Lakeland Industries - Earnings Call - Q1 2022

Transcript

Speaker 0

Before we begin, parties are reminded that statements made during this call contain forward looking information within the meanings of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward looking statements are all statements other than statements of historical facts, which reflect management's expectations regarding future events and operating performance and speak only as of today, 06/09/2021. Forward looking statements are based on current assumptions and analysis made by the company in light of its experience and its perception of historical trends, current conditions, including business affairs pertaining to the COVID nineteen pandemic, expect future developments, and other factors that believes are appropriate under circumstances. These statements are subject to a number of assumptions, risks and uncertainties that are factored into the company's filings with the Securities and Exchange Commission, general economic and business conditions, the business opportunities that may be presented to you and pursued by the company, changes in law or regulations and other factors, many of which are beyond the control of the company. Listeners are cautioned that these statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in any forward looking statements.

All subsequent forward looking statements attributed to the company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements. At this time, I'd like to introduce to you your host for this call, Lakeland Industries' Chief Executive Officer, Charles B. Roberson. Mr. Roberson, the floor is yours.

Speaker 1

Thank you, and good afternoon. I'm joined here today by Lakeland's Chief Financial Officer, Alan Dillard. We appreciate you taking the time to join our fiscal twenty twenty two first quarter financial results conference call. After a tremendous fiscal twenty twenty one, the sustainability of our financial performance was on display as we delivered very strong results in the 2022 ended 04/30/2021. We're now beginning to see the impact of the improvements made to our business over the past year as COVID-nineteen demand subsides.

Business process improvements accelerated due to COVID-nineteen, and we believe that our first quarter fiscal year 'twenty two results demonstrate the durability and magnitude of these improvements. In fact, while there's no question that COVID-nineteen pandemic had a positive impact on our performance through the entirety of fiscal year 'twenty one and into the '2, we believe it has also largely masked the value we derive from the significant operational and process improvements we have made. Only now, in the second consecutive quarter of declining pandemic sales, does the significance of our improvements become apparent. Through my formal remarks on today's conference call, I'd like to provide some perspective on our progress and strategy for a post COVID business environment. Later, Alan will review our financial results for the quarter and related developments in more detail.

Prior to the onset of the global pandemic, we began a business transformation and put in place a five year growth plan that assumed successful implementation of our development plans. COVID-nineteen accelerated the pace of progress by approximately one year and in the process elevated our cash balance to over $60,000,000 today. We expect continued free cash flow generation for the foreseeable future, which factors in the elimination of all COVID-nineteen demand as early as the end of the present quarter. The critical elements of our plan include the strengthening of our leadership team, investing in capacity expansion and higher margin product development and focusing on profit enhancement initiatives led by a new data centric approach to planning and supporting our addressable markets. During the past several quarters, we made additions to our leadership team that allow us to maximize our investments, grow organically at rates in excess of global industry rates and now to grow inorganically as well.

Most recently, we added our first Vice President for Corporate Development. This move is intended for Lakeland to put its sizable cash position to work increasing shareholder value. The actionable elements of our plan are to utilize our manufacturing operations and data centric culture as the cornerstone of our ongoing success as we seek new market opportunities and synergies in our corporate development opportunities. Lakeland has always owned its manufacturing operations, and in this way, we're fairly unique in the PPE industry. Manufacturing is one of our critical differentiators since no other player in the industry possesses similar capabilities on a global scale.

Sure, we can make masks. It's easy to do that. And there are virtually no barriers to entry. As we saw last year, even automotive manufacturers and home furnishings companies were able to jump into that arena virtually overnight. Because Lakeland Industries has a forty year history of manufacturing protective apparel, we remain focused on what we do best, manufacturing high quality, highly specified garments for customers who value the safety of their employees.

Furthermore, in the past few years, we significantly improved and expanded our global capacity in India, Vietnam and China. Our expansions are largely directed at higher growth niche markets with significant barriers to entry, specifically our critical environment and high performance electrical utility product lines. As a result, when the pandemic hit, we were reluctant to chase what we knew to be short term gains at the expense of a growth strategy that we believe to be sound with long term sustainable performance improvement. This drove our decision to focus on the industrial market during the pandemic. Our first quarter fiscal year 'twenty two results validate this decision as our revenues are significantly higher than pre pandemic revenues, as are our gross margin and income from operations.

Alan will provide more color on the contrast between Lakeland's pre and post pandemic performance in his remarks. Last year, fiscal year 'twenty one, as we focused on the industrial market and our higher margin niche products during the pandemic, we saw a temporary pause in the growing demand for these specialized products as customers understandably favored COVID defense spending over other high end PPE purchases and as other customers were locked down or operating under curtailed production schedules. Now for more than the past two quarters, we have seen increasing industrial spending on PPE as the global economy emerges from the pandemic. This is the future of Lakeland. And while we have sustainability in our financial performance today, we see the potential for meaningful improvement in market penetration as we seek to retain as many of our over 500 new industrial customers developed during the pandemic as we can.

Q1 fiscal year 'twenty two data is encouraging on this front. We estimate that 68% of these new customers placed reorders in Q1 alone. On the strength of this performance, are optimistic that we will attain a 75% to 80% retention rate as fiscal year 'twenty two progresses. In expanding our manufacturing capacity in support of our pre pandemic growth forecast, we have shown that with under $2,000,000 in capital investments for production capacity expansions, we are able to increase revenues by approximately $50,000,000 Again, owning our manufacturing makes this possible. Lakeland has tremendous operating leverage, and we have learned how to utilize it to accelerate growth during black swan events and to sustain a higher level of performance afterward.

Overall, our ERP installation has only been a factor for our U. S. Operations, which are now less than 50% of our revenues. As we implement this system globally, we expect incremental benefits from the balance of our business. The timing of our investment could not have been better.

The current forecast for economic growth and the return of industrial demand in most major markets around the world bodes well for Lakeland to realize post pandemic gains from increased market penetration, rationalization of our product lines and our emphasis on higher margin specialized protective apparel. Lakeland has already elevated its profitability levels where we have fixed overhead, enabling us to flex production for even greater returns as variable expenses are limited primarily to success based sales commissions and freight costs. This is further confirmation of how actively managing expenses and driving costs out of our business through investments in technology and process improvements results in sustainability of our performance in a post COVID business environment. Our first quarter sales performance indicates in large part that the decreased demand for direct COVID applications is largely being offset by continuing increases in our core industrial businesses. Leading economic indicators suggest a relatively robust industrial market recovery, although potential headwinds exist in excess supply chain inventories and ongoing freight challenges.

As we've discussed, absent COVID demand, other recovery pressures are expected to be more than offset by growth from our diversified and expanded global reach and other vertical markets. We use COVID-nineteen to our advantage as a catalyst for transformation. At the end of the 2022, we have demonstrated resiliency in our operations and sustainability of our financial performance. Continued investments in our IT systems and data centric planning processes, along with organic growth, are expected to drive ongoing improvements in productivity, efficiencies and profitability. These aspects of our business should be complemented by the inorganic growth opportunities that we are now pursuing.

The key to this strategy will be identifying candidates that are not only accretive, but can be integrated without delaying or impairing our ability to continue the rollout of our technological and process development and are synergistic with our manufacturing and sales platforms. These are quite exciting times in the PPE industry. That concludes my remarks. I will pass the call to Alan to provide more insight into the company's financial results.

Speaker 2

Thank you, Charlie. From a financial results perspective, fiscal twenty twenty two first quarter showed consistency based on the progress made to improve our performance as key measures track to expectations and our balance sheet strength improved. For each of the past five quarters, our revenues have been in excess of $34,000,000 We are indeed winding down from COVID related sales and are benefiting from a strong resurgence in traditional industrial demand while we also tap into certain opportunities in the health care segment for non pandemic related needs that historically we would not have attempted to enter. For all of fiscal twenty twenty one, COVID related sales accounted for 30% to 35% of consolidated revenues. In Q1 'twenty two, we estimate 13% of sales were related to COVID.

As Charlie mentioned, we expect to continue to see decreases in this demand in the current quarter since most regions have sufficient supply, except India, which is still experiencing outbreaks resulting in demand that may outpace the traditional availability of PPE from the health care supply chain. We reiterate that our fiscal year twenty twenty two revenue will not decline proportionally to declines in COVID-nineteen sales. By focusing on the industrial market early on and throughout the pandemic, we believe we have set the stage to emerge post COVID-nineteen well positioned with a larger book of business that targets a much larger and faster growing overall market. Our first quarter results indicate our successful execution of this strategy thus far. Due to the scaling back in most major markets for COVID-nineteen related products, our first quarter sales for disposables and chemicals were down 30% as compared with our first quarter 'twenty one sales, which represented our highest level of COVID sales.

As we have already rapidly emerged from the COVID impacted sales periods, one of our more recent garment lines known as High Performance Wear grew last year and was up nearly 200% in the 2022 as compared to the prior year period. At nearly $900,000 in first quarter 'twenty two sales, revenues were more than half of all high performance wear sales in fiscal twenty twenty one's $1,700,000 and fiscal twenty twenty's 1,600,000.0 Of course, as we noted, last year, we saw a curtailment in spending on non pandemic related PPE purchases. So the year over year comparison is a bit uneven as many economies are returning to traditional industrial purchasing. High performance wear, fire apparel and wovens all increased in the 2022 as compared to the prior year. While all of these garment lines typically have higher margins than disposables, High Performance Wear, in particular, contributes to our efforts to increase gross profit over the long term with differentiated PPE.

I'll speak more to our gross margin improvements in a moment. On a consolidated basis for the 2021, domestic sales were $15,700,000 or 46% of total revenues, and international sales were $18,400,000 or 54% of total revenues. This compares with domestic sales of $23,100,000 or 51% of the total and international sales of $22,500,000 or 49% of the total in the same period of fiscal twenty twenty, while fourth quarter twenty twenty one domestic sales were $16,000,000 or 43% of total revenues and international sales were $20,900,000 or 57% of total revenues. As these numbers show, our international revenues have remained in excess of our domestic revenues for the past two quarters. While we believe we have been taking industrial market share in The U.

S, our growth prospects overall are far more compelling than the higher growth international arena. This plays to our strengths on the manufacturing side of the business. Our growth plans from a manufacturing perspective call for continued investments to increase production capacity in Vietnam, India and Mexico. To the extent possible, we will be investing in near shoring certain manufacturing to shorten lead times, add customer value and improve inventory turns, particularly for our domestic business. All capacity expansions will be fungible between our primary product lines for disposable, chemical and critical environment.

Efforts to improve gross margins involve the manufacturing of far fewer products than we had offered in the past, which provides ancillary benefits through operational efficiencies and reduced inventory. We also continue to diversify our raw material and component suppliers, qualifying multiple suppliers whenever possible to enable us to press for price reductions and better payment terms as well as providing for continuity of supply. We are sourcing raw materials and components from most of the countries in which we have operations in order to reduce freight cost and inventory levels. The insights gained from managing the complexities brought on by the pandemic through our ERP system have proven to be extremely valuable. At the end of the first quarter, we had reduced our targeted SKU reduction of about 40% from pre COVID levels.

We are benefiting from these gross margin improvement strategies, which have relied in large part on our IT driven decision making. First quarter 'twenty two gross margin as a percentage of sales was 42.2%. That's down by 48.5% in Q1 'twenty one when sales were 25% higher. For further reflection, our gross profit as a percentage of sales was 30.6% in Q1 fiscal 'twenty versus 42.2 this year or an improvement of nearly 12 points in two years. So we have been and continue to focus on improvements in terms of supply chain efficiencies, pricing strategies, SKU reductions and product mix variations.

Pricing in the PPE market has been elevated as a result of COVID, and we believe we will continue to see pricing above the pre pandemic era even after certain settlement on the pricing side that we've already experienced through the first quarter of this year. For fiscal twenty twenty one, the company's operating leverage was elevated on higher revenues driven by COVID demand and gross margins, which more than offset increases in sales commissions and freight out. In the '2, with more normalized revenue and gross profit levels, Lakeland reported operating profit of $6,200,000 as compared to $12,400,000 for the prior year period. Operating margins were 18.3% for the three months ended 04/30/2021, down from 27.1% for the first quarter of the prior fiscal year, but substantially higher than the negative 1.3% in the fiscal twenty twenty period when we were struggling with our ERP implementation and 9.9% in the fiscal twenty nineteen first quarter. As we had lower variable costs from the lower sales as compared with heavier COVID sales impacted periods, operating expenses of $8,100,000 in Q1 'twenty two were down from $9,800,000 in Q1 'twenty one and $8,800,000 in Q4 'twenty one.

Income tax expense consists of federal, state and foreign income taxes. With an income tax rate of approximately 25% in first quarter 'twenty two, our income tax expense was $1,600,000 down from $3,700,000 in fiscal twenty twenty one period. Laken's net operating loss for U. S. Federal tax purposes was fully utilized during fiscal twenty twenty one.

However, the company had at the beginning of this fiscal year approximately $22,700,000 in net operating losses for state purposes across multiple jurisdictions. Net income of $4,600,000 or $0.58 per basic common share in Q1 'twenty two was down from $8,600,000 or $1.08 per share in Q1 'twenty one. On the 25% reduction in sales and 46% reduction in net income, we generated $8,300,000 in cash flow from operations, down by only 19% or $10,300,000 from the prior year period. Amid our flexing of production in fiscal twenty twenty one to record levels, Lakeland remained a relatively asset light business. Capital expenditures for fiscal twenty twenty two are targeted at $2,000,000 with only $100,000 spent in the first quarter.

This annual level is relatively consistent with the spending last year of $1,700,000 yet we have shown how we can ramp production. Meanwhile, the majority of our spending this year will be on the IT and technology investments to further expand these data driven solutions to the balance of our global business. In turn, similar to the benefits we have experienced already for our domestic operations, we'll look forward to cost savings and efficiencies at our higher growth and now larger international operations. These objectives support our manufacturing resiliency and flexibility while complementing the existing methods of factory floor efficiencies yielded by our ERP systems and data centric planning. Moving to the balance sheet.

Working capital was $112,700,000 at 04/30/2021, up from $108,200,000 at the beginning of the fiscal year and $66,900,000 at the beginning of fiscal twenty twenty one. The company's current ratio at the end of the first quarter remained at 7.8:one from the beginning of the year. Cash of $60,300,000 at 04/30/2021, was up by $7,700,000 or 15% from the beginning of the fiscal year. The company had no debt at the end of the first quarter and has up to $17,500,000 in available borrowings from its current bank facilities, all of which is currently available. As Charlie mentioned during his remarks, we intend to use these financial resources to pursue strategic acquisitions that provide accelerated access to higher margin products or where our manufacturing capabilities can lead to other synergies or an even greater incrementally accretive addition to our business.

During the first quarter, our Board authorized a $5,000,000 share repurchase program, which leaves more than enough capital to engage in our growth pursuits and continued investments in our global platforms. No shares were repurchased under this program during the first quarter. This concludes my remarks. I will turn the call back to the operator

Speaker 0

for questions. Thank you. And at this time, we'll be conducting a question and answer session. A confirmation tone will indicate that your line will be in the question queue. You may press the star key followed by the number two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Alex Fuhrman with Craig Hallum Capital Group. Please state your question.

Speaker 3

Great, guys. Thanks for taking my question and congratulations on a very nice start to the year. I wanted to ask about the breakdown of revenue between the COVID and the non COVID related business. It sounds like you had about $30,000,000 of non COVID related revenue here in the first quarter. Should we be thinking about that as sort of the baseline that you're going to be growing off industrial production starts to pick up?

Or is it maybe a little bit higher as customers start making more non COVID purchases and you start to bring some SKUs back?

Speaker 1

Alex, I don't think that, that we have seen the economic recovery in the industrial market come to fruition yet. So I don't think that $30,000,000 is the new baseline industrial sales number for us. It will be a little bit higher than all.

Speaker 3

Okay. That's helpful. And then on the M and A front, it looks like you guys made a great hire bringing Josh on board. Can you talk a little bit more about what you're seeing out there in terms of opportunities? Are there any particular product categories or distribution channels that you have in mind that you're targeting?

Speaker 1

We're not quite that far down the road with Josh yet, Alex. You know, right now, we're still make making sure that we have our own objectives and, you know, the potential benefits that we would be interested in acquiring. We're still in that defining process. He's also working to put in place the processes and procedures internally that we'll use for evaluation. Yeah.

That said, we we have seen some opportunities, you know, come our way, and and, you know, we're he's starting a funnel already. You know, we are aware of the challenges that an acquisition brings given our current multiple and, you know, what that might mean for us. So, you know, we are quite quite cognizant of the fact that we need to look for acquisitions that are gonna be synergistic as well. And, you know, that's that's that's kind of what we're working for as to how we define those synergies and where they might be.

Speaker 3

Okay. That makes sense. And then I want to ask about the 500 new customers that you brought on in the past year. I mean it sounds like you're on a path to retain something close to 80 of those customers. Can you give us a little bit more sense of who these new customers are?

Are there any particular industries that they grab it take towards? And then just thinking about the COVID demand that you saw last year and the $4,000,000 exchange of COVID demand that you saw in Q1, how much of that demand is coming from those 500 new customers?

Speaker 1

Quantifying that because of our lack of transparency is pretty difficult. We estimated earlier at the end of Q4, I believe we Alan, we put their sales revenue between 10,000,000 and $12,000,000 That's correct. I can't remember exactly whether it was $10,000,000 or $12,000,000 but it was in that range. As to what kind of customers they are, they largely resemble our existing customer base, Alex. You know, we we were had our sales team focused on taking orders for industrial applications before we took COVID applications.

So they're not very readily, yeah, distinguishable. What what I will say about them is 75% of those or on the order of that are international new customers. And that's reflected, of course, in our revenue distribution between domestic and international sales. So that's also why we keep referring to our increased market penetration internationally is that's where we were most successful.

Speaker 3

Okay. That's really helpful. Thanks, guys.

Speaker 1

Thank you, sir.

Speaker 0

Thank you. And our next question comes from Cam Johnson with Phoenix Capital Management. Please state your question. Hi. Thanks for taking the call.

And you discussed the newer products in the portfolio, what they're made from, where the raw material is sourced from, and talk a little bit about the gross margin profile and how it relates to the rest of the business?

Speaker 1

I I can talk about the raw materials pretty pretty readily as there's no issues with competitors there. Don't wanna get too deep into details on our margins other than to say that they typically run about 10% to 15% above our target margin. So which is, you know, we've said repeatedly, we expect to emerge from COVID with a gross margin that begins with a 4%, probably in the lower half of the 40s. As for the fabrics, they are actually laminated constructions. The raw materials for which it's a mic polyethylene microporous film on spun bonded polypropylene sourced in China, but easily sourceable in India or anywhere in the world.

These are products that are largely used by the diaper business. So anywhere they have disposable diapers, we can source it. The barrier to entry, the hard part of this market, is validation of your clean manufacturing process and product sterility. That's a a minimum of a six month long process and requires that you conform to statistical process control, which means you have to make a full run, let it age for three months to grow bioburden, and you may fail it. And if you do, you've got a whole run of trash.

Speaker 0

K. Thanks. One other question I had is is can you discuss the near shoring strategy you mentioned and the benefits it brings to your competitive positioning and cost basis?

Speaker 1

Sure. We are watching the U. S. Congress very closely. The US stockpiling efforts have gone for lack of a better word, have gone dormant for the last month to six weeks.

That has been predicated by the rejection of 25,000,000 of 26,000,000 garments sourced for the stockpile that didn't meet the AAMI standards for isolation gowns. As a result, they are not rushing out to replace those products right now. Congress is in the process of writing what it means, what made in how made in USA is defined or the, you know, USA PPE act. All of the variations of that legislation that we've seen to date starts off with a at least a Berry amendment for made in USA of US grown or sourced materials and then provides exceptions should pricing quality or availability not be a, you know, be a problem for you to go to a tier two, which is a foreign made of US product tier. And failing that, if they still have unmet demand, it is foreign made of foreign raw materials.

So what we are looking to do is to come in where we can enter into that tier two level, which would be foreign made of US raw materials, which makes manufacturing in the Caribbean Basin, Canada, or Mexico very attractive. We are not looking we do not believe that we can be successful long term manufacturing in The United States. While initial stockpiling orders will be huge, they will only turn 20% of that stockpile every year. So in year two, your volume falls to 25 20% of that level, and that's just not sustainable for a continuing operation. And it is highly unlikely that the private sector will pay the prices that the government's going to have to pay to get made in USA.

Speaker 0

You. Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks.

Speaker 1

Okay. Thank you. We appreciate your participation in Lakeland's fiscal twenty twenty two first quarter financial results conference call. As we look ahead to the balance of fiscal twenty twenty two, we continue to be well positioned as the new standard of excellence for PPE manufacturers anywhere in the world. With an even stronger balance sheet from the beginning of the year and an outlook for continued free cash flow for the foreseeable future, our data centric operating culture is enabling sustainable financial performance to unlock additional growth opportunities.

We're excited for what lies ahead and look forward to sharing our story at the Sidoti Virtual Investor Conference on June 24. Thank you again for joining us on today's conference call, and have a nice day.

Speaker 0

Thank you. And with that, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.