Lakeland Industries Inc (LAKE) 2010 Q4 法說會逐字稿

Good day and welcome to the Lakeland Industries fourth quarter and full fiscal year 2010 financial report. As a reminder today's call is being recorded.

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, April 16, 2010. 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 factors 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 the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent forward-looking statements attributed 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. Good morning to all and thank you for joining us on our fiscal fourth quarter and full year 2010 conference call. After our first loss in 66 consecutive quarters of profitability we are pleased to report a return to quarterly profitability, demonstrating the strength of our business. Over the longer term we also reported today the 18th consecutive full year of profitability. As mentioned in our press release, we credit the perseverance of our workforce and management team for the successful implementation of our international growth strategy that has returned us to profitability. This team has performed admirably, particularly in the final quarter of 2010 to produce our highest level of fourth quarter earnings per share since fiscal 2007. Fourth quarter sales reversed a year long trend of declining revenues by increasing 11.5% from the prior year. I should note that certain of this growth was the result of large contracts that are not necessarily recurring in nature, so while we expect overall revenue growth going forward, there may be shifts from one quarter to the next on a sequential basis. This is going to be the case for the foreseeable future, as i's common place in capturing market share in new markets where we may need to prove our ability to execute for new customers or we are given an initial opportunity when other suppliers can't deliver as required by the customer.

Entering and penetrating new markets has been an essential element to our growth strategy in recent years and it portends to be our model going forward. These new markets are outside of the US and are the basis for our diversification. This strategy was initially implemented several years ago as we saw the US market peaking amid much faster growth and more extensive opportunities outside the US. More recently, while sales in the US have essentially stabilized after more than a year of deterioration, we view our investment in our international operations as being the key to our recently improved sales performance as well as for creating a more balanced and diversified platform for the long term. To this end, we believe we are positioned more competitively on a global scale for long term growth and revenues, margins and profits. Lakeland has put in place the necessary infrastructure to target an addressable global market that dwarfs the US market in size while growing significantly faster. With our mix of global distribution capabilities, manufacturing facilities and a broad line of high quality products, we are poised to attain increased international sales in a market share in fiscal 2011 and beyond.

As for our performance in the final Q4 quarter 2010, consider the following results on a year-over-year basis. Brazil was up by over 38%, Europe as a whole was up about 50% -- these are in sales -- we commenced external sales for China which has gone from virtually nothing and is up 29% in the fourth quarter, India is gaining traction with a 40% increase on a small base, Chile is also a new market for us and that was up 45% in Q4 despite the earthquake. While we would almost exclusively sell to distributors in the United States who then sell to end-users, internationally, we are wherever possible selling direct to the end-user customer. In turn, we are seeing our gross margins increase. Once we build our sales levels commensurately to our in country operating expenses at each of our global units, we expect to see far more dollars dropping to the bottom line.

By way of example we entered Brazil through an acquisition in fiscal 2009 and while it was generating operating profits when we acquired it we have grown its top line and operating profit contributions even as we added significant sales and marketing expenses in anticipation of increased market share in country and sales to neighboring countries. Sales at PolyTextile, representing the Company's operations in Brazil, reported an increase in fourth quarter revenues of nearly 38% over the same period last year and by nearly 18% sequentially from the third quarter. We are further encouraged by the regional opportunities in this business for in Fiscal 2011.

Overall our international sales in the fourth quarter improved by 25% over the prior year and now comprise over 39% of our consolidated sales, up from approximately 5% in 2007 when we made our first concerted effort to move in an international direction. The 39% of total sales from international operations in fiscal 2010 also compares very favorably with 31% in fiscal 2009. To accommodate these sales channels we have built, acquired and made capital investments for manufacturing the products in the US, Brazil, Mexico, China and India and presently offer over 100 products worldwide. Many of the products we manufacture in the US or which were established for initial sale into the US have now been added to our offering in Brazil. From this platform, we intend to add scale in existing markets and to leverage our presence by broadening our reach into Argentina, which is already functioning, and into Russia and Kazakhstan later in fiscal 2011.

As mentioned in our press release today, by this time next year, we anticipate that new products and markets cultivated over the last four years should account for close to 50% of our total revenues. With the US market solidifying and the international segments gaining steam, it's clear that our comments in the third quarter conference were accurate. We noted that proceeding through the fourth quarter, we saw an abatement of the challenges that led to a difficult 2009-2010. The domestic revenue had indeed bottomed and the international revenue growth had essentially made up for the US declines. Our profits also improved as we moved through this period. Still holding true, we see increases in the first half of calendar 2010 although there may be variations in revenue from one quarter to the next depending upon large contracts. But our margin should improve as we reduce our cost of goods sold in Q2 after allowing for a slow Q1 seasonally in Brazil.

Therefore, we continue to believe our earnings per share should accelerate smartly by the second quarter of fiscal 2011 and will compare favorably for the full fiscal year 2011 as compared to 2010. Throughout fiscal 2011 we anticipate that we will benefit on a profit margin basis from the run through of higher raw materials and lower replacement costs, offset in part by the continuation of a challenging pricing environment. For sales outside the US, 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. This has been our strategy all along as we invested in building and acquiring businesses around the world.

The elements of this strategy to highlight are as follows. One, diversify our revenues outside the US to benefit from faster growing economies. Two, manufacture products at a lower cost basis due to the lower cost of manpower outside the US. Three, develop new customers outside the US who are not tied to products made from higher priced raw materials supplied to us by large customers as substantial portion of the revenues in the US have been. Four, as often as possible, to sell direct to the end-user customer and avoid third party distributors which in turn gives us better control to customer, the prices we charge and the margins we receive. And, five, as our presence is stabilized in the primary international locations, the leverage of those operations is regional launching pads for entering into neighboring countries. According to our management team and our channel checks, all these elements should continue to play out and benefit Lakeland's revenues and earnings for the foreseeable future.

Throughout the fourth quarter we continued certain practices that had been implemented earlier in the year in the wake of the downturn. We are now leaner and more competitive. These practices included rationalizing overhead and other expenses, reducing inventory levels, paying down debt, and increasing cash. Through the implementation of overhead and related expense reductions in fiscal 2010, we have eliminated more than $1.7 million of overall expenses on an annualized basis. Due to our effective cash management practices we paid off our bank line of credit and entered into a new facility for up to $23.5 million. Lakeland's bank debt was reduced by $4.7 million in the fourth quarter and $14.9 million since the beginning of 2010 fiscal year to $9.5 million at the end of the year. So we now have ample credit available for internal growth activities as well as potential acquisitions, and our cash balance increased by 85% from the beginning of the fiscal year to approximately $5.1 million at the end of the year. With a strength in balance sheet and leverage in our international manufacturing and sales platforms, we are well positioned with a long term outlook for growth in revenues and profits.

I will now pass the call 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 fourth quarter results and operational developments, I'll provide a more detailed review of our consolidated financial results of the period. Let me first address our banking status. In January 2010, we closed on a new $23.5 million revolving line of credit with TD Bank. We successfully reduced our debt level from our peak borrowing of about $27 million last year to $9.5 million at year-end and we anticipate further reductions. In Q4 alone we paid down the bank debt by $4.7 million. And so far, our experience has been excellent with TD Bank. Our cash balances are growing outside the US and we expect a continued growth.

Our inventory balances were reduced by $18.3 million in fiscal 10 and by $5.5 million in Q4 alone. Disposable sales declined 22.2% in the US for FY10. Disposable margins declined by 4.5 points in FY10 compared with '09 mainly due to higher priced raw materials and an extreme competitive pricing environment. Disposable margins in Q4 were increased by a year-end reversal of rebates accrued earlier in the year due to many customers not meeting the year-end targets for rebates.

Now, I'll address our international segment, which has been and is expected to continue to be an area of growth for our customers. For illustrative purposes here are some revenue highlights for some of our international operations, and I'll give Q4 growth in US dollars quarter-over-quarter. Q4 this year versus Q4 last year. Brazil up 38.4%, Chile up 45.9%, United Kingdom which serves as basically Europe, not just UK, 50%, China external sales of 29.1%, and Canada was down 13%.

Moving on from our international top line growth, I'll provide you with more granularity on our international diversification. As you may know we've traditionally derived revenues solely from North America and over the last several years we've expanded outside this region. Lakeland and its subs now sell product in the following international Markets -- Australia, Brazil, China, Chile, Argentina, Ecuador, Columbia, Peru, the Philippines, Thailand, Malaysia, Indonesia, Singapore, all of Europe, the Middle East and 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 products sourced from our manufacturing facilities primarily in China with other products in the US, India, and Mexico. China's external sales operations commenced about four years ago and were added to an existing large manufacturing plant that makes products which are shipped 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 territory.

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 we intend to penetrate those markets with a combination of direct sales and select distributors. Finally, in Brazil which we entered through an acquisition in May 2008, we have a manufacturing and sales operation 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 new operations but experiencing a high level of proposal activity. For our Brazil operations, gross margins were 53% in Q4 of FY10 compared to 48.4% in Q4 last year, mainly due to just the overall sales growth and the higher margins, but in particular, the result of larger bid contracts and also favorable exchange rates for our cost. Much of the fabric we're using for products manufactured in Brazil are imported from the US which caused unfavorable costs resulting from FX rates prevailing earlier in the year but then it swung over to favorable costs in Q4 which helped the Q4 margins. The more recent strengthening of the Brazilian currency should favorably impact the cost and margins in the future.

In India, the gross margins were still impacted from late stage startup losses. India made its first shipments to China, Canada, Chile, European and our US operations. And we are excited to announce that we've commenced domestic sales in the Indian market. We believe India sales are finally beginning to gain traction.

Our total sales increased by $2.5 million in queue had this year from Q4 last year resulting from a $200,000 reduction in domestic sales offset by a $2.8 million increase or 40% increase in foreign sales. Our Q4 sales breakdown is down 60.9% domestic, 39.1% foreign, compared with the third quarter domestic sales of 64% and international 36%, and fourth quarter last year at 68.9%, international 31.1%.

Now I'll discuss the financial results for the full year of FY10 versus '09. Revenues in 2010 decreased $8.1 million or 7.9% to $94.1 million compared to $102.3 million for the prior year, primarily due to a decrease of $12.9 million in US disposable sales and lower sales of other product lines in the US. The decrease in US sales was partially offset by significant increases in foreign sales including $13.2 million sales of Poly Textile in Brazil compared with sales of $8.4 million which was included in FY09 for the nine months following the acquisition last year, and again growth in Chile, China, Canada, and Europe.

Moving down the income statement, operating profit decreased by $3.8 million or 61% to $2.5 million versus $6.3 million last year. Operating income as a percent (inaudible) 2.6%, down from 6.1%. With the strong gross margin percentage driven by the increased level of international revenues, finding the Company's operating profit and margin is mainly due to the decreased level of total domestic US revenues. Investors may recall (inaudible) 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 US economy which in turn significantly affected the US auto sector and related supply chain. Historically about 35% of our domestic US revenues are derived from the auto and related sectors and new construction. In our first fiscal quarter of fiscal 2010, order production came to a virtual halt. While we saw this trend reversing later on in fiscal '10, in part due to the Cash for Clunkers program, that ended in September, we do not envision a return to 100% capacity in the foreseeable future. Thus, while our domestic revenues have stabilized from the resuscitating auto sector and business activity reflected in the recent moderate improvements in economic and employment data, 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 that the 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 in EPS annually through October 2013. Our effective tax rate for FY2010 was 28.2%. I would expect this to decline to perhaps 26% for FY11. Net income decreased to $1.0 million from a profit of $4.5 million. The decrease in net income primarily from a decrease in domestic sales, reduction in gross margins and disposables earlier in the year in particular, along with stepped up operating costs of certain international operations, larger losses in India earlier in the year partially offset by management's cost reduction program.

I'd like to point out we generated $18.7 million of cash from operations for FY10 mainly as a result of the $18.3 million reduction in inventory levels. Outstanding balance of our bank debt at the end of FY was $9.5 million and we are targeting further reductions as fiscal 2011 progresses. We ended the year with cash of $5.1 million, up from nearly $2.8 million at the beginning of the year. The Company's book value is now $13.31 per share and therefore our share price is now trading at a discount of about 40% to book value.

That concludes my formal remarks. I'll turn the call back to Chris.

Before we turn the call over to the audience for questions I'd like to summarize some of our forward highlights and investment merits for our shareholders and other followers. Looking ahead, a key element of our growth strategy is the attainment of market share internationally and to this end we have been active in bidding on larger projects. As a result of those efforts we have been successful in expanding our customer list and distribution channels. We envision overall revenue growth with lumpiness in revenues and profits depending on the success rate for bidding on these larger pieces of business. Nevertheless we intend to demonstrate growth in the top line and bottom line for 2011. And absent shifts associated with larger contracts we'll see an overall increase in our margins given the revenue mix shifting toward international sales and our exhausting of inventory pegged to higher priced raw materials. Our balance sheet should remain strong in 2011. The increase in sales and profits for the year, along with our access to credit positions, positions us to seek opportunistic acquisitions to further accelerate our growth and rate of global presence.

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

Thank you, Mr. Ryan. (Operator Instructions). Our first question comes from Sam Yake with BGB Securities.

Yes, hi. Thanks for taking my questions. You're building up cash a little bit and your balance sheet is improving very nicely and I'd just like to get your thoughts on, like you said, your stock is still way below your book value, and your thoughts on a potential stock buyback. And also could you elaborate a little bit on the possible acquisitions, what you're seeing out there and if there's any good possibilities available.

Okay. On the acquisition side we are looking both domestically and internationally. Nothing certain but we are actively looking. We do have a program for repurchasing stock which was approved the Board of Directors and we may be using it. But the stock popped a little bit a couple days ago on some volume but we may very well use that if we can't find acquisitions. And we're okay with the bank. Indeed, I think our cash position today is $6 million and our debt position is about $6 million, and so with the $23.5 million line of credit and the $72.4 million net worth, our balance sheet would be rated Triple A if we had ratings from Fitch and S&P.

Our bank, to relate to the stock buyback, as long as we stay within our covenants, and don't buy the covenants, we do have room to do some buybacks from the bank.

Okay. And one other question. I noticed that I think he was your Founder, one of your executives was selling stock in the open market at what I thought was an attractive price. I thought maybe you could reach a deal and buy that back or something?

We're limited legally as to what we can do with insiders. Mr. Smith is 70, 72 I think, and he's no longer being paid by the Company, so he's selling stock basically, I think to live on.

Okay, thanks so much and you're doing a great job and best of luck.

Our next question comes from Sheldon Grodsky with Grodsky & Associates.

Good morning, everybody. Before my question, I first want to mention that I for one, and maybe some other people out here, would find it helpful if you included a quarterly breakdown as well as the annual breakdown on your year-end press release. You gave some of the numbers but you didn't give the income statement. Okay, question. How did you reduce inventory so much?

In the 10-K, there's a footnote that has quarterly breakdowns. If you dig into the details of the 10-K which I realize was just released this morning, the last footnote in the financial statement has quarterly information.

But is it detailed as to--

Not as detailed as a full financial statement, no, but there is summary quarterly information which has Q4 in it.

Okay, I still think it's easier to see both things together, but in any case, going back to the inventories, how did you reduce them so much?

Basically, we are just selling off, we were forced by one of our suppliers to take huge positions in inventory year-over-year over year and this year we just said we aren't going to do it anymore. So we reduced those inventories rather than keeping these huge inventory positions in order to gain rebates from them.

Okay, thank you.

Our next question comes from Douglas Ruth with Lenox Financial Services.

Hi. Congratulations on the improvement in the balance sheet and the rebound in profit in the fourth quarter versus the third quarter. Could you give us a little bit more sense as far as the US disposable market and could it stabilize at a new lower rate? Is that your thinking?

I think that's pretty much it. It has stabilized, it seems to be growing nicely now, but seasonally spring is always the strong period of the year. I think what you've seen is you've seen a stabilization in the car industry relatively, so you're seeing a stabilization into what we sell them. The car industry is probably not going to ever be back to 14 million units any time in the near term but we're going to see stabilization at lower rates is what we believe we're going to see in the United States. For the most part, as opposed to Canada as it affects automobiles. So yes, that's where we are. We're only going to see real growth internationally and selling other of our new products domestically. But when you're looking at disposables, I think it's leveled off. It's returning now and where it returns we'll probably see by this time next year is a return but maybe 5% to 10% off where it was in '07.

Okay. And then the thing that, I can see what you're doing with this. We've got this tremendous, we're getting revenue growth but what's hard for people to visualize is all of the expense that's involved in the revenue growth. The one part of the 10-K shows the increase in revenue but like the profit margin in Brazil, the operating profit, how much of that is really tied to all of the expenses, that we went from $1.5 million in operating profit in '09 to about $300,000 in 2010?

I don't understand the question.

Can you give some more color as far as what could happen in Brazil for fiscal 2011? What kind of revenue growth could there be?

Revenue growth looks very strong. I would say they're looking at continuing the same trends, let's put it that way. Let me describe a little bit more about the way Brazil works. Maybe 60% of their revenue comes from small sales which are relatively constant and predictable and steady, and about 40% of their sales comes from large bid contracts, which are very unpredictable and uneven. The difference between basically no growth and breakeven to significant growth and strong profits lies in how well we do with these large big contracts and it's very difficult to predict that.

Give us a sense what would be a typical large bid contract?

There's three major product lines. The one that's the most profitable that's doing the most revenue, what we call turnout gear, the firefighters' garments, the pant and the jacket. The typical firefighter suit that you wear with the heavy cotton with the reflective tape. We have one bid in the fourth quarter last year, we had a large contract with the City of Rio De Janeiro Fire Department. We hope to have more POs continuing from that one bid. We've got the bid but winning the bid doesn't get you the work. The work is coming from a PO within that bid. So we had a PO, we did get a PO for part of that bid in Q4, and we are expecting or hoping to get the PO for the remaining part of that starting very shortly in Q2.

Other cities are also in the works. We're dealing with major city fire departments, and also the Brazilian agency that runs the airports, Infrarero, runs all of the airports in Brazil and we're bidding with them. Each airport has a fire department at the airport. We have bids out with them. There's also the City of Sao Palo that we have bids on but they are just bids right now. If we win it, it would be huge and if we don't then nothing happens.

Like Rio De Janeiro, how many firefighters are there in that city, as an example?

I'm not sure how many firefighters there are but the bid was for 3,000 suits. We delivered 1,000 in Q4 and we're waiting for POs for the remaining 2,000.

Okay. That helps a lot.

That one is relatively likely. We did win bid, we did deliver the first PO, and we're hoping--

It's when the POs fall, what quarter they fall in. It's depending on the budgets of the local, you're dealing with a government agency which is the same all around the world. They are all the same. They all have their budgets and the POs have to fit within their own budgets and that's why it's catch as you can. You have to deal with the local agency budgets.

So you're suggesting that possibly we could have more than 20% revenue growth in Brazil?

I think our capacity would limit us, maybe a little more than that is the peak for the moment. Without expanding the capacity we would have trouble expanding beyond the 20% expansion at this point. But we have enough bids out there that we should see 20% growth this year.

Okay. Now what about China, because it appears that the revenue declined in China in 2010 versus 2009.

China is a different animal because it depends on the total, depending on where you're looking at it, we have external sales and we have intercompany sales. Intercompany sales did decline from China, made by our China plants, but the external sales from China, which is ultimately the more important part of that, increased by, I think, what did we say, 40-something percent.

To the extent that US sales declined and the Chinese are making products for the US market, their manufacturing sales declined essentially. However, when you're talking about Chinese sales of products into China or Southeast Asia, they are growing at 40% or 50%.

I see, okay. And can you give us more color about India because we know that's been a problem and you said you feel like that's gaining some traction now?

It is gaining some traction. We are basically getting sales, the operation is fixed and the quality is great. Now it's just a matter of getting the sales, quite frankly. And once we get the sales to $2 million to $3 million we have a breakeven. That's probably within this year we intend to get to breakeven. Of course if we don't we're just going to reduce some of the overheads to get to breakeven. There's only so long you're going to sit out there and try to get sales and maintain the sales force in place and the administrative staff. If they don't get there I'm just going to reduce them to breakeven.

And are the customers happy with the gloves that they've been buying?

Yes, they are very happy. In fact, the gloves are very very high quality gloves. They are probably as good as anybody else in the world, so we're very pleased with that, particularly since they are coming out of India. And we probably will see some contraction in this industry. One of the major glove producers was just sold to an LBO fund and when LBO funds buy something they cut everything in half. They cut the employees, salesmen flee the place. So I see a contraction in the manufacturing capacity, which is good for us. And there will probably be a lot of good people available, particularly in the sales area.

I know that you don't give specific guidance but can you give us some general guidance as far as what range you might think you might be able to increase revenue or earnings for 2011?

We're not giving any specific numbers as we anticipate that our actual results may fluctuate from one quarter to the next and based on the many large contracts coming in and out of Brazil. The Brazilian contracts are on the order of $5 million to $6 million, some of them, and you get them or you don't. And of course, we feel optimistic that we're going to get them but we can't say anything about it until we actually get them.

And even when we win the bid that doesn't help because you need to get the PO within the bid. That's why we get a bid we still don't even include it in our internal backlog. We only include it in the backlog when we get a PO.

Okay, I think it might be helpful if the Company would consider issuing press releases when you get some of these big contracts, because one of the things with the Company is we're a little starved for information at times.

Okay.

If you would consider doing that. I think you've done a wonderful job and you really got the Company moving in the right direction and I appreciate the effort of the management team.

Thanks, Doug.

Our next question comes from Brian Rapp with Morgan Dempsey Capital Management.

Good morning guys. A question for you. You guys talked about delivering the fire department suits. What are you guys seeing in the US? We're seeing certainly some municipal closures, consolidation of police forces and that. Relative to fire department sales in the US, give us a sense of what you're seeing trend wise?

They aren't very strong. Most of our competitors are still on four day work weeks. However the federal government is giving the same amount of money they've been given historically to the fire departments as grants to buy equipment. Basically I guess a lot of smaller cities are trimming their budgets and people are being conservative. It's not strong, let's put it that way. On the other hand, I suppose there will be some built up demand over a period of time because these fire coats do wear out. And the cities apparently are on stringent budgets. I guess as their tax base returns they will start spending more money. It's much like the oil sector in this country. Things will return but they are never going to return to what they were. That's why we're not too optimistic about the US or the US economy in general, at least not for the next couple years.

Okay. On that, Chris, what's the durability or the obsolescence of a standard fire suit?

About three years.

Three years? Okay.

If you've got a city fire department it's much less. If you've got a country fire department it's much longer.

Yes, right, sure. Can you give us trend wise again US, anything in the chemical HAZMAT suits, Homeland Security, First Responders, some of the big warehouse depots that they have stocks for. What are you seeing in Homeland Security?

We don't see much because there's been no terrorist incident since 9/11, other than the [Rysan] and those type of incidents. And we won't see probably any real demand until there is a terrorist incident and then our stock acts like sort of a put because if you have a terrorist incident, last time that happened the market went from 10,000 to 7,000, our stock went from $0.06 to $0.13. We're not hoping for one but unless one happens we don't see much action in that area.

So it's a margin of safety. Let me ask you, when you look, Chris, at acquisitions, what for you from a top line revenue would be your range of what would be consumable for you?

Anywhere from $3 million to $15 million in revenues and of course what we're hoping for is as profitable as possible. We're not looking to pick up dogs. We're looking to pick up profitable companies. Usually the private company where the owner is sick or has died, the widow is willing to sell it and there are no kids wanting to run it.

Okay. What kind of multiples of EBITDA are you guys seeing prevailing? Are they coming down, are they attractive? Give me a sense where pricing is.

I think they are down for sure. We haven't gotten to the point where we're actually talking prices with anybody, we're just at the point where we're looking and talking but we're not at a pricing level with anybody. It's hard to say because we're primarily looking offshore, because onshore here you're just looking at a static market for the next couple years. And offshore you're also looking at better prices than you are in the United States. I guess people are still hung over from the fast days of when LBO firms were paying eight and nine times EBITDA. Now all of these LBO firms are stuck with a lot of trash and I expect a lot of them to start going bankrupt soon myself, or not bankrupt but you know what I mean.

Yes, sure. Again the static US side, you hear a lot of rhetoric relative to the Obama administration and the nanny state and the liberal democrats. Does that bleed into anything from OSHA or safety and does that do anything for the US side relative to your suits?

It may. I haven't heard. Bush really tried to hamstring OSHA. What they've done, I guess he's unhamstrung OSHA, but they haven't gotten really aggressive. We haven't seen a lot there. They just seem to be doing their job. The thing is that most companies in the United States are in compliance with OSHA, for the most part, and it's what we're seeing overseas, they are just enacting their first OSHA laws and nobody is in compliance so they are all rushing to get in compliance and part of that is buying our products. The international area is just so much more attractive than the United States. The United States has the highest corporate taxes in the world and when you look at all of the taxes throughout the whole system, it's very difficult to do business in this country. I can hire a salesman in China for $10,000 and he can generate $200,000 or $300,000 in sales and at a 40% gross margin. In the United States I have to pay a guy $100,000 and he doesn't generate the same profit. It makes no sense to do business in this country.

Yes. If you look out, Chris, say the next five years, what is your sense that your sales mix given how tepid and static the US is, what could your international sales mix be?

I have a feeling that within 18 months it will be at 50/50. And as the international sales grow, so does the gross margin of the Company, because the international sales have much higher gross margins than the US. And I suppose you'll see a pendulum swinging in the US. You have these very strong distributors in the US and the manufacturers aren't making any money, and eventually that's going to force the manufacturers to go direct and jump over the distributors.

Yes, okay. If you look on the foreign side, you talked about Brazil's market relative to the firefighter suits. What else do you sell into Brazil? Is it a market for disposables there?

Yes, it is. What we're trying to do is we bought a company that was a very comprehensive company that built fire protective clothing. What we're introducing is all of our other products. For example, India will be making the nitrile gloves and shipping them to Brazil. China will be making disposables and shipping them to Brazil.

Not will be -- they already have.

Yes, they already have. The thing about Brazil that's really driving the Brazilian economy for the next five to 10 years is that oil discovery. They keep discovering more and more and more of the oil there. They are building whole new ports down there. They are building the largest oil refinery in the world just south of Rio de Janeiro. This oil find is a lake that goes from Rio de Janeiro almost all the way to Salvador which is like a thousand miles and this lake of oil is about a hundred miles wide. This is a huge huge find and they just keep finding more. And so you've got all the not only the oil companies down there, primarily Petrobras, but all of the supply companies. You've got all of the people who sell software to the oil companies wanting to buy our garments, you've got a real boom from Salvador all the way down to Macae, which is south of Rio de Janeiro, on this oil find. It makes the Alaskan slope look like nothing. This is a 10 year boom, which we're trying to cash in on.

And also, let me chime in. The disposables sales in Brazil, what we've done is we're pretty much gone through the gear up period last year. We geared up, we expended a lot of costs, we added warehouse, we added people, we brought in several containers of goods and we just hired a disposable product manager just in January, revamped the whole sales structure with respect to the disposable sales. We are beginning to see the disposable sales, we have not yet seen disposable sales coming out of Brazil. We're right at the edge of getting that going.

Okay. If you would, Chris, give me a sense, you talk about kind of ten year boom with the offshore Brazilian oil deposits. If you were to look at your penetration of garments into that oil business versus, say, your old legacy US automotive, with the oil industry being a little grimier, would that be a better end market than the US automotive?

Yes, it's much better. The oil companies have historically always been our best customers because they buy a broad array of our fabric and apparel and they are also very good credit wise. When we were sitting there selling to people who were selling to Delphi, you can see. The auto industry has been in sick and sorry shape for five years essentially. Whereas the big oil companies, they pay their bills in 30 days, you don't have to worry about them.

Okay, okay. Go back to your comment, you talked about just enacting some of the global OSHA. Kind of look around the world. Where are you looking at from the standpoint of better enforcement, better compliance, maybe more worker safety? And where are areas just now starting that?

I tend to agree with Goldman Sachs that the BRIC countries are the place to be. And not only because the BRIC countries all want to be a member or are currently a member of the World Trade Organization. In order to be a member of the World Trade Organization you have to enact the safety laws very similar to OSHA. That's part of the requirement that the US and the Europeans put on getting into the world economic group. It's usually environmental laws, labor safety, social security. For instance China has now joined, so China has, essentially they took our OSHA laws and just translated them into Chinese. So now they are all beginning to buy, and the first buyers are the multi-nationals like GM in Shanghai. They are the first. These multi-nationals don't want to get a black eye. They are the first buyers. They set the trend. And then the domestic companies follow. But see, at the same time, we're looking at the BRIC countries because not only are they enacting these safety measures, environmental and social security net type laws, but they are also the fastest growing. China's GDP last year I think was 14%, Brazil is 5% or 6%, but where we're operating in the oil industry it's got to be 15% or 20% almost up and down the coast. And Russia is the same thing. Russia recovered very quickly from the financial crisis and its GDP is way up. India the same thing. So we're in each one of the BRIC countries and more. We're looking at countries with only fast GDP growth who at the same time are basically enacting these new laws because they want to be a member of the World Trade Treaty. And China just joined, Russia definitely wants to join, India wants to join and Brazil wants to join. So what they are all doing is looking at the requirements of getting in but meanwhile their economies are the ones that are really running. Goldman Sachs is right on that.

Yes. Give me a sense as you look out and you see this the faster grower, the better penetration, the adoption of some of these foreign OSHA, at what point do we get out of this '07 - '08 malaise survival and it really becomes an ability, you talked about Brazil, with actually having capacity constraints as these foreign end markets begin demanding these products? How does that affect your CapEx budgets going forward the next three or four years?

We will have to expand in Brazil so that will probably be a couple million dollars. We are looking, we have the capability in China if we need to. We want to see how the United States shapes up before we expand any capacity in China.

By the way, in Brazil, maybe a couple million dollars to expand when we do it but we don't have plans for this year, it would be at least a year or maybe two years off in the future before we'd --

Yes, we would be planning to do it in '11, the expenditures would be in '12.

Right, if we did it.

Because for short-term growth in Brazil, we'll use contractors.

We also just finished a minor expansion. We expanded the existing plant by 30%.

It's pretty much full this year.

Which just came online and now it's at capacity again. That 30% really just came online in the last couple months.

Okay. Gary, for my gross cash flow model what's your CapEx for your fiscal 2011 year?

About $1.5 million would suffice.

And what of that would be just maintenance?

IT, software, and just building, maintenance, that's all. Small pieces of equipment. Nothing major. Nothing major in the current year.

Okay. Back to my question, Chris, relative to, you said the BRIC countries certainly much more fertile. What's below that? Is that kind of the embryonic adoption, hit or miss? Are there niche countries that are better that you would target going forward?

Yes, it's like with China, we're in China, China is growing but we also target, say, Australia and Japan. But there we will target probably a major distributor. In Australia, we picked up the second largest distributor in the country and they just buy and market our products. The reason being is Australia, like the rest of the western countries or the developed countries, isn't growing that quickly but it's got the same type of model that the United States has. Very expensive offices, very expensive salesmen, expensive to do business. Same thing in Japan. Everybody gets $100,000 a year, everybody wants $50 a foot for office space, doesn't support good profits, unless you happen to be an investment banker.

Okay. What are you guys seeing, maybe I missed the comments, relative to raw materials, commodity feedstocks, fabric, that type of hing? How has that been and what's the trend going forward?

It's slightly up. With oil going up, generally we'll see our fabrics go up because they are synthetically based. But I'll tell you, it's a lot easier to raise prices all of a sudden, and I'll tell you why, because at one point, our sales in the United States for disposables were down 33%, so a lot of people just said screw it, we're just going to drop manufacturing capacity, and they did. Well guess what? Now there's no manufacturing capacity and the economy is coming back. And to be quite honest, in China, we're backlogged two or three months now. So we're going to see what happens when the US economy, where it stabilizes out and then we'll make a decision whether to increase capacity in China or not. Essentially, you've got a real swingback now. A lot of the distributors in the United States did not buy anything, our sales were way down. At some point people have to cut back on capacity. Everybody did. Now they all of a sudden want stuff and nobody can deliver. It's a good time to raise prices, right?

Yes, absolutely. Amen to that. Let me ask you, you talked about the proxy for terrorism and if somewhere, we were to have, certainly there was a hit on the Spanish train station back, you talked about the Ryson, if there was some type of continental US terrorist action, would that issue for you be a bottleneck in the demand for product here? And would that hold you back on certainly your manufacturing capacity able to deliver to some of these growing foreign businesses in the BRIC countries, albeit more industrial or more disposable?

That's a good question, and I don't know how it would play out. Where you have, say, suppose a nuclear dirty bomb go off in Philadelphia, there would be an immediate demand for a lot of stuff for the ensuing two or three weeks. So whether we would have it or not would depend on where we are in the economic cycle. We have capacity to make chemical suits in Mexico, the US, and China and it would be our US operations that would have to respond. We were able to take care of New York City's needs during the 9/11 crisis within the same day. I don't know whether we'll be carrying that type of inventory come the next disaster because I don't know when it's going to happen. But what generally happened after 9/11, then, is it took the government almost a year to get its act together in terms of to start planning and sending out bids for protective clothing. And if you had a serious enough incident here, then they would go back and start doing that because what we've seen happen is after 9/11 they started buying in '03, '04, '05, and all those suits that they bought are now really no good. The fabrics are only guaranteed for five years. Most of them are not renewing them and therefore, if there was an accident, all of a sudden there would be a tremendous demand surge to renew all those garments because they are all basically off warranty and they are more than a couple years off warranty. These garments are to protect you against major major chemical hazards, so if the adhesives don't work anymore, you die.

Yes, right. So what you're saying is a lot of the staging in the depots and warehousing of that was done but now because of the obsolescence, that's really for naught.

Right. There hasn't been really any incidents here of any real, other than these little letter incidents, where they will use our Tyvek to go in and clean post offices.

Okay. One more final question. The debt situation, you would see that to be delevered within the next couple of years. What's the pay down on that? You have a small amount, I think $9.518 million.

It's coming down substantially. It will continue to come down. It should level off. Pretty much when we report our Q1 numbers I would say that will be at about the bottom, maybe a slight decline after that.

As I said earlier, I think we have about $6 million in debt and $6 million in cash. And that's probably where we'll bottom out.

Maybe a little less than that.

All right, super job guys. Keep it up. Thank you very much.

We have a follow-up question from Sheldon Grodsky with Grodsky Associates.

Okay, I'll do two quick ones here. I think in the last conference call, you guys expressed a target, in this fiscal year 2011 achieving a return on equity of about 10%. And I know you guys seem to not be wanting to make any forecasts but are you looking for something along those lines for this year?

Let's look at it this way. This would be our goal. We've got a lot of net worth right now. If you're looking for return on equity you're looking for $7.2 million after-tax. That would be a real tough thing to hit this year.

Yes. That would be $1.40 a share. That's not going to happen.

Okay. Second question. You've given some hints that the fourth quarter that just ended had some large amounts of revenues, and I think you gave some hints that the first quarter may not have them. Just so people don't get disappointed unduly are you expecting a weakish looking first quarter?

Let me explain something. A big chunk of this is coming out of Brazil. Brazil is very seasonal and our first fiscal quarter is their slowest season of the year so I don't expect much out of Brazil in Q1. We do expect a very very strong Q2 and Q3 out of Brazil but Brazil will not contribute much, Brazil will be flat.

Yes, this is the middle of their summer, Mardi Gras and everything else, at least the first quarter.

Okay, so irrespective of how much improvement you're expecting overall for this year you're not expecting a blockbuster first quarter from the Company?

No, no. As we said, not a blockbuster first quarter. Second quarter will be extremely better. That's why people got to understand with all of these international operations, you have different seasonality. It's summer south of the equator. And we're selling a lot in Australia and South America now. So you have quarterly variation. We're probably better off looking at year type predictions than quarterly because they're going to jump all over the place. Even in the US, we see business returning, actually a little bit more rapidly than we had anticipated but it was primarily because most of our competitors just cut capacity to the bone and there's nobody to deliver any more these type of goods. It's not that I think demand is growing.

Thank you.

This does conclude our question and answer session. I'd like to turn the call back over to Mr. Ryan for closing comments.

After a long question and answer session, I suppose the Company's operations will schedule a meeting as management, as we bring in impressive and improving investment story to prospective investors in the months to come. Thanks again, goodbye.

Thank you all.

That does conclude today's conference. We appreciate your participation.