respond to these longer lead times and capitalize on increased demand due to floods.
to the balance of the fiscal year.
While economic conditions appear to be softening and may impact the industry in Lakeland further in the near term, I am confident in our team's ability to deliver growth in our core markets.
Additionally, and as Alan will describe in more detail, we continue to make progress on our various strategic initiatives, particularly the strengthening of our sales force and investment in manufacturing, which should only enhance our operational capabilities over the long run.
I'll now pass the call to Alan to provide more insight into the company's operations and financial results. Pipeline minus traffic and log1 issued by renewable energy agency Alan.
Thanks, Charlie, and good afternoon, everyone.
As Charlie highlighted, our second quarter results reflect the sustainable profitability profile of Lakeland as key financial metrics continue to make sequential progress in the post-pandemic era.
On a consolidated basis for the second quarter of fiscal 2023, net sales were $28.2 million.
Domestic sales were $13.4 million or 48% of total revenues and international sales were $14.8 or 52% of total revenues.
This compares with domestic sales of 11.2 million or 41% of the total and international sales of 16.1 million or 59% of the total in the first quarter of fiscal 2023, while fiscal 2022 second quarter domestic sales were 11.3 million or 41% of total revenues and international sales were 16.2 or 59% of total revenues.
The geographic shift in our revenue for the quarter compared to the year-ago period reflected strong demand in the U.S., coupled with a softening environment in both Europe and Latin America.
On a consolidated basis compared to fiscal 2022, currency fluctuations negatively impacted revenues by approximately $800,000.
In terms of product mix for the quarter, we saw a positive shift from a margin standpoint as disposables represented 45% of total revenues for the period compared to 55% in the year ago quarter.
The mix shift was driven by growth in our higher margin, non-disposable products, particularly chemical, which reached 25% of total revenues for the quarter versus 20% in the year ago period.
As it relates to broader industry inventory levels, our Channa data is showing decreasing stock levels across all domestic customers.
signaling progress towards inventory normalization.
We are also seeing increased orders for direct containers from our larger customers, which is further evidence that our customers are shifting their orders to more reliable suppliers as supply chain headwinds have become more acute with the recent COVID-related lockdowns that have taken place in China.
as well as with certain other global raw material suppliers.
Importantly, Lakeland's proactive strategy to build both finished and raw material inventory has positioned us to navigate a complicated global supply chain environment while maintaining the ability to deliver finished goods to customers as needed.
We expect overstocked inventory levels in the distribution channel, which is predominantly made up of disposable products, to continue to diminish over the next few quarters.
Gross profit as a percentage of net sales was 41.3% for the fiscal 2023 second quarter as compared to 40.5% for the fiscal 2023 first quarter and 46.8% a year ago.
During the quarter, our gross margin benefited from an increase in US direct container business from several of our larger customers.
even as disposable revenues were decreased.
We also began to realize the benefits of lower transportation costs.
Like, when reported operating profit of 1.8M.
second quarter 2023 as compared to 1.4 million.
Q1 2023 and 4.1 million in the second quarter last year.
As a result, operating margins were 6.4% in the second quarter, up from 5.3% for Q1 2023, and down from 14.8% for the second quarter of last year.
Operating income was negatively impacted by currency fluctuations primarily related to the Chinese Yuan.
Operating expenses also increased due to travel and trade show expenses above our normal run rate.
certain administrative expenses such as rent and technology, and a bad debt provision.
We opportunistically invest in our operations but are mindful and aggressive in managing the controllable expenditures to ensure we are on a path to our targeted long-term operating margin goals..
Lakeland delivered non-GAAP net income of $1.1 million or $0.15 per basic and $0.14 for diluted share during the quarter.
This compares to 900,000 or...
15 cents per basic share and 14 cents per diluted share for Q1, 23 and 3 million or 37 cents per basic and 36 cents per diluted share in the prior year period.
as was disclosed in our 10Q filing.
During the quarter, Lieflin reassessed its long-term capital requirements for its Chinese operations.
due to an updated evaluation of our investment strategies.
strategies prioritizing both flexibility and the balance of our capital resources across our global footprint.
The Board considered this assessment and approved a plan to repatriate approximately $20 million in cash currently held in China.
As a result of this planned repatriation, we recorded a $2 million discrete deferred tax provision and withholding taxes in the second quarter.
While this had an impact on net income for the quarter, this action will allow significantly more flexibility as it relates to our future capital allocation plans.
Capital expenditures for the three and six months ended July 31, 2022.
We're 100,000 and 500,000 respectively.
Year to date, our capital expenditures primarily relate to capital purchases for our manufacturing facilities in Mexico, Vietnam, and India, enhancement of our global IT infrastructure, and our new corporate headquarters office.
We expect capital expenditures to be approximately 3 million for the full fiscal year as we continue to make these investments.
in Mexico and Vietnam.
Moving to the balance sheet.
Working capital was 105.1 million in July 31st, 2022.
compared to $108.6 million at January 31, 2022.
Our cash balance was $41.2 million at July 31st compared to $52.7 million at the end of the fiscal year 2022.
During the quarter, we added $7 million of inventory as part of our inventory management strategy we discussed last quarter, with most of the build representing raw materials.
As Charlie already alluded to and I discussed earlier,
Supply chain challenges have persisted, and our inventory program is intended to ensure we have access to an adequate supply of raw materials and have adequate finished stock available to decrease customer lead times, address surge demands such as the U.S. regional flooding events, and free manufacturing capacity for developing product lines.
While we are benefiting from declining transportation costs, lead times continue to be significant.
At this time, we have essentially reached our stocking goals and we expect to see inventory levels begin to flatten in the second half of this fiscal year.
We continue to have no debt at the end of the quarter and we have up to $25 million available from bank credit facilities.
During the fiscal 2023 second quarter, the company repurchased 2.7 million, or just over 171,000 shares of common stock under its repurchase program.
We now have approximately 2.7 million remaining under the current authorization as of July 31, 2022.
Now I'd like to provide an update on the progress made on our key strategic initiatives.
During the second quarter, we finalized our plans for expanding our manufacturing operations in Mexico.
began to build out of our clean room manufacturing facilities in Vietnam, and continue to make progress on our developed technology deployments with a focus on sales operations in the quarter.
Looking to the balance of the fiscal year because of continued macroeconomic headwinds and the delayed recovery of some of our most important industrial markets, including oil and gas, our team has undertaken a rationalization and resource reallocation exercise in support of our strategy to focus on higher value, up-run product lines.
For example, we believe that COVID-19 has rapidly accelerated the commoditization of the disposables market segment.
With ongoing supply chain issues and increased costs for industrial inputs, disposable selection is no longer as important for purchasing managers as price.
Given our long-term margin ambitions, as well as our top-line goals, and support to these objectives, we are moving more aggressively to shift our product mix towards higher value, higher margin, and less commoditized, non-disposable products in specific markets.
This continued shift away from disposables will free up additional resources to focus on high-value product lines that do not suffer from overstock distribution channels and are more recession resistant.
In doing so, we believe we can minimize economic headwinds to revenue growth in the second half of this fiscal year.
With that overview, I'd like to turn the call over to the operator to open the call for questions.
Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time.
We do ask that while posing a question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality.
Once again, if you have any questions or comments, please press star 1 on your phone.
Please hold while we poll for questions.
Your first question is coming from Alex Furman from Craig Hallam. Your line is live.
Hey, thanks everyone for taking my question. I wanted to ask about how the stronger dollar is impacting demand. I know you mentioned a bunch of different economic headwinds that are starting to emerge and I think you called out specifically some negative foreign currency translation impact in the second quarter. But just from a bigger picture perspective, given that you have such a meaningful chunk of your business in emerging markets.
Has that changed the demand conversation with a lot of your end users overseas? Are there particular products that I know you mentioned, I guess, disposables is becoming a little bit more cost competitive. Are there areas where demand is a little bit more inelastic, where you're able to pass through higher pricing? Are there any particular markets or product lines that kind of get priced out given the stronger dollar? Just curious...
US dollar denominated on the sales front. So for the most part, we haven't seen that.
materially affect the man. I know Charlie's got some comments he'd like to make. Well, outside of
The US and Canada, our largest markets are Europe and China, where the currency is less of a headwind in their economic conditions.
So that's the driver there. The other point I'd like to make is the one thing that still matters more, at least in North America.
then the price of the product is availability, and right now we're in a good position.
to satisfy immediate demand given the current lead times that we're seeing from overseas.
Okay, that's really helpful. Then if I could ask about the strategy that you both talked about on the call here, about really focusing more on the higher value, predictable, higher margin items, and moving away a little bit more from the disposable. Given that disposables are such a big part of your business, I imagine this is going to take some time to move the portfolio to
where you want it to be? I mean, should we be thinking about, you know, the disposables part of your business, maybe, you know, kind of declining in the single digits and the rest of your business may be growing in the, you know, single or low double digits and you kind of, you know, tweak the mix in that direction over the next couple of years? Or, you know, could it be a more substantial step function here?
Alex, I think that this is going to be a transition that takes place over years.
The strategy.
is born of recognition that given our new profitability targets, specifically our gross margin targets.
To maintain that level of gross margin, there's a trade-off in revenue, and the disposables market is where that trade-off is the most exacerbated.
Consequently, that's the reason for our focus on the higher end product lines.
We are not abandoning that market at all. What we're really talking about doing is dedicating fewer human assets to it.
so that we can focus them at the higher end where they can impact sales dollars more greatly.
than they can in the disposables market. The problem we get when we try to address
or generate our revenue growth through disposables, is there's a trade-off in margin that can very quickly, given our leverage, more than eat up the revenue growth.
So, that's the reason for the focus on higher margin products.
Okay, that's helpful. And then can you just kind of remind us a little bit, I think for better or for worse, a lot of investors really associate your business with the disposables, I think, especially given all of the business and the headlines around COVID and Ebola and bird flu, I think that's the segment of your business that people are most familiar with. Can you just kind of refresh our memory on the...
you know, the product lines that are higher margin that you're now going to be focusing on, you know, things like the high visibility line. Can you give us a little bit of a sense of, you know, what gives you confidence that there is strong demand there? Are these, you know, segments of the market that aren't being served as well as disposables? Any insight you can shed on that would be very helpful.
Again, we're not abandoning disposables. In fact, one of our
high value product lines is a subset of disposables and that's the critical environment market, which is pharmaceutical clean rooms and sterile applications. So we're not abandoning that altogether.
What we're trying to do is reduce our dependence on that market or the percentage of our revenue that it's accountable for. The reason we know that it will work is if you look at listening to Alan's comments.
We're already we've seen the impact just between Q1 and Q2 what a shift to.
higher value products does.
to our profitability, albeit I think we'll see a greater shift in the future or greater impact in the future.
That didn't just happen overnight. This has been a strategy that we've been pursuing for over a year now. Starting to bear fruit.
We've got two quarters, Q1 and Q2 of this year that I would consider.
true post-COVID quarters.
And what's become apparent is we do believe that
disposable commoditization has been accelerated and given that, price is going to be a bigger part of that market going forward and we want to reduce our dependence on that market and grow in higher value product lines.
Okay, that makes a lot of sense. Thank you very much.
Yes sir. Thank you.
Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star, then one on your phone at this time.
Please hold while you poll for questions.
Thank you. That concludes our Q&A session. I will now hand the conference back to Charlie Roberson for closing remarks. Please go ahead.
Thank you all for joining us in today's call. I'd also like to thank our Lakeland team members, our customers, our distribution partners, and many shareholders. We wish you a wonderful Q3 and look forward to sharing our success with you in the near future.
us in today's call. I'd also like to thank our Lakeland team members, our customers, our distribution partners, and many shareholders. We wish you a wonderful Q3 and look forward to sharing our success with you in the near future. Have a great day.
Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
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Our actual results, performance or chiestatements may fer materily from those expressed or applied by six forward looking statements. We undertake no obligication to update or by any forward looking statements to reflectedevents or developments after date of this call. During to today call, we will discussed financial measuresto ite from our financial statements that are not to termment in the tance for the? U's gap and including EBITDA, justed EBITDA, EBIT margin and non gap net income. A reconciliation of each of the non-GAAP measures discussed on this call to the most directly comparedable gapthe measure is presented in our earnings release at this time like introducute to our host for this call: laland industryes Chief execut Officer, charly ropercent. Mr prober, the flo's. Thank you operator afternoon. Thank you all for joining, joined today by Lake landments Chief operating and financial Officer, Allen deiller. As you saw this afternoon press release, Lakeland deliverred another quarter of sequental provement, highlighted by quarter of quarter and year over year revenue growth and the gross margin of 41%. We continue to execute on our strategic Manu facturing and performance initiatives, which are designed to maintain our profitability profile as we continue to grow. Our revenue. Revenue for the second quarter was 20, eight point two million, 3% sequentialally driven by increased volues and two point 6% compared to the second quarter last year. importanttly, we had continue strong profitability with the another quarter of gross margin ofabove our long term pararget for hold the 40% which is forurther reidence that our profit margins are sustainable as we growth of business in the post COVID-19 erawhile we RE prdof our results and MIL stones ief during the quarter. 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Bring forward to focus on tighting certain general in administrated exexpenses to maintain the we are on to achieve our long term operating margin goals. To that end, we are exedating the shift few technical assets from our dispos segment to our fire high performance and critical environment product lines. These market segments present the greatest DR unity for long term sales growth and margin potential, with the added benefit in the short term that these markets are expected to provide a more stable and consistant growth environment. En will provide more. Inform on this effort. His marksclearly the P of global industri recovery has been lower than we to originally inticipated the beginning of the calendunder year. The channel signs- we are recec- that we have receved tell that U's disribution is still burd with high intheventory levels, ranging from 60 to niny days of ex us. 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On a consolidated bases for the second quarter of fiscal 20- 23, net sales or 20, eight point two million dollars to mest sales for 13.4 million or 40, eight percent of total revenues and international sales for 14.8 or fifforty 2% of total revenues. dis compared with D? omesting sales of eleven point two million or 40- 1% of the total, and international sales of sixteen point one million or fifforty 9% of the total and the first quarter of fiscal two Y 23. while fiscal 20 20- two second quarter, deomestic sales were 11.3 million or 40- 1% of total revenues and international sales were sixteen point two or fifforty 9% of total revenues. The o? graping shift inour revenue for the quarter compared to the year ago period for like strong demand in the? U's coupled with the offoftenening environment and both year and L? America on a consolidated bases compared to fiscal twotwentthousand 20: two currentcy flectuations negatively impacted reues rox imly $8 thousand terms of product MA for the quarter. We saw POS sh from a gin stand point, as disposable represented 40, 5% of total revenues for the period, compared to fifty 5% and the year ago quarter. To make shif was driven by growth in our higher margin- nine on disposable products, particularly chemical, which reach 20, 5% of total revenues for the quarter, versus 20% and the year ago period. As relate broad industry andinventory levels, our Chan dat is showing decreasing stock levels across all demest customers signing progress orwards inventory ormal ization. We are office seeing increased orers for direct conttainers from our lar customers, which is further revenidence. Our customers are shifing their orarters to more reliable supplyers as supply chain head wind have thebecome more key the recent Co related lock downs that have TA place China as well as with certain other global raw material suppliers. importanttly, laland proac strategy to Bill both finish and wrw material inventory has position to navigated complicated global supply Cha environment while maintaining the ability to deliver finish good to customers as needed. We expect over stock inventory levels in the disributionation channel, which is for omment LY made of of disposable products, to continue to mman ish over the next few quarers. Gross profit as a percentage of net sales was 41% for the fiscal 20- 23 second quarter, as compared to 40 point 5% for the fiscal two 20- 23 first quarter and 20, six point eight percent the year ago. During the quarter gross margin benefated from an increase and.