Q1 2024 Lakeland Industries Inc Earnings Call
Good day and welcome to the Lakeland industries fiscal 'twenty 'twenty, four first quarter financial results Conference call.
All lines have been placed on a listen only mode and the floor will be opened 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 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 O. S. T. SEC filings actual results performance or achievements may differ materially from those.
Expressed in or implied by such forward looking statements. We undertake no obligation to update or revise any forward looking statements to reflect events or developments. After the date of this call.
During today's call, we will discuss financial measures derived from our financial statements that are not determined in accordance with U S GAAP, including EBITDA and adjusted EBITDA.
A reconciliation of each of the non-GAAP measures discussed on this call to the most directly comparable GAAP measure is presented in our earnings release.
At this time I would like to introduce you to your host for this call Lakeland Industries, Chief Executive Officer, Charlie Robison, Mr. Robinson, the floor is yours.
Thank you Jimmy good morning, and thank you all for joining.
I'd like to begin by pointing out that in addition to the press release yesterday, we also posted a Q1 investor deck.
On the investors section of our website and while we will not speak directly to it on this call. We do invite you to access it and follow along.
We're pleased with our fiscal first quarter results is likely to delivered net sales of $28 7 million up five 2% year over year.
While our net sales for the quarter included $2 million from our acquisition of Eagle Technical products. This past December .
<unk> also delivered organic growth in targeted geographic markets and product lines of note.
Our fire and flame resistant arc resistant performance product category saw a significant year over year growth of 103% and 55% respectively.
In terms of profitability.
Our first quarter gross margin of 43, 4% was above our long term target of 40% and as Roger will cover in more detail.
Benefited from multiple dedicated actions from our team members.
In regard to our geographic markets North America, North American industrial demand continues to hold strong and is performing in line with our expectations.
Oil and gas turnaround activity, which was significantly curtailed during COVID-19 is returning at a measured pace over a prolonged period, partially due to ongoing labor availability constraints.
We anticipate labor constraints continuing throughout the remainder of the year and are expecting an extended strong fall turnaround season.
Going forward, we will continue to monitor global oil market developments, such as the recent production cuts announced by OPEC plus.
And I would characterize our outlook for the year is cautiously optimistic given the shifting macroeconomic backdrop.
While our North American markets are performing in line with our targets.
Our Asian markets have been weaker than expected driven almost entirely by China.
China is a departure from a zero tolerance COVID-19 policy in late December.
Significantly curtailed govern government demand for testing related PPE, including disposable coveralls.
Industrial economic activity has been very slow to recover as foreign customers seek to reduce dependence on China in their supply chains.
It is China experiences a subsequent outbreak of the Xb variant of the COVID-19 virus.
In addition to depressed industrial activity, China is experiencing post pandemic excess inventory in its distribution channels.
We anticipated an excess inventory condition would likely occur in China, but believed it would not be as severe as in the U S or Europe due to significantly shorter lead times within China.
As a result of these factors, we anticipate China's economic recovery will remain slower than our initial projections throughout the course of the year.
Europe continues to outperform our expectations this year, but admittedly this is because our forecast headed into the fiscal year was quite cautious given some of the macros geopolitical and energy security or supply related issues that overhang this region.
So we do not we do expect Europe to continue to progress this year at a pace ahead of our original expectations.
Even though industrial activity in general remains muted.
Turning to other important markets globally, India, and Mexico are tracking slightly behind our projections for the first quarter. Although we believe activity will ultimately improve and come in line with our projections for the year.
Latin America is performing ahead of forecast right now and is expected to maintain this performance for the remainder of the fiscal year.
In terms of our focus on high value products, we're seeing year over year success with our fire and flame resistant arc resistant products in North America.
Our sales team has been successful in adding new distributors, expanding geographic reach and had begun displacing our competitors as key or primary suppliers with a number of existing and new distributors, resulting in 29% organic revenue growth for fire products and 50.
5% organic growth within the F. R E our product line.
Lakeland is gaining traction in these markets and we believe that our focus on these product lines is yielding success.
Shifting gears to Eagle.
Our integration efforts are tracking firmly on schedule and we are continuing to accelerate synergy capture between organizations.
This is evident in our fire business as Eagle has successfully promoting sales of NFPA certified gear into their existing sales channels.
Our legacy team is also in the process of incorporating Eagle CE hoods into our NFPA markets and promoting Eagle CE turnout gear into our international markets.
Our efforts to integrate Eagle products into Lakeland geographic markets are initially focused on Latin America in Mexico, and will be followed by India and Southeast Asia.
To this end Lakeland leadership team in Eagle personnel will be meeting with our Latin America American in Mexico sales teams to train them on Eagle products later this month.
<unk> will have a chance to learn firsthand about the south American firefighting markets.
On the expansion front.
We're pleased with the progress, we're making at our new Monterrey, Mexico facility, which we expect to be complete by the physical third quarter of this year as we have previously communicated.
This manufacturing plant will greatly benefit our efforts to gain market share in higher value strategic end markets, most notably fire flame resistant arc resistant high performance.
Electrical utilities and.
In chemical by providing short run capability.
And additional capacity to service, our growing high value product sales.
As we look to the balance of our current fiscal year, we anticipate little change in our existing business environment.
We believe that China will remain weak with little in the way of economic recovery.
India, and Mexico are slightly behind projections as of the end of Q1, but are recoverable and we believe they will meet revenue projections for the year.
North America is currently running at forecast sales pace and is expected to continue to do so through the remainder of the year.
Europe and Latin America are both running ahead of their projections through the first quarter and do not show any signs of weakening.
In the aggregate, we believe based on current market information and the strength that we're seeing in fire and industrial fr markets.
We will attain our goal of mid to high single digit growth this year.
Overall, we remain very positive on the position we are generating for ourselves within the market and we expect to deliver continued revenue growth in our core markets as well as profitability levels in line with the company's three year to five year targets.
We will accomplish this through geographic targeting a specific products turn out gear flame resistant arc resistant high performance and chemical suits.
And through pricing deviations in disposables due to select and user accounts, where we believe we can leverage the business to capture strategic sales currently held by our competitors.
I'll now pass the call to Roger to provide an overview of our financial results Roger.
Thanks, Charlie and good morning, everyone.
<unk> delivered sales of $28 $7 million in the first quarter.
Domestic sales were $12 3 million or 43% of total revenues and international sales were $16 4 million or 57% 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.
In terms of product mix for the quarter disposables continue to decrease as a percentage of license sales and represented 43% of total revenues compared to 53% in the year ago quarter.
This again reflects the efforts we've made to shift our product mix towards higher value higher margin and less commoditized non disposable products as we've discussed in prior calls.
Additionally, as we noted in our earnings press release issued yesterday afternoon.
We saw strong growth within our fire product category with sales up 103% year over year.
From a geographic standpoint, Lakeland saw strong sales growth in our U S, Canada and European markets.
However, this growth was partially offset by soft Asian sales, particularly in China and India.
Gross profit as a percentage of net sales was 43, 4%.
For the fiscal 2020 for first quarter as compared to 45% a year ago.
As Charlie already highlighted the strong improvement in our gross margin performance was driven by deliberate sales focus on higher value products as well as improved finished goods material costs and lower manufacturing expenses.
Compared to the prior quarter, our gross margin percentage increased six percentage points up from 37, 4%.
Due to an improved product mix.
The absence of excess freight expense write offs that we had in Q4.
Profit in Q1, ending inventory and a positive Q1 inventory reserve adjustment.
Lakeland reported operating profit of $1 $9 million in Q1, 2024, as compared to $1 4 million in the first quarter of last year.
As a result operating margins were six 8% in the first quarter up from five 3% for the first quarter of last year.
Our operating profit benefited from the improved gross margins and higher revenue as previously discussed partially offset by an increase of $900000 in operating expenses in Q1 of 2024.
The increase in operating expenses is attributable to increases in severance expenses and currency fluctuations.
Travel and trade show expenses and higher professional fees.
Currency fluctuations primarily related to the Argentinian peso.
Which totaled approximately $300000 negatively affected operating profit.
Lakeland delivered net income of $1 $3 million or <unk> 18 per basic and diluted share during the quarter. This compares to $1 1 million or <unk> 15 cents per basic share and <unk> 14 per diluted share in the prior period.
EBITDA for the first quarter of fiscal <unk>.
2024 was $2 $4 million compared to $1 9 million for the first quarter of fiscal 2023.
Adjusted EBITDA was $2 $8 million in Q1, 2024 compared to $2 3 million in Q1 through 'twenty three.
Moving to the balance sheet Lakeland ended the quarter with cash and cash equivalents of approximately $26 million, an increase of $1 $4 million compared to our fiscal year 2023 year end cash balance of $24 6 million due primarily to cash provided by operating activities of $3.
$7 million for the three months ended April 32023.
The company continued to have no debt at the end of the quarter and has up to $25 million available from our bank credit facilities.
Capital expenditures for the three months ended April 32023 were $700000.
We're related to capital equipment for the company's new manufacturing facility in Monterrey, Mexico.
That is scheduled to open in the second half of the current year as Charlie previously mentioned.
As a reminder, we anticipate fiscal 2020 for capital expenditures to be approximately $3 billion.
As we complete the new manufacturing facility in Monterrey, Mexico.
To replace existing equipment in the normal course of operation.
We expect to fund the capital expenditures from our cash flow from operations.
The company purchased $300000 of common stock under its repurchase program during the quarter, leaving approximately $5 $1 million remaining under the current authorization.
Lakeland was also pleased to pay its initial quarterly dividend of <unk> <unk> per share to stockholders during the quarter.
Our inventories declined slightly quarter over quarter from $58 2 million at January 31, 2023 to $57 9 million at the end of Q1 'twenty four.
Raw materials inventory increased by approximately $400000, while finished goods inventories decreased by approximately $500000.
Our increase in raw material inventory is driven by increases in our higher value strategic products.
Moving forward, we remain committed to accelerating the reduction of our finished goods inventory. This year as previously communicated and we will continue to explore various price deviations on additional product styles.
With that overview.
I'd like to now turn the call over to the operator to open for questions and answers.
Thank you very much at this time, we are opening the floor for questions. If you would like to ask a question. Please press star one on your phone keypad now a confirmation tone will indicate that your line is in the question you May press star two if you'd like to remove your question from the queue. If anyone is using speaker equipment.
May be necessary to pick up your handset before you press. The case, please hold a moment, whilst the poll for any questions.
Thank you. Your first question is coming from Alex Fuhrman of Craig Hallum Capital Great. Alex Your line is live.
Hey, guys. Thanks, very much for taking my question and congratulations on a really nice.
Quarter, we'd love to talk about gross margin and what we could expect to see for the rest of this year and heading into next year. It seems like you very quickly hit your longer term profitability targets.
Now you know was there a mix shift involved in getting there. So quickly we'd love to just hear you know your broad thoughts on what we can expect to see over the next few quarters and years.
Hey, good morning, Alex as Roger and thank you for the question and thank you for the comments we work.
Obviously pleased with the quarter.
We did see.
Very nice increase over Q4, as well as year over year.
The bulk of that increase was driven by product mix, obviously with a slight increase.
In revenue driving gross profit, but the mix driving gross margin as we talked about the focus on the.
The higher value strategic product line with inspire and <unk>.
Yeah. The other thing this is you'll probably remember compared to last quarter, particularly we had about a 200 basis points.
Decrease or write off an excess freight cost in Q4, and we did a comprehensive.
Inventory costing analysis cost roll in in Q4.
Cleaning that up from some of the higher freight costs.
During the Covid period.
Other thing that that I mentioned in my prepared remarks.
Did have.
A slight adjustment into positive from a profit and ending inventory.
And inventory reserves of course, we will have those every quarter and they could go either way but.
This quarter they were a positive so long you know longer term.
Of course over the course of the remainder of the year.
We certainly are not.
Guidance account holders.
Quarterly adjustments and ending inventory like we just said that.
We're on track for that.
40% plus gross margin that we've indicated.
Hi, Alex this is Charlie.
Also like to point out.
The investor deck that we did for Q1 actually does contain a bridge showing the margin.
<unk>.
Improvement quarter to quarter.
Okay. That's really helpful. Thank you guys and then you mentioned you know in your in your remark that didn't release.
Last night that Youre seeing a lot of good response to the higher value products that you've been focusing more on obviously that that you know it sounds like that's having a positive impact on gross margin as well can you give us a sense of how much of your business today is that what you would call those higher value products and.
You know where you see that going over the next few years.
Yes.
Alex we're already seeing a shift.
Do that.
Yeah.
It's.
We look at that in more general terms.
Within our product categories, we have.
Sales, even if the same product that may in one case may be strategic or higher value, where another is not.
We tried we're trying to get that message across in our press in the press release, we talked about how we define high value. It's an end user definition and it really goes to the amount of.
Effort and consultation that they've put into the purchasing decision.
Now having said that.
Disposables with the exception of clean room, as we just generally consider entirely.
<unk>.
Commodity or not high value and we've seen a year over year shift.
<unk>.
Full year, a full year shift in our disposables a decline of 6% that has moved largely into the fire and the fr a woven categories.
So.
As we move forward in future years.
Sure.
I expect to see that trend continue maybe not at a 6% a year pace.
But.
As we keep going I think that eventually.
We will see.
Our.
Strategic items grow to where there are 60 plus percent maybe.
And maybe even as high as 65% of our total revenue.
Alex I would again.
We encourage you and the listeners to refer to a couple of slides we have in the Q1 investor presentation that we posted you can see.
If you look at as Charlie referred to as you look at the full year 2023 of the year that we just finished.
Our revenue of about 49% of that was from disposables for Q1 of 2024 that was 43%. So as Charlie mentioned is 6 billion decrease compared to the full year of last year.
The chemical remains consistent at around 20%.
Where we did see the pick up was in the <unk> and particularly the fire. So ego of course contributed to have in the first.
Full quarter.
Performance or results from Eagle, but also as we mentioned in our prepared remarks, we're seeing organic growth in fire.
And Alex the other part of that question is in the higher value products is where we have value for product development.
Got things that are in the business.
There then.
Yeah.
Represented an opportunity to grow those markets as well as to take market share from our competitors.
Yes.
Great. That's really helpful guys. Thank you very much.
Thank you very much while we don't appear to have any further questions in the Keith I'm now going to hand back over to the management team for any closing remarks.
Thank you Ginny. Thank you all for joining us on today's call. We look forward to building on our momentum and sharing our successes with you. This year. Thank you and have a good day.
Thank you everybody. This does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.