Q3 2024 Lakeland Industries Inc Earnings Call
Good day and welcome to the Lakeland Industries fiscal 2024 third 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 will 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 our S. E C filings.
Our 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 adjusted EBITDA and adjusted EBITDA margin.
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 Executive Chairman, Jim Jenkins, Mr. Jenkins the floor is yours.
Thank you operator, good morning, and thank you all for joining us for our third quarter fiscal 2024 earnings call I would like to begin today's call by thanking and celebrating our Lakeland team members across the company.
It went to delivering our strategic initiatives during the quarter.
These efforts have helped drive revenue growth in key strategic markets execute the continued shift in our revenue profile towards higher value products and carry out our small strategic and quick or Q <unk>.
Acquisition strategy.
We enter the next chapter for Lakeland.
I can speak for myself, our executive team and the board when I say that we are excited about the company's future supported by the strength and depth of our organization and leadership teams.
Before turning to our third quarter results I'd like to provide a brief update on our ongoing CEO search. The board is following a very thorough vetting a selection process is engaging its executive recruiter that's.
Preliminarily identified a few candidates who are eager to find the right leader, but we will be methodical and deliberate as we seek a candidate who will continue to drive our business strategy and culture.
<unk> has a solid foundation in place with exciting runway for growth and the board and I look forward to sharing more with you as the search process evolves.
Now shifting gears to the quarter, our first third quarter results our fiscal third quarter results were very positive and as we continue to see demand accelerate and growth within our key product lines and markets Lakeland delivered net sales of $31 7 million up 11, 6% year over year.
Notably many of our high value strategic product lines saw growth in the quarter, including fire service and industrial product categories. Our fire service business continues to expand driven by our superior lead times versus our competitors innovative designs from the Eagle team.
And on boarding successes with new distributors as expected. We also continued to see strong demand from oil and gas turnaround activity.
As we discussed in previous quarters as having extended season.
Season in 2023.
Finally, we saw a significant increase in our direct to customer container business, which is a strategic focus for us. This growth highlights the significant momentum Lakeland is building and our high value product lines and our goal to increase penetration in high value markets is producing positive results.
We believe our recently announced specific helmets acquisition will further enhance our fire service growth.
$300000 or 10, 8% to $3 3 million in the quarter, even with the negative impact of foreign exchange in the quarter, which Roger will discuss later this.
This resulted in adjusted EBITDA margin of 10, 4% compared to 10, 4% last year.
Adjusted for the impact of negative FX in the quarter, our adjusted EBITDA would have been approximately 14, 2%.
With regard to our geographic markets, we continue to see strong demand trends in North America, particularly in the U S and Latin America, as well as our EMEA markets to a lesser extent.
We also were encouraged to see increases in our India and Australia markets for the quarter as these are potential growth markets for us.
In North America, our sales teams continue to have success, adding new distributors and expanding our commercial reach.
Additionally, our considerably shorter manufacturing lead times as compared to many of our competitors have resulted in Lakeland, gaining traction as a preferred supplier and our fire service and industrial categories.
As we have discussed in past calls we continue to see our strategically located manufacturing as a competitive advantage and enabling our favorable lead times.
Finally, our Latin American business continued its exceptionally strong performance for the year as we are the market leader in several of the markets served.
As has been the case for the first half of the year, our Asian markets.
We need to perform below expectations.
As a result of ongoing macroeconomic weakness and overhang of PPE equipment from China's COVID-19 Lockdowns.
As a result, we expect our Asia Pacific business to remain below our initial projections over the last quarter of the year.
Shifting gears a bit I'd like to spend a few minutes discussing the company's small strategic and quick M&A strategy and our overall commitment to identifying and maintaining a robust acquisition pipeline with opportunities that enhance lakeland high value product portfolio.
Last week, we were pleased to announce the acquisition of Pacific helmets specific is a highly regarded global brand with a well established reputation for quality and innovative design and manufacturing and a growing first responder safety helmet market company.
The company has a broad range of helmet model styles and certifications.
They have demonstrated the ability to develop new products and sell successfully around the world.
Acquisition of Pacific is a significant milestone in our efforts to build Lakeland is a premier global firebrand as it enhances our product portfolio and strengthens our ability to deliver exceptional fire turnout protection offerings to our customers worldwide.
Pacific has one of the largest ranges of helmets pellet models styles and certifications.
Of any international helmet manufacturer.
The company currently produces 26, plus helmet models and has a significant number of new product innovations launching in the near future.
Lakeland Pacific owns its own manufacturing facilities and has an in house R&D team that enables it to customize the produce helmets specified to the customer's specific requirements more easily.
Pacific Helmet currently has a strong revenue and tender pipeline and global demand for safety helmets is growing there.
They already sell into over 40 countries and we believe the business is further scalable through the addition of new distributors, particularly in the northern hemisphere in emerging markets, and which Lakeland already has a strong presence.
We expect this acquisition to be immediately accretive to Lakeland Bottomline results and are excited about the organic and cross selling opportunities going forward.
Excited to see our global sales team execute on this opportunity and we look forward to sharing more about the integration of the Pacific business into Lakeland platform in the future.
I'd also like to welcome the Pacific team Gonna Lakeland family and we're very excited to have you as part of our team and the potential for the future.
I also want to thank our team here at Lakeland for all their hard work recently in closing this deal.
We continue to be very pleased with the performance of our Eagle acquisition, and we believe Eagle is an excellent template for our <unk> acquisition model.
After delivering a large tender during Q2 of this year, we expect eagle to ship another larger order in Q4. Additionally, we are continuing efforts integrate eagle products in delinquency of graphic markets as well as to accelerate the sales Eagle gloves.
In particular blocking hoods eagle.
Eagle fired gloves in particular particle blocking hoods are progressing through the certification process and.
Lakeland has leveraged eagle in house designers and the development of our next generation NFPA turnout gear, which is currently underway.
As we look to the balance of the fiscal year and beyond I am confident in and impressed by our current management team I'm also encouraged by the exciting runway for growth. This company has Lakeland is focused on solidifying our foundational business and investing our resources in high growth geographies, which will include product line enhancements and the optimization of our operating and <unk>.
Sales channels.
Over the longer term, we are committed to building out a premier global firebrand as I previously mentioned.
This will include the release of new and innovative products additions to our global sales force and our renewed marketing focus all of these efforts will benefit from the addition of Pacific to our existing platform.
Lake Lakeland is committed to expanding our products and capabilities through our small strategic and quick acquisition strategy continued M&A will help Lakeland already diverse line of products bring premier global brands onto the Lakeland platform and drive strong operating leverage through cross selling our Lakeland vast distribution and sales network.
I'll now pass the call to Roger to provide an overview of our financial results Roger.
Thank you, Jim and Hello, everyone.
Before I get started with my comments on the financials I'd like to remind everyone listening that we have posted investor slides.
Along with this information I will present on our website at Www Dot Lakeland and dotcom.
<unk> delivered sales of $31 $7 million in the third quarter ended October 31.
It.
Domestic sales were $15 1 million or <unk> 47, 6% of total revenues.
And international sales were $16 6 million or 52, 4% of total revenues.
This compares with domestic sales of $14 million or 49, 3% of the total and international sales of $14 4 million or 57% of the total third quarter of fiscal 'twenty three.
As we noted in our earnings press release issued yesterday afternoon, we delivered strong year over year sales growth and continued strong profitability in.
Terms of product mix for the quarter, our fire service category continues to increase as a percentage of Lakeland sales and represented 18% of the total revenue for the quarter compared to 12, 5% in the year ago period.
Disposables continue to decrease as a percentage of Lakeland singles and represented 38% of total revenues compared to 50% in the year ago period.
This reflects the efforts we've made to shift our product mix toward higher value higher margin and less commoditized products as we have discussed in prior calls as well as continued weakness for this product line in Asia.
For the fiscal year to date, our fire service business is 21, 4% of sales and disposables or 39%.
From a segment reporting standpoint, Lakeland saw strong sales growth in our U S European and Canadian and Latin American markets.
This growth was partially offset by softer Asian sales, particularly in China, which is a continuation of what we've seen over the last few quarters.
For the current quarter sales in the U S were $15 1 million or 48% of total revenue.
The increase of $1 1 million over the year ago period.
Latin American sales grew $1 6 million to $4 2 million.
For the quarter, an increase of 63% over Q3 of last year.
All geographic regions, except for Asia showed increases over the year ago period.
Due to the inherent timing variability and our fire service business as a result of the timing of deliveries on large tenders. We have begun work closely tracking our trailing 12 month or TTM revenue.
For the 12 months ended October 31, 2023, our TTM revenue was $122 $4 million, an increase of $11 $8 million or 11% over the trailing 12 months ended October 31 2022.
Gross profit for Q3 of this quarter was $13 $4 million, an increase of $1 1 million or 9% over the year ago period.
Gross profit as a percentage of net sales was 42, 2%.
For the fiscal 2024 as compared to 43, 3% a year ago.
Gross profit performance in the current period was driven by increased revenue during the quarter.
<unk> sales of previously reserved excess inventory, partially offset by an adjustment for intercompany profit and ending inventory.
Our gross margin percentage was affected by an adjustment for intercompany profit and ending inventory and amortization of previous year adjustments to excess inventory.
Partially offset by improved product mix lower freight cost manufacturing cost improvements and a reduction in total inventory, including fully and partially reserved inventory.
Liquid reported operating profit of $3 $6 million in Q3 of 24 as compared to $2 $1 million in the third quarter of last year.
As a result operating margins were 11, 4% in the third quarter up from seven 6% for the third quarter of last year.
Our operating profit benefited from increases in sales and lower operating expenses during the third quarter.
The company evaluated the earn out consideration accrual related to the Eagle acquisition.
And reduced this accrual by $1.5 million, which was recorded as a reduction in operating expense in the quarter.
This decrease was offset by increases in currency fluctuations of $700000.
Merely related to the Argentine peso.
Additionally, higher related higher sales related costs, including increases in travel and Tradeshow expenses were realized as we continue to invest in growth initiatives across the company.
Yeah.
Lakeland delivered net income of $2 6 million or <unk> 35 per basic share and <unk> 34 cents per diluted share during the quarter.
This compares to net income of $1 $4 million or <unk> 19 per basic and diluted share in the prior year period.
Adjusted EBITDA was $3 $3 million in Q3, 24, an increase of 10, 8% compared to $3 million in Q3 of 'twenty three.
Adjusted EBITDA performance in the quarter was driven by higher sales, partially offset by the impact of the previously mentioned negative FX impacts in operating expenses.
Our adjusted EBITDA margin for Q3 of fiscal 2024 was two 4% compared to the same number in the year ago period.
Adjusted for the impact of negative FX in the quarter.
Our adjusted EBITDA would've been approximately 14, 2% in the current quarter.
On a trailing 12 month basis Lakeland suggested EBITDA of $12 $1 million is an increase of 21, 2% versus the TTM adjusted EBITDA of $9 9 billion as of October 31 2022.
Now turning to the balance sheet.
Lakeland ended the quarter with cash and cash equivalents of approximately $26 4 million, an increase of $1 $8 million compared to our prior year end cash balance of $24 $6 million.
Lakeland delivered cash flow from operations during the quarter of $3 $8 million, driven by profitable operations, and a $2 $6 million reduction of raw materials and finished goods inventory.
Year to date, we have produced positive operating cash flow of $7 $7 million led by profitable operations and a $3 2 million dollar decrease in inventory.
Offsetting the operating cash flows were $3 million in investing activities split between capital equipment and additional investment in body drag.
Financing activities for the fiscal year to date, primarily quarterly dividends UK bank repayments and treasury stock purchases totaled $1 8 million.
Finally cash balances have been impacted by $1 $1 million during the year to date due to currency fluctuations primarily from the Chinese one in Argentina peso.
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 three months ended October 31, 2023 were $400000 and $1 $5 million year to date.
As a reminder, we now expect capex to be approximately $2 million for the full fiscal year as we replace existing equipment in the normal course of operations.
Monterrey expansion, which we discussed last quarter remains on pause as we continue to assess weather related damage to our leased building.
Inventories declined $3 million quarter over quarter to $54 4 million from $57 4 million at the end of the second quarter of fiscal 'twenty four.
We were pleased to see the acceleration of inventory reduction in the quarter and this remains a top operating objectives.
During the quarter, we utilized various sales and marketing programs as well as price deviations on reserved inventory to assist this effort and we will continue to do so moving forward.
In closing I'd like to briefly discuss two transactions that occurred subsequent to quarter end and their impact on liquids financial profile.
First is the acquisitions of New Zealand based specific helmets for $8 5 million subject.
Subject to post closing adjustments and customary holdback provisions, which Jim already covered in detail.
The transaction was funded through the company's revolving credit facility and cash balances.
We expect Pacific to add $7 million to $8 million of sales revenue to Lakeland and our next fiscal year and for the company to be immediately accretive to Lakeland Bottomline results.
Next is the sale of the company's Bradford, Ontario warehouse.
On November 27, 2023, the company sold its office and warehouse facility in Branford, Ontario to an unrelated party for $4 $9 million.
This sale will result in a pretax gain after selling expenses of approximately $3 $8 million that will be recognized in the fourth quarter of this year.
Going forward the company will utilize third party logistics providers for customer fulfillment in Canada.
Okay.
Finally on November 32023, we entered into amendment number three to the loan agreement with Bank of America.
This third amendment, the lender consented to our acquisition of the equity interest of Pacific into permit additional indebtedness to be made available in Pacific by its existing bank relationships.
The amendment also waived Lakeland borrowing base limitations through January 31, 2024.
With that overview I'd now like to turn the call over to the operator to open the call up for questions.
Certainly 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.
Confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Your first question for today is coming from Gerry Sweeney with Roth capital.
Hi, Jim.
Doing great.
Great Hey, Gerry.
Just a couple of quick questions. Obviously, you know fire service is doing quite well and Theres a lot of talk about you know getting into distributors just curious.
The fire or the fire with your products and all your distributors that you currently are want to be in.
Or is there an opportunity to get into more meaning.
Yes.
You have some relationships with distributors or they are in those distributors that you have relationships with not new ones I'm, assuming sometimes it's easier to get into existing relationships and expanding footprint.
It's a combination yes, I do I think it's a combination of both.
At this point Gary.
In particular with our North American sales team they have done a tremendous job.
Developing additional <unk>.
Distribution arrangements.
And we are.
We've recently hired somebody in the West coast.
To help further expand.
Those relationships. So we've seen what I would consider more than modest success in developing.
Our current distribution network, but also expanding it and I guess I give kudos to our North American sales team fire sales team particular.
For that and then of course on the Eagle front.
We've inherited a lot of relationships from them.
As they as they seek.
Our bidding bidding opportunities throughout the world.
Certainly with.
Specific helmet will see mostly as a beneficiary of some very strong.
APAC.
Distributor relationships that they have and then you sort of do the cross selling with that and.
No I get really excited about it because theres all kinds of.
Opportunities that we might have had to partner with someone else to do that now we don't have to do that because we've got it we got that debt that service and product offering in house.
Got it.
I don't want to put words in your mouth, but sort of what I'm looking at it is distribution growth there's been great. It sounds like there's still opportunities there, but you take your fire.
Turn out gear.
Eagle Pacific helmet.
You can layer on additional cross selling opportunities and maybe even get into additional distributors who are in different regions of the world. So.
Still some low hanging fruit maybe on the distributors yet yeah look I remain yes, I think thats and youre not putting words in my mouth, I think thats right yes.
And I think.
We feel we're in the early stages of growing out this this opportunity and given that certain competitive advantages, we have certainly on our sort of captive manufacturing.
Additional product lines that we offer.
Yes. This is in a nine inning game I think worried about secondary.
Alright, that's very helpful. And then obviously, maybe acquisitions right totally get Pacific helmets.
Absolutely makes sense are there other opportunities out there that you would be looking for that.
Sort of add I don't know, whether it's the fire gear or some other areas that just add this cross selling opportunity, yes, I mean, we see we see opportunities in industrials and fire being fire is where we've sort of found a low hanging fruit.
We'd love to have a route we want to round out our buyer offering with other possible product. So.
Certainly certainly interested in that and then in terms of the pipeline I mean, what it can.
I mean for anybody who benefit on the call.
Background as I I really have been moving on our strategic plan for Trans Cat.
The M&A circles, where we have pretty much done what we're trying to do at Lakeland writers and as I look at as I look at the two companies. There's lots of similarities there about opportunities that we can move the needle without betting the farm right.
<unk> was an $8 $5 million deal, we're going to get it right I know, we're going to get it right, but if we only get it a little right we're going to be fine in fact, we're going to be better than fine.
So certainly we're always going to find that right sorry, Yes go ahead.
I was going to say Transkei do.
Absolutely expanded the addressable market right through the asset management side. So that's exactly here Yep Yep.
Yeah.
Maybe just a couple quick questions on disposables, where does this go in terms of percentage of revenue I imagine there's always some component to sales for disposables, but some needs.
And I'm just curious if it is what's important.
Important that there's less differentiation et cetera, but I'm wondering where that goes longer term and then maybe just talk about where inventory maybe inventory levels should be in terms of dollars.
On a constant basis I know, it's going to change over time, but I think so in the interest is not making myself a fool I'm gonna have rodger answer that one yes.
Oh, absolutely yeah, no. Thank you Hey, Roger Yes, I would.
I'll just point out that.
Under Jim's and the Board's leadership, we have spent a lot of time and effort over the course of the summer and the fall.
And of course I joined in February February one of this year kind of looking at our strategy strategic direction, how we compete and where we think we have competitive advantages and of course, when we have talked about.
The benefits that in house manufacturing brings we don't we don't want to give the message at all that we're minimizing disposables jet was wounds, even though it's down to 38% or so of the total revenue. That's because other revenue is growing in addition to of course, the weakness in China that we've seen.
But as we think about disposables.
Don't want to give the message or the perspective, the disposables are not strategic now there are some places where it does not make sense who.
To compete in disposables, where we don't think we have competitive advantage and we don't want to race to the bottom on pricing there, but as we think about.
What is strategic and how you know how best to compete and where we have advantages there are disposable products.
That we're very excited about and we're going to that we're going to continue to leverage and you know a couple of things specifically that come to mind and we talked about this a bit last quarter is the clean room applications clean room, it's not just your basic run of the mill low level disposable item, we see opportunities.
And to be conductor EV continued in health care and the Lakeland brand and the product there is very good.
Other we alluded to this a bit in our prepared remarks is our larger distributor.
<unk>.
Direct to contest customer container program, we saw an uptick in that this quarter. Our again, our large customer sales force is doing a great job and what that enables us to do this.
Just kind of strategically use.
Certain disposable products to fill out a container that we ship directly to the customer it's better margin and cost profile for us because we're not handling it in our results in more sales because they can go to one place one stop and kind of get the full range of needs that fall out that fill out the the container that get shipped to them. So.
While while we see the most growth.
The most accelerated growth and growth percentages in fire and especially from an M&A perspective and fire service.
And also in industrial.
The disposables as it relates to new things like critical environment clean room, and direct to customer container programs is considered highly strategic for us.
Got it understood and I didn't mean to.
So all the way, but that's a great overview.
And again I'll, just I'll just add it's kind of hard to get into questions. It's hard to say you know what you think the percentage is going to be really it gets down to what the.
When you see China recovery on one hand, and the other hand, what the acquisitions look like because the acquisitions are going to be.
Typically in the fire are the higher value industrial so that that revenue.
Channel, we just accept expect it to grow faster.
Yeah, and I'm, sorry, I didn't mean to imply that it was going to absolutely go away, but what I understand what youre, saying Theres certainly.
We didn't take it that way. It's just you got us a great opportunity to kind of make it clear how we think about the state and in a lot of ways. Its math right a lot of ways. Its math right I mean, as we continue to grow the higher end higher value and we continue that we and we move.
We don't abandon.
In any way shape or form the disposal market, but it's just as a as a percentage of our portfolio, which is sort of naturally get a little bit smaller.
Got it which I don't think in the past.
Yeah.
And there's little housekeeping more for modeling, but where do you want to get inventory levels down I think all things being equal right.
Growth youre, continuing to grow et cetera, but.
Just curious as to what level, Jerry I'll take that one as well and again it's.
What where you'll need to kind of keep in mind is the caveat is that we are starting to do the purchase accounting on.
Specific we will.
We bring in that and so that will help.
Affect the offset inventory balance like you know kind of like Eagle like our fire products. These are made to order. So there's not there's not going to be significant if any finished goods that come along with Pacific but of course. They have the you know the raw materials and work in process.
Said.
We have been very pleased at how we were able to reduce.
No.
Call it.
When I roughly circled up as the $58 million of inventory down to the 54 level as I think about that baseline. We would we would like to get another two to 4 million out of that it's you know.
So you're pretty close yeah.
No.
We still have it's a call we still have weekly AR, we have targets.
And programs underway and it's still very much a high priority and you can see the cash flow that's resulted in <unk> during the quarter.
Got it I appreciate it.
I'll just add I'll, let a toy lines on that just briefly and that's really a testament to Roger and his team our COO, who later on and her team.
They really have worked together on and our sales team on forecasting and and driving down that inventory number and it's become a significant priority for us and under Roger's leadership, we're starting to see some real encouraging results.
Got it I appreciate it guys. Thanks for taking my call.
Thanks, Gary I appreciate it.
We have reached the end of the question and answer session and I will now turn the call over to Jim for closing remarks.
Thank you operator, thank you all for joining us on today's call. We appreciate your continued interest in Lakeland.
The global growth opportunity for our business are robust and we look forward to building on the strong momentum Lakeland has built and sharing our successes with you in fiscal 2024.
Good day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.