Lakeland Industries Inc (LAKE) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Lakeland Industries' Fiscal First Quarter Financial Results Conference Call. (Operator Instructions) Please note that this event is being recorded.

Before we begin, parties are reminded that statements made during the 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, June 8, 2018.

Forward-looking statements are based on current assumptions and analysis made by the company in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate under circumstances.

These statements are subject to a number of assumptions, risks and uncertainties and factored into the company's filing 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, may of -- many of which are beyond the control of the company.

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

At this time, I would like to introduce your host for this call, Lakeland Industries' Chief Executive Officer, Christopher J. Ryan. Mr. Ryan, you may begin.

Thank you, and good afternoon to you all. Thank you for joining our Fiscal 2018 Fourth Quarter and Full Year (sic) [First Quarter] Financial Results Conference Call.

We're going to provide opening statements on the status of operations and on our financial results. The call will then be opened up so that you may respond to your -- we may respond to your questions.

Now on to my formal remarks. We're off to a very solid start to fiscal 2019, which further solidifies our leadership position in the global workforce protection market.

While fiscal 2018 was quite strong in terms of a rebound, the start of our fiscal 2019 has continued in a similar fashion as we're seeing growth in the global industrial economic landscape with particular resurgence in the oil and gas sector. We achieved the second consecutive year of revenue growth for the first quarter and nearly eclipsed the level of sales in the first quarter above fiscal 2016, when we had significantly heightened demand, resulting from a devastating bird flu outbreak.

In the first quarter of fiscal 2019, we once again experienced sales growth in all our major international operating regions as well as in our emerging market operations.

Sales in the U.S. were lower due to inventory work down from large fourth quarter shipments and a concerted effort to focus on higher marginal product lines. Considerable effort and investment have been made in order to increase our manufacturing capabilities to meet growing customer demands. This was part of the revenue growth strategy we had last year and which is continuing into this year. I talked about our overall revenue growth strategy on the year-end earnings results conference call. I'd like to review the elements of this strategy and update you on our progress in the first quarter.

In addition to increased production capacity, our revenue growth strategy includes: one, new products targeted at underserved vertical markets; two, entry into and scaling of new geographic markets; three, hiring of additional sales people; four, Amazon distribution platform; five, and investments in information technology. Most of these growth strategy elements I've discussed dovetail into our gross margin improvement initiatives. While reporting an increase in our top line for the first quarter, we've made great strides to position the company for longer-term gains and a parallel improvement in our gross margins, and already, we're seeing an uptick in gross margins.

Our gross margin as a percent of sales increased to the highest first quarter level in recent history, 39% in the first quarter of fiscal 2019. We have seen a significant increase from 37.3% in the first quarter of fiscal '18 and a 33.3% for fiscal first quarter '17.

The key components of our ongoing effort to improve gross margins include: entry into faster-growing international markets with limited competition; two, introduction of new specialty products, which benefit from our materials and manufacturing expertise, including the multi-sourcing of raw materials; three, the lowering of our cost of manufacturing; four, improving our operational effectiveness through investments in technology; and five, leveraging of alternative distribution channel, principally with Amazon for retail sales. In addition, we are also increasing prices in select markets around the world.

The development of higher-margin products includes lines of fire retardant garments for the utility market and our cleanroom garments. These products are intended for underserved vertical markets, which are less immune to competition. This is particularly important for our U.S. operations. We have secured marquee customers within the utility market, and these customers are beginning to use our products on an increasingly national basis, once initially penetrated.

Given our exposure to the U.S. market, which is one of the most mature regions for PPE products, it is here where we are learning -- leaning towards the introduction of new higher-margin products that showcase our leading global design and manufacturing capability. We're particularly excited by our new ChemMax product, which will be marketed into the cleanroom market for sale to the pharmaceutical supply chain. This is a large market that spans domestic and international sales opportunities. We began booking orders in the first quarter in the U.S., with sales to be recorded beginning in the second quarter. This product line has significantly higher gross margins than what we currently have with , say, traditional disposables. So you should be seeing that contributing to our sales and margin performance as the year progresses.

Through the course of last year and thus far at the fiscal 2018, we focused on expansion into new and existing territories. Again, unlike the competitive environment in the U.S., international markets are less competitive. So we believe we'll be able to increase sales and deliver higher margins from these sales.

The implementation of our long-term growth strategy includes the addition of sales and marketing personnel globally and expansion of manufacturing, primarily in India and Vietnam. Traction is being gained in our efforts to penetrate international markets, which are growing at a faster rate than the more competitive U.S. market. Five salespeople has been added in calendar 2017, and we added 3 more sales and marketing people through the first 5 months of calendar 2018. It is -- it typically takes 6 to 12 months for sales people to meet their quotas, where we begin to breakeven on them. In addition to these new hires as part of our global expansion. We also have been spending on our international manufacturing, which will contribute to grow our top line and our margins. Improvement in gross margin continues to be partially offset by higher labor costs in China. We are working toward continued establishment and expansion of production facilities in India and Vietnam.

Once fully operational, these new locations will provide us with lower cost production as compared with China and Mexico. Vietnam is now partially up and running with about 300 employees and increased from nearly 0 in January. I'm pleased to announce that we had made our first shipments. Our plan calls for manufacturing staff of 600 by this time next year. Production efficiencies will improve as our team members are trained and gain experience. We are similarly going to phase in India, although we'll be scaled later with roughly the same staff as Vietnam.

In India, we already have selling operations, so the expansion in manufacturing will be a nice complement to gain share.

In Europe and Australia, we've added sales there. In United States, we added 3 sales people last year who are gaining traction. Also in the U.S., we have our first Amazon distribution platform. Last year, we invested in the development of fulfillment capabilities for the same-day, next-day deliveries. As we've discussed, this platform is off to a great start and requires a limited amount of inventory allocation. We basically started with almost nothing in Amazon, and over the last year, we ramped up quite nicely. We're still experimenting with just the right product mix, but I believe we have a strong enough sample size to replicate our success.

Distribution on Amazon platform will be rolling out in Australia, Canada and the U.K. in fiscal 2019. We plan to launch our Amazon distribution in Canada with a very limited number of products during the fiscal second quarter. As you can see, we've been very busy expanding our global operations on many levels, which also includes investments in IT that Teri will touch upon in her remarks. The increased operating expenses in the first quarter aided in the implementation of our growth and profitability enhancements, but we are effectively managing our spending.

Operating expenses as a percentage of revenues remained consistent from the fourth quarter at approximately 29%, while we increased spending by $1 million from the first quarter of last year, with continued investment to support our expanded global presence and product development. The company reported an increase in net income of over 9%, while consolidated net sales grew by 6%. Our increased net income primarily reflects an improvement in our international sales and higher overall gross margin, partially offset by the increased operating expenses.

Along with this increased spending, we continued to grow our cash balance and reduce debt. Cash increased by more than 3% to $16.2 million (sic) $16.3 million during the first quarter, while total debt outstanding at April 30, 2018, was reduced by nearly 7% (sic) [4.3%] in the period. We now have over $16 million of net cash or about a $1.97 per share and no borrowings on a $20 million revolving credit facility. We remain very encouraged by our strong financial condition and our continued ability to further improve the company's top and bottom line performance.

As we look towards the balance of fiscal 2019 and beyond, we are very encouraged by our solid financial position and the growth prospects that are within reach, given our diversified business lines, our optimized supply chain and indications of continued global economic strength. Lakeland Industries is increasingly the partner of choice in the global workforce protection market. We are leveraging the progress that has been made and the vast addressable market available to us to deliver top line growth in excess of markets we serve, while improving the quality of our earnings, so we can deliver sustainable and strong results before onetime contributions.

That concludes my remarks. I will pass the call over to our CFO, Teri Hunt, to provide a more thorough review of the company's financial results.

Thank you, Chris. The following addresses my review of the fiscal '19 first quarter ended April 30, 2018: Net sales from continuing operations were $24.3 million, up from $23 million in Q1 '18. As compared to the earlier period, overall sales volume was higher, which resulted from economic growth globally and the continued rebound in the oil and gas sector.

On a consolidated basis for the first quarter of fiscal '19: domestic sales were $12.4 million (sic) [$12.3 million] or 51% of total revenues; international sales were $12 million or 49% of total revenues. This compares with domestic sales of $12.7 million or 55% of the total and international sales of $10.3 million or 45% of the total in the same period of fiscal '18.

Sales in the U.S. modestly decreased from the prior year period, primarily due to strategic revenue mix adjustments with selected fulfillment of lower margin disposable product orders and renewables. In the U.S., disposables represent approximately 51% of total domestic sales. The other product lines marketed in the U.S. include chemicals, wovens, fire retardants or FR, apparels, reflective and gloves.

Disposable garments are among the least sophisticated and most commoditized of the garments we sell. Therefore, it commonly yields the lowest margins by far in the U.S., although we have a different margin profile for similar garments internationally. Additional production capacity is being brought online in new manufacturing facilities in India and Vietnam, which positions the company to increase sales globally and reduce our cost of production, while expanding our sourcing of raw materials.

As in the fourth quarter of last year, the oil and gas sector has been going through a rebound. A larger concentration of our products sold into the oil and gas sector are drawn from our line of chemical protective apparel and we've seen growth for these products in the first quarter.

Among the company's larger international operations, sales in China into the Asia Pacific Rim increased $3.3 million or 31% as compared to the prior year period. This growth is attributable to improved industrial activity, several larger customers beginning to replace depleted inventories as the company worked through a large backlog and increased intercompany demand.

Sales in Canada increased $0.4 million or nearly 20% to $2.2 million, as that country continues to experience an oil and gas turnaround and as we successfully secure business relating to remediation, turnout gear for firefighting and other safety apparel.

U.K. and Europe sales increased by $0.4 million or 21% to $2.6 million, as new distributors were signed on in Germany which led to the placement of stocking orders. In-country sales in Germany are the result of our new direct sales efforts in that country which were initiated several months ago.

Mexico sales have increased 95% to $1.5 million, driven by successful targeting of large international accounts -- excuse me, large national accounts, Mexico and China sales, included intercompany sales, which were eliminated in consolidation of financial reporting.

Finally, Russia and Kazakhstan sales combined for an increase in sales of $0.5 million.

Gross profit increased $0.9 million or 11% to $9.5 million for the 3 months ended April 30, '18, from $8.6 million for the prior year. Gross profit as a percentage of net sales increased to 39% from 37.3% for Q1 FY '18. The gross margin increase benefited from a mix of sales of higher-margin products, including chemical suits, FR apparel and other woven products, and higher pricing implemented in the U.S. in select international markets for key product lines as the quarter progressed.

Operating expenses of $7.1 million in the quarter increased $1 million or 16.5% from $6.1 million in the first quarter of FY '18. Operating expense as a percent of net sales was 29.1% for Q4 FY '19, essentially flat as compared to 29% for Q4 FY '18 and up from 26.5% in Q1 FY '18.

The main factors for the higher operating expenses are increases in salaries for additional sales and marketing personnel as the company expands internationally and domestically, the Amazon distribution strategy implementation, increased expenses for freight cost and commissions based on higher sales volume, new product development costs and foreign currency exchange fluctuations. As we build out our presence in various international markets, we add warehousing and other support personnel. These costs are elevated today relative to that operation's top line contribution, but we gain operating leverage as our brand and sales development efforts takes hold.

Operating income of $2.4 million for the quarter compared to $2.5 million for the same quarter last year. Considering the $1 million in increased operating expenses year-over-year which are largely tied to future revenue growth, production capacity increases, product development and margin enhancement initiatives, we're pleased with where our operating income came in for the first quarter of this year. Operating margins were 9.9%, down from 10.8% Q1 FY '18. All geographic regions produced positive operating income for the quarter.

Net income for the quarter was $1.9 million or $0.23 per basic share as compared to net income of $1.7 million or $0.24 per basic share in FY '18. The 9.1% increase in net income is primarily attributable to higher sales and gross margins and partially offset by increased operating expenses.

Income tax expense for the quarter was $0.5 million compared with $0.7 million in the same quarter last year. The company continues to be required to pay local taxes on certain country operations when those operations are profitable on a local basis.

Adjusted earnings before interest, tax, depreciation and amortization, or EBITDA, a non-GAAP measure which excludes stock-based compensation, was over $2.7 million as compared to just under $2.8 million in Q1 FY '18.

Free cash flow, also a non-GAAP measure, was $2.1 million in Q1 FY '19, down from $2.3 million in the prior year period.

On the balance sheet, cash and cash equivalents increased to $16.3 million, up from $15.8 million at the beginning of the fiscal year and 37% higher than at the end of the first quarter of last year. To accommodate continued global growth, inventories increased to $44.4 million, up from $42.9 million at the end of fiscal '18.

Working capital increased to $68 million from $66.1 million in January 31, '18, an improvement of nearly 3%. At April 30, 2018, the balance of borrowings under our revolving credit facility stood at 0, which was the same as year-end and down from $2.4 million from the end of Q1 '18. Total debt outstanding at April 30, '18, was $1.6 million, down from $1.7 million at the start of the fiscal year and $3.1 million at April 30, '17.

The company incurred capital expenditures of approximately $0.3 million during the first quarter of fiscal '19. This amount is essentially the same as in the fourth quarter of fiscal '17, but higher than the $0.1 million incurred in the first quarter of last year.

Capital expenditures principally relate to the addition of equipment in China and Mexico and for the new ERP implementations. We expect total capital expenditures for all of fiscal '19 to be approximately $2.5 million to $3 million, which includes the cost for our increased manufacturing capacity in locations around the world and the phased global rollout of our new Enterprise Resource Planning software.

Our ERP implementation is on track for U.S.A. and Canada start in the third quarter of this fiscal year and is expected to provide management with enhanced stability to allocate production capacity, capitalize on sales opportunities and improve inventory cycles.

Our current ratio was 7:1 at the end of this quarter as compared to 7.4:1 at the end of the year and 5.9:1 at the end of Q1 '18. Total shareholders' equity was $84.6 million at April 30, '18, up from $82.8 million at January 31, '18 and $73.2 million at April 30, '17.

That concludes my remarks. I will turn the call back to the operator to begin the Q&A session.

(Operator Instructions) And our first question comes from Dave King with Roth Capital.

I guess, first, a couple of questions on revenue. In terms of the pricing increases you took, sounds like those were kind of late in the quarter. Were those a material driver to the 6% revenue growth? And I guess, more importantly, do you expect a more meaningful contribution next quarter? And then, separately, in terms of the high-margin utility and pharma products, it sounds like pharma launched the ship in Q2. Did you say when utility is launching? And then just more broadly, how should we be thinking about the contribution from those on an annual basis?

Okay. Utility should be launching in the third to fourth quarter. Both these products have very, very good margins. And what was the other part of the question? It was...

On the price...

The price increase.

So it was price increase.

I think that the price increase was lighter in the quarter, and we'll see the effects of that on -- stronger in Qs 2, 3 and 4.

Yes. On a certain divisional line, we just raised prices June 1. So we're not going to see that until the third quarter.

Okay. And then these lines, are they material enough to drive couple of percentage of increase on the overall top line? Or is this...

Yes or no. I mean, on the one we've just raised prices on, it's about 6% of sales. So not there really, it's the year-end increases as they flow in through the rest of the year.

Okay. Okay, that helps. And then, switching gears to expenses. In terms of the increase there, it sounds like a lot of that was currency, but how should we think about the potential for further increases over the course of the year with Vietnam, India ramping? Chris, do you expect to make some more international sale hires and then investments in Amazon or IT, how should we be thinking about those in the expense line?

I think at this point, we've made most of our investments in terms of additional sales staff globally. Typically, Q1 has slightly higher operating expenses. This year, in particular, we had a lot of the expenses came in from the tax work that was done at year-end around the transition tax that was implemented on -- in December '17. We did see currency flux primarily in Latin America and Russia and some in India, to a small extent China, came through -- as well as audit phase that came in on us. We changed our filer status last year to accelerated filers and there were some additional audit fees associated with [stock] compliance around that as well as some medical claims. We're self-insured, so that -- as the experience comes through. But I do think we'll see this level out in the coming quarters.

Okay, okay. That helps. And then I guess, last one from me, and I'll step back. The current Ebola situation at the Congo looks like there is some like 38 cases now. I'd assume that everyone is still working on preposition supplies. Is that the right way of thinking about it, at least, for now?

Yes. It probably won't do a hell of a lot unless there is a huge outbreak. We can't predict that, although it looks like a relatively low percentage to operate. I'm actually watching what's going on in India with this new spreading disease they have there, which is carried by bats. That is actually -- the Indian government is taking that much more seriously than the Congolese government in Africa.

(Operator Instructions) And our next question comes from Alex Fuhrman with Craig-Hallum Capital Group.

Couple from us here. One, we'd love to get a sense of the timeline of milestones that you are looking to in Vietnam and India with regard to production. Chris, I think, you mentioned looking to get to once you're up and running about 600 manufacturing employees in each of those locations. Can you give us a sense of how many you currently have in Vietnam? And at what rate we should expect to see that scale up and then become fully operational?

Okay. We have 300 people in Vietnam as we sit here today, okay? We'll scale that up to 600, certainly, by this time next year. The real key for me is not only hiring in the heads, but scaling them up to, what we call, standard productivity. In other words, getting our ladies to sew at a standard equal to what China sews at, okay, but at lower wages. And that's the real -- that's where we start really saving money. India, it's the same thing. We now -- we've ramped up our Indian sewers and cutters to about 120 people. We'll probably add up to 30 more in the New Delhi facility. We have not chosen the site yet, simply because in India, it takes longer to negotiate things, both with the private sector and particularly with government sector. So we should have something on that in 3 months. We're trying -- we're watching very closely. The gain in sales versus our need for extra capacity because if you build capacity that you don't need, you've got a problem. You got an expense that isn't yielding any revenue. So it's building those in tandem. So we're watching that very, very closely. And what one tends to do is you can see a spike, like we did in the fourth quarter -- last fourth quarter, you can cover that with contractors but if that spike stays there, in other words, it's just continuing, then we can internalize it into Vietnam or India. But India is our long, long-term play simply because you've got about 1.5 billion people there. More than 50% of them are under 30. Wages are still very, very competitive in India relative to the rest of the world. There is very few countries left in the world after China with that larger population that isn't going to get sucked up immediately. I suspect that in 4 to 5 years, Vietnam will be going through the same situation China is now, supply and demand. There won't be any supply of the labor and the wages will just start skyrocketing.

That's really helpful. Thanks, Chris. And then, just trying to unpack the really strong gross margin that we saw in the first quarter. It sounds like -- if I'm understanding your comments correctly, it sounds like a pretty good size portion of that gross margin list is probably related to your growth internationally in markets outside the U.S. And I'm just trying to understand the magnitude and the sustainability of that. Do you anticipate the better pricing environment internationally to persist for the foreseeable future? And then as you continue to grow your businesses internationally, should that continue to be a driver of gross margin going forward?

Yes. Primarily because in many of the emerging market countries or even the mature market countries, we started out getting a good foothold with low prices and that was driven by the fact that we had the lowest costs in the world. Now that we are more established, we have a name, we have a brand, we have the ability to continue to raise price. And when we raise prices, that raises basically the margins across-the-board. And that's what we're beginning to do and that's why you're beginning to see this. So we do have a good way to go before we even get to our competitors' prices, with the -- the guys with the very big brand names. So we have quite a room to raise prices in certain countries, which then raises all the margins.

And there are no further questions at this time. So this concludes our question-and-answer session. I'd like to turn the conference back over to Chris Ryan for any closing remarks.

Okay. We appreciate your participation on Lakeland's Fiscal 2019 First Quarter Financial Results Conference Call. Our global team is energized for the opportunities ahead. We are very well positioned for continued growth in sales, market share and profitability, which we believe will deliver value for our shareholders. Our focus remains on these objectives. For our shareholders, we welcome you to attend our annual meeting scheduled for June 20 in Ronkonkoma, Long Island, and I will look forward to meeting you there. Thank you, again, for joining us on today's conference call. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.