Alpha Pro Tech Ltd (APT) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Alpha Pro Tech fourth quarter year-end 2010 earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Tuesday, March 15, 2011. I would now like to turn the conference over to Mr. Cameron Donahue of Hayden IR. Please go ahead, sir.

Thank you and good afternoon. We'd like to thank everyone for joining us today for Alpha Pro Tech's fourth quarter and full year 2010 earnings conference call. The call today will be hosted by Mr. Al Millar, President and Mr. Lloyd Hoffman, Chief Financial Officer. Following the discussion, there will be a formal Q&A session for the 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 Act 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 the Company has filed with the Securities and 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 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 herein. Forward-looking statements can be identified by such words, 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 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 any change in the Company's expectations or any change in events, conditions, or circumstances on which the statements are based.

With that, I would like to turn the call over to Mr. Al Millar, President for opening comments. Al, the floor is yours.

Thanks, Cameron. Thanks everyone who joined us for our earnings call today. I'm joined by Lloyd Hoffman our CFO. 2010 proved to be a challenging year but we carefully managed expenses and remain profitable, even as sales in both our Disposable Protective Apparel and Infection Control segments decreased significantly during the year. This decline was offset by continued strong performance from our Building Supply segment that delivered almost 30% over-year revenue growth. Building Supply segment sales comprised 46.3% of total sales for the 12 months ended December 31, up from 25.6% for the same period of 2009.

We expect Building Supply segment sales to continue to grow as a percentage of total sales in the coming periods. This is due not only to the industry's enthusiastic acceptance of our REX SynFelt Synthetic Roof Underlayment and REX Wrap Housewrap products, but also to our recent introduction of non-perforated breathable housewrap that opens up 80% of the housewrap market we were not able to penetrate before.

We believe our REX SynFelt Synthetic Roof Underlayment is perceived as an industry leader in terms of quality. As the market evolves from felt paper to synthetic roof underlayment, we are in a strong position to capitalize on significant growth opportunities. REX Wrap Housewrap, our high-quality multi-color printed housewrap, gives us a distinct competitive advantage in the marketplace and our market share is growing even during this weak building market and economic downturn.

Discussions with potential and existing distributors have been very encouraging, and we increased our Building Supply segment sales team in 2010 in anticipation of growth in the coming periods. We launched our new REX Wrap Fortis Housewrap, which is an ICC approved non-perforated breathable housewrap. This non-perforated breathable housewrap market accounts for the majority of the total housewrap market. So our REX Wrap Fortis Housewrap should increase our housewrap market share.

Sales of the REX Wrap Fortis Housewrap commenced in the fourth quarter of 2010, and should contribute to our growth in 2011 and beyond. We remain optimistic about the future of the Building Supply segment, as our distribution channel strategy continues to strengthen. Infection Control segment sales comprised 14.4% of total sales for the 12 months ending in December as compared to 36.4% for the same period of 2009. During which we experienced significant sales of our N95 Respirator Mask due to the H1N1 pandemic which has since abated. The Disposable Protective Apparel segment comprised 39.3% of total sales for the 12 months ended December 31. In this segment, we incurred higher cost as we acquired inventory from alternative suppliers. This was due to our strategy of increasing inventory levels to strengthen our position in the marketplace.

We do not expect to incur these higher acquisition costs on a going forward basis, but will take some time in 2011 to turn this inventory. The decrease in sales of our Disposable Apparel segment was due to decreased sales of disposable apparel to our former largest distributor. As you will recall, during the first quarter of 2010, we disclosed that this distributor decided to launch its own private-label line of Disposable Protective Apparel, which competed directly with our line of products. We made a difficult business decision to transition away from selling Alpha Pro Tech Critical Cover Shoe and Boot Covers to this distributor. 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.

The change in our relationship with this distributor adversely affected sales in 2010, but could be beneficial in the long term, as we are now developing a broader base of distribution. This has been demonstrated in particular with a major international supply chain partner with whom we have achieved a Preferred Vendor Status and for whom we received our outstanding sales growth results for two consecutive years, 2009 and 2010, in our category. We also received an award for outstanding delivery quality for our aggregate service level performance in 2010 from his partner. Alpha Pro Tech was also a finalist for the Overall Supplier of the Year Award in 2010 across all categories. Sales to this major channel partner nearly doubled in 2010. This is not unfamiliar territory and similar to the distribution channel strategy change that we implemented in the Building Supply segment in 2007. It ultimately was the catalyst of our growth in that segment over the past few years.

We continue to reap the benefit our decision to reposition our Building Supply distribution channel in 2007 as reflected in my earlier comments. We expect positive results of our broader distribution strategy in the Disposable Protective Apparel segment as well. The change in product mix with higher sales in the Building segment, which carry lower gross margins and a revenue decline in both the Infection Control and Disposable Protective Apparel segments that both carry higher gross margins, impacted overall margins which declined for 2010 to 39.2% from 48.4%.

In addition, as mentioned above, we increased Disposable Protective Apparel inventory levels and incurred higher short-term cost to better meet market requirements as we implement our broader distribution strategy. Selling, general and administration expenses for both the 3 and 12 month periods of 2010 declined in absolute dollars but increased as a percent of sales due to be lower 2010 revenues.

I would now like to turn the call over to Lloyd, who will take you through the financials and provide more details.

Thanks, Al.Consolidated sales for the fourth quarter of 2010 decreased by 54% to $8.7 million from $18.9 million. Sales for the full year decreased 29.8% to $41.9 million from $59.7 million. I'll just spend a few minutes here to discuss the segment sales for the fourth quarter and the year.

Sales for the Disposable Protective Apparel Segment for the fourth quarter of 2010 decreased by 57.8% to $2.8 million from $6.5 million. For the year, the sales decreased 27.5% to $16.5 million from $22.7 million. The decrease for the three months and the year is primarily due to decreased sales from our former largest distributor, partially offset by increased sales to a broader base of our distribution network, and in particular, to a major international supply chain partner that Al previously mentioned.

Building Supply segment sales for the fourth quarter increased 11.5% to $4.5 million from $4 million. And Building Supply sales for the year increased 26.8% to $19.4 million from $15.3 million. The increase is due to the 21.2% increase in synthetic roof underlayment and a 40.4% increase in housewrap. For both 2010 and 2009, our sales mix was approximately 70/30 for synthetic roof underlayment and housewrap respectively. As Al has mentioned, we continue to see significant opportunities in this Building Supply segment.

Infection Control segment for the fourth quarter decreased to $1.4 million from $8.4 million. Mask and shield sales were down in this quarter, due to concerns of the H1N1 pandemic in 2009. Infection Control sales for 2010 decreased 72% to $6.1 million from $21.7 million. Mask sales were down by $13.4 million primarily related to the surge in N95 Respirator Mask in 2009 due to the concerns of the H1N1 pandemic. Shield sales were down due to a nonrecurring shield order in 2009 as well as the H1N1.

Subsequent to year-end, on February 8, 2011, we entered into an asset purchase agreement with in Oklahoma company to sell our line of pet beds. As consideration for the acquired assets, we sold our inventory at cost plus an additional amount for goodwill. The line of pet beds was included in the Infection Control segment and sales for 2010 were approximately $250,000 and incurred a loss for the segment.

Turning to gross profit. Gross profit margin for the fourth quarter decreased to 39.3% as compared to 51.1% for the same period in 2009. For the year, gross profit margin decreased to 39.2% as compared to 48.4%. Gross profit margin, as Al mentioned, 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 the Disposable Protective Apparel segment were down in the last three quarters of 2010 as compared to the same quarters of 2009, as margin was affected by the higher cost of inventory acquired from alternate suppliers due to the strategy of increasing inventory levels to compete in the new marketplace.

Selling, general and administrative expenses for the fourth quarter decreased by 27.9% to $3.2 million from $4.4 million. For the year, expenses decreased by $900,000 or 5.9% to $13.8 million from $14.7 million. As a percentage of net sales expenses increased to 33% as compared to 24.6%. The year-to-date decrease in expenses was primarily due to increased Building Supply segment expenses partially offset by decreased bonuses.

Net income decreased in the fourth quarter to $49,000 from $3.5 million. Diluted income per share was $0.00 per share as compared to $0.15. For the year net income decreased to $1.3 million compared to $9 million, and as a percentage of sales, net income for 2010 and 2009 was 3.1% and 15.1% respectively. Diluted income was $0.06 as compared to $0.39.

Turning to the balance sheet. The balance sheet remains strong with a current ratio of 39 to 1. Cash decreased to $5.3 million as of December 31, 2010, compared to $9.8 million as of December 31, 2009. But our working capital increased by $800,000 to almost $30 million. The $4.5 million decrease in cash was in large part due to a $4.2 million increase in our inventory level.

In 2010, our Disposable Protective Apparel inventory increased by $1.3 million due to our strategy of having a strong inventory position to compete in the marketplace. Inventory for the Infection Control segment increased by $0.5 million due to the stockpiling of N95 Respirator Mask. Although up year-to-date, both Disposable Protective Apparel and Infection Control inventory were down from both June and September. In addition, inventory for the Building Supply segment increased by $2.4 million as a result of our increased year-to-date and expected future sales. The Company currently has no outstanding debt, and maintains an unused $3.5 million credit facility.

With that, I would like to turn the call over to Al for closing comments.

Thanks, Lloyd. During 2010, we carefully managed our expense structure to maintain profitability as growth declined from 2009. We began broadening our Disposable Protective Apparel distribution channel with new distribution partners, and expect to capitalize on opportunities we see going forward that should help us expand our market penetration. We began generating revenue from our newly introduced non-perforated breathable housewrap during this quarter, which continues to expand our product offerings. This should allow us to strengthen our market leadership position going forward.

While Infection Control sales were down for the year, we built an additional N95 Respirator Mask Machine and will now be able to take even better advantage of future opportunities in demand spikes. Unfortunately, there is historically always some new pandemic and the N95 Mask will still be in demand as we go forward. With built the new N95 line to make sure we can meet these demands.

Our expectations for 2011 is our total overall revenue will be somewhat ahead of 2010 with the Building Supply segment being up approximately 15%. Although we project a year-over-year decline in revenue for the Disposable Protective Apparel segment, we project an increase of approximately 20% as compared to the last half of 2010.

The 2010 full-year numbers present a difficult comparison as the change in our distribution strategy did not occur until the second quarter. And we did not feel the full impact of that change until the third quarter. The Infection Control segment sales is expected to be impacted by the sales of our nonprofitable pet bed line. Reduced medical fleece sales and lower mass sales were our former largest distributor. That being said, we are in a very good position to capitalize on mass sales in the event of another respiratory outbreak or world situation.

Not only are the first two quarters of 2011 going to present difficult comparative challenges for the Disposable Protective Apparel segment, but due to the unusual weather conditions, the Building Supply segment was lower than expected in the first two months of 2011. But they are expected to strengthen in the latter part of the quarter, and continue to strengthen throughout the year. We expect overall revenues to be stronger in the second half of 2011. Gross profit margin will again be negatively affected by the change in product mix in which Building Supply segment sales, which have lower margins, are expected to increase as a percent of total sales. Net income for 2011 is forecasted to be similar to 2010.

This concludes our prepared remarks for the day. I'd now like to open this call up for your questions.

Thank you, sir.

(Operator Instructions)

Our first question is from the line of Amy Norflus with Pilot Advisors. Please go ahead.

Hi guys. Can you talk a little bit about the cotton cost and how it's affecting the margins and the businesses?

It's a good question Amy, and it's been asked before of us. We do not use cotton in our products. Most of our products are spun bonded materials. What's really interesting is, a lot of the pharmaceutical companies still use cotton reusables, which are laundered and returned to them in a clean state and of course, take up the old garments and delivery the notes. The cost of these garments is now getting out of sight and I think what you are going to see is a fairly rapid change over to disposables rather than reusables. It appears to be a cleaner way to go, Amy, and with the cost of cotton where it is, it certainly makes sense economically to make that switch. I hope that answered that.

Yes, perfect, thanks so much.

(Operator Instructions)

The next question is from the line of Michael (inaudible) with Oppenheimer & Co. Please go ahead.

Hi. I have two questions. One is obviously, the stock went up today based on what's going on in Japan. Not assuming that there is any radiation control with the masks, but with the tsunami wrecking so much around, do you see any possibility of any demand for the masks on just the general cleaning up and rebuilding, et cetera? And then I have a different question.

Yes, I -- Michael, we have all seen the devastation over there; you see everybody is wearing a face mask and they appear to be a general face mask. When you get airborne particles that are of respiratory nature that can attack the respiratory system, decaying bodies, garbage, et cetera, and high pollution rates, certainly an N95 would be the chosen mask to wear in a situation like that. I don't know that we will reap the benefit; we certainly had distribution in that area of the world. We will just have to wait and see what happens over the next week or so.

Okay, that was important to note that you do have distribution there. The second question is, about two, maybe three months ago, a little bit more, I was reading a lot about swine flu outbreaks in Europe, in the Middle East, and India, and nothing in the United States. And they had a whole bunch of deaths over there. Is that -- could that possibly be because it's been so cold here? Too cold for flu season?

Well, it's an interesting situation. If you take this year, I know not more than a month ago for example, in the state of Arizona, there was an incredible amount of people that have been hospitalized with localized flu. Now, what we don't know is was it a localized flu or was it H1N1? That probably, I guess we will never hear. So it's hard to say why it doesn't happen. Respiratory diseases have been pretty well predictable in that if you look at them, they seem to run on a three-year time span. We started out, we had SARS which was a pretty scary time, then we ran into bird flu, and then of course, the H1N1, which was an international pandemic. It's still servicing in parts of the world. Most of these respiratory illnesses break out end of March to mid-April. That's when we finally get to hear about them in this part of the world. So what prevents them from spreading, I don't know, and what gets them started I really don't know, but that's kind of the history of them.

Got it. I appreciate those answers, thank you.

(Operator Instructions)

I'm showing no further questions at this time. I will turn it back over to management for any closing remarks.

I'd like to thank everybody for joining us today. We certainly thank you for your continued support and interest in Alpha, and we will continue to update you on our next conference call. Thank you very much.

Ladies and gentlemen, this concludes the conference call. You may now disconnect, and thank you for your participation.