Lakeland Industries Inc (LAKE) 2004 Q3 法說會逐字稿

Ladies and gentlemen, welcome to Lakeland Industries fiscal 2005 third quarter conference call. At this time, all parties are in a listen only mode. Late,r we will conduct a question-and-answer session. I'll give instructions at that time. Before we begin parties are reminded that statements made during this call contains forward-looking information within the meanings of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are all statments other than statements of historical facts, which reflects management's expectations regarding future events and operating performance and speak only as of today December 13, 2004. Forward-looking statements are based on current assumptions and analysis made by the Company in light of its experience and its perception of historical trend, 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'sfilings 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. Listeners are cautioned that these statements are not guarantees of future performance and that actual results or developments may differ materiallyfrom those projected in any forward-looking statements.All subsequent (indiscernible) forward looking statements attributable to the Company or persons acting on behalf are expressly qualified in their entirety by these buddies statements. At this time I would like to introduce your host for this call, Lakeland Industries President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Thank you and good afternoon, ladies and gentlemen and welcome to Lakeland Industries fiscal 2005 third quarter conference call. With me today is Gary Pokrassa, our newly appointed Chief Financial Officer who will take you through our financial results after a brief introduction. Lakeland manufactures and sells a full line of safety garments and accessories for the industrial protective clothing market. Our products are used by industrial customers such as chemical, petrochemical, automobile, steel, glass, construction, smelting, janitorial, pharmaceutical and high-technology electronic manufacturers as well as hospitals and laboratories. We also supply federal state and local government agencies and departments such as fire and police departments, airport crash rescue units, Department of Defense, the CIA, the FBI, the USA Secret Service, the Center for Disease Control and most recently the Democratic and National Republican National conventions.I think the gist of Lakeland's margin expansion is, essentially, our movement of our USA production from Mexico to Mexico and China and the improving margins we will see there. I know one of the questions I will probably have to answer two or three times is, when and where are you moving and when is it going to happen. What I will say you is that by February 1st we will have most of our glove production moved to Mexico and by February 1st, 2005, we will have the majority of our woven production moved to China. The movement of those two pieces of our USA production should improve our margins dramatically over the coming year being February 1st, 2005 to February 1st, 2006.Now I will turn over to Gary Pokrassa, our Chief Financial Officer, who will walk you through our third quarter and our nine months results. Gary.

Thanks, Chris, and good afternoon, ladies and gentlemen. Net sales increased 5 percent to 22.4 million for the fiscal '05 third quarter ended October. Compared to 21.3 million for the same period last year. And increased 5 percent to 72.1 million for the nine months this year compared to 68.4 million for the same period last year. Gross profit increased 9 percent to 4.9 million and increased 19 percent to 15.8 million for the third quarter and the nine months ended October '04, respectively. And that is compared to 4.5 million and 13.3 million for the same period a year ago. Gross margins increased 22 percent for both third quarter and for the nine months of this yearcompared to 21 and 19 for the third quarter and nine months of last year, respectively.Operating profit is up 36 percent to 2.0 million and up 42 percent to 6.3 million in the third quarter and 9 months of this year. Compared to 1.5 and 4.4 million same period last year. Operating margins increased to 9 percent for the third quarter and also 9 percent for the nine months of this year compared to 7 percent for the third quarter of last year and 6 percent for the nine months last year.Our operating margins are at the highest levels in our history which were 6 percent a year ago a full fiscal year and 6 percent, also, in fiscal '03 and 5 percent in fiscal '02. We do expect this upward trend to continue as we move a portion of our domestic production to China and Mexico as Chris has just laid out. Net income increased 37 percent to 1.2 million for the fiscal '05 third quarter compared to 900,000 for the same period last year. In the second quarterwe issued 1.3 million of shares to the public. These new shares had a negative impact on our earnings per share. The weighted average shares outstanding did increase by about 40 percent for the third quarter this year compared to last year, same quarter. Earnings were 26 cents for basic and dilutes share for fiscal '05 third quarter against 27 cents for basic and diluted shares same period last year for the quarter.Net income increased 38 percent to 3.8 million for the nine months this year, compared to 2.7 million for the nine months of '04. Earnings per share increased 16 percent to 96 cents for the nine months this year compared to 83 cents for the same period last year. At the end of the third quarter the balance sheet included total assets of 59.8 million. Cash and marketable securities, 10.7 million; working capital, 50.1 million; no bank debt and stockholders equity of 53.2 million or $11.57 per share book value.With that I'll turn the call back over to Chris.

Okay and I believe the earnings for our third quarter were in line with most street estimates out there of approximately 26 cents per share. Thanks, Gary. And I will go into the other area that I know everybody asks about right away and that is homeland security. So on the homeland defense side, we are seeing solid demand for our high-end chemical suits. These include our level A suits used when the highest level respiratory skin eye and mucous membrane protections are needed. Level A is the highest state and goes to the highest price point and generally carries the highest margin. Our level B suit which is in the middle is used when the highest level of respiratory protection is needed, but a lesser level of skin and eye protection. Level B production is the minimum level recommended on initial site entries until the hazards have been further identified and defined. This is a much larger market than the A market. It is less protection. Then we go to the level C suit used when the type of airborne substance is known and skin and eye exposure is unlikely. Periodic monitoring of the air must be performed. Once again, chemical suits are about 13 percent of our business and they carry our highest gross margin.Okay as to pending, orders, we have one large pending order for about $.5 million with the state in the Midwest and we're hopeful that we will get that in the near future. We also have a $150,000 order from the state of Idaho in the third quarter and I'll remark on that in that Idaho is a low population state. So if you can get 150,000 out of Idaho you can generally get a lot more out of a populous state. There are a lot of funds being allocated toward First Responders now. They are now spending their 2002 money and are continuing to build up their capabilities, including the 2005 budget request. There is between 8 and 9 billion available to First Responders to spend on PPE or what we call personal protective equipment. Some fire departments that never had has mat teams now have a state of the art equipment to respond to every type of disaster imaginable. We've heard of fire departments that have received large amounts of homeland defense money and spent it on equipment but don't have enough personnel to use that equipment. Obviously they will increase their staffing to appropriate levels in the near future.So with that I will open it up for questions.

(OPERATOR INSTRUCTIONS). Michael Hoffman of FBR.

Congratulations on continued margin improvement. Can you talk a little bit about two things. One, the latest sort of noise with regards to quota and to Tyvek and pricing and DuPont?

Quotas, tariffs. Quotas are still online to be removed on all textiles coming out of China. This is essentially a worldwide movement where all countries will be withdrawing tax quotas on textiles. So the United States is just part of a worldwide movement in essence that will remove all quota requirements on textiles. In our specific instance, it is really removing quotas on textiles from China and this affects our woven business critically because part of this our woven business we had to pay high quotas and we had to buy them from our competitors in China. When they remove quotas at December 31st, 2004, we will no longer have to buy quotas from our competitors to import woven garments.Since they've removed this quota, we then are put on an even playing field with the state-owned facilities in China; and most of our expansion plans is going to be into the wovens business simply because we will have access to all sorts of wovens in China. Our factories are in China, we cut and sew in China and the woven market is a $6 billion market. Worldwide. As to pricing on the Tychem products, DuPont has raised our prices of raw materials by approximately 10 percent. It jumps around by type and style. We see pricing in the marketplace of approximately 6-7 percent increase on those Tychem garments. On Tyvek, they have raised us about 3.7 percent, initially, and on pricing we really don't know where DuPont is coming out yet. I think they are approaching it on a case-by-case basis which is the way we are going to approach it.

Did you see any extra order activity related to the Tychem pricing or Tyvek's pricing?

What we saw -- we've seen some very strong November sales which tend to indicate that people are prebuying because the knowledge is pretty much out there that they are going to be increases in garments and fabric prices. That was also driven by the oil price increases. But yes, we are seeing a strong November and that is usually in response to the fact that customers know that price increases are in the offing in January.I believe in our press release, we said that sales were up 17 percent in November over November.

Deborah Ziakis (ph) of Crystal Equity.

I'm calling today on behalf of West Drug Advisers. I was curious about your comment in your opening remarks that the various public agencies are just now spending 2002 money. Is that the case when would you expect them to begin spending monies that were appropriated in 2005?

Probably not until about 2006 or 2007. So that is when when we look at the homeland security market, if we were looking at it today, it is probably in the near-term a three-year market, five-year -- to a five-year market of spending just based on the monies that have been appropriated and funded today. Because it takes a long time. Well, first of all we are waiting for homeland security to issue compatibility standards about different equipment should be out in spring or summer; and we think that the spending will really pick up at about that time. But it also takes the bureaucracies whether it is federal or state a long time to pass the money through. Such that monies being appropriated or really funded in 2004, for instance, the firemen are really still only spending their 2002 money and they are just getting their 2004 money and we are basically into 2005. So those 2004 monies, they may not spend that for a year or two. ))Deborah Ziakis: All right, very good. And then one other question relating to margins. You have already seen some good margin improvement and I wondered if you could give us some idea what additional -- or what your goals might be for 2005, since you anticipate getting most of the gloves and most of the wovens into China by the first of February?

Well, we hope to take our club business which is a relatively low profit business into much higher margins into the 20 to 22 percent gross margin area. We'd like to get our wovens business, which is a lost business again into the 22 percent gross margin area, such that it makes sense to invest capital in those two product lines. In other words if they equaled or bettered the gross margin in our disposable lines, and they are good candidates for investment and we believe once we get the woven business over to China than, indeed, it can generate a greater margin than 20 or 22 percent and therefore, justify, our investment in it. It is a huge huge market; as I said before it is probably 6 billion worldwide and it's 3 billion in the United States or North America where we have our sales force. And we've just opened up a sales office in China to sell domestically. We are selling in the UK so we will be adding our wovens lines to our UK operations. But in general, our goal has been to get about a 100 basis point increase in gross margin each year, either by cost savings or by price increases.

Okay, very good. Then just one last question in regard to the quotas in the margins. Are you -- you indicated that you expected quotas to come off by the end of this year. You would have more flexibility for at least the wovens part of your business. Are you including those changes in the rules on quotas in your goals or would that be incremental to --?

That would be incremental because what we are really looking at is the straightout cost savings, the manufacturing savings of doing something in China vs. doing something in the United States. Removal of quota is, can be anywhere from 3-10 percent of the margin depending on the quota and depending on the product. Further over time under W. T. (indiscernible) the United States' specific agreement with China the tariff will start coming down between now and 2008. So for example if I had a cotton coverall which is a very very large item, quite frankly. I mean every gas station attendant wears a cotton coverall. That is something that has used to carry a $4 or $5 quota per garment; and it is something that had, depending on whether it's cotton, in which case it'd be an 8 percent tariff or whether it was a synthetic it would be a 16 percent tariff. Those tariffs will go down to 4 or 5 percent over the next couple of years. So you get a double whammy. As we grow our wovens business in volume, the quota will disappear for 2005 and the tariffs will also start coming down. This is very similar to what the NAFTA agreement was with Mexico. Tariffs started out at 12, 13 percent pride in NAFTA and they're all down to 0 now.

All right, very good. Thank you.

(OPERATOR INSTRUCTIONS) Brian Gusto of Criterion Research.

Could you please break down sales by product category for fiscal third quarter '05 and then any insights or what kind of trends you are seeing in the various product lines coming forward?

Well, Brian, we really don't segment our sales byproduct category because they really all fit in together.

Okay, I thought in the past you had broken products down by disposable effect of clothing high-end, protective suits maybe the gloves and then maybe the garments?

Yes well, we can break out protective suits to about 12 million, not very high-end Tychem. Okay? That's where it looks like it will end up for 2005. The full fiscal year.

Could you remind us what your initial advance was for fiscal '05? And is that still intact? Secondly, have you any initial guidance for fiscal '06?

Our guidance for '05 was 97-98 million and $1.21 to $1.27 in earnings per share. We are not going to go out with guidance on '06 probably until March when we see the end of the quarter; and then we will probably give guidance then.

John Frank of Miller Asset Management. John Frank: Chris I know you mentioned that you are taking it by case -- on a case-by-case basis but are you considering passing through the price increases in excess of what DuPont has on the table right now?

We will do it where we can.

All right well, do you have a feel right now? I'm sure you've been on the phone with customers and so forth. How big the opportunity is to get above and beyond that level?

It's tough to say, we will knos probably better at the end of January because we don't know necessarily what certain people are paying in the new year.

The last time you had a price increase, was it last year or the year before?

It was two years ago.

Okay so I would think that the receptiveness might be a little bit higher?

Yes I think so. I mean, oil prices are up. Our ability to deliver on time may command a premium to get a price increase. We'll really have to see. I mean we haven't had a price increase I think since May in 2003 but we have still been able to increase our earnings by about 30, 30 percent every quarter.

I've noticed. Another question. Are any of the contracts of the DuPont Tyvek outsourced manufacturers expiring over the next several months?

I really don't know the answer for sure to that.

Okay and if there would be would you be in a position to bid on those contracts?

Well I hope so.

Okay. Lastly, you did address this, maybe I missed it but you said that the gloves and woven products being moved to low-cost sourcing starting February, did you realize any benefit at all during the quarter?

No.

So the increase in margins was mostly attributable to the increase in Tychem sales?

No. The increase in margins was pretty much across the board in Tychem and in Tyvek. Our glove business did a little bit better. UK sales really took off in October. So it's coming from a lot of angles. We are still in the process of basically restructuring our woven business. Their sales are still off; and their losses are still there. But we know that, we know we will have most of that moved by February 1st at which point the sales will flatten out, profits will start to increase and then we will start increasing our sales. Once we see those margins there, then we are going to go to town trying to get new sales in wovens.

And then I guess the gross margin pickup that you expect just from the move of the manufacturing is what?

Well, it will run on a pre-tax basis. It should generate about $150,000 additional earnings pre-tax on the gloves in fiscal 2006. Should that generate about $400,000 pre-tax on the wovens. Now as the gloves are going from breakeven to 150 and the wovens are going from a 500,000 loss, you've got about $1 million swing in earnings here. So $1 million swing in earnings pre-tax and you run it across 4.5 million shares, I think you can do the math. That's the cents per share pre-tax that we should pick up just by moving our product lines to China, to Mexico. Plus we have to start growing since our sales have taken off in Europe and we will be opening up the sales operation in China by December. So we are looking to do a little bit of sales in Europe and in Asia.

Terrific and then share count -- .

It will be all in our non Tyvek or non Tychem product line. In other words we would be selling our wovens, our gloves and everything but Tyvek and Tychem into the Asian and European markets.

And last question the share count that we should expect to the fourth quarter and fiscal year '06?

I'll jump in on that, Gary. It hasn't changed from the third quarter. It should be as it was in the third quarter.

Brian Butler of Friedman Billings.

I just have a question on Tyvek pricing again. What level does Tyvek garment prices have to increase to be basically breakeven on the margin line and is there any possibility that the garment price increase could be greater then 3.7 percent?

Well I don't think so. Basically we have to get about a 2 percent increase in prices to cover the fabric increases; and we will basically see by January whether we are getting that less or more.

Is there any likelihood that they put another price increase through or is that 3.7 pretty much it for the material on the Tyvek?

Generally they only raise it once a year but you never know with DuPont.

Also on the sales for the third quarter, you had really strong sales in the first two months of the quarter. What happened in October? Was it just non double-digit again or --?

I guess it was just a slower month for whatever reason. In our business, you really get the only true measure of the sales, and really the true measure of the expenses in a 12 month period. Things are going to vary month-to-month. We are a small company. So that $1 million in sales, which is not a lot, can move us up or down by 5 percent.

David Cohen, Midwood Capital.

I appreciate everything that is going on on the margin front of the cost reduction side. See the opportunity for pricing but coming back to this sales issue, sales have been somewhat inconsistent, given a $1 million order can't have a 5 percent swing in the quarter. But is not a big part of the problem that just a big disposals business is still kind of lackluster and is that -- and if that is the case -- that's my read on it -- if that is the case, what needs to change to start to move the needle there above 4, 5 percent kind of growth?

We have always said the disposable business in general is during bad times a 1 percent grower. During good times a 10 percent and like right now which we sort of call mediocre time or middling time. About a 5 to 6 percent grower. That is where it is and that is pretty much where it is going to stay. So that is why we are looking for new markets in the wovens and we are looking for new markets in the international area and that is where we're going to really look for our growth in sales. It's out of wovens and out of international sales.

And just as far as the rest of this year is concerned the high end of your target was 98 million. Is that right?

Right.

And that would require a pretty solid fourth quarter increase over last year's fourth quarter.

That is why we said about 97. I think we are more on the 97 level.

What kind of impact if you could quantify do you think the price increase or the expectations of the price increase has gained your capturing fourth quarter sales? And how much (MULTIPLE SPEAKERS) ?

It's just a normal reaction. And has been historically that when raw material prices went up and garment price increases were announced that people would buy a lot in order to beat the increase. And in this instance the increase is probably going to be somewhere probably in reality late January. So people I think will be buying throughout the quarter to beat the price increase. David Cohen: You said last time you had the price increase was in, I assume it was like the last quarter of fiscal year ended January '03.

Yes it was May 21st, 2003. So that's when the garment prices increased.

Okay.

We had a raw material price increase in February 1st, 2003, but the garment prices didn't increase until May 23rd, 2003. So you have disparities in timing here.

(OPERATOR INSTRUCTIONS). Ali Matzamat of Boston Partners.

How's the acquisition pipeline looking?

We are reviewing acquisitions. We have got four or five that we are looking at right now but we're not far enough along to say that we have offered them any money. But we are actively looking at them and, essentially, the only thing holding up any real acquisitions is that we are waiting for their year end numbers, being December 31st most of which will not be ready until January or February.

So you don't anticipate anything until January (inaudible).

At least yes.

Tom Subin of Smith Barney.

Chris, as your customers place orders in this fourth quarter to beat the price increase, is there any way that you judge how that might cannibalize results for the first part of next fiscal year?

Oh, it will but it won't -- not too much. Let us put it this way.

I know we don't judge your Company on quarterto quarter necessarily because (indiscernible) others but there's dislocations between order cycles but -- .

I mean, historically, DuPont has usually been practical enough to put their price increases either January 1st or February 1st and the reason that is done is because the first quarter being essentially February through April is the strongest time of the year for the sales of disposable garments. The reason that is, is that most utilities do their maintenance during that period. Particularly, the utilities south of the Mason Dixon line. It is not cold. It is not hot. It is just cool. So, the demand for energy particularly south of the Mason Dixon line for air-conditioning or heat is very low. And that is when a lot of maintenance is done particularly on the nuclear facility. So that is really -- that adds to the normal demand that we normally -- that we see. So general price increases are generally we try to institute them in January, February, which just predates the very very strong period of our season. So it is much like raising the prices of toys before Christmas.

So you could actually get the best of both worlds. That little goose in the last quarter and that little continuation in the Q1.

That's what we are crossing our fingers and hoping for.

Good luck to you.

Howard Eisenberg.

I'm a private investor. Chris, you talked about your margins are the highest in the history of the Company. Can you comment on whether your margins are going to expand from that? You have given some pretty good detail, both in this conference and the previous one, about margin expansion but are we starting to reach a peak on that?

Well the way we are going to increase our margin expansion is to continue to decrease our costs and to continue to expand into new product lines and new product geographic areas. In other words, most of our increase -- besides cost savings, which I've gone over in great detail with the gloves and the wovens, the sales increases that are going to drive product increases are going to be international sales where we are very small. We only have significant international sales in Canada. We sell almost nothing in Europe although our UK subsidiaries sales were up 200 percent last month. We sell nothing in China, simply because we are legally not able to until the 1st of January 2005. On that day wholly owned foreign subsidiaries will be able to sell products we make in China domestically in China. Prior to this you had to have a Chinese joint venture partner in order to do that. That restriction goes away January 1st. So we will have a huge domestic Chinese market, where we have a manufacturing presence. In a country which is just beginning to think about putting protection on their workers. So our first clients are going to be the international manufacturers or what we call the multinationals like General Motors and Volkswagens who are manufacturing cars in Shanghai or IBM and Hewlett Packard that are manufacturing electronics assemblies in Guanchou. And the list goes on and on. The multinationals are going to protect their people, simply because they're hosts and guests in China but over time over the next 20 years even Chinese domestic companies will start protecting their own employees. Right now, they have laws on the books that are somewhat similar to OSHA, but in fact they are not being enforced. So once enforcement starts then you are going to see a little bit more demand and here the demand is unusually high because you are looking at about .5 billion workers.

Very good, thank you.

Mr. Ryan, there appear to be no further questions at this time.

Okay. Thank you very much.

Thank you. This does conclude this afternoon's teleconference. You may disconnect your lines and enjoy your day.