Lakeland Industries - Earnings Call - Q1 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Lakeland Industries Report on Fiscal twenty twenty First Quarter Financial Results and Conference Call. At this time, it's my pleasure to turn the floor over to Mr. Christopher J. Ryan Griffin. Sir, the floor is yours.

Speaker 1

Thank you, and good afternoon to you all, and thank you for joining us on our fiscal twenty twenty first quarter financial results conference call. I am joined here today with Lakeland's Chief Operating Officer, Charles Roberson. We are first going to discuss the status of operations and our financial results. Then the call will be opened up so that we may respond to your questions. Now on to the formal remarks.

Our first quarter fiscal twenty twenty results show meaningful progress from the fourth quarter of last year, while setting the stage for important business decisions and continued execution towards achieving our growth objectives. Most notable for quarterly performance sequentially, we did deliver an improvement in gross margin, a reduction in operating expenses, lower operating and net losses and a return to adjusted EBITDA profitability. The company continues to work toward the completion of the enterprise resource planning solution or ERP restructuring and business development on a global scale to support our ERP installation, which largely commenced last year. With the sequential performance measures providing perspective on the headway we have been making, we believe we are now past the most challenging aspects of our initiatives, although work remains to be done to fully capitalize on the many opportunities available in the markets in which we operate. A critical component of our plan has included the implementation of an ERP.

Today, the ERP cost us 900,000.0 for the technology suite licensing and installation. There was an estimated 1,300,000.0 in additional non recurring expenses in fiscal twenty nineteen relating to the installation and an estimated $100,000 in first quarter of the fiscal twenty twenty this quarter past quarter. This does not include the business disruption, which is very difficult to quantify. But I can say that we believe it could be a material impact, including the resignation of our chief financial officer. We expect the domestic installation to be completed by the 2019 with installation in our foreign subsidiaries to begin in the 2020, beginning with our Mexico and Canada facilities.

Thanks to our deep senior management bench, we have been able to drive forward in the face of these challenges. In the absence of the CFO on today's call, here are some key financial performance data for the first quarter. Net sales for Q1 FY20 were $24,700,000 compared with $24,300,000 in quarter one FY19 or last year and $25,000,000 in Q4 FY19 or last quarter. Gross profit for Q1 FY20 was $7,500,000 compared with $9,500,000 in Q1 FY twenty nineteen or last year and $6,900,000 in Q4 FY twenty nineteen or last quarter. Since we are required to report all of our sales and earnings in USD, it should be no surprise that both these line items were hurt when translated back to USD from the approximately 10 material foreign currencies we deal in.

Gross margin as a percentage of net sales in Q1 FY20 was 30.6% compared to 30.9% in Q1 FY19 last year and 27.7% in Q4 FY 'nineteen or last quarter. Operating expenses of $7,900,000 in Q1 FY 'twenty, up from $7,100,000 in Q1 FY 'nineteen last year, but down from 8,400,000.0 in q four f y nineteen or just last quarter. Net loss of 465,000 or $06 a share per basic share for the Q1 FY 'twenty quarter compared with net income of $1,900,000 or $0.23 per basic share in Q1 FY 'nineteen last year and net loss of 1,900,000 or $0.24 per share in Q4 FY19 or just last quarter. Adjusted EBITDA of $242,000 as compared to $2,100,000 in Q1 FY19 and a loss of $932,000 in the last quarter. So what's really obvious here is that we picked up from last quarter and the first quarter.

We are making some progress here. Similar to the fourth quarter, the ERP system in The U. S. Led to lower domestic sales and gross margins due to order processing issues and a significant expense incurred to ensure to the extent possible that our customers receive their shipments on time. This was particularly in the first quarter.

The fact that our gross margins increased for the fourth quarter amid these challenges as well as pricing pressures in select markets and other macroeconomic concerns demonstrates the potential for revenue growth and profitability expansion once conditions normalize. On our year end conference call, we mentioned that our investments in product development, quality control and positioning in the market are paying off as evidenced by fiscal twenty twenty, starting with a global order backlog of $10,500,000 with U. S. Backlog going from $5,500,000 at the beginning of the fourth quarter and ending at $4,000,000 ending the year at $4,000,000 Our backlog at the end of first quarter twenty twenty was $8,900,000 of which $4,000,000 was from The U. S.

We made certain improvements here, If for no other reason, then our customers needed it. But as I discussed herein, it was it was at the expense of margins. The other critical change to our business has been the ramping up of our Vietnam manufacturing and associated operations, along with our new facility in India. We have been investing in these facilities for more than a year while adding in country sales and warehousing capabilities. Capital expenditures for equipment peaked last year, so we are now spending less in 2020.

CapEx for fiscal twenty twenty first quarter was $200,000 compared with approximately $300,000 in fiscal twenty nineteen period. Capital expenditures for all of fiscal twenty nineteen were $3,100,000 and are expected to decline to approximately $2,000,000 for fiscal twenty twenty. With the majority of spending in the current year allocated towards the phased global rollout of ERP system and additional manufacturing capacity in both Vietnam and India. Staffing in Vietnam has been elevated to near capacity, and we are training the staff while transitioning some of the production headcount from China to the new facility. Manufacturing staff in Vietnam and India combined for 819 employees, while our manufacturing staff in China is now 542 employees, down from five sixty a year ago.

Following the training regimens to yield more efficient output over the next few quarters, we expect a much lower cost and tariff remanufacturing platform in Vietnam to further bolster our financial performance. Sales activities within Vietnam and India are also gaining traction. Our efforts to strengthen our global marketing channels and manufacturing capabilities and improve our overall financial performance are moving forward. At the same time, by the end of Q1 fiscal twenty twenty, we increased our cash position by 1,500,000.0 from the beginning of the of the fiscal year and modestly reduced the little debt that remains on our balance sheet. We now have under 1,300,000.0 in debt.

Our cash position now at 14,300,000.0 has increased for two consecutive quarters even though we have elevated our inventories to $46,800,000 at the end of Q1 from $42,400,000 at the start of the year. Approximately 75% of this increase was in work in process and raw materials as we seek to continue delivery improvements to our customers, scale up our high value utility product line and support our new manufacturing facility. Our cash flow and profitability should also be assisted by efficiency improvements in our new manufacturing facilities in Vietnam and India and the corresponding alignment of cost as capacity is allocated accordingly. Depending on product mix, our run rate of revenue from a normalized and efficient manufacturing standpoint could be in the range of 130,000,000 to $150,000,000 today, up from our current Q1 annualized revenues of about $115,000,000 With our share price at the current levels and our outlook for improving cash levels, we will certainly be looking closely at our stock repurchase program. This program was approved on July 1936, and to date, we spent $1,200,000 to acquire 105,648 shares, although no shares were purchased in the first quarter.

We are encouraged by the company's direction and progress. With a strategic advantage through diversified manufacturing operations in Argentina, China, India, Mexico, The US, and Vietnam that affords us and our customers significant flexibility in the uncertainty of the current international trade environment and sales of the 65 countries, we remain excited by our strong position in the market. As we move through fiscal twenty twenty and beyond, we look forward to capitalizing on the progress we have made and will continue to make in our efforts to drive sustainable improvements in longer term top line results as well as bottom line performance. That concludes my remarks. I will turn the call back to the operator to begin the Q and A.

Speaker 0

Thank you. And ladies and gentlemen, if you'd like to ask a question at this time, it is star one on your touch tone telephone. We'll take our first question from Dave King with Roth Capital. This is Andrew stepping on for Dave. I guess just first on the ERP system.

We're trying to quantify how much of that that might have weighed on the quarter. Do you have the dollar amount in cost of goods sold of the ERP impact? I'll turn that

Speaker 1

one over to Charlie who's also on the line and indicator where this is all going on. Trying to quantify that, Andrew, you know, as as we had in the written time or in the comments earlier, it's very, very difficult to to try to determine. We are we some of it's legacy issues, but if we had the best I can spitball that number is about 300,000.

Speaker 0

Okay. That's helpful. Thank you. And then I guess, maybe turning to the revenue side, how much do you think maybe the ERP implementation weighed on revenue? And how much of an impact do you think it might have in subsequent quarters?

And then I'll just follow-up sorry, just to follow on with that. How are you feeling about your ability to meet demand as well?

Speaker 1

Well, that's one of the things about the ERP is we've seen our revenues remain pretty consistent through all of the quarters and if we've even seen our backlogs grow, though in Q1, we did begin to pull those backlogs down. We still have a high backlog compared to what we are ordinarily used to seeing, and we're continuing to work to pull that number down. So I think we're benefiting from a good business environment. And manufacturing install is primarily in The U. S, so it is not impeding our manufacturing processes at our foreign subsidiaries.

So we're still able to service our customers. One of the other thing affecting revenues is a lot of the currencies we operate in were really pummeled this quarter. Mean, up until recently, the Mexican peso, the Chinese RMB, the British pound were really pummeled with favor rattling by certain people in this country.

Speaker 0

That's helpful. And then I guess just lastly for me. How are some of your oil and gas customers holding up given some of the recent weakness there? And then similarly, how's demand been out in China with some of the matter of concern we're seeing?

Speaker 1

China has held up fairly well for us. Right now, we've had weakness with select customers, one of whom decided to actually exit the protective clothing business. It was a significant customer. I think our experience with China's economy is not reflective of their economy as a whole. We're a little behind, but certainly not by as much as their economy is suffering right now.

That's the second part. What was the first part of your question?

Speaker 2

Hello?

Speaker 0

Gentlemen, gentlemen.

Speaker 1

I'm sorry. It was oil and gas. And right now, that has not impacted our backorders. We remain in a backordered situation in those markets.

Speaker 0

We'll go next to Mark Rosenkreis Wondering if could just kind of broadly speak to discuss a lot of the developments in India and Vietnam. I wonder if you could discuss the sourcing of your raw materials and maybe some of the labor costs you're seeing in those two countries and compare that to the current setup in China and just how you maybe see those expectations for those regions versus China going forward?

Speaker 1

Well, I'll interject here and Charlie can close-up. But this is the one place where these weakening foreign currencies do help us because we're buying a lot of our fabrics in China and some in India. To the extent that those currencies weaken that make our collection of raw materials much more cheaper, I mean, RMB has been hit pretty hard in the last two quarters. So that's the positive side of the currencies being weak. And if Charlie has anything more to say, I'll let him say it on that.

Yes. We as I mentioned earlier in the previous question, our backlogs remain high. So our plan all along with India, Vietnam and China was to open up Vietnam, use it as a bridge to India, which is a longer term play, and gradually draw down our capacities in China. Well, when you got a backlog like we have and barring any trade issues that may hold us otherwise, we are not drawing down China as quickly as we would have thought that we would. That's a positive.

It's working for us right now. We need the labor and we have it, and we're able to cover it. However, it is at a little bit higher cost. India, just the relative cost of our labor between these markets, India being the least expensive, so let's kind of taps the question in terms of India labor. If India is a one, then Vietnam per hour, it's about a factor of 1.5x, and we find it as a factor of 4x India.

So that gives you some idea of what our labor costs are like. And that's why we will see gradually our product shift to Vietnam and then to India. The one of the control controlling factors in the rate at which we can do that is, of course, raw material availability. Currently, Vietnam serves us very well because it's such a short sale and can be serviced from China. Right?

We have manufacturers now coming online in Vietnam at the lower end of our product lines, and we also have those growing and maturing or developing in India. And that's going to take place over time. Vietnam is first. India is going to follow, and we're prepared to just move that direction around Southeast Asia as that occurs. And especially in terms of the uncertainty of the current trade environment, that's something our customers are quite happy to see us prepared to do.

And I would also add to that. We buy a lot of fabrics in The United States from major manufacturers in The United States. They have all raised their prices significantly, okay? And we can usually pass on that amount or sometimes a little bit more when this occurs because these are the last remaining textile suppliers in The United States. So they usually have a virtual monopoly by the fact that they have patents on their fabrics.

They're very expensive, and we buy them in USD, so at least it don't affect us on a currency basis. But those prices are going up, so it shouldn't be too difficult to pass the increases on because, like said, these are sort of monopoly type fabrics.

Speaker 0

And then just shifting gears, you've mentioned in the past part of the issue with the ERP delays and challenges was the impact on the sales force and notably some of the new hires in the sales force being a little sluggish, maybe open up new clients or just developed markets when things weren't lined up at all in the back end. So, you kind of go through the ERP problems. Have you seen some returned activity on the initial front for some of the sales force ramp?

Speaker 1

That's correct, Charlie. Yeah. To answer that question, yes. The very worst of our delivery issues were in Q3 and Q4. We still have some legacy problems remaining because of planning issues and our lead times.

But think our sales force has held up very well through this, and they are they continue to move forward. They've been very good. I I would add, yes, the salesmen are probably in a holding pattern until they see better delivery. Okay.

Speaker 0

We'll go next to Pete McIrian with Raymond James.

Speaker 2

Good afternoon. Hey, just had a couple of questions. One would be, and forgive me if you've already mentioned it, but your clean room initiative or focus that you've mentioned in previous calls, I was just curious if you could touch on that, any progress you've made. And then also there's there's a handful of hotspots around the world that that I've only read about. One being this whole swine flu thing in China, and then I read a report just yesterday that the WHO mentioned that the Ebola thing could take another two years to get through.

Are you all receiving any sort of business from those hotspots? And or if you could just touch on the clean room thing, that'd be great. Appreciate it.

Speaker 1

Back to you, Charlie. Okay. With regard to our clean room business, we are seeing that is meeting our expectations for growth and actually pushing the upper edges of that. We're very pleased with the orders that we've seen there and with some of our chemotherapy products. So it's for the outbreaks of swine flu and Ebola and that kind of thing.

We we had some phone calls. So far, no orders. In the case of Ebola, it's it's in a place that is largely unserviceable even by medical staff, you know, because of revolution activity and that kind of thing that's going on there. So there's no consumption. But I think people are looking to find out what's available in case it winds up going into less contagious territory.

But I think that the vaccines are actually working pretty well there at this point. You know, if it goes two years, who knows? Because it's gonna mutate several times, and the vaccine will be figured into that mutation. On swine flu, we haven't seen anything yet.

Speaker 2

Gotcha. Thank you.

Speaker 0

Mr. Ryan, there are no further questions at this time. I'd like to turn

Speaker 1

the call back over to you for

Speaker 0

any additional or closing comments.

Speaker 1

Okay. Thanks, Tom. We appreciate your participation on Lakeland's fiscal twenty twenty first quarter financial results conference call. As we close out the first quarter of this fiscal year, we believe we are on track with the right mix of products and manufacturing presence around the world, financial health and a growing global team to capitalize on the opportunities ahead. We continue to be very well positioned for continued growth in sales, market share and profitability in fiscal twenty twenty, which we believe will deliver value for our shareholders.

Thank you for joining us today on today's conference call. Goodbye.

Speaker 0

Ladies and gentlemen, thank you. This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.