Alpha Pro Tech Ltd (APT) 2008 Q4 法說會逐字稿

Thank you for standing by. Welcome to the Alpha Pro Tech Limited year end conference call. (Operator Instructions). Following the presentation, the conference will be open for questions. This conference is being recorded today, Tuesday, March 10, 2009. I would now like to turn the conference over to Mr. Cameron Donahue of Hayden IR Communications. Please go ahead, sir.

Thank you, and good afternoon. I would like to thank everyone for joining us today for Alpha Pro Tech's fiscal 2008 fourth quarter and year end earnings conference call. Our call today will be hosted by Al Millar, President and Lloyd Hoffman, Chief Financial Officer. Following management's discussion there will be a formal Q&A session opened to participants on the call.

Before we get started, I'm going to review the Safe Harbor statement. This conference call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Ac of 1995. Forward-looking statements involve risks, uncertainties and assumptions, as described from time to time in registration statements, annual reports and other periodic reports with the filings that the Company has filed with the Securities and Exchange Commission. All statements, other statements of historical facts, which express the expectations of capital, which express the Company's expectations for the future with respect to financial performance or operational strategies can be identified as forward-looking statements.

As a result, there can be no assurance that the Company's results will not be materially different from those described here, such as believes, anticipated, estimate or expected, which reflect the current views of the Company with respect to future events. We caution listeners that forward-looking statements speak only to the date hereof. The Company hereby expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect change in the Company's expectations or any change in events, conditions or circumstances on which our statement is based. With that, let me turn over the call to Mr. Al Miller, President, for opening comments. Al, the floor is yours.

Thanks, Cameron. And thanks to everyone who joined us today for our earnings call. Today I am joined by Lloyd Hoffman, our CFO. And as most of you know, we conduct these calls twice a year. One to accompany our second quarter and first half results and then again for our fourth quarter and full-year results.

Since our last conference call, we have completed our third and fourth quarters of 2008. So I'll recap events and trends that have occurred over the last six months and for our full year 2008. In our fourth quarter 2008, we generated revenues that were up approximately 15% over revenues in the year ago period. That coupled with the 10% increase in revenues we delivered in our third quarter of '08, offset the decline we experienced in the first half of '08, which were down 10%. As a result, we ended the year with a revenue increase of approximately 1% in 2008.

Our engineered products, particularly our REX synthetic roof underlayment, led the way in the fourth, with an 82.4% increase over revenues in the year ago period. Our engineered products segment also delivered significant growth in the third quarter, 124%. We attribute the strength of this product offering over the last year to three factors. First, our change in distribution strategy that we implemented in late 2006. Second, our solid vendor and distributor relationships within the building industry continue to pay dividends. Third, our ICC approval was critical to our success.

We continue to be optimistic that our distribution channel strategy will broaden our ability to take advantage of market opportunities for synthetic roof underlayment and house wrap throughout next year and into the future. We're currently working on opportunities with existing and new distributors and private label opportunities and are excited about the future of this segment. Our REX synthetic roof underlayment is being positively received as a superior product in the industry, is cost effective and a better alternative to felt paper. Our ICC approval for our REX Wrap house wrap significantly expands our market opportunities, as many construction supply companies, builders and architects require this certification to sell the product.

Our high quality multi-colored printed house wrap gives us a distinct competitive advantage in the marketplace in addition to our lower price points. The downturn in the housing market is still a factor and distributors continue to keep inventories lean. But we've been encouraged by the sales momentum we see in our engineered products segment.

In the fourth quarter, we also had a large shield order for $1.7 million. This order came from the same customer from whom the Company received a nonrecurring order in the first quarter of 2007. The order is being shipped out over a period of three quarters and began shipping in the fourth quarter of 2008. As a result of this order, our infection control segment revenues increased by 52% from the year ago quarter. And we will continue to see an increase in the first half of 2009.

Both of these segments gave our revenues a robust lift in the fourth quarter, which offset the decline we experienced in the apparel and to a lesser extent, extended care segment. Gross margin is down, primarily to cost increases from our suppliers due to increased labor and material costs. As well as the strengthening Chinese currency and higher crude oil prices, has also had an impact on our gross profit margin. Additionally, the higher mix of engineered products sales, which had lower margins, factored into the overall lower gross margins for 2008. We expect our gross margin for the disposable apparel segment to improve beginning in the first quarter of 2009, as we pass on a price increase to our distributors. We do not expect the outlook of improved margins -- or I am sorry, we do expect the outlook of improved margins on the apparel business to be somewhat offset by the increased mix of engineered product sales in 2009, as we expect the continuation of rapid growth in this segment.

Speaking of the apparel segment, I would like to acknowledge Chris Lousios as our new Vice President of Sales and Marketing. We hired Chris as Vice President of Sales for our apparel segment in the second quarter. He previously had worked for Cardinal Health. We quickly recognized Chris' abilities and recently promoted him to our top sales and marketing position. We're confident that as our sales and marketing executive primarily for the disposable apparel segment, he will generate positive results, increase visibility in the marketplace for our complete line of products.

For the year, we generated cash from operation of $3.8 million, an increase of 84% from the prior year. We have also been reducing inventory, primarily in the engineered products segment, as inventories are down by 14.6% compared to December 31, '07. With that, I'll turn the call over to Lloyd to review our financial results and then we'll make some final comments. Lloyd.

Thanks, Al. Consolidated sales for the fourth quarter ended December 31, 2008, increased by 14.8% to $9.1 million, from $8 million. Consolidated sales for the year increased slightly to $35.8 million from $35.5 million. Although sales were up slightly for the year, sales in the last six months of 2008 were up 12.1%, as compared to the last six months of 2007. Management is encouraged by the increase in revenue over the past six months, especially in light of these economic times.

Let me break down the segment sales for the fourth quarter and the 12 months. Sales for the disposal protective apparel segment for the fourth quarter decreased to $5 million from $5.2 million. And they decreased for the year by 10.5% to $20.2 million from $22.6 million. The decrease for the quarter and the year is primarily related to decreased sales to our largest distributor, as well as to lower sales to other clean room and industrial distributors. Partially offset by increased sales to a major national distributor from whom we received preferred vendor status during the first quarter of 2008. Although our sales to our largest distributor were down in 2008, we do expect them to improve in 2009.

Engineered products segment sales for the fourth quarter increased by 82.4% to $1.8 million, as compared to $1 million. The increase is due to 121% increase in the sales of REX Synfelt synthetic roof underlayment, and a 65% increase in the sales of REX Wrap house wrap. Engineered product segment sales for the year increased by 57.2% to $8.2 million, from $5.2 million. That increase is due to 120% increase in synthetic roof underlayment and a 10% increase in the sale of house wrap. We are very encouraged and optimistic about the tremendous growth potential for this segment.

Infection control segment for the quarter increased by 52% to $2.2 million, from $1.4 million. The sales improved due to the fact that we received the $1.7 million shield order in the fourth quarter, that, as Al mentioned, will be shipped out over a period of three quarters. Infection control segment sales for the 12 months increased slightly to $6.6 million, as compared to $6.5 million. Shield sales should improve in 2009 due to the above mentioned order but unless concerns about Avian flu increase, we expect mask sales in 2009 to be similar to 2008.

Turning to gross profit, the gross profit margin for the fourth quarter of 2008 was 41.1%, as compared to 45.4%. Margin for the year was 43.3%, as compared to 46.4%. Gross margin for the quarter and for the year has been affected by the change in mix in which engineered product sales, which has lower margins, was a higher percentage of our total sales in 2008. Additionally, cost of goods for the disposable protective apparel segment increased due to increased labor and material costs in China, the strengthening Chinese currency and higher crude oil prices. We expect gross profit margin for this segment to improve, starting in the first quarter of 2009, as we pass on a price increase to our distributors.

For the fourth quarter, SG&A expenses increased to $3.2 million or 35.3% of sales, as compared to $3 million or 37.5% of sales. For the year, SG&A increased slightly to $12.6 million from $12.5 million. And as a percentage of sales, the expenses decreased slightly to 35.3% from 35.4%. In 2009, we expect to reduce expenses as a percentage of sales as our revenue grows. The effective income tax rate was 37.8% for 2008, as compared to 34.9% in the prior year. Going forward, management expects the effective tax rate to be in the 38% range.

Net income for the fourth quarter was $295,000 or $0.01 per diluted share, compared to $457,000 or $0.02 for the year. Net income income for the year was $1.6 million, compared to $2.4 million. Income as a percentage of sales for 2008 and 2007 was 4.4% and 6.8% respectively. Diluted income per share in 2008 was $0.06, as compared to $0.09 in the previous year.

Turning to the balance sheet. Our current ratio as of December 31, 2008, was 12.4 to 1. We completed the quarter with cash and cash equivalents of $4.6 million, up from $4.1 million in the same period last year and had working capital of $21.7 million. The increase in cash is due to cash provided by operations of $3.8 million. Partially offset by cash paid for the repurchase of $2.1 million of common stock and cash used in investing activities of $1.2 million. Inventory levels decreased by $2 million to $12.1 million, from $14.1 million. This decrease is primarily due to decrease in the inventory for the engineered products segment, which occurred primarily in the third and fourth quarter of 2008.

We do expect our inventory turns to continue to improve in the coming quarters. In 2008, we repurchased and retired approximately 1.7 million shares of common stock at a cost of $2.1 million. As of year end, we have repurchased and retired over 4.6 million shares of common stock, at a cost of $5.6 million through our repurchase program. Future repurchases are expected to be funded from cash on hand and cash flow from operations. The Company currently has no outstanding debt and maintains an unused $3.5 million credit facility. With that, I'd like to turn the call back to Al for closing comments. Al.

Thanks, Lloyd. Last year at this time, we provided guidance in terms of a range of performance for 2008. By the next quarter, we had to revise that due to the deteriorating economic environment. This year, I'll outline for you some key assumptions to give you a framework for thinking about our business for 2009. I've already touched on a couple of these but let me reiterate them all here.

We expect growth in the disposable apparel and engineered products segments and, to a lesser extent, the infection Control segment. We expect improved margins on the apparel business, offset by the increased mix of the engineered product sales, which have lower gross margins, in 2009. We expect sales, general and administrative costs, as a percentage of sales, to decrease in 2009. That wraps up our prepared remarks, and we're going to open up the call to questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from line of [Jerry Fuller] with LPL Financial. Please go ahead.

Hi, gentlemen.

Jerry, good afternoon.

Hi, Jerry.

Hello, there. I'm trying to get my hands around these great contracts, we're looking for future growth. And by the way congratulations on doing well enough to not have to have TARP funds from the US Government or something. But I'm trying to figure out, would these contracts and to model this for clients, what that might mean for what we can look to expect for '09, as far out as you can possibly even go with that?

Yes, Jerry, we're kind of looking forward to a banner year for us in these economic times. We think that -- fully expect that we'll go through the $40 million number for this year, with some very, very nice gross profits, compared to last year. So all of these contracts are going to come into play. I don't think you'll see them really roll in until probably second quarter, as far as some of the bigger engineered products items that we've got going. But everything we have seen in the first couple of months of this year is really encouraging. We're really happy from this side of the coin. So hopefully, we don't have to go and ask for any TARP fund. It sure doesn't look like we will. We're going to remain profitable and with the new increase in our GP's and our increased sales, I think we're going to have a fun year.

Okay. Is there anyway to hone that down a little bit because, of course, it looks like SG&A is going to drop after all in '09, which is good. But with the product mix, is there any way to tell what -- if earnings per share are going to go one direction and revenues the other or how will you work that?

We think they're both going up, Jerry.

All right.

We're going to be pretty happy, I think, with both counts.

Okay. Thanks a lot and congratulations.

Thanks, Jerry.

Thank you.

Thank you. (Operator Instructions). And our next question comes from line of [Larry Booth,] Private Investor. Please go ahead.

Good afternoon. I was pleasantly surprised to see the new product line of what appears to be a roof repair version of the synthetic felt. And I was wondering if you could give some guidance, considering the horrible weather and unusually brutal conditions in many parts of the United States this year, what you expect in terms of a relationship between new home construction and new roof construction versus restoration, repair of existing units? And how that's going to impact things going forward? And secondarily, with the quite depressed share price at this moment, some indications of utilization of existing capital to do further repurchasing of shares?

All right, let me start with the share price. We have been continuing to buy the shares back. We continue to cancel stock. We have no intentions of stopping that program. We still have $1 million left on our buyback program. And I am quite sure we'll have no problem with the Board reapproving another $2 million worth of to repurchase the stock.

But understand, that when you buy stock back as a Corporation, under SEC rules, you can only buy a certain percentage of what is traded on a daily basis. It's not something that you're allowed to go up and take out offers. You can only go on a bid. So, it's not as easy to buy as people would like to think it is. But yes, we are going to continue. And we'll support our share price, certainly a lot of higher than where it is today. But if you look at the general markets, I think Alpha has held fairly well, considering what's happened to a lot of the stocks in today's environment.

As far as the roof underlayment goes, we sell mainly through distribution. We do not sell to direct-to-home builders, et cetera. It is not a great market, I imagine, in today's world but we had extremely nice increases last year. We'll continue to have those increases going forward in '09.

A lot of it, of course, will be hurricane related. And due to economic times, again, people rebuilding their current establishments. When you have shingles that warp and buckle and you have to replace them, no matter what the economic climate, it's either that or start swimming in the living room. So, yes, they will start -- we'll continue to sell roof underlayment for reroofing and new construction. But I can't give you a percentage of where it goes because all our sales are through distribution. I hope that answered it.

Thank you very much, sir.

Thank you. And our next question comes from line of [John Reese] with [Profit] Investment Company. Please go ahead.

Well, I just wanted to offer my congratulations for coming through a very difficult year and acting like a shining star. Fundamentally, I think it is a great credit to your management team and your sales team to be able to do what you did.

I do that, too, John. I look at Lloyd's group and Lloyd and his accounting staff and they've just done a great job with this Company. And they'll continue to do so. We know what happens if you try to raise money in these markets, John, it can't be done. You give away the farm. And I appreciate your comments because you know it better than anybody. We're fundamentally strong, we've got lots of cash and we'll continue to build cash and continue to grow this business this year. We're really optimistic.

Well, my hat is off and I will be looking forward to all of this progress through 2009.

Thanks, John. We'll keep you posted.

Thank you. Bye.

Thank you. (Operator Instructions). And our next question is from Steve Jara, Private Investor. Please go ahead.

Okay. Thank you for taking my question. Back in September, you announced Fortune 500 multiyear contract with a customer. There wasn't really a lot of detail provided with that announcement, I believe, due to confidentiality. Can you give us a little more color on what products are going to be involved in that and when you really see that kicking in?

Well, as far as kicking in, I think you'll see it kick in in second and third quarter fairly heavily. I can't give you much color because of the confidentiality that we have with the company. They have asked us not to disclose their product line due to some of their marketing efforts going forward. So we really can't give you any color on it yet. Hopefully, we'll get to show you revenues from it in the second and third quarter that will impress you.

Okay. Can you share whether this will be domestic or international business or both?

No, it will be domestic.

Okay.

In the United States.

Okay. And then just going back to gross margin, you had talked, it looks like this quarter it was down again to about 41%. And you talked about increases on disposable protective apparel for 2009. What can we model for 2009 for gross margin? Are we looking in the mid-40's?

I've got to give that one to Lloyd.

Yes, what we're going to have -- our apparel margin will improve in 2009. Our engineered products margin will also improve. But with the mix with engineered products being a higher percentage again in 2009, that will have an effect. I would say for modeling purposes, you could probably use something similar to the full year 2008 number. And 2008 was 43.3%.

Okay.

I would use that as a rough number.

Okay. Then one last question. The earlier caller, you had answered, talking about the first couple of months this year that you're pretty pleased with what you're seeing. Is that as far as revenue goes for the first couple of months of the year?

No, that's across the board.

Okay. All right. Okay, thanks for answering my questions.

You're welcome. Thanks for calling.

Thank you. And there are no further questions in the queue. I'd like it turn it over it Mr. Miller for any concluding comments.

With no more questions in the queue, I want to thank everybody that joined us today. And we'll look forward to keeping you posted as we go into '09. Thanks very much.

Thank you, sir. Ladies and gentlemen, that does conclude today's Alpha Pro Tech Limited year end conference call. Thank you for your participation. You may now disconnect.