Lakeland Industries Inc (LAKE) 2006 Q2 法說會逐字稿

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, September 7th, 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, storing 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 factored in the Company's filings with the number Securities and Exchange Commission, general and 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 this call. Lakeland Industries' President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Thank you, and good afternoon, ladies and gentlemen. Welcome to Lakeland Industries, Inc. fiscal 2006 second quarter conference call. With me today is Gary Pokrassa, our Chief Financial Officer, who will take you through our financial results after a brief introduction. For those of you who are new, I usually have an introductory paragraph, which I will tell you now, but it's -- most of you know it.

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, auto, 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 the departments such as fire and police department, airport crash rescue units, the Departments of Defense, FEMA, the CIA, FBI, Secret Service, and the Center For Disease Control.

I think that Lakeland's margin expansion, essentially -- this quarter, essentially emanated from the continuing movement of our USA production to Mexico and China and the improving margins we'll see there. I know one of the questions that we'll probably have to answer two or three times is, when will this be accomplished? Well, as of today half our glove production has been moved to Mexico, and 40% of our woven productions to China. Our first China-made fire coats have arrived in the USA, and we are currently selling China-made FR Cotton and Nomex coveralls in the USA. The movement of those two pieces in our USA production should continue to improve our margins dramatically over the remainder of the fiscal year, ending January 31st, 2006.

Okay, now I'll turn it over to Gary, our Chief Financial Officer, who will walk you through the second quarter results in a summary fashion so as to give you more time for questions and answers.

Thank you, Chris. And good afternoon, ladies and gentlemen. For our second quarter, ended July 31, our net after-tax earnings increased by 44.3%, or $510,000, over Q2 of last year. Earnings per share came in at $0.33 for basic and diluted this current quarter, compared to $0.27 same quarter last year. Sales for this quarter increased by 9.8%, or $2.2 million, over -- from $22.8 million last year, up to 25.1 this second quarter. Our gross, on a comparative basis, went from 21.3 to 23.1%, or nearly a full 200 basis points increase. Our operating profits increased from 8.2% of sales for last year's second quarter, to 8.8 for this second quarter. Therefore, our operating margins are at the highest level in the Company's history.

Just a quick recap. The four previous year ends, in '02, it was 4.8; '03 was 5.6; '04 was 6.5; '05 was 8. And now we're at 8.8 for this current quarter. Despite rising raw material prices and a steep Sarbanes-Oxley compliance expense, we've been able to increase profits over last year, due to tighter controls on our SG&A and international production planning in our non-Tyvek production lines. Normally, we would expect this upward trend to flatten out later in this fiscal year, but the recent hurricane disaster should spur demand for our products in a seasonally weak third quarter, ending October, and probably beyond, for another year or two, actually. Chris will get into more of that, I'm sure.

Also there's the question of when the higher chemical suits sales kick in. We have seen some strength this August, just this past month, in chemical suit sales. But this may just be a reaction by the Federal Government buyers to the use-it-or-lose-it type of spending policies, with the Federal Government's fiscal year ending, then, September 30th. On July 31, our Company's balance sheet included total assets of $66.9 million, cash of $7.1 million, working capital of 51.8, bank debt of $1.88 million, stockholders equity of 57.8, which is now $11.53 a share of tangible book value.

Let me just give some quick key metrics in the history. ROI for Q2 was 11.26, up from the 9.2 for Q2 of last year. ROA was 10.08, up from 8.31 from last year. ROE was 11.56, about even with the 11.65 for Q2 of last year. ROE was only even in this year, due to the secondary offering last year, which still will take some time to properly invest in the business instead of the short-term financial instruments. EBITDA as a percent of sales was 9.8, up from 8.33 from Q2 of last year.

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

Okay. The key elements of our future strategy and Lakeland's immediate outlook include the increase in the cost of raw material and the potential decrease in gross profits. That was the big whack on the stock back in January, in reality has not really turned out to be a negative for us. Our major supplier, DuPont, increased the cost of Tyvek to us and related raw materials by 6%, commencing June 13th, 2005. But garment prices in the marketplace were also raised by 6% by both DuPont and Lakeland in late June, and on April 30th by Kimberly-Clark for their SMS non-woven fabrics, which are competitive with our Tyvek fabrics.

Thus, basically, the whole market has gone up, both in garment prices as raw material prices increase. These price increases were obviously due to increasing oil prices, which are a key component of non-woven fabrics. Given current trends in oil prices, we expect further fabric price increases in 2006, and probably further garment price increases. So in order to offset any fabric-related decreases in gross profit, if they arise, we are continuing the operating cost reduction programs already in effect and have initiated new measures.

For example, last quarter we except selling expenses at approximately the same dollars as in Q2 of the previous year, despite a 10% sales increase. However, some of this was offset by Sarbanes-Oxley-related increases, emanating from consulting fees and professional fees of approximately $140,000 over the second quarter of the previous fiscal year. We have also negotiated cost decreases and other non-DuPont raw materials and raised our woven garment prices. Thirdly, the Company has completed the acquisition of the real estate it utilizes Decatur, Alabama, and Ronkonkoma, New York, thereby eliminating rent expense of $615,000 annually, which will start in full with the third quarter coming up. The savings from which will be partially offset by an increase in depreciation expense of $120,000, for a net book savings for $495,000 pre-tax, or approximately $0.06 per share to net earnings.

We experienced the increase in sales in the first responder market, or what we call our high-end chemical suit market in August, and will probably see strength through September. Although chemical suit sales have been soft for the last two quarters, August sales were up smartly over the prior months. And we hope this is the result of Homeland Security getting into gear, rather than just the end of the Federal year being 9/30/05, and the use-it-or-lose-it spending policies.

Additionally, the Assistance to Firefighters grant program will award approximately 5,500 grants this coming year, worth nearly $600 million in direct assistance to firefighters and first responders through Homeland Security's Office For State and Local Government Coordination and Preparedness, in cooperation with the U.S. Fire Administration. So we're on our third agency now, who's disbursing moneys to the fire department.

We also plan to improve our marketing in existing markets. What most people don't really see us doing, or which is really hard to talk about because it's such an intangible, is basically sales and marketing. So we've hired a new sales manager in China to begin our penetration of the Chinese domestic markets, and are working on opening up a sales office in Tokyo and Chile. The office in Japan will probably open next month, Chile in a few months. Our U.K. operation is off to a fast start, running at about $2 million annually, run ratio, and has started to generate profits. We only opened up this operation about 18 months ago.

Fourthly, we're going to decrease our manufacturing expenses further by moving production to international facilities for our gloves and wovens. As you all know, this has been a continuing move. We're still going to be moving them, probably out to the end of the year. We will be seeing margin increases on a monthly basis, as the bulk of these products are further moved offshore.

We are emphasizing customer service, and that's another market intangible. And to give you some sort of tangible idea of what that means, I'll say in our customer service, it's of note that Lakeland has received quite a few awards this year and over the past years. Specifically, this year, as one of the best Companies for service in the safety industry. This means that safety distributors, being our customers, have voted Lakeland as the -- one of the best suppliers of all manufacturers in the safety industry. This includes over 200 manufacturers.

For example, Lakeland received the top award at the OAR (ph) Safety National Sales Meeting. Lakeland was nominated for Supplier of the Year with Affiliated Distributors, a major industrial safety buying group, with 40 or 50 members, the winner to be announced in Dallas in two weeks. Lakeland was rated in the top five of all suppliers to the Safety Marketing Group by the distributor members in 2005 annual survey, ratings it received for on-time delivery, order fill rates, customer service, and ease of doing business among other trades. I cannot emphasize to you how important that is in retaining our market share and gaining more market share.

Acquisitions such as Mifflin Valley. We closed our acquisition on Mifflin on August 1st. The integration is going smoothly. And we expect, with the combination of our woven division in St. Joe and our Pennsylvania Mifflin acquisition, that sales could probably double from their base in the next 18 months.

Lastly, introduction of new products. It's something we're always doing. But our new products introduced will be in the glove and woven lines this year. And as a result of the Mifflin acquisition, we'll be introducing a host of new products to our worldwide sales operations, in other words, taking all the Mifflin products and giving them to all our other sales divisions.

And with that, I'll open up questions.

Thank you. [OPERATOR INSTRUCTIONS.] Thank you. Our first question is coming from Michael Hoffman with FBR. Please go ahead.

Chris, a couple questions on the income statement and, then, one on the balance sheet. You made a comment about the SG&A. But as you look at it sequentially, on, effectively, flat revenues, you're up about $400,000. Are you saying that's all that and some more is stuff that's nonrecurring? And so there -- what's -- if that's the case, what is the base number that we should be thinking about on G&A by quarter?

This is Gary, Mike. The -- there was a reclassification from Q1 of last year. So if you're looking at -- Q1 of this year, I'm sorry. So look at the numbers this year, at this quarter. And the run rate should be -- there's nothing unusual in Q2 or in the year-to-date. So either one would be -- would be a reasonable run rate.

All right. So let me get this straight. I got to go -- you got to go redo the first quarter?

There was a reclassification between the cost of goods sold and SG&A, yes.

Okay.

Which you can see if you just subtract the numbers, you'll come up with it.

Yes. Okay. And, then, on the -- well, yes. Then, on the operating expense line, again, same sort of thought. And this has got to be in -- is your G&A and then a little bit of depreciation or amortization that -- you're at 9.9% of sales in the first quarter, and you're 8.8% of sales in the second quarter. So that 100 basis points, how much that is non-recurring as it relates to professional fees, SOX, things like that?

Well, it's the same thing. The 9.9 was the way it was reported in the first quarter. But it's been reclassified. So look at the second quarter and the year-to-date numbers as the -- as the way to go, looking forward.

Okay. All right. Well, then, the last question on the credit facility that's now gone up about $1.8 million. Is that due to the Mifflin acquisition, or is that buying working capital -- ?

No, that's the Mifflin acquisition. It's just that closed August 1st. And before we went home last Friday of July, we borrowed just enough to cover our transfers the following Monday. Unfortunately, the Mifflin -- it took place the day after the quarter closed. Otherwise, we just missed getting into the quarter.

Okay.

In terms of the closing. The accounting, every -- contractually, everything was retroactive to June 30, July 1. So the month of July is included in the operations for Mifflin Valley. But the closing was on August 1, effective July 1.

Okay. With regards to the woven products, have you started to see any benefit of the quota changes in China, where now you'd be able to buy raw materials in China, make something and sell it in China?

The quota hasn't changed at all since last year. It's really moving our operations there, okay? Also, there was a lot of hubbub in the press about quota and re-imposing quota by the Bush Administration. That does not affect our particular products.

Okay. But one of the benefits that you thought might come from some of the changes is that you had been precluded from buying raw material in China, making it into something and selling it back into China. Has -- and that was supposed to be a benefit of the --

Are you talking about domestic sales in China?

Yes.

Oh. There's no problem there. We're just basically building a sales force, and collecting customers as we speak. We have no problem selling domestically in China, never has been a problem. I mean, not recently, at least. And years ago -- it all started with WTO. We could start selling domestically in China, starting in 2004 as a result of WTO.

Got it. All right. And, then your comment about a possible upside in activity related to Katrina, have you actually gotten some initial orders?

No, we haven't. We expect, actually, a little bit of a dip in business in September due to the petrochemical facilities being out of -- out or down. And then we expect a huge amount of business that's going to go over the next 18 months. I think that the amount of business here that we're looking at will dwarf the SARS epidemic and dwarf 9/11. It's a huge cleanup.

And this is more instinct than actual initial indications of interest from various parties?

Yes, more instinct. I mean, when we look at the number -- at the amount of the cleanup there and what we see when we get a typical hurricane in Florida, I mean, here you have flooding of almost every first floor in the entire city. By the time they get in there, it's going to be covered with mold. Mold remediation used to be a good business until they stopped insuring it. But with this particular instance, this is all -- the remediations are going to be mostly insured. So there's going to be a lot of work here.

And, then, even when they get into the petrochemical facilities, they're going to have to go through their maintenance again. So that means a lot of new business for our Nomex woven business. I mean, this is really big. And -- but it's not going to be millions in two or three months, like a SARS or a 9/11, but, rather, it's going to be an additional million or a half million every month for the next two years.

Okay. Thanks.

Thank you. [OPERATOR INSTRUCTIONS.] There appear to be no questions at this time. I would like to turn the floor back over to Mr. Chris Ryan for his closing remarks. Please go ahead.

Well, if there are no other questions, I really have no other closing remarks, other than to say that the second quarter was a very, very strong quarter. We hope it continues into the third. As I said, our third quarter is generally our seasonally weakest quarter, because August is our seasonally weakest month of the year. However, August was stronger this year than last year. So we're looking forward to a fairly decent third quarter.

And as I said, the margins will continue to increase as long as we keep moving production to our Mexican and Chinese facilities, and that's only about half done. So we do have room for margin improvement here on the cost of goods sold line. And that's my ending comment.

Thank you. This does conclude today's Lakeland Industries, Incorporated conference call. You may now disconnect your lines, and have a wonderful day.