Lakeland Industries Inc (LAKE) 2012 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Lakeland Industries reports second quarter fiscal year 2012 financial results conference call. Just a quick reminder that today's call is being recorded and before we do 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, September 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 Securities and Exchange Commission, general economic and business conditions, the business opportunities that may be presented to you and pursued by the Company, changes in law or regulations and other factors, many of which are beyond the control of the Company.

Listeners are cautioned that these statements are not guarantees of future performance and the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent forward-looking statements 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, please go ahead.

Good afternoon to all and thank you for joining our fiscal year 2012 second quarter financial results conference call. As stated in our press release issued earlier this afternoon, Lakeland reported second quarter results that were once again fueled by its international operations. While Gary will elaborate in his remarks, here are a few of our second quarter growth highlights. Revenue increased 6.6% year-over-year to $26.2 million. International revenues set a record at $12.6 million in the second quarter. Revenues from outside of the US were at a record high of 48.3% of total revenues.

While we recorded significant increases at many of our international operations, we are particularly pleased to have won a contract from the Brazilian Navy with a potential maximum value of over $5 million net of back taxes. Our overall performance in the second quarter confirms that we are both implementing the approach -- the appropriate growth strategies and successfully executing on our plans. This growth has helped us to diversify our business while offsetting the challenges we have been encountering in the domestic US market. Through effective implementation of foreign sales and marketing strategies, we increased international sales by over 22% in the second quarter as compared to the same period of the prior year.

Driving our international sales growth is the performances from at our operations in Brazil and China. As I mentioned, we won am impressive deal in China. Yes, in Brazil. The contract, which was awarded after a very competitive bidding process, pertains to fire resistant coveralls developed by Lakeland specifically for use by the Brazilian Navy. We believe this is the largest government related contract for protective clothing ever awarded in Brazil. Lakeland was chosen as the supplier of these products because of our technical expertise, our reputation for quality excellence, and our unsurpassed customer support.

It is expected that initially all Navy personnel on one ship will use the coveralls as a combat garment and during naval exercises. The initial purchase order is valued at over $500,000 net of back taxes and is expected to be shipped and billed in September in our Q3 results. With the potential for $5 million in total sales this is one of the largest single contracts ever awarded to Lakeland. We believe the award demonstrates the execution of our global sales strategy for direct sales of branded products, targeting of venues or government, multinational and large corporate customers and leveraging our design and technical capabilities for business development purposes.

Based on the Brazilian Navy order and other bidding activity Lakeland has been adding to its manufacturing and production capacity in Brazil. With recently announced expansion of the Company's credit facility, Lakeland is in the process of investing in property and equipment as well as increasing its funding for working capital purposes. We intend to spend about another $1.2 million through the end of the year to complete the purchase of land and commence the build-out of facilities immediately adjacent to our current location in Brazil.

Revenues in Brazil were up 37% in the second quarter of fiscal 2012 over the same period last year. At the same time, our other Latin American operations are also growing fast, although on a smaller scale. We are successfully leveraging Brazil and our Mexican operations to enter these other Latin American markets. Our international expansion provides us with the opportunity to participate in some of the fastest growing economies in the world. Beyond Brazil, we have been performing very well in China also.

External sales in China, excluding direct container shipments back to the US, continued to improve year-over-year. These revenues were up over 80%. Home to our largest global manufacturing operation, significant production capacity remains available in China despite the top line growth in the second quarter. The available capacity in China was made possible in a large part due to a change in relationship with DuPont which pertains to products that we sell solely in North America, but primarily in the US.

As previously announced, we received notice in July from DuPont that it is terminating the DuPont wholesaler agreement we formed in January of this year. The wholesaler agreement ended a period of nearly 30 years in which we had been licensed to purchase raw materials from DuPont that we made into disposable garments and sold in North America primarily to distributors. With the July termination, DuPont will fulfill orders for purchases of finished garments containing Tychem and Tyvek through September 10, 2011. While we will be eliminating these DuPont related sales, which have been declining for about five years, and were about $5.7 million in the fiscal second quarter, we believe our overall 2012 and 2013 earnings should not be significantly impacted and should still substantially exceed the previous year.

Most of these DuPont-related sales produce our lowest margins. Two, there is no impact on international sales which are now half of total revenues and growing rapidly, and three, the Company believes that in the near term it can replace much of the lost sales with its own higher margin branded products and in the longer term all of it. In the second quarter, sales of DuPont-related disposable garments declined 23% from the prior year. This decline can be attributed largely to continuing pricing actions by DuPont that made purchasing DuPont-branded products from the Company less attractive to customers than purchasing directly from DuPont itself, while correspondingly, increasing the relative attractiveness of Lakeland-branded products.

These DuPont-branded garments which are sold with the DuPont brand and marketed under restrictive agreements with DuPont, delivered a gross margin in the second quarter of fiscal 2012 that are approximately 40% lower than the margin on the balance of all products marketed and sold by the Company worldwide which carry the Lakeland brand. So the impact of the decline on the bottom line is less significant than on the top line. With the dissolution of the agreement with DuPont, we will for the first time have removed the obstacles that prevented us from fully and adequately addressing the US market, such as, licensing restrictions that prevented aggressive advertising and promotion of Lakeland-branded disposable products.

We have moved up the ladder to later this year or in early 2012 are broad scale launch of Lakeland-branded products in the US in order to fill the vacuum left by DuPont. Supporting these products' introduction is the reorganization and increase of the size of the US sales force, and other marketing and product strategies that had already begun just prior to the termination of the agreement with DuPont. The fact that Lakeland uniquely among its competitors does not rely on contract manufacturers, and thus has more control over quality, is highly valued by its customers who also prefer to deal directly with the manufacturer.

So we think we will offer a strong value proposition for disposable garments to our distributor customers and will be in a good position to penetrate any end-user customers including large corporations and government entities, similar to our proven approaches demonstrated in Brazil. This stronger demand pull is already beginning to be seen in recent increases in the sales of other higher margin product lines such as reflective clothing and fire service clothing. Importantly, at whatever price points we choose throughout our various product lines, we anticipate significantly higher margins as compared with the current DuPont products we resell today.

Overall, we see the termination of the agreement with DuPont to be in the best long-term interest of the Company due to its freeing the Company up to act without restriction in the marketplace and to fully unleash the potential of its product development and manufacturing strengths. We remain opportunistic toward our avenues for growth. Lakeland has clearly been executing our strategies to develop a strong global brand, deliver growth and profitability and seize market share in the BRIC nations and nearby territories. But we now believe that after a transition period, our US operation will no longer be the DuPont-inspired albatross that has held us back as it has over the past several years.

The investments being made in our international and domestic manufacturing and sales divisions provide the potential for significant operating leverage and margin expansion. We have available global manufacturing capacity in excess of 30% of our current revenue base and we have been adding additional incremental capacity to come online later this year with modest capital investments or increases in overhead expenses.

In anticipation of this growth, particularly with the large order we received from the Brazilian Navy, we have added to our inventory, mainly in Brazil and China, with our cash balance increasing by 10% since the beginning of the fiscal year and ample access to credit facility expanded to $30 million. Lakeland is now well-positioned for continued growth in its international operations and a resurgence in its domestic business. I will now pass the call to our CFO, Gary Pokrassa, to provide a more detailed review of the Company's financial results.

Thank you, Chris. While Chris has provided an overview of some of our second quarter results and operational developments, I'll provide a more detailed review of our consolidated financial results for the quarter as well as a recap of our fiscal year to date financial performance. Our total sales increased by $1.6 million in Q2 this year from Q2 last year resulting from $600,000 or about a 4% decrease in overall domestic sales offset by growth of $2.3 million, or over 22%, in foreign sales.

On a sequential basis, Q2 international sales grew $1.5 million or about 13.5% from Q1 of this year. Q2 of this year international sales were $12.6 million compared to $10.3 million in the year before and $11.1 million in Q1 of this year. Q2 of this year domestic sales were $13.6 million versus $14.2 million in the year earlier. Q2 of this year's sales breakdown is 51.7% domestic, 48.3% foreign; compared with Q2 last year domestic 58%, international 42%. And Q1 sales this year was 57.1% domestic, 42.9% international

Now I'll discuss our revenue performance by country. In the US, domestic sales of disposables decreased by $1.7 million, glove sales down by $0.3 million, chemical suit sales increased by $0.2 million, wovens were up by $0.7 million and reflective sales were also up by $0.7 million. As a result of the Gulf of Mexico oil spill last year, for which disposable garments were the product of choice for remediation and cleanup, there were stock-out conditions last year which were followed by unusually high orders in our Q2 last year to meet the requirements of the cleanup as well as to replenish the depleted inventories. There hasn't been a buildup within the US supply chain which is slowly being worked down. This resulted in lower demand for disposable products this year.

Under the wholesaler and distributor agreement with DuPont, we resell finished garments they supply to us. Earlier, which was the case in Q2 of last year, we had manufactured the garments at our China operations using raw materials procured from DuPont. When manufacturing these garments in China, our license was only for sales of DuPont disposables in North America, although most of our customers for these items were in the US. In the second quarter of this year, we had only a very small amount of direct shipment sales from China to external customers in the US of DuPont-related disposable garments as we essentially worked off the remaining inventory and that was down from over $560,000 in Q2 of last year.

With the exception of direct shipment to the US and China, external sales for China our operations grew tremendously in the second quarter as compared with the same period last year. For illustrative purposes, I'll give some revenue and margin -- highlights for our more established international operations. I'll quote percentages growth year-over-year in the second quarter. Brazil was up 37%, Chile and Argentina were 154%, although a smaller base, Canada was 25%, up, United Kingdom which is all of Europe, 22%-plus, and China external sales excluding US direct were plus 80%.

The situation in US impacted sales levels for our China operations, however, domestic sales in China and within the Asia-Pacific rim remain strong. At $8.25 million Q2 this year's total sales for our China operations were slightly lower than the $8.6 million year-over-year. External sales to China excluding direct shipment to the US were $1.9 million in this quarter, Q2 this year, again, up 80% from $1.0 million last year. The outlook for non-US external sales growth in China remains very positive.

Chile and Argentina sales increased by 154%. We're actively building out the sales force in these countries which are able to market products we manufacture, mostly in China. To some extent in the US and India.

In Brazil, sales increased 37% or by $1.1 million to just over $4 million from $2.9 million in the year-earlier period. We expect to ship the initial PO from the Navy contract in our third fiscal quarter. We continue to pursue several other large orders that on signing may last for a number of years. Otherwise the Brazilian market demand for our products remains strong. Gross margins were 42.4% in Brazil compared with 46.8% last year. Last year's gross margin percentage benefited from a large contract with (inaudible.) In Mexico, which for the most part has been a manufacturing operation, we are now in the process of setting up a sales office with direct sales activities and those are expected to begin ramping up orders over the next few quarters.

In India, we are at break-even at the operating income level which for the most part is from the manufacturing and sales of gloves. Lack of sales volume is the primary issue we are encountering on a continuing basis. European sales were up 22% from last year. Working primarily out of the UK with sales coverage of much of Europe sales have been strong. Those sales were increased by $0.3 million. As mentioned on our last conference call, we moved into a new leased facility in the UK which will greatly improve our storage and shipping capacities, although it contributed to slightly higher cost given the larger space.

In Canada, we've now experienced strong sales for three consecutive quarters. Year-over-year sales are up 25%. Gross margins increased five percentage points in Canada due to sales mix and favorable exchange rates. Demand from fire departments, defense-related initiatives and into the refinery and mining industries continues to be the driving force for the market expansion in Canada. On a consolidated reported basis, gross profit increased $0.4 million, or 5.4%, to $7.8 million for the current quarter from a $8.3 million for the three months ended last year.

Gross profit as a percent of sales was 29.9% this year, 33.7% in Q2 last year. The lower gross resulted from disposable products purchased from DuPont and sold into the US, as well as the previously mentioned lower margins in Brazil, offset in part by better margins for most of the balance of products that are made by Lakeland and sold in the US, and higher margins on sales of our products throughout the balance of our international operations. Further on down the income statement, consolidated SG&A was $7.1 million this year compared to $7.4 million last year. Percentage of sales operating expenses decreased to 26.9% for this year Q2 down from 30.3% last year.

The [$0.4] million decrease in Q2 expenses resulted largely from lower professional services in Brazil and decreased equity compensation as a result of cumulative changes in the performance levels made in the prior year. These decreases were partially offset by higher R&D for product development and other growth-related initiatives. Net income was $0.6 million for both this year and last year in Q2. Basic and diluted EPS was $0.11, basically this year and last year, fully diluted last year was $0.10. There were 5.2 million and 5.3 million shares outstanding this year on a basic and fully diluted basis for the second quarter compared with 5.4 million and 5.5 million in the prior year. That is a result of our share buyback with lower shares outstanding.

The financial results for the fiscal half year, net sales increased $2 million or 4% to $51.9 million for the six months ended July 11, up from $49.9 million for six months last year. Net increase was due to $3.7 million increase in foreign sales offset by $1.7 million decrease in domestic sales. Gross profit increased $1.2 million or 8.3% to $15.9 million for the six months ended this year, from $14.7 million from six months of last year. Gross as a percent of net sales increased to 30.6% million this year from 29.4% million last year.

Operating expenses increased 0.2% to $13.6 million from $13.5 million for last year. As a percent of sales, operating expenses decreased to 26.1% from 27.1% for the six months ended last year. Operating profit increased 106% to $2.3 million for the six months ended July 11, up from $1.1 million for the six months ended July 2010. Operating margins were 4.5% this year compared to 2.3% for the six months of last year.

Net income increased $2.5 million to $1.7 million for the six months ended July 11 from a loss of $0.8 million last year. The increase in net income was primarily resulted from the $1.6 million charge for VAT taxes with the Brazil of the prior year. Excluding that the Company would've reported net income of $0.8 million in the six months ended last year. The improved profitability before the VAT tax charge reflects an increase in sales and lower operating expenses as a percent of sales, partially offset by the reduction in gross margin and disposables in Brazil. Basic and diluted EPS was $0.33 for six months this year compared to basic and diluted EPS of a loss of $0.14 last year.

There were 5.2 million and 5.3 million shares weighted average outstanding this year and last year compared to 5.4 million and 5.5 million. Reduction in shares outstanding reflects the open market purchase by the Company of its common stock under the share repurchase program that extended into FY 2012 first quarter. In terms of cash flow and the balance sheet, the Company used $3.6 million for operating activities in the first half of this year primarily to increase inventories, mainly in Brazil for the present and in anticipation of future large orders and also in China.

Increase in inventories of $4.7 million since the beginning of the year, or $600,000 for the first quarter, was partially offset by the net income of $1.7 million year to date. We expect that inventory in the [$15] million range should be sufficient on a go-forward basis barring any anticipate large orders or any other extraordinary growth opportunities. We would hope to work that number down somewhat but that is a good range.

At July 11, the Company's outstanding loan balance was $16.1 million from the revolving credit and $1.5 million from the new term loan facility. Our existing $23.5 million revolver was extended so that it now will expire in June of 2014. We had $7.4 million remaining under this facility at the end of our second fiscal quarter. In June, we also entered into a new term facility for $6.5 million, of which we borrowed $1.5 million as of July 31, 2011. Combined the present interest rate on the combined facilities is at an interest at a blended rate of just over 2%.

We ended the year with cash of $6.7 million, about 10% higher than at the beginning of the fiscal year. The Company's book value is now $14.80, and let me say that again $14.80. Therefore, our share price is trading at approximately half of book value. The current ratio is 7.8 to 1, working capital is $69.4 million and our enterprise value is only $52 million. That concludes my formal remarks and I'll turn it back to Chris.

Thanks, Gary. Before we turn the call over to the audience for questions, I'd like to summarize some of our forward highlights and investment and merits for our shareholders and other followers. Looking ahead we intend to continue our pursuit of further building out our international presence. Our international revenues are at record levels and every day we are strengthening the Lakeland brand locally. Given the traction we have, making it in the markets we serve, particularly in the BRIC countries and surrounding territories, where we have significant operating leverage, we feel we are well-positioned for continued growth and margin expansion. In the more mature domestic US market, we are encouraged that our revitalization initiatives are making progress. And our balance sheet remains strong with cash 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) And we'll go first this afternoon to Jason Schacht at Heartland Advisors.

Hey, good afternoon, gentlemen. First off, how much of the inventory is intended to serve the US market?

About half, about roughly half would be. There is some raw material in China that would be coming back in terms of production. It's a little hard to give a precise number, again, because we have inventory in China and the production goes all over the world. But a rough number would be about half.

All right. And then as you try to support this initiative to increase the sales of Lakeland-branded products, what type of a ramp to your SG&A expenses do we need to see?

I mean in terms of SG&A expenses going up?

Right.

Actually, we just, back, if you noticed we had a reduction in force and that translates to about --

About $1 million in savings a year.

Yes. So we are cutting back actually.

We've got a lot of moving balls in action here. For instance, we are going to lose DuPont-branded revenues, okay? But at the same time, we are going to be expanding our Lakeland-branded revenues which have a much higher overall profit margin. I know the analysts are going to come back and ask as well us, well, if you're going to lose $5.5 million in revenues a quarter, what are you going to lose on the bottom line? And today that is about $600,000 to $750,000 but that does not include the increase in Lakeland-branded sales and the much higher margins we make on them.

So it's going to be a transition probably in the fourth quarter and first quarter but we don't really -- we're not too worried about this long term. I mean, what we now can do is over the years past, DuPont was basically just taking $10 million of business every year using predatory pricing. Yet we were not allowed to go out and sort of attack the market, otherwise they'd cut us off. Well, now they have cut us off. Now we can go out and actually sell our products for the first time.

But will you be doing that through your own sales force or are you going to utilize distribution channels for that?

We are going to use -- well, typically were going to increase our own sales force in the United States but we will use the same channels. We're going to go to distributors and we're going to go to end users and pull the sales through end users. Historically, we never went to end users and pulled the sales through. Historically, we were actually limited into the distributors we could go to. So now we are going to be going to both. In other words, we don't have both hands tied behind our back now domestically.

Okay, thanks.

And we'll go next now to Howard Halpern at Taglich Brothers.

Good afternoon. Just add onto your last point, how many additional sales people in the US do you have now compared to before the DuPont agreement was terminated?

Probably four in the last two months.

Okay, and I guess the question is, and I guess it is more of a net question on the promotion that you're going to have to do, the sales force, from what the DuPont business was in SG&A, is there going to be a net increase on that portion over time on an annualized basis?

Domestically there will be a net increase on selling expenses in terms of basically sales and salaries and travel expenses.

Okay.

Okay. The opposite to that is that when they generate Lakeland-branded sales you are looking at twice to three times the return that we made on DuPont-branded sales.

For the same sales expense dollar.

Not even that, since DuPont products sell for $100 a case and ours sell for $80 -- I'm using an example -- revenues will go down, profits will go up.

So a year from now, what would your goal be to see the run rate in gross margin?

We -- it should be up -- we don't usually give out specifics, but it will be higher -- we are looking at a higher gross margin going out than we have now. By a fair amount. Again, we are replacing the lowest margin business we have anywhere in the world with -- even in the US -- with much higher margins.

And now I know you've talked about launching the domestic-branded products in the beginning of calendar 2012? You were saying?

Yes, it in the beginning of the next fiscal year.

And will that correspond to, if everything is passed in Congress, the new potential infrastructure spending that will be out there, is that going to correspond or --?

You are pre-looking at our speech tonight, I see. We don't have his copy, but you're probably right.

Yes, I mean, are you going to be in sync with that?

Yes, a lot of the products we sell go into the people who build infrastructure. Particularly the high visibility products because they are used throughout the highway system and all construction operations. So mostly we will see it in reflective but we will see it in other areas also. But I wouldn't count on that for about at least nine months or 12 months because it takes the US government a long time to get started to do anything.

Okay, and then just one last, sort of domestic one, have you seen any additional push for protective clothing for the nuclear industry since the earthquake in Virginia moved stuff around in the nuclear power plant?

Not quite yet. As I said, the last time I brought this up was when the Japanese had their problem, which was only about six months ago. It takes governmental entities about a year or two years to form a plan and then another year to implement it. In terms of gathering around certain nuclear plants the equipment that they would need to tackle a large scale failure such as what happened in Japan. So as I said, long term this would be very much like what happened in the chemical suit business to us after 9/11. We didn't seen many sales after 9/11, we started seeing them three years later.

Okay, in terms of Brazil, and the large contract that is going to be shipped in the third quarter, will that drive gross margin closer to last year's second quarter gross margin?

I am looking -- the margin on that contract itself is not quite as high as the one that we were referring to in the previous year. But what that will do -- I'm looking at this in two levels. On an incremental basis that will add margin because that is just incremental business over and above the already very, very strong business we are ready have in Brazil. So --

So it will be additive?

It will be would be additive. In addition to that, though, we do expect the margins in Brazil to strengthen significantly. I've been down there, I've been working with us Charlie Roberson, our international sales guy, and we have been really on a big push to change the pricing structure in Brazil. And we have done that actually, you don't see it in the second quarter but effective with orders starting in early July which will be in -- basically in the backlog at the end of July -- you will see, we should see higher margins in Brazil and that should reflect itself in a strong bottom line. We've been experiencing strong top lines in Brazil. I do expect to see a strong bottom line coming out of Q3 in Brazil.

And the development of that for the Brazilian Navy that's the overall product, is that going to be able to translate to the rest of the world?

Well, this was developed specifically for the Brazilian Navy. So there are always products that we are developing for Brazil. We deal with individual fire departments and each one has slightly different requirements. So the basic expertise, certainly, what we are hoping is that the Brazilian Navy will continue on and we can leverage that into other departments. Also in Brazil, the fire departments actually are part of the military in Brazil. So there could be a bit of a slop over here, too.

Okay. And one last one, when you're going to launch the Lakeland-branded products in the US, are they going to be any new product introductions at that time, too?

Yes, there will be, next year calendar 2012.

Okay, well, just keep plowing along because it is the right strategy for the right time.

Thanks, Howard.

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

Good afternoon. I fully support everything that you're doing there. Could you talk some about, give us some more specifics about what you did to reorganize the US sales force?

Okay. Basically we let a few people go and we hired what we felt to be better people. And were going to continue to probably hire more people where we have holes on the domestic side. It is essentially like a football team, you have to drop the older guys who are not performing and bring in the new guys who are highly rated.

And are you done with the reorganization as far as terminating people?

Yes, we will continue the reorganization probably after the end of the year and maybe into the first quarter because we want to get the best people.

And are you able -- you are happy with the people that you've been able to hire?

Yes. We are not moving quickly on that. We are really waiting to get the best people we can get.

And can you give us a sense with the what level of revenue we are at currently with like the Chile and Argentinean countries?

Give me one second, Doug, and let me look it up. We are growing at a very nice percentage, but still on a small basis. For the quarter, Chile did $720,000 and Argentina did -- about $1 million between the two of them per quarter, so about $4 million for the year.

Okay, that sounds good. And then is there any other additional updates as far as manufacturing facilities and where you are with that? You talked about Brazil, but you also sort had talked about possibly --

Let me address where we are on that. We are moving on a few levels. In Brazil, we have completed the first phase of the internal expansion where we were building out a mezzanine level over the existing plant floor. I was just in Brazil last month, I saw the construction on that was completed. We still had not completed hiring out the labor. That actually is the most difficult part of this is finding and training qualified labor.

I'm told that should be done just about now as we speak in mid-September and when that finishes, the manufacturing capacity as of right now in mid-September is exactly double what it was a year ago. At the same time, we completed the purchase of the adjacent land. I walked through it and we are in the process of bulldozing the land and preparing it for construction. At this point,we will know that out in three phases over about two years with -- we don't have a formal architect plan for we will have that probably around the end of the year. It will take a little time to develop that.

But in the meantime we will use the vacant land in a very efficient way in terms of just reconfiguring the current operations, we will use it for additional storage, and we will relocate the shipping docks. We will relocate the main entrance which was on a ridiculous moonscape type of road to a main highway which will allow us -- so that is Brazil. I would expect we would probably spend in the neighborhood of about $1.5 million, $1.3 million or so, between Q3 and Q4 in terms of buying out the remainder of the land which has already happened. And the construction costs that we spend at that point. In Brazil, then, looking ahead several years, looking out perhaps three years, that would give us three to four times the existing capacity when we finish building that out.

Wow.

And that's after having doubled it but again that is looking several years out, so, Brazil and the construction will certainly keep pace with our growth and we have plenty of capacity to keep pace with as strong a growth as we could possibly imagine over the next several years. In Mexico, we are currently working on purchasing the plant which is currently in lease space.

The landlord has a right of first refusal in that contract. He has given notice that they are exercising it. We are negotiating with the landlord as we speak and we do expect to complete the purchase of the building within the next month or so, and there is plenty of excess land that belongs with that and once we have that, we are kind of constrained, it is kind of small space as it is. But, again, there is plenty of excess land and we do expect to build out some serious extra capacity in Mexico. And the term loan that we signed with the bank, we went over all the details with the bankers on Mexico and they are with us in terms of providing the funding to make that happen. So that's Mexico.

That sounds great.

Yes, otherwise, we are looking a little bit at Argentina right now. The political climate is such that we are probably not going to do anything this year but we very might look at putting some -- facility into Argentina maybe in a year or so, kind of more modest scale.

Okay, have you -- go ahead, I'm sorry.

No, I think that's my answer to your question.

Okay, has there been any shipments at all so far on the Navy order or?

I'm told they are shipping pretty much as we speak right about, sometime this week we believe that first shipment should go out and we are looking -- we are very hopeful that we will get a second PO coming in very shortly. We are not quite there yet but we are hopeful.

That would be above and beyond the $500,000 order?

Yes, yes, the whole $500,000 is pretty much all produced. We are putting the finishing touches on it and it should be shipping out within this week, and that will be in Q3 revenue and then we are looking for the next PO to follow on after that.

Is there possible something could still happen in fiscal 2012 then?

Yes, yes, we are very hopeful that we will get a follow-on PO very shortly which we would deliver in Q4.

Wonderful. Can you offer any other commentary as far as what might be happening with either the fire coats sales in Brazil or the disposables sales in Brazil what you might see?

All right, let me address both. The fire coats sales are very strong. We had one big hurdle, let's say, the City of Rio de Janeiro Fire Department. We were working on a very large bid with them and we were very close -- they were very close to putting out the request for the bid and we thought we would have a really good shot at that and then you may have seen on the news there was actually a riot of several hundred of the firemen in the Rio fire department. And in Brazil the fire department, as I said, is considered part of the military.

Well, they don't stand for that too well in Brazil and they fired, actually, several hundred firemen including the commandant and his whole bidding department. So we are starting from scratch on that one.

Wow, okay.

Okay, but we are working on -- a new commandant is in place and we are working with them. So we hope to have a nice customer relationship with them going forward, but our plans have been slightly derailed by events out of our control.

Yes, it's crazy.

Yes, well, that's Brazil. Doing business in Brazil is very eye opening and it's very different from the US in many respects. As for your second question on disposables, we've been making a very big push there and they are getting some real traction. In the last month and the month of July, we sold about $120,000 worth in one month of disposables. So that is, let's say, a run rate of $1.5 million right there. And, again, that doesn't impact the capacity constraints that we have been running in Brazil because that's made in our China plants and imported into Brazil.

Wow.

So Brazil's market is very different and we are pretty much selling -- there is some small people, the small end users which we do sell through distributors. The larger end users we are going direct. So it is a bit of a different market and it is kind of -- it's a lot more wide open. It is still competitive but it is a nice market in Brazil. We are hopeful that you'll see some nice results in disposables sales coming out of Brazil.

Yes, that sounds great. And then my last question is you indicated in the press release that the woven sales increased in the US. Could you maybe offer a little commentary on that?

Well, we've been working on some new products. We have brought in a new manager about a year ago, I guess, and he has been working on some new product developments, he's been building up relationships and much of that is through fire departments. But, again, it is smaller sales. We don't have the -- we are not dealing with a large city and the huge orders like we are Brazil, these are smaller orders from smaller fire departments.

I fully support what the management of Lakeland is doing. You are doing the best you can to maximize shareholder value and I'm grateful that the two of you are there.

Thank you, Doug. We are grateful to have you as a shareholder.

Thank you.

And, gentlemen, we'll go next now to Sam Rebotsky at SER Asset Management

Yes, good afternoon, Chris and Gary. As far as, there is $0.02 to $0.03 severance charge in the current quarter

$0.03, right.

Yes, could you sort of give me some kinds of understanding, the sales in the three months ended in July is up a bit from the three months ended April and the earnings is off more significantly and the operating expenses are up and the cost of goods sold is up. Could you sort of give me some kind of direction? I didn't understand what caused that?

It is mostly in the gross, much more so than in the operating expense. The operating expenses were down actually. It's pretty much all in the gross. And in part, it is in Brazil but mostly it's in the disposables. What you're seeing is the full impact of the conversion of DuPont sales to becoming a wholesaler and a reseller and those margins were very low and we're saying that all along. And that is pretty much what you're seeing.

So you would expect that the margins would increase in the October quarter compared to the July quarter?

For Brazil, yes, for disposables, no, because we are still working off our DuPont inventory and will be doing that into Q4. The volume that we lose will really impact the fourth quarter, really, because we still have inventory. As we said in the press release, DuPont is still delivering right through this week. So we will have inventory into the fourth quarter and that is really where you'll see the volume dropping off.

Okay, so your current sales of DuPont product, you said by $5.7 million and that will keep decreasing going forward? It will end totally by the end of January 31, 2012?

That's a good assumption.

Pretty much, yes, there might be some trickling left but, yes, that's a good assumption. There will be a little bit left over that will spill over into Q1 just to bleed out the remaining inventory but, yes, that's a good assumption.

And you expect to replace that pretty much beginning in the new year or?

Well, there will be a transition and there will be a couple quarters, we are not going to replace it overnight. We'll need a few quarters to make the transition.

Okay, okay. And as far as the backlog, is the only backlog basically the Brazilian backlog?

No, we have backlog throughout the Company. We don't really announce it that much because it's generally not an issue, it's pretty steady. The only time we really announced it -- we announced it about a year ago because we had a huge stock-out situation that the whole industry, the whole world was in, so we announced that at that point. But otherwise our backlog is just normal.

All right, well, I guess with the differentiated -- the $14.80 book and the stock trading under $8, hopefully there would be -- you'd attract some more interest for the value and as long as you could increase the earnings per share I assume the value will come in. Good luck.

Okay.

Thank you.

And we'll go next now to Kevin [Molderic] at Taglich Brothers.

Hey, guys, congratulations on the quarter results. I had two questions, first one, was in your last annual report, you mentioned competition that basically saying that three big competitors DuPont, Honeywell, and Kimberly Clark having greater financial and marketing resources, and then in addition to a lower priority to enter into this area. Is that competition the same internationally as it is domestically and how are you able to compete with the big companies? Do you have a strategy there, how you are beating them for business?

In the United States, DuPont, Kimberly Clark and Honeywell are all very, very strong, okay. However, internationally they are not as strong as they are in the United States which gives us an opportunity. It really goes country by country. If you looked at those three multinationals you might, say, find two of them in Argentina but not the other one.

In a country like Kazakhstan you would only find one of them. So it's all over the lot. But essentially they are a lot weaker in the international markets than they are in the domestic market.

Okay, great. And then, secondly, the results that you had internationally, doing so well there, how much of that is directly related to your efforts and how much is through the market expanding?

I'm sorry you broke up again? Okay. I'd probably say both. I would say market expansion would be about 40% of the increases and our efforts about 60%.

Yes, that's fair.

Okay, great, thank you.

And we'll hear next now from Mike [Disler] at [Aminexil.] holdings

Yes, hi, Chris, how are you? I've been a shareholder for nearly a decade and I just want to laud you guys on basically delivering as promised through the years and don't mean to sound in any way patronizing. I have no questions. I just have a couple of quick comments and please bear with me. Having run a very large home furnishings division for a Fortune 300 company, and now since retired, I just want to point out a couple of quick things for you or for everybody as a shareholder. And that is, that in your case, you guys are doing everything right. I mean, that is possible.

Two, volume drives more volume. So over time with your ability to turn the inventory not only will that volume that you're seeing internationally as well as, hopefully, domestically replacing the DuPont business, will it drive more volume, it will actually drive future margin growth. And the last thing, and I don't mean to in any way sound patronizing, and that is never turn away an order without discussion amongst you guys. When a salesman comes to you guys, sit down at the table and use pricing points with volume to induce your customers to place that business.

Give every possible positive feedback to your sales force so that they come to you with the next order that may not be perfect in terms of margin, but will be over time. And that is it and I apologize if I've abused my privilege.

Actually, that's very interesting. I give kind of a canned lecture that I give to some of our salespeople over that exact issue when they come into me at times with a potential order that may not be so profitable on its face. It's actually an interesting question. The question is, well, what would our financial statement look like if we took this order versus if we did not take the order.

Correct.

And I will actually walk them through the math and usually they see the light. But that is an interesting conversation. Our salespeople -- in fact I'm about to have that conversation in Argentina next week, that exact conversation.

This is how I did a lot of business with Chinese goods and Brazilian goods, import/export for $450 million for a big Fortune 300 company. And what we did was we didn't review on an order per order basis, we did what you do and you have, fortunately, Chris, and Gary, you guys have a perspective that extends beyond not only quarters and years, it extends to the three- to five-year and then some period and that's the beauty of Lakeland.

Regrettably the marketplace, irrespective of market recognition per se on a month-to-month, week-to-week, quarter-to-quarter, year-to-year basis you're building a business. And now that you're free from this DuPont quagmire, the Lakeland brand could become as big as the DuPont brand in isolated communities, and as it does so, though, it overshadows some of those brands and begins to take them over internationally. So all of these things are positive.

I have nothing but praise for you guys and I am very proud to be a shareholder and grateful that you guys are working so hard and doing so well. So thank you very much.

Thank you very much, we needed that.

I second that, Mike.

Okay, take care.

Much appreciated. Thank you.

And, gentlemen, it looks like we have no further questions today. Mr. Ryan, I'll hand it back to you, sir, for any closing comments.

Okay, if anybody is still on.

One second, getting something in e-mail here. Bear with us one second, we just have an e-mail from our chairman here. (Inaudible)

Well, we just got an e-mail from our national sales manager and he wanted to make it clear that we are currently selling a lot more of our Lakeland-branded products than just a month ago. Okay, so the transition isn't so much, oh, will do it at the end of the fourth quarter and the first quarter, it's already happening. He's very positive about the sales switch over. We appreciate your participation on Lakeland's second quarter 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 the long term. 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.

Hold on, there seems to be one more questioner in the queue. Operator, am I missing something?

No, gentlemen, we just had Joe Munda from Sidoti queue up. Joe?

Hey, guys, sorry about that. I had a little bit of trouble getting in the queue.

Okay.

But you know what, Gary, and you guys, Chris, you guys answered pretty much all the questions I had. I mean, I'll catch up with you guys off-line.

Okay. Operator, I guess that's it?

All right. Gentlemen, thank you very much. And ladies and gentlemen, that will conclude today's Lakeland Industries second quarter conference call. We'd like to thank you all for joining us and wish you all a great afternoon. Good-bye.