Lakeland Industries Inc (LAKE) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Lakeland Industries announces fourth-quarter and year-end results conference call. Please be advised that this call is being recorded.

Before we begin, parties are reminded that statements made during this call contain forward-looking information within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. Forward-looking statements are all statements other than statements of historical facts which reflect management's expectations regarding future events and operating performance, and speak only as of today, April 18, 2012.

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 development, and other factors it believes are appropriate under circumstances.

These statements are subject to a number of assumptions, risks and uncertainties, and factored in the Company's filings with the Securities and Exchange Commission, general economic and business conditions, the business opportunities that may be presented to you and pursued by the Company; changes in law or regulations, and other factors, many of which are beyond the control of the Company.

Listeners are cautioned that the statements are not guarantees of future performance, and the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements.

At this time, I would like to introduce your host for this call, Lakeland Industries' President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, please go ahead.

Good afternoon to you all, and thank you for joining our fiscal fourth-quarter and full-year 2012 financial results conference call.

With the reporting of our fiscal 2012 year-end results, we are pleased to have made significant progress in the turnaround of Lakeland Industries. As compared to when we entered the past fiscal year, we have emerged as a leaner, more globally centric manufacturer and provider of quality industrial protective clothing.

Foreign sales accounted for more than 52% of total sales in the fourth quarter, the first time in the Company's history that foreign sales contributed more than domestic sales. We may now say that we are truly a global player, with operations in some of the largest and fastest-growing markets around the world.

Our turnaround involves both topline initiatives as well as strategies to improve profitability. In fiscal 2012, we took aim at reducing our cost basis and eliminating underperforming businesses. Due to the continued losses for a product line that we had high hopes for, but had not resulted in meaningful revenue, we designated our India glove manufacturing subsidiary as a discontinued operation.

In the third and fourth quarters of fiscal 2012, we took the appropriate charges, which Gary will review in his remarks, that will provide for more advantageous operating leverage in our business model. We will, however, continue to sell in India the products we manufacture in our other-country operations.

Another charge we will be taking in the fourth quarter is for approximately $230,000 and pertains to the reduction of manufacturing capacity required in the United States. Expenses relating to the shutdown of the plant in Missouri and relocation of the production to Mexico and warehousing to Decatur were accrued in the fourth quarter, although the actual shutdown will not take place until April. So the overhead savings will be realized beginning in our second fiscal quarter.

The adjustments to our manufacturing capacity in the US are, in a large part, a function of the strategic changes we have had to make domestically. These changes reflect the sales levels in the US for discontinued product lines and new Lakeland-branded products we have been introducing in the US.

As previously disclosed, a significant part of the Company's disposable and chemical product sales in the US have now been removed as a result of DuPont's terminating our licensing relationship last fiscal year. The DuPont products being removed have yielded far lower margins than Lakeland-branded products, so the loss of this revenue is expected to have a less-significant longer-term impact on our earnings. We are working toward the replacement of DuPont products with our own Lakeland-branded offerings.

While the loss of DuPont-related revenue throughout fiscal 2012 diminished the effect of the positive contributions of our international traction, we are encouraged by having a fresh startup domestically. We will no longer be dragged down by a deteriorating low-margin licensed product line domestically. Our turnaround will not truly be complete until we have regained our presence in the US. To this end, we are working hard at developing new products and certifying existing products for sale in the US, as well as for all our international markets.

Research and development expenses relating to new product development initiatives were nearly $430,000 in fiscal 2012 and are projected to increase to approximately $510,000 this year. We now have 825 products available through our sales and marketing channels worldwide.

To address our global growth opportunities, we have also been investing in our property and facilities. Our manufacturing capacity in Brazil was doubled in fiscal 2012. We also have just completed the expansion of the capacity and capabilities of our Mexican plant, which will further accommodate our growth in Chile and Argentina, and the plant closure in Missouri. A catalyst for changes in Mexico is the increasing labor and shipping costs for manufacturing in China. We will take advantage of our geographically diversified manufacturing basis to profit from our international sales traction. The investments being made in our international manufacturing and sales and marketing activities provide the potential for significant operating leverage and margin expansion.

For the 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 35%, depending on sales mix.

We are seeing signs of more meaningful progress developing at our Brazilian operations. Sales in Brazil increased by 16% from 2011 to 2012 on a reported basis in US dollars. The amount would have been higher on a constant-currency basis, and I will have Gary address currency issues in his remarks.

In the fourth quarter, our performance in Brazil was off due to no large bid orders being fulfilled. However, notable developments that we recently announced include the receipt of a signed purchase order valued at approximately $5.3 million, net of VAT taxes, from the Brazilian Navy. Revenue from this order is expected to be recognized in the first through third quarters of fiscal 2013.

We also received a separate signed purchase order for firefighting gear in Brazil valued at approximately $2.3 million, net of VAT taxes, with delivery of products and revenue recognition expected during the first half of fiscal 2013.

Signed purchase orders from the Company's operations in Brazil combined for approximately $8 million, the highest backlog in our history for Brazil. As we are proving, Lakeland is successfully evolving from a marginally profitable domestic supplier with a limited product depth to a multifaceted manufacturer with a comprehensive product portfolio, pursuing profitable growth on a global scale. This has been the result of a prudent but all-encompassing strategy adopted and implemented over the past several years to grow globally and diversify our offering, 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.

Our transformation is nearing completion. As we enter the new fiscal year, we are pleased to report that we expect to return to profitability in the first quarter due to the strength of our Brazilian operations, as well as improvement in the Company's cost structure and reductions in our overhead.

I will now pass the call over to our CFO, Gary Pokrassa, to provide a more detailed review of the Company's financial results.

Thank you, Chris. While Chris has provided an overview of some of our fourth-quarter results and operational developments, I will provide a more detailed review of our consolidated financial results for the quarter, as well as a recap of our fiscal-year financial performance.

Financial results to be discussed reflect our business in India as a discontinued op. Therefore, results from this business have been removed and will not be included in our results from continuing ops. All prior periods have been restated to reflect the removal of the now-discontinued ops.

Further, to the India operations, in addition to pretax charges of $900,000 taken in Q3, we have written down the real estate assets by $540,000, net of taxes, in Q4. So, a total of $1.8 million in pretax charges were recorded in FY '12 for the loss on disposal of the India assets.

I will now review the financial results for the fiscal year. Net sales from continuing ops decreased $3.2 million or 3.2% to $96.3 million for the current year compared to $99.5 million for the last year. That decrease was mainly due to a $9 million decrease in domestic sales, partially offset by a $5.8 million increase in foreign sales.

Net decrease in the US was comprised mainly of a decrease in US disposable sales resulting from the elimination of the DuPont sales. This increase in US sales was offset -- I'm sorry, decrease in US sales was offset by significant increases in foreign sales, including a $2.2 million increase in sales in Brazil, $1.4 million increase in European sales or 27%, and $1 million growth in combined Chile and Argentina sales. External sales from China were flat for the full year.

Gross profit from continuing ops decreased $1.3 million to $28.8 million for the year ended January 2012 from $30.1 million for the previous year.

Gross profit as a percent of net sales decreased to 29.88% for this year versus 30.23% for last year. Major factors driving the changes in the margins were lower margins for disposables, a minimal contribution from the higher-margin large bid orders in Brazil, and the sales mix.

Operating expenses from continuing ops increased $1.3 million or 5.3% to $27.3 million for this year, up from $26.0 million for the last year. As a percent of net sales, operating expenses increased to 28.3% for this year, up from 26.10% for last year, mainly due to FX charges this year compared with FX gains last year.

Operating profit from continuing ops decreased by $2.7 million to $1.4 million from $4.1 million for last year. Operating profit as a percent of net sales decreased to 1.5% for this year, down from 4.1% from last year, primarily due to sharply lower volumes, and margins in disposables in the US again due to the termination of the Company's Tyvek and Tychem supply agreement by DuPont, and weak volume in Brazil, mainly due to lack of large bid contracts.

Net income from continuing ops decreased $300,000 or 22% to $1.1 million for this year versus $1.4 million for last year. This decrease was primarily a result of reduced operating profit from the US disposable division, and it was offset by the $1.6 million VAT tax charge in Brazil in the prior year and various tax credits in the current year.

EPS from continuing ops this year was $0.21 compared to $0.26 EPS last year from continuing ops.

Weighted average shares used in calculating EPS was 5.2 million this year and 5.4 million last year. The Company reduced the number of shares outstanding through open-market purchases of its common stock under a share-repurchase program, which extended into FY '12 first quarter.

Now a discussion of fourth-quarter results -- net sales from continuing ops decreased $4.7 million, 18.8%, to $20.2 million for Q4 this year compared to $24.8 million in Q4 last year. This decrease was mainly due to $3.9 million decrease in domestic sales, along with lower sales in Brazil, which had been higher in the prior year due to large bid orders in that period, partially offset by increased sales on an aggregate basis from the other foreign ops.

The net decrease in the US, again, was comprised of a decrease in US disposable sales. The low volume of disposables in the US for the fourth quarter of this year reflects a drop of 49% of sales from the prior year's Q4, representing a loss in volume of about $4.7 million caused by the termination of the supply agreement with DuPont.

Q4 this year, international sales were $10.6 million compared to $11.3 million last year. Domestic sales were $9.6 million compared to $13.5 million last year. Q4 this year, sales breakdown is 52.5% foreign, 47.5% domestic, the first time in the Company's history that foreign sales have exceeded domestic.

Increases in foreign sales include $300,000 increase in European sales, up 18.3%; $400,000 growth in combined Chile and Argentina sales, offset by a $600,000 decrease in Canadian sales, which also is due to the DuPont termination. Brazil sales in Q4 of this year had no large bids and were down 39% from the prior year, but near the end of the fiscal year the Company received a record level of large-bid POs for delivery in FY '13, resulting in a marked anticipated rebound for total Brazil sales expected in FY '13.

Gross profit from continuing ops decreased $2.7 million or 34% to $5.3 million for Q4 this year from $8 million for Q4 last year. Gross profit as a percent of net sales decreased to 29.9% for this year, Q4, down from 30.2% last year. Major factors driving the changes in the margins -- lower volume in Brazil due to no large-bid orders, and lower volume in Q4 in China, which resulted in some of the Company's plants in China accepting orders at a lower price point to maintain market share, along with a revised domestic rebate program in Q4 of 2012.

Operating expenses from continuing ops increased $400,000 or 6.7% to $6.7 million for Q4 this year versus $6.3 million last year. As a percent of net sales, operating expenses increased to 33.5% for Q4 this year, up from 25.5% for Q4 last year, due to the following major items -- $223,000 charge for the shutdown of the Missouri plant; $68,000 in startup costs for the new sales office in Mexico; $200,000 foreign exchange loss in Brazil in the quarter; $100,000 reserves for final disposition of the Tyvek inventory; and a revised rebate program was instituted in Q4 for disposables customers in the US, which resulted in an additional expense of $84,000.

Further to foreign currency fluctuations, as previously disclosed, the Company has not been hedging in Brazil. In contrast to the loss of $200,000 in Q4, foreign exchange gains were realized throughout fiscal '11 and in the first half of this fiscal year.

We've taken steps to reduce our exposure to foreign exchange fluctuations in Brazil, which include borrowing in Brazil and reducing our trade payables to the US.

Moving on, operating profit from continuing ops decreased by $3.1 million to a loss of $1.4 million from a profit of $1.7 million for the prior year. Operating income or loss as a percent of net sales decreased to a minus 7.2% for this quarter versus 6.9% profit for the quarter last year, again, primarily due to lower sales in the US, Canada and Brazil, partially offset by increased foreign sales in other markets, lower margin contribution from Brazil due to lower revenues associated with a lack of large-bid orders, and increased operating expenses from the international operations and expansion initiatives.

Net loss from continuing ops was $1 million for this quarter compared with net income from continuing ops of $1.2 million for Q4 last year.

EPS from continuing ops for Q4 was a loss of $0.19 this year compared to $0.23 for Q4 last year -- profit.

Weighted average shares used in Q4, again -- 5.2 million this year, 5.4 million last year.

Financial performance in the fourth quarter was negatively impacted by the mentioned charges before and the reduced volume in the US.

The fourth-quarter loss triggered a technical default of our bank loan covenants. We have an excellent banking partner in TD Bank and have worked with them to amend the loan agreements, which included a change in the repayment terms on the portion of the debt, a modification of the minimum EBITDA requirements, a modification of the debt to EBITDA ratio requirements, and some other conditions, which we believe are very manageable, while continuing to provide us with access to borrowing facilities sufficient to accommodate our continued growth.

This brings us to cash flow on the balance sheet. The Company was basically breakeven in cash flow from operating activities. Uses of cash included an increase in inventories, modest amount -- $45.7 million at fiscal year-end -- and a decrease of payables. We expect that inventory in the $45 million range is a sufficient level going forward, barring any unanticipated large orders or other extraordinary growth opportunity.

As amended in April, at January 31, the Company's outstanding loan balance was $8.5 million from the revolver and $6.5 million from a term loan facility. There's also -- there is $1.7 million remaining available under the Company's combined bank borrowing facilities at January, as now amended. Combined, the facilities presently bear interest at a blended rate just about 3%.

We ended the fiscal year with cash of about $5.7 million, modestly under the amount at the beginning of the fiscal year. The Company's book value per share is now $14.02. Therefore, our share price is trading at about three-quarters of book value. The current ratio is 7.8, working capital $64.2 million compared to the enterprise value of about the same number, $65 million.

That concludes my formal remarks, and I will turn the call 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.

Over the past several years, we have invested in the creation and enhancement of a global platform. Much of the heavy lifting has been completed, and we have begun to gain traction in important foreign markets.

Our international revenues are now contributing more than half of our total sales. Domestically, we are at a low watermark, and we are working hard to take back the market share we lost with the DuPont termination, although this will be done with a higher-margin portfolio of products.

On a consolidated basis, we will begin to benefit from the streamlining and cost-reduction efforts of the last year. The Lakeland brand is strengthening globally, and we have significant operating leverage as our consolidation sales improve, and our balance sheet remains solid, with cash and access to capital for growth opportunities.

With Lakeland Industries expecting a return to profitability in the first quarter, we remain committed to our focus on profitable growth and developing on our goal to becoming a worldwide market leader for industrial protective clothing.

I will now turn the call over to the operator for a Q&A session.

(Operator Instructions). Howard Halpern, Taglich Partners.

In terms of that contract in Brazil, how would you model the contribution in the first three quarters -- you know, evenly spread or just (multiple speakers)?

Oh, okay, very evenly spread, actually, yes. We started shipping in March. We expect to deliver it pretty much steadily over a six-month period. So, over the six months, you have March and April, which would be in Q1; you have three months in Q2; and the month of August in Q3, each with roughly one-sixth of that amount.

Okay. And with that large order, do you anticipate the gross margin jumping back towards that 46% level for Brazil?

Because it's incremental, yes. We should be at -- that's about where I would expect it to be, yes.

Okay.

It may be -- but in that range.

Okay. And where would -- what would you estimate, now that we've flipped to a truly international bent towards the Company, would you anticipate closing in on 60% of international sales, of total?

Within a year, I would say, yes. We should be at -- the Q4 is probably a pretty good indication. I don't think our domestic sales -- while they are rebounding, I think our foreign sales will grow faster than the rebound in our domestic sales. But both should be -- both should have bounced -- hit bottom and bounced, as far as (multiple speakers).

Okay. And in terms of the US domestic sales, do you have any visibility yet on how many customers that you had have switched to Lakeland-branded products?

No visibility right now. I wouldn't want to give numbers, but I think we will have a better grasp on that in about six months.

Okay. And will -- you talked about you had approximately 825 products.

Right.

How many new products do you envision this year, and will most of them be targeted for the US domestic market?

We are pretty much working hard on focusing on selling the new products that we've entered into over the last two years. Over the next year, I'm only looking at one or two really material products, and they're going to be aimed primarily in the international markets.

Okay. And I know we've talked a lot about Brazil, and Latin American growth. But what do you anticipate in India? Because that seems to be a nice, good market for potential growth.

We don't see a lot of fast growth in India right now. I think where we are going to see the growth coming out of small markets, is we are going to see a lot of growth in Kazakhstan and Russia and in Argentina.

Okay.

Okay? I don't expect India to sort of get off its feet until about a year from now, and then we should see some steady progress.

Until then, into next year or so, it won't be a significant part of sales.

Okay. Okay, guys. Keep up the good work.

Brian Raffin, Sparta Capital.

Can you give us a sense, when you're talking about what type of incremental gross margins might you see in replacing the DuPont business with your own branded Lakeland, as that builds out over the next couple of years?

Good question. We would -- in the DuPont-branded product itself, over the last year, when we were just selling the -- when we were just reselling the finished goods purchased as finished goods, the margins on those products were in the 12% range, maybe. I would say net of -- we should look, after all rebates and everything, we should look to that disposable division at about a 25% margin going forward.

Okay. Okay, okay. Talk a little about kind of your mix as you guys go forward, as you break out more international -- certainly the fire department sales in Brazil are very positive. How do you see the mix between kind of a global reflation in industrial safety, which is kind of your low-end disposable, versus what you guys can get if you sell the very, very high-end chem suits or the very high-end thermal -- the fire-protection suits? You see your sales going forward as primarily pushing more units on the lower end, or is there incremental demand that you can get on the higher end?

Very simple response -- all of the above.

Well, you know, internationally we will be pushing chemical suits and higher turnouts here. Much more, there seems to be much more of an appetite for those product lines than disposables. So -- and again, we will see that in Russia and Kazakhstan primarily as one of the faster-growing areas in the next year.

In the United States -- and kind of a two-part question -- with a modest reflation, kind of a grinding economic expansion, some tax revenues to municipal levels going up, what are you seeing in demand from US fire departments, be they volunteer/rural or the full-service cities with demand for fire suits?

And then also, too, after 9/11, I think the Bush administration set up a number of depots for hazmat suits, first responders. You've said over time, that those, the glue in those different suits tends to erode. How do you see from kind of a national security or a homeland security, any follow-up to replace some of that aging 9/11 suit stuff?

We haven't seen it yet. When I look at the US market for municipal fire departments, I would say it's probably fairly mediocre.

Homeland security, they will designate some money this year. Again, they've had it every year, but I see US fire demand as mediocre compared to the same demand in other countries for very similar gear.

Okay. Anything on the commodity inflation side? Give us a sense -- certainly you guys, with the plastic stuff, different fabrics, plastics, resins, what do you guys see kind of going forward in the next year or two?

Not a lot of inflation. Cotton really calmed down from about $3 to $0.90.

On the plastics side, you know, the oil has been fairly steady at between, you know, $99 and $110. And even if oil goes up, it doesn't affect the ethyl -- the polyethylenes and the polypropylenes as much, because they are feedstocks; they're a sidebar. And those are produced when oil is refined. So it's really a supply and demand type pricing.

It will -- they will up, certainly; but I don't see them going up much more than 5% a year.

Okay, okay. Chris, you talked about 825 products in your SKU line. If you look back over the last three or four years, how many of those 825 SKUs might be fairly new, or maybe on a percentage basis?

I would say a good 250 of them are new over the last couple years.

Okay. Okay, okay. A sense of, on a cash flow basis, could you give me any budgets you guys have for CapEx next year, and any plans to delever the balance sheet or what the term structure is, relative to repayment?

CapEx, we're looking at -- we're pretty much finished in Mexico and Brazil; very minor additional in Brazil.

The only major project we're looking at is a plant expansion in China for about $1 million. And for that, we will just simply use our cash in China. So I would say the total CapEx budget worldwide is maybe another $1 million, or all together, so $2 million would be a reasonable number for our CapEx budget for the whole year.

Okay. And let me ask, from the standpoint of these kind of large, episodic purchase POs, is the sales cycle different on an international basis versus domestic US base, whether it be a fire department or an industrial firm?

Well, in Brazil, much of our revenue comes from these large bids. And it's largely a function of the budget funding that these agencies get. And many of these are governmental agencies, at one level or another.

And a perfect example -- this PO from the Navy. We had -- we won the bid for this, and the bid was about a $6 million value about a year -- just about a year from now ago. And we couldn't announce it because in Brazil, winning the bid isn't the commitment. You have to get a PO pursuant to the bid.

And after we won the bid, the Brazilian Navy, the department we deal with had their budget cut back, and they could only give us a PO for about 10% of that bid. And we went there until just right near the end of this year, when all of a sudden they got their funding and we got this large PO pursuant to the original bid.

So, it's very sporadic. Unfortunately, it's very lumpy. It's very -- it's hard to run a business that way, frankly. It makes it -- it's feast or famine.

Yes. Let me ask -- is the red tape any worse domestically than it is foreign, or is it pretty much the same game all over the world, when you say sporadic?

Well, Chris and I may differ on this. I think Brazil is in a class by itself.

But domestically, in the fire market, the whole market is fixed. There's no real bidding. You know, everything is already spec'ed in between the fire chief and the supplier. So there is no real bidding in the United States; it's just a totally fixed market.

Okay. All right. All right, I will get back in line. Thanks, guys.

Quentin Matthews.

Thanks for taking my call. Christopher, a question, kind of going back -- I mean, you've been at Lakeland, if I'm correct, 25-plus years now. I would ask you to go back, and assuming -- which may be correct or not -- but assuming that back in the '80s and '90s the business was more attractive than it was, say, over the last five, six years, and now you guys are getting on this good growth trajectory on a global basis. I mean, what can you say that you learned from maybe where things went wrong with you or with the industry over your period at the Company, going forward, and how you think you as a smaller player can keep that traction as you guys expand globally?

Well, if we look at, say, the early '90s, we were looking at George Bush and that recession, and Bill Clinton, and that was all pretty poor economic times, say, between 1990 and 1995, in our industry.

Then things started picking up. We opened up in China. And the market really sort of took off, I'd say, around 2001, when you had 9/11 -- at least for our industry. And we did extremely well between 2001 and 2005, because at that time DuPont decided to get into the garment business, and they couldn't deliver anything. So we ended up picking up $65 million of DuPont Tyvek business between 2001 and 2006.

Then DuPont finally got to the point where they could deliver, and they started what they called Project Regain, took that $60 million back, plus-$60 million in the last six years, back to DuPont. So we had to replace $60 million worth of foreign sales.

What have I learned from all of that? Don't do business with DuPont. (laughter)

Okay. Any comments on the large acquisition in your shares over the last couple months?

We only -- it's basically a 13D acquisition by Ansell. They are an Australian-based manufacturer of protective gloves and clothing with over $1 billion in annual sales from operations, and in many countries around the world. With the discontinuation of our glove manufacturing operation in India, we do not really find ourselves in direct competition in this product line. You know, both companies have many products; some overlap and some are complementary. But we do not view them as a major competitor in the markets in which we operate. And quite frankly, at the present time, we do not believe either company buys products for resale from the other.

That's all I can really say. They filed a 13D, they said what they filed it for, and we've had a couple discussions with them.

Can you give any nature of the discussions between management?

Well we have a, basically, like we always do, a confidentiality agreement, you know, if we are working on products or markets together. And that's where we are now.

Okay. And so would you assume there would be some news developing over the next six, 12, 18 months, that would be of --

You know I can't answer that question.

Okay, okay. Then just lastly, the last conversation we had, we talked about the eventuality of you guys being able to produce return on equities in the 12% range. Do you guys have any clarity or can you give any guidance of any sort of when you think that kind of earnings power would return to the business?

Well, let me clarify that a little bit, because I think I've heard a lot of that quoted back to me. I think I was misquoted or mis- -- what I did say, I think, was misunderstood.

There was a series of questions, and I think at first we said, well, could we to 6%? And I said, sure.

Then the question was, could it go to 8% to 12%, if I remember the way the question was phrased. And I said, it's possible, but that's stretching it. But I said, there is room between -- there's flexibility between 6% and 8%.

So, is it possible? Sure. I would not -- I would not want anybody to put 12% in their expectations for the next two years. That's stretching it. But in that range of -- yes, maybe up to 8% within two years is a very realistic possibility.

It all depends how fast our domestic USA sales recover.

Yes.

Okay. Well, yes, I mean, I had originally asked the question on the last call. I think it was more phrased as, what should an average industry, or what should an average business in your industry do? And that 12% number was thrown around somewhere, but -- all right, I appreciate it very much. Thank you.

Jamie Urich, Lenox Financial Services.

First of all, thank you for your leadership and for the opportunity to ask a few questions. First of all, do you have a range for what the gross margin and the SGA expense could be going forward?

I would say the margins should be moderately improving, certainly -- again, because we are building margin. The sales mix in Brazil should get stronger at their stronger margin. And we are rebuilding the sales in the US at the stronger margin. So I would expect a moderate increase in the margins, so maybe a point or two. And I would certainly hope that the SGA as a percent of sales would get no worse and would fall back a bit.

The biggest uncontrollable factor in that is the foreign exchange issue in Brazil. And that's something that's really beyond our control and that I see, even now, it's getting a bit weaker again as we speak. So, that's the only unpredictable issue. Other than that, other than that, I would say the SGA should get no higher as a percent of sales, and should moderately decline as we rebuild the volume.

And remember that as a percent of sales, the SGA is more fixed than anything else. And as we rebuild the volume, that number should decline as a percentage of sales, moderately.

Okay, and it appears that there was not any buyers for the India operation. Did this surprise you?

To some extent. We looked -- we are actively marketing the product. We engaged a firm to market it, and they are actively marketing it. It takes some time.

Yes, I mean, they only started about a month ago.

Oh, okay.

We would look for them to be marketing for four to six months.

Okay. And can you offer any comment about Ansell possibly buying the Company?

No, I cannot comment on that.

Okay. Are you happy with the buildout of the Mexican factory?

Very much so. It has worked perfectly; it has gone without a hitch.

Okay. And how is Chile and Argentina operation performing?

Okay, Chile is growing slightly; Argentina is growing gangbusters on sales.

Wonderful. And lastly, do you have a capital-expenditure target for fiscal 2013?

I think one of the other callers just raised that issue. Roughly $2 million -- $1 million in China for plant expansion, and about $1 million everywhere else.

Okay, thank you very much.

Mike Disler.

As you know, my family have been long-term holders of Lakeland. I will leave the Ansell issue alone. I am glad, of course, that another large player has recognized the value of Lakeland besides me. But my one in particular question is just regarding the Indian asset write-offs. And I'm just reviewing -- just want to make sure I have it clear.

The third quarter, we took -- you took a $900,000 pretax charge. Then you've also written down the real estate by, according to the release, $540,000 net, after tax.

Net of tax, yes.

Right, and then the net total comes to $1.8 million in pretax charges for fiscal 2012. Am I to assume that that's the total period other than whatever marketing expense you may have, and/or paying a sales agent and/or legal fees regarding the sale of the property for 2013? In other words, the $1.8 million would pretty much cover most of that number?

It certainly should. Yes, yes, we believe it should.

Okay, I just want to make sure there was nothing --

That is our intent. We did our best -- we made our efforts to estimate what all those cost would be, what the valuation would be. We took a very conservative view of it.

We did consider the fees involved in selling the property. We accrued for those, and hopefully --

You know, I assumed you did. I just -- I'm sort of clarifying that for the other caller, for the other people on the call.

Right, right. No, we did consider that, yes.

Okay, good. And finally, I have done business with DuPont over my last 30-some-odd years working. And -- not meant to be funny, though, but obviously, to the best of your knowledge, DuPont is not seeking -- this is a question -- DuPont, I assume, is not seeking to replace you or find an alternate producer domestically for goods that would compete with yours in the United States? In other words, they are not out there saying, gee, we lost this chunk of business. Let's see if we can find somebody to pick it up? Even though (multiple speakers) --

No, I mean, they have a number of master distributors. I think what they wanted to do was to get us out of the channel. You know, they put themselves in a situation where we were their biggest customer, and we were their biggest competitor.

Right.

Okay? So --

That's always a problem. I was in the polyester yarns, and I know fully well what it is to be both a competitor and a customer. It's a terrible scenario. So I'm glad you extricated yourself well, and hopefully those margins will begin to creep up. And of course, hopefully all that business will flow back over the next two years, based on 25 years-plus of reputation, you know, Christopher.

So, that's all. Please keep up the good work, and thank you for taking my call.

Sam Rebotsky, FBR Asset Management.

I guess you talk about being profitable in the April quarter. Do you expect to have sales in excess of the -- what you had, and profits greater than the profits? And do you expect to be profitable domestically or just foreignly -- foreign?

I don't know that we will be profitable domestically. We will be making a great rebound from the numbers that we showed domestically in Q4. I doubt if we would be quite in the black just yet, but we will make a strong rebound in the right direction there.

Beyond that, I think all we're saying is that we expect to be profitable. I don't know if we want to quantify it beyond that.

Okay, and do we expect to be profitable on a quarter-to-quarter basis going forward? And -- I mean, I know you can't indicate where your improvements are going to be, but at this point, does the visibility to be profitable on a quarter-to-quarter basis, or is that not a vision yet?

Oh, no, no; it is, absolutely. And I would say Q2 is basically more of the same from Q1, just that we have nothing different that we see in Q2 that isn't -- that we don't foresee in Q1. Just more of it.

Okay. Is there any way to reduce the inventory or reduce the number of products you have to get greater turns so that you don't tie as much money up in the inventory?

Yes, there is, and we will be doing that. That is one of our priorities this year.

Okay. And China -- okay.

One qualification, though, is that in Brazil, with all these large orders, you do have to buy the fabric first and produce it. So you will see it probably at the end of Q1, I think the overall inventory probably is going to be about the same. You'll see it decline in the US inventory, and a moderate increase in the Brazil inventory.

Once we get to Q2, and we will have shipped that down, I would expect the Brazil inventory should also decline.

Okay. And as far as China, you had added a couple hundred employees. Are you using that facility more? Are these people being fully utilized? Do you expect to expand China?

No, actually all we're doing in China is we had about 250 employees in a rented facility. That facility has been sold, so we have to relocate. We are relocating those people right into our central facility. In so doing, though, we are going to have to build some space for these additional 250 employees.

But, long term, it will reduce our operating costs.

Okay, okay. And one final question, I guess. I became aware of Ansell making an acquisition where they paid $32 million for a company with $25 million in sales. Is that comparable to what you do? Is this a fit? And do you see -- how do you look at the valuation of what they paid for this Company relative to your Company?

Well, I like the valuation. Trelleborg does make chemical suits as we make chemical suits. So, I mean, I have to leave that really to the Street to make determinations on that. But I am sort of surprised -- well, I won't comment on that.

Okay, okay. Well, hopefully sometime soon, we see an appetite for Ansell for something in addition to Trelleborg. Okay? Good luck.

John Curti, Singular Research.

With respect to international operations, you mentioned Chile growing kind of slowly, Argentina much, much more robust. What seems to be going on in Argentina that maybe is not going on in Chile? Different markets, different customers?

Well, we've been in Chile now for a couple of years. Well, we've gotten sort of a ground basis. It's sort of like when you grow to $1 billion in sales, you can't double it every year. We've been in Chile for four or five years now, where we've only been in Argentina for two. So Argentina is going through that very quick growth that you normally see in the beginning, and it's a much bigger country than Chile. Chile is only about 17 million versus 45 million, 46 million in Argentina. So Argentina presents more market opportunities.

Argentina also is very difficult to sell in unless you are in the country, physically in the country, making product with the sales force. It's very, very hard to sell in that country without a big domestic presence.

How important do you view the Mexican facility beyond just, say, on the cost side, being able to penetrate other markets in Latin and Central America, having a presence there as opposed to bringing product in from China or from the United States?

Well, you've got two things working here. You've got expenses going up in China rather rapidly, such that I believe in three to five years Mexico will be comparable to China on costing for apparel.

Mexico has a number of treaties with South American countries that are quite favorable treaties that are better treaties than, say, the US might have. Mexico has the Indian pact treaties. We can make products in Mexico and export them into Brazil for lower tariffs than if we were to make them in China. A lot of the South American countries have put up walls against Chinese goods where they are not putting up walls against Mexican goods.

With the Chinese currency appreciating, expenses going up in China, minimum wages are being mandated in China and going up at the rate sometimes of 15% a year.

As I said, I think Mexico will be comparable to China in costs in a couple years. Mexico's closer globally -- I mean geographically to the South American and the North American markets. And so expanding in Mexico will really play into our growth of getting things into the North American and South American markets, carrying less inventory for a shorter time, being able to ship them to the end user or the customer faster, such that our turn times will pick up when we make in Mexico for the North and South American markets versus China.

And what are the prospects for selling within Mexico itself?

We are doing that right now. I think Mexico has a good domestic market. We can probably see ourselves doing something in the order of $5 million there in a couple years.

And how are things progressing with your sales efforts within China?

Very well, extremely well. I don't want to say anything, because people might copy us. (laughter) But our sales in domestic China are going extremely well. And that's where the Chinese economy is going. You know, as they keep increasing wages in China, it's pretty much what Henry Ford did, saying my employees have to be able to afford my own cars, or the cars that they are building.

The Chinese are really raising wages rather rapidly. And I think this answers the constant complaints from the United States about their currency. In other words, these products are getting more and more expensive, but they are not doing it by lowering the currency. They are doing it by increasing wages in China.

This, in turn, has a tremendous effect for domestic demand in China. And once you have 1.3 billion people earning $8000 a year, the domestic economy in China is going to be booming. And there's where you want to be.

What about some of your other smaller markets where you've just began begun to gain footholds? You mentioned Kazakhstan, Russia --

Right.

-- Europe, you've been there longer, but what's happening in those markets, maybe for some of those newer startup markets? Are they getting closer to breakeven?

Yes, they are. And we are looking at some very big contracts in those countries, along the lines -- not quite as big as Brazil, but they are big contracts. And we are getting a good base on the day-to-day business. So, that's really the next big growth area that we see.

You've got some very strong, large oil companies in those two countries that are multinational. So they demand the type of clothing we make, that is highly certified, highly reliable. And there's a little bit less competition in those countries, because they are harder to operate in.

What about in the Middle East, with the preponderance of oil and gas refining and petrochemical facilities, that type of thing?

We are targeting that in the next two years. It's really the ability to be able to afford a sales force. For instance, it's very expensive to run a sales force in the United States, Europe and Japan. It's not -- and the Middle East follows quickly on to that, whereas it's much more inexpensive to run a sales force in China or Russia or South America.

So, if you -- it's very simple. If I have to pay $100,000 for a salesman in the United States, and he only sells $1 million or $2 million a year at 25%, versus a guy in Russia for $15,000 who sells the same amount a year at 40%, where would you invest money?

And then, on the domestic side, would you say that the most recent fourth quarter is probably the absolute low point for domestic sales? Or, because of now moving into the first quarter of '13, you will have almost none (multiple speakers) if that's the bottom?

Month of January should be up, but on a year-over-year basis, it's going to look ugly. But on a sequential basis, you'll see moderate -- moderate improvement.

The month of January being the absolute bottom?

Yes.

Domestic?

Yes.

The transport of the production to Mexico from Missouri, beyond the cost savings, the ability to jumpstart sales, possible towards Latin America, etc.? Or was it strictly just a cost-save move?

That was mostly a cost-saving move between the Missouri production, which was kind of extraneous. We could make -- we could use Mexico if we just expanded it. We will save a substantial amount of overhead combined. That's a cost-saving move.

Anything new to report on the legal situation down in Brazil, with the --

Yes, as a matter of fact, in our documents, when you get a chance to go through some of the finer print, we actually have a date of May 17 for the arbitration panel to render a decision. We've been formally notified that's the date.

That's all my questions; thank you.

Brian Raffin.

Yes, can you give us a sense -- you talked about the wage escalation in China -- give us kind of a ballpark from your industry, your perspective, what you look at -- a US laborer, say, someone in Decatur, Alabama, or up in Pennsylvania, in wages and salary and benefits, versus what labor you would have to pay for the same wage, salary, benefits in, say, Mexico or China, maybe on an hourly basis.

Well, as Steve Jobs says, those jobs in the United States are gone forever. (laughter) It will be 100 years -- I mean, it will be a long time before Chinese -- when you do apples to apples, that the Chinese will equal Americans. I mean, it's just so expensive to do business in this country.

I think --

The only worse place in the world is Japan.

And Chris does not intend to pun about Apple and Steve Jobs; that was unintentional, I assure you.

But, I mean, the Chinese are getting $3 an hour. I mean, in this country you can't find anybody for $15 an hour. I mean, you may hear that the minimum wage is $7; try hiring a coherent person for $7 an hour in this country. And when you pay the $7, you've got another $7 in benefits.

Yes, okay, all right. What -- give me that same kind of analysis Mexico versus China.

Mexico versus China -- you know, you're looking at it closing rather rapidly, because the Mexican peso is not going up against the US dollar, whereas the Chinese RMB in the next five years is going to appreciate by at least 30%.

You cannot sit on $3 trillion in reserves, okay -- most of which is US government bonds and notes -- and not do something about it. I mean, the Chinese and the Americans are in a situation, it's like a bank loaning a company money that can't pay them back. So, I mean, something has got to give here. And it's going to give all at once, but over the next five years you're looking at a 30% appreciation of the Chinese RMB against the US dollar.

You're also probably looking at wages doubling or tripling again in China. So China, you might be looking at $6 an hour costs in China, all benefits factored in, in 18 months, and maybe $7 or $8 in two years, and then a 30% gain -- you know, overall, you will be looking at $10 an hour. But the fact of the matter is, in the United States it's $14 an hour now. So, you know, they are never going to catch up with the United States.

On the other hand, in Mexico? They will be equal in about three years, I guess.

Okay, okay.

Maybe even sooner.

Okay, okay. Give us a sense -- and it may be different between high-end chem suits or fire suits versus kind of the low-end industrial disposable. In your cycle times for production -- so if you get an order from, say, Brazil for fire suits, are you taking that -- do you have the fabric in inventory? Do you got to source the fabric, manufacture it? Kind of what is, maybe starting with kind of these larger, episodic orders and some of the higher end, how long does it take to source the fabric, manufacture and deliver? What's kind of your turnaround, versus something you might sell out of inventory? And then, in any of the product mixes, are you building a global safety stock?

All right, let me tackle Brazil first. When we get one of these large bids, no, we generally do not keep the fabric in inventory. That would be cost-prohibitive. And the fabric in Brazil, the main supplier is an American vendor, which is one reason why we have some foreign-exchange differences, because we have payables, trade payables on the books of Brazil, in US dollars. So there's -- what would you say, Chris -- from the time we win the bid, get an actual PO, put out the PO, to the vendor, the vendor produces the fabric, it's shipped to Brazil and it gets through customs in Brazil, is 45 to 60 days, 90 days -- isn't that right?

So, from the time we actually get a PO until we can deliver it in Brazil is probably four to six months, at least.

It goes country by country. In China, where we have our production facilities, where we can source fabrics domestically, you know, we can turn stuff in 30 to 60 days. But if we have to buy very high-tech fabrics in the United States and ship them all the way to China, only to be shipped back to Europe, Russia or the United States, you're looking at very long turn times, which is why our inventory is where it is.

As things change throughout the global -- globally, and we are importing less from China and more from Mexico, our turns will increase.

Okay. And then anything -- are there any products that you guys might build up safety stocks or inventory, or do you need to see more robust end-markets? Or will you always be -- manufacture on a PO?

No, it depends on the product. For disposables, it's almost all safety stock. You know, and we sell off stock items. For the large bids, fire gear and coveralls, that's almost -- that's the other side of the pendulum. It's all pretty much made to customer specs. We don't keep stock on that.

Okay. Give me a sense as you guys see -- you talked about having the capacity to grow sales, given your production capacity today of 20% to 30%, 35%. If you get an uptick in, certainly a reflation in markets, sales start to go up, what is your sense of the operating leverage in your P&L? Do you see earnings growth kind of commensurate with sales revenue growth? Do you think you get any operating leverage down through the P&L?

Oh, no, definitely. I think our SGA is relatively fixed. Other than freight and commissions, everything else in SGA is pretty much fixed. So with volume -- and particularly in Brazil, and that's why it's very sensitive to volume. And as we lever up, I think you'll see a lot of that falling right to the bottom line. And the same reason why Brazil had a weak Q4 is because it had a weak volume, not because the costs were up, but because the volume was down.

So, yes, it's sensitive to volume in Brazil. I would say pretty much the same thing in the US, too.

Very much so in the US. Our expanded manufacturing is the addition we did in Mexico and the addition we did in Brazil. That's where our new manufacturing capacity is really coming from.

To the extent that Brazil does more business in the future -- and we expect it to, because the Brazilian government is now beginning to scratch their head and figure out that they've got two big events that they have not prepared at all for.

That's the World Cup and the Olympics.

Right. And it's manana, manana down there. So they haven't done anything in two years, and they are just beginning to figure out that they have to do something.

And so we are seeing bid activity pick up down there because they've got to build -- you know, they've got to expand all their airports. They've got to do a lot of things which require a lot of the clothing to go on those workers in those new airports, new stadiums, new everything -- new highways. So, the Brazilians there are -- we're seeing bid activity really picking up down there in Brazil.

In Mexico, we are building out basically to take -- to be able to service the North American and the South American markets. As China becomes more expensive and as a lot of people try to close China out of their markets, the South Americans are pretty diligent about just raising tariffs or just basically stalling on Chinese goods coming into their ports -- as do the Chinese, by the way, on American goods.

Okay. In your K, you list kind of the manufacturing sites. Could you give us a sense as to what your square footage is in Mexico, China and Brazil, and then maybe what you have left over in the US?

Yes, I think that's in the table. Rather than try and doing it from memory, I'm pretty sure there's a very specific table in the 10-K that gives you precisely what you are asking for. (multiple speakers)

I was looking at it and I don't see any -- I don't see any -- I see every other description, but I don't see any square footage.

I think there should be a square footage in that table of --

There's a big table called Properties, and it lists every property, rented or owned, how many square feet is there.

Okay, okay. I'll go back and take a look at it. One last question -- the resuscitation of frac drilling in the United States, up in the Marcellus and the Bakkens, is there any demand in the petrochemical side in the US with this kind of a renaissance in drilling?

Yes there is, and we will see a lot of activity in the future on F4 coveralls, and basically what we call our fire-retardant clothing. That is a new industry in this country, it's really picking up, and I think it will -- demand for FR clothing will increase by 10% or 15% in this country as a result of all that new drilling, vis-a-vis, call it fracking.

Okay. Thanks, guys, appreciate all your help.

John Curti.

Yes, could you just kind of refresh our memory in terms of, now with the expansions of your capacities in Brazil and Mexico, could you kind of give us an idea what the potential sales volumes are out of those -- out of your factories now?

Well, are you asking about capacity or forecast sales?

Capacities.

Capacity in Brazil -- the manufacturing capacity you've got as opposed to sales of product, say, from China that's -- excluding disposables, which is made in China, the sales value in Brazil right now, capacity, is $24 million. And that is with the present configuration, with the newly purchased adjacent land sitting vacant. Should we need to, we can probably triple that over the next five years, as needed. So the available capacity is in the bank.

As far as Mexico, Chris, do you have an idea of what the capacity is on that?

Well, the capacity is almost doubled there. And we still have additional land that we could utilize if we needed to.

Mexico could probably -- could increase its capacity from a current capacity of about $15 million to about $25 million to $30 million.

Again, it all depends -- a lot depends on product mix, because if -- you could be doing polypropylene disposable garments at $12 a box, or you could be doing one set -- one set of fire turnout gear for $1000 a set. In other words, one coat, one pants, $1000 a pop.

So, mix is a big -- is a big deal. And that's why we said we really want to look at the fire business and the chemical suit business. It's the highest-margin business.

Are these plants basically running kind of one shift a day or two shifts?

Yes, in Brazil it's difficult just because of the nature of the environment, and the workers. We really can't run -- we can run overtime, but we really can't run a second shift. It's just the nature of the workforce there. It's just -- culturally, it just doesn't work.

It's very difficult in many countries. It's very difficult in the United States to do.

Okay. Thanks.

And that will conclude our question-and-answer session. At this time, I'd like to turn the presentation back over to our presenters for any additional or closing remarks.

Okay. We appreciate your participation on Lakeland's fiscal 2012 year-end financial results conference call.

As we are committed to delivering value for our shareholders, we believe Lakeland will continue to effectively manage its balance sheet, control expenses and execute its strategy for long-term growth.

Please feel free to call us to discuss the Company's operations or to schedule a meeting with management, as we bring our investment story to prospective investors in the months to come.

Thanks again and goodbye.

And once again, we conclude our conference call for today. Thank you very much for your participation.