Lakeland Industries Inc (LAKE) Q2 2027 Earnings Call Transcript

Good afternoon, and welcome to the Lakeland Fire and Safety Fiscal Second Quarter 2027 Financial Results Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. During today's call, we may make statements relating to our goals and objectives for future operations, including our goals for cash flow from operations and margin improvement for fiscal year 2027, financial and business trends, business prospects, and management expectations for future performance, that constitute forelicking statements under federal securities laws any such forelicking 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 forelicking statements we're going to take no obligation to update or revise any forelicking statements to reflect events, or developments after the date of this call. On this call, we will also discuss financial measures derived from our financial statements that are not determined in accordance with U.S. GAT, including adjusted EBITDA, adjusted EBITDA excluding FX, adjusted EBITDA margin, adjusted EBITDA excluding FX margin, adjusted gross profit, adjusted gross margin, and adjusted operating expenses excluding FX. A reconciliation of each of the non-GAAP measures discussed on this call to the most directly comparable GAAP measure is presented in the supplemental slides of today's presentation. A fresh release detailing these retail results was issued this afternoon and is available in the investor relations section of our company's website, ir.lakeland.com. At this time, I would like to introduce your host for this call, Lakeland Fire and Safety President, Chief Executive Officer and Executive Chairman Jim Jenkins, Chief Financial Officer Calvin Sweeney, Chief Commercial Officer Global Industrials Cameron Stokes, Chief Revenue Officer Barry Phillips, and Executive Vice President of EMEA Fire Sales Kevin Ray. Mr. Jenkins, the floor is yours.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today to discuss the results of our fiscal 2027 second quarter ended July 31, 2026. Our second quarter results reflect continued progress in the underlying business, with sequential improvement across revenue margin and profitability. Net sales were $50.1 million, down 4.5% year over year, but up 5.7% sequentially, supported by a 12% sequential increase in FHIR. Excluding $3.7 million of prior year revenue from the product lines we divested in March, net sales increased 2.8%. Gross margin was 37% compared with 35.9% a year ago and 31.4% in the first quarter. And adjusted EBITDA, excluding FX, more than doubled sequentially to 2.7 million. Rather than walking through everything we announced during the quarter, I want to highlight important business updates that I believe matter most. First, tender wins. These are important because they are often recurring revenue opportunities for several years. We secured multiple tender and contract awards across nine countries globally, spanning fire, disaster response, law enforcement, industrial, and utility markets. These included notification of an intended award across multiple product categories under the UK National Fire Chiefs Council National Firefighter PPE Framework, a seven-year program with a total potential value of up to 220 million pounds across all awarded suppliers, as well as significant contract wins across Asia Pacific in Latin America. We have significantly expanded our offering of certified products and manufacturing capacity across fire and critical environments, strengthening capacity, supply chain flexibility, and support for higher value growth opportunities, which enhances our margin profile for the long term. Certification and product development work continues across our product lines. Our higher growth recurring revenue fire services platform while repositioning the broader operating footprint. This includes our Denver ISP startup plan to open this month. ISPs generate recurring revenue and support higher margin revenue over time in our high growth space. Our industrial businesses generated $24 million of revenue in the second quarter, down 10.8% on a reported basis. Excluding $3.7 million contributions from the divested product lines in the prior year quarter, industrial revenue increased approximately 3%. Growth was led by three product lines. Chemical protective grew nine and critical environment grew 28%. Critical environment is back on plan following the forecasting, demand planning, and capacity actions we put in place earlier in the year. Our primary manufacturing facilities remain at capacity, supported by improving demand and better order visibility. Our priorities for the balance of the year are channel execution, pricing discipline, inventory alignment, and converting the demand we are seeing into revenue and margin. Fire revenue was $26.1 million in the second quarter, up 2% from $25.6 million a year ago, and up approximately 12% from $23.4 million in the first quarter. Fire represented 52% of net sales compared with 49% in the prior year quarter and the first quarter. Growth was broad-based. Helmets increased 41%, hoods increased 66%, and turnout gear increased 5.5%. Adjusting for the prior year tender and current year's service acquisitions, comparable fire revenue grew approximately 10%. Demand continues to strengthen as customers transition to the updated NFPA standards. Our certified head-to-toe portfolio, spanning helmets, turnout gear, boots, and gloves, lets customers order a complete certified range from a single global provider, and we believe that breadth is a real competitive advantage. On the fire services side, revenue grew 78% year over year, with our independent service provider business contributing $3.5 million in the quarter, and we are accelerating investment in that platform. Three items worth noting, the quarter absorbed approximately $600,000 of expedited freight tied to a strategic fire inventory bill, and foreign exchange was a meaningful headwind with a significant impact of $1.3 million compared with $43,000 a year ago. Our finance team is taking a hard look at hedging strategies where they are reasonably available and financially appropriate. During the quarter, the company also recorded a non-cash goodwill impairment charge of approximately $3.2 million related to LHD, attributed exclusively to the performance and revised outlook of LHD Germany. The impairment reflects the accounting valuation of goodwill at a specific point in time and does not represent a cash outflow, affect the company's liquidity, or impact its ability to invest in strategic priorities. We have taken actions to address the performance of LHD Germany, including leadership and organizational changes, and are executing a broader repositioning of the business focused on improving operating performance, cost structure, and long-term returns. LASD's operations in Australia and Hong Kong continue to perform well, and the impairment charge is not reflective of the performances of those businesses. Lastly, the resolution of the Monterey Lease Matter resulted in a $1.9 million second quarter gain and the permanent elimination of approximately $400,000 in related quarterly cash usage, removing an ongoing obligation and supporting our broader effort to simplify the business, reduce complexity, and provide greater clarity into our underlying operating performance. Inventory ended the quarter at $74.9 million, down $2.8 million sequentially, and $15.3 million year-over-year. Inventory is starting to move, and we expect that trend to continue as sales increase in the coming quarters. With that, I'd like to pass the call to Calvin to walk through the financial results.

Thank you, Jim, and good afternoon, everyone. Net sales were 50.1 million down 4.5% from 52.5 million a year ago and up 5.7% sequentially from 47.4 million. Gross margin was 37% versus 35.9% a year ago and 31.4% in the first quarter. Adjusted gross margin was 37.7% up 410 basis points, sequentially from 33.6%. Adjusted operating expenses excluding FX were $16.2 million versus $14.6 million. Net loss was $4.9 million or $0.50 per basic included share versus net income of $0.8 million or $0.08 a year ago. The net loss for the quarter included the non-cash goodwill impairment charge of approximately $3.2 million related to LHD. Adjusted EBITDA excluding FX was $2.7 million versus $5.1 million a year ago and $1.1 million in the first quarter for a margin of 5.4%. We ended the quote with cash of $17.9 million up from $12.5 million at year end. A few drivers behind those numbers. Gross profit was $18.5 million down 1.5% from $18.8 million with a year-over-year margin increase of 114 basis points. on tariff refunds and a favorable fire mix partially offset by higher inbound freight. An important note on margins, excluding the net tariff benefit of $1.4 million, gross margin still showed a sequential improvement to 34 percent, up 280 basis points, demonstrating that margin improvement was structural and not solely attributable to the tariff refund. Operating expenses were $20.6 million, up 7 percent from $19.3 million. Adjusted operating expenses excluding FX were $16.2 million, up 11.1%, reflecting roughly $4.5 million of Intershoot's trade show cost, new service location startup cost, and a full quarter of service operating cost. On a trending 12-month basis, revenue was approximately $191 million and adjusted EBITDA excluding FX approximately $5.4 million. Both still carry the weaker back half of fiscal 2026, so the sequential trend is a better Gross margin improved 114 basis points on tariff refunds and fire mix, partially offset by higher inbound freight, including roughly .6 million of extra-value freight for our fire inventory bills. The 410 basis point of sequential improvement is the clearest evidence yet that our margin recovery processes are working. On adjusted EBITDA soothing FX, the move from $5.1 million to $2.7 million was about $0.7 million from adjusted gross profit and $1.7 million from higher adjusted operating expenses. The prior quarter also carried a $3.1 million tender and revenue from the divested product lines. The divested business lines contributed $0.5 million of adjusted EBITDA soothing FX in a couple of years ago. Fire was approximately 52% of revenue this quarter, up from roughly 49% in both Q2, FY26, and Q1, FY27. That is the clearest picture of our shift toward global fire protection. Geographically, the mix reflects a more diversified footprint. As fire margins recover toward their structural potential, that concentration should become a margin tailwind. On the balance sheet, we ended the quarter with cash of $17.9 million and working capital of approximately $90.8 million. Cash was up $5.4 million from year end and total debt declined to $28.7 million from $32.3 million at January 31st, 2026. We had $24.9 million drawn on the revolving credit facility with $15.1 million availability and we're in compliance with all covenants. Most importantly, we generated 5.4 million of operating cash flow in the first half of fiscal 27, a 15.1 million improvement year over year. Inventory ended at 74.9 million down 2.8 million sequentially, 7.6 million from 82.5 million at the end of fiscal 26, and 15.3 million year over year, and we did that while taking taking in expedited finished goods and building raw materials for fire. We expect the trend to continue as sales increase while building selectively in fire categories where availability is essential to capturing demand. With that, I'll turn it back to Jim.

Thank you, Calvin. The second quarter reflected continued progress against our plan. Net sales increased 5.7% sequentially to $50.1 million. Gross margin improved to 37% from 35.9% a year ago and from 31.4% in the first quarter. An adjusted gross margin expanded 410 basis points sequentially to 37.7%. Adjusted EBITDA, excluding FX, more than doubled sequentially to $2.7 million. And we generated $5.4 million of operating cash flow in the first half, a $15.1 million year-over-year improvement. Heading into the third quarter, our outlook is optimistic. We generated approximately $47 million of revenue in last year's third quarter at a gross margin well below where we are operating today and a cash operating loss. So the comparison ahead of us is a materially better one. Two things to be clear about in the near term. We do expect the timing of certain fire orders to shift into the fourth quarter, and we expect some near-term impact from repositioning parts of the portfolio and reallocating capital toward our higher growth opportunities. We believe those actions strengthen the business. Looking ahead, four themes frame our outlook. A higher mix of turnout gear at higher volumes and higher margin. Industrial improvement in building North America and Asia, with the third quarter shaping up materially better year over year. Another quarter of sequential margin improvement. Continued simplification and repositioning the business geographically toward higher revenue. Our independent service provider platform, United States, Canada, and Mexico. We remain focused on generating positive cash flow from operations in fiscal 2027 and driving sustainable margin and EBITDA improvement. We want to thank all our customers, partners, and team members worldwide for their continued trust and commitment, and especially those first responders around the world who risk their lives every single day to protect us all. With that, we will now open the call for questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.

One moment, please, while we poll for questions. Our first question comes from the line of Mark Smith with Lake Street Capital.

Please proceed with your question. Hi, guys. I wanted to dig into the gross margin just a little bit more. You know, great jump up to 37%, you know, looks like helped a little bit by a tariff-free fund. I'm just curious, any additional insight you can give us into kind of the underlying gross margin run rate here as we look at second half, especially, as you said, you know, it looks good versus the comparables from second half last year.

I apologize. It seems as if we may have some technical difficulties. Please stand by.

May proceed.

Hi, sorry. We got disconnected, Mark, just as you were asking us a question about margins. Hey, Jim, can you guys hear me now?

Yeah, we can.

Perfect. Hey, I just wanted to ask about gross profit margin a little bit. You know, good improvement sequentially in year-over-year, but just curious if you can give us more insight into second half of this year and, you know, excluding the tariff refund and what the underlying gross margin run rate looks like here in the second half.

Sure, Mark. Yeah, so the tariff refund not expecting a significant impact in the second half of the year. I think we're going to see, though, the build off of where we were kind of in the normalized, if you want to call it a normalized run rate, which was in the mid-30s. I think we'll see continued improvement with growth on the fire and improvement in turnout gear. All of those are higher margins, so we'll see strengthening in the second half of the year, kind of continuing the trend from Q1 to Q2 and a little bit of improvement in Q3 and Q4.

Perfect. And then, you know, you bring up fire services, you know, still a small piece of the business. I think you guys said about $3.5 million. You know, but curious kind of what, you know, what kind of trends that business is having as we think about, you know, revenue and margin and even any insight into kind of your capital outlay for, you know, building out some of these new locations like Denver?

Yeah, so building out a location of Greenfield is roughly about $350 to $500 of capital. So that, you know, from a return on investment for my money, I like that model. You know, the trend in the industry is quite positive. I've got, you know, Barry on the line here who drives our fire growth here, and particularly is very – is a lot closer to this than I am in the U.S., and I might defer to Barry to respond to some of these questions as well.

Well, absolutely.

We have – with Denver just starting to open up this month, just got our validation. The short side of that cost basis for the 350-5 is a sign that's worked out well for us in opening up the Fresno earlier in the year and then Denver now. Looking at the greenfield opportunities where we're going to focus on some of those expanded sites where we're being called in by departments in the regions that we're spotting based on the size of departments and the demand in the areas.

And maybe if I squeeze in one more question here, just you guys talked a bit about kind of simplifying the business and just kind of looking through areas that really maybe aren't producing acceptable returns. Can you just elaborate any more on what kind of portfolio actions you're maybe looking at today?

Yeah, We're looking at geographies where we can consolidate warehousing and other sort of synergies in markets. We've got a European fire presence and a European industrial presence, and likely consolidating some of that I think would be a healthy exercise. We're kind of looking hard into how that might play out. We're doing similar exercise. Besides, we're taking a look at some of our manufacturing footprint and, you know, where we should be and where it doesn't make a lot of sense for us to be and whether it be, you know, we'd be drawing away from capacity from some of the folks that are at capacity at this point. So we're still running that out, but I would expect some meaningful changes in the next six months that anure to the bottom line beneficially, I think, into fiscal 28.

Thanks, Mark. Thank you.

Our next question comes from the line of Mike Shlisky with DA Davidson. Please proceed with your question.

Yes, hi. Good afternoon. Thanks for taking my questions. A lot of moving parts in what grew and what shrunk in the fire business and what changed in fire. But back everything out, did you be suggesting that the organic growth or what kind of consistent year-over-year measure of growth was 10% in the quarter here? Let me make sure that that's – I'm thinking about this correctly, but you really are – when all is said and done with some of the one-time items and large contracts, you do see a, you know, kind of high single-digit or even 10% growth rate in that business in the, you know, near to medium term.

Yes, Mike. That's what we're seeing is the high single, low double-digit growth in the fire space organically.

And as you saw in the quarter, once you strip out a couple of the larger stuff.

Yeah, I mean, when you think about it, there's a tender that we had last year for the Italian government that was $3.1 or $2 million. Now, look, tenders come and go, and those are good things, but you don't necessarily bank on those. So if you back that out and you back out $3.7 million of HPFR, you're staring at $46-ish million. Um, and we did 50.1 million.

And when you think about, speaking of tenders, when you think about what was announced in the UK and Hong Kong and Thailand and elsewhere throughout the last couple of, couple of months, you know, that adds up to, could be well over a year, a year and a half of top line just from those contracts alone. Uh, if I'm, if I'm reading it correctly. So can you maybe comment on the timing of when these will flow to the bottom line? If it's going to be seven years or less for most of it.

Well, yeah, I mean, you've got the – I think as we described in the press release on the U.K. tender, and I have Kevin Ray on the phone here to talk about that a little bit, but we were sort of one of a couple of winners in that, and now the process begins where we are competing with three or four others for opportunities within the U.K., but they're all starting to commence on that front. But, Kevin, I don't know if you want to talk a little bit about that, but before you do, some of these others, some come quicker, some take a little bit longer, depending upon the region. And, you know, we would expect to continue to drive additional tender wins into this quarter that will be reflected both – part of them will be reflected in this quarter, and part of them will be reflected in future quarters. It's just a function of how each of those tenders operates. But, Kevin, I don't know if you want to talk a little bit about – I mean, that 220 million pound opportunity, obviously, is not 220 million pounds, but it is a significant longer-term opportunity.

Yeah, thanks, Jim. Yeah, it's a seven-year scheme, which basically we qualified for now on multiple sectors. So that means we're qualified for the gloves, the turnout gear, the boots, and that means that we can actually really use the benefit of the work we've done over the last two years in new product development. We're very well positioned. There are 25 brigades in the UK, and they go at different times when they need new contracts, but there will be a considerable amount coming up in the next 12 to 18 months. So we've got an exhibition and a big meeting next week, and we've got a pretty solid picture of how that looks and some really strong prospects.

Okay, okay. Maybe one last one for me. I just wanted to get a sense of the cadence in the third and fourth quarters here. Your comments, Jim, on the fire orders being made the fourth quarter, but some of the areas are still being pretty strong. Does it suggest that we'll be seeing sequential growth from 2Q into 3Q and then 3Q into 4Q? Is that the right way to look at it? Yep, that's correct.

Is that a good platform for 2028? That is what we're seeing based on our pipeline and order flow, yes.

Appreciate that color.

Our next question comes from the line of Jerry Sweeney with Ross Capital Partners. Please proceed with your question.

Hey, good afternoon, Jim and Calvin. Thanks for taking my call. Hi, Jerry. Just expenses. I mean, revenue looks solid. Obviously, I think there were some, maybe some one-time items in our line. some expedited phrase, frame that out a little bit to what should SG&A or operating expense be running at and what is truly one-time and what maybe needs to be leveraged through some revenue expansion, i.e., like the ISP stuff.

Yeah, I mean, I'll let you answer that.

Yeah, I think, Jerry, exactly on the ISP, that will be leveraged through revenue going forward. There'll be still a little bit of a build probably in the third quarter, But we'll see the we'll see the ISPs take off especially the new ones that are that have come online Interschutz is a once in a once every five years So that's that that's that we won't see that for a while and then of course that was the German the German fire show And then the expedited freight We needed to move some product to be in the right places Internally to support to support fire growth and we've done that and I think we're now positioned but you're not going to see that. Of course, it will be supported by revenue going forward, but it will be, if we do any type of expedited freight, it will be directly attached to a PO and we'd have revenue support. But in general, no, that will go away looking down the road.

But I will say the OPEX line for us is something that we are keenly aware of. I need to get that into the mid to high 20s as opposed to the 30 where it is now, 32, I think, this quarter. That's got to come down. And then, you know, the FX stuff is stuff that we're going to have to find a way. You know, that has become, as the dollar weakens, that is not a good thing for us. And so we're going to be looking at some hedging strategies on that as well.

Is that, I mean, is that a hedgeable? I mean, that's not Argentina, correct?

Well, a lot of it's Argentina, but it's Europe. It's other, I mean, the renminbi is actually stronger than it's been in 15 years. So all those things are sort of impacting, you know, how we play. The other thing we're doing in Latin America is we're moving inventory as quickly as we can, because as the peso declines, that impacts our FX hit. So Argentina is rapidly moving on inventory, and that will, I think, help alleviate an area where we can't hedge. Gotcha. And, Jared, we also have a million-dollar bond that will probably this time next year come to fruition that gets released that will actually help us in Argentina next year. But it's what we're working on.

Got it. But ISP, obviously, really good business, nice returns, et cetera. I think you said $3.5 million probably across the portfolio. Curious, and you're adding Denver, and I think you added expansion in another location, California, Arizona, I forget. I apologize. But what is the capacity of that business on a revenue fund?

I'm not sure if that's readily available, but I'm just curious as to as it stands today. you know well well qualitatively yeah sorry if they're in a if they're in a market that's growing and most and most virtually every one of these are you get to capacity at between probably two and a half to three and a half million it depends upon the size of the facility but that doesn't that's not limiting to us because we'll just build a we'll build out the facility or find an additional facility one of the things we did in riverside was we ended up expanding in riverside so that we could have the rental capacity there. And then we also built into Fresno because Riverside was servicing that market. And so Fresno picked up a lot of that additional demand as well. And we'll probably, you know, daisy train our way up to Northern California because Fresno is starting to service opportunities in the north that we probably need additional location on that front as well. You know, I would expect, as I said, we've got opportunities in the Midwest, we've got some opportunities in Texas, we've got some opportunities on the East Coast, all of which may be either built or bought, probably more likely to build.

Gotcha. But if I look at $3.5 million, I mean, just with your footprint today, could you be doing $5 or $6 million per quarter?

We could. We could be with the growth that we've got planned, absolutely.

And then you're looking at new locations geographically outside of what you're already at. That's correct.

Thanks, Jerry.

Thank you. And as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. And it looks like we have reached the end of the question and answer session, and therefore I'd like to turn the call back over to Jim Jenkins for closing remarks.

Thank you, Operator. Thank you all for joining us for today's call, and thank you to our customers and distributor partners worldwide for trusting us with your safety. Lakeland continues to be well-positioned for long-term growth, and we look forward to sharing our continued progress on the next call. If we were unable to answer any of your questions today, please reach out to our IR firm, MZ Group, and we would be more than happy to assist.

Thank you, and this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.