Lakeland Industries Inc (LAKE) 2011 Q2 法說會逐字稿

Good day and welcome to the Lakeland Industries Incorporated second quarter 2011 financial results conference call. 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 Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical facts which reflect management's expectations regarding future events and operating performance and speak only as of today, September 14, 2010.

Forward-looking statements are based on current assumptions and analysts 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 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 guaranteed of actual performance and the actual results or developments may differ materially from those projected in any forward-looking statements. Also, forward-looking statements attributable to the Company or persons acting on its behalf are expressedly 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 now begin.

Good morning to you all and thank you for joining our fiscal year 2011 second quarter conference call. Lakeland continues to deliver strong financial performance driven by the growth of its international operations and streamlining of its global operations structure. We have been successful managing our costs while navigating to a very volatile pricing and supply chain environment. Based on continued demand in our backlog at the end of the quarter of approximately $7 million, we believe the Company's positioned for strong results through the balance of this fiscal year. Ordinarily, Lakeland does not have a backlog as we typically ship products from finished good inventories stored in our warehouses or can turn production around in what we believe is an industry-leading pace.

However, global manufacturing capacity constraints and certain raw material shortages have led to stockout and backorder conditions. This is also true with all our competitors being DuPont, Kimberly Clark, et cetera. We also are pleased that we have been able to deliver this performance absent large bid orders from our international operations that have helped to boost our foreign sales figures last year. All along, our international growth strategy was clearly defined and for the most part, has produced its intended results.

Specifically, we had plans for the following. Use foreign growth market opportunities to offset anticipated long term declines in the domestic US market. Attain diversification that will contribute to building and strengthening our global brand while better leveraging our foreign manufacturing capacity. Improve our margins by focusing on foreign growth markets that lack existing and more developed distribution channels as compared to that of the US. Marketing a broader product line with garments from the most economical and highest performance materials and using lower cost manufacturing processes. Amid reduced domestic revenues due to lower industrial requirements which we believe is a longer term trend and not isolated to the recent recession, we continue to successfully grow our international base of business.

We had previously set a goal of 50% of our revenues being derived from international operations by the end of fiscal 2011. In the second quarter, our international revenues comprised nearly 44% of total revenues, up from less than 38% a year ago. And this was achieved on higher overall revenues quarter-over-quarter. On a reported dollar basis, international revenues in second quarter of fiscal 2011 were $10.7 million, an increase of 24% from $8.6 million in the second quarter of 2010. Our improved financial performance for the second quarter benefited from our international operations which generally deliver higher margins than our domestic sales.

Furthermore, our international operations have an ancillary benefit of the smoothing out our seasonality, as much of our international growth was originating from the southern hemisphere which offsets the northern territories by mitigating the normal slowdown of sales of industrial protective garments that are primarily used during the spring and fall. Lakeland's results in the second quarter could have been even better if we had been able to deliver products that had been ordered in response to the Gulf of Mexico oil spill. Although the oil well has been contained, significant clean-up effort is underway. We experienced demand for our protective and safety apparel that outstripped our supply of products. Our warehouse inventory was used up.

Our manufacturing capacity was nearly at full scale production for the specific products required for the clean up and raw materials and our other sourcing of goods were on backorders. Stockout conditions and capacity issues resulted in backlog of orders at end of the quarter. Presently, the Company is working down the backlog and we expect to fill the backorders by the end of the fiscal year.

Following the new agreement with DuPont announced last quarter, we have essentially depleted our inventory of products made from material we've received from them and will resell finished goods they send to us although they also are experiencing manufacturing constraints. The oil-spill related demand benefited our US operations which overall has experienced longer term challenges. The long term trend in the US was the basis for our international diversification strategies. Our timing was pressing as we are now more than offsetting the decline in the US with foreign revenue.

On the international front, we are making progress and growing market share in more developed regions of Canada and Europe. The economies in these markets are improving and we represent a small but growing presence. Furthermore, on a consolidated reported basis, these operations have benefited from favorable exchange rates. In emerging and high growth markets, China and India represent relatively new platforms for us in terms of sales operations and we have gained traction in both as evidenced by our nearly doubling of revenues in each market.

Brazil contributes significantly to our presence in the industrial growth markets and can deliver significant upswings as there is an abundance of large, big contracts for public and private sectors for which we have bids outstanding. In Chile, there was a temporary disruption of sales due to an earthquake so you might consider this one-time natural disaster being more than offset by the demand created from the Gulf disaster. Russia and Kazakhstan are new markets for which we recently commenced sales and marketing activities.

The burden of these new operations are presently being borne by our collective SG&A expenses. Although the sales channels have not yet produced but are on track to deliver future growth that will report on the second half of the fiscal year. Progress has also been made in our mission to improve our cost structure and balance sheet. Inventories have been brought down 13% fiscal year-to-date and are now at a reasonably steady state. We do not expect the significant further reductions. Our debt has been reduced 69% in the same time frame to $3 million while our cash position is up 30% to $6.6 million at the end of the second quarter.

In an attempt to rationalize our resources and retain and motivate our workforce, in a challenging operating environment, we took the necessary actions that resulted in unusual expenses in the second quarter. While our second quarter diluting earnings per share surged to $0.10 from break-even last year, an equity compensation adjustment expense, legal and professional expenses in Brazil, and a reduction in force in related costs reduced our earnings per share by nearly $0.11 in the second quarter.

Excluding these charges, the Company would have reported net income of $1.2 million in the second quarter of fiscal 2011 or $0.21 a share. In light of the improvement made at our international operations, which presently represent minimal global market share as well as the steps taken to maximize profits, we are confident there is a sustained room for growth. I will now pass the call to our CFO, Gary Pokrassa, to provide a more detailed review of the Company's financial results.

Thanks, Chris. While Chris has provided an overview of some of our second quarter results and operational developments, I will provide a more detailed review of our consolidated financial results for the period. Our total sales increased by $1.5 million in Q2 this year from Q2 last year resulting from a $0.6 million decrease in domestic sales, offset by growth of $2.1 million or 24% improvement in foreign sales. 2Q 2011 domestic sales were $13.9 million versus $14.4 million last year and international sales were $10.7 million compared to $8.6 million last year. 2Q FY 2011 sales breakdown is 56.5% domestic, 43.5% foreign compared with 2Q last year domestic 62.5%, international 37.5%.

Now I will discuss our revenue performance by country. In the US, disposable sales were flat in Q2. Disposable gross margins increased by $1.5 million in Q2 this year compared with the same period last year, mainly due to industry-wide shortages prevailing and price increases. Sales of disposables which are likely the product of choice for oil spill for remediation benefited from the Gulf of Mexico-related demand in Q2 this year but our sales are muted to a certain extent because the stockout positions resulting in backlogs.

On the international front, we've spent the last few years building a foreign presence as we view the most significant opportunities to be represented by higher growth markets located outside the US Lakeland and its subs now sell product in the following international markets--Australia and Brazil, Canada, Chile, Argentina, Ecuador, Colombia, Peru, China, the Philippines, Thailand, Malaysia, Indonesia, Singapore, all of Europe, the Middle East and India. And as Chris mentioned earlier we've just commenced sales out of two new countries, Russia and Kazakhstan.

For illustrative purposes, here are some revenue highlights for few of our more established international operations. I will give you -- the numbers I'll give you are Q2 growth in US dollars, quarter-over-quarter, year-over-year. Brazil is down 7.6%. Chile is down 68%. UK is up 16.7%. China external sales are up 98%. India is up 141%. Canada is up 12.4%. Brazil sales reflected the lack of large bid sales in Q2 and Chile reflects the effect of the earthquake in Chile. India sales are now gaining traction.

Moving on from our international top line growth, here is some more granularity on our international operations. The India due to an improvement of global command, the new management team and a consolidation of our product offerings into a single universal line to be offered through all of our global businesses. And we were pleased to report increase of revenue to $0.4 million in Q2 from $0.2 million last year. We are now marketing products made in the -- through our sales channels in China, Canada, Chile, Europe and the US as well as in-country and India. Margins improved to due to higher volume inefficiencies. The business in India is still operating at a loss but the loss has declined and we believe it will be profitable sooner than anticipated.

Australia has no real operations as we have a large distributor serving that market with product source from our manufacturing facilities primarily China with other products in the US, India and Mexico. These sales are included in the China external sales we referred to earlier. We are using a large distributor for Australia who are selling products in that country bearing the Lakeland brand. This supports our global branding initiative. In fact all of our operations throughout the world accept certain legacy Tyvek, Tychem product operations in the US which operate under a different brand model are now selling products with the Lakeland brand.

Over the last few quarters, we have been selling products directly in the China market through direct sales efforts as well as through distributors on a select basis. Sources from our Chinese manufacturing operations as well as specialized products from our other manufacturing facilities around the world. (Inaudible) sales increased to $1.2 million in Q2 from $1.0 million in the prior year. Demand continues to be strong in this region and most active in the UK and introducing some products that will help to better establish our brand. Finally, in Brazil which we entered through an acquisition in May of 2008, we have manufacturing and sales operations which represent a good-sized contribution to our overall financial results.

I should note that from this Latin American hub in Brazil and Chile, we have begun to expand into neighboring markets such us a Colombia and Argentina which are all relatively new operations but experiencing a high level of proposal activity. For Brazil, sales in Q2 were $2.9 million compared to $3.2 million in the prior year. Gross margins were 46.8% versus 40.6% in Q2 last year due to favorable exchange rates but reflecting a lack of larger big contracts in Q2 this year. Further, to our operations in Brazil and as discussed on our last conference call, we've terminated for cause certain members of the management team and promoted others from within to take their place.

We've taken a charge of $0.2 million which is $0.027 a share in the second fiscal quarter relating to cost associated with the terminations. We have attempted to negotiate a settlement to no avail and we are preparing to file an arbitration claim in the near future. Consolidated SG&A expenses in Q2 were $7.4 million compared to $6.0 million in Q2 of last year. This included a cumulative charge of $0.5 million to equity compensation this year resulting from the Board's decision to change the expected performance level of 2009 restricted stock plan from zero to baseline. This impacted results by $0.054 a share. We also recorded a $175,000 US charge for legal and professional fees in Brazil resulting from the termination of two managers that was $0.027 a share.

Further, there was a $0.2 million severance cost for a reduction in force charge to Q2 operations that was $0.026 per share. Without these three unusual charges, the equity comp cumulative charge, legal and professional fees in Brazil and RIF, we would have earned $0.21 per share in Q2. The balance of the increase in operating costs comes mainly from an increase in China upgrading costs allocated to SG&A resulting from a near doubling of their external sales. The Company's net income in the second quarter this year was $0.6 million from net income of zero to three months ended July of 2009. The net income per share in Q2 was $0.11 a share compared with earnings per share of zero in the prior year. The increase in net income primarily resulted from higher sales particularly from our higher margin international operations and higher margins in the US resulting from stockout conditions as mentioned earlier.

Turning to cash flow and the balance sheath. Fiscal year-to-date, we generated $4.7 million of cash from operations, mainly as a result of operating profits and a reduction of $5.1 million in inventory levels to $33.6 million at the end of the second quarter from $38.6 million at the beginning of the fiscal year. This cash generation was partially offset by the net loss of the six months ended July 10, and other adjustments stemming from the Brazil VAT tax issue in Q1. During the second quarter, we further reduced our bank debt by $2.0 million after a $4.6 million reduction in Q1. The outstanding balance of our bank debt at the end of our second quarter was $3.0 million. We expect this will remain about where it is going forward. We ended the second quarter with cash of $6.6 million, an increase of $1.5 million from the beginning of the fiscal year.

The bank facility allows total borrowings of $23.5 million and an interest rate presently below 2%. Given our borrowings at the end of second quarter, there was a remaining about $20.5 million available to us. Of the total amount subject to certain conditions, we are allowed to use up to $8 million of the cash for permitted acquisitions. The Company's book value per share is now $13.39 and therefore, our share price is trading at a discount of about 25% to book value. Current ratio is 5 to 1. Working capital is $50.3 million compared to our enterprise value of about $51 million. That concludes my remarks and I will turn the call back to Chris.

Thank you, Gary. Before we turn the call over to the audience for questions, I would like 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 maintaining our level of business domestically. To this end, we have been active in bidding on larger projects and moving up the value chain toward the production and sales of higher margin products while broadening the product lines offered by each of our international sales operations.

As a result of these efforts we have been successful in expanding our customer list and distribution channels. We envision overall revenue growth and margin improvements with the softening of the seasonality given our more globalized presence. Action shifts associated with the larger contracts will see an overall increase in our margins given the revenue mix shifting toward international sales. Our balance sheet should remain strong in 2011. Our healthy balance sheet and access to credit positions to seek opportunistic acquisitions to further accelerate our growth rate and enhance our global presence. I will now turn the call over to the operator for a Q&A session.

Thank you. (Operator Instructions) We will take our first question from Sam Yake with BGB Securities.

Yes, hello. Thank you for taking my questions.

Sure.

I'm just a little unclear on the new relationship with DuPont. Maybe if you could just give a -- summarize it in general? Could you sum it up? Would you say the new situation -- is it a positive, a negative or a neutral going forward?

I would probably say it's a neutral. Simply because in prior years, we bought the fabric from DuPont, shipped it to China, shipped it back, sat on the shelf, it sold. We had to wait to collect the receivables. So that's one of the reasons you have seen the debt -- basically, the debt come down rapidly to almost to close to zero. So on the one end we don't have this capital expenditure any more. On the other hand, we have less control over what we make.

In other words, we used to buy the fabric from DuPont and make the garments. Now we buy finished garments from DuPont and resell them. So we are still selling the same thing to the same people, but the way it's being produced is differently. And in certain instances, we have quite a few customized products where DuPont still sells us the fabric to make the products they don't make. So I would probably say it's a neutral simply because we've lost the ability to make the garments ourselves but on the other hand we don't have the huge investment upfront that we used to.

Let me jump in also is that the shipments from DuPont for the new finished good items has just commenced in August following Q2.

So this is one of the reasons for the backlog in the inability to attain higher sales is because the entire industry was caught flat-footed. Last year sales were down 40% in the United States and domestics. And then this year around February, the economy came back and then you had the BP oil spill. Not only were we not prepared for it but DuPont, Kimberly Clark and everybody else in our industries was totally unprepared for a snap back in the US economy and the BP oil spill. So none of us have really been able to make the sales that we wanted because not only were we not in position to do the cut and sew work, but a lot of our raw material suppliers were not in the position to ship raw materials either because they had cut back. So that's where we sit now.

Okay. Thank you. That's very helpful. And then have I one other question and that is I know in the past there was some concern about Sarbanes-Oxley. Is it my understanding that you guys as a small Company would be exempt from the more owners provisions of Sarbanes-Oxley now?

That's correct. If you noticed, we reverted back from an accelerated filer down to a smaller reporting Company with the market cap of unaffiliated holders. If you look at the front cover of the 10Q we just filed that will determine our status. And it was about, I don't know, $32 million or something which puts us in that smaller category. What we are exempt -- we're not exempt from Sarbanes-Oxley. We still have to report -- management still has to go through its own internal analysis and express its opinion on the internal controls. What we are exempt for and the only thing we are exempt from is the outside auditors are no longer required to express an opinion on management's opinion. That's about it. So it saves us some legal and some professional fees.

Okay. Thanks so much and best of luck in the future.

Thank you.

We will move on to Howard Halpern with Taglich Brothers.

Congratulations, guys. Great quarter.

Thank you.

First question, with the supply -- the backout constrains, I guess, starting to ease with (inaudible) conditions, starting to ease, can you talk about the pricing environment for that end product?

Our backlog has come down, yes. But we just stated that we probably get our backlog down to the zero area by the end of the year but that doesn't mean we're going to have an inventory. That means that we will get through the backlog. We hope to build our inventory positions next year. But most importantly, it will, I think -- these shortage conditions will result in price increases. We are one of the few companies that actually (inaudible) increased prices in spring and summer. I expect the bigger companies who are locked into annual contracts with their customers will increase their prices also at year end. Because we have been able to increase prices and we have been able to hold them. So our competitors looking at that probably will increase prices and I've heard rumors in the marketplace of same.

Okay.

One other -- just to clarify. Backlog are never totally zero. What Chris means is zero outside of our normal backlog which normally runs in the $1 million or so disposable.

Okay. Could you talk I guess a little bit about -- you discussed that you are doing larger big contracts in Brazil and I'm assuming in other countries, what is the average size of the contracts that you are actually bidding on?

Let me talk a little bit about Brazil. Brazil has maybe 50% to 60% of its revenue from small invoices that are very, very predictable and very steady. The balance of their revenue comes from these so-called large, big contracts. And most recent one that is the city of Rio De Janeiro and we have been working on it for the last year and a half. We won a bid of 3,000 units and winning the bid isn't really the end all. Once we win a bid, we still don't put that in our backlog. You have to get a PO from the entity, from the purchaser within that bid. Within that bid of 3,000 units from Rio De Janeiro, we have gotten two different POs for 1,000 units each. One we fulfilled mostly in Q4 of last year and one we fulfilled in Q1 of this year.

We are anxiously awaiting the third PO for the remaining 1,000 units which we do -- we won the bid and we do expect to get that shortly but we have not gotten it as of today. Those are fairly lucrative and pretty sizable amount. Total contract in US dollars was nature of about $3 million US. So each 1,000 unit of PO was about $1 million each. That one we've won the bid and are awaiting the PO. There are a number of other bids out there which I can't disclose where we have bids outstanding.

They are for major departments and major cities and major airports, major fire departments. Mostly fire coats from major city fire departments or airports for major utilities. Those are very irregular. They're totally unpredictable. And when they come in, they are very large and we are fairly optimistic that we will get a number of those between now and the end of the year and in fact, we are gearing up our capacity to handle those. But what happened is in Q2 there was just nothing that came in. Just the way it breaks -- it's totally irregular and totally unpredictable.

Okay, could you also talk about maybe new product that you are working on that will be in the future and I'm assuming higher margin products?

Well, we were introducing a new products across the board. Basically they fall into the fire category which where we make in the United States and Brazil. They fall into the reflective category where you have high visibility clothing. Those are the two areas where we have a lot of new developments. Generally, they represent new fabrics and new patterns and made in new places. Another area that we've introduced probably 15 or 20 new products is in the glove area, okay?

Because in India, we are basically expanding the line. Sales are up over 100% there. So we've introduced about 20 new products in the glove area. So when you are looking at new products, you are looking at new fabrics, new patterns and new materials. And we've probably introduced close to 100 new products over the last 18 months.

And you had also talked about the potential for acquisitions. I know you probably don't want to be specific, but in general what are you looking for and you think anything might happen within the next 12 months or so?

I think it's a high probability. Let's say over 50% that something might happen in the next 12 months. What are we looking for? We are basically looking for companies in our industry which we are familiar with. How to sell the products and we were looking for them in high growth countries which could spread anywhere in Asia, pretty much or anywhere in South America. We do look at the United States only because prices have finally come down here after the financial crisis.

But we are very open to looking at anything, anywhere in the world but we tend to look harder at high growth countries like the BRIC countries or the [CIVIC] countries. But as I said, we've got a lot. We've got a balance sheet with essentially no debt and about $74 million of net worth. So we have a lot of borrowing ability and prices are somewhat reasonable now that the private equity firms have learned their lesson. So I think that answers your questions.

Yes, it does and keep up the good work. And we will hopefully things will -- they will -- some contracts will come in the third quarter and it will keep it going for the balance of the year. Thanks.

Thank you.

We will move on to our next question from Sheldon Grodsky with Grodsky & Associates.

Morning everybody.

Morning.

You have mentioned in a couple of different ways a fairly negative outlook for North America or specifically for the United States. Is that simply because of the decline in our manufacturing base? You don't seem to see a cyclical recovery in the products you actually sell?

We will give you a very short answer, yes. United States has been a declining market for the last couple of years. And it really declined during the financial crisis particularly as related to the auto industry and their suppliers. More importantly, you had a big market here that's in decline so therefore you have a lot of companies with a lot of capacity absent the last couple of months so you lot of price competition. That's why we keep saying margins are higher in every other country in the world but the United States. So it's a market that you hold on to but it's just a declining market and you have declining sales and consequently declining margins in the disposables business.

Another good example would be fire in the United States. When you go and look around at the state, county, and municipal agencies, well, they didn't get $600 billion of stimulus this year. So they aren't buying anything. So the United States is, at least in our industry is we sell to manufacturing. And we sell, unfortunately, this year to Dayton County and city people, none of whom are spending money because they are also experiencing cutbacks because they are not picking up the tax revenue that they are used to.

Thank you.

(Operator Instructions) We will move on to Douglas Ruth with Lenox Financial Services.

Good morning and congratulations on a nice report.

Thank you.

In the past, you gave us an actual dollar amount of the backlog. Do you feel comfortable doing that or --

I thought we said -- at the end of the quarter it was $7 million. That's for disposables. Company-wide just disposables.

I think in the last quarter you told us what it was, an almost --

It was down from $8 million, I think.

Okay. All right. And then can you tell us how many people were terminated?

That was just a couple of senior people. Three or four senior people accounted for that.

Okay. And then there is additional color you can give us on Brazil and some of those large sales?

Well, there's a lot of bids outstanding. We are fairly optimistic that we will get a number of those between now and the year end. That's about it. They're very competitive bidding situations.

And is the number of bids that you are making, is that stable? Is it increasing? Is it decreasing in Brazil?

It's hard to characterize that, Doug. It's very irregular. Right now we have an unusually large number of bids outstanding on large bid contracts. And we are awaiting the third PO from the Rio contract. You see, in Brazil there is only about three or four companies big enough to really compete on some of these big bids. So we get our share of things. It's not as though there is over capacity like in the United States. Indeed, there is really under-capacity.

When you look at all of the bids out there, the three or four companies that can do them can barely do them. And we were actually increasing our capacity right now in anticipation of that. Because the Brazilian economy just keeps growing. And with Petrobras doing a $40 billion offer, a lot of the state economies -- a lot of the state utilities are growing. Brazil itself is growing. You've got the World Cup coming. You have the Olympics coming and you have the economy growing at a very fast pace. We actually know that we're going to have to increase capacity to meet the demands of these large bids that will come in primarily from state-owned companies which is where -- why you see the bid process.

Either state-owned companies or municipalities.

Or municipalities. And then the smaller companies who represent the constant business that Gary talked about. Small order. Constant business represent more or less the smaller private company.

Okay. Is there any -- do you feel like there is any progress at all made with resolving the conflict or in Brazil with management?

I think that we will have to go to arbitration and I think that once the former managers see the strength of our case, they will settle. But that probably -- if I had to guess, that probably won't be until after January or February of next year.

Okay.

I feel confident in the strength of our case. Unfortunately, the lawyers like to play games and they don't know the strength of our case.

Okay. And what about the tax situation? How do you feel that, that's coming along?

That tax we paid the amount into amnesty and almost no other developments since. Pretty much as we had laid it out at end of Q1.

And when would you expect from update as far as what's happening with that?

Well, the only update is I think we've laid out all of the exposure that there is other unassertive claims we referred to. The auditors come in, I guess, and --

Just passage of time?

Within the next 18 months, I'd say, we will probably have to lay out some cash to move on to the next step but all of that has been provided for. At least the P&L effect has been provided for.

Can you give us some additional color on what's happening in India and how close you are to breaking even and that thing?

Well, we broke even in July and August. It's only two months. We did hit break-even during those months. Basically it's just a matter of sales. As I said we introduced probably about 20 new product lines on the gloves. We are shipping basically our core product gloves out of India to the various international operations in the USA. But if we can keep our sales just level right now, India breaks even and sales increase around our various subsidiaries in the world. What used to be a $0.25 million hit every quarter, probably won't be that going forward. And back on Brazil, I'm very confident that we will get the escrow money. I'm very confident that we will probably also get additional judgments. So it's just a matter of timing what quarter they fall into. As I said, lawyers don't work on my time schedule, unfortunately, and most people who work with lawyers have had -- know that experience. They just don't work very quickly.

Yes. And you are happy with the management now in India?

Very happy. I mean, we basically changed management in India. That's helped turn things around from large losses through break-even and hopefully, we can move from break-even to profitability.

And what feedback are you getting on the gloves? Are the customers happy with the products?

Yes. That's not a problem. I mean, the product we are making is a product that's -- our core products in India, we started out with a product we knew we could sell. It's a product made by the top four glove companies. It's a volume product. If I look at a world-wide demand basis, it's probably $1 billion product. So we don't have to get a whole lot of market share to break-even. As I said in previous months, we only need about $3 million in sales to break-even. So it's just getting our sales force off their (inaudible) to sell it.

And what's the status now of Chile? Are things back to normal? Is that --

Things are fairly close back to normal. They've got all of the streets repaired. I think as we speak today here in September, things are back to normal. I think we only saw a small loss in August for Chile. And so we hoped to break-even by September and then back into profits by October.

Okay. Can you talk a little bit about Australia? That seems like it's going pretty well.

We have a big distributor there and their sales keep increasing and it's a matter of them introducing our product through the Australian market, primarily through their own sales force. They have been working on it for two years and I think sales are growing in a double digit fashion. Simply because their sales force is becoming more familiar with our product line as is their customer base and it's just a matter of people get familiar with the product, they start buying more.

And you feel that the future can continue to be strong there?

Yes, because they have introduced product now to New Zealand and hopefully, they'll introduce product into South Africa where they have sales operations and continue to introduce the product into Australia. The Australian economy is still strong primarily because of a big part of it is a mining economy. And that's where we are selling a lot of our products is into the mining operations.

Okay. And my last question, would you consider stock buyback? I think that would add some value for the shareholders.

We most certainly would.

Okay. Would you consider that pretty soon you think?

Well, we have to get Board permission for it and then we generally have to put out a release. Yes, I have been thinking hard about that myself.

Okay. Thank you and congratulations again.

Rebotsky

(Operator Instructions) We will move on to Sam Rebotsky with SER Asset Management.

Hi, good morning, Chris.

Good morning.

Basically the sales which are flat in the US -- is there -- has the inventory and accounts receivable more in the same proportion to the sales, et cetera, the percentage relative to the total sales?

Well, the inventory has come way down actually. And the receivables are holding to a steady day sales outstanding.

But is it fair to say that in the proportion of your sales, your accounts receivable and inventory are domestic and overseas in similar proportions? Are you growing the inventory more overseas because your sales are growing overseas?

Well, domestically it's come down to -- we hit bottom and it will probably grow slightly -- it'll grow a little bit from here as we work through our backlog and then build up -- rebuild our inventory with DuPont's finished goods. So it will be rebuilt a little bit in the US Internationally, we will be building inventory not to a large degree, but very steadily, mostly in Brazil. Receivables are pretty steady. From domestic sales, day sales outstanding, as I said, is holding very steady.

See, one of the problems with the sales being flat in the US and not higher because of the Gulf spill is because we could not get product from DuPont. I'm not blaming them. We made the same mistake by reducing overhead during the financial crisis only to find out that we had to build capacity very quickly. So DuPont really didn't start delivering to us until very, very recently. Had we had that product in June and July, our sales would have been way up.

I'm looking at our day sales outstanding and receivables overall, it's -- I calculate 64.7 which is in the same range we had been for the last several years.

So going forward, would the sales increasing overseas, is there, say at the end of the year do we see 50/50 break between domestic/international? Or is there a goal you have? What do you see for your improvements and presumably would it be beneficial to grow it that way?

Well, yes. Beneficial, sure, because the more we can grow international the better. It's no downside to that as far as I can see. The answer to your question, though, it really depends on how the large sales from Brazil play out. If we get -- we could approach 50% if we do extremely well in Q3 and Q4. Otherwise, we will -- it will still be growing. Percentage will be growing. I don't know if we will hit 50% in the next two quarters. But it's possible, Brazil really gets some of those big sales.

In essence, the Brazil sales, it appears -- were down for this quarter and basically you are just up a tad for the six months and it -- you expect with these big orders that you have out there that they will pull it in? It's the bidding process or is there anything else that you could do? Is it just price or about the same quality? What is the need to get the contracts here?

The hold up is the bidding process itself. We seen a couple of bids postponed for various reasons. So you got to go through these legal bidding processes which covers the federal, the state and the local municipalities and it also covers a lot of these state-owned utilities. Because they are state-owned, again, you are in a bidding situation as opposed to a totally private company. We're also -- and the other thing where we expect Brazil to come -- to post something in the third or fourth quarter out of one of these larger bids and they are always in $1 million plus category. But also what people do not really see yet which will be a form of growth is that we've opened up sales in Kazakhstan and Russia. We've just opened up sales offices there that have just made their very first sale of products.

We've also just very recently opened up an office in Buenos Aires, Argentina, so you're going o see sales growth there and should see sales growth coming out of Chile now that the reversal has been turned around on the earthquake. So when you look at Brazil, Argentina and Chile, we should see South American sales grow a lot more say in the third and fourth quarters than this quarter. And the very new operations in Kazakhstan and Russia will add in small amounts but will grow gradually. China, on the other hand, continues just to grow fantastically. And we are looking at expanding in more rapidly into the markets in Indonesia and Vietnam from China. And again, right now we have got to take our time because our -- we've got manufacturing capacity constraints. We expect to address them by year end and then go on growing again.

Okay. Now, as far as the tax situation in Brazil, this -- the location that the tax was paid that was improper, did that occur before you owned it or after?

Both. It started with shipments from imported raw materials from 2004 until April of 2009. So it continued for not quite a year following our acquisition. We made an analysis on a legal terms but the economics of it that it didn't pay. And we decided to shift the port cities in the way we imported in April of 2009.

So this was a value added tax that was improperly paid based on the value added tax system?

Yes, I guess that's right.

And it's just a matter of -- is it a matter of filing a claim for a refund to get that back? I mean, is there any rationale if a tax is -- like in the States, you pay something improperly it's just a matter of filing a claim for refund.

Not quite in this case. In this case it's more matter of two states actually being at war with each other. This VAT tax is not at federal level, it's at the state level in Brazil. Like New York and New Jersey squabbling over the VAT tax here. And terms of the credit, we do get a credit for a significant amount based on whatever we pay in to the state (inaudible), which we are local, the residents state. We'll get a credit back of about $0.60 cents on the $1.00 against future purchases.

So in essence you will not lose anything. You have the ability to utilize anything that --

No, no. Not everything. I said we will get credit on $0.60 on the $1.00 that we pay in. $0.40 on the $1.00 that we do not get credit is the very basis for the $1.6 million charge that we took.

Okay, okay.

We've two lawsuits going on that and if we are successful in the lawsuits we recover a lot of that cash.

In them and the provisions.

There is $1 million in escrow that we certainly expect to get and then I expect to get a lot more over and above that from selling to shareholders and from the logistics company that basically suggested we do this because it's negligence on their part. With $1 million in escrow, I certainly expect to see that sometime.

Okay. So getting back to the United States, as far as other than -- I mean, the capacity -- the number of employees you have, do you reduce the number of employees? What do you have to do to adjust the economy that you need to get the sales up? What capacity of being utilized in the United States.

Let me look at the United States, we are going to adjust employee head count to sales literally on a monthly basis because it's very difficult -- we have done some cutbacks here. And now we're going to follow and see how the economy and basically how the product lines in the United States move forward. If we see them dropping again, we will respond by reductions in force. If we see things staying the same, we will stay the same. It's the Goldilocks formula. And of course, there's a possibility that sales could go up in that case. We would try to maintain our headcount but we might actually have to add a few people. But we were just going to look at the economy, sales by product line and do it on a monthly basis and adjust upwardly or downwardly.

Okay. So at this point there is no more surprise charges or anything and your model to go forward should be decently improved profitability both domestically and internationally to the extent that you've got your cost down in place.

We have I think a good read on the third quarter which margins should maintain. It should maintain what they were this quarter. But we don't see all of these write-offs coming in the third quarter.

Okay. Well, good luck. Hopefully the economy improves. It'll make it easier.

Yes. Thank you.

Gentlemen, we have no further questions at this time.

Okay. Thank you very much and good luck.

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