Lakeland Industries Inc (LAKE) 2007 Q1 法說會逐字稿

Good afternoon. I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lakeland Industries Inc. 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 reflect management's expectations regarding future events and operating performance and speak only as of today, June 8, 2006. 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 they believe are appropriate under certain circumstances.

These statements are subject to a number of the 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 this call, Lakeland Industries' President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Thank you. I won't go over what Lakeland is all about. I think most of you on the line know that and what the Company does. So, I will just get right into the first quarter. Sales growth in FY '07 for the first quarter ended April 30, '06 increased basically in the area of international sales, gloves and our woven products. Leaving us with a normal 6% increase in sales for the quarter. Chemical sales decreased due to a lull in spending on Homeland Security chemical suit business. The 2002 Fire Act grants have been consistently spent since the Fire Act appropriations in early 2002 of our product. However, that spending has decreased over the last year, basically beginning in 2005, as pipelines filled.

But seemingly, and I underscore the word "seemingly", it appears to be picking up a little in 2006. The most significant shortfall in spending comes from the Bioterorrism Act of 2002 grants and spending programs. Although enacted only a few months after the Fire Act, the Bioterorrism act, very little of the money has been spent. Even in the current weak market, we think we are beginning to see light at the end of the tunnel in this potential market. As for the first time in years, we are seeing in U.S. hospitals beginning to buy equipment in preparation for terrorist attacks or pandemic flu.

More significantly, we are seeing various government agencies are requesting bid for the products we make to prepare for an Avian flu epidemic. And there's been about two of them out there recently. They are really -- they are aimed at Avian flu response. They are not aimed at bioterorrism response. And so it's 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 decent year in terms of revenue and earnings growth. But slanted much more toward the fourth quarter of this year and first quarter of next year. I will give the financial statements and financial combinations to Gary. So, I will turn it over to Gary now.

Thanks, Chris and good afternoon, ladies and gentlemen. Net sales increased 1.5 million or 5.9% to 27.2 million for the quarter ending April of '06, compared to 25.7 million in Q1 of April '05. Gross profit increased 400,000, the same 5.9% to 6.5 million for Q1 of April '06, FY '07, from 6.2 million for the first the months ended April 30, '05, Q1 '06. Gross profit as a percent of sales was 24.0 for both the three months ended this year and the same quarter last year.

Operating profit increased -- decreased, I'm sorry, 14.9% to 2.2 million in Q1 of FY '07 from 2.5 million for the three months ended April 30, '05. Operating margins were 8%, 8.0 in Q1 of FY '07, compared to 9.9 for Q1 FY '06. Net income decreased by 250,000, 14.7%, to 1.46 million for Q1 of FY '07, from 1.17 million in Q1 of FY '06. Earnings per share were $0.29 for Q1 of this year, compared to $0.34 for Q1 of the year ago.

Sales in Q1 were firm in February and March but were heavily impacted in April by DuPont's introduction of new products, sizing and patterns for their Tyvek garments. Therefore DuPont heavily discounted and promoted their old garment inventory in a clearance sale in late March of '06. Sales of chem suits were slightly higher in February and March compared to the same ones a year ago. But weakened substantially in April and May due to a generally weak market. While the margins in the chem suits were and remain strong. Operating margins were also impacted negatively by SG&A expenses, which did increase significantly due to the Company's new ventures, in India, Chile and Japan. However, management feels these areas will contribute significantly to future growth later in FY '07 and beyond.

Also increasing SG&A expense in Q1, were the acquisition of Mifflin Valley's operations. First acquired in Q3 of last year, so they were not in last year. So, the absolute dollars did increase. Mifflin does run at a higher margin with higher SG&A costs than the rest of the Company's operations. The Company's effective tax rate in Q1 '07 was 30.8%. And it actually could have been better than that, except that the start-up losses in India, Chile and Japan were incurred and there's no current tax benefit for those, since there's no local tax credit. That effectively somewhat raised our global tax rates.

We do expect our China subsidiaries to generate higher profits starting in Q2 of this year, right now, which should lower our effective tax rate for the remainder of '07. On April 30, '06, the Company's balance sheet included total assets of 73.4 million, cash of 1.5 million, working capital of 58.9, bank debt of 4.8 million, that's down about 3 million from a year ago -- from the year end. Stockholders equity of 62.3 million, and book value of $12.41. Finished goods inventories declined by 4.2 million or about 17% from the January '06 levels. However, raw material purchasing continued at higher level than normal in order to take advantage of discounts offered by suppliers. Raw materials increased by 2.6 million or 14% from January.

Such discounts should positively impact our fourth quarter earnings as the discounted raw materials roll through our international pipelines and into finished goods and then through the pipeline into sales. Our overall inventory position declined by about $1 million for the first quarter in April, in January. And one additional result to the buildup of in inventory will be to protect us from any possible supply chain interruptions. Margins were the same 24% in FY '07 in Q1 as they were in Q1 of '06. Factors in that were a decreased proportion of the chem suits, the mix in '01, our policy of aggressive purchasing and continued increases with production China, offset by the impact of the DuPont clearance sale.

In Q1 of '07, we increased the total production volumes in our three China plants combined, by about 46% over Q1 of a year ago. With believe these trends will continue in FY '07 with the hopeful of firming up the chem suit market, get more production in China, along with continued strong expansion into the international markets.

At our last conference call we had expressed management's goals for FY '07. To be an increase in overall sales of about 8% to 12% and an increase in net income of 12% to 16%. We now believe that we will be at the lower end of those ranges. In Q1 of '07, the Company generated 2.7 million of cash from operating activities, as we did reduce inventory balance and pay down our bank debt. And we generated 2.5 million in free cash flow. With that, I will turn the call back to Chris.

Getting back to the first quarter, which was a little disappointing, personally, for me. But it was basically caused by a move by DuPont out of the blue in April. But DuPont's clearance sale filled supply lines leading to an abnormally weak pricing of sales in April for the Tyvek protective garments. Essentially, DuPont blew out about six weeks of full industry supply all in one month. And a lot of distributors basically filled their pipelines with the highly discounted products so they could move into their new pattern or design. That really slowed down sales and it actually will affect us in the first two weeks of May probably also.

Additionally, the petro-chemical refining facilities have been running flat out south of the Mason Dixon line, pretty much from Houston to New Orleans. And given the current shortage of diesel oil and gasoline and the concomitant higher prices to refineries that file such shortages. Consequently, many have postponed their normal spring maintenance schedules where disposal garments are used in large quantities. Our guess would be maintenance on these facilities might be done in our third quarter, as opposed to this first quarter when they have historically been done.

Normally, our first quarter is our best quarter in sales. Primarily because of this huge maintenance schedule that goes on in the Southeast and the Southwest refineries. Because they try to do it in spring. It's too hot to do it in the summer. And so the only other opportunity they had to do it is in our third or fourth quarter, which would be autumn or winter where the weather actually helps them, makes it possible to do it. So this past year, the current year is a year of transition for Lakeland. And in order to increase our revenue growth and earnings growth that should logically follow, we have adopted a three prong strategy.

Expand our international sales operations, which is hurting us in this first quarter. It will hurt us in the second and the third. It's going to be a headwind to earnings. But hopefully, I'm fairly certain we're going to start seeing even to benefits in the fourth and a clear trend of profitability in the first quarter. But it's going to hold us back a little bit. The second of our three pronged strategy is to acquire product lines, which we do not carry presently, but which our sales force can integrate our bundle into the existing product lines. As they are already sold to our existing customer base. We continually look at acquisitions. We're looking at them now. And we're working hard on our India, about to be acquisition.

That has some real promising -- it is promising in terms of sales growth in the future. This is something that could grow much more rapidly than some of our other lines. And our third strategy is the development of new proprietary products, which solve a problem or better answer the demand and the needs of our customers. And we will be introducing quite a number of new products in September, October and November of this coming year. So addressing the above in order; this quarter we have opened new sales office in Beijing to cover the emerging markets in China and Southeast Asia. An office in Tokyo to address the unique needs of the large Japanese market.

Another office in Santiago, Chile, to address the growing South American market and are continuing our investment in our New Delhi, India facility. 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% this year. So, it's really our international sales that are growing and the other areas of growth are going to be new products introduced this autumn.

We believe the emerging economies for our products are growing much faster than the U.S. economy per same. As reflected by our international sales and even in areas where we are just starting up and losing money, sales are growing fairly rapidly. The reason for this is that emerging economies are for the first time adopting standards of personal apparel protection for industrial and medical workers. As the world globalizes, and American and European producers move their production offshore, they are open to adopting the type of workers' safety standards that exist in their home countries. Emerging economy governments are also beginning to put in legislation, similar to our OSHA regulations enacted in this country some 35 years ago.

The key driving force for emerging economy governments to implement safety regulations are; World Trade Organization, or WTO requirements, that member countries adopt and utilize international safety standards. Simultaneously, developed countries are not only increasing their standards but standardizing the standards themselves across borders. In short, many of jobs moving out of the United States and Europe and into Southeast Asia, those jobs that wear our garments, we're going to move with them.

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. We are investing for the future over Q2 and Q3 and we will start seeing some benefits in Q4 of this year on this international growth initiative.

Acquisitions will also play a role in our growth. We acquired Mifflin Valley Inc. a manufacturer of high visibility protective clothing. And we have an option to buy an India manufacturer of gloves, which provides protection from hazardous chemicals, much as our Tyvek coveralls do. Currently, this Indian subsidiary is a total drain on earnings.

We hope to have that turned by September, October but we're in the investment process. We are building out an entire new line of products there. We're investing in technology and we're investing in equipment. So, we continually look at such acquisitions, which fit our product lineup and out international strategies.

Lastly, we have developed a number of new products, such as our DesPro glove line, which received two patents this year and answers a problem posed by the U.S. auto industry in reducing their costs. And I think of GM and Delphi when I think of this. We also introduced with specially engineered yarns that extend the life of those gloves and thereby reduces our customers' overall costs. Again, the auto industry is suffering and they're looking for solutions like us.

We introduced gloves that are antimicrobial, thus killing on contact, not suspending bacterial impurities, which has been a need in the food processing customers as they deal with E. coli, Streptococcus and other microbial contaminations. And this sort of feeds into the Avian flu. Most of the chicken or poultry processing companies in this country are not only looking for garments to stop the spread of normal viruses and bacteria and perhaps the Avian flu but gloves also.

So, we are also introducing fabrics for hot environments that are highly breathable, increasing comfort by over a factor of 100% to 200%. Such innovations have been asked for but never deliver by our industry. This innovation is evidenced by the fact that over the last few years we have received 18 patents and presently have nine more in the application process. We plan on introducing a whole new -- a host of new products by October FY '07 in our disposable, glove, woven, fire, and high visibility protective clothing lines. In the interim, we plan on reducing our SG&A costs to fall more in line with our revenues currently. And with that, I'll open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Brian Butler from Friedman, Billings. Please go ahead.

Hi, good afternoon, Chris, Gary. Just a question on the SG&A. Is this kind of where it stays at for the next couple of quarters or now that you've started up these sales efforts does it come down to the more 4 million or below for the rest of year?

Well, the dollars are pretty much it's going to be, I'd say. We are looking at some initiatives to focus on cutting some costs out. We are looking at some bank credit card key fees, I think we can cut out. And we're looking at some foreign exchange translation issues I think we can reduce. And this -- we're looking at trade show costs and certain selling expenses. We are going to trim SG&A where we can.

Yes, but the dollars are pretty much going to be where they are. The hope is that as sales grow, they will come down as a percent of sales.

Right, because just looking at -- from the next three quarters to get to your -- let's say you get top line growth of 8%. To get 12% earnings growth, that suggests that your margins are going to materially improve over the 8% -- you saw operating margins of 8% that you saw in the first quarter. Is that realistic to believe?

Not so much in the next quarter or so but certainly we think the fourth quarter looks extremely strong. And later in the year and beyond we believe we will be extremely strong and that should firm things up.

Okay. And then just on the quarter, one last thing. Is third quarter -- so, is that then going to be the strongest quarter from a revenue perspective? How much does the maintenance add dollar-wise?

Actually, the fourth quarter probably should be stronger than the third quarter. The third quarter actually, has less -- there's still more in the summertime. The third quarter ends -- well, it's up. The third quarter ends in October. So, the beginning of the third quarter is still summertime, it's slow. So you will have probably the last month or so of the third quarter will be strong and going into the fourth quarter.

Okay. And then on the inventory side, is inventory going to continue to run kind of in this 40 million plus range or is it at some point does this get drawn down?

Well, we did draw it down a little bit. But then we had another opportunity -- we were presented with an opportunity for additional purchases at a substantial discount going forward for the recent purchases. And we jumped right in and took advantage of that. That will work its way through the pipeline because of the stuff that we have on hand that's got to go out on a FIFO basis. So, we project that the most recent purchases, which are at a very handsome discount, will cause the sales in Q4.

Is that going to drive margins in Q4 or one of the primary things?

It's one of the primary margin drivers we're looking at in Q4, yes. But one of the issues also is supply chain interruptions, in that we want to protect ourselves against interruptions of the supply chain. The major supplier here is producing the Tyvek in basically one factory in North America. And supplies all of North America out of one factory. And occasionally they've had -- about a year ago, they had some interruptions for several weeks, actually. We had trouble getting deliveries. It's an issue, we do want to keep some insulation. And with our favorable borrowing rates, it's relatively cheap. But yes, we do expect fairly high inventory levels. I wouldn't say anything higher than we have now but I don't think it's going go much lower either. It's about at the same levels is what I would say.

Okay. And then last question, just on the tax rate, where do you see that on a go forward basis for the next couple of quarters?

I would say, we're looking at increasing profits in China going forward and that should bring down the rate. On the other hand, the start-up costs in the internationals are driving up the rate a little bit. So, I would say it should go down maybe a little bit in Q2 and maybe as low as 30% in Q4.

We think it will probably be somewhat consistent at 30% for the next couple of quarters.

Okay. Great. Thank you very much.

Right.

Thank you. Your next question comes from Tom [Soden] from Smith Barney. Please go ahead.

Yes. First, Gary this time last year, you sort of stated with your moving plants offshore to China and stuff that fiscal '06 was more of a transition year, that it was really a fiscal '07 story. Are now we pretty much now looking at a fiscal '08 story, as far as some consistent earnings growth?

Yes, we are looking at more significant earnings growth in fiscal '08.

Part of that is due to the international subsidiary start-ups too, which we are now looking at in particular India and South America.

How about any anticipated raw material cost increase? Is that something that you have no control over but do you get a sense from DuPont that raw material costs keep going up, petro-chemical stuff that you may be looking at that?

We don't see any raw material increases this year. That's the best sense from the suppliers.

And any -- as the DuPont thing was a big surprise to you fellows, the DuPont dumping of --?

Yes, it was. And it took place with no notice in 48 hours.

Wow. And would you anticipate other issues with DuPont, since they obviously control the market, or they are the biggest producer, I'm assuming; that stuff like that could also be a headwind for the rest of this year? Or are they --?

No, I think they're through with all of their surprises. DuPont has been getting a couple of big Avian flu contracts, which should keep them very busy for the rest of the year.

They put out a press release actually two years ago, announcing one USDA contract, I believe.

So we feel basically, number one, insulated from any supply chain disruption, simply because we have plenty of inventory on hand for the next couple of months. We also feel that DuPont is very busy and we congratulate them on their success in getting these contracts. But I think they are going to be very busy making them and we'll be happy doing business as usual.

That's not a market you are after, the Avian flu stuff?

No, not at those prices we are not.

Okay. And this had always -- Lakeland had always been a margin story, not necessarily a top line story. And when these transitory issues get resolved you're still of that mind, that that's where the growth in Lakeland's earnings is going to come from is margins?

Margin and with some of the international revenue too. It's both.

There's only so much you can do in cutting SG&A and improving manufacturing efficiencies. So, we basically bit the bullet this quarter and next quarter. And we're going to really try to grow revenues and it's going to come from new products and international sales. And unfortunately, we're not going to run the Company quarter to quarter. We're going run it for the long term. And we have to make the investment now. I was disappointed with sales growth last year and I want to see sales growth of 8$, 10$, 15%. And it isn't going to come without an investment in salespeople, sales salary, sales commission, opening of sales offices. I've got to invest in sales.

Trade shows. Yes.

We're really looking at our sales expenses very hard and cutting out stuff that doesn't give us a new sale and spending money on -- in areas that does give us a new sale.

Have you had a few sort of negative surprises with the DuPont issue and other stuff, the SG&A overseas? Is there anything out there that could be a positive surprise?

Yes, big contracts. DuPont has scooped up two big Avian flu contracts. We have one that we hope we're going to get, it's not Avian flu. I really don't know what it is. Maybe it's bioterorrism because the ultimate government agency is not disclosing who they are. Yes, there are some big contracts out there. And I would like to see us get some of them. But they've got to be reasonably priced and they've got also have to be something that we can bite off and chew. In other words, it can't be so [expletive] big that we have to neglect our current clients, our bread and butter clients to fulfill the contracts.

Does Dupont have enough capacity to take all those mega-contracts at lower margins and maybe put some screws on competitors?

No comment.

They are -- you said they are going to be busy with the Avian flu stuff. Do they have a bottomless pit of capacity where they can continue to do that?

No comment.

Enough said. All right guys, best of luck. I will be sticking with you. Thanks.

Thank you, Tom.

Thank you. Your next question comes from Jerry [Pepperdine] from Lord Abbett.

Good afternoon, gentlemen. How are you doing? Can we review the Tyvek situation? I think the last time we spoke, going back in March, we were talking about how you had made some forward purchases at that time because DuPont had been raising the price of Tyvek, I believe, three times in the last 12 months. But yet you seem to be able to get another opportunity to buy it at discount. What is going on in the market there? That sounds a little bit odd.

Well, what happened was, not surprisingly, the last time we purchased in advance, at their -- with their knowledge and with their encouragement, because they are looking at their own sales quotas, I guess. We bought what we thought was appropriate, that we forward bought. We are very happy with our purchases. We'll get the advantage of cheaper Tyvek going forward. And we kind of filled up our pipeline for that in around December --.

Right.

And then we pretty much turned the spigot off in January and February and bought very little from DuPont in that period. And they came back to us in late February or early March and said, "you haven't been buying very much from us." And we said, "well, you raised the price and we bought a lot." They were anxious to have us continue or resume buying again and they offered us a deal we couldn't refuse at that point, with our purchases from March forward. And they offered us a very nice, handsome discount for the purchases we have been making from March 1 forward.

Okay this handsome discount, was this at a price that was equal to or was it greater than the price at which you bought the previous time in December?

Actually, it was -- it's actually --

Less.

It works out to be less, actually.

Okay. I'm having a little trouble understanding, excuse the elementary speak here, but who is playing who? Were you able to play them by buying a lot and then they got near the end of their reporting period that they hadn't made the volume measures? Or did this they that know that pricing was not going to stick and were able to get you to buy before hand, thinking --?

No, I think your first comment was valid on both sides. They actually realized that they needed to make their quotas and came to us and offered us a deal we couldn't refuse and we didn't.

Okay. The -- part of it in the back of my mind is that we have all kinds of nasty things being said in the housing industry. Anyone who has seen a new house go up lately has seen the word Tyvek on the side of the house. And if the builders stop buying, I have got to believe that they're going to have a surplus of Tyvek there.

Not exactly, because the grade for the business industry is a totally different grade than what we buy. Different machines buy it. So they are sort of stuck in the sense that the machines that they sell us Tyvek are different machines than the building industry. They can't cross utilize.

And their stock is different too. We buy it in these gigantic industrial rolls of 200,000 or 300,000 linear yards at a time. And it's a different grade of Tyvek than you see. It's the same composition material but it's --.

The initial raw material though, has got to be the basic volume that they're inputting. So --

Yes.

And they can decide what machine to put it in?

Well, No the old machines that make -- see, Tyvek was first made for our industry in 1970. Most of the machines they are using to make our materials are very, very old machines. And the machines they use to make for the building industry were machines that were brought online some 20 years later, so they are totally different machines. So, they can't sit there and say -- decide they want to make house wrap on our machines. And they can't make our stuff on house wrap machines.

And also being older machines, the machines do break down. About a year ago, their factory did -- was out of commission for several weeks at a time.

Okay. That's good. Let's go onto the next. Chemical suits, can you talk to us a little bit more specifically about the chemical suits? The last time we spoke, you thought this could be a real wild card and had the potential for upside, if some of the Homeland Security stuff started shaking loose. You referenced the refinery business and that they are not doing turnarounds. I imagine that the business that's using these chemical suits. Is that the only issue going on in the chemical suit segment now?

Well, as Gary said, chemical suit sales were up roughly 2% in February 2% in March and then dropped like 18% in April. I think that had a little bit to do with DuPont out there discounting and trying to make their garment number. But it just seems -- there seems to be a lull. So much of chemical suit is dependent upon government buying. And government buying is very erratic. That's why you can go along and be fairly flat for two months and then have a 20% drop in one month. And then the next month it can go up 40%. And that's what's so difficult to predict about the chemical suit business.

We are maintaining very nice margins in the business and it's still running somewhat flat with last year, overall. But we are basically waiting for the government to come in and buy. And what -- they seem to be much more interested in purchases to protect themselves against the Avian flu, than they are against bioterorrism instances. So, that's where we are seeing the action. And --

The Avian flu suits, are they the same suits that are normally in your chemical category?

They could be any -- the Center For Disease Control has not decided yet what should be used for Avian flu. And this is the things -- this is the problems we deal with with government, is that a state or a federal agency will go out and tell them, "that we need to buy something." And they say; "what should we buy?" And we will make suggestions and then they look back and say, "how do I CYA myself?" So, they look at the government regulations and there are none.

Okay.

Okay? You had another question, though. There are two parts to your question. Can you remind me what the other one was?

It was -- actually I think you covered both parts there. It was, what area are we seeing weakness in and do you still see the Homeland Security money coming through for this?

Homeland Security, at least for the next month or two, I would say will probably run flat. But we're running at very decent margins. And you just -- you are really hoping to run flat with last year and hope to get a contract or two. And the thing is, is that this industry only has so much capacity. And if we or DuPont or a third party get a contract, they may be very busy doing that contract, which then means you can't service the day-to-day guys who are here every day, day in and day out for 20 years past and 20 years to come. So, then that business has to go somewhere else.

And that also relieves the pricing pressure too.

Okay. I will get back in queue. Thanks, guys.

Thank you. [OPERATOR INSTRUCTIONS] Your next question comes from Robert [Ederven] who is a private investor. Please go ahead.

Hello. My question will keep DuPont in the center ring. Do we have any alternative supply possibilities other than DuPont? Since we seem to be captive to their whims of pricing. And if we did have an alternative, how great is the risk of DuPont slashing their prices, basically operating at a loss in this division, just to put us out of business? Second question, is in terms of our international production. As we are increasing international production, are we buying our raw materials from DuPont here, shipping it overseas? And if so, is there, again, any possibility of getting supplies overseas closer to our production facilities?

Okay, number one is DuPont. Are there alternatives to DuPont? Yes, there are. There are many alternatives to DuPont Tyvek. We have been selling them for 15 years. We've always emphasized Tyvek as our best product because it is the best fabric out there. Okay? It's a premium product. We make the most money on it. We have an economic incentive to sell Tyvek because we make the most money on it and it's the best product.

Number two, there are many alternative products out there. We make them all. If we're a supermarket and Campbells Soup is the main seller, that's our DuPont Tyvek product. It's our branded product, it goes for a premium and we make good money on it. Nonetheless, we also make the [King Cullin] brand. Most of you you guys may not be in New York but that's a --

Private label.

Private label.

That means a private label. Supermarkets are private label.

So, we have all of those fabrics available to us in China, all within range of our backers in China. They are easily available, they're very cheap. We can make them and sell them. But we always promote Tyvek first and if the customer says, "not that's -- I absolutely don't want that," then we have other alternatives to sell them. And number two, on the international side, the only product that we really have to ship to China is Tyvek. All the other fabrics are available in China. And in our international operations, we only sell non-Tyvek, non-DuPont products. So, the national operations that are growing rather quickly, are all doing it with alternative products to Tyvek, Tychem and other products that don't even bother DuPont.

Thank you.

And also -- and amend that, also since you asked, the DuPont Tyvek is source in the U.S. and it is shipped to China for production. When Chris referred to all the alternative fabrics made by China, that's all sourced locally in China for the most part. That's not shipped from the U.S.

And that's not where we experienced supply interruptions.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS] Your next question comes from Tom Soden of Smith Barney.

We just want to follow-up. We have been hearing now for 1.5 year about the Homeland Security money has not been spent, even though it's been allocated. Guys in your opinion what is the reason for that? It's there, it's obvious -- you can't have those suits in the fire station. You have to have them in the fire station closet or the first responders' station closet when a terrorist act occurs. What is the reluctance to spend the money?

Well, I think most of the firemen have spent the money they are going to spend. They have been buying consistently since 2003. For three years they have been buying. They pretty much bought what they are going to buy. They are sophisticated buyers. They bought our product longe before 9/11. Therefore, when the government gave them $600 million a year to buy all sorts of products to respond to a terrorist incident, they went out and spent a lot of money on fire trucks and various things and they bought our product right along with everything else they were buying. They are pretty much finished buying.

So the other Act that is out there, is the bioterorrism Act. And there, the federal government told the states that they had to come up with a plan before they even got the money. The fire departments, all they had to do was fill out an application, 15 pages, fill it out, send it in. If you got it in by April 30, you were told by June 30 whether you got the money or not. And then if you got the money, it was given to you by August. The Bioterorrism Act required -- it was like an environmental impact statement by the states. The paperwork that the feds wanted from the states about how they were -- what their plan was and then how they were going to spend the money took years to do.

Now, the states are just getting their money and I guess sitting back on their haunches and you would too if you were somewhere in maybe, College Park, Maryland, saying, "I'm not going to get hit by a federal -- by a terrorist attack. That's Washington's problem." So they don't buy it. It's that simple. And with the bioterorrism money, they have just been sitting back and really not spending it.

And the only thing that has, I think, motivated hospitals to get involved with the Bioterorrism Act money is not bioterorrism, it's the Avian flu. They are much more responsive to a SARS type of a situation. Doctor/administrators know what SARS or a virus could do to the United States versus a bioterorrism act. A bioterorrism act would be contained geographically. It's not like a pandemic flu that would spread in 48 hours from Washington, D.C., to Seattle. So, the hospitals are actually thinking about the Avian flu. They are not thinking about bioterorrism act but at least the bioterorrism monies is available to them.

And that is some business you are or will pursue?

That's what we are going to pursue because that's where the bids are. We'll go out and bid -- we look to make money on bids. We don't look to lose money on bids.

Thanks very much.

Sure.

Mr. Ryan, there are no further questions at this time. There are no further questions at this time.

Thank you. We'll hang up.