Alpha Pro Tech Ltd (APT) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Alpha Pro Tech second quarter 2011 earnings conference call. (Operator instructions.) This conference is being recorded today, Wednesday, August 3rd of 2011.

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'd like to thank everyone for joining us today for Alpha Pro Tech's second quarter and year-to-date 2011 earnings conference call. The call today will be hosted by Mr. Al Millar, President, and Mr. Lloyd Hoffman, CFO. Following their discussions, there'll be a formal Q&A session open 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 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 that the Company has filed with the Securities and Exchange Commission. All statements, other than statements of historical fact which address the Company's expectations or sources of capital, or to express the Company's expectations for the future with respect to the 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 words such as believe, anticipate, estimate, expect, which reflect the current views of the Company with respect to future event. 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 revision to any such statements to reflect any change from the Company's expectations or any change in events, positions, or circumstances on which our statements are based.

With that, let me turn the call over to Mr. Al Millar, president, for opening comment. 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.

Overall, our 2011 metrics remain challenging compared to last year, but building supply revenues continue to lead our three sales segments, and in the second quarter comprised a record high 61.8% of total sales for the three months ended June 30, 2011, and a record high 57.8% of total sales for the six-month period. Building supply sales for the second quarter of 2011 increased by 30.7% to a record $6.4 million and increased 36.2% sequentially from the first quarter. In addition, we surpassed our previous quarterly record by 20.1%.

For the six months ended June 30, building sales were a six-months record of $11.1 million, up 15.8% over the same period last year. 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 housewrap products, but also to our recent introduction of a non-perforated, breathable housewrap that opens up the majority of the housewrap market we were not able to penetrate before.

The launch of the REX Wrap Fortis housewrap has seen a positive endorsement from the end users, and we are now confident the new product meets our high quality brand recognition. We have started to increase our sales and marketing efforts and expect sales to start contributing more significantly commencing in 2012. We remain optimistic about the future of the building supply segment as our distribution channel strategy continues to strengthen.

This robust growth in our building supply segment was offset by a decrease in disposable protective apparel and infection control segment sales. The disposable protective apparel segment comprised 27.9% and 30% of total sales for the three and six months ended June 30. Infection control segment sales comprised 10.2% and 12.2% of total sales for the three and six months ended June 30 respectively.

The [disposably] protective apparel decrease was partially due to the decline in sales of disposable apparel to our former exclusive private label distributor, which we have referenced in our last two calls. Although this distributor informed us of this decision in the first quarter of 2010, it was not until the second quarter of 2010 that we started to experience the significant impact of this change.

Sales to this distributor in the second quarter of 2010, although down from historic levels, were still significant on a comparison basis to the second quarter of 2011, making quarterly and year-end revenue comparisons challenging. Sales to this distributor are expected to be insignificant, going forward, as they were only approximately $100,000 in the second quarter of 2011.

In addition, sales to our major international supply chain partner, from whom the Company received two awards in 2010, were also down in the second quarter of 2011 as compared to the same quarter of 2010. This resulted from initial stocking orders to fill their pipeline for the anticipated increase in business during the second quarter of 2010. Although sales to this partner were down as compared to the same quarter last year, sales in this quarter were higher than the average of the past three quarters. And in addition, this partner's same quarter sales to their end users were up 39%, demonstrating a strong demand for our products.

Infection control segment sales for the three months end June 30 decreased by 30.5%. Gross margin for the second quarter of 2011 was essentially the same as the same period last year, but year-to-date gross margin is down. The change in product mix with higher sales in the building supply segment, which carry lower gross margins, and the revenue decline in both the infection control and disposable protective apparel segments that both carry higher gross margins, impacted overall year-to-date gross margin.

Selling, general and administrative expenses for both the three- and six-month periods of 2011 declined in absolute dollars but increased as a percentage of sales due to the lower 2011 revenues. Year-to-date, we remain profitable even with decline in year-over-year revenue, and hope to continue to build on this.

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 second quarter of 2011 decreased by 8.4% to $10.3 million from $11.2 million. Sales for the year decreased by 15.9% in $19.2 million from $22.9 million. Let's spend a few minutes here to discuss the segment sales for the second quarter and the six months.

Sales for the disposable protective apparel segment for the second quarter decreased by 40.7% to $2.9 million from $4.8 million. The decrease in this period is primarily due to decreased sales to our former largest distributor and to a major international supply chain partner that ramped up heavily in the second quarter of 2010, as Al has previously mentioned.

For the six months, sales of apparel decreased by 41.8% to $5.8 million from $9.9 million. Building supply segment sales for the second quarter increased by 30.7% to a quarterly record of $6.4 million from $4.9 million. The increase is primarily due to a 25% increase in sales of REX housewrap and a 32.8% increase in REX synthetic roof underlayment. Building sales for the first six months of 2011 increased by 15.8% to $11.1 million from $9.6 million. That increase is due to a 19.5% increase in housewrap and a 13.1% increase in synthetic roof underlayment.

For the six-month period in 2011 and '10, the sales mix percentage was approximately 68%-32% for synthetics versus housewrap. As Al as mentioned, we continue to see significant opportunities in the building supply segment.

Infection control segment sales for the second quarter decreased 30.5% to $1.1 million from $1.5 million. Mask sales were down 38.7% to $700,000, and shield sales were up 37.1% to $400,000. Infection control sales for the six months decreased 29.8% to $2.3 million from $3.3 million in the year-ago period. Mask sales were down 36.5% to $1.5 million, and shield sales were up 7% to $700,000. Overall, the mask sales decrease for both the three- and six-month period of 2011 was primarily due to a decline in industrial mask sales as a result of our previous largest industrial distributor launching its own line of masks as well as, to a lesser extent, the decline in medical and dental mask sales.

Turning to gross profit, gross profit margin for the second quarter increased slightly to 37.7% as compared to 37.6% for the same period in 2010. Year-to-date gross profit margin decreased to 37.2% as compared to 40.3%. As Al has mentioned, year-to-date gross profit margins were 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. Building supply sales comprised a record high 57.8% for the six months compared to 41.9% for the same period last year.

For the first six months of 2011, gross profit margin in the disposable protective apparel segment, although similar to the average of the last four quarters, was down compared to the same period of 2010, and this is due to competitive pricing pressures from our previous former largest distributor. We expect gross margin on the building supply segment to increase starting in the third quarter of this year as a selling price increase went into effect in early July.

Selling, general and administrative expenses for the second quarter decreased by 6.3% to $3.3 million from $3.5 million, and SG&A for the first six months decreased by $600,000, or 8.5%, to $6.7 million from $7.3 million. As a percentage of sales, expenses increased to 34.7% as compared to 32%.

The year-to-date decrease in expenses is primarily due to a decrease in the disposable protective apparel and infection control segments, as well as decreased corporate expenses, partially offset by increased building supply segment expenses.

Net income in the second quarter was $304,000 from $372,000 from the year-ago period. Basic and diluted income per share was $0.01 compared to $0.02. Year-to-date income for 2011 decreased to $192,000 as compared to $1.2 million, and as a percentage of sales, net income for 2011 and 2010 was 1% and 4.6% respectively. And basic and diluted income was $0.01 as compared to $0.05.

Turning to the balance sheet, the balance sheet remains strong, with a current ratio of 29 to one. Cash increased to $6.4 million compared to $5.3 million as of December 31, 2010, and working capital increased by $300,000 to $30.2 million. The $1.1 million increase in cash was in large part due to a decrease in inventory. The cash on hand of $6.4 million increased significantly as compared to the $2.8 million that we had as of the March 31 and is expected to continue to increase in the coming quarter.

Year-to-date inventory is down 2.2 million, and all three business segments are down this year. Disposable apparel is down 1.5 million, infection control is down 400,000, and the building supply segment inventory is down 300,000.

During this quarter, we started purchasing shares in our existing buyback program and repurchased approximately 110,000 shares. We do expect to continue the buyback program in the near-term. 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 over to Al for closing comments.

Thanks, Lloyd.

On our last call in March 2011 to discuss our 2010 results, we provided some general visibility, going forward, into 2011. We are tracking closely to those metrics, so I'd like to reiterate them briefly. We continue to carefully manage our expense structure to maintain profitability. 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, albeit more slowly than anticipated, from our newly introduced non-perforated breathable housewrap during this quarter. However, this provides us with an additional product offering, which is gaining traction and should allow us to strengthen our market leadership position, going forward. We have revised our expectation for 2011 overall revenue to approximately 10% below last year, with the building segment up approximately 15%.

Although we project a year-over-year decline in revenue for the protective apparel segment, we expect revenue in this segment to improve in the coming periods. Disposable protective apparel and infection control 2010 numbers will continue to present a difficult comparison as the change in our distribution strategy did not occur until the second quarter of 2010 and we did not feel the full impact of that change until the third quarter.

Year-end gross profit margin is expected to be similar to the second quarter and year-to-date percentage. However, as Lloyd mentioned, we expect gross margins on the building supply segment to increase starting in the third quarter of 2011 due to a price increase that went into effect in early July.

This concludes our prepared remarks for the day, and now we'll open up the call for your questions.

(Operator instructions.)

Larry Booth, a private investor.

Good afternoon, gentlemen.

For the eight years that I've been involved with -- a shareholder with this company, during at least the first five of those years, during these conference calls, I heard shareholder after shareholder literally begging for your company to diversify your distribution network for the infection control products and also express concerns over the extremely high relative salaries to the top echelons in this company, and what seemed to be a program of endlessly buying back stock on one hand and issuing stock options to these same high-ranking officials. And the actual outstanding shares do not go down. You repeatedly on these conference calls justified the high salaries and the distribution philosophy as being valuable because of your extremely close, tight preferred vendor status with your largest distributor. It has become obvious that that philosophy was flawed, and that did not succeed.

I have never heard of a company that has a program wherein, before anything is considered, 5% of the pretax profit goes to two different individuals. Many shareholders on message boards, and analysts, such as SeekingAlpha, have expressed that, while they would normally consider your company to be a good value as it is selling well below tangible book, they're not going to come even close to it as long as such a program is in place.

The salaries in your company seem to be following a 20th century model. You have a philosophy saying that you pay high to retain employees. We have 10% unemployment right now throughout the United States. I do not believe multi-hundred thousand dollar salary packages, severance packages and option packages for a company which is generating zero to $0.01 per quarter in revenue and has made virtually no progress in the last five quarters as being justified.

And I respectfully request that, if you are going to buy back shares, that you stop issuing the endless options that you grant to your employees and yourselves because the share count hasn't gone down. You authorize five million shares to be given. You bought back the five million shares, and you've just authorized yourself another five million shares to give out as option. The Company's never going to provide for the shareholders.

As far as I can tell, all of the money that you guys made on the beautiful spike in sales on the N-95s was either spent on bonuses to employees or issuance of options or stock buyback, as much as $3, and I believe $0.45 a share. And I just think that you guys are doing very well and are now all multi-millionaires, perhaps, but the shareholders are getting absolutely nowhere. This stock is selling less than it was five, six, seven years ago. And I don't see any way out of this as long as you maintain this philosophy of behavior.

You want me to answer any of that now, Larry?

Well, all of the above as you would choose, please.

If you don't mind, the 5% to the two principles you're talking about has been in place since the beginning of this company 20 some-odd years ago. And I haven't heard one comment about the number of years where we didn't take a single dime in salary or a single dime in bonus money. So I have a little difficulty with that, seeing we started it and we built it.

The other side of the coin is we do not issue options every year. Our share count has declined continually, and will continue to decline, as far as you want to see us make a change in our distribution channel for the infection control program, I can assure that that would be insanity. I don't think that an Alpha Pro Tech is ready to go head-on against a Kimberly-Clark or a 3M Corporation today or probably any day, going forward.

We do enjoy the N-95 business when there is a spike in some of the respiratory diseases, but there's no way that we can get into that ballgame. We would have an SG&A that would eat up the entire revenue of this Company to try and attack that field. We're not a medical distributor, and we never were, and we've never claimed to be. So, I mean, I can't answer all your comments at this point in time, but I think that's the majority of them.

(Operator instructions.)

Jamie Wyland with Wyland Management Corporation.

Yes. To follow up on the first statement that was made and your response to it, I understand you started and you built the Company, but managing the Company is not looking through the rear-view mirror. It's looking forward, looking today and tomorrow.

Your salaries relative to the profits that are being earned are rather large, and I think you have to look at the whole corporate structure of what our overheads are and what are reasonable salary levels so you can return a decent return on sales. It really doesn't matter where you were 20 years ago. It doesn't matter how much money we made with the N-95 a couple years ago. You have to look at the business as is the structure today, the building supplies and the mask business, and see what are appropriate overhead levels so we can get a decent return on those sales.

And in your mind, what would be a -- given the levels of sales that we have, what do you think a decent pretax profit margin could be achieved for Alpha Pro Tech, moving forward, on these levels of sales?

Jamie, I think when we talk about -- we look at the bonus structure. I just want to talk about that for a minute -- and that is a bonus structure based on income, so as you know, only paid out [taking a third of] income. So basically, that's in line with the shareholders, right? The Company makes money, the executives make money.

As far as salary, we do have a Compensation Committee. They've decided those salaries. The salaries, whatever they are, that's not going to make a huge difference in our EPS. I mean, their salaries have to be -- they're not unreasonable. And if they changed a little, there is not really going to obviously change our earnings.

Our earnings have been hit, as you know, by the loss of that distributor, and we are building that business again. We're building the building supply business, and we will increase our income given some time. But we took a big hit, unfortunately. I mean, we had a distributor who had -- we enjoyed $15 million worth of sales with them, and we essentially -- as we stated today, they're down to nothing. So that was a pretty big hit. The fact that -- we still remain profitable even in that situation.

So we have traditionally been able to put a reasonable amount of income to the bottom line, and we will get back to that. But the first year after what happened to us, that's a little hard to ask anyone to do. Will we get back to it? Absolutely.

Given the level of sales that you have now, and as you look out over the next 12 months, the level of sales that you might expect without having the fantasy of replacing that business immediately, can you get the overhead level down to a reasonable level so that you can be much more profitable than a penny a quarter, moving forward, over these next 12 months?

Well, as we said, we brought down SG&A 9%. We continue to look at all our SG&A, and we're going to do whatever we can. In order to build the sales up, unfortunately, one of the things you have to do in some cases is not reduce your SG&A but, at a minimum, keep it where it was and, in some cases, increase it.

So it's a tough situation, because if it was as easy as to say let's just get rid of all our expenses so we can put more to the bottom line, we would absolutely do that. But we know that those expenses we had -- that's what's going to give us our future revenue, is those expenses. Any expenses that don't bring us future revenue, we're going to look at.

Okay. And lastly, as you move forward, what in the way of new product opportunities or potential acquisition opportunities are you currently investigating at the moment?

Jamie, we have new products on the drawing board today. We will always have new products on the drawing board, and we'll introduce them to the market as they become available. We don't particularly look at buying companies unless something comes along that would be a good product fit for us. And hey, we're not against doing that. We've always done that. We've always acquired anybody that we felt would help us.

Okay, so nothing specific within either the building products or the infection control area?

Well, the one big one on the building supply is the breathable housewrap, and that we've started this year. The opportunity -- we've had to simplify it. The housewrap sales we enjoy right now are non-breathable. That is the smaller percentage of the market. The larger percentage is breathable. So with the expectation that we have started generating revenue from those, and there is an expectation that those sales starting in 2012, that is going to essentially dwarf our existing housewrap sales.

Are you going to the market the same way as you're going with the non-breathable, and how large of a potential product line can that be for you over the next year or two?

It is the same distribution channel. It's probably, I would say, one to two times greater than our current market.

Than we can expect.

And it will start next year.

Okay. And the margins on that product versus your current building product margins, how would you describe them?

Similar.

Okay, very good. Thanks, fellows.

Thank you. (Operator instructions.)

I would now like to turn the conference back over to management. Please continue.

I'd like to thank everybody for joining us today, and thank you for your continued support and interest. And we'll continue to update you on our next call.

Ladies and gentlemen, this does conclude our conference for today. We thank you for your participation, and you may now disconnect.