Lakeland Industries Inc (LAKE) 2008 Q3 法說會逐字稿

Before we begin, parties are reminded that statements made during this call contain forward-looking information within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical facts, which reflect management's expectations regarding future events and operating performance and speak only as of today, December 6, 2007. 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, current 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 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 the call, Lakeland Industries' President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Thank you. Dear fellow stockholders, we're pleased to report an increase in operating earnings of 18.6%, over the third quarter of last year. This improvement is based on an overall revenues increasing which reverses the trend of the preceding quarters. Our revenues have been impacted by domestic softness with revenues peaking in 2006, 2007 time frame, resulting from demand from post 9/11 spending.

Off those highs were more aggressively implemented a plan to increase our revenue growth through one, international expansion in high GDP regions and two, new product introductions. In turn, this also would diminish our reliance on domestic sales of Tyvek products which have a tendency to present challenging circumstances. Moreover, our intent was to generate more revenues from higher margin businesses, and to produce an overall improvement in profitability through efficiencies and other overhead cost management and we are seeing signs of success in this. For example, earnings per share in the third quarter increased by over 20% sequentially from our second fiscal quarter. The steps we're taking to produce this earnings per share growth story include the following.

Right sizing the long-term times and inventory channels from China, Mexico, and India. This means thinking logistically on each transaction on a case by case basis. Costs and overhead expense management, entering international markets to extend growth of domestic mature disposables. Stimulation of new international demand with lower cost products, and introduction of new products which meet our customers' demands. Among our activities to control costs of goods, expenses and overhead, we have made and continue to make progress in reducing cost of goods sold. We have worked through all our high price DuPont Tyvek, this was completed by the end of our second fiscal quarter.

Two, constant control and management of overhead. We have reduced our USA headcount from 260 at January '07 to 240 at our Q3 here and will continue to do so. We have taken positions in raw material product to large price increases due to higher oil prices, where the cost savings exceed our cost of capital by a substantial margin. Our way of utilizing our low cost of capital and ample borrowing power to stay ahead of rampant oil inflation and U.S. dollar depreciation.

Regular reviews of inventory and opportunistic purchasing based on market conditions and cost management at every level. By drilling down on every expense line, cutting out the expense all together, moving the expense offshore or renegotiating the price. These activities have already been a contributor to our earnings per share growth, some of which, in essence is a form of recouping lost earnings per share.

Our international growth strategy which commenced about two years ago is gaining a lot of traction. In these operations our experience is that we invest and spend while incurring losses for the first two years to the point of break even. We are now nearly at this point for certain of our international operations. These operations still reduced our earnings per share by about $0.05 a share in Q3. As we grow these businesses further, we expect to begin to add higher margin revenues. Our international operations strategy and review is as follows.

Expand international operations. Follow the U.S. dirty jobs that are going offshore by opening new sales offices in Chile, India, and China and greatly expanding our existing sales operations in the U.K. and Canada. We also make in these countries and thus achieve lower cost manufacturing i.e., not only selling in these fast GDP countries but manufacturing in countries like India and China.

Raw material sourcing. We're taking advantage of international sources which are lower than the U.S., using our emerging market manufacturing operations in China, Mexico, and India. We logistically search for the lowest raw materials and component cost and by exchange of information on prices, tariff, freight, and lead times, this allows bullet delivered, duty pay price to the target company or the buying country. It also allows us an opportunity to control margins and increase revenues.

So in the emerging markets, we have already invested $7 million to date. From a sales perspective we are now located in the fastest growing GDP countries and regions in the world, such as China, India, and South America. The initial progress for international revenue growth is 12.3% in FY '07 as compared to 9.8% in FY '06 as a percent of total sales.

International sales excluding Canada were $6 million in '07 versus $3 million in '06. We're moving our Canadian sales office next week to a larger warehouse which enables capacity expansion and new products, which we expect will increase sales substantially in Canada. New plant in Mexico replaces less efficient plant. They did $500,000 of an ongoing savings we expect to kick in in the first quarter of next year. Reduced operating losses from international locations. China opened in January '06, Chile in March '06, Japan in July '07, and India will open this December '07. Start-up costs in India, China, Chile, and Japan impacted us by $0.05 per share this quarter as I said before. These start-up costs should get to break even and then to profitability over the next three quarters.

Domestically and internationally our intent is to stimulate growth through the introduction of new products. We have an established domestic presence including a market leading position and a direct sales force and distribution channels that give us access in many of the fast growing economies around the world. It is with this infrastructure coupled with our geographically disbursed manufacturing capabilities that we intend to generate long-term revenue growth.

A review of our new product initiatives is as follows. Industrial protective clothing. Room for Lakeland to increase market share internationally and in the North American non disposable products markets. We plan to expand or introduce new products, disposable clothing into U.S. and foreign food processing, foodservice, chicken, fishery, slaughter operations. Large applications not being served by non wovens currently.

Gloves and related garments, we plan to expand in international glove sales. We need to compete the product line in India to be competitive in the U.S. and internationally. That will be cured once India goes online next month. India operations give us approximately nine new styles of chemically resistant gloves that complement our Kevlar knitted glove lines. Our current line is too narrow for customers. By adding the Indian glove line we think we can increase sales dramatically on the glove side of our business. We recently introduced anti-static aseptic garments, and had got a $1.6 million contract for same. This is basically demand from the pharmaceutical manufacturers, which is a growing demand.

We're bidding for several large contracts in fire gear in South America. The key here is fabrics that are only made in the USA, we cut, sew, package them in China, ship them to South American countries that have cut free trade deals with China. Metals, oil, lumber for textiles. Most US based investors only think about the free trade deals between the emerging market economies and the USA. Not all the free trade deals between the emerging market countries amongst themselves. For example, the free trade treaty between Chile and China, copper for textiles or China and India or India and Mexico.

First, we're the first Company in the world to produce USA NFPA National Fire Protection Agency fire gear and soon EN fire gear for the European and other countries that prefer European standards. Those fire protective clothing and fire products will be made and sold in Asia and sold in world markets such as China, becomes a full participating member in WTO with the large industrialized countries. Despite the 12% drop in our North American disposable sales, which is attributable mainly to a reduction of Tyvek product sales, our overall revenues showed an increase which reverses the trend of preceding quarters. Sales are down in the USA due to a softening industrial economy in auto, auto suppliers, housing, power utilities, and light manufacturing. Such as boats and competitive discounting by our competitors.

Our strategy in summary is to increase our international sales to the point where they more than make up for the loss of the USA domestic sales. The second tier of that strategy is to introduce new and better performing higher margin products such as our Chemex line of chemical protective garments, new chemical protective gloves from India, new novel offerings in our high visibility line of garments, all to be introduced in the third and fourth calendar quarters of this coming year.

Our diversification strategy thus far is beginning to deliver its intended results as we have expanded our product line and our increasing revenues from outside of our traditional North American market. We have been experiencing strong demand for our new reflectives, wovens, and glove products as well as growth at international sales from the United Kingdom, Chile, and China. As well as recording the first shipments of our new aseptic anti-static garment to large US pharmaceutical manufacturers. Overall we see a stabilization of revenue from our existing domestic activities and growth continuing to increase from new products and new markets with the international operations delivering higher margins.

Barring unforeseen market forces such as a real recession as opposed to the obvious current economic softening, we believe we can increase our earnings sequentially in the coming quarters from the third quarter reported here today. We feel we are well on our way of a turnaround spanning the next several quarters. The stock is trading below liquidation value. A valuation usually reserved for companies losing money or headed toward bankruptcy. We have a strong balance sheet, almost no debt, cash of $2.6 million access to over $20 million through our banking credit lines. We expect to earn a reasonable profit this year and with our overall earnings and cash flow outlook improving, we believe it is an opportune time to consider an investment in Lakeland Industries. Of course, there is always an environment upside potential to our business and earnings model with events involving Homeland Defense, bioterror, virus outbreaks such as SARS and the bird flu, and natural disasters. Which are not included in our approved earnings outlook per share.

Given this outlook we are planning a series of investment community road shows beginning in January 2008 on the West Coast and the Midwest and the East Coast in the first quarter calendar 2008. I would like to introduce our CFO, Gary Pokrassa.

Thank you, Chris, and I'd like to point out our operating profit has increased over 47% in this quarter compared to Q3 a year ago. And increased over 27% over the second quarter sequentially. There were some anomalies in our tax expenses in both this quarter and Q3 last year which affected the net earnings. Our loan balances are very closely tied to our inventory levels. As a result of lower purchase of raw material in November. Our inventory levels are down today as is our loan balance.

I would like to address our effective tax rate, 28.7 for Q3. It's a combination of a number of things resulting from lesser domestic profits, greater foreign manufacturing profits and that's offset by, as I said an anomaly in the foreign exchange issues. The inventory increased by $2.7 million from last quarter. This is in part due to the soft Tyvek sales in Q3 and renewed buying in anticipation of near term raw material price increases. Our Mexican restructuring is proceeding. We should be at full efficiency by late December and as Chris said we believe this should allow us to decrease manufacturing costs by at least $500,000 a year, once it hits full efficiency in Q1. And with that we'll turn it over to the audience for questions

Thank you. (OPERATOR INSTRUCTIONS) The first question is from Brian Butler from FBR. Please go ahead.

Good afternoon. Good quarter.

Thank you.

Question just can you refresh us on where your mix currently stands on North American versus, let's just say, international, everything else?

Well, North American is declining as a percentage of our total and international is growing. I don't have the precise percentages. I thought that was actually one of the -- that should be in the 10-Q, as one of the footnotes, I think.

Okay. I haven't had a chance to look at the Q yet.

The exact number should be right in the Q as a footnote.

Then when you talk about on the opportunity side of the food processing and in that area, what's the kind of size of that market and how far down this road are you? Or is this just something that you're looking to target?

It's something we're looking to target in North America. It's a fairly large market. The key is, going in and switching people out of wovens into disposables. But it's an area where people are generally not using disposables so we've really identified it as a place to go, at least to try to expand North American revenues.

Any traction there yet or you're just once again this is very early stages?

Very early stages.

Okay. And then on your operating cost side or the SG&A piece of it, that's still a little bit on the high side. Is that -- how much or how quickly can that come back down to where you had been in the past? Or is that, kind of the levels you're at now is the right way to thing about it going forward?

No, that should be coming down as a percentage of sales. As a percentage of -- it actually did decrease in dollars actually quarter-over-quarter. It's up -- it's decreased as a percentage of sales also. It's still higher than where it should be. That's only because even though the volume has increased it's still -- the volume still is less than what it should be. So as the volume does pick up, I think you'll see that percentage of sales coming down.

Can you get it back into the 14% or less?

No, that's in the rear view mirror. That's not going to happen.

We're talking maybe 100 basis points, or something like that?

I think it's at 17, it's in the mid-17s right now. It could come down to 17, perhaps high 16s. Not much lower than that, though.

How about on the international growth side, obviously you're making good strides there. What -- when you think about the growth in those markets, what's -- what is it growing at now, I guess and is that -- can that accelerate from there?

Well, it can definitely accelerate. If you give me a minute I'll give you some exact -- okay. U.K. is up 23% in the quarter from a year ago. Chile is -- bear with me a minute. Is up 68%, that's from a very small base, of course. Chile is exploding. We expect to see tremendous growth out of both Chile and U.K. Certainly 40% growth, I would say, annual, from each of them.

And our Chinese market is exploding, literally just in the last month.

I believe we had over $1 million increase in China sales, sales made by the China companies in this quarter versus a year ago.

What's driving that demand? Is that just basic, you're successfully getting into those markets and taking share or is it just that it's growing that fast, that market?

Well, the markets are growing very quickly and we're hiring more and more salesmen to represent us. We're being careful about hiring the right sales guys because you can waste a lot of time with the wrong guy. Last year we had one guy in China. This year we have right now three and we're going on -- looking for four and five. Okay. Same thing is taking place in Chile. The same thing is taking place in the U.K. As we hire more people, the sales go up. But in South America and China, you also have a very rapidly growing economy. So you've got probably 20 or 30% growth in the overall market, and as we hire more and more salespeople in these markets we're growing at 30 or 40% in these markets.

Last question. Just when you look at capital expenditures, do you have any large ones coming up in the next 12 months? Where do you stand with those, the spending?

Well, we're just finishing up one large one in Canada which most of the dollars will be in Q4, actually. Chris mentioned we're moving into a new warehouse. That is a self constructed facility where we will be owning the building and we have the equivalent of IDA type funding with a Canadian government owned bank at favorable rates. So that -- by year end, that will be about $2 million U.S. for the current year. Over and above that, though, there are no major projects, ongoing projects, capital expenditures. This is not a capital intensive business in terms of the capital equipment needed. Million, 1 million to $2 million a year should more than cover it.

Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Ryan.

Okay. Well, we would like to thank our shareholders and other interested parties for participating on today's conference call. The results in our third fiscal quarter mark an improvement on a number of fronts and we are confident that our strategy for delivering growth and our earnings per share continue to be successfully executed. As I mentioned earlier, we are planning a series of investment community road shows beginning in January 2008 on the West Coast and in the Midwest and East Coast later in the first quarter of '08. If you're interested in meeting with us or have any questions about the business we welcome you to contact us. Thank you, again, and have a good evening.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation, and have a great day.