Lakeland Industries Inc (LAKE) 2009 Q1 法說會逐字稿

Before we begin parties are reminded that statement during this call may 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 fact, which reflect management's expectations regarding future events and operating performance and speak only as of today, June 9, 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 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 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, and thanks, everyone, for joining us today on our first quarter conference call. I'm pleased to report that sales at Lakeland rose 6.6% over the comparable quarter last year to a record $27.3 million. We find it very compelling that in the middle of a major slowdown in the U.S. economy, we post the highest quarterly revenue in the Company's history, evidence that the Company is taking the right steps to grow even, as American industries are arguably operating in a recession.

In line with the growth strategies outlined for investors in our prior conference calls, the increase in sales represents all the areas where we've invested over the past two years. Although as anticipated, our Tyvek sales, which are solely sold in North America, were down, just as they have been almost every quarter for the past two years. Our woven and fire product sales rose 46% over last year, due primarily to international demand in South America, along with strength within the U.S. oil and refining industry. Where high demand for our fire protective products is no surprise with oil at $30 a barrel. It appears to us that all the major oil producers and refiners are pushing out every barrel possible, hence Exxon's $40 billion in profits this year.

Canadian sales were up 5.2% over last year, due to a booming petrochemical that was counterbalanced somewhat by a very slow manufacturing environment. Reflective high visibility product sales increased 20.7%, with some nice Department of Transportation contracts. China external sales were up 350% over last year and we continue to add people to the sales force there. Our UK sales rose 43.5% over last year's quarter and our Chile sales were up 372% over last year. So overall, we had the best sales quarter in our history, despite very low market prices in Tyvek and almost a recessionary climate in the U.S.

Profitability in the quarter was a little under our expectations due to high legal costs in dealing with the Holtzman Opportunity Funds proxy contest, which ended in late April and India expenses being higher than anticipated due to the final trial tests of our international lines. These two one-time items represented about $0.06 per share in after tax expenses. Analysts earnings per share estimates for Lakeland Are $0.90 for the coming fiscal year, ended January 31, 2009 or a 50% increase in earnings. We believe the $0.90 estimate is very attainable, particularly given the benefits of our Brazilian acquisition.

We closed the Brazil deal on May 13, 2008, and we estimate additional sales coming out of that country will be approximately $9 million for the remaining three quarters of fiscal 2009. With estimated accretive earnings of $0.10 to $0.15 a share. This includes estimated integration expenses of approximately $225,000 over the three quarters. Next fiscal year, we look for Brazil to add considerably more in accretive earnings due to organic sales growth in the 20% plus range in their core products. And additional growth as they add our other international and domestic Lakeland product lines, such as Indian made gloves, customized China cotton, high visibility vests and jackets and many of our new product introductions that only hit our production lines in China two months ago. The EBITDA added by Brazil in calendar 2009 should grow at a higher percent than the growth in sales, which we're estimating at 20% core and plus with our other products.

We also just took our first baby steps to opening up a sales channel in Russia. We have retained an individual to be a prospective General Manager in Russia, who will build from the ground up, as we did in Asia and South America. We expect substantive results in nine to 12 months, as we now have an operating model for opening foreign sales offices and practice makes perfect. In other words, we expect very small losses initially and rapid profitability. We are very upbeat about the remainder of this year and our growth for fiscal 2010 regardless of what happens to the U.S. economy. Our growth strategy, led by the maturation of our international operations, is delivering the intended results to the top and bottom lines. With that, I'll turn the following discussion over to Gary Pokrassa, our CFO.

Thanks, Chris. I know we've been promising you for quite awhile to work down our excess inventory of Tyvek. Well, we've finally done it. We drew down our inventory by $7.5 million in Q1, much of which was in reduced Tyvek stock. It is now at a normalized level again and should gradually increase with sales and for Q2 with new inventory in Brazil. That's the total inventory.

As a result of our improved inventory position, we generated cash flow from operations of $6.4 million in Q1. Our loan balances were also paid down by $5.4 million, even as we used $1.1 million in borrowings for our stock buyback program. The stock buyback program has been quite successful so far and has, as expected, provided an excellent return on investment. Our effective tax rate for the first quarter was 35.2%.

I just want to note that, the China rates have increased to 25%, effective January 1 but there's still some losses from India not generating a tax benefit. And going forward the effective tax rates in Brazil will range anywhere from 17% to 22%, depending on how the incentives play out. So, all in all, I would project an effective tax rate of about 30% going forward.

Before handing the call over for questions, I just wanted to add to Chris' comments about Brazil and say that I'm personally very excited about the prospects of future growth, using quality textile as a base. I expect this acquisition will prove an appropriate and opportune way to leverage our balance sheet. And as Chris mentioned, we fully anticipate the transaction to be extremely accretive for our EPS. With a strong balance sheet and the success of our overseas markets, we believe we're well positioned for continued growth and margin improvement in the quarters to come.

Thank you, Gary. With that, we will turn it over to the audience for questions.

Thank you. (OPERATOR INSTRUCTIONS) The first question will be from [Brent Reed] of FBR Capital Markets. Please go ahead.

Good afternoon. My first question had to do with the proxy expense. Do you see any additional proxy expense going forward?

Maybe a couple -- very minor, nothing significant. Maybe a few dollars will creep in but nothing that would get anybody's attention.

Okay. As far as the SG&A how should we think about that going forward?

In terms of what? I know it's at a higher level now. I would say pull out the stockholders' expense but other than that, it should be at a normalized level without the extra legal expense. One of the reasons for the increase is the additional China external sales, which have -- we had previously charged all of the China SG&A to cost of goods sold because it was basically a captive manufacturer. And now the accountants are asking us to allocate a proportional amount of that to SG&A because we have external sales now. So many -- much of that is not really incremental expenses. It's just it used to be buried in cost of sales and overhead as an allocation. Now, it's coming through as SG&A.

Okay. All right. And also as far as the international growth is concerned, what was the organic growth from international sales?

I think let's see, we have in our 10-Q we have a footnote for the proportion of the sales in Q1 coming out of domestic versus international and our footnote is roughly 85% domestic and 15% international, which I think was up from 13.5%, I'm doing this from memory, for the full fiscal year '08 and it was only 9.5% in Q1 a year ago. So -- and the dollars, the domestic sales are flat and the international sales is where the $1.7 million growth came from. So, virtually all the growth came from international.

Okay. Great. Well, thank you.

Thank you. (OPERATOR INSTRUCTIONS) The following question will be from Sam Rebotsky of SER Asset Management. Please go ahead, sir.

Is the $0.10 to $0.15 that you're talking about earning from Brazil, is that included in the $0.90?

Yes, it is.

Okay. And the profitability, do we have a plan when India is going to be profitable, which quarter it would happen or --?

India will probably break even in the fourth quarter. We had a $0.03 hit to earnings this quarter. That's going to go down drastically simply because they had no sales in the first quarter. This quarter, they are shipping containers in Europe, Brazil, United States, Canada. It's not going to take them to profitability but it will certainly reduce their losses significantly in the second quarter. And in the third quarter, they should increase sales and reduce losses again. I'm hoping for a break even by the fourth quarter but it may take as long as the first quarter. Thereafter, we're looking for a profit from them in FY '10, which is calendar 2009.

As far as the agreement with the Holtzman Group, did they decide -- was there any discussion relative to; will they continue to be investors or will they decide to cease being investors? Was there any discussion relative to that?

No. Not anything really. Okay? They may continue to be investors. They may not.

Okay. Relative to the price of oil would that increase your future purchases of Tyvek? And is there any -- what impact would that have on inventories that you presently have?

That's a good question. DuPont has notified us that there will be an increase in Tyvek prices starting July 1 of approximately 5%. They're calling this a surcharge due to increasing polymer prices and increasing energy prices to run their operations. On the other hand, we have raised prices to many of our customers, as of May 1 and we're going to raise our prices again on July 1. So essentially, we're basically, I think, not playing catch-up with oil prices increasing. Simply because, in any given time, we have about six months of inventory. In this area, we just basically follow DuPont's lead. If they're going to raise prices on fabric and raise prices on garments, there's really not much we can do about it other than to find our place in the market because with Tyvek and DuPont we're pretty much a little sailboat following the ocean liner. So we just follow their wake.

Presumably, the price increases are flowing through appropriately due to -- people always would normally resist that, but that presumably, they're following and accepting the price increases?

Let's put it this way. On our non-Tyvek products, because I don't want to comment on what DuPont is doing for anti-trust reasons, on our non-Tyvek products, polypropylene and microporous, we are having absolutely no problems pushing on price increases. Simply because we do have large inventories in China. The Chinese themselves, who we compete with on the non-Tyvek alternatives, have no inventory and they're raising prices even faster than we are. So customers are actually calling us for product because the Chinese can't deliver.

Okay. And the Chinese currency, is that having any impact on future profits?

Yes, it certainly will and that impact is going to be based on our ability to pass on price increases. And as I've said, I was passing on price increases myself on the order of 20% to 40% to certain clients over the last month or two.

Okay. And the Brazilian acquisition, which you only have at about a month, how's that going?

It's closed.

No. How is the operation going, now that it's closed?

We're just in our first month. We're picking them up starting May 1, so we don't have much of a track record but everything we see so far is all green light and it just looks like it's going to be a very, very good deal. We see no storm clouds on the horizon at all. We are looking to this as the basis for our infrastructure in our growth in Latin America.

Okay. Well, good luck.

Thank you. The next question will be from Tom [Soden] from Smith Barney. Please go ahead, sir.

Congratulations on a great quarter. Just one question on your entree into Russia. Is there any particular sector or industry that may be targeted for your product?

In Russia, we're going to be targeting the oil industry, oil exploration and petrochemical refining and smelting. That is where Russia is growing. So, we're going to attack the big obvious customers first like Gazprom and the joint ventures that Exxon and Chevron have. And then into the smelting or what I call steel, aluminum, gold refining. Those are the areas where you have a lot of Russian industry and they're easy for us to penetrate because we have products that are just not even in Russia today.

Well, that was my next question. What -- is there a competition that you're -- a Company in this country or Europe?

The only competition I would be aware of is DuPont on the chemical suits and a variety of Russian domestic companies on the fire protection.

Okay. Best of luck to you in the rest of the year, Chris.

Thanks, Tom.

Thank you. There are no further questions registered at this time, Mr. Ryan.

Thank you. Then I'll close it up and wish everybody a good Monday.

Thank you.

Good-bye.

The conference has concluded. You may disconnect your telephone lines at this time. We thank you very much for your participation.