Lakeland Industries Inc (LAKE) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, welcome to Lakeland Industries announces third-quarter results conference call. Please be advised that this call is being recorded.

Now I would like to turn the conference over to Mr. Christopher J. Ryan, President and CEO. Please go ahead, Mr. Ryan.

Good afternoon to you all and thank you for joining our fiscal year 2012 third-quarter financial results conference call. We are very pleased to report another quarter of improved results for our international operations. As many of our followers know, Lakeland's international growth strategy was implemented in order to capitalize on global trends and opportunities that would enable our Company to improve it's top and bottom lines, ultimately in pursuit of building value for shareholders.

The parallel objective of the international growth strategy was to alleviate the Company's concentrated business in the US, which was subject to one supplier in DuPont. At this juncture, we are now finally concluding our business with an exposure to DuPont, and have built a solid foundation around the world. With our global business now able to absorb the elimination of DuPont related sales, we are more focused than ever on profitability. I'll talk more of our present circumstances relating to DuPont in a moment.

I'd first like to address an important recent development that ties into our efforts to improve profitability. As announced today, we reclassified our nitrile glove manufacturing business in India as a discontinued operation and among the more likely options intent to sell the business or close it by January 2012. This has been and unprofitable operation for us, and in any case the nitrile product will be sourced from an outside supplier under our label at a similar cost as part of our comprehensive line of hand and arm protection products. I'll let Gary discuss the accounting treatment in his remarks. We will however continue to maintain and grow a sales and marketing presence in India where we see great long-term upsides, sourcing our full range of products from our global manufacturing facilities. But bringing an end to our money losing glove manufacturing business in India illustrates our progress in enhancing profitability while focusing on growth opportunities.

We believe more can be done in the next few quarters to further enhance profitability throughout our global footprint. Important steps have been and will continue to be taken both in our home market and abroad to bring us closer to realizing the potential of our global platform. We see vast opportunities for Lakeland around the world and have continued to invest to build out our platform. The investment being made in our international manufacturing and sales and marketing activities, provides a potential for significant operating leverage and margin expansion. Lakeland's international operations continued to increase on an aggregate basis as well as on a percentage of total sales. We still reported the highest level of international revenues for the third quarter fiscal 2012 at $12 million. International sales as a percentage of consolidated revenues in the third quarter reached a record level of 49%.

Another highlight is our gross margin, which continues to improve. Prior to our international expansion, our margins had been in the high teens. In 2007 when we made our first meaningful international foray, we had gross margins in the 24% range. For the first nine months of fiscal 2012, we are setting new Company records at nearly 31%. There is further room for improvement from here. Meanwhile, we have been investing in our infrastructure to increase our sales capacity and have been implementing strategies to increase our sales. In the past two quarters alone, we made capital investments of about $2.9 million to expand our manufacturing and support facilities in Brazil and Mexico. From a manufacturing capacity available at our operations in China, Brazil, Mexico and the US, we estimate that we can accommodate an increase in global sales by 20% to 50% depending on sales mix.

We have been investing in product development, sales force expansion and marketing initiatives. A key initiative on the sales and marketing front has been our outreach to international distributors. We are pleased to report success in this endeavor. These actions position Lakeland at the forefront of the industry as the low cost and high-quality supplier with one of the largest portfolio of products for our segment in the world. Our brand building and manufacturing capabilities will not only continue -- or contribute to our ability to become a leading provider of safety garments and accessories for the industrial protective clothing market in foreign markets, but also being leveraged for the transformation of our US operations.

The US is our most important market, and we will still see plenty of opportunities to realize more of its enormous potential for a full range of products both current and planned. Less than three months ago, DuPont severed what had been a 29 and 17-year licensing relationship with us for the Tyvek and Tychem brands in the US, from which we built a nearly $78 million business in the US, albeit at recently low margins. Because DuPont had in recent years further squeezed our margins with continually higher Tyvek and Tychem fabric costs, the impact of losing this business on the bottom line is considerably less than on the top line, but is nonetheless a meaningful reduction at the present time. We experienced a decline in these two DuPont related product revenues of $4.1 million in the third quarter of this year from the same period of last year. Our revenues from these products will be essentially eliminated completely in the next few months.

Since the end of the DuPont relationship, which really only had meaningful impact on us in the US, we have been aggressively approaching the US market with an expanded product line. The DuPont licensing agreement did not permit us to effectively market our own disposable and higher end chemical products. With our new sales management in the US, we are pleased to report increases in our non disposable product lines, in our home market where we did not have a conflict with DuPont, including garment lines such as fire service, reflectives and wovens. In order to realize more of our potential in the US, we are in the midst of doubling our sales and support personnel in the field, increasing research and development for new products, upgrading our systems and marketing and streamlining our operations. We are determined that our customers realize we are the go to supplier of protective clothing and that we will perform better than our competitors in all aspects of the business.

We have been successful thus far in our new approach, as an increasingly recognized leader in service in recent months, two of our largest customers in the US named us number one in service and support out of all their thousands of suppliers. Along with our international footprint, we are now in a position where we can very effectively support multi-national companies through a combination of regional sourcing or warehousing together with localized market knowledge and logistics. This includes the expertise for any given geography to devise sourcing programs from our mix of factory locations that most cost effectively account for tariffs, shipping costs, standards and other local as well as international requirements. Focused on profitable growth, we believe we are well positioned to become the worldwide market leader over the next five years.

Lakeland is successfully evolving from a marginally profitable domestic supplier with limited product depth, to a multi-faceted manufacturer with a comprehensive product portfolio pursuing profitable growth on a global scale. This is been the result of a prudent but all encompassing strategy adopted and implemented over the past several years, grow globally and diversify our offerings while at the same time decreasing the Company's vulnerability and dependence on DuPont in the event it were to terminate the licensing agreement, as has now happened. Had we not adopted this strategy and successfully execute it, we would be giving you quite a different report today. Our transformation is nearing completion, we believe after only a few quarters of transitions we will be a much stronger Company. We are very excited by the opportunities that have opened up or Lakeland. I will now pass the call on to our CFO, Gary Pokrassa, to provide a more detailed review the Company's financial results.

Thank you, Chris. While Chris has provided an overview of some of our third-quarter results and operational developments, I'll provide a more detailed review of our consolidated financial results for the quarter as well as a recap of our fiscal year-to-date financial performance. The financial results to be discussed reflect our business in India as a discontinued operation, therefore result in this business have been removed and will not be included in our results from continuing operations for the third quarter of FY 2012. While prior periods have been restated to reflect the removal of the now discontinued operation.

Our total sales from continuing operations decreased by $1 million in this Q3 this year from Q3 last year, resulting from $3.6 million decrease in domestic sales, partially offset by growth of $2.6 million in foreign. Q3 this year international sales of $12 million versus $9.5 million in the year earlier period. Q3 2012 domestic sales of $12.7 million versus $6.2 million. Q3 2012 sales breakdown is 51% domestic, 49 % foreign. As a percentage of revenue, international sales in the most recent quarter represent the highest contribution in the Company's history. Relating to our Brazil operation, in the third quarter we took a large charge for foreign currency exposure, we are not hedged here because of the high Brazilian interest rates and the expense resulting from that hedge this currency.

In Mexico, which for the most part had been a manufacturing operation, as we noted last quarter we've been setting up a sales office for direct sales activities, which are expected to begin ramping up orders over the next quarters. We are pleased to report initial sales in Mexico, well the figure is still very small. We purchased our current leased building in Mexico from the landlord for $1.3 million and expect to spend another $1 million or so combined in Q1 and Q4. This year and Q1 next year for construction. This expansion will accommodate the anticipated increases in sales and Latin America, primarily Chile, Argentina, Brazil and Mexico as well as provide for warehousing and future manufacturing capacity expansion of products for our operations around the world.

European sales were up 22.6% from last year. Working primarily out of the UK, with sales coverage of much of Europe and some of the Middle East, sales have been strong. As we mentioned on our last conference call, we moved into a new facility in the UK which will greatly improve our storage and shipping capacities although it is contributing to somewhat higher cost given the larger space. Like our other growing regions in Europe, we have been implementing a more active marketing campaign and have advanced talks with strategic partners that we believe bode well for future growth and share expansion.

In Canada, we've now experienced sales for about a year, year over year sales were up about 7%. Revenues in Canada will be modestly impacted with the elimination of the DuPont product sales. Demand from fire departments for defense-related initiatives and to the refinery and mining industries continues to be the driving force for our market expansion in Canada.

Although not included in continuing ops, I'd like to address our business in India. This operation, which for the most part is for the manufacturing of nitrile gloves, has consistently lost money. Company has decided to discontinue operations in it's India glove manufacturing facility and put the assets in business up for sale. Company's attempting to sell the operations as an ongoing operation, but if not successful, we're preparing for a shutdown of operations by the end of this January.

Prior-year financial statements for the three and nine months ended October 2010 have been restated to present the ops of India of the glove manufacturing subsidiary as a discontinued op. In conjunction with the discontinuance of operations, the Company recognized the pretax loss on the disposable $880,000, consisting of $585,000 in inventory write downs, $145,000 in shut down expenses and $150,000 in operations in Q4 till the shut down. The business to be sold or shut down relates to the manufacturing of nitrile gloves, as I said, we intend to maintain and grow a separate business in India for domestic and regional sales of our full range of products. We will continue to sell the nitrile gloves as part of our hand and arm protection product line, but again through purchases from private label manufacturers. As noted, by taking this action we eliminate what had been a significant operating loss, and if the sale of the facility can redeploy the capital to operations that afford better opportunities for profitable growth.

Moving back to the consolidated financial results on a continuing operating basis, gross profit increased to $7.4 million from the three months this year from $7.2 million for last year. Gross profit as a percent of sales was 30% for Q3 this year compared with 28% in Q3 last year. The higher gross margin resulted primarily from an improved mix of higher margin Lakeland branded products around the world, partially offset by lower margins on the disposable products purchased from DuPont and sold into the US, the sales of which had been declining.

Moving further down the income statement, consolidated SG&A for continuing ops in Q3 was $7.2 million compared to $6.3 million in Q3 last year. As a percent of sales, operating expense increased to 29% from 24.5% for last year. The $900,000 increase in Q3 expenses resulted largely from currency fluctuation losses this year compared with currency gains in the prior period and also increased sales and marketing activities in the Company's growing international ops. Net income from continuing ops was $146,000 for Q3 this year, down from $700,000 in the 2011-- in last year's period. Basic and diluted earnings per share from continuing ops was $0.03 for the third quarter compared to $0.13 last year. There was 5.2 million to 5.3 million shares outstanding weighted average on a basic and fully diluted basis for Q3 this year compared with 5.4 million and 5.5 million last year.

Now for the nine-month results. Net sales from continuing ops increased $1.5 million, or 2%, to $76.2 million from $74.7 million for the nine months ended last year. That increase was due to an increase of $6.3 million in foreign sales partially offset by a $4.8 million decrease in domestic sales. Gross profit from continuing ops increased $1.4 million to $23.5 million this year from $22 million for the nine months ended October 2010. Gross profit as a percent of sales increased to 30.8% for the nine months this year from 29.5% for the same period last year.

Operating expenses for continuing ops increased 4.8%. As a percent of sales operating expenses increased to 27% from 26.3% for the nine months this year versus last year. Operating profit from continuing ops increased nearly 21% to $2.9 million for this year from $2.4 million for the nine months ended last year. Operating margins were 3.8% for the nine months this year compared to 3.2% for the nine months last year.

Net income from continuing ops increased $1.9 million to $2.1 million for the nine months ended October 2011, up from $0.2 million, $200,000 for the nine months last year. Increase in net income primarily resulted from the $1.6 million charge for VAT tax expense in Brazil in the prior year. The improved profitability before the VAT tax expense reflects the overall increased gross margins partially offset by Brazil and other foreign exchange losses. Basic and diluted EPS from continuing ops was $0.40 and $0.39 respectively for the nine months this year compared with a loss of $0.03 last year. There was a reduction in shares outstanding comparable which reflects the open market purchase by the Company of the common stock on the share repurchase program that extended into the current fiscal 2012 first quarter, so you see it in the weighted averages.

Turning to cash flow on the balance sheet, Company used $1.4 million for operating activities in the nine months this year, primarily to increase inventories. We expect inventory in the $47 million range should sufficient go forward level barring any unanticipated large orders or other extraordinary growth opportunity, we would hope to work that down somewhat. At October 31, 2011, the Company's outstanding loan balance was $12.7 million from a revolving credit facility and $3.7 million from a term loan facility. There's $13.6 million remaining available under the Company's combined bank borrowing facilities at October. Combined the facilities bear interest at the blended rate of about 2.5%. We ended the third fiscal quarter with cash of about $6 million, essentially the same with the beginning of the year. The Company's book value per share is now $14.34. Therefore our share price is trading at about half of book value. Current ratio is 7.8 to 1. Working capital is $66.9 million, which is more than our enterprise value of $52 million. And that'll conclude my formal remarks, 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 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 globally. Given the traction we have been making in the markets we serve, particularly in some of the fastest growing markets in the world 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 the revitalization initiatives are making progress. Importantly, we have been steadily improving our position in an effort to accumulate market share. And our balance sheet remains strong with cash and access to capital for growth opportunities. We remain committed to our focus on profitable growth and delivering on our goal to become the worldwide market leader over the next five years. I will now turn over the call over to the Operator for a Q&A session.

(Operator Instructions) Howard Halpern with Taglich Brothers.

Hi, guys. Could-- the-- you're talking about I guess streamlining and having some reduction in expenses for underperforming businesses, is that going to be an offset to the increase in the sales force in the other programs to drive business in the US and overseas?

Yes, that maybe an offset, we are-- we have already increased our sales force in the United States, so that's an expense. On the other hand, we will be reducing expenses across the board both internationally and domestically. So what we see it's difficult to say because we've already incurred the additional expenses this quarter for increases in the sales force in the United States. So you see it in the expenses already. So any offset we have like reducing losses in India, will actually increase profitability.

Okay, so that line should trend down somewhat as time goes on then?

Right.

Okay. Guess could you talk about the Brazilian market? Were there any large orders or pending large orders that you could talk about?

The one that we have been discussing before is the Brazilian Navy. We had set out a press release when we just won the bid, and we had gotten one PO for about 10% of the total bid. That was shipped and billed in Q3 in those revenue numbers. There are a couple more POs from that which should go into Q4 sales. Other than that, we've got a number of things pending but nothing I can specifically talk about. Brazil is a very active market, and there are a number of these large bids out there, but nothing that I can really talk about other than the Navy.

Okay. I guess in terms of your international push, is-- are there any new markets that you are targeting or new end user markets that you're targeting at this point?

Yes in the coming months, we'll be targeting some of the countries in North Africa and South Africa.

Okay.

Also, we're still in start phases in Mexico domestically and Russia and Kazakhstan and some of the other countries in that area.

Yes, you should see the Russian and Kazakhstanian markets at least from a sales and earnings perspective start to grow much more rapidly this coming year.

Okay and I guess could you could you talk a little bit about the Indian market and the market potential there?

Okay even though we are shutting down the manufacturing operations there, we will continue to sell what we produce around the world in India. It's just that we are not going to be manufacturing in India anymore, but we will still be maintaining our sales force in India. We currently have a warehouse outside of the manufacturing operations that is currently selling our products as made in China and will continue to sell those products, and we will continue to penetrate the Indian domestic markets with the products that we make around the world.

Okay. And just lastly, in the US you're starting to see some positive momentum from your direct selling--

Yes, I think we're seeing some positive momentum. I think we'll be able to say a lot more next quarter. We just basically have gotten rid of most of our DuPont inventory, so now the next quarter will be the first quarter where we're going without any of those sales and we wanted to obviously get rid of the inventory. And you can't ask people to buy something different when you want to get rid of the DuPont inventory. So next quarter we'll really be able to give you a good gauge on how we're doing with our own Lakeland branded products in the United States.

But do you envision seeing customers coming to you or the products that you have and not necessarily having to knock down a tremendous amount of doors?

Yes there's a lot of business out there, not only DuPont business, but there are five or 10 other companies that compete out there in these product lines in the United States. So there's a big market out there, and the United States, the economy seems to be sort of slowly coming back. I mean I wouldn't say anything great, but we probably will see some growth in 2012, because all the politicians want to get re-elected so we'll probably see lots of spending in 2012 and the [QE4] and so on and so forth.

And that would really impact the higher margin reflective year and such, especially if there are a lot of projects like that that go on the next year?

Yes, I think you'll see a lot of government projects being announced in 2012.

Okay. Well thanks guys, and keep up the great work.

Okay, thank you.

Anthony Chiarenze with Key Equity Investors.

Hi, good afternoon, how are you doing?

Fine, good afternoon.

What were the DuPont sales in the last quarter?

$4 million altogether.

About $4 million.

I'm sorry closer to $5 million.

And by the time we get to the fourth quarter should be minimal or maybe a $1 million or $2 million will be left?

There'll still be some transition in Q4, we're still working on some inventory, but it won't be zero, it'll-- it probably will be close to zero in Q1, there'll be some transition, there'll be $2 million probably in Q4, no more.

Okay. Now as you transitioned out, you're not allowed to sell your own disposable's yet? It has to be like a demarcation point or can you?

No we've been selling our own disposable's for years, we always have, that's never been an issue. It's just we aren't able to market it and promote it aggressively against DuPont, but we've had our own parallel product lines for years.

Okay so you-- once this-- the inventory is gone you'll be able to promote and maybe we'll get a bigger ramp up with the new sales force?

Well actually once the license agreement was terminated, we can start promoting and we have been doing that.

Okay so you have been promoting it. So it's not like one cuts off and the other ones start, so you-- how much disposable's did you have of your own, of Lakeland disposable's in the current quarter?

How much sales of disposable's?

Yes, yes.

Hang on one second. I think there's some detail in the-- we disclosed it in the MD&A, but about $7.5 million, just the disposable's, that's without chemical or anything and just in the US. We have disposable's throughout the world. Canada sells it and Brazil is now getting traction on that. So just in the US it's about $7.5 million.

Okay, so it's a significant number and as we get the DuPont off, maybe we should be over the next two or three quarters, we should hopefully pick up some portion of that DuPont business that has gone away?

Exactly.

How is this process going within transition to the new sales force and so forth? I mean are we-- as you said you've hired the sales people, there's some transition for training and so forth, when do you expect to really-- for it to ramp up?

It should really-- we should be doing very well by this time next year. And within two years we should replace all of the gross margin that went along with the DuPont products. You've got to understand four to five years ago, we have $78 million in sales of DuPont products. Now we're only looking at a loss of $20 million. We've been able to replace, that's $58 million of DuPont product sales over the last five years. So we feel very confident that we can replace the profits on the remaining DuPont business within the next one to two years.

Also keep in mind, what you really need to look at is not necessarily the top line but the gross margin line because the margins that we've had on the DuPont sales have been in the 12% or so range, and our Lakeland branded products are much higher than that.

So from an argument point of view, we would only need theoretically 50% of Lakeland branded sales to replace all the DuPont profits. So if we sold $20 million in DuPont, we only the $10 million of Lakeland to make the same profit.

Yes, I understand. Great, thank you very much. Good luck.

Thank you.

Doug Ruth with Lenox Financial Services.

Hi, good afternoon, guys, I think you're doing all the right things.

Hi, Doug.

Thank you.

Can you-- is the Navy or the Navy order in the fourth quarter, will that be a large order do you think?

Pretty sizable, yes it should be a-- it's hard to say because of the-- as you've seen the foreign currency translation rate bounces around a lot, it's denominated in reals. But it should be north of $1 million in the quarter.

Oh, that's great. Is there interest in somebody buying the Indian manufacturing facility?

We have a couple people looking at it, I can't guarantee what they're going to offer or that they're going to buy it, but we have interested parties.

Okay, I think that you're doing the exact right thing shutting that down and I'm grateful that you made that hard decision.

Thank you.

Can you give a run rate as far as what's happening with Chile and Argentina as far as an annual number?

Let's see, they've been really doing very well. Combined between the two we had about $800,000 of sales in the quarter combined.

So $3.2 million between the two of them?

At least, yes, yes and they're growing rapidly, so that should take you in the current run rate, it should be over the next four quarters I would expect it to be more than that with allowing to growth.

Okay, $4 million maybe?

Somewhere in that range, yes.

Okay. And is there any success stories that you can share with us at this time on the MicroMax product?

Not quite yet. Probably next quarter we'll be able to share some. It's really that we -- it's competitive information that I don't want to disclose publicly.

Okay. And is there any color that you could tell us about the contract for the Brazil, the new contract for the Brazil President? You obviously feel highly about the person, you're giving us a new contract.

Yes, he's done a very nice job and we've rewarded him.

Okay. And he's-- you're happy, he's happy, and you think he's an honest person?

Yes, yes and yes.

Okay. Can you add any additional color, are you happy with the money that was spent in Brazil and the build out of that facility?

Very much so actually. We're doing this in two phases, let me just talk about that for a minute. The build out of the existing facility, we doubled that, we put a mezzanine level in two phases over the production floor. That was completed in September. At the end of September then, without the additional land, we exactly doubled our manufacturing capacity from September the year before. And we did at an amazingly small capital expenditure, of maybe $500,000 in total. Now, the additional land that we bought is directly adjacent to the rear of the property, we've-- the purchase is closed, we own the land.

We've-- what we're doing what that is two issues. We're looking at it more to bank for the future because right now, we have plenty of capacity for our current operations, we don't need to build out more capacity yet. I'd say we're about a year off. The capacity we have now should allow us to have very strong growth for another year or two, 15 months or so before we'd have to look at building that out.

What we are doing with that is we're using the additional land to just reconfigure the structure. It's very tight, the excess is in an interior dirt road that's like a moonscape, we're going to be able to reconfigure the entrance to a main road, we'll configure it very cheap capital expenditures in the new facility for the next year or so. We'll just build out a receiving and warehousing facilities, low cost usage of the space, and reconfigure the current space which will allow us to free up some of the additional space. So I don't anticipate spending a heck of a lot more in the next year in Brazil, but the land is there, it's banked for the future, and I would say the second year out we would probably commence phase two of the building.

Okay, that's really helpful. And what about -- you-- tell us about Mexico and what your thoughts are there with-- you purchase the land and maybe tell us more about that, if you could?

All right, well we purchased the facility we had been occupying, it was a leased facility. The lease had a right of first refusal provision in it. The landlord called us and notified us earlier this year that he had an offer to buy the property and he was triggering the right of first refusal. We looked at it, we looked at alternate space in the same area, we couldn't find anything even close to being as useful as the one we're presently in, so we decided to buy the building. We have already closed on that. We bought the building for $1.3 million, again that was funded by our bankers who have given us term loan specific to these foreign capital expenditures.

And now what we're doing is we're now building out an expansion of the property. The building itself comes with several acres of available land along with the building. There was actually a foundation for an expansion facility built out but then never used, so we're working with that that was already constructed. We're working on the construction now as we speak, it will be complete, if not by the end of the year, somewhere early in Q1, perhaps $1 million of construction on top of the $1.3 million to buy the facility. That then gives us expansion in Mexico and Brazil, and the two of them should then allow us to supply much of-- all of our Latin American operations basically.

How much bigger will be Mexico facility be when you finish then when you started?

40,000 square feet.

Additional.

Additional. Why are we doing this? Because we expect increased sales in North and South America, particularly in our fire division.

Okay, that sounds-- it all sounds great. And I think you're doing all the right things, and we're patiently waiting for the stock to go up.

Well somebody bought a lot at the close.

Yes, it was nice day for you and congratulations on that.

Thanks, Doug.

Sheldon Grodsky with Grodsky Associates.

Hello, everybody, I have a few small questions. One question has to do with that old dispute you had when you bought the Brazilian operation and then were surprised by the VAT and I think you had an arbitration proceeding against the people who sold you the Company.

That's currently underway, yes.

Okay, and the expectation as to when that would be concluded and how--

March. I was just down there actually in Brazil for the hearing in October. There was a formal hearing that lasted a full day and I'm told that the decision should be expected in mid-March.

Okay, that's the decision and that could be how much money roughly were you asking for?

Well there's a couple of issues. One is just we just have to avoid paying some additional contractual money to the two people that were terminated. We have to demonstrate that their terminations where in deed for cause. We believe we have ample evidence to support that, but obviously there's a judicial proceeding. They obviously feel otherwise. So that would not involve any money coming in. There are some other -- there are other claims that are part of the adjudication, but the main issue is just to have them adjudicated as having been terminated for cause.

The other issue is as a result of the VAT tax, when we closed on the acquisition we set aside some money in escrow, the same two individuals are withholding their funds to be released from the escrow to reimburse us for that VAT tax, that's why it was not picked up as income. We would expect a decision also at the same time. There's about $1.3 million to $1.4 million in the escrow fund at this point. Fortunately, is being invested in Brazil at about an 11% APR, so it's growing very nicely even as time passes. And if we do win that, that would be money coming into the Company and that would represent a gain which we would report at that point net of legal fees and some other costs.

Okay. And where do you stand now with your stock buyback program?

We completed -- it was a $2 million program and we spent literally every penny of that. That was completed in Q1 of this year.

Okay, and there's no new authorization as of yet?

No.

Okay. Now moving over to DuPont, you've been selling product and you can't sell-- well you're not be selling the DuPont stuff for very much longer, the Tyvek and Tychem. Are your customers resistant to the switch over to your products from the Tyvek? Does Tyvek have a very strong market position where people say look we don't really want to buy your stuff, we want Tyvek?

Some people say that, some people don't. But as I said, it's not only DuPont's products that are out there that we compete against. We compete against Kimberly-Clark, we compete against other people who make competitive products. So it's really going to the general population out there as a whole and going after market share, not only from DuPont but from Kimberly and some of the other competitors.

So there's a lot of market share out there to go after, to switch, and we feel that we have a good position in doing this because we're the only guys out there actually making the garments. The rest of these guys, they're just using contractors to make them. They're like Procter & Gamble, they're marketing operations. And to be quite honest, none of them deliver on time, none of them have a very good quality garment because it's being made by some Chinese contractor. So we have a lot of good reasons for end users to buy our product.

Okay. Yes, you'll be doing that in India, you'll be distributing product made by contractors also.

No, we'll be distributing product that we make. Oh on the gloves, yes, yes.

And that's part--

It's become a very pricey competitive market, so we will source those to and really only to service our existing customers so that we don't interrupt their supplies.

Okay, I'm going to ask one more question then I'll give it back to everybody else. When do think, if you had to guess, that the US top line, the US revenue, would surpass what it had done before the DuPont decision?

Top line two years, bottom line one year, that's just in the US.

Right.

As I said we've lost $58 million of revenues in the US over the last five years on the DuPont product line but have been managed to replace them internationally. So yes the US will take maybe a year to replace the bottom line and two years to replace the top line in that specific product line. That's not to say that international operations are not going to continue to grow at the rate they've been growing.

On the contrary, we believe that we'll have--

Yes, so you're not-- at least the bleeding has stopped in the United States, so now you'll really see the growth on the international operations.

Yes, one more quarter, you'll see one more quarter of decline at this point.

Did DuPont terminate their other --

They terminated one other person that I know of, my guess is they'll start terminating other people as time goes on. But--

Is it going to stay in the business or are they just-- they're losing interest and all?

Well I shouldn't comment publicly on that. Your guess is as good as mine.

Okay, that's it. I'm sorry, I asked one more question. Thank you.

Thank you.

Jason Schacht with Heartland Advisors.

Hi, everybody. Just to clarify, the answer to the first questioner that you had, so should we expect that Q3 will be at least a near-term high watermark for SG&A expenses?

I would hope so. A big part of that was the -- it's hard to tell, a big chunk of the increase from a year ago was the foreign exchange, and that comes mainly out of Brazil which we do not hedge. Virtually every other currency is hedged, so there shouldn't be that much variation. But Brazil last year had-- we picked up a $200,000 gain in the quarter, and this year we-- the currency got a lot weaker and we're picking up a few hundred thousand loss. So the swing from a $200,000 or $300,000 gain to a $300,000 some odd loss is almost $600,000.

All right and then two items on the balance sheet. How much of your inventory was related to Tyvek?

You're talking about in India or just in general?

Just overall of the I guess $47.3 million in inventory.

I don't have an exact number but it's declining significantly, it's only a few million at this point, $4 million or $5 million at most, if that, I don't think it's even that.

Okay.

It's probably--

And lastly, what is the value being assigned to India on the balance sheet right now?

Well actually there's a line that we-- because of the accounting for discontinued operations, there's one line where everything, all India assets are lumped together as one line as assets held for sale. It's right there on the balance sheet, if you give me a minute, I'll look it up for you. It's about--

Okay I can find it here. It looks about $3 million here.

Well that was a year ago. I think it's less than that now. Yes, just-- all right just under $3 million.

Right, okay.

That's building equipment, receivables, inventory, cash, everything.

All right, thank you.

Yes.

Joe Munda was Sidoti.

Good afternoon, guys, thanks for taking my question. A lot of my questions have been answered. I was just wondering as far as modeling goes for discontinued ops, what can we expect going forward into the fourth quarter and into the first quarter of fiscal 2013?

Well that's an easy one, zero.

Zero, so nothing in the fourth quarter then?

The whole-- let me explain something, the whole idea of the theory behind the accounting for discontinued operations is once a decision is made to close an operation, like we've done here in India, the idea is when you make that decision, then all future cost are supposed to be anticipated. Why we've even included, if you noticed it, when you go through the details you'll see there's $150,000 that we accrued as part of the loss here which we anticipated would have been the operating losses in Q4 but they're brought into Q3 as an accrual. So if we've done this right, the answer should be zero, zero and zero.

Okay. And I'm just a little curious as to why did you guys make the decision now to close this operation? I know you said it was money losing, but what really drove you to make this decision right now as opposed to a couple quarters ago?

We've been losing money for a long time. The only reason that we didn't do it a few quarters ago is because we wanted to give our sales people every opportunity and bend over backwards and do three triple somersaults just to allow them to have every opportunity to get traction on the sales and at least reach break even on this. And it became obvious that that wasn't going to happen, and after giving them every opportunity, we just shut it down.

Okay. And so now you still have inventory left of these nitrile gloves that are made in India, correct?

Yes, there's some finished goods which we shouldn't have to much trouble with some time, there's only a very minor write down on the finished goods. Most of that inventory write down comes from the inventory physically located in India which is mostly raw materials and work in process. And the nature of this raw materials is mostly liquid nitrile which has a very short shelf life, and unless you produce the finished goods from that, it's very good to realize the value. So on an ongoing basis, you'll only-- you have raw material and work in process which gets turned into finished goods. When we shut it down, we took a pretty hefty write down on that, we're trying to be conservative.

And there's no way to convert that liquid nitrile into any other garment that you guys are currently making?

It's possible or we can sell it as a raw material. But we're going to write it off now and if we can get something for it, then great, we get something for it.

Okay. And then my last question, because like I said, all my questions were answered already, this one's for Chris. Chris, despite the spike up in volume at the close, stock has been trading roughly 7,000 shares a day, book value over $14. I know you said you were taking your bonus in stock. What are you guys doing to increase liquidity in this name?

All we can do is go out and talk to people on the street, do things like this, a lot of companies going through it, but hey, a lot of stocks are way way under right now in terms of -- certainly the micro caps, a lot of them are trading below book value and I hate to say it, but what do you guys doing about cleaning up your industry? Because that 's the whole reason for this volatility in this terrible market. (Multiple speakers) is having a great time.

But the stock has been trading at these levels for a long period of time, it's been trading between $7 and $9. I know you had mentioned that there were some directors who are getting up there in age, has there been any indication that they'd be willing to sell some of the stock that they're currently holding?

Maybe they would, I really have to ask them. It's really-- I realize it's hard to-- there's not a lot of liquidity in the stock. But I'll tell that you that when we went out to buy our stock, we had no problem purchasing some 200,000 shares within 30 days.

300,000 actually.

300,000 shares. I always hear oh I can't buy it but we certainly can whenever we want to.

I believe we bought a total of 340,000 shares over-- maybe over a six-week period or a couple months.

Okay, that's what I don't understand, you guys instituted a share buyback program but at the same time are wanting liquidity in the stock. Wouldn't have the cash be used someplace better other than a share buyback?

Not really, when you look at the depressed price of the stock.

If you could buy the stock back at 50% of the book value, that is accretive to earnings per share. We figured out that that share buyback program increased earnings per share by about 4%.

Okay, so why not then offer a dividend instead of buying back stock?

We feel it's better to buy back stock then offer cash dividend. Simply because once you offer a cash dividend, the street, the investors think that they're entitled to it for eternity. So if you run into a bad quarter and have to cut your cash dividend, they then crucify you.

Okay. That's pretty much all I had. Thanks for taking my questions.

Thank you.

[Quentin Matthews], private investor.

Hi, guys, thanks for taking my call.

Thank you.

Kind of on that last conversation, I agree with you on the share buyback and appreciate it, and I've asked this question before, but I'll ask it again on return of capital, return on capital, return on equity, instead of looking at -- what on average, you guys being in this industry, would you say that the-- if you were shooting to be an average player in the industry, your return on capital and your return on equity should be? And I think that is why we're trading significantly at a discount to book, we're not showing a market return on capital.

Well I think an average return on capital in this industry, an average return on equity would be 12%. On capital it's tougher to say because capital moves around. But I'm always curious as to why gold trades at $1800 an ounce. What's the return on investment and on equity there?

I completely agree with you. There's a reason why markets are a voting machine in the short term. But they are voting on the numbers that you guys are producing and I obviously hold shares, I believe in the story, I'm patient, I'm just trying to get an idea of internally your goal is let's say maybe to return 12% and given--

Return on equity.

Yes, sorry, return on equity. So if you guys are planning to be a leader in five years, you think that you can reach that goal in five years or you think you can reach it earlier?

We think we can probably reach in two to three. It's really just getting the US sales up to where they used to be and at a reasonable profit. If we have an equity base of $75 million and we can get a 12% return, and the stock is trading at roughly $40 million, then we're really looking at a 24% return on people buying the stock today.

Agreed. All right, last little thing on India, will India be profitable immediately going forward? Now that you're selling other people's products, will you start showing a profit there?

Right now the sales is so small that it's really not worth --

You're not going to see a large profit or a large loss there at all.

No, outside sales are just-- it's basically a start up sales office.

On a macro view, when you look at the BRIC countries, when you guys are really pushing your international development, are the majority of your sales protected in the sense that you read a lot about the Chinese and the Brazilian economies and what's going on there, are you guys protected in the sense that most of your sales are from the government and therefore you don't feel that there's a lot of downside if there was a huge shock to one of those economies?

No, I think most of our sales there are more protected because there's just less competition, people able to deal in those countries. In Brazil, more of our sales our government oriented in the sense that we deal with utilities. And we deal with (multiple speakers) for instance Petrobras, which is partly owned by the country of Brazil and partly owned by the public. So utilities are sort of quasi-government authorities. When we're dealing with the fire departments, you're really dealing with 100% owned authorities, so each country is different. We're not doing a lot of business with the Chinese government at all for that matter. But in Brazil probably 50% of our sales are with quasi or fully government-owned facilities.

Well if you want to count utilities as government, it's probably well more than 50%. The industrial--

Sorry, go ahead.

It varies by country, the only thing I sort of expect in China is some sort of a real estate bubble sort of slowly detracting, because the Chinese have a command economy. So they more or less control what goes on in the real estate industry, and there is a bubble bursting there, it has to burst at some point. But I think it will be a controlled burst.

Okay. Quick question on VAT tax. The liability that you guys show on your balance sheet, I just try to get a better understanding, I've read through all the disclosures on it, but can you-- I know you've got the escrow that's sitting there in this arbitration that offsets close to 50% of it. But I mean are you guys expecting to have to pay $1.5 million, $2 million coming up at some point on that?

Absolutely, we're just waiting. We're in the point where there's been a claim received from the state of Bihar government so we have that. We're fighting that in an administrative proceeding within the tax department and -- which is basically waiting for the government to declare the next amnesty program which they've-- this is at the state level in the state of Brazil. They have a history, a 25 year history every two to three years of declaring an amnesty, we took advantage of the last one in May of 2010. That tax issue was basically in two tranches. The first three a period and the second three a period. The first one we already paid into amnesty last May of 2010 and we will do the same as soon as the next amnesty comes which should be, hard to say exactly, but certainly within the next year why I expect to see an amnesty and we have to pay about BRL6 million, would be about $4 million US roughly.

Okay, thank you. And the last thing more just a comment than a question. I've been following you guys for a little over a year now and it's back to the market exposure. It seems to me just that just as you take the calls there's a barometer that there's more and more people following you these days than in the past. So I don't know if you have any comment on that, but that's it, thank you.

Thank you.

Mark Niemi with KMS Financial Services.

Good afternoon, guys.

Good afternoon.

Back in your fourth quarter fiscal of 2011 conference call, I wrote down some notes that you mentioned that you were coming out with a potential new blockbuster product in October of this year. What's the status of that?

A little bit delayed due to testing.

Can you tell us what it is or is it still a big secret?

I'm not going to disclose that. When it comes out, it'll be well advertised.

Okay. Next question, when I look at your operating profit percentage for like the last six, seven quarters, I'm looking maybe around 3% range. If you go out couple of years from now when you're doing a larger percentage of business internationally, when you get rid of the DuPont business, what type of margins you think you could be running at? Can it get back up to like 8%, 10% range or is that just too high for the industry?

It's possible. Certainly you double of that, 8% to 10% is possible.

Okay. And that's the only questions I had. Thank you.

Okay.

Sheldon Grodsky with Grodsky Associates.

Sometimes I'm a bit of a slow listener, but I figure I better check if I heard right what you guys are saying about return on equity. Did I hear you say that you thought you could be at a 12% return on equity within two years?

Yes.

Yes, so that means you're expecting to have some rather dramatic earnings improvement some time in the not too distant future?

Yes.

Okay, well hopefully people will take note of it and hopefully you will deliver that. So okay, thank you.

And we have no further questions from the phone audience, I'll turn the conference back to our speakers for any additional or closing remarks.

No that's it, thank you everybody for attending, and I will close it up. Thank you. Bye.

Thank you. Ladies and gentlemen, that does conclude today's conference call. We'd like to thank you all for your participation.