Lakeland Industries Inc (LAKE) 2012 Q1 法說會逐字稿

Thanks so much for holding, everyone. Welcome to the Lakeland Industries first quarter fiscal year 2012 financial results call. 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 fact which reflect management's expectations regarding future events and operating performance and speak only as of today, June 8, 2011.

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 are factored in the Company's filings with the SEC, general economic and business conditions, the business opportunities that may be presented to you and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the control of the Company.

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

Good afternoon to you all and thank you for joining our fiscal year 2012 first quarter financial results conference call. As stated in our press release issued earlier this afternoon, Lakeland reported first quarter results that were fueled by its international operations. We delivered impressive growth in all major operating metrics. Comparing this quarter against the same quarter last year, here are some of the highlights.

International sales increased 13.4%. International revenues were 42.9% of total sales, up nearly 12%. Gross margin increased to 31.3% from 25.2%. Gross profit increased 26%, or $1.7 million, to $8.1 million. Operating margin grew to 6% in Q1 FY 2012 from a 1.1% in Q1 FY 2011.

Operating profit increased 434% to $1.6 million from $0.3 million. Net income increased $2.5 million to $1.2 million from a loss of $1.3 million. Earnings per share increased to $0.22 from a loss of $0.25. And our EBITDA reached the highest level in 11 quarters at 9.14% of sales. We are very pleased with the progress being made in building a diversified international platform that has significant operating leverage for long-term growth and profitability. However, not all of our operations performed to our liking.

Specifically, detracting from the impressive international growth that we have been delivering our domestic performance continues to under perform. We are completely reorganizing the US sales force and have appointed Stephen M. Bachelder, Chairman of the Board, as our national sales manager for domestic sales. Mr. Bachelder has a deep background in sales and intends to resuscitate eroding US revenues in the coming year. A reversal of the contributions from our US operations from the past few years to our consolidated results will serve to underscore the true impact of the progress we have made in building a global footprint.

More and more we are seeing Lakeland strengthen its position and develop a brand that is well regarded world over. However, it is in the BRIC nations, Brazil, Russia India and China, and nearby territories, that we made the most progress and see vast opportunities for continued growth. To this end, we have [likened] Lakeland to a BRIC mutual fund replete with diversification of operations in these markets. Moreover, given that our gross margins on foreign revenue is much higher than that of our domestic US revenues, every dollar of increased international revenues will result in a higher operating and net margin contribution.

To a meaningful extent, this is what we have witnessed in the first quarter of 2012, although we also benefited from favorable foreign currency exchange rates. Most of these foreign countries we have entered into have recently enacted what we would call OSHA-type laws. They were forced to do this when they entered into a [W2O-like] agreement with Europe and the United States. A good example would be China which has agreed to abide by certain environmental laws along with certain safety nets for their workers.

They agreed basically to compete with the US and other large developed nations on somewhat of an even playing field by having the same environmental standards and instituting things like Social Security and OSHA-like regulations. So many foreign countries now have a statute on the books similar to OSHA, and all of those multinational corporations operating in those countries or big public companies all abide by these new statutes because they are host companies in foreign jurisdictions they cannot afford to ignore these statutes and regulations.

In addition to traditional economic development, we believe that what's really driving the sales in these BRIC countries are these new statutes and regulations. If you look at when OSHA was instituted in 1970 in the United States, it drove the sales of safety clothing for the next 30 years. From when Lakeland was formed in 1982 our sales, which were essentially all from the US, didn't really slow down until about 2005. So it grew for over two decades in the United States.

What we're now looking at is the very beginning of what may well be a 10- to 20- or even 30-year period of growth in BRIC countries slowly complying with global environmental and safety standards. This growth is incremental to what may be associated with requirements for traditional GDP growth presently and projected to be well in excess of the US. In response to these growth factors and anticipated growth over the last few years, and even in the present year, we have entered into new markets, hired and trained personnel, purchased real estate and built manufacturing facilities, introduced many new products and added distribution centers and storage warehouses in targeted locations around the world.

In addition to the performance we turned in this quarter, even with negative contributions from our US operations, we have been funding and paying for the international presence that will propel our financial performance in the future, and as our sales and profits improve from the present level, this is where we envision significantly increasing shareholder value. In the first quarter alone through effective implementation of foreign sales and marketing strategies, we increased international sales by over 13% in the first quarter as compared to the same period of the prior year, approximately three times the rate of GDP growth in the markets in which we operate.

International sales represented 42.9% of total first quarter revenues. This performance is without the benefit of large orders in Brazil which we are working towards securing, although our Brazilian operations grew approximately 40% year-over-year. All told, our quarterly international revenues of $11.1 million represent the highest level in the Company's history. Yet despite this growth there remains significant operating leverage as we capitalize on our substantial production capacity in place now and being added at our operations in Brazil, Mexico, and China.

We have available global manufacturing capacity in excess of 30% of our current revenue base and we may be adding additional incremental capacity later this year with modest capital investment or increases in overhead expenses. We stand to benefit from the significant margin contribution from our operating leverage compounded by growth in net consolidated revenues from sales in our higher margin international markets.

Lakeland Industries reported growth on many fronts in the first quarter but we have much work to do to further improve our financial performance and take advantage of the benefits of our operating leverage. Our international markets are robust and growing and we believe we are well positioned to capitalize on the many opportunities available to us around the world. With strong first quarter results and a promising outlook, our stock trades at a price to sales ratio of about 0.45 and our price-to-book value is at about 40% discount. Most companies are losing money when they trade at or below book value yet our profits grew significantly in the first quarter and we have been profitable for the past 19 years.

With earnings on the uprise, we hope our shareholders, both current and future, will benefit from the hard work and execution of the globally expanded Lakeland team. As CEO of Lakeland, and as a publicly traded Company, the primary responsibility is to create value for shareholders. We share the belief of many professional investors that Wall Street is ultimately an efficient marketplace. While in the most recent quarter we delivered solid operating performance, the recession and economic instability over the past few years took a significant toll on our business as we had been largely a domestic Company.

This impacted our performance such that we have delivered inconsistent results. The US economy still shows certain signs of instability yet our reliance on US has been diminished as a result of a decreased exposure in the US along with a new agreement with DuPont which had previously supplied the materials for a large majority of the products we sold in the US. Moving outside of the US, we invested and transformed into an international Company which provides us with a tremendous long-term runway for growth. Our US business has pulled back to a level where we believe we should reach bottom in the third quarter, and we have put in place a new sales team to improve this business thereafter.

The stabilization in our US operations along with international growth enable Lakeland to deliver consistent growth. Consistency of growth is paramount in garnering Wall Street interest. In fact, over the last several months a few Wall Street research houses have confirmed this outlook by launching coverage on Lakeland. All research on Lakeland has buy recommendations. This further put our financial performance in perspective with the view of increasing shareholder value.

On annualized basis, our first quarter results put both our revenues and earnings per share on a course to be at the highest level in the Company's history, and I remind you that this was achieved with declining sales from the US where we now have a new team to reverse this for us, and also while investing in our international operations that has significant operating leverage going forward. Personally, I own as much or more stock in Lakeland as just about any of our largest institutional shareholders. Rest assured my interests are aligned with my fellow shareholders.

My compensation, as well as that of my management team, is in line, if not lower, than other companies in our industry and of our size. So we are not here just to milk the cow. We are building something of significance and have been working very hard in traveling the world to do so. In the end, it is our ownership of Lakeland shares and the return on this stock ownership that excites us. To this end, I believe that our continued and consistent operating performance ought to be rewarded by the marketplace such that Lake shares would trade significantly higher thus driving shareholder value.

We also consider other strategic relationships constantly which from a larger context could increase shareholder value. Our near-term plan, that is for the next few quarters, is to continue to build out our international operations and show some growth in the domestic market by about mid-year. In the intermediate term, which could be viewed as later this fiscal year, our international revenues would be more than half of the total. International revenues have much higher margin contributions and our operating leverage provides further benefit. So we can look for solid growth in the bottom line and toward improving our return on equity.

To us, while the past few years have been challenging from a top down as well as bottom up perspective, given the economy, the auto sector and other issues, if you need further proof that we believe the Company is under valued and has significant upside opportunity going forward, you need to look no further than the share repurchase program that we completed a few months ago.

Over the next few years, we believe our profits should improve to the point that we are delivering consistent levels of record revenues, profits, and margins which the market will not be able to overlook any further. 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 provided an overview of some of our first quarter results and operational developments, I will provide a more detailed review of our consolidated financial results. Total sales increased by $0.4 million in Q1 this year resulting from a $900,000, or 6%, decrease in domestic sales offset by growth of $1.3 million with 13.4% growth in foreign sales. Q1 this year domestic sales of $14.7 million versus $15.6 million in the year ago period. Q1 this year international sales were $11.1 million versus $9.7 million a year earlier.

Q1 this year's sales breakdown is 57.1% domestic, 42.9% foreign compared with Q1 last year, 61.6% domestic, 38.4% foreign. Now I will discuss our revenue performance by country. In the US, domestic sales of disposables decreased by $1.9 million but chemical suit sales increased by about $100,000, wovens increased by $400,000, reflective sales increased by $100,000, and glove sales increased by $100,000.

Following the Gulf of Mexico oil spill, in which disposable garments were the products of choice for remediation and cleanup, there has been a build-up within the US supply chain. This in large part resulted in external sales from our China operations to the US to be flat in the first quarter of this year compared to a year ago. But for Lakeland, as Chris spoke to earlier in the conference call, international diversification and growth is the real Lakeland story. I will give some revenue and margin highlights for some of the more established international operations, and I will give percentages for the Q1 this year growth in sales compared to year-over-year.

Brazil was up 39.3%, Chile was up 13%, UK was up 48.7%, and China external sales were up 3%. While US demand impacted sales levels for China operations, domestic sales in China and Asia-Pacific Rim remain strong at $6.6 million in sales in Q1 this year, overall sales in China were 3.1% higher than last year. Outlook for sales growth in China is strong. UK sales increased by $600,000 or 48.7%.

Although the euro has been weak against the USD, which negatively impacts performance on a consolidated basis, sales in the region remain strong. Chile sales increased by 13%. We're actively building out the sales force in this country, as well as in Argentina. We are now generating operating profit in Chile and are adding more products to be sold through these channels. In Brazil, sales increased 39.3%, or $1.1 million, to $4.1 million from $2.9 million a year ago. For the most part, the substantial sales growth in Brazil was achieved without benefit of large orders.

We continue to pursue several large orders that upon signing may last a number of years. Otherwise, the Brazilian market demand for our products remains strong. Reflecting our expectations for growth in Brazil, we have been moving forward with another expansion of our property and plant. Through the course of this year, we plan to pay for additional real estate and build another manufacturing facility on a piece of land adjacent to our current plant. That construction will go on over a period of two years in phases. Gross margins in Brazil were 39.3% this year versus 49% in the prior year period. In prior year, there was a very large contract with particularly high margins and year-over-year comparison is not too relevant.

In Mexico, which for the most part has been a manufacturing operation, we're now in the process of setting up a sales office for direct sales activities which are beginning to ramp up and we should have orders over the next two quarters. Russia and Kazakhstan has experienced initial sales success. Sales personnel are in place, we have been stocking inventory, in large part addressing the manufacturing and energy industries.

India continues to under perform and from a sales perspective its contribution to date has been minimal. Sales in the quarter were down year-over-year but the operating loss of $200,000 was the same as last year due to more favorable exchange rates. European sales were up 48.2% from last year, working primarily out of the UK, with sales coverage of much of Europe sales have been strong. On a reported basis, the sales performance is partially offset by the weak euro against the USD. In the UK, we have moved into a new leased facility which will greatly improve our storage and shipping capacities.

In Canada, the first quarter was strong which followed the trajectory set in the fourth quarter. While sales were flat this year compared with last year, but operating profits are up 50% in Canada, and we expect sales to be strong for the remainder of this year with demand from fire departments, defense-related initiatives and into the refinery and mining industries. With the strong Canadian dollar favorably impacting our reported results we are also benefiting from a strong competitive position in Canada and improving margins.

On a consolidated reported basis, gross profit increased $1.7 million, or 26%, to $8.1 million for the quarter ended April this year from $6.4 million for April quarter last year. Gross profit as a percent of net sales increased 31.3% for this year versus 25.2% for the same quarter last year. The improvement is driven by higher international sales which carry higher margins, improved sales mix, favorable currency translations and improving pricing climate and utilization of lower cost raw materials.

Moving further down on the income statement, statement, consolidated SG&A expenses in Q1 were $6.5 million compared to $6.1 million last year. As a percent of sales, operating expenses increased to 25.3% from 24.1%. Higher expenses in Q1 this year were largely from growth initiatives relating to operations in Brazil and other foreign markets and a $200,000 increase in non-cash expenses for equity compensation, which brings me to earnings before interest, taxes, depreciation and amortization, or EBITDA.

Our adjusted EBITDA as a percent of sales was 9.14% or nearly $2.4 million in our first quarter. As Chris mentioned, the EBITDA margin and EBITDA dollars are the highest levels in the last 11 quarters. Net income increased $2.5 million to $1.2 million from a loss of $1.3 million from last year. Increased net income primarily resulted from last year's charge of $1.6 million for the bad tax expense in Brazil and also stronger volume and margins in the current year.

Excluding the one-time VAT charge in last year's first quarter, our net income in the first quarter of this year would still have delivered a nearly four-fold increase. Basic and diluted earnings per share increased to $0.22 for the first quarter this year from a $0.25 loss last year. There were 5.2 million and 5.3 million shares outstanding on a basic and fully diluted basis this year compared with 5.4 million and 5.5 million basic and fully diluted last year. We previously reported as of Q3 last year there was a $0.10 spike in the deferred inter-Company profit sitting in inventory. We have recouped $0.06 of that in the current quarter.

Turning to cash flow in the balance sheet, the Company used $3.6 million for operating activities in the first quarter primarily to increase inventories, mainly in Brazil, to anticipate large orders later in the year. Also foreign exchange rates increased the inventory, too. The increase in inventory of $4.1 million since the beginning of the year was partially offset by the operating income of $1.2 million, and we do expect level of our inventories to reach a steady level globally at about the current levels.

As of this year at April 30, the outstanding loan balance was $16.2 million. That gives us $7.3 million of available credit. The bank facility allows total borrowing of $23.5 million at an interest rate presently below 2%. We ended the quarter with cash of $6.1 million, slightly more than at the beginning of the fiscal year. The Company's book value is now $14.66. Let me say that again, $14.66.

Therefore, our share price is trading at a discount of about 40% to book value. Current ratio is 7.4 to 1, working capital is $68.2 million, and that compares to our enterprise value of maybe $55 million. That concludes my formal remarks. I will turn it back to Chris.

Thank you, Gary. Before we turn the call over to the audience for questions, I would like to summarize some of our forward highlights and investment merits for our shareholders and other followers who is are newer to us. Looking ahead, we intend to continue our pursuit of further building out our international presence. Our international diversification provides us with many avenues to pursue growth and we have clearly demonstrated that we have been effectively executing upon this strategy.

We are focused on the BRIC countries and surrounding territories where we have significant operating leverage. To this point, our asset utilization is low and improving which enables significant upside. At the same time, we have new leadership in the US to revitalize this business, particularly the sales end, 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 a Q&A session.

Thank you, Mr. Ryan. (Operator Instructions) We'll take our first question this afternoon from Mr. [Quinton Matthews,] private investor.

Hey, guys, congratulations.

Thank you.

Two questions, really kind of short, though. When you look at international, so you guys have kind of a -- your margins are better there because the run -- the distributors here in North America just haven't gotten the leg up there. How long of a runway do you guys see that existing before they kind of come in and try to clamp down the margins?

Let's look at that in two sections, Brazil and everywhere else. In Brazil there is really very little distribution network and we sell direct. That's the major reason why Brazil has higher margins. And I will let Chris address some of the other areas where we do sell through distributors.

That's a good question. He is asking, when I look at the United States, I look at Thermo Scientific, Fisher Scientific, with $30 billion in revenues and I look at W.W. Grainger with $8 billion in revenues. I look at Airgas, they are a little BIT smaller, but they are all much larger than us. Oddly enough, I don't see their existence so much in China yet.

Yes, they will get there. Yes, eventually they will get to the foreign countries. But the key is, is that if are you talking to the end user, like we are in the foreign countries, the fact that they're there or not doesn't make much of a difference. The problem in the United States is that these safety distributors or large distributors have been around since the 1930s.

They have been handling most of the end users since then. The only companies that have ever been at all successful in the United States were companies that deal directly with the end user. There they will generally, a manufacturer might enjoy a 40% gross margin. If you are not dealing with the end user, in the United States you are dealing with 17% to 23% gross margin. That's it. The distributor makes everything.

Okay. And then, thank you --

How long it takes to get there? Maybe ten years, but it won't matter because we'll be in or at all the end users. The relationship with the end user is key. It is much like if a manufacturer had a relationship with all Walmart's consumers. Who needs Walmart?

Exactly. Okay. On that, I mean, you may not be able to answer this. But on a long-term plan, I mean, obviously, the size between you guys and them is enormous. Long-term plan for you guys, I mean, do you see yourself becoming one of those players on an international market? I mean on a smaller scale? Can you share that, what your long-term plan is?

On a smaller scale, yes. Indeed, we even have the opportunity to become distributors in foreign countries.

Okay. And lastly, kind of on China, if you are somebody who believes that China may run into trouble and if they do it is not a soft patch, it is negative, what do you think the repercussions on your business in the other BRIC countries are given that a lot of that business is driven by mining and just the need that China has for what they're selling?

Well, a good example right now is like the Chinese stock market is fairly low. It is come off quite a bit because everybody sees that the economy is come off quite a bit very recently. That's why we show, even in China we're still showing about 2% or 3% growth in what is a very negative quarter for China. It may get a little worse.

My guess is -- China's major problem is the population problem, and it is a long-term problem. Again, I am guessing in China, but when you have a population that has been cut in half by the one-child policy you are going to have long-term instability on the social security and the healthcare fronts, but --

Okay. So then Brazil, you're saying Brazil continues --

Brazil is the exact opposite of China. It looks good all the way for the next 20 years.

(Inaudible)

What's that? We didn't pick you up.

That growth of 40% in Brazil is not highly dependent on China in the near term at least?

No, it is not, not in the least. In fact, Brazil has two major events coming up which are driving a lot of the government spending in Brazil which is the World Cup in 2014 and the Olympics in Rio in 2016. The government is spending strongly on building up their infrastructure.

All right, guys, thank you very much.

Okay.

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

It was a terrific report, and congratulations. You have done everything you said you would do.

Thank you, Doug.

What do you think the -- what is the challenge, do you think, in the US operation?

It is basically the sales force and we're going to have to rejuvenate and resuscitate it, which is why we appointed a new national sales manager for the US. And it is going to take some time, but not an inordinate amount of time.

Is the sales force is not doing their job, is that what you are essentially saying?

They need to learn how to brand a product.

Okay. You said something --

Branding the product means going to the end user, okay, not selling -- not having independent sales reps sell to the distributors.

Yes. And so that's the focus is to change from working with the distributor trying to get more to the end user?

Right.

You said something about that you were licensing the Lakeland brand. Is that a done deal?

No, I don't think we're licensing the Lakeland brand.

I am not sure what you refer to by that, Doug. We never said we licensed. We're building the Lakeland brand.

Okay. I thought you said something about licensing the --

Building the brand, not licensing, building the brand.

How much did the inventory increase in Brazil?

About $2.5 million, about $600,000 of that is just simply, if you look at the change from January to April, just simply the exchange rate went up. In the local currency it was the same, but we did -- that accounted for about $0.5 million and about $1.7 million, $1.8 million we are building inventory for anticipated larger orders later in the year. The raw materials, the basic fabrics, much of which are imported from vendors in the US, unrelated vendors, and it's a very long lead time, very long. And if we wait until the end, and a big order comes in, and then we put an order in, we won't be able to deliver. So we're taking the initiative and we're very confident, later in the year we'll have these orders and we're building up some raw materials.

And are you able to add any additional color about what's happening in Brazil?

I can tell you that we're expanding. There is a piece of land adjacent to the rear of our property and we have a contract on it right now. We're not closed, but it is a little less than an acre and we're in the process of buying that and we will then build out into that land. That's about three times the square footage or square meters of the current land property that we have. In addition to that, I had mentioned last quarter that we were building out a mezzanine level over the current production floor.

We had -- Phase 1 was done in Q4. Phase 2 is now complete in terms of the construction. The biggest drawback is hiring qualified labor in that and then training them. We expect by September that we'll be fully operational and by the end of September when that second phase-out, build-out is done, the capacity just for manufacturing items in Brazil at September will be just about double from where it was from September a year ago.

Wow. Congratulations. That's exciting. And this parcel of land that you are potentially acquiring, do you have a target date of when you might be trying to close the property?

I can tell you exactly, yes. We have gone to contract with it. It is presently being used by a junkyard, which I walked through just through three weeks ago when I was in Brazil, and it is going to be quite a challenge for the landlord to clean up all the junk on the property.

We have taken -- we have had an environmental engineer come in and do a study and take core samples of the soil so there is no issues there. We're satisfied with that. We went to contract. We gave them a deposit of about a third, and we gave them 90 days to clean all the junk off the property, at which point when it is done to our satisfaction, we will go to contract and we will close out and he will get the rest of his money.

So they are incentivized to get it cleaned. I can tell you it is going to be quite a challenge to meet that deadline. They tell me they will meet the deadline, somewhere around the summer, maybe August or so we should probably close on that purchase of land.

And, Chris, during the last conference call we spent quite a bit of time talking about Japan and what happened over there. Is there any kind of update as far as how that's affecting Lakeland's business?

As I said, we don't see getting much of that business. We're looking at one big bid out there for chemical suits for Japan. But other than that, as I said, we don't expect a lot of business out of Japan. What we do expect is 18 months from now, much like after 9/11, we're going to see a lot of business from international atomic nuclear sites because everybody is asking each site, well, what's going to happen if a tornado hits your nuclear site like it did in Decatur, Alabama, two weeks ago, and it took out the nuclear plant and there was no power.

What happens if there is going to be an earthquake under your nuclear plant? All of these nuclear plants now have to respond with a plan, and we expect them to take about 18 months to come up with a plan. At that point, once the plan is in place and approved, we expect a lot of nuclear plants probably using the fire departments around them to start stocking our products. So long term, as I said, I remember our -- within three months of 9/11 our stock went from $8 to $13, but the actual buying didn't start for two years.

Okay. I have two other questions. Do you have plans on what you might do with India to sort of rejuvenate that now?

All we can do is continue to try to sell enough product -- the problem is a selling problem, and to sell enough product to get the facilities to break-even, if we can't do that then the only answer is to sell it.

Yes. We would still maintain our domestic sales office in India. I am just talking about the capital equipment we have to make gloves, and that's the problem. It is all capital equipment. You have large depreciation here. It is not cash going out the door.

But nonetheless, you have large depreciation and you have to sell so much to get to break-even. It is not like the sewing business where the capital might be a sewing machine, so the capital investment is not that high, and if your business goes down, you just lay off people and you have a sewing machine sitting there. There is a lot of fixed expenses here. Yes.

And a fairly high level of sales to break even.

And are you optimistic that this still could turn?

I guess so. A good part of the problem was, again, US sales not doing what they should be doing. Since that has changed, I am beginning to see some actual sales in the US of the product.

Okay.

And we're also -- we're basically sitting on everybody in the world and saying you have to sell these gloves, and if we can't get it turned, then I guess we sell the assets.

Can you give us -- my final question is -- can you give us some vision as far as where you could see Brazil going somewhere down the road, how big could that operation be?

What we see, the reason we're expanding Brazil and I will turn it over to Gary, the reason we're building out Brazil is because we're seeing $20 million and $40 million of large contracts in our area being put out every year by the oil industry, by the government. And when I say the government, I am talking about city fire departments, their military, and then you have got a lot of -- the country itself is growing so quickly, so all their utilities are growing.

So we're seeing a lot of utility business, a lot of oil company business, a lot of government business which is both public in the sense of fire departments and new buildings for the Olympics, and then the military even. So Brazil is just a phenomenal growth story for the next five years. The only other place that is doing seemingly as well is Canada because they don't have any of these banking problems. They have a lot of natural resources, mostly oil, so they're doing well on that, but they don't have this, basically instability in the economy and these tremendous banking problems.

So when we're doing business around the world, the nicest places to be are Canada and Brazil. Also their currencies are getting stronger than the US.

And could Brazil, potentially, the sales double over the next five years?

You're underestimating. You're underestimating by several factors.

Is that right? Wow.

Let's put it this way. We are investing in increasing the capital capacity of our plant, okay? I just finished telling you that when we finish the capital, the build-out right now in the mezzanine level, that that would double from a year ago.

When we buy the land, that has the capacity in terms of the square footage, that's at least three times the current footprint of the current building and we plan to build that out in three phases. So you can do the math, but, yes, a lot more than double, several times.

In 2011, fiscal 2011 we had sales of $13.5 million, so perhaps we could have $30 million or $40 million somewhere down the road.

At least. In Brazil, that's entirely possible, yes. It all depends on these large bids. The organic sales are growing very strongly. As I said, we had 40% growth this year, year-over-year without the benefit of any really large -- a couple modest-sized bids but no really large ones. We are looking at a number of them that are in process.

These bids take a long time and then even when you win the bid we have to wait for a PO to come, actually to get a commitment. So we're hoping and we're planning for the second half of the year to get some of these actually in and in process.

Like last year, our sales in Brazil were $13 million. We're looking at bids out there that are $5 million.

Wow.

It's huge. And there is only two other players in the country. And even they are going to be hard pressed to deliver. I mean, because we're building out in Brazil we're using our Chinese factories to back up the Brazilian demand. Our Brazilian factory can't even make it fast enough.

Wow. It is a beautiful report. You've done everything that we could ask, and thank you for being there and delivering for the shareholders.

Thanks for your support, Doug, we appreciate it.

We'll take our next question now from Howard Halpern at Taglich Brothers.

Congratulations on a great quarter, great quarter.

Thank you, Howard. Thank you.

In terms of Brazil again, inventory build, is that once the large orders come in, margins the costs of the inventory build, you're going to be able to hold those margins pretty nicely?

Yes. Again, the large bids can vary. Some have much higher margins. Some have lesser margins, so it really depends on the bids, which of the bids come in. The margins can vary. We expect from -- the margins in Q1 were actually on the lower side. So I don't think we'll see anything lower than Q1 and it should improve from that actually.

Okay. And in terms of just overall commodity prices going up, how is that impacting the business?

Well, that's in two areas. The petroleum affects the disposables market. In Brazil, really, the issue is the cotton prices because much of Brazil's raw material is -- much of Brazil's products are made from fire-resistant cotton. That, we have pretty much got the orders in place. I don't know that cotton is going to go up much more from where it is. It is based on the crop, by next year's crop, the prices should come down a bit.

Cotton storages should probably ameliorate around the end -- this fall.

Last time, Gary, you had talked about -- you weren't exactly sure of the timing -- but are you still planning on CapEx spending in the Mexican facilities?

Yes, that's another area, we're looking at capital expansion in Mexico. We're working with our bankers and John is on the call and we're working with them. We have nothing to announce yet but we're actively working on a very creative way to fund some of these international capital expansions and we hope to have an announcement shortly. But, yes, we're looking at capital expansions in Brazil, Mexico and Argentina.

Okay. And getting back, I guess, to India, will their recent announcement of all the spending, infrastructure spending, they're going to do on roads, is that going to positively impact the glove business or is that, doesn't really impact the glove business at all?

In India? You mean in Brazil.

No, in India.

Oh, in India.

That would impact our reflective business, okay? It would not impact the gloves made there, but it would impact many -- a lot of what -- we have two operations in India. One is in a special economic zone where we make gloves, okay, and then we have a selling operation which is outside the special economic zone. The selling operation is not only selling what we make in India but what we make in China also.

That's an operation that we've really just started. But in other words, we have, through that Indian domestic sales operation we have the ability to sell everything that Lakeland makes all over the world. The only problem with India is you have some very high tariffs and a lot of paperwork, so lead times are long. But we have sold the New Delhi Airport a whole set of fire coats, okay. So we have penetrated the domestic market and it was a decent sale, about $350,000.

Okay. So this infrastructure spending over, I think they said over the next five years to be a $1 trillion, that should be a nice benefit as you continue to penetrate that market for your other --

When they built the new airport, we got some business out of it, and it is, I just went through it last November. It is really nice, I mean, compared to the old airport and it had to cost a least a couple hundred million dollars.

Okay. And with the US, I guess, I think you really talked a lot about it, but are there any additional point -- keys that are really going to help that business by, I don't know, I know you said selling directly to the customers, but to reorganize the sales force, is it going to be a regional sales force that will have certain responsibilities for East Coast, West Coast?

Yes, we're restructuring it, but what we're doing is we're looking to going to the large end users and making the sale there rather than have independent reps sell it to distributors. That's the goal.

Okay.

And it requires some reorganization and it's going to require some hiring, too.

Okay. Yes, and so it is reorganization, hiring and training of the new people and the old people who are --

That's right.

Okay. Well, just keep up the great work, guys.

Thank you.

Thank you.

(Operator Instructions) We got next now to Buzz [Highkey] with [Highkey.]

Thank you. We're stockholders. You answered one about the raise so I don't have to worry about that. Let's see. Tax rate, it was around 22%. Will that be going higher, to 35%, 36%, 37% or 38%?

That bounces around a lot. It depends on a lot of things. It depends on the mix of where the income is coming from. I don't think it will get as high as 35%. That would be a full rate at US rates, and remember the US rate is the highest in the world. Most other countries are not like that. We do have income tax incentives in Brazil that lower our rate there, and the effective rate in China is 25%, so it really depends on the mix of income.

So it probably wouldn't be ever going above 30%, would it?

No, no, unless we had some unusual -- like last year we had the VAT tax charge that didn't get any tax benefit at all. Without something like that, no, it should be in the 20s at most.

And then back -- what about your backlog? Is that meaningful and is that up?

The backlog is only meaningful when it grows to the point where it is higher than it should be like it was a few quarters ago and we had stock-outs. That became meaningful. Right now our backlog, pretty much across the board is at normalized levels, not too high, not too low, and I wouldn't read much into it, either plus or minus.

Okay. Then the last thing, your sales have been $25 million, $26 million per quarter for a number of quarters, maybe another couple of quarters that will start ramping up from that level?

Well, again, our international sales have been growing. The reason --

Your total sales have been around $25 million or $26 million for at least the --

Yes, but, that's right, but that's a combination of domestic sales in the US declining offset by growth in foreign sales which left the total about flat. Once the US sales are flat or have modest growth, then we should see accelerated growth with -- we'll see continued growth in the international sales and if the US sales can be at least flat or slightly positive, year-over-year, we should have some pretty respectable overall growth.

Could that be by the end of the year?

I would expect that will be by Q4, certainly.

Okay, then. Thank you very much.

Yes.

Gentlemen, we'll go next to Ross Haberman with Haberman Management.

Good afternoon. How are you?

Hi. Okay.

Just two questions. Did you specify how much in the quarter you ended up losing on an operating basis in the US as well as in India?

We actually had a profit in the US, so we didn't -- we were losing volume but we did not have an operating loss in the US.

Okay.

We had a modest profit even after covering all of the corporate expenses which we don't allocate out to the other divisions. We covered all of that in the US and had a modest operating profit to boot in Q1. In India it was about $200,000.

Loss?

Loss for the quarter, yes.

Okay. Any other --

Much of which is depreciation, not a cash loss.

Got it. Any other locations which currently are running at an operating loss?

We have a few start-ups that are still modestly at a loss, Argentina hasn't quite grown to operating profit just yet. We expect that shouldn't take very long, but in Q1 there was a very small operating loss in Argentina. That's really it.

Okay. All right, thanks, guys. The best of luck.

Okay. Thank you.

And, gentlemen, it appears we have no further questions this afternoon. Mr. Ryan, I will turn the conference back to you, sir.

Okay. Thank you all, and we appreciate your participation on Lakeland's first quarter full fiscal year 2012 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.

And, again, that will conclude today's Lakeland Industries first quarter conference call. We would like to thank you all for joining us and wish you all a great afternoon. Goodbye.

Thank you.