Lakeland Industries Inc (LAKE) 2008 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 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 the 14th, 2008. 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 the circumstances.

These statements are subject to a number of assumptions, risks and uncertainties that 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 control of the Company. Listeners are cautioned that all 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 now 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. Welcome to all of you and thank you for participating on our fourth quarter and full fiscal year 2008 conference call. Our financial results were reported earlier today and we were very pleased with the Company's performance. In light of the impressive results and to discuss what was accomplished during the fiscal year, as well as to provide commentary as to what should be expected in the future. It may be helpful to begin with reflecting on last year's 2007 letter to shareholders. In that letter, I wrote the following.

The real test in golf and in business is not keeping out of the rough but getting out of it after we are in it. John H Moore. Since the writing of that letter, your management team has been steadfast in its resolve to continue developing, implementing and executing on a transitional strategy, intended to improve Lakeland's financial performance and position it for longer term growth and prosperity. I believe we have already benefited from these endeavors and that we succeeded in getting out of the rough as evidenced by our fourth quarter results for fiscal year 2008 ended January 31, 2008. We are now setting our sights on restoring our historically high levels of cash flows and enhancing profitability. I believe our recently reported fourth quarter mentioned above proves that Lakeland Industries has turned the corner and that the investments made and proposed prior to 2007 has borne fruit.

In 2006 we communicated to shareholders that calendar year 2007 would be a year of transition and that we would adopt a three prong strategy. Expand our international sales operations, acquire product lines that we do not presently carry but which our sales force could integrate or bundle into existing offerings and develop new proprietary products that solve a problem or better answer the demands and needs of our customers. The infrastructure for this process is almost complete two years later and has positioned us for continued revenue and earnings growth for the foreseeable future. In the last two years we have completed the following--new sales operations, opened sales offices in Beijing, Lifong, and Shanghai, China and we will be opening a fourth office in Guangjo this summer. We opened up a sales office in Tokyo, Japan as an outlet for our Chinese production. Our China sales effort was built from the ground up beginning two years ago with one salesman. Nonetheless, sales for China for fiscal year 2009 are projected to be in the range of $4 million as we have just begun to scratch the surface of the potential in Asia and Pacific Rim markets.

We are currently selling the bulk of our products in China but are also selling into South Korea, Thailand, Malaysia, and Singapore. Traction and reputation takes time to build but once you have it sales can expand exponentially. On March 31, 2008, we concluded a deal with West Pharma Industrial Safety, publicly traded company in Australia to exclusively sell our products in Australia, New Zealand and South Africa. This will add significantly to revenue and earnings growth going forward.

Our European sales office which also commenced operations a few years ago with only two people is also projecting sales to be in the range of $4 million and thus another significant contributor to our revenue growth. Again, we have only begun to scratch the surface of the very large but mature European economic community markets but more importantly, Lakeland will be in a position to tap the faster growing markets in Central Europe such as the Czech Republic, Poland and Hungary. In South America the quality textile acquisition that we announced in February 2008 and our new Santiago, Chile sales office should contribute additional sales of approximately $12 million on an annualized basis.

In India which only opened after retooling in March 2008 is fast becoming one of our most exciting operations. As a new market for Lakeland, our activities here will continue to be a drag on the bottom line during fiscal year 2009 until we achieve greater traction that comes with an established local brand. However, in a relatively short order we believe our operations in India will enable us to capture $10 million in market share as we penetrate this fertile landscape. In the U.S., we do not expect much growth until the myriad of financial crisis are set to rest. These issues have caused liquidity and currency challenges that will not make domestic business any easier until they are solved. We do however look forward for some improvement in our Canadian sales as they now have the space to carry all of our products, not just a few. The downturn in Canadian industrial output coupled to the U.S. economy is more than made up for in higher commodity prices and profits in oil, petrochemical, mining, lumber, and other natural resource sectors.

Our new facility in Mexico which should start adding to the bottom line in a significant way before the end of the current fiscal year. We will look to it as an additional tool not only to penetrate the Mexican domestic markets but to leverage its capabilities to take advantage of favorable tariff treaties with other Latin American countries by the fourth quarter of the fiscal year 2009. In terms of new product lines, our second prong, we acquired the assets of an Indian glove facility in October 2006, adding 20 new styles of chemically resistant gloves which bundle well with our chemically resistant coveralls. Additionally this new operation will serve as an entree into the Indian domestic market for our products and we are already selling domestic gloves in India. We retooled this operation and start shipping products in March 2008.

We are close to completing the acquisition of quality textile a Brazilian manufacturer of primarily fire protective apparel. This closing is scheduled for May 2, 2008. The acquisition carries some 40 new products and opens up the (inaudible) markets of Brazil, Argentina, Paraguay and Uruguay to our other global products. It also brings with it $1.8 million of EBITDA, as reported for calendar 2007. Sales grew 57% last year and sales for the last three months ended March 31, 2008, have grown 34% over the same period in the prior year.

[Mercosor] Member countries continued to impose very high tariffs on finished apparel imported from other countries. By importing the fabrics and finish them in Brazil we can avoid many of these protectionist tariffs. In these markets we can introduce the fabrics we source globally and we can be very competitive on the cost side. Since distribution in Latin America is at its infant stages, many of our products are sold directly to end users and yield 40 to 50% gross margins as opposed to the 20 to 25% gross margins we experience in North America. Our goal is to cross fertilize textile product lines with 30 or so of Lakeland's global lines, such as Indian chemically resistant gloves and Chinese European non woven and chemically resistant fabrics. With virtually unparalleled suite of products, quality textile sales force of 48 in house, independent representatives, may become even more productive. The Mercosor markets have a population of approximately 250 million people and we expect other South American countries to join Mercosor, much as we see the Central European countries joining the EEC.

The acquisition of Mifflin Valley in late 2005 added 88 new high visibility protective apparel products with seven new products developed since the acquisition. These product lines are manufactured in China, USA, and later Mexico and sold internationally. Our third prong of developing new proprietary products has realized significant progress as well. We have been perfecting a new fabric that better answers the needs of our customers. We developed a new line of high protection chemical suits that squarely meets the needs of our international customers. [Chemax] 1, 2, and 3, which are CE certified and passed European CE types 2, 3, and 4 testing was introduced to the market in February 2008. Most global markets have embraced the EECs and CE protocols for high end chemical protective clothing and thus intermediate acceptance in the developing industrial economies of China, Brazil, India, Eastern Europe, and the Middle East in particular and globally in general. More significantly, this is a very high margin line of products due to the technology incorporated in them. Sales have just started and we have few competitors in this area.

We introduced a new product for pharmaceutical and aseptic applications for clean room applications in the pharmaceutical industry. The fabrics are anti-microbial, high density wovens that have very strong repellant barriers and thus provide a high level of protection and more importantly comfort, qualities that are in demand by our existing and potential customers. We have sold 1.4 million of this new product since its introduction in October 2007. In total, we have newly developed, acquired or completely redesigned 147 new products over the last two years, the majority of these items will be introduced this coming year. These new product introductions should result in increases in revenues and earnings for fiscal year 2009 as compared to the prior year.

With our transition and retooling of the last two years mostly over, there is a tremendous amount of pent-up earnings power about to become apparent in our Company, recession or no recession. Lakeland felt this current recession coming two years as the oil industry, a large consumer of our products, had to deal with overly optimistic pension, retirement, healthcare accounting assumptions coming home to roost, and the start of oil price increases making their SUV models unattractive. This affected their suppliers like Delphi and many others in the auto supply chain that we sell to. Rising oil prices also started squeezing some of our utility customers who use of oil to generate kilowatts. So we felt this downturn in the U.S. coming long ago and began adjusting accordingly.

Additionally, the relative maturity of the domestic U.S. market required that we take action in order to position Lakeland for longer term opportunities. Our industry generally sees a slowdown or recession first and we are generally out of it first. However, unlike most other microcaps, we are no longer totally reliant on the U.S. economy whose GDP growth for the fourth quarter of 2007 was 0.6%. Rather, we are becoming more integrated into the developing economies such as India, China and Brazil, which have GDP growth rates of 5 to 10%.

We were slow out of the box in the first two quarters of our recently completed fiscal year due to our long-term decision to streamline and invest in the necessary infrastructure in India and Mexico. This long-term approach was seen as favorable as compared to haphazardly accelerating our entry into these markets for short quarterly earnings that would have hampered our ability to expand more profitably in the years to come. Our third and fourth quarters of fiscal year 2000 showed the upward earnings trend even with relatively flat sales compared with FY '07. Fiscal year 2009 should begin to deliver meaningful revenue growth and calculated robustness in our earnings growth. Our choices on Mexico and India that negatively impacted our first two quarters, nonetheless, are expected to meaningfully contribute to earnings for the years to come.

As for the stock market, this we cannot control. We believe in a strong balance sheet, smart growth, particularly when a recession is looming. We will not mortgage the Company into maintaining quarterly earnings at the expense of our long-term future. We are certainly appreciative of our fellow shareholders who have taken the time to understand our business strategies and support our efforts. Perhaps the recent progress we have been making on the operational front has led investors bidding up on our stock which has appreciated from a 52 week low of 9.50 early in 2008 to over 12.50 at the end of last week. However, we still trade at about 70% of sales.

In contrast, we noted several acquisitions in the industrial garment sector that valued some targets at approximately two times revenues, specifically DuPont earlier this month acquired Cardinal Healthcare's industrial apparel business. Also this month, Honeywell purchased Norcross Safety products for $1.2 million from Odyssey Partners and a few months ago 3M bought safety equipment maker Aero Technologies also for $1.2 million. Given the revenue multiples that have been seen from our peer companies and our proven strategies for growth, we believe we are well positioned to create value for our shareholders. I would now like to introduce our CFO, Gary Pokrassa, who will provide a few specifics on our financial results reported today that may be of interest to analysts and investors.

Thank you, Chris. I'd like to point out our quarterly EPS has increased sequentially for each quarter in FY '08. On our commercial borrowings, our loan balances are very closely tied to our inventory levels. Inventory increased by $1.6 million over the previous quarter. This is in part due to the soft Tyvek sales in Q4, and our renewed buying in anticipation of probable raw material price increases. We have bought significantly less raw material in Q1, and we expect our Q1 inventory and loan balances to decline significantly from the January balances.

I would also like to address our higher than normal effective tax rate during 2.3 for FY '08 is resulting largely from the $500,000 Mexican restructuring charge we took in Q1 which did not result in a tax benefit. Our Mexican restructuring is proceeding. We should be at full efficiency by this summer. We believe this should allow us to decrease manufacturing costs by at least $500,000 a year once it hits full efficiency. I want to say I'm personally excited about our pending Brazil acquisition scheduled to close May 2. We expect this to be the cornerstone of our expansion into Latin America. And with that we'll turn it over to the audience for questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is from Mr. Brian Butler from FBR Capital Markets. Please go ahead, sir.

Good afternoon, Chris, Gary.

Good afternoon.

Hi, Brian.

First question, just I'm going to have to ask if you can expand on meaningful growth in 2009 because it looks like internationally, again, you guys are very strong, domestically a little flat to, well, hopefully up a little bit. Any help kind of thinking about where that ultimately pans out growth-wise? I mean, is meaningful 5 to 10%? 10 to 15?

Well, I think the best guidance we can give you was just that we just said we believe the Chile plus more importantly the Brazil acquisition on an annualized basis should yield $12 million a year in sales.

Right. So you got $12 million there, but China is going to be $4 million in '09. What was China in '08?

That's up about 30% going forward.

So $4 million is up 30%?

Also, we have The Australian distributor contract.

Right. You said Europe was another $4 million in '09. What was that in--?

That's not $4 million growth.

No, I know. That's why I'm saying, what was it in '08?

Hold on one second, I'll tell you. Europe did $3.5 million this current year, so we're looking for another 400 or so from there.

Okay. And then on the operating profit, looks like operating profits had a great improvement in the fourth quarter, hitting 7% range. Is that -- should we be expecting that to continue into the '09?

Yes.

Okay. Any improvement on that or is it just?

Should be gradually improving.

Continuing to improve.

Gradual improvement, yes.

Right. In the third quarter you guys talked about the international operations kind of being a drag of about $0.05 in the third quarter '08? Did you do that calculation for the fourth quarter? Any sense of improvement?

Wasn't quite as much, which is good news, but on a pretax basis, India still losing -- let's see. India lost about $0.02 a share in Q4 and Chile lost about a $0.005.

Okay. So in the right direction.

Yes, yes.

Most of India's losses are just depreciation which are non-cash loss.

Well, that's until we get -- while we're gearing up the factory we had to take some depreciation.

And then on the material, you talked about the inventories coming up a little bit as you're prebuying again. Did I catch that right?

That's exactly right. DuPont we believe will be raising their raw material prices somewhere in the spring to summer.

So does that mean, should we be looking to the second half of the year where material prices catch up and is that catch-up a lot?

Well, I wouldn't -- in terms of our costs as we purchase it in the second half of the year, that would be right. But the way it hits our accounting, the one reason why we can stock up, we should have enough on hand that as we speak today, we're near the end of our first quarter. We account for that on a strict chronological FIFO basis. We should have enough to just almost get us through the year-end at the old costs, even though we'd be buying at the new costs and stocking up for the future. So that actually -- if the garment prices go up and that's a big if, Chris wants to jump in.

We have already notified our customers that we're raising prices on garments.

Is that potentially ahead of DuPont raising prices on garments?

Yes.

Really?

Yes, we expect an increase out of DuPont on fabrics so we've already notified our customers that we're raising price.

If DuPont doesn't raise garment prices, what do you think the potential fallout occurs there?

Well, we'll cross that bridge when we come to it but I don't think it's going to really affect us one way or the other because DuPont now deals with the largest customers in the country and we don't deal with them too much anymore. So we're basically serving the small customers.

Okay. And what percentage--?

We might have to retrace our steps on prices but I don't think we will have to.

Okay. That makes sense. What percentage is Tyvek now of your revenues? As you think about it, what number--?

Tyvek specifically is probably down to about 55% of our revenue.

55%, really.

Yes.

That's not all disposable, that's just Tyvek.

Right. Tyvek was a significantly larger percentage of your revenues, call it two or three years ago, i think it was closer to 80%, so that's a material change. All right, well good quarter, guys. Thank you very much.

Thank you, Brian.

Thank you. Our next question is from Kyle Kreuger from Apollo Capital. Please go ahead, sir.

My question was answered. It was on pricing. Thanks. Nice quarter, Chris.

Thank you.

Thank you.

Thank you. There are no questions registered at this time. (OPERATOR INSTRUCTIONS). There are no more questions registered at this time. I will now turn the meeting back over to Mr. Ryan. Please go ahead, sir.

Well, I want to thank our shareholders for at least understanding the story. So we would like to thank our shareholders and other interested parties for participating in today's conference call. The results in our fourth fiscal quarter mark an improvement on a number of fronts and we are confident that our strategy for delivering growth in our earnings per share will continue successfully and with that I'll close the meeting. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.