Lakeland Industries Inc (LAKE) 2007 Q4 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 opening performance and speak only as of today, April 12, 2007. Forward-looking statements are based on current assumptions and analysis made by the Company in light of its experience and its possession of historical trends, historic 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 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 that 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 introduce you to your host for this call, Lakeland Industries' President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Thank you. As you read our year-end results, I'd like to remind our stockholders what I have been saying since last year at this time. Our long-term plans which span the next three years, and which in large part are responsible for the current increased operating expenses, cannot be sacrificed for an obsession with this or next year's quarters. Many CEOs I talk with contend that they have no choice but to adopt a short-term orientation, given that the average holding periods for stocks and professionally managed funds has dropped from about seven years in the 1960s to less than a year today.

We at Lakeland believe this reasoning is deeply flawed. What matters is not investor holding periods but rather the market valuation horizon, i.e. the number of years of expected cash flows required to justify our stock price. While hedge funds may focus unduly on near-term goals and hold shares for relatively short periods of time, stock valuation reflects the market's long-term view. We would suggest that it takes five to ten years of value creating cash flows to justify the stock prices of most companies. Therefore, we feel our responsibilities deliver those flows, that is to pursue long-term value maximization regardless of the mix of high and low turnover shareholders. We do not think that it is reasonable to argue that an absence of long-term shareholders gives management the license to maximize short-term performance and risk endangering the Company's future. Lakeland's competitive landscape, not the shareholder list, should shape our business strategies.

Last year at this time, I told you our strategy in this difficult transition year would be to expand our international sales operations, acquire product lines that we do not carry presently, but which our sales force can integrate or bundle into existing product lines, already being sold to our current customer base, and lastly, to develop new proprietary products that solve a problem, or better answer the demands and needs of our customers. Okay.

So let's review the year in these terms, since this is our year end. Our new Japanese sales subsidiary, which was incorporated in late October '06, opened for business in March '07 in Tokyo, Japan. Product introductions also started in March 2007. This Japanese market is a unique market as buyers are not quick to switch suppliers, and real sales will be a year or two in coming. But this is a relatively large market supporting better margins for our products than other global regions. This new subsidiary increased our operating expenses by about $77,000 in FY '07, with no sales to offset expenses.

Our South American sales agency was legally initiated on March of 2006, as Lakeland Industries agency de Chile, and has achieved cumulative sales of almost $500,000 as of January 31st, in the larger markets as of January 31st -- and is almost at breakeven. We intend to use our presence in Chile as a springboard into the larger markets of Brazil, Argentina, Colombia and Venezuela, but nonetheless startup expenses were incurred throughout the year.

Our Beijing sales office opened January 2006 and has sold some 330,000 cumulatively at a profit this fiscal year. We intend to add new salespersons in Shanghai and Guangzhou to aid in this growth endeavor.

Our UK subsidiary increased its sales from last year by 47% and brought down a $260,000 profit after losing $552,000 cumulatively in the three years from startup.

Our Indian glove subsidiary was purchased in November of 2006 and we anticipate production by June of 2007. This acquisition fulfills two strategies simultaneously. It gives us a platform to sell our products in India and gives us a new product line that we can bundle both domestically here in the USA and abroad at all our new international and domestic distribution points. It is this purchase that more than anything else has increased our operating expenses without corresponding increases in sales and earnings but has the potential to add $10 million in additional sales over the next few years.

As a general statement, foreign sales operations take off much more slowly than a startup operation in the USA. This is usually a result of customs and culture. However, once a foreign company is accepted and it's obvious to foreign customers that it is there to stay and has competitive product offerings and prices, foreign customers begin to give you a small portion of their business as a test. If satisfied, they slowly turn over more and more of their business from their current suppliers. When this starts happening, usually in the third year, sales growth can become exponential, as smaller distributors turn over larger portions of their business and the very large distributors start to do business with you for the first time. This was the pattern we observed in our UK office.

The next thing I spoke about last year was to acquire new product lines. As stated above, the acquisition of our Indian-based glove manufacturing facility will not only serve as a sales platform in the Indian domestic markets, but will also expand our product offerings into industrial gloves used for chemical protection. This includes gloves made from chemically resistant nitriles, neoprenes and butyls and achieves biological resistance using latexes. This encompasses approximately 14 new styles of supported and unsupported gloves. These chemically resistant gloves are often worn with our Tyvek disposable garments and thus lend themselves to being bundled as a package deal.

We acquired Mifflin Valley Inc., a manufacturer of higher visibility clothing in late 2005 and have introduced 15 new products to that line this year. We also began to transfer many of its basic stock offerings to our more cost-efficient Chinese manufacturing operations. This year also saw the introduction of the first disposable high visibility vest.

The third leg of our strategy was to develop new proprietary products. For laymen, you generally see highway construction workers wearing high visibility vests with reflective tapes visible at night. Our new vests are innovative as no one else before has produced a disposable reflective vest for short-term use, such as dirty job sites or for onetime visitors touring a factory airport or other worksite, where reflective vests are required by law or by company safety policies.

We very recently decided to develop several new proprietary products, [Amax] 1, 2 and 3 lines of chemical protective garments to be sold to our international subsidiaries, and a high-end interceptor line. These are used as protection from highly hazardous chemicals in liquid or gaseous forms, and will be proprietary and, in some cases, patented.

Our glove division will bring to market new engineered yarns incorporating anti-microbial finishes that do not wash out. In addition, Lakeland will release new Kevlar gloves, incorporating two styles of Kevlar fibers, which featured our patented [despro] design for extra wear at a lower overall cost. This is particularly interesting to car companies who are under tremendous costing pressures right now. As stated above, we will also introduce more than 15 significantly new styles of high visibility clothing and have transferred the manufacturing of some 20 existing styles to our China subsidiaries for fabrication there at lower costs.

We're introducing a new line of woven antistatic garments for use by the pharmaceutical industry in cleanroom application, and expect to sell approximately $1 million of this new line in FY '08.

Consolidated FY '07 after-tax earnings this year were somewhat disappointing when compared to last year's record earnings of $6.3 million. But they still exceeded FY '05 earnings by $125,000.

Going back over the years, if you looked at our earnings profile from FY '01, we were at $1.1 million in after-tax earnings, then $2 million in '02, $2.6 million in '03, $3.6 million in '04, $5 million '05, $6.3 million '06, and $5.1 million this year.

Difficult to have double-digit earning increases year in and year out when you have to invest for the future, as we did this year in India, Chile, Japan and China. In FY '08 we will be investing further in Mexico and Canada.

The other thing holding Lakeland back, which we could not predict when planning these international investments, was the slowing domestic market for our basic Tyvek disposable garments and static Homeland Security markets for our high-end chemical suits. Since there have been no catastrophic U.S. domestic terrorist incidents since 9/11, the sense of urgency at most governmental purchasing levels has been turned down a couple of notches from its 2002 to 2004 peaks. Of course, this situation would quickly reverse if such an attack happened, which is why our stock has always been more or less of a put option on a downward market move in response to a terrorist incident. Lakeland's stock appreciated by some 60% in the weeks following 9/11, while the broader market average tumbled very steeply.

The future for FY '08 will be somewhat similar to FY '07, in my estimation. We will continue to diversify our product line, look for sensible acquisitions, and invest in expanding our sales reach internationally. The real test in golf and in business is not keeping out of the rough but getting out of it after we're in it -- John H. Moore. I believe we will be out of the rough by the fourth quarter of FY '08.

So with this I will turn it over to Gary Pokrassa, our CFO.

Good afternoon, ladies and gentlemen. I anticipate our overall effective tax rate will be about 30% for FY '08. I will speak to our Q4 operating results.

Sales were up about $400,000 from Q4 of a year ago. In Q4, our disposable sales were up $500,000 from Q4, even though those disposable sales were down $900,000 for the year. The chemical Q4 sales were down $600,000 from last year, and down $1 million on the year. [Enada] was down $400,000 for the quarter and $100,000 for the year. UK sales were up $200 K in the quarter and $800,000 on the year. Mifflin sales were up $100,000 in the quarter and $1.2 million on the year, mainly due to the operations being included for only seven months in the last year. Chile sales were up $200,000 for the quarter and $500,000 on the year, which is basically up compared to zero and at basically a breakeven, as Chris had said.

Our gross was 22% for Q4, which was lower than we had expected. The gross was impacted by startup costs in India, and the Chemland division had lower gross resulting from a larger contract. The disposables gross was helped by lower Tyvek raw material costs, which resulted from the rebated purchases that we had made, but was impacted by higher costs for Mexico.

Speaking of Mexico, we will be restructuring our Mexican operations over the next two quarters. We're closing our current facility in [Zoliah] and moving to a new facility in Juarez. This will result in lower operating costs and a more productive configuration. We expect this will have about a one-year payback in terms of lower production costs, and contribute in the range of about $500,000 a year in annual lowered costs after we get through the first year on a going forward basis. Our (technical difficulty) costs were 16.5% of sales in Q4, and(technical difficulty) level off at about this percentage going forward. Let me also add that we generated $8.2 million of operating cash flow in FY '07 and over $6 million in Q4. And with that we will turn it over for questions.

(OPERATOR INSTRUCTIONS). Brian Butler, Friedman Billings.

Just thinking about -- I guess when you think of the longer term, let's say in the three-year range, and you're making these investments internationally, when do you think the growth kind of turns, and what level is the right level to kind of think about from a longer term? So like, when we get to three years out, is it possible that Lakeland is growing at 10%, or is it really more because of the large domestic presence and that slowed, you're kind of in this 2% to 5% range?

That's a difficult question. We can talk to our international operations probably with more certainty that we can through the domestic U.S. operations. Generally, the sales operations internationally would follow the format of our UK operation, which will get to a couple million dollars and to high profitability within three years. And you hope to expect at least 25% to 50% growth every year out of those operations, and profitability following.

So we've got quite a few foreign operations which we hope to follow that path. The one exception to that is India. It is a much bigger expense up front but it also has a lot more potential in terms of sales growth. The nitrile neoprene latex type gloves is about a $2 billion market worldwide, and the operation we have has the capacity to make $10 million. So we see somewhat of a probably faster ramp-up there in dollar terms. In other words that is something that could be at $10 million in three to five years and not $4 million to $5 million. As to the domestic situation, it's like reacting to the stock market almost. It's almost unpredictable. We probably are only going to see 1% or 2% growth on what we would call really U.S. and Canadian sales in the future. And this year we actually saw a drop in U.S. growth. So it is hard to predict. It really has to do a lot with the competition out there and what's happening, the economy, which is equally difficult to predict.

Let me jump in also. In terms of the Indian glove product, we've seen statistics that somewhere in the nature of one out of every three people who buy our Tyvek suits currently wear a neoprene glove, which we are [not now] supplying, which is what the Indian factory will be producing. So there should be a very high synergy rate in terms of moving that through our current distribution channels once we get that up and running.

That would move through your domestic distribution, so that's (multiple speakers) domestic customers?

Both. What we will do is we will take these gloves and bundle them with Tyvek garments in the USA, but they will also be shipped all over the world, say from India to Chile, India to China, India to Canada.

So what do you think the incremental on that -- what is -- what are the Tyvek -- what do the neoprene gloves go for, I guess is -- I'm trying to understand that opportunity.

Okay. It's hard to put a market price on these things, but what I can tell you is if we're selling $50 million or $60 million of Tyvek and you can bundle the gloves for 20% or 30% of those sales, you're looking at a lot of sales. But you're looking at an opportunity where we can at least sell internationally all over the world the minute we're in full operation.

Full operation is occurring when, again?

June to July, this summer.

Okay, June to July. Okay, and then, just kind of looking at the operating profit line, it's down -- I'm guessing most of that is due to the investments you're making abroad. When does -- does that turn around, and is that when you're out of the rough? Is that the fourth quarter '08, or does it stay kind of in this --?

We're looking at a couple -- fourth quarter '08, yes.

Does that mean you get back to kind of operating margins that you've seen historically, kind of in the 10% range, or is it going to be lower -- at a lower level for a while as you spend the next three to five years ramping up?

I think we will be getting to a higher rate than where we are now, but maybe not quite as high as we hit a couple points. Just below our peak, I would say. I don't think we will be quite at that peak for this year, anyway.

My last question. Is there any opportunities internationally where you could either buy into or some other way expand faster, so it becomes a larger part of your revenue than it is today? (multiple speakers). Is that possible or is it just kind of, you have to go this kind of gradual pace?

To answer your question, is absolutely. There are opportunities, and we're always talking to some people. There's always some out there, and the question is, at what price? The opportunities are there, but the real issue is, is it there at an acceptable price. And that -- the answer is we're trying. But the opportunities are there, definitely. It's just a question of can we find something at an acceptable price.

Thank you very much.

(OPERATOR INSTRUCTIONS). Gerry Heffernan, Lord Abbett.

Good afternoon. Just want to review. What did you say the domestic sales or the North American sales growth can be expected to be over the next couple years?

One or 2%.

One or 2%. Is that down somewhat to what you would have said a year ago?

Yes.

What would you have said about a year ago?

About a year ago I would have said 3% to 5%.

What has structurally changed in the market to account for that dramatic decrease in the growth rate of the North American market?

Competition.

Just competition of similar product, of price, of --?

Price is dropping, and basically competitive pricing.

Okay. Who's the primary competitor who is dropping the price?

DuPont is the primary competitor dropping prices. Speculating they raised the prices too high in '06, and now they're backtracking in '07 to lower prices to prevent alternatives from coming into the market and attacking the Tyvek base, which leaves us in a sort of fragile position here.

What is going on with your Tyvek pricing from DuPont?

DuPont is offering rebates to certain customers, and we've offered our own program of growth incentives and rebates to our customers. So you're somewhat in a little bit of a competition on pricing in that area.

I'm sorry, I didn't understand that answer. I'm asking about what's going on with the Tyvek pricing that you are buying.

Our material purchases, you mean?

Yes.

We've structured a longer-term deal with our supplier that happened a few months ago, and then more recently there were some other competitive developments in the market. That was sweetened a little bit, and we have what we believe is a fairly long-term arrangement that's mutually -- there was a mutual understanding. I believe in terms of our costing --

That's fine, but what is happening with the price of Tyvek that you're buying?

Let me explain how it works. The last quarter I said we were on a roller coaster, and we're not quite off the roller coaster yet but the end -- the flat track is in sight. In Q4, we were eating through -- remember, we have to go on a strip chronological 5-0 basis. And what was running through our cost of goods sold, we ran through the expensive rebate of Tyvek, and then most of Q4, not all, but most of Q4, benefited from rebated Tyvek that we bought last spring and summer as raw materials.

That's the Q4 that is just reported?

Yes. And that continued through the end of March, pretty much. The first two months into Q1 we were still working off that earlier rebated Tyvek. As of the end of March, we're party much through that, and we have about two months of supply on hand, depending on the sales number, but roughly two months on hand for the months of April and May, approximately, which is one month in Q1, the last month in Q1 and the first month in Q2. We will be at no rebate of Tyvek. That will have to run that through our cost of goods sold. So one month in each of the two quarters will be at a very high price. Once we get past that, then we're kind of off that roller coaster and our costing the Tyvek should level out for the foreseeable future.

That's because we have a one-year agreement with DuPont that basically gives us a long-term rebated price for 13 months. So we have at least a year of no more roller coaster, we will have much more predictability in earnings with regard to our core Tyvek styles.

And more of the --

Forget about the April, May spike. When we get into the longer-term purchases, so we're talking June through July, right?

Anything beyond that will be at the same price. We don't see any other --

And will that same price be a price that is equivalent to the lower price you had spring, summer '06, or is that going to be equivalent to the April --

Yes. Pretty much equivalent, yes.

Okay. So from spring/summer '06, where you had a rebate because you -- if I remember correctly -- they needed to get volume out the door and you agreed to take the volume for them.

Right, and we're now working down our inventory levels as you can see --

Understood. But given the Tyvek markets in general have been very difficult -- staying away from just the chemical suits, many other uses for Tyvek, many of them are having a whole lot of difficulty. We're not getting any break in price there.

[Right.]

Shouldn't we be getting a break in price? Shouldn't we be doing better than we did on a rebated price 13 months ago, when the housing sector wasn't considered to be nearly as bad and all the other construction-related businesses were considered more healthy than they are right now?

We just have gotten a pretty good -- what we consider is a pretty good --

Slightly better than what we had last year. However, this was a negotiation that went on for two or three weeks. It was very intense negotiation. DuPont was caught in a vice, so dropping sales, and not being able to maintain their margins.

Well, I'm fearful that you're caught in a vice, in the competitive situation that I think the market has always feared that you may be susceptible to, and that is when the going gets tough on Tyvek, DuPont would feed themselves first and become very price competitive. And if I look at your comments of 3% to 5% growth in the North American Tyvek market a year ago dropping down to 1% to 2%, that seems to justify the reasoning track I just went down there. Unless you were able to get an even better price because the Tyvek market from DuPont's point of view is worse than it was 13, 15 months ago.

I would agree. I would agree with your reasoning.

Okay. The glove plant in India, I guess I'm somewhat surprised to hear that that will be a full operation June/July. I would've thought, given the discussions we had on the chronological events of the India thing that we were looking more at the -- this time of the year to be a full production. When you guys were able to finally fully take that over, you had to swap out the molds to the bigger size and have that thing running as your own operation. Am I just missing something, or has (multiple speakers) July a push out?

We had to order a large amount of new parts for the glove factory and they were delayed in coming. Many of the parts you have to fly to Malaysia, you have to negotiate with the supplier, then he has to build it customized, then he's got to ship it from Malaysia to India. And those things just came in slower than anticipated.

So this is a push out?

Yes.

Okay. I apologize for jumping around here. Again, going back to the Tyvek pricing, in the fourth quarter, we saw a 22% gross margin compared to a year ago, at 24.9%. And through the release, you do point out some indications in regards to why the SG&A expense is higher because some expenses got pulled out of the cost of goods line into the SG&A line. So on a -- I guess on a true compare, that gross profit of 22% would even be lower if we had everything alike. So is this 22% or lower number a number we should be expecting going forward?

No, we actually weren't that disappointed in the Tyvek -- in the disposables margin. It came in pretty much where we thought, actually, except for some higher costs in Mexico, which we're addressing by restructuring the entire Mexican operations. But in terms of the disposables, that really wasn't what really caused the drop in the Q4 gross. It was more in the Chemland division, which had a lower volume and there was one large -- even with the lower volume, there was one very large contract in that volume, which was at a more competitive pricing, which did lower the margin. So the Chemland gross profit contribution, both in terms of its percentage and the total dollars declined, which did bring the consolidated gross margin down. Also, the India cost also contributed to the lower gross in Q4. So if we look out over the next fiscal year, I believe we will do better than the 22%.

Okay, so the -- but the explanation of the 22% is the Chemland suits being a smaller percentage of overall revenues?

And a small percentage at a lower percentage margin also to boot. It was a double whammy.

Was that all of them or just that one large order or did the one large order make up (multiple speakers)?

I'm talking about the total reported sales and gross of the Chemland division, which was affected by that one -- impacted by that one large order.

Yes, but what I'm trying to get at, has the market for the chemical suits in all, all of them, has it been -- (multiple speakers)?

It's been flat.

Okay, then why did the one large order go out at a lower margin?

Because large government orders are bid very competitively by three, four or five distributors and different manufacturers. When you get government bids for $800,000 to $1 million, it is some pretty hefty bidding. Because it's on the Internet, everybody is bidding it.

So the federal government was the buyer and that explains why that one went out at a lower price?

It went through a distributor, so directly no, but indirectly, yes.

Okay. That confuses me again. I mean if it went through a distributor, why wouldn't a distributor put his next order on some sort of option market like this and always get his merchandise that way?

This distributor was kind of a special deal -- a onetime deal for this one bid. The distributor was trying to handle the government bid and in order for the distributor to win the contract, he's got to assemble not only chemical suits from us, but respirators and other boots, I guess, helmets, whatever, and he's got to pull it altogether from different suppliers. But it's in response to a government bid.

Okay.

So my answer is directly we're selling to a distributor, but the through sale is to the government.

Okay. Can you give me some information regarding the operating cash flow for the quarter and for the year?

The main component of that was the change in the inventory. The operating profit and the change in the inventory were the two main components.

I'm sorry, just what were the numbers? What was the operating cash flow?

For the year it was $8.2 million and for the quarter I believe it was $6.3 million. And we had about a $4 million decrease in inventory in the quarter.

What do you expect the cash flow to be like next year?

I would expect the inventory levels to drop gradually over the year, to be somewhat lower so we should have a pretty healthy cash flow number. I don't think we want to get into the prediction business, but cash flow should be pretty healthy. And should -- I would say cash flow should exceed our net income as reported over the next year.

So you do not anticipate anything other than intermediate period balances as far as any debt next year?

What do you mean by intermediate period balances?

Well thinking that where you need to make payments before receivables come in, if you have one big buy or anything. But in general, you would not expect to be bringing on debt throughout the year?

No. Unless there is some unforeseen acquisition or something. But without some triggering event, just normal operations, and I would expect our debt to basically operate in tandem with inventory.

I'm sorry, the one issue that will impact the debt is we're building a new facility in Canada; that is covered not through our normal revolver. We have a special loan with a Canadian bank in [honor of] the Canadian government, which is like a development, an IDA type of loan at a pretty advantageous rate. But that will affect capital expenditures and bank debt. That's about $2 million. Other than that, I would say without a triggering event, our debt level should be flat to declining.

Okay. What do you expect CapEx to be next year?

For everything but the Canadian facility, about $1.4 million and about $2 million for the Canadian facility.

$1.4 million in general needs, and plus $2.0 million for a Canadian [finish] facility.

That's right.

Okay, all right. Thank you, I'll get back in line.

Eric [Mancini], [BLS Advisers].

My one question was sort of answered. But I'll re-ask it again for a more precise. Basically it has to do with the CapEx investment cost last year versus this year. You mentioned in the press release last year was India, China etc., this year is Canada, Mexico. Basically how do you see it comparing, the investment cost this year versus last?

I just outlined what I thought the CapEx would be over the upcoming year. Without Mexico it shouldn't be very much in terms of CapEx. There'll be some costs involved in that, that may be $100,000 to $200,000 at most. Not a huge amount.

How much was last year?

I don't have that -- it was about $3.5 million I think total. But most of that was in -- I'm sorry. India alone was $3.5 million. Hold on one second -- grab that in one second. CapEx was $3.4 million for the purchase of India, $900,000 for everything else.

Okay. So pretty close, not too much -- do you anticipate -- you already answered the $1.4 million. That's it. Thank you.

(OPERATOR INSTRUCTIONS). There appear to be no further questions. I would like to turn the floor back to our hosts.

I would like to thank all of our shareholders for calling in asking some very detailed questions, which I guess covered most other people's questions. So we will close the meeting. Thank you.

Thank you.

This concludes today's Lakeland Industries conference call. You may now disconnect.