Lakeland Industries Inc (LAKE) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Lakeland Industries, Inc., Q3, 2006 conference call. [OPERATOR INSTRUCTIONS] 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 reflects management's expectations regarding future events and operating performance and speak only as of today, December 12, 2005. Forward-looking statements are based on current assumptions and analysis made by the company in lights 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 Securities and Exchange Commission, general economic 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 person acting on its behalf are expressly ing 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. Good morning, gentlemen. Welcome to Lakeland Industries fiscal 2006 third 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. Lakeland manufactures and sells a full line of safety garments and accessories for 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 electronics manufacturers as well as hospitals and laboratories. We also supply federal and state, local government agencies and departments such as fire and police departments, airport crash rescue units, the Department of Defense, the CIA, the FBI, and the Centers for Disease Control.

Sales in Q3 to multiple distributors in the Gulf Coast areas of Texas, Louisiana, Mississippi and parts of Alabama were a little slow as hurricanes Katrina and Rita affected their operations during the months of September and into October. We expect these sales to return in the fourth quarter and to perhaps accelerate with mold remediation and petrochemical plant cleanups and maintenance being performed in the wake of the hurricane damage. I think Lakeland's margin expansion continues to emanate from our movement of our U.S.A. production to Mexico and China and the improving margins we'll see there. As well as -- while as of today half of our glove production has been moved to Mexico, and about 30% of our woven productions to China. So we still have a ways to go.

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 U.S.A. The movement of those two pieces of our U.S.A. production should continue to improve our margins over the remainder of the fiscal year and through January 2007. While our third quarter was better than last year's third quarter management expects an exceptionally strong fourth quarter. November sales were up significantly, and chemical suit sales, which have lately been very soft, in particular were strong in November. We have won two major bids for weapons of mass destruction money, the first shipped in November with the second to ship in late January or early February. There are several bids out for weapons of mass destruction money that we have a good chance of winning and hopefully an increase in basic industrial sales which is nongovernmental money. One major bid will be awarded at the end of the first quarter of next year which is in the 1.8 million plus range. Most of the bids are in the 50 K to 300 K range.

It's very hard to project revenues due to constant changes in the release of government funding which is result in partial shipments over a period of time. We also built up significant inventories in DuPont Tychem fabrics which are for the high-end chemical suits in September, October, November, and anticipation of material and garment price increases which did indeed take effect in late November 2005. Our margins in Q4 and well into fiscal year '07 should reflect the benefits of this very large accumulation of inventory of both DuPont Tyvek and Tychem fabrics at significantly lower cost than are prevalent in the market today. Therefore management is comfortable with the analyst consensus earnings estimate of $1.30 for FY '06. I'll now turn it over to Gary Pokrassa, our Chief Financial Officer, who will walk you through third quarter results. Gary.

Thanks, Chris, and good morning, gentlemen. Net income increased 0.12 million, or 10.3% to 1.3 million for the three months ended October '05 from 1.19 for three months ended October '04. Earnings per share were $0.26, for basic and diluted, for the three months ended October '05 compared to $0.24, basic and diluted three months '04. Net sales increased 300,000, or 1.3% to 22.7 million for the three months ended October '05 from 22.4 for the three months ended last year. Gross profit increased 760,000, or 15.4%, to 5.7 million for the three months ended October '05, from 4.9 million for the three months ended October '04. Gross profit as a percent of net sales increased to 25.0% for the three months October '05 up from 22% for the same quarter a year ago. Operating profit increased 1.4% to 2.0 million for the three months ended '05 from 2 million from '04. Operating margins increased to 8.9% for the three months ended '05, the same as '04, as a percent, Lakeland's operating margins are at the highest levels in company history which were 8.0, 6.5, 5.6, and 4.8 in fiscals '05, '04, '03, and '02 respectively. You can see that trend. It's a nice trend.

Despite rising raw material prices we've been able to increase prices over last year due to garment prices, controls on our SG&A expenses and international production planning in our non-Tyvek product lines in particular. During the second quarter ended July '04, the Company did issue 1.2 million new shares to the public that helped solidify its balance sheet. In April '05 we recorded a 10% stock split. These issuance of shares had a negative impact on the Company's earnings per share. The weighted average shares outstanding did increase 16.9% for the nine months year to date compared to the same nine months a year ago. On October 31, '05, the Company's balance sheet included total assets 73.7 million, cash of 4.4, working capital 59.6, bank debt of 8.4, stockholders equity of 59.1, and that's $11.79 per share of tangible book value.

Let me just give some quick key metrics in the history. ROI for Q3 '06 was 8.75, compared with 8.71 for the same quarter a year ago. ROA was 7.47 for this quarter, 8.03 last year, ROE was 8.98 for this quarter, 9.05 for last year, and EBITDA as a percent of sales was 10.08 compared with 9.48 for the same quarter last year. And with that I will turn the call back over to Chris.

Okay. Let me reiterate the key elements of our strategy and our immediate outlook. Increases in garment prices took effect November 21. We raised garment prices by approximately 5% on November 21, '05. As a percentage of sales, our raw material costs only went up 3.5%, and our prebuying of raw materials to supply at least the next two quarters could increase our margins by an additional 1 to 1.5%. Over the 1.5% we have for the next year. Thus gross margin expansion will be healthy for the fourth and first quarters coming up. We are continuing the operating cost reduction programs already in effect and have initiated new measures. We have negotiated cost increases and other non-DuPont fabrics and will raise the majority of our woven garment prices effective January 1, 2006. So our woven garment facility which many of you know to be out in St. Joseph, Missouri, which sells things like Nomex and other -- what we call woven fabrics, we'll be raising prices there at the beginning of the new year and hopefully that will induce a little bit higher margins in that segment of our business.

I went over our increased sales for the first responder market. We're seeing some real strength in November and bids are coming up in the spring, but basically due to government spending problems which are regular at best and highly dependent upon bureaucratic whims and sort of a CYA mentality it's really difficult to predict when bioterrorism monies will be spent. A lot of the monies we're seeing being spent are out of the Fire Act and out of some of the federal agencies but the real bioterrorism money that we can see is not being spent yet. The Fire Act again provides 6 million in grants to fire departments this year, and this does get spent each year, but we only get a small portion of it. Bioterrorism money has yet to come out in any substantial amounts, and all we can do is guess at perhaps next summer or fall as a spending start for those monies.

Our new Indian company seems to be working well and sales orders are in line with projections for the fourth quarter ended January 1, 2006 this company is basically starting from a stand-still so I'm actually pleased with the orders that are coming in rather rapidly. We have retained a marketing consulting firm to coordinate marketing in all our new product lines that we have acquired and developed internally. All the new sales people we've hired and all the new geographic markets we are entering. China, India, Japan, South American and Europe. In the first quarter of calendar '06 we opened up sales offices in Tokyo, Japan, Santiago, Chile, and Beijing, China. We continue to decrease manufacturing expenses by moving production to international facilities. We continue to emphasize customer service.

On the acquisition front we continue to look at JVs and acquisition opportunities, and we continue to introduce new products. We plan on introducing three new products in the first quarter of calendar '06. So with that I will open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question is coming from Brian Butler of Friedman, Billings, Ramsey.

Good morning.

Good morning.

Just first real quick, on the tax rate, your tax rate was higher than expected this quarter, and I was just hoping you could put some color on why it was 35% versus last quarter at 27, then if you could give some thought on what's the right rate using going forward?

Let me address that, Brian. Tax rate bounces around a lot, and it's a function of the volume that we run through the China plants. The second quarter had a very unusually low tax rate, which was a very high volume going through the China plants, which created far more profit in China, which is taxed at a 12% effective rate. That, to some extent, was a catch-up for Q1, which was a little slow, and also Q3 was a little slow. So that explains why it bounces around. I would say, my best estimate would be that if we use the year to date tax rate, which I think it's about 32%, that should be as representative of an estimate going forward as possible, but it does bounce around, and it's a little tough to pin down precisely.

That's probably the best number to use for the further quarter in 2007?

I would say at this point I would use the year to date, not the third quarter.

Okay.

Year to date -- as far as I know, we should be doing more volume in Q4 through the China plants than we did in Q3.

We'll be building volumes of finished goods in Q4, so the tax rate will go down.

The tax rate will go down, but then for modeling purposes, looking at '07, 32% is probably the right number to use?

Yes, I would say use the year to date number.

You'll get that generally in the first quarter also, and then a little slow -- China will slow down in the second and third quarters generally.

But every other operation we have, whether it's in Mexico or in Canada, outside the U.S., those countries have reasonably comparable tax rates. The only one that really affects it is China, and our volume does bounce around a lot.

Now, does the fourth quarter go back to like the second quarter 2006, similar kind of volumes?

I don't know if we'll hit quite as much, but it will be more than Q3. I would say the best estimate would be to use the year to date percentage.

Okay. And then looking at the manufacturing moves and how it's impacted your margins, you're at 25% gross margins now and you're talking about possibly going higher. Is there a new time frame for when you expect to get the production moved to China and Mexico? Originally it was kind of the end of 2006 was kind of a goal, now you have half in Mexico, 30% of the wovens in China. What's the new time frame, and where could margins -- how much more can you get out of the move?

The new time frame I'll say is about probably six months to a year. We basically had to wait a couple months because our current manager in Mexico basically wanted to retire, so we had to hire a new guy and get him in there, train him, so that slowed Mexico down a little. And there's sort of consolidating down there on the glove side because that's where the gloves are being moved. On the China side, basically they're doing a lot of the simpler garments, but right now as they move into the fire coats it's much more complex. We had to send people over to China from the United States, independent agencies to certify the facilities, so that slowed things down a little, but then I guess it's good news because we probably can squeeze another percent of gross margin out over the next year, just on manufacturing efficiencies.

You think you get to 26% on the gross margin side?

Yes, we can hit there by this time next year, certainly.

That's great. Last question. On -- any signs from DuPont on potential and other increase on the Tyvek raw materials?

I would guess no, simply since oil has pretty much stabilized, I don't think DuPont will be increasing prices unless you saw oil go up significantly. So I think we'll probably have at least six to nine months of stable pricing. I don't -- myself, I don't expect oil to go back up into the $70 area, therefore I don't expect raw material price increases.

Do you expect them to get back on their kind of annual--?

Yes, I would probably expect that.

So sometime maybe in two thousand and?

Seven.

Seven, you get something. Okay. Thank you very much.

Thank you. Your next question is coming from Tom Sodan of Smith Barney.

Yes, Chris, good morning. In Q2 conference call, and Katrina had just happened, but you felt sort of anecdotally that the cleanup business could be substantial. Do you pretty much feel the same way two or three months later?

Not so much, and I'll tell you why. They seem to be using a lot more polypropylene, which we make, by the way, as the cleanup garment, as opposed to Tyvek. Polypropylene is a lower cost, lower price garment, so significantly below Tyvek. So for $1 million worth of Tyvek garments you can buy 250,000 worth of polypropylene, so you see the dollar sales trending down.

But will you expect some business--?

Yes, we expect some business out of it. Certainly not as much as a lot of people were expecting. Also, we'll see some business in the oil maintenance. I mean, most of the Tyvek line and the facilities have to be -- go through a maintenance program and they'll be using a lot of Nomex and Tyvek there.

So the real driver, potential driver in '07 is going to be still that eventual showing up of the bioterrorism money hopefully?

Yes, on sale side. The other things that could pick up later in the year, and I'm talking about Q3, Q4 next year, are glove sales out of the Indian company.

And we hear something almost daily about the avian flu. Should that become a real serious -- is there any business from that when they destroy flocks of birds would they use your types of garment?

They do. We get good sales when they do it in the United States. We don't see too much when they do it in Thailand or Vietnam. I mean, we just don't have the sales into those countries.

Okay. Thanks very much.

Okay.

[OPERATOR INSTRUCTIONS] Your next question is coming from Barry Mendel of Mendel Money Management.

Yes, couple questions. What kind of goals do you have several years out on operating margins? How high do you think they could get given your production moves? Also, secondarily, India, what are your sales expectations for '07 for India?

We're not actually giving guidance here. We're -- we decided to give guidance just for the fourth quarter, only to avoid having the wrong impression because we looked at Q3 and Q3 by itself was a little weak, so we didn't want the market to get the wrong impression about where we're going in the near term, but beyond that, the Company's policy is not to give guidance.

How about goals? Do you have goals for where you think--?

That's kind of the same thing.

Not really. But okay.

I think we've indicated where the trends are, but I don't think we're willing to put specific numbers on it.

Okay.

Your next question is a follow-up coming from Brian Butler of Friedman, Billings, and Ramsey.

Ryan, just a quick question on the chemical suits. That was running in 2005, around 11 million a year. What's 2006 kind of looking like, and excluding chemical sales, what do you think top-line growth can look like?

Well, Chris went through a few factors that we're experiencing currently. It's kind of tough to really predict these things. What we can tell you is November was exceptionally strong, much better than it had been in probably 18 months. It's probably the strongest month in the last year and a half, and there are a lot of orders in the pipeline, but we could get a couple of those, then it could dry up again. It's really difficult to predict that.

Well, excluding the chemical suits, the high-end chemical suits, what's the rest of your business looking like, I guess on a growth basis, on the top line?

The rest of the business is mostly the Tyvek. On the top line, we're experiencing, what, in the range of 6 to 8% sales growth?

Right.

6 to 8, okay.

I think that's -- that's probably the best we can do in terms of a projection, I guess, at this point.

See long term I think a lot of growth can come from this new glove business that we are working on in India. It's a very big market. That facility has the capacity to make $8 million worth of gloves, probably 15 million if we were just to sink 3 or 400,000 into equipment and machinery there. Sales are ramping up quickly right now. It's a huge market. I mean, absolutely huge. In the United States alone it's $1 billion market. When you look at the Tyvek and the Tychem markets in the United States those are probably only a 250 to $300 million market. So this glove market is three times that size, just these specific types of gloves that we're making in India.

If we look at the overall glove market, you're talking a 2 to $3 billion industry. What we're trying to do is avoid the commodity type gloves that are coming in from China, which are pigskin and leather and Jersey type gloves. We're looking for top-line growth in the next year, or two to three years, and I think a lot of it is going to come out of the gloves.

That market you said is a billion. In general in that market how fast is that market growing?

It grows at about 4 or 5% a year. It's not a great grower, but what we do have, is what we feel we have in India, is one of the lowest cost producers of the world with one of the highest quality product in the world. And most of the people who are making similar gloves of this quality are charging significantly more than we are charging for these gloves currently.

So the goal with the new Indian operation is then to run those gloves through your current distribution channel?

That's right. It's going to take at least six months to get it set up, so that's why I'm saying in Q3 and Q4 we should start to see significant increases in sales. Not -- not overall to the Company, but when you see the growth coming out of that, in other words, sales doubling and tripling every quarter--.

For that operation.

For that operation.

Right. Okay. Thank you.

[OPERATOR INSTRUCTIONS] Sir, there appear to be no further questions.

Okay. Wish everybody good luck and a happy new year. Bye-bye.

This concludes today's Lakeland Industries, Inc., Q3, 2006 conference call. You may now disconnect.