Lakeland Industries Inc (LAKE) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Elsa and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lakeland Industries Inc. year-end and fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (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 reflect management's expectations regarding future events and operating performance and speak only as of today April 17, 2006.

Forward-looking statements are based on current assumptions and analyses 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 filing 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 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, operator and good afternoon, ladies and gentlemen. Welcome to Lakeland Industries' fiscal 2006 fourth-quarter and year-end conference call. With me today is Gary Pokrassa, our Chief Financial Officer, who will take you through our financial results after a brief introduction. That introduction is really for the benefit of people who have not been with Lakeland very long.

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 department, airport crash rescue units, the Department of Defense, the CIA, the FBI, the DoD and the Centers for Disease Control.

In my letter to you -- in my letter to shareholders this time last year, I stated that it would be difficult to improve upon FY '05 earnings per share. Yet we did increase our earnings by 26.2% for FY '06 despite the huge financial burdens placed upon us by compliance with Sarbanes-Oxley and increasing raw material and freight costs due to skyrocketing energy prices, which are difficult to pass on.

Actual consolidated sales growth in FY '06 decreased from 6.2% to 3.5% growth rates due to pretty much one thing; a lull in spending in homeland security chemical suit business. 2002 Fire Act grants have been consistently spent since the first Fire Act appropriations in early 2002 on our chemical suit products. However, that spending decreased in the beginning of fiscal 2005 as pipelines filled, but seemingly now appears to be picking up a little in 2006 and Gary may go over that in some of the financials concerning the fourth quarter.

The most significant shortfall in spending in the chemical suit business comes from the Bioterrorism Act of 2002 grants and spending programs. All our other product lines or area of sales were up. Although enacted only a few months after the Fire Act -- being the Bioterrorism Act, very little of this money seems to have been spent, particularly in our areas of expertise being protective suits for biological and chemical warfare weapons protection.

We think we are at the beginning or about to see the light at the end of the tunnel in this potential market and for the first time in years, we are seeing U.S. hospitals beginning to buy equipment in preparation for a terrorist attack or a pandemic flu and much larger homeland security bids are being floated out there in our first quarter. In other words, some of the bids we're seeing are basically about ten times the size of the ones we have been seeing historically.

It is on this speculation, along with the seeding of our international initiatives, which I will discuss in more detail in a moment, that we believe FY '07 will be a rewarding year in terms of both revenue and earnings growth.

Okay. I'll turn it over for now to Gary Pokrassa, our Chief Financial Officer, and he will walk you through the year-end results and the fourth-quarter results.

Thanks, Chris. Good afternoon, ladies and gentlemen. Net income increased $1.3 million or 26.2% to $6.3 million for fiscal '06 and $1.26 a share compared to $5 million for the previous year and $1.12 per share. Net sales increased $3.4 million, 3.6%, to $98.7 million for '06, up from $98 and $95.3 for '05.

Gross profit increased $3.5 million, or 17.3%, to $23.9 for the year in '06, up from 20.4 from '05. Gross profit as a percent of sales increased to 24.2 for the year ended '06, up from 21.4 for the year ended '05. Operating profit increased 24.1%, up to $9.5 million for '06 compared to $7.7 million for the '05 fiscal year.

Operating margins increased to 9.6% for '06 compared to 8% --8.0% for the '05 fiscal year. Lakeland's operating margins are at the highest levels in Company history and just a quick run through of the history. As I said, 8% for the previous year, 6.5% for '04, 5.6% in '03 and 4.8% in '02.

Our effective tax rate for '06 was 35.2%, which was impacted by the repatriation of $3.2 million of profits from our Chinese subsidiaries, which resulted in about $165,000 of additional taxes in Q4.

Our fourth quarter ended where we expected about $0.36, but the actual was $0.32 and that goes to tax adjustments in the fourth quarter, which were about $0.046. Most of this resulted from our January decision to repatriate China profits due to a onetime tax break offered this year by the U.S.A. and expiring for us on 1/31/06. It was difficult to project whether or not the Chinese government as opposed to the U.S. government would allow a repatriation of this amount. We watched the currency very closely. The Chinese currency has not been moving very aggressively against the U.S., so we waited until the last minute and then we had difficulties getting it through the Chinese.

Right now, you are seeing a lot in the papers about the Chinese currency being allowed to go offshore, by its own residents, 20,000 a head. You see big banks like the China Construction Bank probably investing $4 billion in Bear Stearns. This is going to have an effect on the Chinese currency and it may not go up as rapidly as we thought it would, so we repatriated the money and paid a large tax on it. Although, it was a onetime tax of about 5.2% across about $3.2 million. So that basically is what affected our tax rate in the fourth quarter and it was something that we had to play by ear right up until the last minute.

Also affecting our tax rate was an adjustment resulting from an ongoing IRS audit, which added about $65,000 of additional taxes in addition to the repatriation taxes. I would estimate our effective tax rate going forward to be between 33% and 33.5%.

Sales for the full year '06 (technical difficulty) as follows compared to '05. Disposable sales in the U.S. are up 2.4%; gloves are up 4.7%. Chemical suits are down 27% for the full year. Wovens are up 10.3% and internationally, Canada is up 21.5% and Europe is up 35.9%. Sales for Q4 of '04 break down by product as follows and it is a little different than the full year and it is interesting.

In Q4 of '06, disposable sales in the U.S. were flat. Gloves are up 15.4%. Chemical sales are up 32.7% for Q4 despite being down for the full year and including the fourth quarter by 27%, so that is a pretty strong sign I would say. Wovens are up 2.9% and internationally, Canada is up 18.4% and Europe is up 113%. For Q4 '06 on a year-over-year basis compared to Q4 of '05, major metrics are all up significantly. ROE is 11.05 for '06 compared with 9.35 for '05 Q4. ROI is 10.32 for '06, up from 9.03. ROA is 9.06 for 4Q '06 compared to 8.38 and EBITDA as a percent of sales was 13.36 for Q4 compared with 6.92 for Q4 of '05.

Pretax income for Q4 increased by 105.6% over Q4 of last year, while net income only increased 31.6% over the same period last year due to the favorable tax effective of carryforwards in the prior year compared with extra taxes resulting from the repatriation and the audit as discussed before. Margins continued to increase in '06 over '05 due to the aggressive proportion of higher margin chemical suits -- due to the increased proportion of higher margin chemical suits and the mix of '04 -- of Q4, a policy of aggressive purchasing and continued increases in production moved to China.

For the full year '06, we increased total production volumes in our three China plants combined by 24% over the full year '05 and in Q4, it was 29.7%. So our China plants were increasing over Q4 of '05.

We believe these trends will continue in '07 with the firming up of the chemical suit market, yet more production in China, along with the continued strong expansion in international markets.

Management's goals for FY '07 are an increase in overall sales of between 8% and 12% and net income should increase -- our goal is 12% to 16% on net earnings. Despite rising raw material prices, we have been able to increase profits over last year due to garment pricing controls on SG&A and international production planning.

On January '06, the Company's balance sheet included total assets, $72.5 million, cash and marketable securities at $1.5 million, working capital of $59.9 million, bank debt of $7.3 million, stockholders equity of $60.8 million, which is $12.12 per share book value.

Some key metrics in the history for the full year. ROI for '06 was 10.14 compared with 10.16, 8.97 for '04. Before that, 6.92 for '03 and 5.78 for '02. ROA was 9.53 for '06 compared with 9.32 for '05, 8.07 for '04, 6.11 for '03 and 4.86 for '02. ROE was 10.98 for '06 compared with 12.62 for FY '05, 15.69 for FY '04, 12.99 for '03 and 11.17 for '02. The reason for that drop is the way the stock offering impacted the ROE results coming in in the middle of '05.

EBITDA as a percent of sales was 11.02 compared with 8.54 for '05, 7.37 for '04, 6.42 for '03 and 5.72 for FY '02. With that, I will turn the call back over to Chris.

This past year and the coming year are years of transition for Lakeland. In order to increase our revenue growth and the earnings growth that should logically follow we have adopted a three pronged strategy.

Number one, expand our international sales operation. Number two, acquire product lines, which do not -- which we do not carry presently, but which our sales force can integrate or bundle into existing product lines as they are already sold to our existing customer base. And number three, develop new proprietary products, which solve a problem or better answers the demands and needs of our customers.

Addressing the above in order, we have recently opened new sales offices in Beijing, China to cover the emerging markets in China and Southeast Asia, an office in Tokyo to address the unique needs of a large Japanese market and an office in Santiago, Chile to address the growing South American markets. This strategy is supported by the fact that our existing foreign subsidiaries in Canada and the United Kingdom increased their revenues by 21.5% and 35.9% respectively this year.

We believe emerging economies for our products are growing much faster than the U.S. economy for same. The reason for this is that the emerging economies are for the first time adopting standards of personal apparel protection for industrial and medical workers. As the world globalizes and the American and European producers move their production offshore, they are open to adopting the type of worker safety standards that exist in their home countries.

Emerging economy and governments are also beginning to put in place legislation very similar to our OSHA regulations enacted in this country almost 35 years ago. The key driving force for emerging economy governments to implement OSHA-type safety regulations are the World Trade Organization, or the WTO requirements that member countries adopt and utilize international safety standards. This means in order to comply with OSHA regulations -- with WTO treaty requirements, emerging countries have to conform to environmental standards and safety standards found in the U.S. or Europe as an example.

Simultaneously, developed countries, like the U.S. and Europe, are not only increasing their safety standards, but standardizing the standards themselves across borders. U.S.A. and Europe are working to standardize European ISO standards with American ANSI standards. This is a long-term trend and will play out over the next decade. Therefore, we believe it will be a decade of steady sales and earnings growth for your Company.

Number two, acquisitions will also play a role in our growth. We acquired Mifflin Valley, a manufacturer of high visibility protective clothing, and we have an option to buy an Indian manufacturer of gloves, which provides protection from hazardous chemicals very much as our protective Tyvek coveralls do. In other words, the type of gloves this company make go hand in hand, forgive the pun, with our Tyvek garments.

We continually look at such acquisitions, which fit our product lineup both domestically and in our international strategies and it's both. Mifflin was the U.S.A. domestic acquisition; whereas our Indian was an international acquisition.

Lastly, we've developed a number of new products such as our DesPro glove, which received two patents this year and answers the problem posed by the U.S. auto industry in reducing their costs. We also introduced gloves with specially engineered yarns that extend the life of these gloves and thereby reduces our customers' overall costs. And the U.S. auto industry in its sad state of affairs is really looking for cost savings right now. We introduced gloves that are also antimicrobial, thus killing on contact, not suspending like the competition does, bacterial impurities, which have been a need of our food processing customers as they deal with E. coli, streptococcus and other microbial contaminations. This also is a patented product.

We are also introducing fabrics for hot environments that are highly breathable, increasing comfort by a factor of at least 100% to 200%. Such innovations have been asked for, but never achieved or delivered by our industry. This innovation is evidenced by the fact that over the last few years, we have received 14 patents and presently have nine more in application process. Technologically advanced and innovative products, as a general statement, usually produce higher profit margins.

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

(OPERATOR INSTRUCTIONS). [Andy Schmor], Market Edge.

Great quarter and great year. (technical difficulty) I have got a question on your (technical difficulty).

Operator, this caller is breaking up. We can't hear his question.

Hello?

Hello. Can you speak louder?

Can you hear me now? Is that level better?

That's better.

Sorry about that. Congratulations on your year and your quarter. It was a great year for you guys. I have a quick question on your guidance that you had provided here in the call. I think it's 12 --10% to 12% top-line growth? Is that correct?

I'm sorry. 10 to --?

On your top-line growth.

For fiscal '07 or fiscal '06?

8% to 12% for '07.

Fiscal '07, yes.

8% to 12%.

And the bottom line?

12% to 16%.

(technical difficulty) -- showing a 2007 estimate of $1.60. Do you know where that is coming from?

I think you'd have to ask the -- I think that is from FBR and he is going to have to I guess revise that in light of the information we just disclosed.

Bob Sullivan, [Statute] Capital Management.

Could you walk me through the sequential order rate or revenue in the chemical suits Q4 over Q3 of fiscal year '06? And also you were talking about a growth that you are seeing in RFPs and dollars spent in that particular line and could you review that a little bit and kind of get a little bit more granular on your outlook for the chemical suits business?

I don't have the Q3 handy. I have Q4 and the year-end frankly. It was up significantly in Q4 though. It was up 32.7% from Q4 this year year-over-year and it was up significantly compared to Q3 of this year also.

Do you have an actual dollar figure because I didn't see in the press release where there were the actual quarterly numbers given? They were just --.

We don't disclose --. This is the most disclosure I think we have ever given on --. We have not given this type of disclosure before, no.

Could you walk through then what you are seeing on the chemical suit side and maybe give us a bit more anecdotal evidence or some more granularity on the kind of growth you're seeing and the kind of order patterns? You had mentioned you're seeing more -- etc.? Hello?

We'll probably be -- a slight growth in Q1, up from a very strong quarter in Q4. I guess some of these bids are still out there as bid, so Q1 is holding up pretty nicely compared to Q4 last year. I wouldn't say there's any great growth quarter-over-quarter; year-over-year, would be significant growth, very significant growth, probably comparable to the 32% this year.

In terms of growth beyond that, it depends on how these bids play out. We just can't answer that other than to say that the bids are getting stronger. The RFPs are getting bigger, but it takes a while to get these processed with the governments.

Government spending is very precarious from quarter-to-quarter. They can put out a bid. You can bid on it and you don't hear from them for six months. For instance, there is a large bid that we bid on for $3.5 million. We bid on it. Probably won't hear until June. So you never know when these things are going to fall and when you're going to get them.

I would expect Q1 for the chemical suits to be comparable to Q4.

Okay. So when you're talking about the bid activity, it's basically what you're seeing on the government side as opposed to say the private industrial sort of sector if you will?

Yes, basically the private industrial sector is a fairly steady eddy. It is the government bids that can really swing you huge amounts one way or the other. For instance, one bid out there is about 25% of our annual sales.

Right. Right. Okay. I'll jump off and get back into queue.

Michael Hoffman, Friedman, Billings, Ramsey.

Free cash flow -- can we talk a little bit about what happened in the fourth quarter and the whole year and then what your thoughts are about free cash flow in '07?

I think you got me. I don't have that -- I am not quite prepared with free cash flow by quarter. I've got just about everything else, but free cash flow I don't have at my fingertips.

Okay. Then what about your capital spending in the fourth quarter and then for the full year?

Not significant. We did significant capital spending earlier last year when we bought the real estate, but other than that, this is not really a capital intensive business and I don't think we'd have anything significant in the pipework.

Okay. So what did you finish the year in capital spending?

Hold on. Unfortunately -- I apologize. Our 10-K is going to be issued later today. Otherwise, you guys would have this. The capital spending, other than the acquisition of Mifflin Valley, was 4.6, of which 3.6 was real estate.

In general, we don't look for much greater capital spending than about $1 million a year.

It might be a little -- we have had a computer project that threw a few dollars --. Yes, it's within the range of $1 million a year.

So for '07, we should use $1 million for forecasting purposes?

Yes, I would say so.

And then disposable sales are flat in the fourth quarter, up 3% for the year --.

That was domestic disposable by the way, not -- Canada and the U.K. are also disposables, but we are dealing with those separately. Domestic disposables were flat.

Okay. So U.S. So I guess the first question is what is the trend in the first quarter and what do you expect that trend to be for the full year?

Well, let's see. In terms of the full year, I think we gave overall revenue guidance, but in terms of Q1, it has actually been quite strong so far for the sales for -- February and March have been very strong.

In disposables?

Yes. And in fact, it has been strong in the alternative fabrics also, other than -- in terms of -- what was it? Micro? -- MicroMax is the trade name.

So the pattern that was in the fourth quarter, what would account for the flatness? Was there some prebuying earlier in the year?

Fourth-quarter flatness in disposable sales -- it was hard to figure out. It is generally not the strongest part of the year. First quarter is always our best, but basically there is significant competition out there, discounting in the fourth quarter. That is probably what I would account for most of it for.

When you -- the industry raised prices by 6% effective November 21. A lot of people went out and bought a lot of product in November to beat that price increase. So that left December sort of sitting there with both the Christmas vacation of two weeks and the fact that everybody had bulked up before the price increase. It generally left us with a much weaker December than we usually see simply because we don't generally have price increases in November.

As you think about your working capital needs, you did some prebuying in anticipation of these price increases. What are your thoughts about visibility on price increases on raw material in this calendar year 2006 and therefore, how would you characterize your working capital trends in this calendar year?

Well, your guess is as good as mine in a sense -- you tell me the price of oil and if it keeps going up, we will probably see price increases on the raw materials. As far as capital spending, we will continue to buy raw materials. We will basically continue ahead of the curve simply because we don't see prices going down. Right now, I don't necessarily see prices going up immediately, but if the price of oil goes up, raw material prices may very well go up. So we are always ahead of the curve in terms of keeping a large raw material inventory.

That also prepares us for basically one of these typical events of disaster, be it SARS or terrorist activities. That puts us in the position to be able to ship huge quantities at a moment's notice.

[Richard Chester], WPG.

I really apologize. I missed the questions. I just got right back on, so if I'm asking a question that has been repeated , I apologize in advance. In your comments, you said that order activity is up considerably. Can you talk about that vis-à-vis the EPS being up 12% to 16% and is the estimate going for just a conservative estimate? Just talk about what order activity looks like and what some of these foreign orders could be. Thanks a lot and good year.

In terms of being conservative, I like to think Chris and I are always conservative.

Okay. And just in terms of the orders and what that could mean? What are we looking at?

Well, what we are seeing is at least better order activity on the (technical difficulty) and that is key because (technical difficulty) higher gross margin than the rest of our lines. And as we've said, fourth quarter was significantly above the prior fourth quarter. First quarter is significantly above last year's first quarter. So at least from the first-quarter perspective, we're hoping and looking for a better year in chemical suits.

Our sales growth would have been probably right on target but for the drop in chemical suits. Now we are seeing it picking back up and with that, hopefully margins will pick up a little bit.

[Pierre Brole], PB Investments.

I am retired and the stock is a sizable part of my portfolio. What I would like is to thank profoundly all of your employees, not just the ones who are here meeting, but all of them.

You're welcome. Thank you.

Thank you.

[Howard Eisenberg], a private investor.

Chris, good morning. I noticed in the report that you have approximately 5 million shares outstanding compared to 4.4 million a year ago. However, your comment is that it has been adjusted for the 10% stock dividend. Is there still some dilution that was being worked out in fiscal '06?

There's no dilution. You are just not factoring in the 10% stock dividend on the previous year's numbers. The 4.4 a year ago was before the 10% dividend.

Got you. Okay. Thank you.

There was not a single share of dilution I believe other than that.

(OPERATOR INSTRUCTIONS). There appear to be no further questions. I'll turn the floor back over to you for any further or closing remarks.

We don't have any other closing remarks. I think we covered it pretty well. So that is it unless there is another question.

No, sir. No further questions.

Okay.

Thank you.

Thank you very much. Thanks, gentlemen.

This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.