Lakeland Industries Inc (LAKE) 2004 Q2 法說會逐字稿

Ladies and gentlemen, welcome to Lakeland Industries' second quarter 2004 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will give instructions at that time.

Before we begin, participants are reminded that statements made during this call contain forward-looking information within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical fact which reflects management's expectations regarding future events and operating performance, and speak only as of today, September 10, 2004. Forward-looking statements are based on certain assumptions and analysis made by the Company in light of its experience and its perception of historical trends, certain conditions, expected future developments and other factors it believes are appropriate under circumstances. These statements are subject to a number of assumptions, risks and uncertainties and factors in the Company's filings with the Securities and Exchange Commission; general economic and business conditions; the business opportunities that may be presented to and pursued by the Company; changes in law or regulations, and other factors, many of which are beyond the control of the Company. Readers are cautioned that these statements are not guarantees of future performance and the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements.

At this time, I would like to introduce your host for this call, Lakeland Industries' President and CEO, Christopher Ryan. Mr. Ryan, you may begin.

Okay. Thank you, operator. Good morning, ladies and gentlemen, and welcome to Lakeland Industries Inc's second quarter 2000 conference call. Because this is our first conference call, some of you may be new to the Lakeland story, so I'm going to go over a little bit about Lakeland and then touch on the balance sheet and the income statement as of recently.

Lakeland manufactures and sells a full line of safety garments and accessories for the industrial protective clothing market. Our products are sold by our internal sales force and independent sales representatives to a network of over 900 safety and mill (ph) supply distributors. These distributors supply end-user industrial customers such as chemical, petrochemical, automobile, steel, glass, construction, smelting, janitorial, pharmaceutical, and high-technology electronic manufactures, as well as hospitals and laboratories. We also supply federal, state and local governmental agencies and departments such as fire and police departments, airport crash rescue units, the Department of Defense, the CIA, the FBI, the USA Secret Service, the Centers for Disease Control, and most recently the Democratic and Republican national conventions.

I'd like to touch on a broader overview. Most people seem to be focusing pretty much on the most recent quarter, but I'd like to touch a few things with regard to the balance sheet. Using yesterday's closing price of 17.25 a share, our price to book value is now 1.5. Our PSR ratio, or price to sales ratio, is 0.66, which is pretty low. In other words, this is beginning to look like a value stock.

Our trailing 12-month PE ratio is 14. Our projected for the end of the year PE ratio is 12 -- this is in a pretty low interest rate environment -- and our debt-to-equity ratio is about 0.1 to 1. We have $2.32 of cash per share, and our book value is 11.40 -- and that's a tangible book value. And that's probably a liquidation value for the Company, simply because $9.15 is added (indiscernible) in liquid inventories and receivables and about $1.50 of it is in real estate that is probably appreciated 50 to 100 percent.

Touching the income statement. Average earnings growth last year was 38 percent for the year ended 1/31/04, and average earnings growth for the six months just ended 7/31/04 was again 38 percent. If we go back historically, earnings growth from '01 to '02 was 71 percent; earnings growth from '02 to '03 was 31 percent; earnings growth from '03 to '04 was 38 percent; and as I said, for the six months it's 38 percent. And we're projecting basically a 36 percent increase in earnings from '04 to '05 this year. And we still feel comfortable with our management guidance on that area.

So with that sort of quick overview, I will open it up for questions.

(OPERATOR INSTRUCTIONS). Michael Barr (ph), Shaco (ph) Capital.

Actually, could you comment on any changes in pricing trends, expectations for any price increases due to raw materials cost going up, or what you're seeing there?

Okay. We've had raw material costs go up. Effectively for us they really won't go up until October or November, and that is in our high-end TyChem chemical suits. We'll certainly be instituting a price increase off those numbers. On our core business in Tyvek we expect the price increase to take effect January 1, 2005; therefore, we'll be notifying our clients in November or December of price increases on TyChem and Tyvek.

Generally what happens when there's a price increase, our customers rush to beat the price increase. So therefore, we expect a very strong December sales. And we expect the price increases that will be instituted January 1 will go into effect on January 1. Therefore, our January sales will be rather brisk because we're getting a big price increase, not only on the sales, but that will really, I think, leverage the earnings in that month. So we're looking for a very powerful fourth-quarter here.

Brian Russo, Criterion Research.

Could you just provide us with a revenue mix breakdown for the latest quarter, and then also comment on the 16 percent increase in August sales? Is that indicative of what we might see for the entire quarter?

In general, for the second quarter the revenue breakdown -- and we break it down by disposables, gloves, chemical suits and wovens -- we're pretty much looking at something on the order of about 18.2 million for disposables, 960,000 for gloves, roughly 3 million for chemical suits, and about 850,000 for wovens. Those are rough numbers because they're intercompany sales, and that's how it's very broken down by product line.

The 16 percent increase in August is a big, big jump. That's probably one of the largest sales jumps we've had in any given month for the last four years. But recognize that you're looking at what was a very powerful second quarter last year where sales were up 23 percent, versus a less than powerful third quarter last year. So the 16 percent in essence is being compared against a very weak third quarter last year. So I think from December (technical difficulty) through 15 when we announce our third quarter, you're going to see a very nice comparison between the third quarter last year and the third quarter this year, at which point I think people will begin to realize that maybe the second quarter was somewhat of a kosher pickle. It's just hard to meet or exceed a quarter where -- that went up 23 percent itself, whereas your average sales were only up 15 percent last year.

Debra Fiakas, Crytal Equity Research.

I'm calling today on behalf of Westrock Advisors. I wondered if you could talk a little bit about the margins and the various categories. For example, the margins on your disposable product line. Now that you have been doing more of the production in offshore markets, how have those margins changed?

Those margins generally run about 20 percent as a gross margin, and then they do constitute a very large amount of our sales. The glove margins are about 14 percent gross margin, which to the bottom line means breakeven to tiny loss this quarter. The wovens, the gross margin is about 7 percent, which means we lose 7 percent on almost everything we sell there. That's why we're moving the wovens from the St. Joseph, Missouri operation to China. Since those what we call wovens, which include fire coats, fire pants, Nomex and cotton FR coveralls, and any static garments for the automotive industry, can represent 4 to 5 million in sales every year. What we're seeking to do here is not take on sales that we're just going to lose money on, and at the same time fill the pipeline to China, such that when these things return from China we can actually make a 20 percent or 22 percent gross margin on them, rather than a 7 percent. So what you are doing is you're taking a company that probably lost 800,000 -- lost $800,000 last year and turning that to a positive 500 to $800,000 profit. And that's a big swing in earnings, but that will play out month by month from now to late spring.

About how much of the production was still in the U.S. in the last quarter?

Production in the U.S. was roughly all our chemical suits at 3 million in the quarter, all of our wovens at roughly 8 to 900,000, and all of our gloves at 900, 950,000. Now what's going to happen is by spring of next year all of the gloves will go to Mexico, most of the wovens will go to China. I would say about 80 percent of the wovens will get to China. 20 percent will still be made here, and that 20 percent will only be for things that are just not in inventory, things that we could not anticipate that we should have in inventory because of the long-term times from China.

Will you retain any U.S. production capability just for short turnaround orders?

That's what we -- probably 20 percent of the woven, which is fire coats and fire-related stuff, 20 percent or 30 percent capability will remain in the United States. We will try to do that at breakeven and make all the money we make on the 70 percent imported from China. But if you have the delivery and you have the service, you can generally grow your customers.

Very good. And then also, if you could just comment -- I did hear your comments comparing this most recent quarter with last year, but what were some of the comparisons between the -- sequentially, between this quarter and the first one?

Between the second quarter and the first quarter last quarter?

The first quarter of '05, the quarter ending in April.

I don't have the April numbers right in front of me. April numbers were very strong. They were up 12.5 percent year-over-year and earnings were up 70 percent. Under Sarbanes Oxley we can no longer manage earnings like Coke and GE used to do for 20 years, but in those days most people would have saved something from the first quarter, put it into the second quarter, and everybody would have been happy. But now with Sarbanes Oxley, I think you're going to see a lot more spikes and valleys with reporting if people are reporting honestly.

Yes, of course. I was just wondering if there were some unusual ordering patterns in that quarter.

In the first quarter? No, but the first quarter is generally our strongest quarter, always has been. Because generally a lot of the maintenance that goes on at petrochemical facilities and nuclear facilities, and coal, gas-fired utilities, is all done in the spring, particularly south of the Mason-Dixon line.

David Cohen, Midwood Capital.

Thanks for instituting the call; it's pretty helpful. The first question is just looking at, I think when you came out a couple of months ago with your first effort at guidance, it was roughly a 10, 11 percent annual growth for the year. Now we've seen sort of some bouncing around. The first half growth is 5.5 percent, and you explained some of the second-quarter growth shortfall, but then we're seeing 16 percent pickup in August. What is -- for the full year, therefore hopefully smoothing some of the seasonal elements -- what is your current expectation?

When we came out with our guidance we said 99 million in sales and $1.50 to $1.60 in earnings. And we still feel fairly comfortable with that. We may not make the 99; it may be 98 million. But basically when you look at last year, we did 89.7 million in sales. And if we do 98 million in sales this year that will be a 10 percent growth. If we do 99 million it will be 11 percent growth. It will be somewhere in there, 98 to 99.

As to the earnings, I think we're well within the band of earnings that we predicted. Basically we predicted 4.9 million to 5.2 million in earnings, and basically I think our half-year here is running at about that 5 to 5.1, within the band that we predicted. So we're still on our numbers and we still feel pretty comfortable with the guidance that we gave. I think some of the disappointment was people looking at the calculations of earnings on an earnings per share basis, because what you see is, is you see almost 600,000 of the 1.2 million shares that we sold coming out and being used to calculate earnings per share as of July 31st. So that's fully 47 percent of the new shares are being used 45 days after the offering for calculation of earnings per share purposes.

To give you an idea of the confusion that creates, if you look at our income statement and you say look at the six months ended July 31st -- remember, July 31st -- six months, the number of shares used is 3.569 million. But if you look at the three months ended July 31st, there are 3.864 million shares. I think that caused a lot of confusion when they started dividing the number of shares, because you get a different number when you use the six months, you get a different number when you use the three months. But essentially when you get 47 percent of your shares included after the first 45 days of being -- since your offering, what it's saying is -- oh, Lakeland, you must go out since you're going to earn 30 percent, 36 percent increase in earnings this year -- based on your management guidance -- you have to take that 24 million in the public offering that you got, and in 45 days you better go out and earn 36 percent on it.

It was a dilutive offering.

Yes. People have to understand that you cannot deploy money and have the 36 percent return on capital that quickly, so therefore, you have basically a flat comparison of 30 cents to 30 cents.

Understandable. You spoke in your brief comments before the Q&A, you said -- I think you said you're projecting a 30 percent -- 36 percent increase in earnings from 2000 -- fiscal '04 to '05. You're speaking on a net income not an EPS basis.

That's right, and we're doing that. We came in at, I think, what, 38 percent for the six months.

So what's your math, just to clarify -- if you look at the second half of the year, incorporating the higher shares outstanding, what is your -- what EPS does this work out to be the second half of the year?

That is a number I haven't done yet simply because we put out the numbers that will be there for the third quarter, we put out the numbers for the fourth quarter. But the number of shares for the year-end will again be different than the number of shares for the fourth quarter, just like the number of shares for the six months is different than the number of shares for the three months.

Why -- if you look at the third quarter number, which I think (indiscernible) another press release announcing this conference call, you had 3.9 million shares in the third quarter, 4.06 in the fourth quarter. Why the increase across those two quarters in the shares outstanding?

It's very much like when we do the -- let's say we look at the fourth quarter, and you have the higher number of shares, the 4 million shares out. But that's the fourth quarter; that won't be the 12 months.

I appreciate that. But why is it going to go up even that much, even 100-plus (multiple speakers)

That's the formula used in the accounting practice; it's that simple. As I said, it doesn't make a lot of sense that 47 percent of the new shares would be included 45 days after the offering. The formula they use.

Brian Butler, Friedman Billings Ramsey.

Just looking at the second half and how it's going to break out between the third and the fourth quarter, is the fourth quarter going to be significantly stronger now due to the expected Tyvek price increase with people loading up on orders?

Yes, I think that you're looking at a couple million more than most of the other quarters.

That will translate as well then, down to the earnings line?

Look at it this way -- our sales declined 1.9 percent from last year in the second quarter, yet our earnings were still up 15 percent. Now if you look at the third quarter and you say, well, sales are up 16 percent and not down two percent -- what are the earnings going to look like if that holds throughout the whole third of the quarter? I don't think it will, but I think we'll have a really nice comparison both on the sales and the earnings in the third quarter, and I think we'll have a pretty nice comparison on the fourth quarter. The reason being is in the fourth quarter last year, DuPont did not raise its prices on the raw materials and on the garments. Now that's the third time in 22 years that they have not raised the prices. They've been very plain about this recently, that indeed they've actually raised the prices of the TyChem -- which we bought up probably enough of an almost to the end-of-the-year supply at the old price -- and they are definite about raising the price of Tyvek. And this is all going to be announced in November. We're just looking at the amount they're going to raise Tyvek.

They have raised -- they've basically said they're going to raise the price of the TyChem 10 percent, and if I had to guess, they're going to raise the price of Tyvek by 6 to 7 percent, which will be very large increases. And I think a lot of that is coming off the oil increases and their ability to do it. They just raised the price of Kevlar which we buy for our glove business; they raised it 6 percent, only, I guess, effective in two or three weeks. But they haven't raise the price of Kevlar for four or five years.

So that means in the first quarter '05 you should see a little boost in margins then, because you'll be at lower prices but -- I mean higher prices but lower costs?

I think you'll see a very big boost in margins, because now with the money that we got from the public offering -- we're sitting on about 10 million in cash -- we have the luxury of going in and pre-buying fabrics that we know are going to go up 10 percent, fabrics that we know are going to go up at least 6 percent. Pre-buying them -- okay? -- and pre-buying them in November and December, say 10 container loads that we couldn't afford otherwise, and then reselling them in the month of January where we have huge price increases. So we will be selling old priced fabric at new higher prices. So we will have quite a bump in the month of January in terms of earnings, plus some sales. If you think -- well, if prices go up six percent, well sales are going to go up 6 percent. Because these TyChem fabrics not only cover our core business but the TyChem business also. So we're talking about almost 90 percent of our business, and by the way, Kevlar also. So we're talking about 95 percent of our business, sales are going to go up 5 to 10 percent just because of price increases.

How much is offset in the fourth quarter with the fourth quarter extra orders expected? That has to have some effect.

The way I explain it is we'll let people know, certainly at the latest December 1st, probably in November, that prices are going to go up effective January 1st. And they're going to start buying quite a bit in December to beat that price increase. Then they're going to get the price increase in January. And in the case of something like Tyvek, if prices go up 6 percent, then theoretically garment prices will go up 6 percent, sales will be higher 6 percent for the year -- I mean for the month. And generally if sales were to go up 6 percent, our internal cost would really only be an increase of 4 percent. So we could theoretically pick up a 2 percent on the gross margin in that month and going forward. More importantly, if you're selling old Tyvek that you bought 6 percent cheaper in November and December, and it's still in your pipeline coming out of China in January and February, your margins can be even higher.

How long does that usually last? How much material can you buy?

Our pipeline is about 90 days.

Thank you. We have time for one further question. Our final question is coming from Kyle Krueger with Apollo Capital.

A question for you. You mentioned in the press release that you had a $900,000 order for high-end chem suits coming out of Homeland Security. I know there's several multimillion dollar contracts floating around for Homeland Security orders which have been slow to materialize, but now appear like they're going to start coming in nicely. Can you kind of size that pipeline and what the opportunity is there over the next six or 12 months, as these long-awaited contracts start dropping? And can you just refresh my memory? I thought at some point along the line you said that -- I know the margins are substantially higher from the high-end suits, but can you just discuss in general terms what the margins look like on that business?

Generally, the average margins -- when you get an order, you generally get an order for a variety of suits from our A-level protection, which is the high-level very expensive suit, down to Level C protection. And a (indiscernible) if a city is ordering and they're well-educated, they will order Level A, Level B and Level C suits. So the Level A's get a 40 percent gross margin; the Level C's at about 23, 24 percent gross margin; the Level B's are about 30. And they average around 28 to 30 percent, which is almost 10 percent higher than our average gross margin.

So this year we've been averaging about $1 million a month. We're running at 12 million, up from 8 million last year, which is about a good 60 percent increase. This quarter was 60 percent. And what we -- this big $900,000 was the biggest single order we ever got, and it came out of the state of Florida state police. And what we are seeing is a number of states beginning to at least buy for their police system. There's another 2 to $3 million order sitting out there waiting to be accepted by the state of Indiana, again, primarily for the state police.

We sort of expect that to be awarded by the end of the year, but what we are looking at is basically that a lot of the equipment being used has to be okayed by Homeland Security. In other words, it has to meet federal standards. Our equipment does, but it hasn't been -- the standards haven't really been promulgated and okayed by the Homeland Security. We expect that to happen in spring of '05. That's when we expect these state things to really start dropping.

Now what we predicted or what we -- longer-term we basically said we would do 12 million for this year. We're right on target for that. The margins are holding at 30 percent. And next year we would sort of suspect 16, maybe more. It depends on how many of these state contracts come out. And this is the type of thing that can really spike a quarter one way or the other, if somebody drops a $2 million contract on you and, you know, you're doing 20 million a quarter or 22 million a quarter. All of a sudden your quarter can spike by 10 percent. And with bids, they just come when they come; they have nothing to do with seasonality. Or for instance, generally our third quarter is our lowest quarter in sales because of the hot weather and people on vacations; they're not wearing our garments. So it's a hard thing to put your hands around. And generally what I would as a speculation tell you -- yes, we'll do 12 million this year in chemical suits and then 16 the following year and 20, just to give you somewhat of a progression. But it probably won't follow a nice even progression like that.

Where do you think -- that's all great news -- where do you think you can drive margins to over the intermediate-term as, you know, over the next three years, say, as these contracts start to come to fruition -- I mean, you're 21 percent in the most recent quarter -- realizing there's going to be volatility associated with it, peaks and valleys?

The first thing we're doing is we're moving a lot of our chemical suit production to China. Presently it's all made in the USA, and that's at 30 percent gross margins. When we move them to China those margins will climb significantly. But we are also moving into China in anticipation of the volume we will be doing next year as opposed to the volume that we are doing this year. We can barely keep up with the volume we have this year with our U.S. facilities. We're probably two months backlogged. Volume we figure will pick up as usual another 50 or 60 percent next year, and we really have to have the capability to make all of this stuff. This is very, very labor-intensive, these suits. They have to be heat-sealed together. All the seams have to be heat-sealed together by hand. And quite frankly, we can't hire anybody in the United States in Alabama. We can't find people. Unemployment is 3 percent down there. We cannot hire people in Missouri, we cannot hire them in Alabama to do this type of work. So we're hiring them -- we have to go to China. Unfortunately China may increase the margins another 3 or 4 or 5 percent.

Where do you think you can take overall margins?

(multiple speakers)

Overall margins over the next couple of years, I think, could get to 25 percent from 21, and that's the real play. We don't see our sales going up much more, say, than nine or 10 percent a year. But what we really want to do is keep our earnings growth at 30 percent a year, and that will happen if margins go from 21.5 this year to 22.5 next year, and from 22.5 to 23.5. Those will result in the continuing 30 percent earnings growth. In 1982 the gross margin in this industry was 25 percent, and it went down from 82 right up to about 19 -- right up to about 2000 or 1999. It went from 25 percent; it hit its low at around '95 at 15 percent. It maybe climbed back to 18 or 19 percent by 2000. And what we're looking at now is back in an oligopoly situation, we're looking for it to go from 21 here to roughly to 25 over the next four years. So you can theoretically achieve a 30 percent earnings growth without any sales growth, but we do anticipate trying to grow our sales by 10 percent each year. And a lot of that will come from the fact that as we move our production to China, we will be the low-cost producer in the world on gloves, the low-cost producer on wovens and fire coats and fire retardant garments. And these are 2 and $300 million markets that we can grow into.

Thank you, Mr. Ryan. At this time do you have any closing remarks?

No. I guess my only closing remark is remember that even though we had the 2 percent less in sales than last quarter, our earnings still went up 15 percent. And you have to look at the big picture. Our earnings have been plus -- our earnings growth have been plus 30 percent for the last four years, and they're going to be that way this year. So you'll have to compare that to a PE of 14 times trailing and 12 times projected.

Thank you. At this time, this does conclude today's teleconference.