Q3 2024 Lakeland Industries Inc Earnings Call
Participants
Jim Jenkins; Executive Chairman; Lakeland Industries, Inc. and Subsidiaries
Roger Shannon; CFO; Lakeland Industries, Inc. and Subsidiaries
Gerry Sweeney; Analyst; ROTH MKM Partners, LLC
Presentation
Operator
Good day and welcome to the Lakeland Industries Fiscal 2024 Third Quarter Financial Results Conference Call. (Operator Instructions)
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'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 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 US 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.
Jim Jenkins
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 for their commitment to delivering our strategic initiatives during the quarter. These efforts have helped drive revenue growth in key strategic markets, execute a continued shift in our revenue profile towards higher value products and carry out our small strategic and quick or SSQ acquisition strategy. As we enter the next chapter for Lakeland. I know 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 has following a very thorough vetting and selection process as engaging as executive recruiter that preliminarily identified a few candidates were 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. Lincoln has a solid foundation in place with exciting runway for growth in 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 products categories. Our Fire Service business continues to expand driven by our superior lead times versus our competitors, innovative designs from Elite, the Eagle team and onboarding successes with new distributors as expected, we also continue to see strong demand from oil and gas turnaround activity, which, as we discussed in previous quarters, is having extended 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 Lincoln is building in our high-value product lines, and our goal to increase penetration in high-value markets is producing positive results. We believe our recently announced Pacific helmets acquisition will further enhance our Fire Service growth.
In terms of profitability, our third quarter gross margins remained strong at 42.2%. And importantly, our adjusted EBITDA grew by over $300,000 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 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 US and Latin America as well as our media markets. To a lesser extent. We also were encouraged to see increases in our India and Australian 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 Lincoln gaining traction as a preferred supplier in 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 in enabling our favorable lead times.
Finally, our Latin American business continued its exceptionally strong performance from Europe 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 continued to perform below expectations as a result of ongoing macro economic weakness and an 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's high value product portfolio.
Last week, we were pleased to announce the acquisition of Pacific helmets Pacific is a highly regarded global brand with a well-established reputation for quality and innovative design and manufacturing in the growing first responder safety helmet market. The Company has a broad range of helmet models, styles and certifications and have demonstrated the ability to develop new products and sell successfully around the world.
The acquisition of Pacific is a significant milestone in our efforts to build Lakeland as a premier global fire brand. As it enhances our product portfolio, it strengthens our ability to deliver exceptional fire turn-up protection offerings to our customers worldwide Pacific has one of the largest ranges of helmets, helmet 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, like Lakeland's Pacific owns its own manufacturing facilities and has an in-house R&D team that enables it to customize and 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. They already sell in 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, in which Lakeland already has a strong presence. We expect this acquisition to be immediately accretive to Vacon's bottom line results and are excited about the organic and cross-selling opportunities going forward. I'm 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 to Lakeland's 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 SSQ 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 to integrate E-Co Products into Lakeland's geographic markets as well as to accelerate the sales of even gloves, in particular, blocking hoods, Eagles, fire gloves, in particular, particle blocking hoods are progressing through the certification process and Lincoln has leveraged Eagle's in-house designers in 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 am also encouraged by the exciting runway for growth this company has Lakeland is focused on solidifying our foundational business and investing our resources at high-growth geographies, which will include platform enhancements and the optimization of our operating and sales channels. Over the longer term, we are committed to building out a premier global fire brand. As I previously mentioned, this will include the release of new and innovative products additions to our global sales force and a renewed marketing focus. All of these efforts will benefit from the addition of Pacific to our existing platform.
Finally, Lincoln Lincoln is committed to expanding our products and capabilities through our small strategic and quick acquisition strategy. Continued M&A will help Lakeland's already diverse line of products, bring premier global brands onto the Lincoln platform and drive strong operating leverage through cross selling on Lincoln's vast distribution and sales network.
I'll now pass the call to Roger to provide an overview of our financial results. Roger?
Roger Shannon
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 that align with the explanation now present on our website at www.micron.com. likely delivered sales of $31.7 million in the third quarter ended October 31, 2020, for domestic sales were $15.1 million or 47.6% of total revenue 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 50.7% of the total in the third quarter of fiscal 2023.
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 continued to decrease as a percentage of life and sales 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 are 39%.
From a segment reporting standpoint, Lakeland saw strong sales growth in our US, European 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 US were $15.1 million or 48% of total revenue, an increase of $1.1 million over the year ago period.
Latin American sales grew $1.6 million to $4.2 million in the current 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 in our Fire Service business as a result of the timing of deliveries on large tenders. We have begun work closely tracking our trailing 12 months 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, including sales of previously reserved excess inventory, partially offset by an adjustment for inter-company profit in ending inventory. Our gross margin percentage was affected by an adjustment for inter-company profit in ending inventory and amortization of previous year, adjustments of excess inventory for partially offset by improved product mix, lower freight costs, manufacturing cost improvements and a reduction of total inventory, including fully and partially reserved inventory.
Lakeland reported operating profit of $3.6 million in Q3 '24 as compared to $2.1 million in Q3 of last year. As result, operating margins were 11.4% in the third quarter, up from 7.6% for the third quarter of last year. Our operating profit benefited from increases in sales and lower operating expenses. During the third quarter, 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 $700,000, primarily 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. Lakeland delivered net income of $2.6 million or $0.35 per basic share and $0.34 per diluted share during the quarter. This compares to net income of $1.4 million or $0.19 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 '23. Adjusted EBITDA performance in the quarter was driven by higher sales, partially offset by the impact of the previously mentioned negative in FX impacts in operating expenses. Our adjusted EBITDA margin for Q3 of fiscal 2024 was 10.4% compared to the same number in the year ago period adjusted for the impact of negative FX in the quarter, our adjusted EBITDA would have been approximately 14.2% in the current quarter. On a trailing 12 month basis, Lakeland's adjusted EBITDA of $12.1 million is an increase of 21.2% versus the TTM adjusted EBITDA of $9.9 million as of October 31 of 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 decrease in inventory. Offsetting the operating cash flows were $3 million in investing activities, split between capital equipment and additional investment in body tracts financing activities for the fiscal year to date, primarily quarterly dividends, UK bank for payments 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 yuan in Argentine pesos. The Company continued to have no debt at the end of the quarter and has up to $25 million available from bank credit facility. Capital expenditures for the three months ended October 31, 2023 were $400,000 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 operation. The Monterey expansion, which we discussed last quarter remains on pause as we continue to assess weather related damage to our leased buildings. Inventories declined $3 million quarter over quarter to $54.4 million from $57.4 million at the end of the second quarter of fiscal '24. We were pleased to see the acceleration of inventory reduction in the quarter, and this remains a top operating objective. During the quarter, we utilized various sales and marketing programs as well as price deviations, unreserved 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 Lakeland's financial profile versus the acquisition of New Zealand-based Pacific elements for $8.5 million, 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 balance. We expect Pacific to add $7 million to $8 million of sales revenue to Lakeland in our next fiscal year and for the company to be immediately accretive to Lakeland's bottom line results.
Next is the sale of the Company's Brantford, Ontario warehouse. On November 27, 2023, the company sold its office and warehouse facility in Brantford, 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.
And finally, on November 30, 2023, we entered into Amendment Number three to the loan agreement with Bank of America in this third amendment, the lender consented to our acquisition of the equity interest of Pacific and to permit additional indebtedness to be made available at Pacific Bank, its existing bank relationships. The amendment also waived Lakeland's 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 Q&A.
Question and Answer Session
Operator
(Operator Instructions) Gerry Sweeney, Roth Capital.
Gerry Sweeney
Good morning, Jim, how are you guys doing?
Jim Jenkins
Great.
Gerry Sweeney
Just a couple of quick questions. Obviously, fire service is doing quite well and there's a lot of talk about getting into distributors. Just curious, it's the fire or the fire gear products in all your distributors that you currently are want to be in? Or is there an opportunity to get into more meaning if 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, expanding float, but I think it's a combination.
Jim Jenkins
Yeah, I think it's a combination of both. At this point, Gerry. In particular with our North American sales team, they have done a tremendous job, some of developing additional 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 give I give kudos to our North American sales team, the fire sales in 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 out bidding bidding opportunities throughout the world. And certainly with Pacific helmet, we'll we'll see the beneficiary of some very strong on APAC, some distributor relationships that they have. And then you sort of do the cross-selling with that. And and I get really excited about it because there's 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've got that, that that service and product offering in-house.
Gerry Sweeney
Got it. And I don't want to put words in your mouth, but sort of what I'm looking at it is distribution growth has been great. It sounds like there's still opportunities there, but you take your fire turnout gear. Our Eagle Pacific comment there is that you can layer on additional cross-selling opportunities and maybe even get into additional distributors in different regions of the world. So still some low hanging fruit maybe on the standard meters?
Jim Jenkins
Look, I remain yes, I think that you're not putting words in our mouth. I think that's right on. And I think some weeks, we feel we're in the early stages of growing out this opportunity. And given that certain competitive advantages we have certainly on our sort of captive manufacturing, the additional product lines that we offer. Yes, this is a in a nine-inning game. I think we're at about the second inning.
Gerry Sweeney
Okay. That's very helpful. And then obviously maybe acquisitions right, totally get specific comments to absolutely make 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 just add this cross-selling opportunity.
Jim Jenkins
Yeah, I mean, we see we see opportunities in industrials and in fire, being fire is where we've sort of found the low hanging fruit. We'd love to have a route. We want to round out our fire offering with other possible products so certainly, I'm certainly interested in that. And it's true in terms of the pipeline, I mean what it can mean for anybody's benefit on the call. My background is I really have been moving on a strategic plan for Transcat in 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? You know, Pacific 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, going to be better than five. So certainly well, is that I heard that right.
Gerry Sweeney
I was going to say Transcat do absolutely expanded the addressable market right through the asset management side. So that's sort of calculating here.
Jim Jenkins
Yeah.
Gerry Sweeney
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, the sales for disposables, but some need. And I'm just curious, it's less important, there's less differentiation, et cetera. But I'm wondering where that goes longer term? And then maybe just talk about where inventory maybe of right 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 --
Jim Jenkins
So when this is interest, I should not make myself a fool, I'm going to have Roger answer that.
Roger Shannon
I'd point out that a bit. But 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. Of course, I joined in February, February 1 of this year, kind of looking at our strategy, strategic direction, how we compete and where we think we have competitive advantages and a question. We have talked about the benefits that in-house manufacturing brings. We don't want to give a message at all that we're minimizing disposables. Disposables even though it's down to 38% or so of the total revenue. That's because other revenue is growing. In addition, to course, the weakness in China that we've seen, but as we think about disposables, we don't want to give the message or the perspective. The disposables are not strategic or there are some places where it does not make sense to compete in disposables where we don't think we have a 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 use data 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 a couple of things specifically that come to mind and we talked about this a bit last quarter is the of the clean room applications clean room, if not just your basic run-of-the-mill low level disposable item. We see opportunities in quick in semiconductor, the continued in health care and the Lakeland brand and the product. There's very good. The other we alluded to this a bit in our prepared remarks is our larger distributor direct to customer customer container program, and we saw an uptick in that this quarter. Our again, our large customer sales force is doing a great job of what that enables us to do. It's 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 and it 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 gets shipped to us. So while while we see that the most growth, the most accelerated growth in growth percentages in fire and especially from an M&A perspective in fire servicing and also industrial disposables as it relates to new things like critical environment, clean room and direct-to-customer container programs is considered highly strategic for us.
Gerry Sweeney
Got it. Understood. I didn't mean disposable go all the way, but that's a great overview.
Jim Jenkins
I'd just add, it's kind of hard to -- given the question, it's hard to say, You know what you think the percentage is going to be generally that gets down to when you see China recovering on one hand and the other hand, what the acquisitions look like because the acquisitions are going to be typically in the fire or the higher value industrial so that that revenue our channel, we just accept expect it to grow faster.
Gerry Sweeney
Understood. Yeah. Sorry, I didn't mean imply that it was going to absolutely go away, but I understand what you're saying. There's certainly --
Roger Shannon
We didn't take it that way. It's just you gave us a great opportunity to kind of make it clear or how we think about the same.
Jim Jenkins
And in a lot of ways it's math, right? A lot of ways. It's math here. You're right. I mean that as we continue to grow the higher end higher value. And we continue that we move can be that we don't we don't abandon in any way, shape or form the disposable market, but it just as a percentage of our portfolio, we just sort of naturally get a little bit smaller.
Gerry Sweeney
Got it, which I don't think you just address what and the little housekeeping more for modeling, but where do you want to get inventory levels down? I think all things being equal, right? You're going to grow, continue to grow, et cetera. But just curious as to what level hedge?
Roger Shannon
Gerry, I'll take that one as well. And again, it's what we'll need to kind of keep in mind is the caveat is that we we are starting to do the purchase accounting on Pacific, we will, of course, be bringing that. And so that will affect the offset inventory balance like 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 raw materials and work-in-process that said we would have been very pleased at how we were able to reduce, give you the color to that. What are roughly circle that is the $58 million of inventory down to the [$54 million] level. As I think about that baseline, we would like to get another $2 million to $4 million out of that.
Gerry Sweeney
Okay, so you're pretty close.
Roger Shannon
Yeah. So now we we still have it's a call, we still have weekly. 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 during the quarter.
Gerry Sweeney
Got it. I appreciate.
Jim Jenkins
I'll just add -- I'll editorialize on that just briefly, and that's really a testament to Roger and his team, our COO, Helena An and her team, they really have worked together on it and our sales team on forecasting 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 kind of.
Gerry Sweeney
Got it. I appreciate it, guys. Thanks for taking my call.
Jim Jenkins
Thanks, Gerry.
Roger Shannon
Appreciate it.
Operator
We have reached the end of the question and answer session, and I will now turn the call over to Jim for closing remarks, but thank you, operator, and thank you all for joining us on today's call.
Jim Jenkins
We appreciate your continued interest in legal and the global growth opportunities 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. Have a great day.
Operator
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
