Lakeland Industries Inc (LAKE) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Lakeland Industries to report Q3 FY '11 results and conduct conference call. Please be advised that this 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, December 13, 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 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, trade news in law or regulations and other factors, many of which are beyond the control of the Company.

Listeners are cautioned that these statements are not guarantees of future performance and the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. At this time, I would like to introduce your host for this call, Lakeland Industries President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Good afternoon to you all. Thank you for joining our fiscal 2011 third quarter conference call. Lakeland has delivered another strong quarter driven by growth in both international and domestic operations. For the last few years, the Lakeland story has centered on growth of faster growing international markets, while the domestic market for our products have declined precipitously, with outsourcing trends and the exporting of dirty jobs to nations with lower cost bases. This negative progression was later punctuated by the global recession and a severe pullback in the domestic auto supply. We are pleased to report that by most measurements, many of the economies around the world are recovering, and the US auto sector is rebounding, although unlikely to reach its previous levels. During the recession, many of the customers allowed inventory of our products to run low, so we believe that orders and sales increases through the first three quarters of the fiscal year may not necessarily be indicative of continued or accelerating order flow.

Lakeland's international revenues increased by 14%, even though our Brazilian business was slightly lower year-over-year as it awaits awards on several large bid contracts. Importantly, we have strengthened our near-term prospects through revenue and earnings visibility and our longer-term growth strategies are gaining traction. Consolidated revenues increased by 18% during the third quarter to $26.3 million, which on an annualized basis is higher than any fiscal year revenue reported by the Company in its nearly 30 year history. We ended the third quarter with a backlog of $3.4 million in firm, US disposable orders, and deferred profits from our operations in China that should yield approximately $700,000 in pre-tax profit, or $0.10 in net earnings per share.

Domestic operations for Lakeland have improved since bottoming out with the recession. Of particular importance is the rebounding of the auto sector, for which we supply our products and manufacturers throughout the supply chain. US auto sales rose 17% in November from a year earlier according to reports from manufacturers. The annual sales rate was nearly 12.3 million vehicles in November, as America returned to dealerships to take advantage of incentives and after putting off car purchases during the recession. We believe modest growth in the auto sector is achievable, although the industry likely will not return to previously seen levels in the 16 million vehicles per year range.

Demand for products related to the Gulf oil spill has abated, but we are seeing requirements pick up in other sectors of the domestic economy. Many believe employment will drive the economic recovery further from here. Economists see gains in employment as evidence that the recovery is gaining a bit of momentum. Manufacturing where Lakeland products are frequently required seems to have been a leader of the recovery. In a recent report from the Institute for Supply Management, the index of national factory activity was over 56 in both November and October, in line with expectations and well above the 50 level, which indicates expansion.

Other domestic sectors where there is some strength is in infrastructure spending and among the public utilities. We believe the year-to-date order and revenue increases for the domestic market may be for stock replenishment, not to mention the one off needs related to the Gulf oil spill. Despite a stabilizing economic environment, we believe challenges remain for our business in the US market where our products generally deliver the lowest margins as compared to our profitability elsewhere in the world. We still derive the majority of our consolidated revenues from our domestic operations, which represented 63% of the total in the third quarter and grew by 21% from the year earlier period. Yet our international operations, which deliver higher margins relative to the US market, grew to represent 37% of consolidated revenues in the third quarter and is expanding much faster and presents far greater longer term opportunities for Lakeland's top and bottom line performance.

Internationally, we are gaining traction in multiple markets around the world, with particular growth anticipated in China, Brazil, Mexico, Chile, Russia, and Europe. We anticipate double-digit growth from most of our international operations in 2012. With the heavy spending in international operations behind us, management, sales, and manufacturing personnel are perhaps the most critical elements to our success. Sales and marketing personnel have been added to our operations in China, India, Kazakhstan, Russia and in multiple locations in Latin America. The teams have been marketing -- making considerable inroads towards securing an impressive number of new product approvals and setting up direct sales channels. Charges against earnings were taken earlier in the year, and in the third quarter for personal changes that enabled us to improve upon our management teams in Brazil, India, North America.

We implemented a head count reduction at our manufacturing facilities in China during the recession and amid a modified agreement with DuPont, whereby they would supply us with the finished goods and we would be able to reallocate our production capacity. The additional capacity was not needed until recently, as the global economic recovery took effect. In October, we added nearly 200 sewers hired from a neighboring company that did not plan accordingly in the facing the recession.

The addition of this workforce has multiple implications. First, with the growth of our business, the increase in our cash balance and the reduction of debt and available credit under our bank facility, we were prime for making an acquisition to add manufacturing capacity, increase our revenue and customer base, and expand our global brand and market penetration. As it turned out, practically adjacent to our major plant in China was the unit of a Korean company that had its own sewing staff of some 200 strong. Demonstrating the industry acumen of our management team, we were able to weather the economic downturn, while our Korean counterpart was declaring bankruptcy. This made the pick up of the sewing staff relatively easy. Instead of buying growth, we can build it organically as we are being presented with a multitude of growth opportunities around the world for which we can manufacture products easily and with high quality in China. In turn, we can maintain an asset light business model while increasing the utilization of assets that we have previously invested in. The result, we believe will be higher returns on capital.

Further we have just completed a plan expansion in Brazil, which will result in a 30% increase in production capacity. Now, with our manufacturing capacity returning, the Company's global asset utilization provides significant upside to our financial results as there is a substantial opportunity gap to capitalize on. Capital investments should be minimal from this point forward.

The primary investment being made by Lakeland is in its personnel. We are actively cross training our global workforce so that we can make and ship products at multiple facilities to multiple hosts. In addition, we are introducing new products sourcing lower costs for materials, which is important as we are experiencing pricing pressure in certain of our markets, and securing regulatory and licensing approvals on products for introductions in the very near future. While we generally sell products almost exclusively in the US through distributors, we are employing a direct sales model in most of our international operations. The Lakeland brand is being marketed as lower cost and higher quality than many of the local brands. This is the approach that we have always practiced and which has led to our long history of profitability for 18 years.

Our working capital and cash position increased in the fiscal year with a cash balance at October 31, 2010, of $5.5 million USD. At the same time, we have reduced our debt from the beginning of the year to a very low and manageable level below $6 million, although this may increase modestly as we rebuild inventory levels. With a credit facility of $23.5 million at our disposal, we are provided with significant access to over $17 million for growth capital and acquisitions.

Reflecting the confidence we have in Lakeland's fundamental strengths and growth prospects, as well as the belief that our current valuation does not reflect the Company's underlying long-term value, we announced in November a stock repurchase program for up to $2 million worth of outstanding common stock. We believe the repurchase of our common stock and our favorable outlook should enhance shareholder value. I will now pass the call over to our CFO, Gary Pokrassa, to provide a more detailed review of the Company's financial results.

Thank you, Chris. While Chris has provided an overview of some of our third quarter results and operational developments, I'll provide a more detailed review of our consolidated financial results for the period. Total sales increased by $4 million in Q3 this year from Q3 last year, resulting from a $2.8 million increase in domestic sales and growth of $1.2 million in foreign sales. Third quarter this year, domestic sales was $16.5 million versus $13.7 in the year earlier. Third quarter international sales were $9.8 million versus $8.6 million last year. Q3 11 sales break down is 63% domestic, 37% foreign, compared with last year of 61% and 39%.

I have discussed our total sales for the quarter, these figures do not reflect backlog. Ordinarily, Lakeland does not have a significant backlog as we typically ship product from finished goods inventory 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 lead to stockout and back order conditions. The Company's back order for domestic disposables is down to $3.4 million at October 31, from nearly $7.5 million at the end of the second quarter. We plan to work off the remaining backlog in Q4, provided we have the necessary access to raw materials or finished goods in the case of products we resell that are received from DuPont.

As for the deferred profit, this relates to our operations in China. Lakeland has always followed the practice of eliminating or deferring any manufacturing profits on items sold to affiliated companies until the items are shipped to the customers. Although these products are revenue for the China operation, at the parent Company level, we eliminate the revenue and defer the related profits until the products are sold and shipped to a third party customer. The aggregate amount of this deferment previously fluctuated within a range which has not been material. For Q3, at October, due to unusually high production levels in China resulting from the previously mentioned backlog and stockout conditions, a pre-tax profit amount of $694,000, or $0.10 a share, has been deferred since it's still in consolidated inventory. This profit will be recognized when the items are sold to third party customers. Until that time, the products are reported as inventory on Lakeland's consolidated balance sheet.

I'll now discuss the revenue performance by country. In the US, disposable sales were $11.6 million in the third quarter, up from $10.3 million last year. Disposable grosses increased by $1.1 million, 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 remediation, benefited from the Gulf of Mexico related demand in Q3 this year. As mentioned, we have a backlog for disposables in the US of $3.4 million.

On the international front, we spent the last few years building our 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 sells products in the following international markets--Australia, Brazil, Canada, Chile, Argentina, Ecuador, Columbia, Peru, Mexico, China, Kazakhstan, Russia, Philippines, Thailand, Malaysia, Indonesia, Singapore, all of Europe, the Middle East and India.

For illustrative purposes, here are some revenue highlights for a few of our more established international operations, and the numbers I'm going to read are the Q3 change quarter-over-quarter versus Q3 last year in the revenue. Brazil is down 8%, Chile down 17%, UK down 28%, and I'll explain that in a minute. China external sales is up 146%, India is up over 200%, and Canada is up 47%. Brazil sales reflected the lack of large bid sales in Q3; however, we have several large orders for fire departments, municipalities, and national government agencies, that we feel very confident in winning and commencing shipments in Q4.

For our Brazil operations, sales in Q3 were $3.1 million, compared to $3.4 million last year. Gross margins were 41.7 versus 41.4 last year due to favorable exchange rates but reflecting a lack of the volume benefits in the larger big contracts compared with last year. Further, our operations in Brazil, and as we discussed on previous conference calls, we've terminated for cause certain members of the management team and promoted others from within to take their place in Brazil. Lakeland and the two terminated sellers unsuccessfully attempted to negotiate a settlement. The stock purchase agreement provides for arbitration to settle disputes, and Lakeland has asserted for the damages in such arbitration proceedings.

We took a charge of $175,000 US in Q2 and another $50,000 in Q3 to the legal and professional fees incurred with this matter. Lakeland filed a formal request for arbitration on October 29, of this year. All future legal fees are contingency-based upon the successful judgments by the arbitration panel.

Chile reflects a rebounded activity after stalled business in the second quarter from the effect of the earthquake. Q3 sales were received for large multinationals and other entities in the commercial and petrochemicals industries. Also, related to Chile, previously, we had included Argentina with our other Latin American operations, but with Argentina sales opportunities accelerating we created a separate subsidiary. Of particular interest in this region are fire coats and garments worn in the mining and energy industries. In Mexico, which for the most part had been a manufacturing operation, we are now in the process of setting up a sales office for direct sales activities, which are expected to begin ramping up in the middle of 2012, I'm sorry, fiscal 2012, about two quarters from now.

In India, we are pleased to report that following prior efforts to improve margins and with higher volume production, we've finally broken through to a breakeven gross margin from the glove manufacturing business. We are now marketing products made in India throughout our sales channel in China, Canada, Chile, Europe and the US, as well as in country and India. Sales of Indian-made products increased over 200% in the third quarter from the previous year, in the last several months, we've been implementing sales and marketing strategies to grow our in-country presence including advertising and hiring of sales personnel.

For China, as we previously mentioned, we began selling in country directly following years of solely having operations of manufacturing. The economic growth in this market, like most of our target international markets except Europe, is expected to be in the double-digit range. For Lakeland's third quarter China external sales more than doubled to $3.8 million in Q3 from the year ago period. Through the use of a substantial portion of lower cost materials, this operation is very profitable for us. Third quarter operating profit in China increased nearly 150% year-over-year. We recently opened direct sales of customer service offices and higher sales personnel in Shanghai and Ningbo, Zhejiang province. Furthermore, in addition to selling direct, we are also using distributors for coverage of neighboring Asian countries. 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. These sales are included in the China external sales referred to earlier.

Russia and Kazakhstan are relatively new offices for us, we've been stocking inventory, adding sales personnel and have commenced sales activities, in large part addressing manufacturing and energy industries. European sales were negatively impacted by shortages of product and a build up in orders earlier in the year following a workdown of customer products through the recession. Yet on a year-over-year basis, our revenues were higher by 19%, that's year-to-date, not for the quarter. UK Q3 was impacted by production shortages, which will be resolved in Q4. We expect the full year to show a significant increase for European sales. Finally, in Canada, the third quarter was stronger than the prior year with selling products into fire departments or defense-related initiatives and into the refinery and mining industries.

Moving further down on the income statement, consolidated SG&A expenses were $6.4 million, compared to $5.5 million last year. This included higher expenses resulting from higher sales commissions, about $0.5 million of increased operating costs in China, which were previously allocated to cost of goods sold, about $0.5 million increase in freight out shipping costs, about $400,000 increase in equity compensation resulting from the 2009 restricted stock plan treated at the baseline performance level and the resulting cumulative charge, $300,000 increase in foreign exchange costs resulting from unhedged losses against the Euro in China. The Company has since commenced the hedging program for the Euro. $300,000 increase in professional fees resulting from the management changes and the commencement and arbitration proceedings from Brazil as we said, and also international tax planning, and about $400,000 of increased sales personnel in payroll or severance relating to management changes offset by about $200,000 resulting in a reduction of payroll resulting from the severance.

The Company's net income in Q3 was $650,000 from a net loss of $200,000 for the quarter ending last year. Net income per share in Q3 this year was $0.12, compared with a loss of $0.03 in the prior year. The increase in net income primarily resulted from higher sales particularly from our higher margin international operations.

Turning to cash flow and the balance sheet, fiscal year to date, we generated $5.3 million of cash from operations, mainly as a result of operating profits. This cash generation was partly offset by the net loss for the nine months to October 2010 and other adjustments stemming from the Brazil back tax issue. Our inventories of approximately $39 million at the end of the third quarter were relatively consistent with the beginning of the fiscal year and should remain in this facility -- in this vicinity on a somewhat steady state basis, perhaps a modest increase in the near term. This level is needed to accommodate the five month turns in inventory, which is relatively good for companies that source raw materials and manufacture industrial garments internationally.

At October 31, the Company's outstanding loan balance was $5.9 million. This figure compares with $9.5 million at the beginning of the fiscal year. From the end of the second quarter, when the balance is $3 million, we borrowed more to accommodate the increase in purchases from DuPont. We expect our bank debt balance to increase modestly as we purchase more and replenish our finished goods inventory from DuPont going forward.

On November 30, TD Bank agreed to extend the Company's revolving line of credit for a two year period, expiring January 14, 2013. Bank facility allows total borrowings of $23.5 million, at an interest rate which today, is presently below 2%. Given our borrowings at the end of the third quarter, there was a remaining amount of $17.6 million available. We ended the third quarter with cash of $5.5 million, an increase of about $400,000 from the beginning of the fiscal year and modestly lower than at the end of the second quarter. The Company's book value per share is now $13.64. Therefore, our share price is trading at a discount of about a third to book value. Our current ratio is 6.7:1. Our current working capital is $57 million, which is about equal to our enterprise value.

That concludes my formal remarks, and I'll turn it back to you, Chris.

Thank you, Gary. 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 improving our level of business domestically. As we have discussed, our international diversification provides us with many avenues to pursue growth. In the shorter term, we have a certain amount of visibility given our order backlog and deferred results from our Chinese operations. Our asset utilization is low and improving, which enables significant upside, and our balance sheet remains strong with minimal debt and access to substantial capital for growth opportunities. I will now turn the call over to the Operator for the Q&A session.

Thank you, sir. (Operator Instructions). We'll go first to Howard Halpern from Taglich Brothers.

Congratulations. Great quarter guys.

Thank you.

In terms of you talk about gaining market share internationally, could you give some perspective, say in the mining industry internationally? How much of a percentage do you currently have, and how much could you get up to do you think over the next three or four years?

Well we're currently looking at about 37% international and the rest being domestic. We plan on being 50/50 probably within 12 months.

He's asking about the mining industry in particular.

Mining industry in particular, it's really big in Chile and Argentina and also in Kazakhstan. If we're looking at specifically supplying end-user or distributors who go to the miners. In the United States it's a fairly general thing. In Canada, it's a much larger exposure. It literally goes country by country, and I'd say if we sold, we're probably selling the most to mining in Canada simply because our revenues in Canada are larger than they are in Chile and Argentina. But in Chile and Argentina, mining is going to probably represent about 35% of our sales in those two countries, and it looks like it's becoming a significant factor in Kazakhstan, but in Kazakhstan, I think the petrochemical industry will probably out-distance everybody.

I would say in Brazil, the other major foreign market that I think is almost zero sales into the mining industry. That's not a major customer.

Okay, and in terms of you talk about asset utilization. If you were to max out now without increasing any additional workers and stuff, how much revenue could you support?

Well we could probably support another $7 million or $8 million in India with hiring a few more workers, and we could probably support another $7 million or $8 million in China. So we're probably looking at about $15 million extra capacity there, and in Brazil what are we looking at?

Well we just expanded the plant capacity in Brazil, and about 25% is plenty of room to expand that physically, and another 25% or 30%. And then when we can tack on outside contractors and then bringing in our plant in China to also supply Brazil, we can supply Brazil, we could increase another 60% or 70% with almost no additional investment in Brazil.

So you are really looking at, like you said earlier, focusing on getting personnel in place to just getting new customers to drive higher revenues to increase your asset utilization?

Well, as a round number, we could probably do an additional $20 million in sales without really spending a lot of money on new plant and equipment and machinery.

And that's really your first line rather than looking for what like you talked about a big acquisition or-- ?

We're always looking for acquisitions. We can't say I'm going to do an acquisition tomorrow afternoon; these things take years and years. We've viewed a number of companies. We are definitely actively in the market. I'll give you a perfect example of it. Our major acquisition in Brazil, we were first introduced to that company in March of 2007, and we closed it in May of 2008. It's a long, long process.

Okay. Related to the deferred income that you talked about that's now really hanging out in inventory until it's sold, would you anticipate that being sold in this current quarter, or do you think it will spread out over the next --?

It might slip over into Q1. Between Q4 and Q1, that should all be taken care of, yes. That's a normal process. The only reason we even mentioned it is because of the unusually high level of manufacturing of China in Q3 to catch up on the backlog, which generated a lot of profit in China which is based on sales to our other Lakeland affiliates which are still on the ocean and still in inventory. Which is just that spike in the China production for affiliated type of sales as opposed to external sales. Otherwise this is something that's nothing new. We've had it every time. It's just an unusual spike in the China production, which generated a spike in the amount of profit we had to defer.

And with India, the Indian operations now breaking even, how do you see the glove demand, breaking even in gross profit? How do you see the glove demand from that facility around the world?

Our job is to drive the sales on those gloves to take this to profitability. I think that can be done in the next six months. It's really now a job for sales, for our sales personnel. It has nothing to do with the Indian operation. It's running very, very well. It's running at a fairly good clip right now. All we need is the sales and that thing goes right into profitability, and because most of this is fairly automated, it's once you hit your breakeven that sales beyond breakeven become even more and more profitable. It's like a machine that turns out widgets. Man, if you could run it 24 hours a day, the profits are phenomenal compared to running it eight hours a day.

And the rise in commodity costs, how has that impacted raw materials and how quickly would you be able to turn the higher input costs to higher prices to end-users?

What we've seen is we're a customer of DuPont now. DuPont has raised, it sent out price increases, and we will too to our customers. Price increases are going to be anywhere from 3% to 10% on many of our products, depending on the type of raw material increases we're seeing. A lot of the raw material increases are being driven by the fact that there's substantial shortages right now. A lot of raw material suppliers cut their capacity back by 50% in 2009, and they still are not back to normal. In other words, supply is not meeting demand; the economic activity is greater than what the suppliers can make right now. I don't see that balancing off until probably June of 2011, so we have seen raw material prices go up, and we're just passing them on. It's not too hard when you have backlogs of $10 million at one point, and nobody could deliver anything for six months.

Right, okay. And you talked about the domestic auto industry picking up and at that $10 million to $12 million run rate, which is good for you, but my question is the production of hybrids and now electrics, is that going to increase the demand for your product at all?

How many do you think are going to be bought? Your guess is as good as mine. One is at 4$3,000 and the other is at $33,000, but if you get the $7,500 tax credit on the lease of $33,000, that's a pretty reasonable price. That's one that can only go 100 miles. I don't know. I really, I can't predict where the auto industry is going to go. All I do know is that our domestic sales are fair. We do about 15% with the auto industry, and it's not with Ford, General Motors and Chrysler. It's with all of their suppliers. That's where the bulk of our sales are.

Okay, and one last question is regarding if you have some idea on what the full year for this year the tax rate might be?

It really bounces around a lot. I would use 27%.

Okay, guys. Keep up the great work.

Thanks.

We'll move now to Sheldon Grodsky from Grodsky Associates.

Good afternoon, everybody.

Hi.

I think, I don't want to put words in your mouth exactly, but you said something to the effect that the quarter's results annualized would be at a record level.

Of revenue.

Now, what I'm wondering is if you made all the adjustments that you did during the recession, why didn't we also come up with record profits for the quarter? I'm looking at a couple of years ago, you had comparable revenues and you're in $0.25 or $0.26 a share, so what happened in between?

Two things happened. One is in Brazil, we did not have the large bid sales in the quarter, which is part of the revenue, but also, that's what creates the profit in Brazil is that extra layer of sales. So Brazil was not profitable; it was about a breakeven quarter. We expect that to change as the large bids come in. Also, we had to defer, as we said, a big chunk of profit that we did earn, which should come in through Q4 or Q1.

Yes, if you add that $0.10 today it would be $0.22.

Okay. Let me just do a somewhat different question. In terms of your relationship with DuPont, which has gone through a very big change in the last year or so, do you think that your business with DuPont's product is going to be as profitable as it used to be or less profitable?

I think it will probably be less profitable simply because we now are just a customer, so we have to compete with all the other customers. And it will be, yes, it will be less profitable, no question about it. What we plan on doing is introducing other products that are not even competitive with it that have a much higher margin and sell it into the same customer base.

Thank you.

We'll go next to Douglas Ruth with Lenox Financial Services.

Chris and Gary, it was a beautiful report on a lot of levels, and thank you for doing what you've done to the shareholders.

Thank you, Doug.

Could you talk some about the new products and specifically what you're doing, where they are going to be introduced and that sort of thing?

Well, it's a country by country basis. A lot of product introductions, it's sort of like, I don't know, a new car model. They are different in each country, but they are somewhat the same. We're introducing new products across all our lines; a lot of them are awaiting certification. For instance, if I introduce a new product in a lot of these countries, they have to be certified as safe by a government agency of that country, okay? So sometimes those certifications in the United States can take 12 months, where as in other countries they only take two to three months, which is a comment on the United States. Big bureaucratic countries are five times faster.

But in any event, specifically, we're introducing a whole bunch of new fire products which are products much like Brazil manufactures. We're introducing a whole new line of fire coats in the United States and internationally and in Brazil. We're introducing a whole new line of disposables, which have really only gotten off the ground in the last year. We've introduced a whole new line of high visibility clothing primarily geared toward the utilities who are willing to pay very high margins for customized high visibility clothing for men on the wires and around electrical projects. So literally across-the-board, even in our glove operations, we've introduced eight or nine new products in the last couple of months. They haven't even been certified for use in a lot of the countries yet.

Now, did the customers ask for these products, or did your technical people design the products? How did that happen?

What we generally do is we get ideas from our salesforce. When our salesforce talks to the customers and they start hearing one guy wants this or one guy wants that, when you start collating together and you see a common request by a whole group of customers, that goes into our planning of a new product. So it's really listening to the customer, and there may be one customer who wants something that's so far whacked-out, and it's only one request. But if you listen to a lot of customers what you start hearing is a lot of the same things repeatedly. That's where we seek to change our products to meld with what the customers are asking for, or trying to come up with something that's truly innovative that we think our customers will bite on. I'd rather listen to the customer and produce that way, but occasionally, we'll go with something that meets a new standard, or that is truly a breakthrough technically and test it and see how it goes for the customers and if it works, then what is the price point it should be sold at.

And is there anything that you're specifically excited about that you're introducing?

I am, but I don't want to let my competition know, Doug.

Okay, that's fine. Could you talk a little bit more about the 200 sellers? It sounds, I knew there was a capacity problem, so the package you are able to add then, sounds great. And could you give us a little more color on how its been going and all that?

Okay, well, as we said the facility next to us went into bankruptcy, which provided us 200 trained sewers, and they were trained on woven garments, which is where we're moving toward, away from disposables and into wovens. But more importantly, during this period and continuing, it's very hard to hire new Chinese laborers. In other words, if I have 1,000 ladies working in my factory who are earning say $500 a month; but any new hires, they want $700 a month. What do I do with the other 1,000? I can't hire ten new girls who I pay $700 because that's all they will take. Then I have to raise the rest of the factory to $700 from $500, which is an unbelievable cost. What was good about this was picking up 200 ladies who didn't have a job and being able to integrate them at the average cost now. This is the problem everybody is having in China.

And Doug, this just happened right at the end of the quarter into November really, so the effects of this really aren't even in this quarter that we reported.

It's like the contractor who makes materials for Apple and you've heard this, doubled their wages.

Yes. Have you bought back any stock so far?

Yes, we have.

And when did you start the stock buyback?

Within the last ten days I guess.

Okay, good. And can you give us anymore color about Brazil? You've mentioned in the past that there's been some fairly large orders. What gives you the confidence that some things may close in the fourth quarter?

It's a tough process, and frankly we've also spent the last two quarters cleaning up some of the mess that was left from the people we terminated who were specifically responsible for the bidding process. The revenue in Brazil is composed of maybe 50% of smaller orders that are very consistent and predictable, but the other 50% comes from very large bid contracts of the Rio De Janeiro Fire Department, a government military agency, a number of government agencies, other large city fire departments. That type of thing, and they put a contract out for bid for several thousand, if it's a fire garment, for example, several thousand pieces ,and that's the coat and the pads basically that you see the firemen wear. That's a very high-tech item and it's not cheap, in particular it's not cheap here and it's not cheap in Brazil. It's very expensive.

What happens is you go through a bidding process, and it's very irregular. You have to wait for the agency to put up a request for a proposal and it's a very long process that can take a year. And then you have competition who are always jockeying for a position to shoot down whoever does get the preliminary bid. These things go on for a long time, and even when you win the bid, that's not a committment. The committment is when you get a PO from that agency pursuant to the bid. That's the real chase, and we've gotten one PO. We didn't put out a press release on it, but we do have one PO, which we do expect to fulfill in Q4. And we've just won another bid, which again is not a committment, so we aren't putting out any press releases, but we have won a bid and we're very hopefull of several other bids in progress. We're very hopeful we understand the process. Our people in Brazil have kept a finger on that pulse, that's what they do full time, and management is very optimistic that we will be getting several of these large bids in the next couple quarters.

A good example is you can win a bid with a government agency say for $5 million, and over the course they might issue three POs over the course of the year. They are not required to buy the $5 million. They may come in and only take down $4 million of the $5 million bid.

Well the perfect example is the Rio de Janeiro bid I just referred to. We won that bid about a year and a half ago, and that was for 3000 units. We got the PO for 1000 units in Q4 a year ago, which was in the revenue for Q4 a year ago. We got the second PO for 1,000, which was in Q2 of this year, and they have their own local budget constraints. The purchasing manager for the Rio de Janeiro Fire Department ran into a budget issue. He couldn't issue the third PO. You've gotten that recently, so it's now over a year and a half after we won the bid that we're still getting the third PO. And frankly, even if you win the bid for 3,000, if we got 2,000 POs for it, there's nothing that says you get all 3,000 either.

Yes, I understand.

So it's a very very complicated process. It's irregular. It's very lumpy. You can run for two quarters and have excess capacity in the factory, but boy, when you get those orders in they all seem to be coming in, that's why we expanded our plant capacity. Because we have won some pretty large bids, but we're not going to go out and say -- they aren't certain, so we can't make press releases out of them.

Well even if you're certain you win the bid, it doesn't matter. There's no committment from that. What's important is when you get the PO pursuant to that bid.

I understand.

And that's what's also iffy, and it's a question of timing. You have no idea when that comes or even if it comes.

Are you happy with the management that's in place in Brazil at this point now?

Pretty much so, yes.

Very much so. Very happy.

Got it, and then you talked some about India, so the factory is up and running. It sounds like based on --from a gross profit standpoint, you've got a profitable and--

Breakeven, Doug.

Breakeven rather, I'm sorry.

Breakeven at the profit level. Let's not overstate the case.

Yes, I don't want to do that. And then where do you go from here with that then?

Where we go from here is we get our salesmen to sell the gloves. It's that simple. It's getting the whip out with our salesforce around the world. All they need is a couple more million and they're very profitable.

It's purely process of sales at this point. The factory is done, we have our production people in place. All the production processes are streamlined. It's ready to go. We're ready to produce. We need sales.

And can you give us a little more color on how you had such wonderful operations of such wonderful results in China? The 100% increase?

No, let me make something clear. The $0.10 we were talking about, when we were talking about the sales in China, our China plants produce both for our own use for other Lakeland companies affiliates around the world, and also for domestic sales to actually external customers in China and to the Australian distributer. Right now, the production of our China plants is about 65% affiliate, 35% external. So the $0.10 refers to the 65% profits on the sales of the 65% to our affiliates. The sales that you just asked about, Doug is on the 35% that's really growing over 100% year-over-year to outside third party customers made directly from China. Those are third party sales, not affiliated sales that were eliminated.

And where are those third party sales going to?

Primarily into domestic China, but there are sales into Southeast Asia and Australia. But the real growth we're seeing is coming out of domestic China itself.

And any specific industry?

It's really all industries in China. We keep adding salesmen, and it's very economical to set up a salesforce in China. You don't have to pay them $200,000 a year like in the US, and they only generate $10,000 in profit. Rather, it's just the opposite. You pay them $15,000 a year and they generate $150,000 in profit. So on those numbers, I should fire everybody in the United States and get out of this country.

It's a beautiful report. You guys have done a wonderful job, and it's exciting to watch what you're doing and looking forward to the next report. Thank you for answering my questions.

Thanks, Doug.

(Operator Instructions). Moving next to Sam Rebotsky from SER Asset Management.

Yes, good afternoon Chris and Gary.

Hi.

I want to get a handle, the $0.10 that you're talking is my understanding it's pre-tax and--

$0.10 is after-tax.

After-tax? I thought I read in the Q that" said okay, I'll read the Q again.

(Inaudible) pre-tax which is $0.10 EPS, which is after tax.

Okay, and do you expect it to be 50% in the fourth quarter and 50% in the first quarter or is there a--

It's probably a little more in Q4 than next year but also, it's a very dynamic number because what will happen then, is we'll go through the same exercise at Q4 and I'll have to defer the profit from Q4. The $0.10 is really not actually the total deferment. The $0.10, so we're clear here, is the increase in the deferment over the previous year. I actually deferred more than that. This is something we always do. The only reason I'm posing this at all is because we had a big spike at Q3. So if the production continues in China in Q4, I'll replace some of that with Q4 profits, but that will come down and we will pick up some of that. It's hard to break that down. Over the next two quarters, we should pick up all of that. We should be back to normal levels of production and profit in China probably two quarters from now.

Okay, now the increase in inventory from $33,560,000 to $38,780,000 -- is a piece of that this Chinese-- ?

Three pieces. Part of it is now China is now sourcing locally. They're producing for our other products, and they are sourcing materials locally, so the raw material and then process inventory in China is up because of the local sourcing. Second, Brazil is expanding, the inventory in Brazil has grown. And lastly, in Q3 for the first time, we commenced purchasing finished goods from DuPont. We had let the inventories of those products go all the way down at the end of Q2 hoping that DuPont would replenish us, and then we got hit with everybody being stocked out. So that inflated or exacerbated the reduction to a point that was probably a little too low for normalized inventory, and now we're getting back to a normalized inventory level with the DuPont timing guidance but we're purchasing it from DuPont.

And you would expect to be able to increase -- significantly increase sales significantly larger amount carrying this $38,780,000? inventory?

Yes, I would look more towards the international aspect here, but yes.

Okay, and when we look at this October quarter compared to the July quarter, the sales are up almost a couple of million, but the profits aren't. Is there anything unusual in this quarter that's a one-time expense comparable to the previous quarter? I know you spoke about a lot of different things, but it wasn't clear to me what specifically is a one-time fixed expense.

Well, I don't know that we have any real one-time fixed expenses in Q3. We had a few of those in Q2. I wouldn't, there's not that much in expenses in Q3.

Of course I'm looking at sales of $26,293 versus $24,551.

It's pay off expenses. These are all one-time--

We had some lay off expenses and professional fees, nothing huge but there's some of that, a few hundred thousand I guess.

Okay.

If you go to the MD & A--

And the 10-Q--

-- there's a list specifically of all of the expense differences.

Actually there's a very detailed analysis of differential in the gross margin and in the operating expenses in the 10-Q.

Okay.

Which I understand is out now. It was a few minutes delayed.

Okay, so now based on what you've accomplished in this quarter, is it fair to say that your visibility from what you have would support more significant, a greater sales and greater profitability going forward?

Well more international than domestic, yes. We're looking for domestic to be flattish at best and international to grow like a weed.

Okay. All right, that's good. Hopefully you'll get some respect in the future.

I hope you're right.

Okay.

It appears we have no further questions at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Okay. We appreciate your participation in Lakeland's third quarter fiscal year 2011 financial results conference call. As we are committed to delivering value for our shareholders, we believe Lakeland will continue to effectively manage its balance sheet, control expenses, and execute its strategy for long-term growth. Please feel free to call us to discuss the Company's operations or to schedule a meeting with management as we bring our investment story to prospective investors in the months to come. Thanks again and goodbye.

Thank you.

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