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Edited Transcript of LAKE earnings conference call or presentation 10-Jun-19 8:30pm GMT

Q1 2019 Lakeland Industries Inc Earnings Call

RONKONKOMA Jun 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Lakeland Industries Inc earnings conference call or presentation Monday, June 10, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles D. Roberson

Lakeland Industries, Inc. - COO

* Christopher J. Ryan

Lakeland Industries, Inc. - CEO, President, Secretary & Director

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Conference Call Participants

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* Andrew Mali Vijaiyan

Roth Capital Partners, LLC, Research Division - Research Analyst

* Mark Alan Rosenkranz

Craig-Hallum Capital Group LLC, Research Division - Associate Analyst

* Pete Muckerman

Raymond James Financial, Inc. - Financial Advisor

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Lakeland Industries Report on Fiscal 2020 First Quarter Financial Results and Conference Call. (Operator Instructions) At this time, it's my pleasure to turn the floor over to Mr. Christopher J. Ryan, President. Sir, the floor is yours.

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [2]

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Thank you, and good afternoon to you all and thank you for joining us on our fiscal 2020 first quarter financial results conference call. I am joined here today with Lakeland's Chief Operating Officer, Charles Roberson. We are first going to discuss the status of operations and our financial results, then the call will be opened up so that we may respond to your questions. Now on to the formal remarks.

Our first quarter fiscal 2020 results show meaningful progress from the fourth quarter of last year while setting the stage for important business decisions and continued execution toward achieving our growth objectives. Most notable for quarterly performance sequentially, we did deliver an improvement in gross margin, a reduction in operating expenses, lower operating and net losses and a return to adjusted EBITDA profitability. The company continues to work toward the completion of the enterprise resource planning solution or ERP restructuring and business development on a global scale to support our ERP installation, which largely commenced last year. With the sequential performance measures providing perspective on the headway we have been making, we believe we are now past the most challenging aspect of our initiatives, although work remains to be done to fully capitalize on the many opportunities available in the markets in which we operate.

A critical component of our plan has included the implementation of an ERP. Today, the ERP costs us $0.9 million for the technology suite, licensing and installation. There was an estimated $1.3 million in additional nonrecurring expenses in fiscal 2019 relating to the installation and an estimated $0.1 million in first quarter of fiscal 2020 this quarter -- past quarter. This does not include the business disruption, which is very difficult to quantify, but I can say that we believe it to be a material impact including the resignation of our Chief Financial Officer.

We expect the domestic installation to be completed by the end of calendar 2019, with installation in our foreign subsidiaries to begin in the first half of fiscal 2020 beginning with our Mexico and Canada facilities. Thanks to our deep senior management bench, we have been able to drive forward in the face of these challenges.

In the absence of the CFO on today's call, here are some key financial performance data for the first quarter. Net sales for Q1 FY '20 were $24.7 million compared with $24.3 million in quarter 1 FY '19 or last year and $25 million in Q4 FY '19 or last quarter. Gross profit for Q1 FY '20 of $7.5 million (sic) [$7.6 million] compared with $9.5 million in Q1 FY '19 or last year and $6.9 million in Q4 FY '19 or last quarter. Since we are required to report all of our sales and earnings in USD, it should be no surprise that both these line items were hurt when translated back to USD from the approximately 10 material foreign currencies we deal in.

Gross margin as a percentage of net sales in Q1 FY '20 was 30.6% compared to 30.90% (sic) [39.0%] in Q1 FY '19 last year and 27.7% in Q4 FY '19 or last quarter; operating expenses of $7.9 million in Q1 FY '20, up from $7.1 million in Q1 FY '19 last year but down from $8.4 million in Q4 FY '19 or just last quarter; net loss of $465,000 or $0.06 a share -- per basic share for the Q1 FY '20 quarter compared with net income of $1.9 million or $0.23 per basic share in Q1 FY '19 last year and net loss of $1.9 million or $0.24 per share in Q4 FY '19 or just last quarter; adjusted EBITDA of $242,000 (sic) [$269,000] as compared to $2.1 million (sic) [$2.7 million] in Q1 FY '19 and a loss of $932,000 in the last quarter. So what's really obvious here is that we've picked up from last quarter, in the first quarter. We are making some progress here.

Similar to the fourth quarter, the ERP system in the U.S. led to lower domestic sales and gross margins due to order processing issues and the significant expense incurred to ensure to the extent possible that our customers received their shipments on time. This was particularly in the first quarter. The fact that our gross margins increased for the fourth quarter amid these challenges as well as pricing pressures in select markets and other macroeconomic concerns demonstrates the potential for revenue growth and profitability expansion once conditions normalize.

On our year-end conference call, we mentioned that our investments in product development, quality control and positioning in the market are paying off as evidenced by fiscal 2020 starting with the global order backlog of $10.5 million with U.S. backlog going from $5.5 million at the beginning of the fourth quarter and ending at $4 million -- ending the year at $4 million. Our backlog at the end of first quarter 2020 was $8.9 million, of which $4 million was from the U.S. We made certain improvements here, if for no other reason than our customers needed it. But as I discussed herein, it was at the expense of margins.

The other critical change to our business has been the ramping up of our Vietnam manufacturing and associated operations along with our new facility in India. We have been investing in these facilities for more than a year while adding in-country sales and warehousing capabilities. Capital expenditures for equipment peaked last year, so we are now spending less in 2020.

CapEx for fiscal 2020 first quarter was $200,000 compared with approximately $300,000 in fiscal 2019 period. Capital expenditures for all of fiscal 2019 were $3.1 million and are expected to decline to approximately $2 million for fiscal 2020, with the majority of spending in the current year allocated toward the phased global rollout of ERP system and additional manufacturing capacity in both Vietnam and India.

Staffing in Vietnam has been elevated to near capacity, and we are training the staff while transitioning some of the production headcount from China to the new facility. Manufacturing staff in Vietnam and India combined for 819 employees, while our manufacturing staff in China is now 542 employees, down from 560 a year ago. Following a training regimen to yield more efficient output over the next few quarters, we expect a much lower cost and tariff-free manufacturing platform in Vietnam to further bolster our financial performance. Sales activities within Vietnam and India are also gaining traction.

Our efforts to strengthen our global marketing channels and manufacturing capabilities and improve our overall financial performance are moving forward. At the same time, by the end of Q1 fiscal 2020, we increased our cash position by $1.5 million from the beginning of the fiscal year and modestly reduced the little debt that remains on our balance sheet. We now have under $1.3 million in debt.

Our cash position, now at $14.3 million, has increased for 2 consecutive quarters even though we have elevated our inventories to $46.8 million at the end of Q1 from $42.4 million at the start of the year. Approximately 75% of this increase was in work-in-process and raw materials as we seek to continue delivering improvements to our customers, scale up our high-value utility product line and support our new manufacturing facility.

Our cash flow and profitability should also be assisted by efficiency improvements in our new manufacturing facilities in Vietnam and India and the corresponding alignment of cost as capacity is allocated accordingly. Depending on product mix, our run rate of revenue from a normalized and efficient manufacturing standpoint could be in the range of $130 million to $150 million today, up from our current Q1 annualized revenues of about $115 million.

Without -- with our share price at the current levels and our outlook for improving cash levels, we will certainly be looking closely at our stock repurchase program. This program was approved on July 19, 2016. And to date, we spent $1.2 million to acquire 105,648 shares, although no shares were purchased in the first quarter.

We are encouraged by the company's direction and progress. With the strategic advantage through diversified manufacturing operations in Argentina, China, India, Mexico, the U.S. and Vietnam that affords us and our customers significant flexibility in the uncertainty of the current international trade environment and sales into 65 countries, we remain excited by our strong position in the market. As we move through fiscal 2020 and beyond, we look forward to capitalizing on the progress we have made and will continue to make in our efforts to drive sustainable improvement in longer-term top line results as well as bottom line performance.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Dave King with Roth Capital.

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Andrew Mali Vijaiyan, Roth Capital Partners, LLC, Research Division - Research Analyst [2]

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This is Andrew stepping on for Dave. I guess just first on the ERP system. We're trying to quantify how much of that, that might have weighed on the quarter. Do you have the dollar amount in cost of goods sold of the ERP impact?

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [3]

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I'll turn that one over to Charlie, who's also on the line and indicate where this is all going on.

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Charles D. Roberson, Lakeland Industries, Inc. - COO [4]

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Trying to quantify that, Andrew, as we've had in the written comments earlier, is very, very difficult to try to determine. We are -- some of it's legacy issues, but if we had -- the best I can spitball that number is about $300,000.

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Andrew Mali Vijaiyan, Roth Capital Partners, LLC, Research Division - Research Analyst [5]

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Great. That's helpful. And then I guess maybe turning to the revenue side. How much do you think maybe the ERP implementation weighed on revenue? And how much of an impact do you think you might have in subsequent quarters? And then I'll follow -- so just to follow on with that, how are you feeling about your ability to meet demand as well?

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Charles D. Roberson, Lakeland Industries, Inc. - COO [6]

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Well, that's one of the things about the ERP is we're seeing our revenues remain pretty consistent through all of the quarters, and we're even seeing our backlogs grow. Though in Q1, we did begin to pull those backlogs down. We still have a high backlog compared to what we're ordinarily used to seeing, and we're continuing to work to pull that number down. So I think we're benefiting from a good business environment. And our manufacturing -- the install is primarily in the U.S., so it is not impeding our manufacturing processes at our foreign subsidiaries. So we're still able to service our customers.

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [7]

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One of the other thing affecting revenues is a lot of the currencies we operate in were really pummeled this quarter. I mean up until recently, the Mexican peso, the Chinese RMB, the British pound were really pummeled with saber-rattling by certain people in this country.

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Andrew Mali Vijaiyan, Roth Capital Partners, LLC, Research Division - Research Analyst [8]

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That's helpful. And then I guess just lastly for me, how are some of your oil and gas customers holding up given some of the recent weakness there? And then similarly, how's demand been on in China with some of the matter of concern you're seeing?

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [9]

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China has held up fairly well for us. Right now, we've had weakness with select customers, one of whom decided to actually exit the protective clothing business. It was a significant customer. I think our experience with China's economy is not reflective of their economy as a whole. We're a little behind, but certainly not by as much as their economy is suffering right now. That's the second part. What was the first part of your question? I'm sorry, it was oil and gas, and right now that has not impacted our back orders. We remain in the back order situation in those markets.

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Operator [10]

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(Operator Instructions) We'll go next to Mark Rosenkranz with Craig-Hallum.

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Mark Alan Rosenkranz, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [11]

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I was wondering -- just kind of relative to the discussion on a lot of the developments in India and Vietnam, just wondering if you could discuss the sourcing of your raw materials and maybe some of the labor costs you're seeing in those 2 countries and compare that to the current setup in China and just how you maybe see those expectations for those regions versus China going forward.

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [12]

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Well, I'll interject here and Charlie can close up, but this is the one place where these weakening foreign currencies do help us because we're buying a lot of our fabrics in China and some in India to the extent that those currencies weaken that make our collection of raw materials much more cheaper. I mean RMB has been hit pretty hard in the last 2 quarters. So that's the positive side of the currencies being weak. And if Charlie has anything more to say, I'll let him say it on that.

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Charles D. Roberson, Lakeland Industries, Inc. - COO [13]

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Yes, we've -- as I've mentioned earlier in a previous question, our backlogs remain high. So our plan all along with India, Vietnam and China was to open up Vietnam, use it as a bridge to India, which is a longer-term play, and gradually draw down our capacities in China. Well, when you got a backlog like we have and barring any trade issues that may hold us otherwise, we are not drawing down China as quickly as we would have thought that we would. That's a positive. It's working for us right now. We need the labor and we have it and we're able to cover it. However, this is a little bit higher cost. India -- just the relative costs of our labor between these markets, India being the least expensive, so let's kind of couch the question in terms of India labor, if India is a 1, then Vietnam per hour -- is about a 1 -- factor of 1.5x and Weifang is a factor of 4x India. So that gives you some idea what our labor costs are like, and that's why we will see gradually our product shift to Vietnam and into India.

The -- one of the controlling factors in the rate at which we can do that is, of course, raw material availability. Currently, Vietnam serves us very well because it's such a short sail and can be serviced from China, right? We have manufacturers now coming online in Vietnam at the lower end of our product lines, and we also have those growing and maturing or developing in India. And that's going to take place over time. Vietnam is first, India is going to follow and we're prepared to just move that direction around Southeast Asia as that occurs. And especially in terms of the uncertainty of the current trade environment, that's something our customers are quite happy to see us prepare to do.

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [14]

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And I would also add to that, that we buy a lot of fabrics in the United States from major manufacturers in the United States. They have all raised their prices significantly, okay? And we can usually pass on that amount or sometimes a little bit more when this occurs because these are the last remaining textile suppliers in the United States, so they usually have a virtual monopoly by the fact that they have patents on their fabrics. They're very expensive, and we buy them in USD, so at least that don't affect us on a currency basis. But those prices are going up, but it shouldn't be too difficult to pass the increases on because as I said, these are sort of monopoly-type fabrics.

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Mark Alan Rosenkranz, Craig-Hallum Capital Group LLC, Research Division - Associate Analyst [15]

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Okay. Great. That's helpful. And then just shifting gears. You've mentioned in the past, part of the issue with the ERP, the [weight and] challenges, was the impact of the sales force and notably some of the new hires in the sales force being a little skittish to maybe open up new clients or just develop markets when things weren't winding up well in the back-end. Maybe kind of work through the ERP problem. Have you seen some [recurring] activity on the initial [ramp from] some of the sales force trend?

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [16]

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That's by Charlie.

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Charles D. Roberson, Lakeland Industries, Inc. - COO [17]

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Yes, the answer to that question, yes. The very worst of our delivery issues were in Q3 and Q4, that we still have some legacy problems remaining because of planning issues and our lead times. But I think our sales force has held up very well through this, and they are -- they continue to move forward. They've been very good.

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [18]

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I would add, yes, the salesmen are probably in a holding pattern until they see better delivery.

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Operator [19]

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(Operator Instructions) We'll go next to Pete Muckerman with Raymond James.

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Pete Muckerman, Raymond James Financial, Inc. - Financial Advisor [20]

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Just had a couple questions. One would be, and forgive me if you've already mentioned it, but your clean room initiative or focus that you've mentioned in previous calls, I was just curious if you could touch on that. Any progress you've made? And then also, there's a handful of hotspots around the world that I've only read about, one being this whole swine flu thing in China. And then I read a report just yesterday that the WHO mentioned that the Ebola thing could take another "2 years" to get through. Are you all receiving any sort of business from those hotspots? And/or if you could just touch on the clean room thing, that would be great. Appreciate it.

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [21]

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That's you, Charlie.

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Charles D. Roberson, Lakeland Industries, Inc. - COO [22]

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Okay. With regard to our clean room business, we are seeing that is meeting our expectations for growth and actually pushing the upper edges of that. We're very pleased with the orders that we've seen there and with some of our chemotherapy products. So as for the outbreaks of swine flu and Ebola and that kind of thing, we've had some phone calls. So far, no orders. In the case of Ebola, it's in a place that is largely unserviceable even by medical staff because of revolution activity and that kind of things going on there. So there's no consumption, but I think people are looking to find out what's available in case it winds up going into less contentious territory. But I think that the vaccines are actually working pretty well there at this point. If it goes 2 years, who knows because it's going to mutate several times and the vaccine will be figured in to that mutation. Swine flu, we haven't seen anything yet.

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Operator [23]

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(Operator Instructions) Mr. Ryan, there are no further questions at this time. I'd like to turn the call back over to you for any additional or closing comments.

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Christopher J. Ryan, Lakeland Industries, Inc. - CEO, President, Secretary & Director [24]

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Okay. Thanks, Tom. We appreciate your participation on Lakeland's Fiscal 2020 First Quarter Financial Results Conference Call. As we close out the first quarter of this fiscal year, we believe we are on track with the right mix of products and manufacturing presence around the world, financial health and a growing global team to capitalize on the opportunities ahead. We continue to be very well positioned for continued growth in sales, market share and profitability in fiscal 2020, which we believe will deliver value for our shareholders.

Thank you for joining us today on today's conference call. Goodbye.

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Operator [25]

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Ladies and gentlemen, thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.