Lakeland Industries Inc (LAKE) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Lakeland Industries third quarter results conference call. Please be advised this call is being recorded.

Before we begin today parties are reminded that statements made during this call contain forward-looking information within the meaning of the security acts 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 10, 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 and factored in the Company's filings with the Securities Exchange Commission, general exchange 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 these projected in an 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 caution statements.

At this time, I'd 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 third quarter conference call. It looks like we have a bigger turnout than we have ever had. I'm pleased to report that for the fiscal 2009 third quarter ended October 31, 2008 revenues rose over 7% over last year's third quarter and earnings climbed by 50% despite tough domestic selling conditions in September and October.

We expect domestic U.S. conditions to continue to be challenging in the fourth quarter, but we still expect to achieve earnings of $0.90 per share for all fiscal 2009 or growth of over 50% as compared to the prior year as a result of our successful international diversification strategy. Despite the current global economic crisis Lakeland is expected to continue to be very profitable. Moreover we expect next year's fiscal results to show top and bottom line improvement of over 10% excluding any future potential acquisitions and the impact of currencies.

For these reasons I remain very confident when encouraging investors to consider Lakeland stock. Lakeland shares have outperformed the market although down about 40% year to date, yet few companies have delivered as well as Lakeland has operationally, nor do they have as favorable an outlook as our Company.

Lakeland may very well be one of the few companies in calendar 2009 that will outperform its 2008 top and bottom lines. On a relative performance basis we are trading at about 50% of our book value. This makes our stock quite attractive indeed.

If you need more data points to suggest that we are undervalued and perhaps poised for significant investor interest before, or as the overall market recovers, then consider the following: Our debt to equity ratio is only 0.4; our current ratio is almost 10 to 1; our average current interest cost is about 3.5%, and our credit line renewal is not up for 20 months with Wells Fargo Wachovia. So we are clearly very solvent. But we are trading as though our sales and earnings are projected to drop 40% not increase by more than 10% during what is considered among the worst economic climates in our lifetime.

Our price to sales ratio is 0.37 while both revenues and margins are increasing. Given that our inventories are primarily made up of patented proprietary DuPont fabrics and garments that have not changed much for the last 35 years in terms of pattern, design and use we believe we can liquidate the Company for $13 a share or about two times our current share price.

But at that price we still haven't factored in that our receivables are solid and our real estate, particularly our foreign real estate, in China, Canada and India, are still carried at values on the balance sheet that are significantly under even today's depressed real estate market values. I concede that there are a lot of cheap stocks out there, but Lakeland is even cheaper.

We were encouraged that trading liquidity was not a problem from September 15 to November 1 on Lakeland stock, but recently it has been. These have been brokered dealers dropping many stocks at any price as the apparent result of margin calls since the beginning of November.

Brokerage firms have little capital to commit to making markets and stocks these days which has a lot to do with the liquidity problems, not the Company's efforts to get their story out. As a result, most [microcraps] have had little to no liquidity recently. This market scenario is unlike most any of us have seen or studied, but we are confident that the market will recover at some point.

In fact, it was reported that storied value investor Bill Miller said on December 3 at an annual Legg Mason luncheon that it looks as if the bottom has been made in U.S. equities. For our part we are attempting to remedy the liquidity situation and prepare for a market rebound by getting our fundamental value story out to buyers. That put Lakeland into that position at such an attractive value investment we have had to manage our costs and execute our growth strategies effectively.

On that note, I will now address some of the steps we have taken and the progress that has been made. On our expense management, we have cut pay roll in the USA by 600,000 on November 4, 2008 anticipating a slowdown in USA sales and are prepared for the worst should that come to pass. We don't think it will due to the nature of the products that we sell. But at the same time we are expanding our manufacturing and sales capacity in South America, particularly Brazil.

We fully anticipate using cash flow generated within Brazil, not debt. With oil refinery capacity no longer under severe pressure they are planning many more maintenance shutdowns than we have seen in the last two years. Such shutdowns drive demand for our fire protection apparel and the orders are already coming in.

The same shutdowns are coming in the chemical industry also. We continue to introduce new products and penetrate virgin territories for Lakeland, those being China, southeast Asia, Japan, India, Russia and South America. I remind our investors that the total market size for protective industrial garments is in excess of $6 billion worldwide with Lakeland representing less than 1.6% of the total market.

Therefore, it is our intent to stay nimble and to leverage our low cost, global manufacturing, and distribution platform to take market share even in the worst of the economic times. The investments we made to diversify our revenue base outside of the mature North American market are delivering their intended results.

Through organic growth and acquisitions we have increased our international revenues as a percentage of total revenue to 25% and 23% in the third quarter and fiscal year to date, respectively, as compared to 15.7% in both periods in the prior year. This percent was single-digit only three years ago.

Our opportunities to grow in virgin territories will provide sales increases even though the growth in these countries GDPs has dropped on average from 9% to 11% to 5% to 8%. We will continue to grow revenues in these virgin territories, but not as fast as we thought we would have last July. Virgin territories is the key concept here.

Rather than banging our heads against the wall in North America where you have negative growth in already mature markets and tough, entrenched competition virgin territories mean for our products very weak competition, weak competitors, both technologically and cost wise, positive economic growth and new safety codes mandating the use of our products.

The logic is this, we will enter the Russian market next year. We have no sales there. Thus, we have no sales to lose, only the ability to increase sales. The major multi-nationals that have been in all these markets for years don't have much or any room to grow. The market is mature for them. They are mature trees fully grown. We are a sapling with only growth ahead of us for the next 10 years. Creative destruction you may ask? The Company business cycle, birth, middle age and death.

We view ourselves as teenagers, how many companies listed on the New York Stock Exchange in 1928 are still around today? Only a hand full. This is due only to outstanding management and corporate cultures.

We expect better penetration of southeast Asia due to tariff reductions on Chinese made products to the Asia/Pac countries of from 9% to 3% in 2009. For example, this makes our Chinese made products sold in Thailand, Malaysia or the Philippines 6% cheaper and thus either increases our competitive sales price or increases our margin by 6%, or a little of both in these Asian markets.

Under the USA WTO treaty with China, all textile [quarters] will be removed on Chinese goods starting January 1, 2009. This presents an economic benefit for Lakeland to manufacture [quarter] product in its China facilities for resale in the USA.

We believe next year will bring continued economic sluggishness in the U.S. and most of Canada, with the exception of the western Canadian oil provinces and perhaps the eastern Maritimes where we are positioned to expand our business. Long term we believe the U.S. will emerge from recession in 2010, just as we expect to hit peak earnings as a result of our new product entries and strategic resource allocations overseas and by aggressively expanding our geographic footprint in rapidly growing economies.

With our Brazilian acquisitions complete, we feel more confident than ever that Lakeland is poised for further performance improvement and enhanced shareholder value this year and next. With that, I will turn the financial discussion over to Gary Pokrassa, our CFO.

Thank you, Chris. Before reviewing the consolidated financial results for the third quarter in greater detail it is important to address one of the most important developments that is helping to shape Lakeland's future and contribute to our improved operating performance. I'm referring to our recent acquisition in Brazil which Chris just mentioned and I would like to thank all the people in Brazil and of Lakeland that worked so hard with us to make this acquisition a success.

Let me emphasize one point which I'm sure is lost in the technical language of our 10-Q. In Brazil effective just now in November, for a number of reasons we have merged our holding company into the operating company Qualytextil SA which was the acquired entity. This merger creates goodwill on the books of the Brazilian company which we will be able to write-off against Brazilian income taxes over a five-year period.

The cash tax savings on this alone should generate about $0.03 a year in EPS going forward. The operating results from Brazil have exceeded our expectations. Our Brazilian management team has thus far met their projections and budgets since we first began negotiating the acquisition. They are now budgeting 20% organic growth in revenue for the next two years.

This 20% growth excludes sales in Brazil of Lakeland products which are being aggressively set up as we speak and should expand earnings next year especially in the second half. However, our operations in Brazil have recently been impacted when consolidated in U.S. dollars due to the weakening of the Brazil currency against the USD. Thus our healthy sales and earnings in local currency have been reduced in USD on a reported basis.

Now, I will review the Company's overall financial results. While Chris already spoke about our top line growth, I will provide you with more granularity on our international diversification. We've traditionally derived revenues solely from North America. Over the last several years, we have expanded outside this region. Lakeland and its subs now sell product in the following international markets, Australia, Brazil, Chile, Argentina, Ecuador, Columbia, Peru, China, the Asia/Pac countries of Philippines, Thailand, Malaysia, Indonesia and Singapore, also in Europe and in India.

One of the strategic imperatives associated with our international diversification strategy was to improve our gross margins. Gross profit increased by $1.5 million or 26% to $7.2 million in the third quarter of this year compared with $5.7 million for the same period last year.

Gross profit as a percentage of net sales for the quarter ended October '08 rose to 28.5% which is a record level for the third fiscal quarter and the second highest level in the Company's history. That has increased from 24.3% in the same period of last year.

This improvement was primarily due to the inclusion of the Company's Brazilian and other more developed international operations. Highlights from the gross margin analysis include the addition of Brazil's strong performance in the current year, the end of the previous year's sales rebate program to meet competitive conditions and that contributed to improved margins domestically. We had the Mexican restructuring in the prior year, in the first quarter of the preceding year, and a slight offsetting effect from the late stage start-up losses in India.

As of today, India has gotten its machinery to the point of producing a million pairs of gloves a month and made its first shipment to our China, Canada, Chile, European and USA operations and has started domestic sales in the Indian market. We anticipate India should achieve break even levels in Q4 of next fiscal year, one year from now.

Moving down the income statement, operating profit increased by $0.7 million, $700,000, or almost 53% to $2.1 million compared to $1.4 million in the third quarter of last year. Operating income as a percent of net sales increased to 8.2% for this quarter, a level we have not seen for over two years. That's up from 5.8% for the same period last year.

EBITDA was 9.8% of sales for this quarter, a level not seen in nearly three years. The improvement in operating profit and margins is due to the increased level of total revenues including high margin contributions from Brazil, use of lower cost raw materials and production of garments outside of the U.S. where in-country and external revenues are increasing, new product introductions, new customers and the end of the rebate program initiated early in the previous fiscal year.

On another subject, our effective tax rate is evolving. China is now at the statutory rate of 25% and Brazil, after incentives, is 16% overall effective rate before the goodwill deduction I mentioned before. My estimate for overall effective tax rate on a consolidated basis going forward is about 25%.

As a result of the Brazilian acquisition, we have added a modest and acceptable amount of leverage to our balance sheet. The Company's debt to equity ratio is now about 1 to 2.5. Our ROE has gone from 5.5 to 7.9 year-over-year. ROI went from 5.1 to 5.8, although we believe this should be improved upon. And the Company's ROA is 5.4, up from 4.8 last year.

We believe all these key performance measurements will be improved on in fiscal 2010, the upcoming fiscal year. The Company's book value per share is now $12.63 and, therefore, our share price is trading at barely half of book value.

As Chris pointed out, our stock represents an undervalued investment story for a Company that continues to show long-term growth trajectories.

We appreciate your participation and we would like to open it up for a Q&A session.

Thank you, sir. The question-and-answer session today will be conducted electronically. (OPERATOR INSTRUCTIONS) And we'll go ahead and take our first question from Patrick McCarthy from FBR Capital Markets.

Yes, hi. Good morning. I just had a couple questions on the international markets, just specifically where you are seeing a lot of strength, a lot of weakness and then within that could you comment on some of the end market that is you are seeing strength and weakness in?

Okay. The strongest growth in both sales earnings is in Brazil, number 2, China, number 3, Australia, number 4 the Asia/Pac countries which are Vietnam, Malaysia, Cambodia, Philippines, Singapore. And the second part of your question was -- could you repeat it?

Sure. Just specifically within those countries what end markets are you seeing as particularly strong or weak?

Weak is United States, no question about it. Canada is more or less static --

I think he means more what industries.

Yes, what industries within those countries?

Oil and petrochemical are by far the strongest. They may not be making billions per quarter but they are still making a lot of money. The next strongest industries are utilities because people still use electricity, so the demand there is fairly constant. They get to raise rates generally with the cost of oil going up or down.

Weakness, construction and auto. Those are the two weakest. The strongest are basically oil, petrochemical, chemicals. Some of the smaller businesses that we do business with that are, again, not being affected by the economy are things like undertakers, people die, they wear our gowns. We sell to a lot of small businesses like that.

Okay.

In Brazil -- I will address Brazil specifically, the local fire departments are particularly strong growth, the city, the municipalities. We have a number of contracts we have been winning. The capital city of Brasilia is one. There's several other fairly large, nice size contracts to outfit the fire departments. We also have the [petro brush] offshore facilities, fire protective garments there. And there's a lot of work being generated in Brazil with the electric utilities. That is a product we haven't sold in the U.S. It's mostly arc protection for the high tension workers.

In the U.S. one of the other industries that is still has strength and we're picking up new customers is the munitions plants in the United States. The Iraq war is not over and will not be for quite a while. In any event we are picking up nice orders from munitions industries, at least in the U.S.

Okay. Interesting. Just one other question. You had some nice margin expansion for the quarter. I'm just wondering, is that something longer term that you think is sustainable or should we be thinking about a pull back?

I don't think there is going to be a pull back simply because Brazil should maintain its margins and grow its sales. Where we will pick up more margin is in China and the Asia/Pac countries. As sales expand there, the margins are quite high.

Counter balancing that, I think it is more on the international side. On the U.S. side our margins will be impacted somewhat by some of the tyvek pricing, the raw materials pricing has gone up. Our garment pricing has not quite kept pace with it. We have some pent up higher cost sitting in inventory that will impact margins probably near the end of Q4 and into Q1.

I may have missed it. What percent of revenues is tyvek?

About 40% of revenues.

30?

40%.

Oh, 40%. Thank you. Thank you very much.

Okay.

We will take our next question from Sheldon Grodsky from Grodsky & Associates.

Good morning, everybody, and congratulations on a good quarter in a difficult environment.

Thank you.

There are two things that you said that I didn't catch. They went quickly, so I wanted to make sure I caught that. In India, did you say you would be making a million pair of gloves per month or per year?

Per month.

And in Brazil, I think you said you expected to grow 20% in the next two years, is that 20% per annum?

Yes, compounded, that's right. 20% each year, that's in the local currency. The Brazilian exchange rate has gone all over the place. What is $.05 a share last quarter is now $0.03 a share, unfortunately, in U.S. dollars. They are doing tremendously in local currency. That's really all we can focus on.

Let me ask you one more question on this subject since you're kind of a tiny multi-national company. Do you guys feel you are up to speed on how to deal with the foreign currencies or do you feel you can be blindsided now since this is a relatively growing part of your business?

I have spent a considerable amount of my time on that subject. Every time I start talking about it, I bore everybody to tears. We do hedge the Canadian dollar, the Euro and the pound. I have quarterly contracts, but that is hedging our receivables and our cash accounts. Once the sale is made, I'm hedging any further translation gains or losses at that point. That's been a very successful strategy so far.

We are not hedging the Chinese currency. That moves very slowly and steadily if it moves at all. That we can deal with. I'm not hedging the Brazilian real and that's an issue. It has not impacted our P&L directly, but indirectly it does because basically we have an investment in the Brazilian real, and it is a very large investment.

To the extent the U.S. dollar gets stronger that investment in Brazilian reals gets weaker. That is reflected on our balance sheet in terms of our goodwill going up or down and there is a CTA sitting in equity that reflects that. That's where the currency changes are on our investment. In terms of how it affects our P&L, there is no loss or anything. It just means that if the U.S. dollar continues to get stronger, in local currency, even if local currency grows, it would mean -- it would be that much less in U.S. dollar,s but there is no loss per se.

Unfortunately, the Brazilian real is not a free trading currency and it's extremely, extremely expensive to hedge that. I've been discussing that ad nauseum with our bankers. It is not an easy currency to hedge or a cheap currency to hedge. There is a huge differential in the interest rates, which is one major factor in determining the cost of a hedge.

I can hedge a Canadian dollar basically for a year or 90 days at today's spot rate. If I want to hedge the Brazilian real the interest rate in Brazil is between 13% and 19%. So the bankers have to go out and take out a corresponding loan in that currency to offset it. It costs something like 13% annualized to have a hedge. We have determined it is just not worth it at this point.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go ahead and take our next question from Tom Soden from Smith Barney.

Good morning, fellows, a terrific quarter.. On the acquisition front, Chris, will any acquisitions be more geographic driven or product driven? Would you be interested in get to go another area like Brazil or is there a product line that you don't have that you would like to acquire?

I don't think there is any difference between the two. In that vein, we would be more opportunistic. Prices around the world have dropped a lot on companies, at least in currencies when you are looking at the USD. On the other hand, we don't have anything in our rifle sites right now.

We will be a little conservative here because of the financial crisis and the banks aren't in any mood to make acquisition lending. We will probably look at just starting our own operations in new countries and bring in our current product line until real liquidity returns to the banking industry.

Brazil was a unique situation where it is hard to do a start-up in Brazil.

Yes, that's why we bought in there.

I'm a little surprised with the weakness in this market, in this economy, domestic economy that tyvek costs are still rising. Is that a function of oil prices?

It is a function of how DuPont wants to price their product. I don't know what they will do next year. I'm waiting for next to hear. But most of the major competitors out there like Kimberly-Clark have basically stayed flat.

They haven't raised prices for fabrics or for garments. It is not the time to raise prices, and they recognize that. But I can't guarantee what DuPont is going to do. If I had to guess, they will probably just stay flat in terms of tyvek pricing and garment pricing. It is a tough call.

Last question is if the fiscal stimulus package does take shape in the form of some infrastructure play is that high visibility vest market, could that get a lot bigger?

You hit the nail on the head. That would positively affect high visibility sales.

Let me jump up, in terms of our domestic operations that has been the brightest light among our five different product lines domestically. That has been the one that has really dramatically improved over the last year actually in the current quarter.

Obviously, there is competition in that business. Would that b e something that if all of a sudden if this does, if an effective demand is created, it is a pretty easy product to create or produce?

Yes, we are currently -- we moved most of the production of the high visibility garments from our Shillington, Pennsylvania plant to our own Chinese plants. They are just really getting up and running. They doubled their capacity last week on high visibility. It comes to a nice segue in the sense that some of the disposable sales in the United States are coming down due to inventory adjustments.

There is no question that in November, December and January everybody is cutting their inventories to the bone. It is the deleveraging that you are seeing all over the place. But the nature of our product is the disposable. Generally their worn for a day, but you can really only stretch them to a week or a couple days and you have to buy a new one.

It is not like a car or a fire coat where they have a life from three to five years and, guess what, I can get another year out of them. Disposables don't lend themselves to that kind of thinking.

Best of luck with the balance of the year and look forward to following your progress, Chris. Thanks.

Thank you.

We'll take our next question from [Sam Grabosky] from [Sir Asset Management.]

Good morning, Chris.

Good morning.

I jumped off for a little bit, did you address what your plans are as far as international, as far as what percentage of operations you expect to be next year, assuming Brazil --?

Brazil should be increasing. We have only reported Brazil now for two quarters of the three that we have reported. I think if you look at the current quarter percentage, that's a good run rate I would say. That's the base. The percentage should be increasing slightly because domestic is shrinking a little bit and Brazil, in particular, is growing. What do we say, we are at what percentage were we at, 25%, I think.

25%.

It should go up a couple of points. Long term our goal is to get up to 50% from 25%, but we are talking a couple of years.

That's several years.

Okay. Now, as far as, presumably your inventory will lower as you go towards the middle of the year, what is your expectation as far as reduction?

That is major -- that is mostly a function of our tyvek purchases. I expect it will actually increase through the end of December. We are working with DuPont to work through, to meet some commitments for an annual rebate incentive if we hit certain targets which we need to do by the end of December. We anticipate heavy tyvek purchasing in the month of December followed by very little to no purchases certainly through next March, possibly through next April.

The January year end balance sheet actually should be a little higher than where it is at Q3 and then I expect Q1 following to drop dramatically. If you look at last year, this same thing happened last year. December of '07 we bought very heavily, in the month of December. The January ' 08 numbers were fairly high in inventory.

We bought virtually nothing in our first fiscal quarter and the April '08 first quarter numbers from fiscal '09 were much lower and our loan balance reflected that. We are following the same pattern.

That sounds good. As far as your stock buyback based on where the stock has gone, presumably you are limited, I think, by 25% of trading volume to buy any stock. Is there any thoughts to sort of -- with these low prices to nibble. I think there is a stock authorization plan in place?

There are obviously thoughts of that but right now cash in December we are going to be using to buy tyvek to meet our DuPont commitments and get our rebate. As we move into January, yes, we will be thinking very hard about that.

Clearly, although the market has driven the stock down on negligible volume, so it would not take a lot of cash to buy, say, 10,000 shares, relative to what the market is traded --

We will be opportunistic. The point is what is the best use of our cash and our terms from DuPont are [1.5, 10, 30] so it's a significant amount in the month of December and we are looking to take that 1.5% cash discount. That's a pretty attractive rate.

That is in order to achieve a rebate approximately of a percentage of the total sales --

Which is a very big number.

I could jokingly say we just want to get out of the way so you guys can buy.

All right. Sounds good. Sure as next year should be better for you. Good luck.

Thank you.

And we'll take our next question from [Mike Disler] from [M&X Holdings.]

Hello, gentlemen. Good morning, and another great quarter. As a relatively longer term holder, you guys have been executing on the plan you have set upon two or three years ago. I'm pleased to see it. My question in particular, most everybody has covered everything else.

Have you in the current environment in terms of credit issues, especially with the smaller companies both domestically and internationally, have you had to in essence increase the allowance for doubtful accounts or are you taking that credit on your own and is there an increased risk at the margin on those smaller companies and smaller distributors?

Let me take that. If you look at our October balance sheet our reserve for doubtful accounts is -- barely registers. I think it is $35,000, yes, $35,000 was our reserve on the $13 million or $14 million receivable. That ain't bad.

Our cash collections have slowed down a little bit in the last month. Noticeably so, we are working on it. Our credit -- we have a very competent credit manager who is on top of the situation and I'm not terribly concerned about any bad debt issues. We are on top of our customers and I don't see any major issues with --

Good, no, I just wanted to make sure it was a low number, that's why I was asking the question and I wanted to make sure you guys were right on it and congratulations and have continued success.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our next question from David Harris from Tocqueville.

Good morning. You know, nice quarter. Two quickies. Seasonality. This is usually sort of the weak quarter. With the new business in Brazil and the Far East do you see your seasonality changing?

Good question. Our seasonality still exists, however, Brazil is also seasonal, but guess what, their seasons exactly balance against our seasons. So on a consolidated basis you should see our results smoothing out. Our domestic business is just as seasonal and Brazil's strongest quarter -- Brazil is stronger over the second half of the calendar year which is our weaker part.

And Australia and southeast Asia, again, are counter cyclical to the North American. A lot of our garments are weather related so when it gets extremely hot, sales go down. Below the equator, which is Australia and southeast Asia and Brazil, they are counter balancing our North American sales, so we will see seasonality smooth out over the year.

Okay, good. The safety vests, the visibility safety vests, what size market do you think there is out there?

It is a pretty big market. We are running at about what, $4 million in that. It is a $100 million market in the United States and probably that again in the world. So it's about $200 million or $300 million market.

Worldwide.

Worldwide.

What size do you think -- how much of that -- what market share do you think you could --

I think we will be able to penetrate the Chinese market very efficiently since we're making those vests in China now and the Chinese street sweepers have been wearing them since I have been there in 1994. So there's a market there.

Southeast Asia will be growing, Philippines is pretty good on wearing this stuff, whereas Vietnam is just getting into wearing things like this. It is something that if we really focus on it, it is something that could grow by 50% a year.

Okay. Thanks, guys.

Thank you.

Our next question comes from Gary Siperstein from Eliot Rose Asset Management.

Hey, guys, congratulations. Another wonderful quarter again.

Thanks, Gary.

Chris, you guys, and Gary, you spoke about the inventories peaking here around December and January and then they will come down. When you combine the reduction in inventories through the first half of next year into next year with your earnings potential, the 10% both sales and EPS growth, can you give us a flavor and plus your comments on being a little more cautious on the M&A side and mostly doing start-ups on your own? Where do you think debt will be in the absence of any significant M&A? Where do you want to get it down to and where do you want to keep it stable at?

Let me address that a couple ways. If you notice, we did an interest rate swap in September. The amount of principal, the notional amount on that was $18 million. That should give you a clue as to what we are thinking in terms of the lowest level our debt would hit. I didn't want to lock into a fixed interest on debt where we have done -- our outstanding level would be below that. So the $18 million was the number that Chris and I came up with.

Another way to look at that is, as I said, our first quarter in this past year represented pretty much of a low point. If you look at any, if you exclude any excess tyvek purchases that we may do due to opportunistic buying. That represented the so-called normalized inventory levels to the best of our ability. I don't think we had much in the way of excess inventory at that point. So that would be the low point.

And at that point our loan balance was just about $4 million. If you look at what we put into Brazil, that's kind of a permanent investment. That was $13.3 million for the purchase price and we have put in $600,000 some odd for working capital. We have $14 million U.S. tied up in Brazil. So the $4 million plus the $14 million is how we got the $18 million. If you look at the tyvek levels in inventory due to price increases and the same yardage is now $2 million to $3 million more.

We are probably looking at around $20 million to $20.5 million, $20 million to $21 million in that range is about the low point. It depends on our tyvek purchasing and its cycles.

Sure. So the $4 million to $5 million reduction in debt ratably over the year or how will that work?

It is very quickly. In a month in which we don't purchase tyvek, we still are collecting our receivables steadily and our debt goes down about $2.5 million in a month where we have no tyvek purchases.

Okay, so even by the spring, summer, you could be at the reduced levels?

By April 30, we should be down to the $20 million.

Super. Okay. Just a follow-up, I want to encourage you in light of your statements about the debt coming down and probably not doing any M&A, doing start-ups and just working on what you have on the plate and getting it as efficient and profitable as possible.

The buyback program at half book, six or seven times earnings, anything you buy there would be obviously very accretive to both book and EPS, and would obviously absorb the baby with the bath water selling that is going on or hedge funds going wild or whatever it is. Provide stability for your shareholder and obviously you guys in light, Chris, you mentioned earlier $13 liquidation without factoring in any appreciation on the real estate.

It seems like a slam dunk even if you only buy 200,000 shares or 400,000 or 500,000 shares. But it would create a floor and anything you buy there would be a great buy.

I agree with you a 100%.

It's just a matter of cash flow, that's all.

Thanks, guys. Appreciate it. Good job.

Thank you.

(OPERATOR INSTRUCTIONS) Sir, I show no other questions at this time. I'll turn the conference back over to you.

Okay. We appreciate your participation in Lakeland's third quarter fiscal year 2009 conference call. As we're committed to delivering value for our shareholders, we believe Lakeland will continue to effectively manage its balance sheet, control expenses and execute its strategy for long-term growth despite a fourth quarter that will be hampered by customer inventory depletions, unfavorable exchange rates and recessionary market conditions. Please feel free to call us to discuss the Company's operations or to schedule a meeting with management as we bring our impressive and improving investment story perspective to investors in the months. Thanks, again, and goodbye.

That does conclude today's conference. Thank you for your participation, and have a good day.

Thank you.