Lakeland Industries Inc (LAKE) 2004 Q4 法說會逐字稿

Good day everyone, and welcome to this Lakeland Industries year-end results conference call. Today's call is being recorded. Before we begin, parties 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 facts, which reflect management's expectations regarding future events and operating performance and speak only as of today, April 15, 2005.

Forward-looking statements are based on current assumptions and analysis made by the Company in light of its experience and its perception of historical trends and conditions, expected future developments and other factors it believes are appropriate under the circumstances. These statements are subject to a number of assumptions; risks and uncertainties and factored in the Company's filings with the Securities and Exchange Commission; general economic and business conditions; the business opportunities that may be presented to you 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 the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent 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 today's call, Lakeland Industries President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Thank you, operator, and good afternoon, ladies and gentlemen. Welcome to Lakeland Industries, Inc.'s 2005 year-end conference call. With me today is Gary Pokrassa, our Chief Financial Officer, who will take you through our financial results after a briefing introduction. My brief introduction, for those of you who are new, is simply that Lakeland manufactures and sells a full line of safety garments and accessories for the industrial protective clothing market.

I will skip further over that and go right into the fact that I think Lakeland's earnings, story or expansion this year will be our movement of our USA production 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 will this be accomplished.

Well, as of today, 50% of our glove/foot (ph) production has been moved to Mexico, and about 30% of our wovens production has been moved to China. And our first China-made fire coats will be shipped in 3 weeks, and we are currently selling China-made FR cotton coveralls and Nomex coveralls. The movement of those two pieces of our USA productions should improve our margins dramatically over the coming year, beginning May 1, 2005 through February 1, 2006.

I will now turn over the financial part over to Gary Pokrassa, our Chief Financial Officer, who will walk you through the year-end results. Gary?

Thanks, Chris, and good afternoon, ladies and gentlemen. Net sales increased 5.6 million or 6.2% up to 95.3 million for the January 31, '05 year-end; and that is up from 89.7 million for the 2004 year preceding. Gross profit increased 2.4 million or 13.5% to 20.4 million for the year ended '05, up from 18 million for the year ended '04. Gross profit as a percent of net sales increased to 21.4% for the year ended '05, again up from 20% for the previous year.

Pretax income is up 33% to 7.1 million compared to 5.3 million last year. Pretax margins increased to 7.4% for this year compared to 5.9% for the last year. Our pretax margins are at the highest levels in our history. We do expect this upward trend to flatten out next year and then move up again depending on when the increased chemical suit sales kick in, as we continue to move a portion of our domestic production to China and Mexico, as Chris just laid out.

(technical difficulty) increased 38% to 5.0 million for '05 compared to 3.6 (technical difficulty) second quarter of this year, we issued 1.3 million new shares to the public. New shares had a negative impact on earnings per share. The weighted average shares outstanding did increase about 24% for the full year in '05 compared to '04 last year. Let it be noted that '06 will have the full effect of the mid-year offering on the shares outstanding used to calculate EPS in FY '06.

Earnings were $1.23 for basic and diluted shares for fiscal '05 compared to $1.11 for basic and diluted share for '04. At the year-end, our balance sheet reflected total assets of 60.7 million, cash and marketable securities at 9.2 million, working capital of 49.9 million, no bank debt and stockholders' equity at 54.5 million or $11.94 per share of book value.

Let me give you some key metrics and their history. ROI for FY '05 was 10.16, up from 8.97 for '04, 6.92 for '03 and 5.78 for '02. ROA was 9.32% for FY '05, up from 8.07 for '04, 6.11 for '03 and 4.86 for '02. ROE was 12.62% for '05, down from 15.69% in '04, 12.99 in '03 and 11.17 in '02. ROE was down in '05 due to the secondary offering in the middle of the year, which will take some time to properly invest in the business instead of short-term financial instruments.

EBITDA as a percent of sales was 8.54 for '05, up from 7.37 in '04, 6.42 in '03 and 5.72 in '02.

With that, I will turn the call back over to Chris.

Okay. I believe the earnings for our fiscal year 2005 of $1.23 were mostly in line with estimates out there of approximately $1.21 to $1.27 a share. 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 and defense side, we saw a softening of demand for our high-end chemical suits from November through January 1st of our last fiscal year. So that softness has already been reflected in the earnings we just announced of $1.23 a share.

Things continued slow in February but have started to pick up in March and April, as the new chieftains at Homeland Security settle in. It's difficult to identify why this is -- other than bureaucratic bottlenecks, but more so because most of the upper-level Homeland Security personnel, like Tom Ridge, left the department of Homeland Security last November. And new management is just getting settled. Here in roughly March '05, we are beginning to see some money flow out again.

Michael Hoffman is an analyst at Friedman, Billings, and Ramsey. And, Mike, you are probably on the line. I happened to see you quoted in Wall Street transcript last week, and I thought your quote was right on target. Mike said that the Department of Homeland Security has actually allocated a lot to the states, but the states have only just started to build the bureaucracies to spend those funds.

There's also the first responder issue for which these billions of dollars available hasn't been spent. The states are waiting for Department of Homeland Security to come up with the guidance on what is really needed. Mr. Hoffman went on to say, "The Department of Homeland Security needs to provide more specific guidance."

This is what you should be buying. It's a little bit of a hangover from the unfunded federal markets of the 1960s and 1970s when states were told, here is exactly what you are supposed to do, but we're not giving you any money. Now they are giving the states several billion dollars but have not told them exactly what they had to spend it on. So the states all sat there, kind of looked at them and said, what are we supposed to do? First they developed a bureaucracy, but they still come back and ask, what were they supposed to spend the funds on.

The Department of Homeland Security is now supposed to deliver a list. And we have been told that in our specific line of business that it was there looking for a list of compatibility of our suits with the other pieces of the ensemble that go with our suits like an MFA respirator or a 3M respirator or a batta (ph) boot. Will they fit? Is there compatibility?

Most state bureaucrats want an imprimatur from Homeland Security, which is basically a piece of paper identifying that all these parts will fit together. And those chieftains of Homeland Security haven't been there since November, so we're starting again here in April. So we expect that list probably be delayed a little bit.

For those of you who are new to Lakeland, I will describe our chemical suit business a little bit. Our high-end chemical suits include our Level A suits, used with the highest level respiratory skin RA (ph) mucous membrane protections are needed. As the Level A is the highest level of protective suit and it gets the highest price point and generally carries the highest margins.

Our Level B suit, which is in the middle of the protective ratings, is used where the highest level of respiratory protection is needed but lesser level of skin and eye protection. Level B protection is the minimum level recommended on initial hazardous side entries until the hazards have been further identified and defined. This is a much larger unit market than the A market is but lower protection and lower prices and lower margins.

Then we go to the Level C suits used when the type of airborne substances known and skin and eye exposure is unlikely, yet periodic monitoring of the air must be performed.

Once again, chemical suits are about 12% of our business, and they carry our highest gross margin. As for booked orders, we have one large pending order of about .5 million with -- excuse me, 500,000 -- with the state of Indiana. And we are hopeful that will ship that in the near future. Other bids out there pending as of this month approximate another 1.2 million for suits only, and those types of bids I'm looking at our bids that are 20,000 and above because we do a large amount of business which is just filling slots at distributors for 5, 10 and 15,000. But a lot of the little orders do add up.

So there are a lot of funds being allocated toward first responders now. They are still spending their 2003 money and are continuing to build up their capability. If we include the 2005 budget request, there is between 8 billion and 9 billion available to first responders to purchase PPE or what we call "personal protective equipment" like our chemical suits. Some fire departments that never had a hazmat team, now have state-of-the-art equipment to respond to every type of disaster imaginable. We have heard from fire departments that have received large amounts of homeland and defense monies and continue to spend it on our suits but that they don't have enough personnel trained to use these suits. Obviously, they will increase the size of the trained staff over time to appropriate levels, which hopefully will necessitate the purchase of more of our suits.

So the key elements that we're looking at going forward now is next year the increase in the cost of our Tyvek raw materials will give us a potential decrease in gross profits. People will say, well, how much? And I will say, I don't know until DuPont actually increases the price of garments. At that point in time, I might be able to speculate on what earnings will be next year. But our major supplier, DuPont, increased the cost of Tyvek-related raw materials by 3.7% to us on January 3, '05.

DuPont is also one of our major competitors in the industrial protective clothing market. And today DuPont has not raised the Tyvek garment prices in 2005, which is our fiscal 2006. Therefore, in order to maintain our market share, we may absorb this increased raw material cost until such time as garment prices increase.

Also, our fiscal 2006 may absorb across-sales increase without an offset in revenues, which many have a negative effect on gross profit and gross margins as a percentage of sales in fiscal 2006.

Sarbanes-Oxley expenses are from 500 to 700,000 expenses for the next fiscal year. All I can say on this point is I'm sure investors will rue the day that they agreed with Congress to lop off a half trillion of market cap off the public companies as an aggregate forever going forward because of Enron, WorldCom and Tyco. And the latter of which has proved to be an excellent investment if you bought Tyco at 10.

In order to offset this decrease in gross profit, we're continually operating cost reduction programs already in effect and have initiated new members. For example, number one, certain SG&A expenses have been revamped that will render a net cost savings of approximately 500,000 in the coming fiscal year. In contrast to last year, we will incur interest expense on revolving credit facilities or approximately another $200,000 savings. We have also negotiated cost decreases in other non-DuPont raw materials. The savings here where we will be -- they will be more quantifiable, once the sale or amount thereof have been made.

The Company intends to acquire the real estate it utilizes in Decatur, Alabama and Ronkonkoma, New York by the end of May; thereby, eliminating rent expense of 615,000 annually. The savings from which will be partially offset by an increase in non-cash depreciation expenses of approximately 100,000, therefore a net 515,000 of savings from May forward.

We will continue to expand our marketing in our international markets. We heretofore do not sell much in international markets, and we are making a big push there. We're already introducing new products and expanding existimer (ph) product sales in the European markets, the Asian markets and the South American markets. These sales will all be new sales.

We're decreasing our manufacturing expenses by moving costly USA production to international facilities. I have been telling people that for the last 6 months. This should represent a cost savings of $800,000 over the next 18 months. We continue to emphasize our customer service, something we continue to improve upon all the time, which gives us increasing market share along most of our product lines.

Acquisitions, we should see some acquisitions over the coming year, which will add new accretive streams of earnings, and we will be continue the introduce new and innovative products, particularly in our glove product lines with new yarns and wholly new patented way of making string knit gloves.

So with that, I will open it up for questions.

(OPERATOR INSTRUCTIONS). Deborah Fiakas, Crystal Equity Research.

I wanted to ask if in the operating expenses for this year, if there were any non-recurring charges for Sarbanes-Oxley or other expenses of that nature.

We did have Sarbanes-Oxley, but I would unfortunately not characterize them as non-recurring. And in fact, most of the expenses that are being incurred in Q1 of 2006, we had about 200 sum-odd thousand in the fiscal year ended just January '05. But we do expect to spend about 700,000 in total for it '05. So we expect to see it about 500,000 more in FY '06.

And how about expenses in regard to your move of operations or move of production out of the US and into Mexico and China? Did you incur any unusual expenses?

Only airfares for engineers to go back and forth to China and hotel bills.

Tom Sowden (ph), Smith Barney.

Past, has there been a -- what has been the lag time between, let's say, material price increases and increases in garment prices? Or has there been a consistency between those two in the past?

Can you repeat that question?

Well, in the past, when DuPont has raised raw material prices to you fellows, is there a predictable or normal lag period when they will come back and increase garment prices?

I can only to you the history of DuPont Tyvek increases. In the last 22 years, they have decided not to raise prices 3 years out of the last 22. There have been some lag years. I believe it was 3 years ago, they raised the price of the Tyvek raw materials to us in January but did not raise the price of garments until May 27th. So there have been instances where they just don't raise at all or where there is a lag in the raise.

So, if I understand that correctly that there is normally not a -- when they raise prices to you guys, garment prices have gone up the same time? Or you expect --

No. Generally when they raise prices of the raw material, the garments have gone up. I'm saying that we have had 3 years, let's say, in the last 20 where that has not occurred. And 1 year where the lag was about a 3 or 4-month lag between the raw material increase and the garment increased.

So are you expecting something by June or something, you think, end of May?

If they don't raise prices by June, then I give the probability to be less and less as time goes on.

Michael Hoffman, FBR.

Hi. This is actually Brian Butler for Michael. I'm sure Michael will be happy to hear that you mentioned him on the call. A quick question just on the taxes. The taxes look like 29% for the full year. It just seemed a little low. Hello?

Yes?

Can you comment on the taxes?

Yes. We had a tax carry-forward this year from last year, which resulted from a large contribution of inventory in the prior year, which resulted in actually a limitation on the taxes of the deduction in last year's return -- which turned into a carry-forward from last year -- which we utilized this year.

Do you think you would be seeing that again in 2006? Or, at the very least, what do you think that tax rate should be?

The tax rate clearly will be going up. We utilize not quite all of it, but I think there's a footnote in the 10-K that shows the remaining carry-forward. It was about $80,000 of carry-forward. So it's not all that much.

In going forward, I would say the tax rate is going to be -- in the prior year, I think it was 31.3. Before that, it will be closer to that range and maybe a little bit more. One of the China companies is going off a tax holiday very shortly, so it will be a little north of 31% to 32% going forward, I'd say. I think this is the CFO.

And then on the Tyvek, if DuPont does not put through the price increase, what is potentially the annual impact if it does not go through? Because that is 3.7% increase was (multiple speakers) --

(indiscernible) about 38 to $40 million.

So, my calculations, that's probably about 2.5% on your gross margin line, right? 250 basis points?

Yes.

(OPERATOR INSTRUCTIONS). Alan (ph) Margulies (ph), Horseman (ph) Left (ph).

My first question was about the lag time and the history here with DuPont. But what about the actual pricing of the garments? Is there any pricing pressures there?

No, there is no pricing pressures there. Garment prices have pretty much just remained the same.

They have just remained the same?

Right.

And in terms of acquisitions, can you maybe -- I know you cannot disclose details, but can you talk a little bit about maybe what areas they may be in -- geographies?

Okay. Near-term acquisitions would be probably in the woven/fire area. Okay? They would probably be North American-based. In other words, these are product lines that we currently sell. We currently have a small operation in Saint Joe, Missouri, and we are moving a lot of that production to China. What we would want to do is expand that type of an -- those type of product lines. They are very, very large market of which we are a very, very small player. In other words, fire coats, fire pants in the United States alone annually is probably close to a $200 million market, and we only do 3 million in that area.

Private investor Lee Fernandez (ph).

I want to congratulate you on a good year here. Hopefully -- if you are not going to make any acquisition, are you going to probably give a cash dividend out this year?

Probably not this year, but we would consider it next year.

If there were no acquisitions.

Well, if there is an acquisition, then you definitely will not consider it, would you?

That's right. We would be using the cash for the acquisition, not only for the purchase price but to fund the growth of the receivables in the inventory.

That is the only question I have. Keep it up.

David Harris, Hopeful (ph) Asset Management.

Now, you mentioned some non-woven material as a substitute for Tyvek. Will the market accept it, a substitute? And how much can you substitute for Tyvek?

Well, we have been making alternative garments out of alternative fabric since the mid '80s. A lot of these fabrics can be substituted for Tyvek, and they are substituted for Tyvek. And consequently, we always support our Tyvek as our core market and our prime product, our really premium product. But when people ask for other than Tyvek, we will supply it. And those requests have been going up probably more so in the last 3 or 4 years than in any time in the past history.

It's fairly price sensitive, so do you expect the substitutes to make any major inroads?

Over the next decade, I do expect them to make inroads. I almost would compare it to something like DuPont Nomex market. FR cottons were introduced in the mid '80s when Nomex had 100% of the market. And 15 to 20 years later, the FR cottons have 60% of the market, and Nomex has 40% of the market. And that's a typical product lifecycle.

Would the margins the lower if--?

On some of the alternatives, like polypropylene, the margins are somewhat lower. In other areas, they are actually higher. In other words, if you move into microporous films, margins are actually higher than they are in Tyvek. So, when you have a situation where Tyvek raw material prices increase but garments don't, then it makes sense to move to alternate garments because they yield a much higher return on investment and a much higher margin.

(OPERATOR INSTRUCTIONS). Mike Barish, Lazarus Investment Partners.

I wondered if you could just speculate a little bit regarding DuPont's inactions. And don't they posture themselves almost in a predatory capacity if they just raise prices of raw material but don't do anything with the manufactured garment prices?

I don't know the reasoning for the action. It may be something that they may reverse in a month, 2 months or next year. But since there are price-fixing issues there, it's something we just cannot talk to them about. And therefore, we can't even get an inkling of what their thinking is. We just have to sit and wait. We never know. The last time this happened, it was apparently, from what we found out later was, it was just they were unable to get organized fast enough to put out a new price list.

And we have no further questions in the queue. I'll turn the conference back over to our speakers for additional or closing remarks.

Well, if there's no more questions, I don't think we have anymore closing remarks because it's late on Friday. And I am certain everybody wants to go home.

That does conclude today's conference. We thank you for your participation. You may now disconnect.