Lakeland Industries Q4 2024 Earnings Call Transcript

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Provided by Quartr
April 11, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the Lakeland Industries Fiscal 20 24 4th 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 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 SEC filings. Our actual results, performance or achievements may differ materially from those expressed in or implied by such forward looking statements.

Operator

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, adjusted EBITDA margin, adjusted EBITDA excluding FX, adjusted EBITDA excluding FX margin and gross margins excluding inventory adjustments. 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.

Operator

At this time, I would like to introduce you to your host for this call, Lakeland Industries' Acting President and Chief Executive Officer and Executive Chairman, Jim Jenkins. Mr. Jenkins, the floor is yours.

Speaker 1

Thank you, operator. Good morning, and thank you all for joining us for our Q4 fiscal 2024 earnings call. First, I would like to start by thanking customers and distributor partners around the world for trusting us with your lives and safety. Our mission at Lakeland is to protect the world's workers, first responders and communities by providing quality protective solutions for the most critical situations. Our customers are heroes and we never take that trust for granted.

Speaker 1

I also want to thank our Lakeland team members across the company for their continued commitment and enthusiasm as we further delivered on our strategic initiatives this quarter. Our fiscal 4th quarter and our activities since January 31st have been very exciting and eventful as we continue to execute our previously communicated strategies and position Lakeland for profitable growth into the future. And I appreciate all the hard work put in by our dedicated team. We will talk more about those results and initiatives during this call. Our fiscal year 2024 was a good year for Lakeland, but also a year of great change.

Speaker 1

We are excited about the progress we are making and the work that lies ahead as we take Lakeland to new heights. Before beginning my comments about the business, I'd like to provide a brief update on our ongoing CEO search. Our Board has been methodical and deliberate in its vetting and selection process for a leader who will continue to drive our business strategy and culture. Lakeland has a solid foundation in place with an exciting runway for growth and the Board and I expect to be in a position to make an announcement in our 2nd fiscal quarter. As we discussed in our previous call, our team is doing an excellent job of executing our strategic plan of creating high performance culture driven by our corporate values.

Speaker 1

We are investing resources in high growth geographies and product segments, including building a premier global firebrand through product and marketing enhancements. We are also working to drive profitable growth in our other strategic product lines through product development, strategic pricing, channel diversification and operations optimization. Finally, as we will discuss more, we are acquiring companies that improve Lakeland's competitive advantage in focused markets. On that front, we took a significant leap forward with the completion of our Pacific Helmets acquisition, which closed in Q4 and Jolly Scarpet Boots, which closed in early February. We also recently announced the signing of an agreement to acquire LHD Group of Germany's fire service business, which we expect to close in late May 2024.

Speaker 1

Along with our Pacific Helmets acquisition, the Jolly acquisition completes Lakeland's head to toe fire product offering strengthens our geographic diversity and presents exciting cross selling opportunities with global certifications across Lakeland's existing sales and distribution channels. Dalia Scarpa manufactures and sells a premium foods product line with a global reputation for safety and design and innovation and we are excited to add their products to the Lakeland family. LHD's fire and rescue offerings give us another premium product portfolio for fire services that complements our Eagle technical products and new Pacific and Jolly offerings. Additionally, the LHD Care service offerings provide us with attractive recurring revenue streams and gross margins that Lakeland will work to leverage and expand. These acquisitions reflect our commitment to executing and accelerating the pace of small, strategic and quick M and A strategy, SSQ.

Speaker 1

We still have a very attractive SSQ acquisitions pipeline and we continue to search for opportunities that further position Lakeland execute our broad growth strategies. We expect to continue investing strategically to broaden and diversify Lakeland's range of products and end markets. I trust everyone has had the opportunity to review the press release and Q4 and full year earnings deck we published last evening. I encourage you to follow along in the earnings presentation as Roger and I review our results. Looking at our Q4 and full year results, our net sales for the Q4 of fiscal 2024 increased by 7.7% to $31,200,000 compared to $29,000,000 in the previous year.

Speaker 1

For the full fiscal year ended January 31, 2024, Lakeland delivered solid revenue growth of $11,800,000 or 10.5% compared to last year, despite a 44% decrease in our Asia business during the year and a weaker than expected Q4. We are very pleased with the growth in our U. S. And Latin American operations this fiscal year as these important geographies grew 13% 49% year over year. Our fire service business continues to deepen and broaden having grown over 80% versus last fiscal year driven by our strategic acquisitions, superior lead times from our manufacturing pipeline and onboarding successes with new distributors.

Speaker 1

Our Eagle technical products business also had a very good year with growth of over 103% since being acquired by Labeland. In terms of profitability, our 4th quarter gross margin came in at 44.6%, excluding the effect of a one time charge for inventory rightsizing and our adjusted EBITDA $3,400,000 excluding the negative impact of foreign exchange losses, both of which Roger will discuss in more detail later. Adjusted for the impact of negative FX in the quarter, our adjusted EBITDA would have been approximately 11% versus 6.7% last year. Our gross margins and adjusted EBITDA for the quarter benefited from the improving sales mix of our higher value strategic products and improvements in our logistics and shipping operations. For the full fiscal year 2024, our revenue increased by almost $12,000,000 or 10.5% against last year.

Speaker 1

This includes an 80% year over year growth in our fire services business, dollars 8,300,000 or 7.4 percent of our fiscal 2024 growth fiscal year 2024 growth came from our strategic acquisitions, while our organic business grew by $3,600,000 or 3.2%. This despite a 44% year over year decline in our Asia business. As I mentioned previously, our Latin American business has also experienced significant growth, up 49% year over year. We experienced foreign exchange volatility from a significant devaluation in the Argentinian peso this year, but we believe that the country is making improvements in its fiscal stability. We are very optimistic about Latin America where we continue to invest and take market share.

Speaker 1

From an earnings perspective, our fiscal year 2024 net income increased by 3,600,000 dollars to $5,400,000 resulting in net income per diluted share of $0.72 compared to $0.24 in the prior year, despite the previously mentioned inventory adjustment and FX loss. Our adjusted EBITDA excluding FX loss increased by over $6,000,000 to $15,700,000 in fiscal year 2024, resulting in an adjusted EBITDA margin excluding FX of 12.6%. In line with our growth trajectory and to further support our global portfolio of premium safety brands, we are gearing up to hire a new Senior Vice President of Sales this summer. Additionally, we anticipate expanding our integration team to drive operational excellence across the organization. Our commitment remains unwavering and I'm excited to see where this coming year takes us.

Speaker 1

From here, I'd like to pass it over to Roger to cover more of the financial results for you and provide an outlook for the coming year.

Speaker 2

Thanks, Jim, and hello, everyone. 1st, covering the current period, Lakeland delivered sales of $31,200,000 in the Q4 ended January 31, 2024. As noted in our earnings press release yesterday afternoon, we delivered solid year over year sales growth. Domestic sales were $12,700,000 or 40.6 percent of the total revenues, and international sales were $18,500,000 or 59.4 percent of total revenues. This compares with domestic sales of $11,800,000 or 40.8 percent of the total and international sales of $18,200,000 or 50 9.2 percent of the total in the Q4 of the previous year.

Speaker 2

While our geographic mix was relatively unchanged year over year, both our domestic and international sales grew even with the 44% year over year decline in Asia. In terms of product mix for the Q4, our fire service category continues to increase with an 18% year over year growth. Disposables continued to decrease as a percentage of Lakeland sales and represent 41% of total revenues compared to 48% in the year ago period. This is a result of growth in our fire services and high performance categories and the continued weakness in the disposables product line in Asia. As we discussed in the previous quarter, we do see excellent opportunities in both our disposables and woven product categories.

Speaker 2

We're having great success with our North American direct container program as well as with our oil and gas turnaround business, which continued into the 4th quarter. We are also very optimistic about our critical environment opportunities as our excellent sales team continues to identify and close new opportunities. Additionally, we are taking steps to bolster our North American industrial sales channels, which we will have more to discuss later in the year. As Jim mentioned, revenue for the full fiscal year 2024 increased by almost $12,000,000 or 10.5% versus last year. For the fiscal year, our fire service business is 21.3% of sales and disposables are 39.8%.

Speaker 2

On Slide 11 of our earnings presentation, we provide a comparison of our FY24 geographic and product line revenue versus FY2023, as well as a pro form a depiction of our geographic and product revenue assuming we had owned Pacific Helmets, Jolly Boots and LHD Fire and Rescue for the full year FY 2024. On a full year pro form a basis with these acquisitions, our fire service business increases to 42% of revenue, the largest category, followed by disposables at 29%, chemical at 13% and high performance at 12%. Our U. S. Revenue percentages go to 32% and Europe expands to 23%, led by Jolly and LHD.

Speaker 2

Reported gross profit was $11,200,000 for the Q4 of fiscal 2024, an increase of $300,000 or 3.2 percent compared to $10,900,000 in the Q4 of fiscal 2023. Our reported gross profit as a percentage of net sales was 35.9% for the Q4 of fiscal 2024 compared to 37.5% for the Q4 of last year. Versus the previous year, our gross profit margin was helped by 3.7 percentage point improvement in sales mix from higher value products and a 3.4% margin benefit and improvements from freight costs as we show on Slide 7. As Jim mentioned, gross profit performance in the current period was negatively impacted by one time excess and obsolete inventory adjustment of $2,700,000 Excluding the inventory adjustment, the 4th quarter gross profit would have been 44.6%. As we discussed in prior quarters, we were not pleased with the level of inventory the company was carrying coming into fiscal 2024.

Speaker 2

We took strong steps to reduce it. 1st, by implementing better planning and operational improvements led by our new Chief Operating Officer, Helena Ahn, and by working with sales on customer incentives for excess and reserved inventory. Those initiatives were quite successful during the fiscal year, particularly in Q3. During the Q4, we made a decision to clean up obsolete styles and non strategic products, resulting in a $2,700,000 one time charge for inventory rightsizing. We believe our inventory position going into fiscal year 2025 is much more aligned with the strategic focus of our business.

Speaker 2

As a reminder, fire services products are made to order, which is positive for our inventory and working capital positions. Lakeland reported an operating loss of $3,300,000 for the fiscal Q4 of 2024 compared to an operating profit of $100,000 for the fiscal Q4 of fiscal 2023. The main drivers for the difference between the two periods were the previously mentioned $2,700,000 onetime inventory adjustment and a $1,700,000 negative impact on operating expenses caused by the currency fluctuations, primarily the devaluation of the Argentine peso. Additionally, higher SG and A costs, including non recurring acquisition, severance and restructuring costs, higher selling expenses from sales growth, acquired company operating expenses and higher bonus expenses negatively affected SG and A and operating profit in the 4th quarter. Operating margins were minus 10.6% for the 4th quarter of fiscal 2020 24 compared to 0.3% for the Q4 of fiscal 2023.

Speaker 2

Excluding the negative impacts of the inventory adjustment, foreign exchange, severance and acquisition expenses, our operating profit would have been $2,300,000 or 7.5 percent operating margin for the quarter. The company reported a net loss of $1,000,000 or $0.13 per basic share and $0.13 per diluted share, compared to net income of $200,000 or $0.02 per basic and diluted share last year. Net income was positively impacted by a $3,800,000 gain from the sale of our Canada warehouse in Q4 of 2024 and negatively impacted by an increased tax expense for the quarter, primarily driven by international jurisdictions, including the sale of our Canadian warehouse, in addition to the previously discussed inventory adjustment and FX losses. Adjusted EBITDA excluding FX losses for the Q4 of fiscal 2024 was $3,400,000 or a margin of 11% compared to $1,900,000 for the Q4 of fiscal 2023. Foreign currency losses of $1,700,000 negatively impacted adjusted EBITDA, resulting in an as reported adjusted EBITDA of $1,800,000 As shown on Slide 7, our adjusted EBITDA for the quarter benefited from improvements in our higher value product sales mix and lower freight expense, partially offset by higher selling expenses related to sales growth and acquired entity OpEx, higher professional fees and higher bonus expense, in addition to the previously mentioned foreign exchange impact.

Speaker 2

As we show on Slides 89, for the full year fiscal 2024, Lakeland's adjusted EBITDA, excluding FX, of $15,700,000 is an increase of 64% versus FY2023 adjusted EBITDA of $10,700,000 Full year FX fluctuations, primarily from the Argentine peso reduced FY 2024 adjusted EBITDA by $3,700,000 while sales mix and improved freight and logistics bolstered adjusted EBITDA versus last year. Now turning to the balance sheet. Lakeland ended the year with cash and cash equivalents of approximately $25,200,000 compared to our prior year ended cash balance of 24.6 $1,000,000 Our focus on working capital improvements resulted in $3,200,000 of cash flow from operations during the 4th quarter, $2,800,000 of which was driven by accelerated reduction of raw and finished goods inventory. In FY 'twenty four, we produced positive operating cash flow of $10,900,000 led by decreases in inventory of $7,700,000 to a level of $51,300,000 of inventory at January 31, 2024, along with improved gross margins. Our laser focus on cash further strengthens the company's financial position, particularly our robust balance sheet and cash position, which we believe will allow us to continue pursuing organic and inorganic growth opportunities.

Speaker 2

At January 31, 2024, the company had $1,000,000 of debt outstanding at a foreign subsidiary. As we mentioned in our press release in early February, we drew down a portion of our revolving line of credit in conjunction with the closing of our acquisition of Jolly Scarping. In addition, on March 28, 2024, we completed an amendment to our existing revolver to extend the facility for 5 years and to expand our line of credit availability to $40,000,000 up from $25,000,000 previously with improved terms. Capital expenditures for the 3 months ended January 31, 2024 were $600,000 $2,100,000 for the fiscal year 2024. We expect FY 'twenty five capital expenditures to be approximately $3,000,000 as we develop additional in house fire service manufacturing capacity and replace existing equipment in the normal course of operations.

Speaker 2

Monterey expansion, which we discussed last quarter, remains on pause as we continue to assess weather related damage to our leased building. Finally, I'm very pleased to report that we continue making significant enhancements in the skill set and capabilities of our global finance and accounting teams, and we will continue to invest in our global finance and IT systems. This becomes even more important as we continue to expand globally. I'm particularly happy to report that we have made significant improvements in our global control environment and we were able to quickly remediate and remove the controlled material weakness that was identified at the end of fiscal 2023. Looking ahead to fiscal 2025, we are very pleased that for the first time Lakeland is providing forward looking guidance for our fiscal 2025 fiscal year.

Speaker 2

Please note that these expectations include the recently announced Jolly Scarp Ape and Pacific Elements acquisitions that do not include the LHD Fire Business, which we expect to close in late May 2024. We are becoming more confident in our global sales platforms and earnings ability, and we see FY 2025 revenue in the range of 140,000,000 dollars to $150,000,000 Additionally, we expect FY 2025 adjusted EBITDA, excluding FX, to be in the range of $16,800,000 to $18,500,000 We expect to update these expectations once we close and as fiscal 2025 progresses. With that overview, I'd like to turn the call back over to Jim before we begin taking questions. Thank you, Roger.

Speaker 1

Let me wrap up by taking a few minutes to talk about our ongoing strategy to emphasize the opportunities we see for our business. Our value proposition continues to be strong and unique and we believe it will resonate in the market. We also believe our growing portfolio of product offerings in the fire space, which will soon offer total care complementary service with our acquisition of LHD, coupled with our growing ability to effectively leverage our other brands in areas of the world like Latin America, where we once had little presence, should help drive more consistent performance over the long term. But we think there's a real opportunity to get even better and to take more market share. We also see an opportunity on the systems side, which is being addressed with a concentrated effort over the next couple of years to upgrade our systems and software and to drive technology as a competitive advantage.

Speaker 1

This is a longer term play. As I said on our last call, we are still in the very early innings of a 9 inning game. Over time, we expect these investments to drive more productivity and efficiency. While it will not happen overnight, our confidence is high that we will see the anticipated mid to longer term productivity improvements and associated EBITDA margin expansion. From an acquisition strategy perspective, the fire market continues to be fragmented and acquisitions both making them and driving organic growth after the acquisition is completed will be an important element of our growth strategy.

Speaker 1

Our acquisition plan is supported by healthy cash flow. We will make concerted efforts to expand our integration programs as we add expertise to effectively consolidate our growing fire services offerings. Our acquisition plan is both disciplined and strategic and we believe we are the only company in our space actively acquiring with the end goal of comprehensive integration. We want to continue focusing on the smaller companies as we believe the integration process to be less disruptive as exhibited by our success this year with Eagle. We see us replicating the Eagle model with Pacific Helmet, Jolly and LHD.

Speaker 1

That means we will drive to execute the sales and cost synergies from the acquisitions we make while maintaining the brand value and key contributors from the companies we acquire. We believe that is unique in the market. I'll conclude by saying that the pipelines associated with both our organic and acquisitive growth are very strong and we remain confident in our direction and believe we will continue to be well positioned to capitalize on future growth opportunities. We also expect to be able to continue to generate positive short term results simultaneously to better position the company for the longer term. With that, we will now open the call for questions.

Speaker 1

Operator?

Operator

Certainly. At this time, we will be conducting a question and answer session. Your first question for today is from Gerry Sweeney with Roth MKM.

Speaker 3

Good morning, guys. This is Brandon Rogers on for Gerry Sweeney. Thanks for taking my question.

Speaker 2

Hey, good morning, Brandon.

Speaker 3

How's it going? So I understand that there's a company wide focus on growing the service aspects for both Fire and the core business as well. How much of the current business has a service component? And then will the service component growth come organically or inorganically or both?

Speaker 1

So on the service end, this is our first foray into the service throughout the LHD acquisition. So we do not have that offering, but we're very excited about it. We've got a team sort of exploring whether that's something we might greenfield in other areas of the world. But right now, I think we're going to spend a good chunk of this year learning from LHD and how their processes work through that service

Speaker 2

component. And Brandon, it's Roger. I'd just add that there's something that we have talked about. We've been looking for an opportunity and the fact that LHC has such a strong, what they call LHC Care Program in a number of countries. I think that gives us a leg up and also we'll have more information following the acquisition, but the gross margins for that business, as you can expect, are well above company averages.

Speaker 3

Awesome. Thank you for that. And then another one, can you provide just some of the details around like the value proposition, the important benefits of providing the head to toe fire product offering?

Speaker 1

Well, when you think about it, a lot of these are tenders, right? So they've got in various countries certain opportunities to win the entire bid and having that head to toe offering rather than having to find a partner to join in the bid, we believe provide us with a significant competitive advantage.

Speaker 2

Yes. And we mentioned this at your conference recently. I mean, we've got recent very recent anecdotal evidence of that. We had a significant bid in LatAm going up against much larger fire turnout near providers and the fact that we were able to come to the tender with the Pacific helmets and Jolly Boots resulted in us winning that tender, which was very exciting. Thank you.

Speaker 3

And then one more for me is just on FX. I know there was a FX had a much more significant impact this year compared to last year. And is that strictly due to the devaluation in the Argentinian peso or were there other aspects at play that had a material impact?

Speaker 2

Yes. So this is a great question. The FX that we called out was due almost exclusively to the Argentinean peso. So if you think about how FX impacts the global company and we are incredibly global at this point, It can go through the balance sheet translation through OCI. It can certainly affect the top line revenue number depending on one currency versus another.

Speaker 2

That's not what we're talking about here and that's just normal part of doing business. The Argentinian situation arises it's got a couple of distinct features. 1, it arises because of the current high inflation rate in Argentina being above 100%, U. S. GAAP requires us to carry that operating entity in the U.

Speaker 2

S. Dollar currency, not a local currency. What that results in is when we remeasure our assets, particularly cash and receivables, that currency impact flows through OpEx. So not only was it a headwind, it's a headwind and what I'd refer to as a bad place and that's OpEx. That said, we do see the situation improving there.

Speaker 2

There are steps being taken to get their physical house much more in order. We are comprehensively reevaluating and looking at all of our functional currency designations and we'll manage that as best we can. But the reason that we called that one out is, in addition to where it flows through OpEx, it was kind of compounded by the fact that there is unlike most currencies, there's nothing you could do about it to hedge it. It just was not hedgeable. That said, like Jim said, we're very bullish on that market.

Speaker 2

We are taking market share. It is profitable and it's growing and we are going to continue to invest in the Latin American market.

Speaker 3

Thanks, you both. Appreciate you taking the questions. I can take the rest offline.

Operator

At this time, there are no other questions in the queue.

Speaker 1

Thank you, operator. Thank you all for joining us on today's call. We appreciate your continued interest in Lakeland. We look forward to building on the strong momentum Lakeland has and sharing our successes with you in fiscal 2025. Have a great day.

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