Alpha Pro Tech Ltd (APT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alpha Pro Tech, LTD second quarter 2010 earnings conference call. During today's presentation, all parties will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions).

This conference is being recorded today, Tuesday, August 10th of 2010, and I would now like to turn the conference over to Cameron Donahue of Hayden IR. Please go ahead, sir.

Thank you, and good afternoon. We would like to thank everyone for joining us today for Alpha Pro Tech's fiscal 2010 earnings conference call. Our call will be hosted by Mr. Al Miller, President and Mr. Lloyd Hoffman, Chief Financial Officer. Following the management's discussion there will be a formal Q&A session open to participants on the call.

Before we get started I am going to review the Safe Harbor statement. This conference call contains forward-looking statements that are made pursuant to the Private Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risk, uncertainties and assumptions as described from time to time and registration statements, annual reports and other periodic reports that the Company has filed with the Securities Exchange Commission. All statements other than statements of historical facts which address the Company's expectations or sources of capital or to express the Company's expectations of 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 of the Company's results will not be materially different from those described herein. Forward-looking statements can be identified by such words as believe, anticipate, estimate or expect which reflect the current views of the Company with respect to future events. We caution listeners that these forward-looking statements speak only of 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 any changes in the Company's expectation or change in events, conditions and circumstances on which the statements are based. With that I would like to turn the call over to Mr. Al Miller, President, for opening comments. Al the floor is yours.

Thanks, Cameron. Thanks to everyone who joined us for our earnings call today. I am joined by Lloyd Hoffman, our CFO. Sales for the second quarter and first half of 2010 decreased relative to the strong ramp up we saw in the first half of 2009. But our Building Supply segment continued to perform extremely well, despite the continued slow down in the Construction and Building Industry.

The overall sales decline was due to several factors, including the abatement of the fear of the global H1N1 influenza A pandemic which affected our Infection Control segment mask sales as well as decrease in sales of our Disposable Apparel segment due to decreased sales of disposable shoe covers to our former largest distributor. The Critical Cover Disposable Protective Apparel brand and its associated trade names have been manufactured by Alpha Pro Tech exclusively for our former largest distributer since the early 1990s.

During the first quarter 2010, this distributor decided to launch its own private label line of Disposable Protective Apparel that competed directly with our line of products. We made a business decision to transition away from selling Alpha Pro Tech Critical Cover shoe and boot covers to this distributor as we knew there was a demand from the end customer that would enable us to move our products through new distribution channels and that it would be in the long-term interest for the Company.

This was a difficult situation but one we were not unfamiliar with as we were faced with a similar situation in our Building Supply segment a few years ago. And we have seen the positive results that have emanated from that decision. As a result, we have shifted away from this distributor as the sole distributor of our Critical Cover Protective Apparel product line, and are in the process of implementing a more diversified, broader global distribution strategy.

The decrease to our former exclusive distributor in the second quarter of 2010 was partially offset by increased sales to a broader base of our distribution network, and in particular, to a major national distributor with whom we have preferred vendor status. As previously announced, we received the Outstanding Performance Environmental Vendor Award from this distributor for 2009. Our sales to them were over two and a half times greater in the second quarter of 2010 as compared to the same period of 2009.

The change in our relationship with our former largest apparel distributor has adversely affected sales in the short-term. But we expect it to be beneficial in the long-term as we develop a broader base of distribution. This is also a primary reason for our increase in inventory during the second quarter as we transition to supplying product to a broader distribution channel. This is similar to the distribution change that we implemented in the Building Supply segment in 2007, and ultimately it was the catalyst of our growth in that segment over the past few years.

As a case in point, we continue to reap the benefit of our decision to reposition our Building Supply distribution channel strategy in 2007. During the second quarter 2010, we increased our building supply sales team in anticipation of significant growth in the coming quarters. Discussions with new and existing distributors have been very encouraging. We are now a market leader in synthetic roof underlayment space and expect to keep and expand our market share during the transition from felt paper to synthetic roof underlayment. One of the driving forces in this transition is that synthetic is now priced at similar levels of traditional felt and provides a labor saving of 50% and is a superior product.

In addition to growth opportunities with existing products, we are also excited about our planned launch of a breathable house wrap in the third quarter of 2010 that should increase our potential market share. The breathable house wrap market represents for approximately 80% of the total house wrap market. This is an exciting new growth opportunity for the Company, and we are very optimistic about the future of this segment.

The decrease in mass sales was primarily attributable to a decrease in demand for our N-95 respirator mask sales relating to the global H1N1 influenza pandemic in 2009. We expected sales to return to pre-H1N1 levels unless pandemic resumed. But we also know we took market share when supplies were tight in 2009, and we expect that some of those customers will remain with Alpha Pro Tech.

Shield sales were primarily down in the second quarter of 2010 due to the final shipments of the $1.7 million nonrecurring shield order received in the fourth quarter of 2008. That order was shipped out over a period of three quarters and finalized shipping in the second quarter of 2009. General shield sales also decreased in the second quarter in 2010 partially due to the H1N1 influenza pandemic. With that I will turn the call over to Lloyd to review our top and bottom line details and select balance sheet data, and then I'll make some final comments. Lloyd?

Thanks, Al. Consolidated sales for the second quarter of 2010 decreased by 22.9% to $11.2 million from $14.5 million in the second quarter of 2009. Consolidated sales for the six months decreased by 4.3% to $22.9 million from $23.9 million. I will spend a few minutes and break down the segment sales for the second quarter and six months.

Sales for the Disposable Apparel Segment for the second quarter of 2010 decreased by 20.3% to $4.8 million from $6.1 million. And for the six months decreased by 9% to $9.9 million from $10.9 million. The decrease for the three and the six months is primarily due to decreased sales of disposable shoe covers to our former largest distributor partially offset by increased sales to a broad base of our distribution network, and in particular to a major national distributor that Al has previously mentioned.

Building Supply segment sales for the second quarter increased by 29.4% to $4.9 million from $3.8 million. This quarter's Building Supply sales were the second highest on record, exceeded only by the sales in the third quarter of 2009. The segment increase was primarily due to a 24% increase in sales of REX SynFelt synthetic roof underlayment and a 46% increase in sales of REXWrap house wrap.

Building sales for the six months increased by 59.4% to $9.6 million from $6 million. The increase is due to a 63% increase in synthetic roof underlayment and a 58% increase in house wrap. For the first six months of this year, the sales mix for the building segment was 69% for synthetic roof underlayment and 31% for house wrap. The mix was very similar last year. As Al has mentioned, we continue to see significant opportunity in the Building Supply segment.

Infection Control segment sales for the second quarter decreased by 67.9% to $1.5 million from $4.7 million. Mask sales were down $2.5 million and shield sales down $700,000. Infection Control sales for the six months decreased 52% to $3.3 million from $9.6 million. For the six months, mask sales were down 2.3 and shield sales were down 1.4.

The overall mask decrease for the second quarter and the first six months in relation to mask is primarily related to the surge in the N-95 respirator mask in the second quarter of 2009 due to the concerns of H1N1. Shield sales were down primarily due to approximately $1.3 million in shields being shipped in 2009 from the nonrecurring shield order that we received in the fourth quarter of 2008.

Turning to gross profit. The gross profit margin for the second quarter decreased to 37.6% as compared to 47.2% for the same period of last year. For the six months, gross profit margin decreased to 40.3% compared to 46%. Gross profit margin was negatively affected by the change in product mix in which Building Supply segment sales, which have lower margins, increased as a percentage of total sales and Infection Control segment sales, which have higher margins, decreased as a percentage of total sales. Gross profit margin in Disposable Protective Apparel segment was down in the second quarter of 2010 as compared to the same quarter last year.

As part of our strategy to increase inventory levels to strengthen our position in the market place our gross profit in the second quarter was affected as we acquired some inventory primarily from alternative suppliers at a higher cost. Although we do not expect to incur these higher costs on an ongoing basis, gross profit margins for the Apparel segment is expected to be softer in 2010 as compared to 2009, but should improve from the second quarter levels.

General and Administrative expenses for the second quarter of 2010 increased by $119,000 or 3.5% to $3.5 million from $3.4 million. As a percentage of sales, expenses increased to 31.4% from 23.4%. Expenses for the six months increased by $663,000 or 10% to $7.3 million from $6.6 million. As a percentage of net sales expenses for the six months were 32% as compared to 27.8% for the same period last year.

The year to date increase in expenses was primarily due to increased employee compensation, increased market expenses, increased professional fees and public company expenses offset primarily by a decrease in executive bonus and a decrease due to a severance agreement for our previous Senior Vice President of Marketing which was expensed during the second quarter of 2009.

Net income decreased by 82.8% for the second quarter of 2010 to $372,000 from $2.2 million. Net income as a percentage of sales for the second quarter 2010 and 2009 was 3.3% and14.9% respectively. Basic undiluted income per share for the second quarter of 2010 and 2009 was $0.02 and$0.10.

Net income decreased by 60.6% for the six months to $1.1 million compared to $2.7 million, and as a percentage of sales, net income for the six months 2010 versus2009 was 4.6% as compared to 11.2%. Basic and diluted income was $0.05 as compared to $0.12.

Turning to the balance sheet. The balance sheet continues to remain strong. As of June 30th, 2010 we had working capital of $30 million representing an increase in working capital of $1 million since December 31st, 2009. As of June 30th our current ratio is 26 to 1. Cash decreased to $3 million as of June 30th, 2010 compared to $9.8 million as of December 31, 2009.

The decrease in cash was due to cash use in operating activities of $6.4 million and cash use in investing activities of $400,000. For the six-month period cash was affected by the increase in our inventory level of $4.8 million as well we paid out over $2.2 million in the first quarter of 2010 for 2009 accrued liability. Management expects the cash position to improve over the coming periods as we anticipate a decrease in our overall inventory level, and the impact on cash in the first quarter of 2010 resulting from the annual payment of the 2009 accrued liabilities will not occur in the latter half of 2010. In fact, cash has increased by approximately $.5 million since quarter's end.

The inventory increased for the six months was primarily due to $3.1million increase in inventory for the Disposable Protective Apparel segment related to our strategy of having a strong inventory position to compete in the market place. Inventory for the Infection Control segment increased by $1million due to the stock piling of our N-95 Particulate Respirator mask, but is down from the March quarter. In addition, inventory for the Building Supply segment increased by $700,000 as a result of our increased sales. The Company currently has no outstanding debt and maintains an used $3.5 million credit facility. With that I would like to turn the call back to Al for closing comments. Al?

During the first half of 2010 we have risen to the challenge of managing the slow down of the growth we experienced through most of 2009, and we continue to be carefully manage our expense structure to maintain profitability. We are taking advantage of the opportunity in our markets to broaden our distribution channel with existing and new distribution partners and expect to capitalize on opportunities we see going forward that should help us expand our market penetration.

We are excited about introducing our new breathable house wrap during this quarter as we also broaden our product offerings and maintain our market leadership position in this segment. Building continues to strengthen and therefore we are increasing our Building Supply segment. Sales growth for 2010 to 25% to 30% from the previously announced. And we currently have manufacturing capacity in the $38 million to $40 million range that can be expanded as required.

We expect the Disposable Protective Apparel segment to be down 20% on an annualized basis, but with increased distribution we are looking for a stronger 2011 relative to the latter part of 2010. We have also built an additional N-95 respirator mask machine and will now be able to take even better advantage of future opportunities in demand spikes for the N-95 mask. We want to thank everyone for the continued interest and support. That concludes our prepared remarks for the day and would now like to open the call up for your questions.

Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions). And our first question comes from line of Ali Motamed with Boston Partners. Please go ahead.

Hi, guys.

How are you doing, Ali.

Hi, Ali.

Good, thanks. Can you repeat the last probably five sentences of your prepared remarks where you are talking about the annualized volumes and give a little clarity on whether you mean like if you add the whole year up year-over-year or give us a little more visibility on what you were saying there?

On the Disposable Apparel?

Yes, Disposable Apparel and the Building products. You were talking about a couple different segments.

Yes, on the building products, if you go back to our last conference call, Ali, we expect to grow that by 20% for this year.

Okay.

Now we are saying 25% to 30% will be a gimme on that one.

Okay.

So all you have to do is take last year's and add 30 points to it.

Okay, and then on the Protective Apparel?

We're looking at probably down 20% this year over last.

For the whole year, so whatever happened in the first quarter -- the first little part we should consider that. Okay.

And we've had a pretty good bump the last couple months. We have no idea where it is going, but we'll wait and see.

Okay. Thank, you. [Bye now].

Thank you. And our next question comes from the line of Amy Norflus with Pilot Advisors. Please go ahead.

Hi, guys. Can you comment on what the World Health Organization put out today claiming that the virus has run its course and is pretty much over?

Yes, what they have basically done, Amy, is said that the H1N1 pandemic is over. I mean, we all expected that to end in 2011 and it ended a lot sooner than we all thought it would. But if we look at the history of time and what's been happening, respiratory diseases are the wave of the future.

We had SARS come along in 2003, then you had the Bird flu and now you have H1N1. We are certainly not looking forward to anything happening, but as you get into the flu season each year there is always some new break, and the N-95 mask will still be in demand as we go forward. That's one of the reasons we built the new N-95 line to make sure we can meet those demands. But that's one we are going to have to wait and see.

And then two more things. Can you talk about this new breathable house wrap and where it will be sold and the applications and how big it can be, and is that part of your new guidance for Building to be up 20% to 35%?

It isn't part of our guidance. We have yet to sell it, but we will. When you look at the house wrap industry, your leader of course being DuPont with Tyvek, and that is a full breathable product. The house wrap industry is somewhere around $1 billion a year annualized. 80% of that market is for breathable building wrap. We did not have a breathable up until very recently. Now we can go after that 80% of the market that we never had a shot at before. So we are looking for good things coming from it, Amy.

Perfect. And can you just break out the inventory? How much of the inventory increase is in Building products?

Amy, the $700,000 of the $4.8 million is Building.

And that should be sold when?

That's just part of our inventory that we need. We have increased the inventory in relationship to our increase in sales.

Okay. And now what about the other parts of the inventory?

The Infection Control was up $1 million which was due to N-95 stock piling. That has come down by about $100,000 this quarter, so it was up even more at the end of the first quarter. And the largest increase is a $3.1 million increase in the Disposable Apparel segment which we have basically brought that in, in order to compete in the situation that we're in.

And how are you doing competing in the situation and when should that go down?

Amy, I'll answer that. I was just talking to sales today on it. I think we'll win the war. We may have lost a few battles, but we'll win the war.

Okay. I'm with you. Congratulations, good luck and catch you next time.

All right thanks a bunch, Amy.

All right. Take care.

Thank you. And as a reminder, ladies and gentlemen,(Operator Instructions). And our next question comes from the line of Ephraim Birnbaum, a Private Investor. Please go ahead.

Good afternoon. Just a question. If I'm reading correctly you are a Building Supply and your other sales are about equal for the quarter for the public. Would it be something to consider to have two public companies, one straight building supply and the other as you were before? And the investment community could look at it better?

No, that wouldn't make any sense at all.

Okay.

We are much better off as a one piece company than breaking it up.

Thank you very much.

Thank you. And our next question comes from the line of Michael Anthony, a Private Investor. Please go ahead.

Yes, sir. Hello, gentlemen. I see you announced that you made $0.02 to $0.10 for the six months. You made $0.03 for the first quarter. What did you actually make for the second quarter in cents wise?

$0.02 for the second quarter.

$0.02?

$0.05 for the year.

Okay. So you are guidance up for the rest of the year? Is that what I'm understanding?

No, you saw us giving you guidance on the Building products being up 25% to 30% over last year and Apparel sales being down 20% over last year.

Thank you. (Operator Instructions) And our next question comes from the line of [Rod Roman of State Safety]. Please go ahead.

How are you guys doing this evening?

Good, thanks.

A quick question here for you. DuPont Tyvek with the coveralls and everything is having a serious back order issue and production problems, from what I understand. Have you been able to infiltrate against DuPont Tyvek and the coveralls with the Micromax, et cetera? I actually have a couple questions. The second one is, I know that freight prices from overseas are starting to go up. Do you think you guys will be able to pass along the pricing pretty efficiently? Are you tied up in contracts? Do you think you will be able to pass that along? Those are my two questions.

Let's go to DuPont Tyvek for the first one. We hear conflicting stories on what is happening with Tyvek in the market place. We hear rumors it is up for sale and all kinds of good things. However, if somebody comes to us, for an example, and they want an equivalent coverall manufactured out of our materials and something that we would recommend for use where they are currently using Tyvek, we'd be happy to supply that item and certainly quote it and make it for them and supply it.

The problem being in a lot of cases is when you get a direct quote, and they specifically say Tyvek, unless they are Dupont, you can't manufacture it, of course, and you can't supply it. That's where a bit of the problem is in Tyvek. If somebody wants a competitive garment in our materials, we will be happy to manufacture it for them, and I'm sure save them a lot of money in the same process. Does that answer your Tyvek question?

Yes. I was just curious if you'd seen a spike in your samples, if they are trying to push it and move people away from the Tyvek.

Certainly we try to do that every day of the week. Those guys are out there hustling and we sure hope we manage to win some. That's something we will have to wait and see. We currently have, as you can see by the inventory numbers, we have a lot of stock in finished goods. We will be happy to sell to anybody who would like to buy them. And we are going to continue to push hard to sell our inventories, and of course, turn that inventory back into cash.

All right, thanks.

Thank you. And at this time we have time for one more question. Our final question comes from the line of Hank Sauerwein, a Private Investor. Please go ahead.

Good afternoon, Al. How are you guys?

Pretty good, Hank.

Super. I've got a question. Even though it's diminishing importance as far as the business mix in terms of mask. Recall back when things were getting furious in the latter part of the year. Was it 3m that announced what was it a $20 million expansion of capacity for making their masks that were comparable to the N-95's, right?

Correct.

Okay. So given their expansion and our ability now to increase production subject to demand, what do you see as realistic -- there you go -- expectations for pricing realities if another bulge in demand were to hit? Can we still get the same margins? Will we be able to still receive the same margins on the next (inaudible)?

Yes. Very simply, Hank, yes. Number one, we are still the low cost provider of N-95's in the market place. Number two, with 3m running flat out and Alpha Pro Tech running flat out and everybody else and their brother that make one running flat out, you will still never cover the demand for N-95's during a pandemic. It will not happen.

Okay. If I can just get one more quick one in. Let's talk about underlayments for a moment. On an absolute level of sales quarter-to-quarter-to-quarter, are we still making good progress against the competition and maintaining our industry leading position there?

We sure are and continuing to grow it.

That's all I've got, Al, thanks.

All right. Thanks.

Thank you. And at this time, I would like to turn the conference back over to management for closing comments.

I would like to thank everybody for joining us today. Thanks for your support, your continued interest and we will continue to update everybody as we go forward and get some good news out in the street. Thanks very much.

Ladies and gentlemen, this does conclude the Alpha Pro Tech, Ltd. second quarter 2010 earnings conference call. We thank you for your participation and at this time you may now disconnect.