Lakeland Industries Inc (LAKE) 2010 Q3 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, December 10, 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 and beliefs 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 performances and the actual results or developments may differ materially from those projected in any forward-looking statements. (Inaudible) forward-looking statements attributed to the Company of persons acting on its behalf are expressly qualified in the entity 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. Good morning to you all and thank you for joining our fiscal third quarter 2010 conference call. In a departure from every single quarterly conference call we've ever held, we have the displeasure of informing our shareholders and other followers that we broke our string of 66 consecutive quarters of profitability.

Challenging operating conditions were anticipated given the backdrop of the unprecedented economic and credit crisis, as well as the year-ago record high prices of oil that dictate the cost of goods sold for many of our products. Losing money at Lakeland Industries, even the relatively small amount of $190,000 in the third quarter, is not taken lightly.

As we proceed through the fourth quarter, we see these challenges abating. Domestic revenue has bottomed and our international operations continue to grow, partially making up for the decline in revenues of certain product lines in the U.S. Importantly, our profits should improve, as we derive a greater percentage of revenues from traditionally higher margin international sales.

And in the first half of calendar 2010, we see our margins increasing even more as we reduce our cost of goods sold. Therefore, we believe our earnings per share should accelerate smartly by the second quarter of next year. Reviewing the third quarter, we continue to feel the impact of the global recession, although it has moderated in recent months.

Our legacy business in the U.S., dominated by Disposable Products, sold primarily into the auto sector and the related supply chain, which is quite huge, has grown every month since hitting a low water mark in July 2009. The "Cash for Clunkers" program seems to have rejuvenated the auto sector.

By the end of our third quarter, there have been no other benefits to us from the U.S. government's stimulus spending. The administration's proposed public works program dealing with roads, bridges, and other infrastructure should boost our Reflective clothing sales. However, this assumes it gets implemented by Congress.

Offsetting the increase in Disposable Products revenue in the U.S. during the third quarter, was softness in the chemical and petro chemical sectors, broader industrial sectors and municipalities, where we sell chemical suits and reflective and woven garments. Sales activities are more competitive than ever and our margins have suffered accordingly.

But we have and will continue to reduce our cost of goods sold and operating expenses to see a real return of earnings by the second quarter of next year. Domestic peak in economic growth was foreseen by Lakeland several years ago, although never to the extent and certainly not to the extent of GDP declines that have recently been experienced.

Our strategy to address this economic outlook was to expand internationally, which would enable us to capitalize on faster growing economies, which are more geared toward industrialized businesses that require our products. That was about three years ago, and we have been very busy since that time in creating an international infrastructure, building robust sales channels, broadening our product lines, and enhancing our global brand.

The international diversification strategies we have been implementing continue to produce results that demonstrate the success of our endeavors. We are setting the stage for more aggressive growth from the steps we have taken to build a global model. The costs that are born today for this expansion are being absorbed by our more mature businesses.

We are concentrating efforts in South America, led by our Brazil operations, and Asia led by our China operations. In each of these key countries, we have added a significant number of new direct sales personnel, which hurts our earnings now, but should ramp up sales prospects through the course of the next few quarters. We have added numerous direct sales personnel in Brazil and China over the last few months.

Not only is there a more substantial demand for our products, but we can generally benefit from higher margins because of our use of different materials and other reduced costs to make products geographically closer to the customer, which are provided on a direct sales basis that cuts out the middle man. Regional hubs are being leveraged for entry into secondary markets, and through the use of distributors for more expanded international coverage, including our sales growth in Chile and Australia.

In our international operations, we generally had strong performances in both sales and earnings, except where one-off large contracts skewed the mix, such as in Chile, which was up year-over-year, but down slightly on a sequential quarter basis. Brazil's top line was up 38% from last year and 7.8% sequentially.

Canada was slightly lower sequentially due to a weak economy. The UK was up 23.8% from last year and India is starting to get traction while China was up 24% from the third quarter last year. Amid the stabilization of our domestic operations and growth on the international front, we have worked down our inventory levels and significantly reduced overhead expenses.

Through the implementation of overhead and related expense reductions, we have eliminated more than $3 million of overall expenses on an annualized basis, an approximate contribution of about 5% to our bottom line. That was implemented throughout FY 2010 year-to-date.

The prudent cash management initiatives have strengthened our balance sheet. We are very pleased to have executed on positioning the Company for growth, while strengthening its underpinnings, particularly in the wake of such devastating economic climate. The Company's cash increased by 76% from the beginning of the fiscal year to $4.8 million at the end of the third fiscal quarter.

Furthermore, our bank debt has been reduced by $3.5 million in the latest quarter and $10.2 million since the beginning of the fiscal year to $14.2 million overall, and it's much lower today. Overall, we are encouraged that our business appears to be rebounding toward pre-recession. The latest U.S. reports on declining unemployment filings and increased productivity suggests that additional hiring may be on the near-term horizon.

Inclusive of our international diversification strategy, we have implemented a number of top line growth and margin enhancement strategies that position the Company to prosper with even moderate improvements in the domestic or global economies. Lakeland stands to benefit from it's very leverageable model, boasting the industry's lowest cost and highest quality production of industrial and workplace garments and accessories.

With the strength in balance sheet and leverage in our international manufacturing and sales platforms, we are poised for growth and market share gains in the coming quarters. I will now pass the call over to our CFO, Gary Pokrassa to provide a more detailed review of the Company's financial results.

Thank you, Chris. While Chris has provided an overview of some of our third quarter results, I'll provide a more detailed review of our consolidated financial results for the period.

Let me first address our banking status. We had increased our bank facility back in 2008 to $30 million to provide us with the capital resources to acquire Qualytextil in Brazil. With the profitability and cash flow of this business, as well as the steps taken to maximize cash flow in our consolidated operations, we successfully reduced our debt level from our peak borrowing of about $27 million last year to $14.2 million at October 31.

This bank facility requires that we comply with specified financial covenants. At October, we were in compliance with everything in the credit facility, except for the ratio of debt to EBITDA. Given the need to address this covenant, as well as our desire to have a credit facility with additional international flexibility to accommodate our future plans for expansion, we've been accepting proposals from new banks, as well as our current lender to replace the current facility.

We have received several proposals from various banks for a revolving line of credit to replace our current line. We have signed a term sheet with TD Bank for a $25 million revolver on terms nearly as favorable as our existing line.

We are working with TD Bank and their lawyers to close this new facility and we do hope to have this in place shortly. In connection with switching to a new bank, we anticipate a buyout for the remaining term of our interest rate swap and have, therefore, taken a charge of $297,000 to reflect this.

This charge could have been amortized over the next eight months, but we chose to get this charge behind us, thus strengthening future earnings. This one-time charge was $0.035 a share. Further, we took a pre-tax charge of $187,000 in the month of August for severance payments as a result of a reduction in force, which was about $0.022 a share. Without those two items, we likely would have earned about $0.03 a share in Q3.

Now I'll address our international segment, which has been and is expected to continue to be an area of growth for the Company. The earnings in USD from our international operations was also diminished by mostly one-time issues with the margins and gear-up costs in Brazil, although our unit orders in Brazil continue to expand at a rapid pace. Brazil's revenue is up 38.5% over Q3 of last year.

For illustrative purposes, here are some revenue highlights for a few of our international operations, and the percentages I'll quote are the Q3 growth expressed in U.S. dollars quarter-over-quarter, year-over-year. So in Brazil, we're up 38.5%. Chile Q3 was up 78%. UK is up 23.8%. China, external sales, 24%. And Canada was up 3.5%.

And moving on from our international top line growth, I'll provide more granularity in our international diversification. As you may know, we've traditionally derived revenues solely from North America. Over the last several years, we've expanded outside this region.

Lakeland and its subsidiaries now sell product in the following international markets; Australia, Brazil, Chile, Argentina, Ecuador, Colombia, Peru, China, the Philippines, Thailand, Malaysia, Indonesia, Singapore, all of Europe, all of the Middle East, and India. And we're about to move into Russia and Kazakhstan.

Australia has no real operations, as we have a large distributor serving that market with product 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 operations 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 reach covering the Philippines, Thailand, and other Asian territories. In Europe, we market our products to distributors, which recently expanded coverage for the Middle East. Russia and eastern Europe are relatively new markets for the Company as well.

And finally, in Brazil, which we entered through an acquisition last year, we have manufacturing and sales operations, which represent a good size contribution to our overall financial results. I should note that from this Latin American hub in Brazil and also in Chile, we've begun to expand into neighboring markets, such as Colombia and Argentina, which are relatively nascent operations, but experiencing a high level of proposal activity.

Our Brazil operations had gross margins of 41.1% in Q3 this year versus 49.3% in Q3 of last year, mainly due to large sales with bid requirements for entire ensembles, including boots or helmets, requiring Qualytextil to procure items from outside vendors. There were several problems with these vendors and we're presently negotiating with boot and helmet vendors to obtain more reliable delivery and costing.

We've also begun maintaining the stock of these items on hand in inventory to avoid such problems in the future. Because many of the bids we are 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 garment is consistent with the global reputation.

To this end, much of the fabric we are using (inaudible) 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, however, should favorably impact the cost and the margins in the future coming out of Brazil.

Finally, on reviewing the Brazilian gross margin performance, the 49.3% margin last year was extraordinary and may not be achieved in the future. We would say a more normalized rate would be in the range of 42% to 46%.

Our Disposables line, which accounts for a significant portion of U.S. domestic revenue, margins declined by 10 percentage points in Q3 this year compared with Q3 last year, mainly due to higher priced raw materials, a very aggressive pricing environment, and lower volume. Gross margins were still impacted from late-stage start-up losses in India.

India has made its first shipments toward China, Canada, Chile, European and USA operations and we are excited to announce that we have commenced domestic sales in the Indian market. Our total sales decreased by $2.9 million in Q3 this year from Q3 last year, resulting from a $4.5 million reduction in domestic sales, 24%, offset by a $1.6 million increase, or 25% improvement, in foreign sales, as I outlined a moment ago.

Our Q3 sales breakdown is now 64% domestic and 36% foreign compared with 2Q of 63% domestic and 37% foreign, and Q3 of last year at 75% domestic and 25% foreign. Operating expenses included $0.5 million in increased expenses in Brazil, resulting from our investment in Brazil's future growth.

Qualytextil has incurred start-up expenses in connection with the sales of Lakeland branded products in Brazil. Such start-up expenses including hiring 20 sales and logistical support staff, printing of catalogs, lease of two new distribution centers, and increased travel expenses. Excluding Brazil, operating expenses decreased $0.2 million in Q3 this year compared with Q3 last year.

Moving down the income statement, operating profit decreased by $2 million, or 91% to $0.2 million versus $2.1 million recorded in Q3 last year. Operating income as a percent of net sales decreased to 0.8%, which is down from 8.2% for the same period 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 U.S. revenues, coupled with the mostly short-term issues with the margins in Brazil discussed earlier.

Investors may recall the implementation of our strategy to increase international revenues as a percent of total revenues. On 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, auto production came to a virtual halt. While we have seen this trend reversing later on in FY 2010, we do not envision the return to 100% capacity in the foreseeable future.

That's why we see our domestic revenues improving through calendar 2010, from the resuscitating auto 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.

Moving on to net income and EPS, I should point out 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 earnings annually.

The Company's interest expenses included a $297,000 charge to buy out the interest rate swap. Excluding the special charge, interest expense decreased slightly for the three months this year compared to the three months last year. That's due to higher interest rates in the current year, offset by lower borrowing levels outstanding in the current year.

Income tax expenses consist of federal, state and foreign income taxes. Income tax expenses decreased $0.6 million to a credit of $187,000 for the three months ending October from taxes of $0.4 million for the quarter last year. Our effective tax rate was 24.6% for the three months ending last year. This year, our effective tax rate was a 49.6% net credit.

Net income decreased to a loss of about $190,000 for the three months ending October 2009 from a profit of $1.4 million last year. The increase in net income primarily resulted from a decrease in domestic sales, reduction in gross margin in disposables, and in Brazil, along with stepped up operating costs for certain international operations and larger losses in India, partially offset by managing cost reduction programs.

There were no shares purchased in the fiscal third quarter under our share repurchase program. For EPS, we had about 5.4 million shares, basic and diluted, outstanding respectively, about the same number as last year. Our EPS was a loss of $0.03 a share, $0.03 a share, compared with a profit of $0.25 a share in Q3 last year.

We generated $13 million of cash from operations for the nine months year-to-date, mainly as a result of the $12.8 million reduction in inventory levels. The outstanding balance of our bank debt at the end of our third fiscal quarter was $14.2 million and we are targeting a further reduction as the fiscal year progresses.

Inventories were reduced by about 23% in the first nine months of FY 2010 from approximately $57 million to $44 million. We ended the quarter with cash of $4.8 million, up from nearly $2.8 million at the beginning of the fiscal year.

Last, but not least, the Company's book value is now $13.29 and, therefore, our share price is trading at a discount of over 40% to book value. And that concludes my formal remarks. I'll turn the call back to Chris.

Thank you, Gary. Before we turn the call over to the audience for questions, I would like to summarize some of our forward highlights and investment merit for our shareholders and other followers.

Looking ahead, we believe there will be an inflection point for our operating performance due to revenue trends for stabilization in the U.S. and increases internationally. We have substantial leverage in our global manufacturing and sales platform and a significantly lowered cost structure.

Our balance sheet has been strengthened through a material decrease in debt and an increase in cash. Our current ratio is impressive, while the valuation metrics for our stock makes it appear quite attractive. And from a personal point of view, I feel very optimistic going forward, which is something I did not feel so much three to six months ago.

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

Thank you, sir. The question-and-answer session will be conducted electronically. (Operator Instructions) We'll take our first question from Sheldon Grodsky from Grodsky & Associates.

That's Sheldon Grodsky. Good morning, everybody. I'll start with a comment. It's amazing how different the stock looks with a $0.03 a share loss than a $0.03 a share gain. We're stuck with that until I guess the next quarter.

I'm impressed with your improvement in the balance sheet, but why is it that your receivables were up? I mean your inventory were down. Your revenues were down. Is there anything bad happening on receivables?

Not at all. The receivables are up. That increase is coming entirely out of Brazil.

Brazil sales are composed of a number of smaller accounts and some very large accounts, most of which are government agencies. And the government agencies -- there's no credit issue there at all. We're dealing with major city, fire departments, major airport authorities, but they had their own municipal budget and they take their own sweet time to pay us.

And that's the only reason. We fully expect to make a fair amount of those collections in the month of December. I would expect that Brazil receivables to be, to be less next quarter.

Thank you.

No credit issue there at all.

Thank you.

Moving on to our next question from Doug Ruth with Lenox Financial Services.

Good morning, gentlemen. Have a few questions for you. Could you give us some color as far as how big you think the Brazil operation might be down the road?

Well, they're growing very rapidly. The people there are extremely aggressive and they are actually motivated to grow that even more with the way we structured the purchase price. If you get into the details, the way we structured that was a, with a down payment and a supplemental purchase price, a contingent buyout, which is based on a multiple of the EBITDA that they have for calendar 2010, and we are just now going into that period next month, January 1st will start that period.

I can assure you, they are hyper motivated to increase their growth on both top and especially on the bottom line. They put in some very impressive growth numbers already and we see that number growing extremely rapidly.

You're not able to quantify any further dollar, dollar revenues or earnings from those operations?

I would not want to quantify it, but they are running at a current run rate of about $13 million or $14 million a year, Chris?

Yes.

And we've reported 38% year-over-year growth. I don't know that they will have 38% sequential growth, but I, I would say fairly substantial growth based on that.

Okay, and what about the China, could you quantify what might -- how big the China operation might be at some point?

Well, China's, China's not quite as -- there's no simple answer to that because the structure was originally set up -- we have four plants operating in China on the, now four subsidiaries. We opened up a trading company in China to handle some of our external sales. Much of China's operating results are simply to supply the rest of Lakeland's operation around the world.

When we're talking about the more recent growth in China, we're talking about the external sales coming out of China for the sales domestically in China and for the Asia-Pacific rim in particular, in Australia and local sales, but to outside customers from China.

So our China operations are evolving fairly rapidly from just being a captive plant to actually being a sales organization, and the external sales are -- our intercompany sales in China have been contracting because the orders coming out of the U.S., obviously, are much less.

That's one reason why we've reduced our inventory. We've given the China plants less orders for the U.S. domestic sales, so the intercompany sales from China have actually decreased, but our external sales, which is ultimately, the strong point here, our sales have gone up about 24% in China on the external sales.

Is that quarter-over-quarter, or sequential?

No, not sequential. Year-over-year.

Yes, okay.

We do see that increasing very rapidly. We're growing that very aggressively. We've got some young sales people in there and who are very aggressive and they are doing a very good job.

We see that growth continuing quarter, at about a 24% rate annually, if not more.

Yes, China and Brazil is where the future growth is going to. We see the real future growth coming from, Brazil and the rest of Latin America, or basically Asia-Pacific and Latin America, basically, is where we see the growth.

And much higher gross margins also.

And 24% for how many years out?

China?

China and Brazil.

Well, hold Brazil for a moment. China's starting with a relatively small base. That's sustainable for several years, I would think.

Five years?

Probably two or three.

Two or three, okay. All right. And then Brazil, you don't want, you don't want to, you don't want to do that one?

It's hard to go beyond the year. I would be very aggressive in Brazil. The Brazilian economy is growing. We see that as basically, virtually the crown jewel of the Company, frankly, going forward.

Brazil is the crown jewel of the Company?

That's the way we look at it, yes.

Yes. Should sales grow at the rate of GDP, or is it, can't be tied to GDP?

In the U.S. or international?

Well, how about -- could you answer that for both?

Internationally, for instance, take Brazil. GDP growth there is about 5%, but we're growing at close to 40%.

We'll beat that in Brazil, no question.

GDP growth in China is about 6%. We're growing at 24%. A lot of the reason for that is that these countries are now implementing safety laws and safety programs that heretofore have never been in these countries.

The United States implemented OSHA in 1970 and I would say safety protective clothing sort of topped out in early 2000, 2000 to 2003 and 2004.

Now we're entering the growth stage that we saw in 1970 in this country and you had a very nice growth in these type of safety markets of 10% to 12% for close to 30 years. We're entering those growth stages in Asia and Latin America now, and since there is not competition down there as there is in the United States, historically, even 20 years ago, the growth there is just much greater.

As I said, we're coming -- we're not coming off too much of a small base in Brazil because last year, it was almost $10 million, $12 million, so Brazil's sort of a large base. China's a smaller base. We started there about three years ago and the external sales are about $4 million today. So, it -- when you get to $10 million, it's hard to grow at 30%.

Yes.

But Brazil's doing it, nonetheless. One of the prior questions was, how fast can China grow and how long? Probably pretty much the same, simply because the markets are expanding so rapidly there. To a certain extent, they carry us. You're guaranteed almost 5% or 6% growth if you do nothing.

Right, I understand. Okay. What is the payable for the Canadian warehouse on the balance sheet?

It's a loan that we have -- it's a construction loan that we took out. It's kind of IDB-type financing with the BDC, which is the French acronym for the Development Bank of Canada. It's -- it was about a $2 million Canadian dollar --

It's higher now.

Yes, the reason it went up is because of the exchange rate, if that's what you're getting at.

And when will that loan be paid off?

That's a 20-year loan.

Oh, okay.

It's payable in 240 monthly equal installments.

Oh, I see, and there's always a current component of it?

Yes, that's why there's a current component.

And then can you talk some about -- you folks are essentially a real estate company with all the properties. How much -- have you spent time -- it seems like there's an awful lot of properties, an awful lot of moving parts. Can the Company talk some about how that might change in the future, or is there some rationalization going on?

We have no plans for additional real estate purchases, if that's -- I can state -- there's nothing on the boards at all that we've been talking about in terms of new capital additions on real estate.

For the -- could there be some consolidation or some simplification?

Possibly in China, but nothing -- not at the moment. Perhaps -- I wouldn't rule that out in the future, but not at the moment.

The, logistically, you have -- you're sort of in the U.S., you're on the two coasts and then in the Midwest in effect, I guess, or sort of south of the Midwest. Is it based on the economics of selling disposable uniforms that --

No, it's just historically we originally set up in Decatur, Alabama, which is our biggest hub operation. And it's really a distribution facility and we've been there since 1982. And we've seen no reason to leave there and go to more expensive parts of the country. With regard to our Pennsylvania operation, that was the result of an acquisition.

We plan on staying there and we lease all of our properties there. In St. Joseph, Missouri, we've been operating there since 1986 and it makes a very specific product line of bunker gear for fire departments and we lease there.

With regard to owning or leasing, quite frankly, in most foreign operation, rents are pretty high. Essentially if you buy and build, you'll recognize a 25% return on equity.

Wow.

Rather than leasing. A good example with that would be our Chinese operations, which not only by building out we saved about 25% return on monies payable in leases, but the value of the properties have tripled since we've owned them, very much like the Chinese R&B keeps going, we'll keep going up against the USD.

So the, in effect, the -- well, there's not too much depreciation on the foreign buildings, but those possibly could be worth more than book value?

None in China. There's some coming out of Brazil.

Oh, I see, because the Brazil operation was acquired, so that asset may be worth more than book value?

Not much. When we wrote it up to fair market value for the acquisition accounting.

I see. Okay. Well, I'm excited about the future. I think you're well positioned and I appreciate you taking the time to answer my questions.

Thanks, Doug.

We'll move on to Kyle Kreuger with Apollo Capital.

Good morning, guys. Can you, can you talk about the extent to which inventory destocking has played a role in your, your revenues over the last 12 to 24 months and what impact a restocking might have or how that may play out or is that not a factor?

Well, when I look at most of our customers being big safety distributors, their sales are down approximately 14% over the last three quarters, their actual sales. And our sales are down 20% to 25% in the U.S., depending on which month you're talking about. So what I, I sit there and the destocking is probably about a 10% phenomena every month for the last nine months or so. There is a destocking.

I think we've sort of probably hit bottom here on any destocking, which is why we saw -- we really hit bottom in July on U.S. sales. And we've seen incremental sales across the board in the U.S. every month since then.

So I think the destocking hit the bottom in July and now sales go up 3% or 4% a month from the prior month, but they're certainly not back to where they were last year. And that's probably a function of the unemployment rate right now, particularly in the auto industry, because when people -- when we say the auto industry, most people think of Ford, Chrysler, and GM.

It's not that. It's all their suppliers. For every person in the auto industry making the car, there's seven people behind them making glass, steel, plastic, tires, at Goodyear, all sorts of other companies, who we supply. So as we said, the auto industry is a big part of the Disposables sales in the United States. It will come back, but we don't see it coming back 14 million units a year.

Yes, is it possible for you, Chris, you guys -- you mentioned your sales are down more than the industry. Is it possible to differentiate between destocking and potential loss of market share? Are you sure you're not losing market share?

We're fairly certain that we're not losing market share. The drop-off in sales coincided with the economic crisis.

Yes, okay. And you guys have a very strong book value in relation to where the stock is trading. Longer term, or, say, over the intermediate term the next three to five years, what kind of an ROE would you target on that book value given your current business mix? Once the extraordinary international ramp and expenses start to come off?

That's a really tough question going out three to five years, because we're in the process of paying down debt now, and in the future, we could lever up a little bit again and that alone would affect the return on equity. In other words, the more we lever up, the higher the return on equity. If we're sitting looking at, what, about $73 million in net worth equity today, to say we're going to earn 10%, we would have to earn about $7.3 million.

Yes, yes.

Okay. Is that going to happen this year? No. Next year, possibly. And when I mean this year, I mean this coming year, 2010.

And also for the immediate future, we're levering down, not up.

Yes.

Right. So, so over the next year, you're saying 10% could be an attainable goal in terms of ROE?

Not over the next year.

Not 2010. 2011.

Okay.

What I think you'll see is by our second quarter ended July 31, we'll be well on the way to getting back to historical earnings. It won't be quite there, but it will be well on the way of getting there.

Okay, okay. Thank you.

Moving on to Mark Zinski with 21st Century Equity.

Good morning.

Good morning, Mark.

Hi. I'm just wondering how we should kind of think about consolidated gross margin going forward? I understand there are a lot of moving pieces here, but you've indicated there's some pricing pressure with domestic Disposables, but yet, the increasing international business should help offset that as well as the transition to lower cost of goods.

So on a net-net basis, do you think that there's a chance for gross margin to begin improving meaningfully in the near term?

Oh, we think better than a chance. We're pretty confident that that should be the trend, yes. We see that -- gross margins have been impacted recently in two areas, the Disposables division and in Brazil.

Brazil, we've been addressing some of the issues. It's not going to improve spectacularly, but we believe the margins in Brazil should improve fairly -- a couple points coming out of there with, coupled with the revenue increases, should be a fairly dramatic increase over there. And I'll let Chris address the Disposables gross margins.

On Disposables, since we don't expect much growth in the United States, as I said, yes, the auto sector is recovering, but it's not going to recover anywhere to near where it was just last year. We basically lowered our cost of goods so dramatically, which you'll start seeing it in the fourth quarter, improvement from certainly this quarter.

You'll see it more in the first. You'll see it I think strongly return in the second and the third, so it's really just -- we've had to reduce our cost of goods sold in the United States and you're going to start seeing it quarter-to-quarter, each quarter will build in terms of earnings based on that lower cost of goods sold. And I think by the second quarter, you'll see what's really possible here in terms of earnings going forward.

Okay, and then just touching on India, what's the prognosis for profitability there?

Six to nine months.

Six to nine months?

It's just a matter of getting the sales to where we want it.

We've solved all of the technical and manufacturing issues. We've solved the supply chain issues. Now it's just a matter of getting our worldwide sales force out there and getting the sales in.

Okay, and that operation is still focusing on just gloves exclusively, is that right?

In India, yes. And certain type of gloves at that.

Okay. And you're not, at this point there's no plan to introduce any other product lines there in the near term?

There's a possibility of that, but if we do, it will be immaterial.

Okay, great. That's it for me. Thank you.

Thank you, Mark.

(Operator Instructions). We'll take a follow-up from Sheldon Grodsky with Grodsky & Associates.

Okay. I'm going to ask one more question on India. You describe Brazil as your crown jewel. Has India been your problem child? It's a big market and you don't seem to be exuding too much --

I think that's a very fair assessment, yes.

We made management changes in the last week. We look at it as something if we can't get it right in the next six to nine months, then we'll sell the asset.

Mm-hmm, okay. A second question, which is broader and judging by your optimism, I don't think it will be an adverse question, but you're a small Company that's rapidly becoming a multinational.

Do you think you're up to that challenge of doing business in different countries, different languages, and controlling the operations?

Well, we've been in China and Mexico since 1994. I think we are. To be quite honest, management of sales and earnings is the same everywhere around the world. I'll tell you that the only challenge here is the taxes. Because you've got so many different tax regimes, okay, and then you've got the U.S. tax regime.

And to me, that's really the only challenge. We have, all our staff is multilingual. Even I speak a couple of languages. So it's really not a matter of management.

It's getting acculturated to the particular country's way of doing business. But as I said, no, we haven't had any problems and the fact of the matter is we do much better in foreign countries than we do in the United States.

Oh, I can, I can reiterate that. Our future is international, no question.

Thank you.

We have no other questions in the queue. (Operator Instructions) Mr. Ryan, we have no further questions at this time.

Okay, thank you. We appreciate your participation on Lakeland's fiscal year 2010 financial results conference call. Excuse me, I have ice in my mouth.

As we are committed to delivering value for our shareholders, we believe Lakeland will continue to effectively manage its balance sheet, control expenses, continue to reduce them, 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 improving investment story to prospective investors in the months to come. Thanks again and good-bye.

Again, ladies and gentlemen, that does conclude today's conference. Thank you for your participation.