Lakeland Industries Inc (LAKE) 2010 Q1 法說會逐字稿

Before we begin, parties are reminded that statements made during this call contain forward-looking information within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical facts which reflect management's expectations regarding future events and operating performance and speak only as of today, June 9, 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 are 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 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 the 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. We appreciate your participation on today's conference call to discuss Lakeland's fiscal year 2010 first quarter results. I'm pleased to report that for our first quarter of 2010, April 30, 2009 we extended our profitability streak to the 65th consecutive quarter. Given the unprecedented economic events of the last several months, the most recent quarter may have been the most challenging in our Company's history. It is the collective strength of our global strategy, our balance sheet, and our work force that we have maintained our position and positioned the Company for far better times in the recovery of the global economy.

We report our first quarter results only 55 days after the year end results were announced so not too much can happen in such a short period of time. By our accounts, there were three defining events since our last conference call. First and foremost, the economy. Companies around the world and particularly in the US continue to face severe business conditions, as a result of the recession. These challenges impacted Lakeland's fiscal first quarter financial performance. However, based on our channel checks, the situation appears to have bottomed out. There are signs of a recovery in several of the markets we serve.

The second defining event was the swine flu outbreak. This is an unfortunate global health concern that has reached near epidemic proportions. The areas of highest incidence are Mexico, China, and the US. All locations where Lakeland has significant operations. This is expected to be a short-lived event that should primarily result in increased sales for related Lakeland products in our second fiscal quarter. Gary and I will further address both of these events through the balance of our formal remarks.

And the final event we would like to point out was the continuation of our international expansion, matched by the translation of foreign currencies into US dollars when consolidating our non US sales and earnings for the home market financial reporting. The US dollar has been unrealistically strong against many foreign currencies, but since April 30, it has fallen considerably. For example, the US dollar fell [7.25%] against the Brazilian real, 6.95% against the Canadian dollar, 7.54% against the British pound, and 5.2% against the euro. And that's not even accurate, it has gone up more since the last weekend. At the present rate, or if this reversal continues, it represents a catalyst for improved sales and earnings in the coming quarters.

Before I pass the call to Gary Pokrassa, our Chief Financial Officer, for detailed information on our first quarter performance, I will provide an overview of our operational performance and recent achievements. For the top line analysis, we need to take a global perspective. While US sales were down in the first quarter, India, Latin America, and Asia-Pacific sales were up. As previously noted, this strength was masked by the weakness of foreign currencies against the US dollar in our first quarter. Increases in other international areas are measured by units, were also up. But this growth also was hidden by the currency. Our gross strategies rely, in large part, on global expansion which began a few years ago. We continue to establish new and have been expanding our international sales force in China, Brazil and India.

Total international revenues represented over 28% of total revenues in the first quarter of fiscal 2010, which is an increase from 15% in the same period of the prior year. This positions us favorably with broad-based diversification, and the ability to expand our market share, with or without meaningful recovery of the global economy. In light of the challenging economic times, and tightening credit environments, there has been a noticeable effort among distributors and end users to allow their inventory levels to reduce so that they may better cope with global liquidity concerns, or until there is a resumption in business activity.

In a highly fragmented market and given our expanded global reach, Lakeland is benefiting from its financial strength and has seen greater interest from a multitude of new customers. There has been an overall increase in the number of customers we serve, and a number of purchase orders we receive. Although given the most recent economic activity, the average order size has declined. As the economy improves, and we further penetrate our new increasing number of customers, we envision an overall increase in the quantity and magnitude of orders. Furthermore, we have several new products using lower cost materials, that we have recently introduced or are preparing for commercial launch internationally, which complement our expanded product lines. We are doing a better job of funneling our various products successfully and introducing new products through our expanded sales channel.

Now we will provide regional and sales highlights. Disposable products, which is our highest group and sold mainly in North America, has experienced a major decline. This is the result of the US economy overall and the oil sector in particular. Even with this drop, these products represent a major contributor to our operating profit, reflected product sales primarily in the US has grown as a percentage of revenue. The product line increased over 26% in the first quarter. Fire resistant product lines have seen demand from oil refineries being shut down or service for the first time in two years.

Gloves made at our facility in India are a relatively new line. Product has been shipped to many of our global locations for quantity sales, and as part of a bundling strategy to increase revenue per customer. In China, which historically had been solely a manufacturing base, we are expanding our presence with a direct in country sales force, and working toward the development of relationships with the distributors for coverage of neighboring markets. We had an increase in sales and profits in China in the first quarter. India is still not profitable, although we have increased sales and margins and reduced our losses in the country. We are selling in country and also use this location for manufacturing of products for our other US and international operations. South America, led by our Brazilian operations, is an attractive market force. We are expanding the sales force in Brazil, adding distributors and end user customer, and working toward more meaningful penetration of countries outside of Brazil.

Turning to manufacturing operations and expense management, we are pleased to report progress in new initiatives. As we noted on the fourth quarter conference call, we vigorously took all of our costs and expenses under review in recent months, due to the ongoing economic uncertainties. This has resulted in an improvement of our gross margin percentage, on lower sales volume in the first fiscal quarter. A key initiative relied on our ability to leverage our global manufacturing facilities, such that we may benefit from lower cost of operations and faster delivery to our growing base of global customers. We are moving manufacturing to more economically and productive centers. We now have nine manufacturing sites around the world. Staffing has been modified accordingly. And we have even relocated certain machinery to locations where production is expected to increase.

Capital equipment purchases, although somewhat minimal, have been made to enable us to efficiently ramp up production as order sizes and quantities of orders grow in the coming quarters. These initiatives enable us to have finished goods closer to our distributors and end users. As a result of our geographic balancing efforts, we are in a position for faster turnaround time for order fulfillment and may significantly improve our margins due to lower manufacturing costs and reduced freight expenses. Our status is low cost manufacture, along with favorable geographic proximity to customers has positioned us well, particularly in taking advantage of the immediate term increase in orders for products relating to the swine flu outbreak. Swine flu related orders should be additive to our second fiscal quarter, which began May 1, 2009. Among other expense management initiatives, we have reduced overhead and wages commensurately with our sales levels.

As a well capitalized company amid a contracting global economy, our business is in demand by suppliers and business partners. The global recession has afforded us the opportunity to renegotiate terms and pricing on materials we use in making our products, as well as items and services used in various aspects of our daily business. In addition to more disciplined spending, we have been aggressively managing our cash flow. To this end, work in process, as well as finished goods inventories, have been reduced, and are being closely managed. The result of our cash management initiatives is the paying down of $3.9 million of our debt, in the first quarter. At April 30, 2009, our loan balance was $20.5 million, a reduction of $24.4 million at the end of our fiscal fourth quarter on January 31, 2009.

So amid the obvious economic challenges, we have reported continued profitability, made operational progress on many fronts, and have seen our share price increase. Since the last conference call on April 15, our stock has increased approximately 25%. This increased valuation, of course, may not take into account the debt reduction announced today, and our growth potential going forward. Although the global economic challenges and unfavorable currencies of the past quarters have worked against us, we feel more confident than ever that Lakeland is presently operating from a position of strength.

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 first quarter results, I will provide a more detailed review of our consolidated financial results for the period. I will first address one of the more important developments shaking Lakeland's future which has already made an important contribution. Turning to our acquisition in Brazil in May of '08, and I would again like to thank all of the people in 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 I'm sure is lost in technical language in our 10-Q and 10-K, and Brazil, effective in November, for a number of reasons, we merged our Holding Company into Quality Textile SAR 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 $0.04 in EPS annually. Our Brazilian management team has thus far met virtually all 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 in revenues for the next two years in Brazilian currency. This growth excludes sales of Brazil's 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 product are now in Brazil.

However our operations in Brazil have recently been impacted when consolidated in US dollars, due to the weakening of Brazil's economy against the USD. Our healthy sales and earnings in local currency have been reduced in USD on a reported basis. This has been changing very rapidly since April 30. At April 30, the exchange rate with Brazil was about BRL2.17 to $1, and today it is about BRL1.95, BRL1.96. This change in FX rates bodes well for the outlook for the remainder of (inaudible).

Now, I will review the Company's overall financial results. While Chris already spoke about our top line growth in international revenues, 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've expanded outside this region. Lakeland and its subs now sell products in the following international markets -- Australia, Brazil, Chile, Argentina, Ecuador, Columbia, Peru, China, the Philippines, Thailand, Malaysia, Indonesia, Singapore, Europe, Middle East, and India, and we're about to move into Russia.

One of the strategic imperatives associated with our international diversification strategy was to improve our gross margins. Gross profit as a percent of net sales for Q1 ended April 30 rose to 25.1%, a record level for the first fiscal quarter and an increase from 24.5% in the of same period of fiscal '09. this improvement was primarily due to the inclusion of the Company's Brazilian and other more developed international operations which has a mix of fire margin products.

Highlights from the gross margin analysis include the addition of Brazil's strong performance in the current year. Brazil's gross margin was actually lower than normal, due to a large order shipped in Q1 for which the bid was submitted last year before the change in FX and that had significant purchased items impacted by the major change in FX rate from August to October of '08. Brazil also had one month in Q1 which had no government incentives. Both of these should be nonrecurring and we expect Brazil will return to 50% margins. Disposables margins declined by 4.5 percentage points in Q1 in the US, this year, compared with Q1 last year mainly due to higher-priced raw materials, a very competitive pricing environment, and lower volume.

Gross margins were still impacted from late stage start-up losses in India. India has made its first shipments to China, Canada, Chile, European and USA operations and has started domestic sales in the Indian market. We anticipate India should achieve breakeven levels as early as Q1 of 2010. As we have stated in the past, we anticipate the start-up operations in a new country should achieve break-even point within two or three years of our formal entry. India is on track.

Total sales decreased by $3.3 million in Q1 this year from Q1 last year resulting from a $6 million reduction in domestic sales, 26% offset by a $2.7 million increase in foreign sales mainly resulting from $2.6 million in sales in Brazil, not included in Q1 of last year. Our Q1 sales breakdown is now 71.8%, domestic, 28.2%, foreign, as compared with 84.9% domestic and 15.1% foreign in the same period of fiscal '09.

Moving down the income statement, operating profit decreased by $0.8 million, or 53%, to $0.7 million, versus $1.5 million recorded in Q1 last year. Operating income as a percent of net sales decreased to 2.8%, for Q1 this year, down from 5.3% for the same period last year. EBITDA was 4.5% of sales. With a strong gross margin percentage, driven by the increased level of international revenues, the decline of the Company's operating profit and margin is mainly due to the decreased level of total domestic US revenues. Investors may recall the implementation of our strategy to increase international revenues as a percent of total revenues. While executing the strategy with success, our total revenues were negatively impacted by the unprecedented economic downturn in the US economy, which in turn significantly affected the US auto sector, and related supply chain.

Historically, about 35% of our US domestic revenues are derived from the auto and related sectors. In our first fiscal quarter, oil production came to a virtual halt. While we see this trend reversing later on in FY 2010, we do not envision a return to 100% capacity domestically in the foreseeable future. That's why we see our domestic revenues improving through next year, from the resuscitating order sector, and some other product lines that Chris outlined earlier. Our primary top line growth engine and margin expansion opportunities will be driven by our international diversification strategy.

Now, let me talk about our effective tax rate, which is evolving. In Q1, we added $350,000 allowance to reserve against deferred taxes, set up on the India restructuring. This is a noncash item that reduced our reported net income and earnings per share. It affected about $0.06 per share. China is now at the statutory rate of 25%. And Brazil after incentives is at a 16% overall effective rate but before the goodwill deduction I mentioned. My estimate for overall effective tax rate on a consolidated basis going forward is now about 25%.

As a result of the Brazilian acquisition, we've added a modest and acceptable amount of leverage to our balance sheet. We generated $5.2 million of cash from operations, mainly as a result of the $4.7 million reduction in inventory levels. $3.3 million of this was used to reduce the outstanding balance on our loan facility. The outstanding balance at the end of the first fiscal quarter was $20.5 million, and we were targeting a further reduction as the fiscal year progresses. The Company's book value per share is now $12.74. Therefore, our share price is trading at about a third discount to book value.

And that concludes my formal remarks. I will turn it back to Chris.

Thank you, Gary. Before we turn the call over to the audience for questions, I would like to comment on our outlook and mention a few investment merits for our shareholders and other followers. Looking ahead, we believe there will be an inflection point for our operating performance. The pendulum currency has been swinging the other direction such as is likely that our foreign sales and earnings will be positively impacted in forward periods. Many of the overhead and cost reductions made throughout the first quarter will more completely impact the second quarter which is a period that will also have an elimination of the one-time noncash charge of approximately $0.06 per share in the first quarter.

Finally, in addition to activity related to the swine flu outbreak, the global economy seems to have bottomed out, and we have made considerable inroads toward penetrating new contributors and new end user customers with a more comprehensive line of high quality low cost products. Overall, we are encouraged by the prospects for our second quarter and future periods. With this backdrop, and given our encouraging outlook, we look forward to sharing the Lakeland story with the New York investment community when we conduct meetings later this month.

I will now turn this over to the operator for a question-and-answer session.

(Operator Instructions) We will hear from Sheldon Grodsky with Grodsky and Associates.

Good morning, everyone.

Good morning.

I have a couple of questions. But the first one, in looking at your balance sheet, I noticed that your receivables are up, and your sales were down from your income statement, so it looks like there is some slow paying. Did you have to add anything to your reserves there, or do you anticipate doing that? Or is that one of these quirky items?

Just one of those quirky items. Day sales outstanding are still within the mid 50 range, and we've been in that range, if you look at our day sales outstanding calculated by quarter going back several years, we've been, I think the first number has been a five and we've been between 51 and 57, I think, constantly, so that is just one of those quirky things. We do not have a bad debt problem nor do we anticipate any issues in that area.

And I want to ask one more question and then I will let someone else go but what do you sell that the swine flu will necessitate buying?

We're seeing really the best demand for swine flu products are in China, and it is disposable garments, generally used by hospitals, medical clinics. Disposable garments obviously keep people from taking the virus home with them. Much like any hospital, they're using our garments as a protection against the viral bacteria moving around the hospital. The Chinese, having been through SARS in March of 2003, are taking this much more seriously than say the US or Mexico simply because in 2003, China essentially shut down for four months. I was going over there then, and the planes were empty. You go over in a plane and there would be three people in a jumbo jet. So China took this very seriously. Bought a lot of supplies. And we're seeing the biggest impact in China on swine flu sales. But we're seeing some in the United States and some in Mexico.

Let me just jump in again. The day sales outstanding, I calculated as 57.4 for this quarter and it was 58.1 last year. And we've been -- the first number has been a five I think on every (inaudible).

Thank you.

Next, we will hear from David Harris with [Taxo] Asset Management.

Good morning, Chris.

Good morning.

The question is, who was your biggest supplier of raw materials this quarter? And could you discuss Tyvek as a portion of your inventories?

This year, we're running down our inventories. I think Dupont only represented about 13% of our purchasing in this quarter. We buy a variety of products from Dupont, being Nomex, Kevlar, Tyvek, Tychem. Tyvek is our biggest purchase. Since sales slowed down, particularly in the Tyvek area, we have not been reordering Tyvek for a period, so that is essentially where we sit. We're looking to expand some of our other products, particularly the fire products, and internationally, but there is not much we can do about what happens in the United States, with Tyvek sales. I understand Dupont's Tyvek sales are also down, as are Kimberly Clark sales, in what we call the disposable garment market.

Thank you. Who was your biggest supplier for just the quarter? I realize that the fourth quarter is a big quarter for buying Dupont materials, and the first quarter isn't. But I'm just curious on who -- if there is any new suppliers that are coming on strong.

No major new suppliers. It is the same line. The mix changes from quarter to quarter, depending on our Tyvek purchases more than anything, but Dupont is still our number one supplier and number two is probably Southern Mills.

Okay. Thank you very much.

(Operator Instructions) We will hear from Sam Robotsky with SER Asset Management.

Good morning, Chris.

Good morning.

As far as the $0.06 relative to India, was this something unexpected, or you didn't expect -- you expected the profitability sooner to provide this $0.06 additional tax, by reduction of your deferred tax assets?

Let me respond to that. It was unexpected. We have been planning, we have been working on a restructuring in India for quite a while, and the way it has been structured, we've been picking up a US tax deduction in anticipation of an eventual tax deduction in the US. We have not taken it and at this point it is still in the future, and we're still working on restructuring the Indian companies, and in consultation with our new accounting firm, we thought it was prudent to take a $0.06 reserve against that.

And as far as the profitability of India, what is the plan there? When do we expect that to occur?

We expect that to occur probably by next January. Normally, we would have said that we could break even there in the third or fourth quarter, but with the economic slowdown in the US, we're obviously not going to sell as many gloves as we anticipated in the US. However, in the foreign markets, they are selling what we anticipated they would sell. But the US being the biggest market in the world, unless the economy picks up, we don't see the sales basically hitting our targets until such time as the US economy does pick up. So that is the only thing that is holding India back, is sales in the United States, because they would have represented a significant segment of those new product sales.

Okay. Now, as far as evaluation of inventory and the prices, the price of oil has been going up, and you generally buy at the end of the year, discounted prices. Could you talk about the valuation of inventory, the price cost, your expectations of your cost of inventory going forward?

On Dupont products, they will probably hold the price for the year. Last year, they had a blip up in July of about 5% when oil got up to about $140 but then they lowered again in December as oil came down. We're seeing a little price push in China, with the price of oil at $70 on some of the raw materials, but it is not too much of a push. Let's say, I think they're looking for about another 5% on raw materials. And you just have to let people know, "Hey, oil is back to $70 a barrel again." And we've let them know throughout last year that we anticipate price increases when oil jerks up like this again.

And as far as reducing your inventory further, what is your thoughts, what kind of percentage decreases do we expect for the balance of the year and presumptively, you will reduce your bank line.

Exactly. It is almost a direct correlation. As our inventory balance goes either up or down, our bank line pretty much follows suit. We would expect to continue a reduction in our inventory balances in the second and the third quarter, and stabilize it after the third quarter. A couple million dollars a quarter I would estimate.

Okay. I thank you very much. Good luck.

Thank you.

(Operator Instructions) We will hear from Mark Zinski with 21st Century Equities.

Good morning. Do you guys have a rough estimate on EPS in terms of the negative foreign currency impact for the quarter?

The negative in terms of -- it is so hard to phrase that. How it is going to turn around, you mean?

Just for Q1.

$0.06 was the India tax, that is not foreign exchange. The foreign exchange was a couple cents. I would say in particular coming out of Brazil, that's where the biggest impact is going to be, and I'm looking first at a stronger second quarter from Brazil than they had in the first quarter, and I would estimate $0.02, $0.03. But for the quarter, about $0.02 a share I would say coming out of Brazil.

Okay. Great. And then in terms of the expansion into Russia, any comments on that would be helpful. Are you still pretty bullish on that market, given like gas promise had some recent problems, but just generally are you still pretty bullish about that market?

Yes, we will probably be formally entering the market by autumn. We have to incorporate and do a lot of legal work. Product certification with the Russian government. Normally, this economic crisis caught everybody by surprise and it really whacked Russia. However, by the time we get in there in autumn, if oil prices are still at $70 a barrel, and they could be at $75 by year end, I think the Russian economy will heal very, very quickly at those oil prices. So I am a little bit positive. Even though oil affects the prices of our raw materials, on the other hand it affects positively some of the marks we're in, for instance, Brazil and Russia which are big oil producers.

And in speaking of oil prices are you seeing from your oil customers more capex spending because of the recent spike-up in prices?

What actually happened was prices spiked last summer, and then they crashed down to about $36 a barrel, in the November/December time frame. I don't really remember when it hit bottom. But at that point, a lot of companies decided to do their maintenance because with oil prices at $140 a barrel, or $80 to $140 all last year, none of them did maintenance because they were making too much money really at the pump. So now, when oil fell down to the $30s, $40s, they did plan to do their maintenance and they are in the beginning of the maintenance this spring which may be one of the reasons that you see pump prices going up so rapidly now, because a lot of the refinery capacity has been taken down for maintenance, which has not happened for two years. So what we're seeing now is when they do maintenance work, we see a lot of our fire products being used, because people going in and doing the maintenance work have to be protected against unexpected fires. So that's where it generally is affecting us.

We're seeing a lot more maintenance, particularly up in Canada. Our Canadian operations are doing pretty well. All things considered. Considering how close they are to the US economy, the fact that the entire auto sector shut down there, our Canadian unit sales are actually up.

And that's the other place where, I forgot, that's the other place where the FX rate is improving for the Canadian dollar and that is coming through in the Canadian gross margins, too.

Okay. Great. That's it for me. Thank you.

(Operator Instructions) We will hear from Tom Soden within Morgan Stanley.

Good morning. Could you give us a little color on the reflective division and what kind of legs that division might have in infrastructure spending.

Again, reflective was up this quarter, first quarter, over last year by approximately 35%. It is one of the stronger businesses in the US economy. Where it has legs is that we really haven't introduced the reflective products to China, Brazil, India, or any of our other foreign operations. So what we're in the midst of doing now is introducing the reflective garments into the foreign operations.

As far as the infrastructure spending goes, I guess that is why we're still up 35% over last year. A lot of the money flows in, over the period of a year or two, so we expect that reflective will stay fairly constant, in terms of growth, and our chemical suit division, although not growing, is pretty much flat with last year which in these circumstances is not bad.

Chemical is holding its own and the margins are strong actually.

Right. It is the disposable business that is way down primarily because of the distributors just reducing their inventories to zero.

Thank you.

And with no further questions, I would like to turn the call back to our presenters for any additional or closing remarks.

We appreciate your participation in Lakeland's fiscal 2010 first quarter financial results conference call. As we are 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. 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 to prospective investors in the months to come. Thanks again, and goodbye.

And that does conclude today's teleconference. Thank you all for your participation.