Lakeland Industries Inc (LAKE) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Lakeland Industries fourth-quarter and year-end results conference call. One note that today's call is being recorded.

Before we begin, parties are reminded that statements made during the 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, April 15, 2009. 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 that actual results or developments may differ materially from these projected in any forward-looking statements. All subsequent forward-looking statements attributable to the Company and the persons acting on its behalf are expressly qualified in the 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. Thanks, everyone, for joining us today on our fourth-quarter and fiscal year 2009 conference call. I'm pleased to report that, for fiscal year 2009 ended January 31, 2009, our sales and earnings exceed the prior year's results by 7% and 38% respectively. Despite severe economic conditions that had a most meaningful impact in our fourth quarter, the fiscal year's results were remarkable in that we achieved our 64th consecutive quarter of profitability and reported the highest level of annual revenues in our company's history.

From a top-line analysis point of view, in light of these achievements, it's important to review the strategies implemented that enabled our progress. Furthermore, I will review how we are emerging in a position of strength from a period in which most companies are experiencing challenges from the global economic downturn.

Our growth strategies rely in a large part on our global expansion which began a few years ago. We have established new and have been expanding our existing international sales forces in China, Brazil, and India. These global points of operation are the linchpins to our overall international growth strategy. Despite USA reductions in our overhead, we are adding to our sales and marketing staff in select countries around the world where GDP has been and is expected to continue to grow well in excess of the US.

In addition, we are building our various products successfully and introducing new products through our expanded sales channels. In China, we have 1700 employees operating from our four facilities in the world's most populous nation. Our operations in China comprised of 550,000 square feet making products that have been sold historically in the US. We have established a domestic Chinese salesforce now comprised of seven people. From this country, we will also be making products to be exported to other regions such as the Middle East, Europe and the Russian BLOC nations, the Pacific rim countries and Australia. In these new markets, there are numerous industrial applications where our garments are in demand, such as oil and gas exploration and refining; petrochemicals; manufacturing; heavy machinery; and for local infrastructure programs.

Fed with product manufactured in China, we intend to hire local sales staff in the Middle East and Africa in 2010 and 2011. This shows that we have strength in China and through its other regional markets.

In India, we entered after China. We have moved forward with a similar business model. We have a manufacturing facility in India at 50,000 square feet and a staff of 49, including a team for in-country sales and marketing. From this facility, we can feed product into regions into which we have sales coverage.

Gloves represent a primary product lines made in India and exported to the US, as well as other international markets such as China, Europe, Canada, and South America. Gloves are a relatively new product lines for Lakeland and it's important in that it represents an untapped $1 billion global market for us. This shows strength in India in regional markets as well as strength to our investment in product development.

Our international efforts have been energized by the impressive growth we are experiencing in South America. Specifically, our Brazilian operation is progressing on every conceivable front. We acquired this business last year and we have consolidated its results for nine months of fiscal 2009, providing $8.4 million in sales and $1.5 million in operating income. The figures would have been higher if the Brazilian Real had not weakened against the US dollar since July 2008.

Since announcing the acquisition, we have received several large contracts from multinational corporations and government agencies. We expect this operation to continue to add to our consolidated operating performance, absent currency fluctuations, for multiple organic growth initiatives. These include additions to the regional salesforce, ongoing marketing, and the introduction of Lakeland's own product lines into the Brazilian market through our local sales channels. Clearly, we have increasing strength in South America.

Although there are growth opportunities domestically, specifically for reflective garments, which are now required for all roadwork activities, we expect domestic US conditions to continue to be challenging in the next coming 12 to 18 months. However, we still expect to achieve solid profitability as a whole for all of 2010 as a result of our successful international diversification and product expansion strategy.

Despite the current global economic crisis, we see strength in Lakeland as a whole and expect to continue to be quite profitable. With this backdrop of strength 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 there is a disconnect between our inherent strength and the market value for our publicly traded shares, then consider the following. Our debt to equity ratio is only 2.6 book value divided by all debt; our current ratio current assets to current debt is almost 10-to-1; our average current interest cost is about 3.5%, and our credit line renewal is not up for 16 months with Wells Fargo. So we clearly are very solvent.

We have over $7 of availability on our credit lines and plan to further reduce our debt in each quarter as our cash flow from operations allows. Our goal is to reduce our debt from this year end of $24 million to $18 million by October 31, 2009. Incidentally, this debt was almost entirely incurred to finance our Brazilian acquisition last year which provided us with a powerful and meaningful accretive platform for long-term growth in South America. Now, to put Lakeland into this position of strength, we continue 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 had been made on these fronts.

On our expense management, we have cut USA payroll, overheads and various SG&A expenses by an approximate $2 million with future savings expected from vendors of products and services in response to a slowdown in USA sales such that we are prepared for the worst, should that come to pass. The full benefit of these reductions will be recognized in our second quarter of fiscal 2010.

We are expanding our manufacturing and sales capacity in South America, particularly in Brazil, with the expectation of ongoing growth. We anticipate using only cash flow, not debt, generated within Brazil for our growth initiatives in this region.

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, both domestically and abroad. Such shutdowns drive demand for our fire protection apparel and the orders are already coming in. The same maintenance shutdowns are coming in the chemical industry also.

We continue to introduce new products and penetrate new markets. We believe we have a significant competitive advantage in being the low-cost producer anywhere in the world for the $6 billion total market in which we have only tapped and continue to take market share despite currencies having worked against us in fiscal 2009.

It is our intent to stay nimble and to leverage our low-cost global manufacturing and expanding distribution platform to take more marketshare even in the worst 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 percent of total revenue to 31% and 25% in the fourth quarter and fiscal year respectively, as compared to 14% and 13.5% in the prior year. These percentages were single digits only three years ago.

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

Under the USA WTO treaty with China, all textile quotas have been removed on Chinese goods effective January 1, 2009. This presents an economic benefit for Lakeland to manufacture quota product in its Chinese facilities for resale in the USA.

Longer term, we believe that US 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 acquisition now complete, we feel more confident than ever that Lakeland is operating from a position of strength and 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. While Chris has provided an overview of some of our annual results, I will now provide a review of our consolidated financial results for the fourth quarter in greater detail. Before doing so, I will first address one of the more important developments shaping Lakeland's future which has already made an important contribution. I am referring to our acquisition in Brazil last May. I would again like to thank all the people in Brazil and at Lakeland who have worked so hard to make this acquisition a success and provides us with an attractive point of entry for all of South America.

As I mentioned last quarter, there is one point, which I am sure is lost in all of the technical language in our 10-Qs, in our 10-Ks. In Brazil, effective in November for a number of reasons, we emerged our holding company into Qualytextil USA, or the operating company, which was the acquired entity. This merger creates goodwill on the books of the Brazilian company which we are now 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 share annually.

Our Brazilian management team has thus far met every -- virtually every one of their projections and budgets in local currency since we first began negotiating the acquisition. They are now budgeting in excess of 10% organic growth and revenue for the next two years in Brazilian currency. This growth excludes sales in Brazil of Lakeland products, which are being aggressively set up as we speak and should expand earnings later this year, especially in the second half.

The first three containers of our products should be arriving just about now in Brazil. However, our operations in Brazil have recently been impacted when consolidated in US dollars due to the weakening of Brazil's 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 topline growth in international revenues, I will provide you with some more granularity on our international diversification.

We have traditionally derived revenues solely from North America. Over the last two-plus years, we have expanded outside this region. Lakeland (inaudible) now sell products in the following international markets -- Australia, Brazil, Chile, Argentina, Ecuador, Colombia, Peru, China, the Philippines, Thailand, Malaysia, Indonesia, Singapore, Europe, the Middle East, and India.

One of the strategic imperatives associated with our international diversification strategy was to improve our gross margins. Gross profit as a percentage of net sales for the fourth quarter ended January 30, '09 rose to 26.8%, a record level for our fourth fiscal quarter, an increased from 24.4% in the same period last year. This improvement was primarily due to the inclusion of the Company's Brazilian and other more developed operations.

Highlights from the gross margin analysis include the addition of Brazil's strong performance in the current year, the end of the prior-year sales rebate program to meet competitive conditions that contributed to improve margins domestically. We had the Mexican restructuring charge in the first quarter of the prior year and a slightly offsetting effect from late-stage startup losses in India.

India has made its first shipments to our China, Canada, Chile, European and USA operations and has started domestic sales in the Indian market. We anticipate India should achieve breakeven levels in Q4 of the current fiscal year.

As we've stated in the past, we anticipate that in-country operations should achieve a breakeven point within two to three years of a formal entry. India's very much on that track.

Moving down the income statement, operating profit decreased by $1.2 million or 66.9% to $0.6 million versus $1.7 million recorded in the fourth quarter of last year. Operating income as a percent of net sales decreased to 2.6% for the fourth quarter FY '09 which is down from 6.9% for the same period last year. EBITDA was 6.6% of sales for Q4 '09.

The decline in operating profit margins is mainly due to the increased level of total domestic US revenues. US revenues accounted for 69% of total revenue in Q4 '09, a reduction from 86% in Q4 '08. This is a result of our strategy to increase international revenues as a percentage of total revenue and also the unprecedented economic downturn in the US economy in the fourth quarter, which has had a significant impact on the US auto sector and related supply chain.

Historically, about 35% of our domestic US revenues are derived from the auto and related sectors. In our fourth fiscal quarter, auto production came to a virtual halt. While we see this trend reversing in the first quarter and throughout the course of FY '10, we do not envision a return to 100% capacity in the foreseeable future. Thus, while we see our domestic revenues improving through 2010 from the resuscitating auto sector and some other product lines that Chris outlined earlier in this conference call, our primary topline growth engine and margin expansion opportunities will clearly be driven by our international diversification strategy.

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

As a result of the Brazilian acquisition, we've added a modest and acceptable amount of leverage to our balance sheet. As Chris noted, the Company's debt-to-equity ratio is now about 1-to-2.6.

ROE for Q4 '09 has gone from 5.8% to 3.5% year over year. ROI went from 5.1 to 2.8 and the Company's ROA is 2.6%. We do expect to show improved ROA as we bring down our inventory levels.

We believe that all of these key performance measurements will be improved upon in fiscal 2010 with a portion of our free cash flow being used to reduce the outstanding balance on our loan facilities.

The Company's book value per share is now $12.61. Therefore, our share price is trading at about half of book value. From these measurements which further confirm what Chris had pointed out, Lakeland stock represents an undervalued investment story for a company that continues to show increasing global strength and long-term growth trajectories.

Thank you, Gary. Before we turn the call over to the audience for questions, I want to summarize our recent financial results.

We are pleased with our performance in the fourth quarter and full year of fiscal 2009, particularly since we've made so much progress despite the obvious negative circumstances which are, in a large part, out of our control. With this backdrop and given our encouraging outlook, we look forward to sharing the Lakeland story with investors and potential shareholders in the following upcoming events.

Later in April, we will be conducting a non-deal roadshow in Milwaukee and Minneapolis. On May 5, we have been invited to present at Taglich's Brother's Sixth Annual Small-cap Equity Conference in New York. We will be presenting at the Fifth Annual Noble Financial Equity Conference in Florida from -- in June 8 and June 9.

I will now turn the call over to the operator for the Q&A session.

(Operator Instructions). Mark Zinski, 21st Century.

I just wanted to touch on India in terms of operating profit. I'm sorry, what's the forecast for breaking even there?

We're looking at a breakeven in the fourth quarter of the current year.

Okay. In terms of product line being sold there, are you selling any product beyond gloves right now?

Currently, we're only selling gloves. But we may expand that to other products being made in China or Mexico, or Brazil, or the US. You're talking about sales into the domestic Indian market -- yes. We're about a year or two from that. Right now, we want to penetrate India with what we're making in India.

In terms of the high visibility vests for instance, are there plans to sell into India?

That would be a year or two from now.

A year or two from now?

Yes.

In terms of the gloves, I just want to clarify that those are industrial gloves. Is that correct?

They are chemically resistant gloves generally sold to industrial users. They are not medical gloves. They are primarily sold to industrial users who are fooling around with hazardous chemicals.

In terms of the foreign currency impact on an earnings per share basis, would you have an estimate of that? Would that be about, for instance, $0.04 you might have trimmed off on EPS?

It depends on how you look at it. If we look at the exchange rate between Brazil -- and the biggest impact of that is Brazil, clearly. If we look at our second-quarter results, which is the first quarter we consolidated Brazil, that's the quarter ending July 31, the exchange rate from Brazil to the US was 1.65. If you look at the fourth quarter, the average exchange rate was about 2.3. It was about a 26% -- we just did a quick analysis. If you look at the Q4 numbers from Brazil and recast them at the Q2 exchange rates, in other words taking the local currency as their actual reported results in Q4 but exchanging them at the Q2 exchange rates, Brazil would have been about 26% higher, which -- I didn't convert it to earnings per share, but $0.03 or $0.04 just in the fourth quarter is not a bad number.

Most economists and exchange predictors are now predicting that the dollar will weaken against most of these foreign currencies.

Could you comment at all on the status of your Petrobras relationship in Brazil in terms of order flow? I understand that they are expanding pretty aggressively and investing pretty heavily in CapEx in Brazil. Are you seeing an uptick directly from them?

In a word, yes, but it's a really complex relationship. We have a contract with them which covers a region of their offshore drilling platforms. They are very much into offshore drilling, as we all know. They have it broken down into several regions. We have a contract to supply the fire-resistant clothing, fire-protective clothing for the workers going out in this entire region for them. So that's a firm contract, and that extends out another four years or so.

Beyond that, we are getting some other orders and Petrobras is opening up new areas. I believe we have some bids outstanding at the moment. We have not been awarded anything major, but they keep giving us existing orders over and above our contract. As I said, there are some bids that are outstanding as far as I know.

Then in terms of the auto industry, do you have any European auto industry exposure?

Not really. It's the US auto industry that has been hit hard. It's not so much Detroit itself but their suppliers. You've got PP&G glass, windows shield and windows. You've got Nucor and US Steel. These guys are all down quite a bit because of the auto halt in production during most of December and a good part of the last few months. Most factories have gone to one shift and half shifts in four days. So it's not just Detroit itself but all the suppliers down the chain.

Then I guess last question -- in terms of operating expense management going forward, I noticed, in the press release, you listed quite a long list of factors impacting the year-over-year operating expense increase. Is it possible to fixate on a couple of those areas that you might be able to improve on, whether it be the fuel surcharges in your shipping costs, etc.?

Our shipping costs have come down. Remember, this was for the entire fiscal year, the first three quarters of which the oil prices were through the roof and freight-out is one of our larger operating expenses. Needless to say, we just had to pay the fuel surcharges like everybody else did. But those have gone away pretty much (technical difficulty) quarter. Freight-out expenses were greatly improved. The first quarter as we speak has greatly improved over the earlier part of year-over-year.

We will probably see our transportation expenses drop by about 25% to 30%. It's not just US domestic trucking but it's ocean shipping around the world.

Then just last question on -- maybe Gary could help me with this -- on the CapEx forecast for 2010. I think you mentioned you are expanding capacity a little bit in Brazil. Is that going to --?

Yes we are come on but we are doing it on a budget. We are actually thinking of moving to a whole new facility and we jumped at that -- we tabled that for the next year or two. We can meet even our most aggressive projections in terms of additional capacity requirements simply by expanding the additional plant on about a -- the capital budgets is about BRL600,000 which is maybe $250,000, which is about 30 to 60 days from completion at this point.

Okay, great. Thank you very much. That's all for me.

Sam Yake, BGB Securities.

I was wondering if you could comment on the relationship with DuPont. I was wondering if -- is there any hope that you guys have to maybe expand that outside of the US?

We have a good relationship with DuPont. We've dealt with them for some 25 years. They've always been gentlemanly in their business dealings. But for years, we've asked whether we could expand that relationship internationally and they chose not to simply because they basically set up their original relationships or they do it themselves.

So over a period of time, we've just basically decided to move our own branded products off internationally. But it's always been a good relationship. I have a lot of respect for them.

Then one other question -- since you're such a financially strong company, you have options whether you could acquire other companies. I'm always hoping you are going to buy back your stock more aggressively.

So my question is do you weigh any potential acquisition against -- financially against buying back your own stock?

Yes we do. We continued to buy back our stock this quarter. We believe -- I mean our stock price is pretty depressed, but then on the other hand, so is everybody else's. So, if we can make a purchase of a company whereby it is going to be accretive to earnings, we can theoretically do it. For instance, who wants to sell their stock at $6 or $7 a share to raise capital for an acquisition? But on the other hand, if the acquisition is going at even half of that, it does make financial sense.

Sheldon Grodsky, Grodsky and Associates.

My question was just answered.

Ross Haberman, Haberman Fund.

Just two very brief questions -- what was the D&A for the year, if I may ask?

What was the what?

The depreciation and amortization?

Depreciation, you mean?

Yes, sir.

$1.6 million -- $1.63 million I think -- I can get you the exact number.

That includes the amortization on the goodwill as well?

Goodwill is not being amortized in the US. That was for Brazilian tax purposes. The only thing that is amortized is the value of the Petrobras contract for book purposes.

So you said it's about $1.6 million?

$1.633 million is the number for FY '09.

You expect the same roughly for the coming year?

Yes, except remember Brazil is -- a fairly large part of that in Brazil is only in for nine months of the year, so you have to annualize it a bit. So on an annual run rate, it's about $2.1 million I guess -- (multiple speakers)

$2.1 million on an annual basis, okay. I'm sorry. You said you expect to pay down about $6 million during the year in terms of your debt?

That's correct.

Just one final question -- how much revenue does Brazil -- are they generating roughly on an annual basis?

About $12 million a year at current exchange rates, which may have changed as we speak, but as of 10 minutes ago, it's about $1 million a month, roughly.

And against similar operating margins as the Company in total?

No, Brazil has a much higher margin -- Brazil runs gross margins of roughly 50% (multiple speakers).

5-0?

And a much higher percentage of EBITDA as a percentage of sales and a much lower tax rate also.

I think, in your opening statement, you generally said that you expected a fairly difficult year. Is that because you think that the softness in the domestic business will more than cut into the better growth of the foreign operations?

I think the long and short answer to that is yes. If it continues like this, definitely yes. It's very hard to prognosticate what is going to happen here, you know, how fast sales will come back, if at all. But if they just remain like this, yes, we can't grow faster internationally than where we are declining here in the US but we will still survive and we'll still make a pretty decent profit.

Just one question -- I do appreciate your time. How much is dedicated to the auto industry? Again, is that the weakest part of the domestic business?

Yes, it is by far the weakest part of the domestic business. In disposables, it probably accounts for a large majority of the -- roughly 30% we're down. And in Kevlar gloves specifically, which is very auto intense, those sales are down about 50%, although it's a very small division, so it doesn't impact us too much. But that shows you what can happen when you're reliant on the auto industry and part of the reason for us diversifying -- because we saw the auto industry as a pretty weak sister two years ago with all of their pension accounting problems and overcapacity. When basically that was one of the driving forces behind our diversification strategy -- not only internationally but also new products.

And auto would represent what part of your roughly your $100 million in sales last year?

That's tough to say. I hate throwing out something on the telephone. I'd really have to sit down -- and I couldn't really nail it down. We know when we're selling to GM and Ford and Chrysler. But we don't necessarily know when we're selling to Delphi or PP&G.

I'm trying to get a sense of if you see a bankruptcy in GM or any of these other ones -- how big of an effect it's going to have.

We've got a distributor between us and that bankruptcy. So it's got to take the distributor down too before we might see a receivable problem. Most of our distributors are pretty strong. We could have some problems there but I don't think it would exceed a couple of hundred grand.

(Operator Instructions). Walter Schenker, Titan Capital.

You made reference to trying to increase ROAs by cutting down inventory. Clearly, the inventory term is deminimus. If you could get it up to picking a number three times, we would be debt-free. What is a realistic expectation for -- in a normal environment -- I'm giving you a lot of caveats -- what inventory turn ought to be?

Rather than answer it that way, let me answer it another way. If we look at our first quarter last year -- April 30 '08 balance sheet, I would say that's close to an ideal level of inventory. We're looking to bring the inventory levels down to about that much but then add back -- adjust for two factors. That was just before the Brazil acquisition. They have about $3 million of inventories. So add $3 million to that number. And so raw material in particular, Tyvek costs have gone up since then. So carry the same quantity (inaudible) -- add another $1 million to $2 million on top of that. So add $4 million or $5 million to that number and you've got about an optimal level of inventory for us.

Optimal meaning you thought you were running pretty efficiently on inventory turns at that point?

That's right. Keep in mind our returns are very much decreased and affected by the fact that we produce in China. We buy our raw materials and roll goods directly from the factory in the US. It's put on a boat to China. That takes 45 days. It takes two to three weeks to go through the plant in China. Then it is put on a boat back to China, so it's another 45 days back. You're talking about close to three months just before we get a finish-good back in inventory, which affects our turnover. You have raw material outbound in transit and finished goods inbound in transit, which is always -- those in-transit numbers are always a major part of our operations.

Tom Soden, Smith Barney.

My question has been answered already. Thank you.

(Operator Instructions). Mr. Ryan, there are no further questions at this time. I will turn the conference back over to you for any additional or closing comments.

Thank you very much. I maybe have only one small comment on the inventories. As this company grows more internationally -- and here's a good example, as Gary explained to you -- we manufacture in China essentially to be the low-cost manufacturer in the world. We use our own facilities there, our own employees. Many of our competitors use contractors. We learned early on that presents real problems not only in terms of quality but in terms of consistency and reliability. Also, they make a pretty big profit, particularly during good times. So, we incorporate that profit into our own P&L statement.

But as we start selling more of our products in domestic China, i.e. made in China, sold in China, you're going to see the inventory turns start increasing. Rather than made in the United States, sent to China, sent all the way back to the United States and then sold in the United States. The same goes for India.

As all of these manufacturing operations start selling in their domestic market, they will start seeing three and four-time turns rather than just looking at this huge -- where we buy some DuPont fabrics, which are the premium fabrics in the world, the best in the world, and send them all the way to China and then all the way back to the United States. That is what causes long turn times. That will come down over the next few years.

Other than that, I'd like to thank everybody. They can always call us if they have any questions.

Thank you. Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. Have a great rest of your day.