Good day. And welcome to the Lakeland Industries’ Fiscal 2025 Second Quarter Financial Results Conference Call. All lines have been placed on a listen-only mode. And the floor will be open for your questions and comments following the presentation. During today's call, we will make statements relating to our goals and objectives for future operations, financial and business trends, business prospects and management's expectations for future performance that constitute forward-looking statements under federal securities laws. Any such forward-looking statements reflect management expectations based upon currently available information and are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our SEC filings. Our actual results, performance or achievements may differ materially from those expressed in or implied by such forward-looking statements. We undertake no obligation to update or revise any forward-looking 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 US GAAP, including adjusted EBITDA, excluding FX and adjusted EBITDA, excluding FX 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 President, Chief Executive Officer and Executive Chairman, Jim Jenkins. Mr. Jenkins, the floor is yours.

Thank you, operator. Good morning, everyone. Thank you for joining us today to discuss our fiscal 2025 second quarter results, which ended on July 31, 2024. We appreciate your continued interest in Lakeland Industries. I always want to begin our call by thanking our customers and distributor partners worldwide for trusting us with your lives and safety. Our customers are heroes and we never take that trust for granted. Finally, I want to thank our Lakeland team and members across the company for their continued commitment and enthusiasm as we further delivered on our strategic initiatives this quarter. Lakeland continued to experience significant growth and change during this quarter and I appreciate the hard work from our dedicated teams as we continue to execute our growth strategies. As previously announced, we closed on the LHD acquisition in early July. LHD is a leading provider of firefighter turnout gear, accessories and personal protective equipment, cleaning, repair and maintenance with an annual revenue of approximately $27 million. This strategic move enhances our global fire services offerings and footprint and continues our small, strategic and quick SSQ growth strategy. LHD Group increases Lakeland's ability to serve firefighters in Germany and Australia, two of the largest fire markets in the world, and the Hong Kong region with an expanded range of high quality and rescue gear as well as care and maintenance services. LHD's product range includes structural, wildland and industrial fire and rescue gear, technical rescue equipment and stationware, and it complements Lakeland's existing fire service offerings. LHD Care provides a holistic approach to protecting clothing maintenance, including laundry services and repairs, a software app for tracking the progress of those services and sample production. As the global focus on firefighter health and safety increases, this offering further protects firefighters from environmental contaminants…

Thanks, Jim, and hello, everyone. Looking at our second quarter 2025, Lakeland delivered sales of $38.5 million compared to $33.1 million for the second quarter last year. Organic revenue comprised 85% of our total sales and 15% of our Q2 revenue came from our recent acquisitions, including one month of sales from LHD Group. On a trailing 12 month basis, Lakeland's TTM revenue as of Q2 of fiscal 2025 is $137.7 million. This is an increase of $18.6 million or 16% versus the Q2 of fiscal 2024 TTM revenue total of $119.2 million. Year-over-year organic sales decreased by $300,000 in Q2, impacted by slightly lower sales in the US and ongoing weakness in European markets, offset by continued robust growth in Latin America, which increased 63% compared to the second fiscal quarter of fiscal year 2024. We were also encouraged to see double digit growth in Canada, Mexico, Asia, India and our rest of world markets. Lakeland's domestic sales were $12.4 million or 32% of total revenues and international sales were $26.1 million or 68% of total revenues. This compares with domestic sales of $15.2 million or 46% of the total and international sales of $17.8 million or 54% of the total in the second quarter of fiscal 2024. Regarding product mix for the second quarter, our fire services business grew by $3 million or 34% versus the same period last year as we start to see gains from our head-to-toe strategy. Our industrial product lines grew $2.4 million or 10% over the same period last year, led by our woven products, particularly in Latin America. Disposables declined 2% year-over-year and chemical products were flat due primarily to the LineDrive transition as Jim discussed. We are seeing significant growth in the woven product category driven by outstanding performances in Latin…

Thank you, Roger. I'll conclude by saying that our strategy and focus has not changed. Prospects for both our industrial and fire businesses are bright. The value proposition between these two business models continues to be unique and resonates in the market. We continue to expect high single digits organic growth and the sales pipeline continues to strengthen. We expect impact of the timing of our sales will reflect stronger second half sales and gross profit margins. We're making progress on our operational improvements and expect to see productivity improvements in the third quarter. Our operations team is also focused on productivity improvements in the short term in parallel to their longer term multi-year efforts across the organization. We still believe and expect significant margin leverage as operational initiatives progress and our period ending inventory is sold off. We continue to work on improving the effectiveness and efficiency in our processes, databases and systems as we look to eliminate redundancy and improve our analytics. Over the longer term, we expect to be even more competitive to take market share and improve our scalability, predictability and profitability. In other words, we plan to drive a better business model. Acquisitions remain an integral part of our growth plan and we expect to continue growing our M&A pipeline and methodically pursuing our SSQ M&A strategy. With that, we will now open the call for questions. Operator?

Certainly. At this time, we will be conducting a question-and-answer session [Operator Instructions]. Your first question for today is from Gerry Sweeney with ROTH Capital.

I want to start on the revenue side. It sounds as though we'll just say core base revenue is doing reasonably well, as you said, high single digits going forward. But it also sounds like some of this impact on the revenue mix came from the -- I'll call it LineDrive friction as you sort of transition into that relationship. Is there any way you can sort of segment out how much revenue was impacted by the transition to some of the sales over to LineDrive?

Gerry, we did as we did the first quarter end review with LineDrive go methodically account by account looking, and so we know exactly which accounts were unchanged and which were affected. And I'm not -- obviously, I can't get into an account by account basis. But we did have the appropriate people on the call and looked at the individual ones and we kind of know the -- how that unfolded. I guess it's not surprising when you have that 33 or so large national accounts transition and we had a team on our side that is now redeploying more toward end user engagement in the LineDrive regional and headquarters team starts to take over that there would be some friction in that and that's certainly what we saw. As we look at the USA sales, USA operations, we were down about $2.8 million year-over-year for Q2. So we think that is the bulk of it having to do with that transition and with that friction. Of course, there are other aspects, the timing of oil and gas turnaround is unpredictable. Sometimes it's a big headwind, sometimes it can be a tailwind. But we are very bullish still on taking market share on kind of further developing our value proposition in the US market. So like we said in our guidance, we do still expect that to pick up in second half of the year.

Gerry, look as the relationship develops with LineDrive, we're starting to get more visibility to their pipeline approach and the way they work their pipeline. And we are -- our team is having weekly meetings with them. Roger and I are sales leaders who are having check-ins. I have a monthly call with the LineDrive CEO and then we have a 90 day sort of look back. So we're kind of laser focused at this point on ensuring that that LineDrive relationship meets our expectations. And they have every reason to want to meet them as well. I mean, they don't make money if they don't grow this thing. I think we're all rolling in the same direction right now. And I think as Roger said, maybe started off a little clunky and maybe we should have expected that. But at the end of the day, we're very confident in that relationship and where it's going.

I mean, I personally probably should have expected some lumpiness in transitions like that, especially with larger accounts. But Jim, you’ve kind of touched upon it on the pipeline. As you look at the pipeline of sales process, I think it was what 33 accounts they took over, plus I think there's maybe some others. What does that building pipeline look like versus maybe what you were doing in sales previously?

Well, there's a couple of changes. I don't want to get into the specifics of the pipeline because obviously pipeline management is something that can be a little nuanced. But I will say that the approach we're taking right now to our pipelines, both with LineDrive and within our sales organization, I believe is a robust process, one that was obviously different given the two sales professionals that we brought in and with attention to more interaction with end users, which when traditionally you're used to sort of channel partners giving you information that information sometimes is not as accurate as it might be from a traditional sort of engagement with an end user. And we're starting to pivot to that. And the more we engage with our end users, the better we feel about the pipeline. And we're in the early stages of doing that. Obviously, LineDrive has visibility to some end users as well between their relationships with their own channel partners and our channel partners and end users. So it's a lot -- art versus science in a lot of ways, but I will tell you that I'm feeling a lot more confident about how that pipeline is being generated as opposed to the way it was being done about six to nine months ago.

Switching gears, this may go to Roger as well, gross margins. Just want to understand, there's probably a couple of different buckets here. We had some impact from integration, we had some I think profits or inventory end of quarter profit, which I'm probably the least understanding. And then there's another bucket, which is probably the raw future opportunities, but optimization. But just want to understand how gross margins maybe qualitatively rebound over the next couple of quarters? I mean, some of this sounds like I'm not sure the purchase accounting kicks back in or the inventory side. And I just -- I think it would be helpful for everyone just to understand on an apples-to-apples basis and what happened in the quarter as well as maybe what the rebound looks like?

And you're right. It gets into a lot of the GAAP and accounting needs, but it is an important concept to understand the profit and ending inventory, because it affects us pretty much every quarter and it can be a benefit as we've seen in past quarters and it can be a headwind as we've seen in past quarters. I'd like to first start off by mentioning that as we point out on Slide 8 of our presentation, we actually got a 4.4% margin uplift from our organic sales mix and that's very promising to see. So we are continuing to make manufacturing efficiencies and improvements and being able to maintain price on organic. So really you're looking at two things, the acquired company gross margin including the purchase accounting. And I won't go off on my rant here, although it takes all our chance to hold that back. But the way purchase accounting works is when you acquire a company, and we're going to see a lot of this with our acquisitions as you pay X amount for a company and then we have to record that on our financials. And the process of how you record it is you do -- you kind of remeasure, you kind of revalue all the assets you've acquired up to market value. So if you could theoretically have CapEx, equipment that's been fully depreciated, it still has value, you kind of reestablish the value and start the depreciation clock over. Where this affected our gross margins in this quarter was the acquired companies, and particularly Jolly had raw material -- had finished goods inventory at the time that we acquired them. So if you think about that, the finished goods inventory is written up to fair value, which is what we're going…

So that sort of gets to the point of my question, gross margin [3.9]. The inventory, that happens every quarter but there was this an abnormally large one, so it certainly impacted the gross margin. How long with -- we always take less gross profit dollars, because revenues were down because of sales…

That's right…

But that makes sense. Last question, I know these are probably shorter questions but longer answers. The one thing that caught me, well, I don't know if I caught me off guard, but the $2.4 million in acquired, we'll say, SG&A or operating expenses from some of the acquired companies. Is that permanent or is some of that going to be transitionary as you integrate some of these companies, and how do we look at that?

I think we are certainly scrubbing that to work that down. So LHD, we have identified. We just had it a month or so. We've identified certain SG&A costs that we don't think are necessary. And I think we explained before when we acquisitions we don’t really build in a really big takeout or stripping of cost, because more often than now we bring -- we need to add some sales reps and resources, but see some see some things there. On the Jolly side, kind of same thing. Jolly has a new manufacturing entity that's relatively new that they had just kind of stood up before we acquired them in addition to the Italian operation. So we're looking for ways to make those more efficient. And then same thing with Pacific. A part of that SG&A was these integration marketing efforts. We've had these teams traveling like all around the world to the Pacific people and Jolly people training our LatAm teams, training our US teams. US teams going to trade and sales shows in their market. So we have seen an increase in selling expense as we work to get these integrated.

I mean, Gerry, some of this is an investment in the people that we have. Some of it, to Roger's point, we have some low hanging fruit we can fix. But I mean, I'm talking to you from Sydney, Australia. So my -- the Chief Revenue Officer is in Argentina right now. So we're trying to -- we're growing this thing and there will be some expense associated with that. But we are -- I mean, Roger has got guys heading out to Romania shortly to sort of work through those things as well. So I would expect -- obviously, sales fixes everything, but there are some expenses here that we're looking at to drive down.

I'd rather have the infrastructure in place to drive sales than the others. The question was probably more just understanding the model and progression, et cetera. But totally understand. So I'll jump back in line and -- but thanks guys.

Your next question for today is from Matthew Galinko with Maxim Group.

Can you maybe talk about the pipeline with -- I guess the backlog with LHD? Is it safe to assume you can convert that all or is there attrition that you sort of expect to kind of get peeled off from competitors, or how do you expect that to go?

So I guess what Roger and I -- and actually the entire executive team were surprised to learn was that this backlog issue is not necessarily unique to LHD, although, obviously the business was not managed terribly well. And they got cut off from suppliers and that slowed things down. But the competitive environment in Germany is such that the delivery -- there are delivery issues that our competitors are facing as well. So there's -- I wanted to -- that’s sort of one issue that we were all surprised about how we were -- it was not necessarily unique to us. There are some -- we are looking hard at those backlog opportunities and we want to make sure that we're not building something for something that somebody already decided to go walk away and do something else with, by enlarge we're not finding that. So what we're trying to do now and because we're getting better delivery terms and we're getting discounts on purchases that where we're delivering cash, we're addressing things like what's the margin look like when an order was made over a year ago when prices may have gone up. So we have that delicate tight wired sort of walk with our customers. But we're finding ways to capture that margin, as I said, in other ways by perhaps purchasing something COD and getting a discount as opposed to being on COD prior to our arrival on our balance sheet. So we're winnowing down that. We're aggressively going after it. We are utilizing -- the gentleman that we acquired Eagle from, turned out to be a very good talent pickup for us. And he is spending considerable time with our friends at LHD to work that backlog down. I hope that answers your question.

I would just add that of the LHD revenue that we mentioned in the call, Germany, over the last year has only been about $8 million. The bulk of the stream currently is coming from Australia. We have the turnout gears as well as the services. So we see very significant upside in Germany, because like we said, like Jim said, other competitors are having the same delivery lead time issues. So we're working to bring on additional capacity as well as in housing some capacity for the Asian markets into our China facility. So we think there's a lot of upside. I've said before that if we just double the German, I'm going to be disappointed with that, because I think there's significant upside in the country.

And I guess on the subject of Europe, it sounds like you see opportunities in Europe that you aren't capturing now. What kind of levers can you pull to kind of go after that a little bit more effectively?

So I'll say that on the industrial end, which is where we -- our legacy business in Europe is primarily that industrial business. We almost exclusively relied on our channel partners, on our distributors. And we actually have some very solid distributor relationships, particularly in the Benelux areas. And one of our larger distributors in that market recently merged with the French entity and that has resulted, we believe, in some potential opportunity for us to expand our market share in Europe. So on the channel partner side, we've got one sort of real significant opportunity with a channel partner to drive that. The other is that our new industrial sales leader, Cameron Stokes, is really preaching end user engagement. And the entire executive team spent some considerable time about a week in Europe, about a month ago in Poland with our European industrial sales team. And so the opportunities that we see are sort of a different sales style, engaging with the end user along with our channel partner to sort of be the industry expert when it comes to selling the industrial side of the business. And it's going to take a little bit of time I think to do that. But I think we're starting to get the right people in place, we're certainly getting the right attitude. And then of course, on the fire end with Eagle and with LHD and Jolly, there's obviously opportunities for growth in Europe there.

I'd add one additional thing that we're doing there and this is going on as we speak is, we're addressing both some customer service delivery time challenges as well as cost challenges, so -- and led by our operations group, we are revamping how we do warehousing, logistics and distribution to kind of significantly cut down on delivery time. And in the sales team, what Jim said is what we want to do is kind of translate the approach and model that we have in LatAm into Europe. And I know our sales folks are working hard to get that message across and not just the message but the training, the approach and then having the right products that we can deliver quickly to get to the customer. So like we said, I think there is opportunity particularly with Kimberly Clark selling their PBE business to Ansell, I think that creates some displacement. We're getting that feedback already from our sales teams, so we're going to work that hard. As well as make it very easy to work with like them, both in terms of delivery, lead times, product availability and customer service.

And I guess my final question is around the opportunity to take the service maintenance business from LHD and kind of expand the concept into North America or elsewhere. I think you touched on it in the prepared remarks, but I'm curious now that you've had the business for a few weeks. What -- do you expect to do it organically or inorganically and kind of what do you expect from that expansion opportunity through the back half of the year?

So Matt, I'm actually in Sydney. I'm at the largest trade show in Australia, the fire trade show in Australia, AFAC. And I spent considerable time with our friends at LHD. I got a tour of the Sydney facility and it is impressive. And I was so excited about it. I was sending videos to Roger and the team. This is scalable. I spent some time with my Chief Revenue Officer, who has some experience on this in his prior life. This is something that we would look at both organic and inorganic opportunities. I know for a fact that our friends in Latin America and that they're trying to do this, and we've already put them in touch with the LHD folks. And I would expect a dialog there in the short term. I don't think -- these are not -- you don't just add water and poof it happens, right? It's going to take a little bit of time. But it clearly is on our radar. And it is a -- for me, I view this as a significant opportunity in a space that's going to grow by virtue of the fact that, that is the way that fire is trending these days and that we have to decontaminate these suits. So these guys are not inhaling -- guys and gals, not inhaling carcinogens on a regular basis. And the easiest way to do that is the consistent cleaning of the garment. And so you're going to see that in all of the markets all over the world, and it's still very early in the game on that. And we believe we've got an edge in some pretty interesting markets.

I also want to touch on the software, because the software that LHD Australia has, which we also believe is scalable and deployable, was kind of really -- we knew about the services, but this was a really pleasant surprise as we -- as you dug into it.

Yes, I mean, that's another opportunity to monetize and it's one that I think is probably a little bit longer term, 12 to 18 months before we get our arms fully around that. But right now, it is a total differentiator for LHD within the Australian market. And we want to be able to roll that out in other markets.

Just a quick follow-up on that. You mentioned more early innings on that, I guess, globally. But can you maybe touch on just what proportion of the fire equipment TAM is currently kind of entering those sorts of contracts, your best guess of kind of what the penetration of that opportunity is today?

I couldn't -- look, there's millions of suits all over the world that got to get cleaned. Each firefighter generally, within those markets, has two sets of those suits. So I'm not in a position at this point, Matt, to give you an actual number. But it is significant and we've really only got our baby toe in the water right now. And obviously, we're going to do this smartly and methodically but we'll do it with urgency. And I would expect that we would be wading into the water here over the course of the next 12 months in other markets.

[Operator Instructions] At this time, there are no other questions in queue.

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

Thank you. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.