Lakeland Industries Inc (LAKE) 2010 Q2 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, September 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 the 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 present to you, and pursued by the Company, changes in law or regulations and other factors many of which are beyond the control of the Company. Listeners are cautioned that these statements are not guarantees of future performance and the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements.

At this time I would like to introduce your host for this call, Lakeland Industries President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Thank you. As stated in our earnings announcement issued this morning we're disappointed with the Company's fiscal year 2010 second quarter results. Although our performance could not have been fully anticipated given the unprecedented economic and credit crisis experienced around the world and other factors which are essentially out of our control, despite this environment we did achieve our 66th consecutive quarter of profitability while investing and expanding our presence and footprint around the world. I will talk more about our gross initiatives in a moment. I first want to address what we have learned from the recent global business climate and the changes we have made in response.

The reset economy, a phrase which is being used in many business circles is in full effect. This refers to adjustments in expectations and behavior to a post recession and increasingly global business landscape. Similar to other companies embracing this concept, we have taken steps to reset Lakeland to the present realities. To this end we have reduced our debt by $6.7 million since the beginning of our fiscal year and have increased our cash position by 63% in the same timeframe. Throughout the last nine months we implemented major overhead and related expense reductions that are expected to eliminate $3.1 million of overall expenses on an annualized basis. The approximate contribution of about 5% to our bottom line.

We have been examining every aspect of our business such that we are emphasizing more leveragable platform while building brand equity as the industry's lowest cost and highest quality provider of industrial and workplace garments and accessories. To further review Lakeland's performance in the second quarter and to discuss the Company's outlook, we would like to address it in the context of two businesses, the U.S. operation and the international operations. The U.S. operation is a legacy business in which we market products that we manufacture in our U.S. facilities and foreign based lower cost manufacturing locations.

These products are in large part tied to higher cost Tyvek material purchased from and marketed under a licensing agreement with DuPont. These products are sold through distributors resulting in generally lower margins than if we had direct sales to end-user customers. About 35% of our historical sales in the United States were in some way tied to the automotive supply chain and new construction. Although the U.S. recession may, and I say may be over, a bottom seemingly hit in July as shown by leading indicators which have risen sharply in recent months thus signaling impending turning points, they're not a forecast of growth rates.

Lakeland puts protect apparel on people in the workplace, so we prefer to look at the number of people working rather than productivity. Against this back drop we note that payroll employment continued to decline in August. In past recessions payroll employment continued to dip even after the GDP trough was hit and stock markets rallied. The last harsh recession in 1980 through '83 the stock market rallied in August of '82 but payroll employment did not turn upward until eight months later when employers became convinced that a recovery was sustainable. Contrary to this historical indication we're looking for a slow rebound in sales of protected clothing in the U.S. We see continued uncertainty in U.S. sales in the third quarter with greater clarity becoming evident for the fourth quarter and the first quarter of next year. The Company by an earnings breakout in the second quarter of next year. Beyond our own channel checks we see confirmation in various reports.

In the first calendar quarter 2009 there were nearly 2.2 million cars and light trucks sold in the U.S. In the second quarter there was an increase to about 2.6 million vehicle sales, and in the current quarter through the beginning of September there were nearly 2.3 million vehicles sold. In addition, both Ford and Chrysler have announced large production increases for current quarter as well as for the next quarter. According to the Wall Street Journal Ford will increase its output to nearly 1 million vehicles, and Chrysler is reported to now be using overtime and additional shifts to boost output.

In terms of resetting our business objectives and expectations, we do not believe that the auto sector will come close to matching its previous production levels prior to the sector meltdown, but we do believe that there will be a pickup from what had negatively influenced spending within the automotive supply chain during our last few quarters to a normalized level of where we have recently been. The capitulation of the auto industry was far more severe than the more modest cooling off that we anticipated several years ago. In fact, we foresaw the overall U.S. economy peaking some time ago which led us to the conclusion we needed to expand internationally to capitalize on much faster growing nations. Although our change in strategy and focus from domestic to international sales in 2006 was dictated in large part by the sickening economic health of the U.S. auto industry, one of the larger end-users of our products, we did not anticipate a derivative induced financial crisis causing our U.S. sales to plunge by 28% very late in the game. International growth nailed the consolidated sales decreases to 16%. We believe we have hit bottom at this July inflection point. U.S. growth in payroll employment is a lagging indicator.

What we see in international sales continuing to be our growth engine while U.S. sales slowly recover from here on out. At some point the continued international growth will intersect with slow U.S. growth such that we reach our 2008 gross revenues of $102 million and forge forward from there with much better consolidated operating margins than our historical operating margins which were dominated by lower margin U.S. sales. We have rationalized our U.S. overhead and operating expenses to cope with the current situation so that when U.S. sales growth does resume, the balance and profit margins will be pronounced and sustainable. This includes the aforementioned reduction of $3.1 million in operating expenses on annualized basis implemented over the last nine months. Federal bailouts and stimulus spending are only now beginning to make an impact.

We now believe that our domestic unit traditionally our largest although well off peak likely will experience a modest improvement in the near term with a more significant rebound next year. This rebound will take into account a lowering of costs on many fronts including some of our oil based synthetic fabrics that are used primarily for products sold domestically whose prices had skyrocketed during the $147 oil price period last year. With oil now at about half that level, we'll be able to replenish our inventory at a lower cost to drive our margins higher. I should also note that we have rundown inventories to $49 million from $57 million in the beginning of the fiscal year. While we are at a low point in earnings presently due to short comings in the U.S. business, we have taken steps to position the Company for top line growth and improvements in margins and profits through international expansion and diversification. Lakeland has made massive progress in executing its international strategy. Our reference to expand internationally were by most measures successful. However, given the monetary policies implemented to avoid a protracted global recession, the U.S. dollar in which we report our consolidated financial results has been incredibly strong against foreign currencies and resulted in muting out the progress we have made through our international operations.

In the face of significant economic challenges we continued to invest in our international operations and have targeted attractive opportunities where market share can be attained through sale of higher margin products that we market directly to end-user customers as well as through aligning with our large distributors. During the second quarter of fiscal 2010 we spent a lot of time cultivating the Latin American market, particularly in Brazil where we hired an additional 20 sales and support personnel. Brazil is a strong hope for our operation in the region, and we have set the stage for further market expansion that strategically positions manufacturing facilities and enhanced product lines.

In our other international operations we had strong performances in both sales and earnings in Chile, China, Canada and the United Kingdom. Although still in the red India saw 47% growth in sales this Q2 compared to last year's Q2. Chile 204% sales growth and moving nicely into the black on earnings growth. Strong both in the USD and chilean pesos, Brazil 3.7% sales growth, much more in local currency and units, China 36% sales growth, Canada 2.5%, and 5.7% sales growth in our USA wovens division based on export sales to our foreign subsidiaries.

On the margin front there are several businesses performing well which help to partially offset price pressures in the U.S. and aberrations in Brazil resulting in a negative impact to margins. We saw improved margins in the international areas of Canada, up 15.2 percentage points, the U.K. up 2.6 percentage points and in Chile up 11.2 percentage points.

While our international operations did not completely fill the gap in sagging domestic sales and margins, we expect continue higher margin growth from our international operations and a more beneficial contribution from the recovering domestic market where we have been vigilant in reducing our cost structure. From the third quarter forward we will benefit from the cost reduction implemented in the last nine months and we will continue to reduce debt and inventory levels into the first quarter of next year. Our CFO, Gary Pokrassa, will cover these matters in more detail with his formal remarks.

Finally, some of the other initiatives we have been working on include the redeployment of U.S. based machinery to our foreign manufacturing locations. This will enable us to right size the U.S. business while enhancing our ability to increase our margins through low labor costs outside the U.S. We are introducing new products made internally, cross-selling products throughout our various regional sales organizations, and sourcing and packaging products from third party vendors to increase our overall product line and maximize revenues from our increasing number of customers. Increasingly and as a result of our international expansion we have been emphasizing direct sales of our products which may result initially in higher SG&A costs for the international operations but over the long-term will meaningfully benefit with ongoing relations and revenues which are higher margin in nature since we are selling directly to customers. The result of all of these steps we have taken that we have been able to streamline manufacturing, increase sales opportunities and benefit from higher margin sales more effectively position Lakeland closer to customers and reinforce our reputation as the industry's lowest cost, highest quality provider of industrial garments. I will pass the call over to our CFO, Gary Pokrassa, to provide a detailed review of the Company's financial results.

Thank you, Chris. While Chris provided an overview of our second quarter results, I will provide a more detailed review of our consolidated financial results for the period. I will begin with our international segment which has been and is expected to continue to be an area of growth for the Company. The market penetration we have been experiencing in country at the majority of our international operations, however, has recently been impacted when consolidated in U.S. dollars. The earnings in U.S. dollars from our international operations also diminished by mostly one-time issues with the margins in Brazil although our unit orders in Brazil continue to expand at a rapid pace. Thus our healthy sales and earnings and low currency in the aggregate have been reduced in USD on a reported basis.

To illustrate that, here are some revenue metrics for a few of our more established international operations. In Brazil the USD growth in Q2 year-over-year was 3.7% but in local currency it was 26%. Canada, the USD year-over-year Q2 growth was 2.5%, 15.3% in Canadian dollars. And in the U.K. it is actually a loss of 11.2%, a decline in USD but a growth of 8.9% when expressed in euros.

Moving on from our international top line growth, I will provide you with some more granularity on our international diversification. As you may know, we have traditionally derived revenue solely from North America. Over the last several years we expanded outside this region. Lakeland and its subs now sell product in the following international markets.

Australia, Brazil, Chile, Argentina, Ecuador, Columbia, Peru, China, Philippines, Thailand, Malaysia, Indonesia, Singapore, Europe, the Middle East and India and we're about to move into Russia. Australia has no real operations as we have a large distributor serving that market with products sourced from our manufacturing facilities primarily in China with other products from the U.S., India and Mexico. China's external sales operations commenced about four years ago and were added to an existing large manufacturing component that makes products which we ship to our sales operation throughout the world. More recently we began a sales organization that markets products to end-users and distributors in country for China as well as through an extended breach cover Philippines, Thailand and other Asian territories. In Europe we market our products to distributors and end-users which recently expanded coverage (inaudible). Russia and eastern Europe are new markets for the Company. Finally in Brazil which we entered into an acquisition last year we have manufacturing and sales operations which represent a good sized contribution to our overall financial results.

I should note from this Latin American hub in Brazil and Chile we have begun to expand into neighboring markets such as Columbia and Argentina which are all relatively nascent operations but experiencing a high level of proposal activity. For the Brazilian operation gross margins were 40.6% in Q2 this year versus 55.9 in Q2 last year, mainly due to large sales with bid requirements for entire ensembles including boots or helmets requiring quality textile, that's our sub, to procure items from outside vendors. There were several problems with these vendors, and we are presently negotiating with the boot and also with a helmet vendor to obtain more reliable delivery and costing.

One large contract in Brazil was bid at a 17 margin as an introductory pricing for a large new customer. Because many of the bids we're winning are with large Corporations, multinationals and government agencies which we believe will result in very meaningful long-term relationships, we need to ensure that the quality of our garments are consistent with our global reputation. To this end much of the fabric we're using for products manufactured in Brazil are imported from the USA which caused unfavorable costs resulting from foreign exchange rates prevailing earlier in the year. The more recent strengthening of the Brazilian currency should favorably impact the cost and margins in the future not to mention that we are working through higher cost raw materials in the U.S. from when oil prices would double the present rate.

Finally, on reviewing the Brazilian margin performance, the 55.9 margin in Q2 of last year was extraordinary and may not be achieved in the future a more normalized rated would be in the range of 42 to 46. For a disposables line margins declined by 4.4 percentage points in Q2 this year compared with Q2 last year mainly due to higher priced raw materials, very competitive pricing environment, and lower volume. Gross margins were still impacted from late stage start up losses in India. India made its first shipments to our China, Canada, Chile, European, and American operations and we have commenced domestic sales in the Indian market.

Total sales decreased by $4.6 million in Q2 this year from Q2 last year resulting from a $5.7 million reduction in domestic sales or 28% reduction offset by a $1.1 million increase in foreign sales mainly resulting from growth in sales in Brazil. Our Q2 sales breakdown is now 62.8 domestic, 37.2 foreign, compared with our first quarter this year of domestic sales of 71.8 and international of 28.2 and 2Q last year domestic at 72.7 and international at 27.3. Operating expenses included $0.3 million in increased expenses in Brazil resulting from our investment in Brazil's future growth. Quality Textile has incurred start up expenses in connection with the sales of Lakeland branded products in Brazil. Such start up expenses include hiring 20 sales and logistical support staff, printing of catalogs, lease of two new distribution centers, and increased travel expenses.

Moving down the income statement, operating profit decreased by $2 million or 90% to $0.2 million compared to $2.2 million recorded in Q2 of last year. Operating income as a percent of net sales decreased to 0.9% down from 8.0 for the same period of last year. With the strong gross margin percentage driven by the increased level of international revenues, the decline in the Company's operating profit and margin is mainly due to the decreased level of total domestic revenues coupled with the mostly one-time issues in Brazil discussed earlier. Investors may recall the implementation of our strategy to increase international revenues as a percent of total revenues.

Upon executing the strategy with success our total revenues were negatively impacted by the unprecedented economic downturn in the U.S. economy which in turn significantly affected the U.S. auto sector and related supply chain. Historically about 35% of our domestic U.S. revenues are derived from the auto and related sectors and new construction. In our first fiscal quarter order production came to a virtual halt while we see this trend reversing later on in FY 2010 we don't 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 top line growth engine and margin expansion opportunities will be driven by our international diversification strategy.

Moving on to net income and earnings per share, I should point out that goodwill on the books of our Brazilian company is being written off against Brazilian income taxes over a five year period in accordance with local law. The cash tax savings on this alone should generate about $0.04 a share in EPS annually. Companies interest expenses decreased slightly for the current quarter as compared to same quarter last year due to lower interest rates in the current year offset by higher borrowing levels outstanding in the current year. Income tax expenses consist of federal, state, and foreign income taxes. Income tax expenses decreased 0.4 million to 0 for the three months ended July '09 from 0.4 million for the three months ended July '08. Effective tax rate was 18.6 for the three months of last year, our effective tax rate for this year is not meaningful due to the near break even level of pretax income.

Net income decreased to about $7,900 for the three months ended July this year from $1.6 million last year. Decrease in net income primarily resulted from a decrease in domestic sales, reduction in gross margin in disposables and in Brazil and larger losses in India partially offset by management's cost reduction program. There were no shares purchased in the fiscal second quarter under our share repurchase program for EPS calculation we had 5.4 million and 5.436 million basic and diluted shares outstanding respectively for the second quarter of fiscal 2010 compared to 5.421 million, and 5.459 million basic and diluted for the year ago period.

Because we were marginally profitable in Q2 this year, our EPS was rounded to zero compared with $0.30 last year. As a result of the Brazilian acquisition we've added a modest and acceptable amount of leverage to our balance sheet. We generated 8.9 million of cash from operations for the six months year-to-date mainly as a result of the $7.7 million reduction in inventory levels. The outstanding balance of our bank debt at the end of our second quarter was 17.8, and we are targeting further reduction as the fiscal year progresses. Inventories were reduced by about 14% in the first six months from about 57 to 49. We ended the quarter with cash of $4.5 million up from nearly $2.8 million at the beginning of the fiscal year. The Company's book value per share is now $13.10. Therefore our share price is trading at about a third discount to book value. That concludes my formal remarks. I will turn the call 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 against us since such that with any reversal it is likely that our foreign sales and earnings will be possibly impacted in forward periods. Further to the issues that are working in our favor, we view there to be a stabilization and improvement in the global economy. We have leverage in our global business platform and a significantly lower cost structure. We have introduced new products in our cross-selling products in high growth international markets.

We're working through our higher cost raw materials and continue to transition to lower cost materials for use in foreign markets. We expanded use of selected manufacturing at lower cost facilities. There will be full quarterly impact of reduced operating expenses beginning in the third quarter. The trend is quite clear that our international diversification expansion strategy is delivering the intended results with consistent increases in terms of total international revenues despite very unfavorable currencies. As a percentage of total revenue. In the number of units shipped, the number of customers served, the number of proposal submissions, the number of distributor agreements, the number of end-user customers, our international market share and the value of our global brand equity.

In conclusion, while our total revenues and profits have declined primarily as a result of unprecedented global economic industrial moves we're very proud to have accomplished the following. We remained profitable for 66 consecutive quarters. We have meaningfully strengthened our balance sheet in the last quarter. We have made changes Companywide to reflect a resetting of the global economy and which is most important we're exactly where we want to be in terms of positioning for our future growth. I will now turn the call over to the operator for question and answer session.

Thank you, Mr. Ryan. (Operator Instructions) We'll take our first question from Mark Zinski with 21st Century Equity.

Do you have an estimate on EPS from the foreign currency impact for the quarter?

No, I didn't break that out separately. We looked at the revenue but the top line. Did not break that out separately.

Any idea what that -- a couple cents most likely or?

Oh, yes, yes. If you just look at the change in the revenue, yes, it would be several cents a share, sure.

Okay. Great. In terms of the -- I was wondering if you could comment on what you're seeing in the oil verticals in your international business given the pullback in oil prices. Is that materially impacting your business or is there still robust drilling occurring in certain geographies that's offsetting that?

Oil, integrated oil from the well right down to the gas station has settled down a little bit with prices dropping off. I mean, a lot of oil drilling has stopped. The refining facilities are still pretty much going on average. We don't see any drop in oil, but we don't see any big growth either. It is hard to measure simply because you're talking about hundreds of companies some that only drill, some that only refine, some that sell at retail, some that do, only exploration, so obviously drilling and exploration has slowed down considerably.

Okay. Then in terms of Brazil, are you expecting then these gross margins of between 42 and 46% to continue for the next several quarters?

Yes. We have been back and forth with our operating and financial people in Brazil and we did have a number of issues with the margins. We've identified every one. We believe we've addressed every one. Some were just introductory in nature, just introductory, and I am firmly assured by our operating and financial people in Brazil that we should expect 42 to 46 going forward.

Okay. So I think originally you were expecting about a 50% gross margin, so does this come as somewhat of a surprise in terms of what's occurring there with the bidding process and such?

It is a competitive market. It is a bit more competitive, I think, than some of our sales people had initially thought, optimistic in terms of the pricing levels and competition.

Okay. And then just finally in terms of India, do you have any timetable for profitability there?

We're looking to get there by the first quarter of next year.

Break even you mean.

Break even. Initially it was very difficult to start a whole new product line in this climate. Okay? In a normal climate we would be been off to probably larger sales than we are right now. The glove industry in the United States itself is off about 20% in sales across the board, so had we come out and been ready to do this a year earlier, I think we would have hit break even much faster, but trying to introduce a whole new product line in this atmosphere in the United States which is the biggest market in the world is making it doubly difficult.

In India you're producing product primarily for export? How much or how much of your business are you selling domestically within India, then?

Right now it is probably about 90/10, 90% export, 10% domestic.

Okay. And then in terms of product lines, how many product lines are you exporting from India?

From India we're exporting about 10 basic product lines of chemically resistant gloves.

Okay. And do you anticipate expanding that?

Oh, yes, we do anticipate expanding that without a doubt. In fact, in about two or three months we'll probably add another five or six lines.

Okay.

All within the glove area.

Okay. So you're still going to be focusing on gloves then for the near term?

From India, yes.

Yes. Okay. Great. That's it for me. Thanks a lot.

(Operator Instructions)

Okay.

Having no further questions at this time I would now like to turn the conference back over to Mr. Christopher Ryan.

We appreciate your participation on Lakeland's fiscal year 2010 second 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.

This does conclude today's Lakeland Industries conference call. Thank you for joining us and have a wonderful day.