Alpha Pro Tech's Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: Alpha Pro (APT)

Alpha Pro Tech, Ltd. (NYSEMKT:APT)

Q4 2012 Earnings Conference Call

March 05, 2013, 16:30 PM ET

Executives

Alexander W. Millar - President

Lloyd Hoffman - CFO

Cameron Donahue - Hayden IR

Analysts

Sam Rebotsky - SER Asset Management

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Alpha Pro Tech, Limited Fourth Quarter and Year End 2012 Earnings Conference Call. During today's presentation, all parties will be a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, March 5, 2013.

I would now like to turn the conference over to Cameron Donahue with Hayden IR. Please go ahead, sir.

Cameron Donahue

Thank you and good afternoon. I would like to thank everyone for joining us today for Alpha Pro Tech's fourth quarter and full year 2012 earnings conference call. On the call today will be Mr. Al Millar, President; and Mr. Lloyd Hoffman, Chief Financial Officer. Following their discussions, there will be a formal Q&A session open to participants on the call.

Before we get started, I'm going to review the Safe Harbor statement. This conference call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks, uncertainties and assumptions as described from time to time in registration statements, annual reports and other periodic reports that the company has filed with the Securities and Exchange Commission.

All statements other than statements of historical facts which address the company's expectations or sources of capital or to express the company's expectations for the future with respect to financial performance or operational strategy can be identified as forward-looking statements. As a result, there can be no assurance the company's results will not be materially different from those described herein.

Forward looking statements may be identified by such words as believe, anticipate, estimate or expect, which reflect the current views of the company with respect to future events. We caution listeners that these forward-looking statements speak only as of the date hereof. The company hereby expressly disclaims any obligations or undertaking to release publicly any update or revisions to such statements to reflect any change in the company's expectations or any change in events, conditions or circumstances on which these statements are based.

With that out of the way, let me turn the call to Mr. Al Millar, President, for opening comments. Al, the floor is yours.

Alexander W. Millar

Thanks, Cameron. Thanks everyone who has joined us for our earnings call today. I'm joined by Lloyd Hoffman, our CFO. We turned our strategy at the beginning of 2012 to continue to grow our top line through new product introductions and expanded distribution relationships and to rebuild profitability and we did indeed generate solid increases in revenue over the year-ago period as well as higher net income.

We delivered bottom-line profitability in all four quarters and full year net income increased 4.7% while revenues increased overall by 6.6% for 2012 over the previous year. This was below our expectations of 10% for the year and was partially impacted by the delay in the accelerated growth of our new products launched in the Building Supply segment, which despite the delay, are now expected to contribute more significantly in 2013.

For the first quarter of 2012, overall sales increased by 7.5% from the year-ago period led by another strong quarter of Building Supply segment revenues. Building Supply segment revenues were exceptionally strong and sales increased 23.3% from the year-ago quarter. For the year, Building Supply segment revenue was a record 23.7 million, up 10% over 2011.

This segment currently comprises approximately 60% of our total consolidated revenue. Current offerings include our REX synthetic roof underlayment, REX housewrap as well as REX Wrap Fortis, our non-perforated breathable house wrap. In addition, in early 2012, we launched TECHNOply, an economy version of our synthetic roof underlayment to capture market share in the lower end of the market. This product contributed approximately 13% in the most recent quarter and contributed approximately 6% of total synthetic roof underlayment sales for 2012. We expect this to be a growth product for the company.

Sales of our REX Wrap Fortis non-perforated breathable housewrap continued to be lower than anticipated and we saw increased sales of this product in the fourth quarter of 2012, which accounted for almost half of the sales in 2012. We expect new distribution in the coming year which should drive additional momentum for this product and sales of this product are expected to contribute more significantly to the sales line in 2013.

Even with the collapse of the housing market in 2007, we still have been able to grow this business from $5 million that year to almost $24 million in 2012, a growth of over 4.5 times in just five years. This is why we continue to be excited about the future of the Building Supply segment and expect continued growth going forward. We'll continue to introduce new products through our Building Supply segment as we see opportunities arise.

Sales for the Disposable Protective Apparel segment increased 5% in 2012. This segment was trending at low double-digit growth through the first nine months of 2012 which reflected the strong demand for our major international supply chain partner and its end users.

Sales in the fourth quarter were impacted primarily by FOB destination product shipped at the end of December and increased rebates. We're encouraged by the progress to-date we've made in rebuilding of Disposable Protective Apparel segment and expect increased growth in the coming year.

The growth in the Building Supply and Disposable Protective Apparel segments for the year was offset by a decrease in Infection Control segment sales for the 12 months ended December 31st. However, for the fourth quarter, Infection Control segment sales increased by almost 11% with both mask and shield showing double-digit growth. Infection Control is our smallest segment at approximately 10% of our consolidated revenue.

Gross margins for the fourth quarter and full year period declined due to an increase in raw material prices and competitive pricing pressures for our Building Supply products. During 2012, we secured a new contract manufacturing facility for our Disposable Protective Apparel in Asia. In addition to increasing our capacity for this segment, it eliminated the duty imposed on some of our imported products.

I'm now going to turn the call over to Lloyd who will take you through the financials and provide more details.

Lloyd Hoffman

Thanks, Al. Consolidated sales for the fourth quarter 2012 increased by 7.5% to 9.8 million from 9.2 million. Sales for the year increased 6.6% to 41.1 million from 38.5 million. I'll now spend a few minutes discussing the segment sales for the fourth quarter and full year.

Building Supply segment sales for the fourth quarter increased 23% to 5.9 million from 4.8 million. The increase is primarily due to a 35% increase in housewrap and a 19% increase in synthetic roof underlayment. Building Supply sales for 2012 increased by 10% to a record 23.7 million from 21.6. The full year increase is primarily due to 16% increase in housewrap and a 7% increase in synthetic roof underlayment. The mix for both years was approximately 70% for synthetic roof underlayment and 30% for housewrap.

Sales for the Disposable Protective Apparel segment for the fourth quarter decreased by 15% to 3 million from 3.5 million. The decrease is primarily due to product shipped with FOB destination shipping terms at the end of December as well as rebates to our major industrial -- international supply chain partner. Sales to their end users increased significantly as compared to the fourth quarter of 2011.

For 2012, sales of the Disposable Protective Apparel segment increased 5% to 13.2 million from 12.8. The increase is primarily due to an increase from our major partner, partially offset by decreased sales from other distributors. Over the last year, we've been emphasizing a more diversified and broader distribution strategy for our Critical Cover protective apparel product line, and we believe this will grow our market share in this segment with existing and new distribution.

Infection Control segment sales for the fourth quarter increased 11% to approximately 1 million from 900,000. Both mask and shield sales were up approximately 11%. Sales in this segment decreased 5% to 4.1 million from 4.3. Mask sales decreased 4% which was primarily as a result of our previous largest industrial distributor launching its own line of masks and medical bed pad and pet bed sales were down as this product line was sold in 2011. Shield sales were essentially flat year-over-year.

Turning now to gross profit, gross profit margin decreased in the fourth quarter of 2012 to 34.4% as compared to 35.3% and for the year with 35.2% as compared to 36.5%. As Al has previously mentioned, gross profit margin for the quarter and the year has been negatively affected by the Building Supply segment margins due to increased material costs and competitive pricing pressures. We do expect margin to be in the 35% to 36% range going forward.

Selling, general and administrative expenses for the fourth quarter increased by 26% to 3.3 million from 2.6 and expenses for the year increased by 5% to 12.9 million from 12.3 million. As a percentage for the year, expenses decreased to 31% of sales as compared to 32%. For the quarter and the year, the increase in expenses is primarily due to increased sales and marketing expenses for both the Building Supply and Disposable Protective Apparel segments which enjoyed revenue growth in 2012.

Net income for the fourth quarter was 118,000 as compared to 355,000. Basic and diluted income for the fourth quarter was $0.01 as compared to $0.02. Net income for the year increased by 5% to 977,000 as compared to 933,000. As a percentage of sales, for the year net income was 2.4% for both years. For the year, basic and diluted income was $0.05 this year as opposed to $0.04 in 2011.

Turning to the balance sheet. The balance sheet remains very strong with a current ratio of 19 to 1. As of December 31, 2012, we had cash of 4.6 million compared to 7.5 million in December 31, 2011. Decrease in cash was primarily due to higher inventory levels, payments for the repurchase of common stock and for longer payment terms offered as an end-of-year promotion to Building Supply segment customers.

As of the end of the first quarter of 2013, our cash position should improve as the majority of the extended receivables should be collected. Inventory for the year increased 1.6 million to 17.2 million. Building Supply inventory was up in response to increased sales and Disposable Protective Apparel inventory was higher due to purchasing more inventory this year to account for the Chinese New Year.

2013 to our stock buyback program, we repurchased 1.1 million shares at a cost of 1.6 million. As of December 31, 2012, we have repurchased a total of 8.6 million shares at a cost of 10.8 million. Subsequent to the quarter of the quarter, the Board of Directors authorized an additional $2 million expansion of our share buyback program. The company currently has no outstanding debt and maintains an unused $3.5 million credit facility.

With that, I'll turn the call over to Al for closing comments.

Alexander W. Millar

Thanks, Lloyd. We're encouraged by the growing acceptance of the TECHNOply economy version of our synthetic roof underlayment which we introduced in the first quarter of 2012. This is helping us capture market share in the lower end of synthetic roof underlayment market and we expect it to be a growth driver for this division going forward.

Outstanding array of Building Supply products at different price points has allowed us to continue to our double-digit growth and our expectation of signing additional distribution agreements will provide broader days from which to deliver these exceptional products. Our brand recognition, reputation for quality and industrial certifications are certainly factors in the acceptance of the product and increased the market opportunity we have in these highly competitive markets.

We believe we'll continue to grow our market share in the Disposable Protective Apparel segment as our relationship with our major international supply chain partner continues to strengthen and our strategy to broaden our distribution channel with non-exclusive distribution partners for our Critical Cover protective apparel product line gains traction. This distribution strategy will serve us well in 2013 and beyond and expect this progress to continue to accelerate.

The Infection Control segment showed strong growth in the fourth quarter of 2012 and we expect it to be up slightly in 2013. As Lloyd stated, we expect the gross margins in the 35% to 36% range are sustainable and we continue to look for ways to reduce cost, innovate and improve our gross margin. We will continue to monitor expenses and leverage our operating efficiency throughout the organization.

For 2013, our expectation is to continue to grow the top line, show additional leverage culminating increased profitability due to our expanded line of building products and additional distribution agreements. We also expect additional distribution agreements in the Disposable Protective Apparel segment, which will continue to drive sales.

That concludes our prepared remarks for the day. I'd now like to open the call up to your questions. Thanks for joining us.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Sam Rebotsky from SER Asset Management. Please go ahead.

Sam Rebotsky - SER Asset Management

Hi. Good afternoon, gentlemen. We gave better terms for the Building section and yet we lost money and we were hoping to be at 35% to 36% gross profit margin. Would that improve the profitability over the prior year if we achieve that kind of margins, do we expect to achieve that margin?

Lloyd Hoffman

The terms actually were just payment terms. So what we do and we've done this for a few years now, we started a little earlier this year. To incent people to buy because it's -- the January, February periods for Building is slow. We want to incent people to buy at the end of the year. So we just gave them extended terms. So instead of giving 30-day terms, we gave 60 or 90-days terms but it wasn't any price concessions. So it had no effect on our margins. It was just the amount of days to collect the receivable.

Sam Rebotsky - SER Asset Management

So the loss in the fourth quarter before the adjustment for the taxes -- you said we expect to be 35% to 36% in the gross profit margin. Would that have made this profitable and is that what we need to be profitable?

Lloyd Hoffman

Well, our normal margins are in the 35% range which we were this year. So yes, that's the expectation, 35% to 36%. We're at 35% this year and that's what we expect to be in 2013. And with increased revenue growth, our profitability will be increased through revenue growth.

Sam Rebotsky - SER Asset Management

So the fact that we weren't profitable, is it attributable to not enough sales even though our sales increased? I'm trying to understand what was the problem with the profitability because the sales increased from the prior year and there seemed to have been more profits in the prior year in the fourth quarter?

Lloyd Hoffman

The main difference was our increase in expenses in the fourth quarter.

Sam Rebotsky - SER Asset Management

What type of expenses where they?

Lloyd Hoffman

Basically we've got some expenses in relation to -- we had some bonuses that weren't accrued the previous year and there were executive bonuses that were taken in the previous year.

Sam Rebotsky - SER Asset Management

So that's the difference…?

Lloyd Hoffman

…as well as we had increased sales and marketing expenses for both segments.

Sam Rebotsky - SER Asset Management

Okay. So that makes sense. Now tell me based on what you see now, the fact that I assume there's a lot going in the housing area in the [East is sandy] and various other things, it would appear that the need for your product should increase. Is there a visibility of a pipeline that's significantly greater than it was at this time last year?

Alexander W. Millar

Lloyd, I think we can say yes to that.

Lloyd Hoffman

In some of the new distribution points that we're looking at, yeah, I would say that we definitely have a clear line on increase on the sales side from that.

Sam Rebotsky - SER Asset Management

Okay. Should I jump out and jump back into the queue or is there anybody else looking to ask questions?

Alexander W. Millar

I can't answer that.

Sam Rebotsky - SER Asset Management

Okay. Well, basically is there anything specifically occurred during the period in January when there was substantial increase in the volume and the stock and the increase in the price?

Alexander W. Millar

Yeah, that was basically -- what happened there was, there was 12 or 13 cases of SARS in the United Kingdom as well as a couple in other varying parts of the world. So what happens is when you get an increase in respiratory diseases, the normal assumption is that we will sell several million dollars worth of N-95 Face Mask. Now you need a pandemic of course to drive the sales of an N-95 Face Mask and we certainly didn't have one at this point in the year, although there have been as I say a lot of Internet chatter about bird flu and swine flu and some of the various respiratory diseases and that is what drove the share price and the increased volume.

Sam Rebotsky - SER Asset Management

Okay. I'll jump out and I'll jump back in if there's anybody else who wants to ask some question. I'll come back in.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of (inaudible). Please go ahead.

Unidentified Analyst

Hi, gentlemen. Congrats on a reasonable quarter. Looks like the revenues are moving in the right direction. Just want to -- got to get this bottom line up obviously otherwise other investors aren't going to be too interested in the company. Have you got some specific plans to drive it or is it kind of just get revenues up and lower expenses?

Alexander W. Millar

You want to handle that one, Lloyd, or do you want me to?

Lloyd Hoffman

From the sales side, you can handle that.

Alexander W. Millar

All right. [Benji], we're going to continue to drive the increase in sales on the product line, continue to try and lower our cost. We had some supply issues in 2012 that we think we sorted through and we're back on track going into 2013 and I think we'll have the growth in all areas for this year. Lloyd is looking pretty hard at all expenses to make sure that we got more wherever we can.

Cameron Donahue

Lloyd, this is Cameron Donahue. I think that just going over the leverage we do have in the model because of the distribution strength that we have, incremental sales are going to have much higher margin as we move forward. And we saw that before when we had the revenue spikes within our sales where that additional [lever] really layers on significantly and you can really see the movement as we move forward. So you can expand on that as well, but I think that's important.

Lloyd Hoffman

Yeah, I think -- as we look at increased sales, we should be able to and will reduce sales by reduced expenses as a percentage of sales which will drop more to the bottom line. So whereas this year we were -- sales expenses were 31% of sales, we expect that to reduce which will effectively increase our net income as a percentage of sales. So sales growth basically will be significantly higher than expense growth which will help net income tremendously.

Unidentified Analyst

Okay, that will be good to see. The other question is there's one statement I've mentioned to you guys before I think would be wise to have a dividend rather than a share buyback. If you look statistically at corporations, for the stock price to move it generally moves much more if there is a dividend as compared to a share buyback and intrigues investors more. So I still suggest -- I know part of the reason you didn't want to do it was because you guys own a fair number of shares and it looks like you're doing it for yourselves. But I still think it would be a good idea to think about doing that for investors and to get the stock price up?

Lloyd Hoffman

Benji, we can kick that one around and we have. We've gone into it dozens of times and I continue to hear pros and cons on both sides of that. I've had major fund managers tell me that if we were to pay a small dividend with their stock, they would sell theirs because they didn't feel we would know what to do with the money to reinvest it rather than just paying a dividend. So I get a lot of negatives from some of the fund managers. I've had fund managers tell me that dividends are not the way to go, that you definitely have to continue to buy back the shares and that increases the value. So it's one of those things that what comes first, you know.

Alexander W. Millar

If I can -- I'll just add something as well. If we look at where we got the – essentially the funding for the buyback, we had a great year in 2009. The H1N1 year we made a lot of money and we've used that money to fund our buyback. If we look at essentially our income from operations over the last three years, since that 2009; so '10, '11 and '12, we have actually had -- we've not had income from operations. So we're not in a position just yet to be able to issue a dividend because we're not consistently generating income, cash from operations. We hope that's going to change and that will change, but we're not there just yet.

Unidentified Analyst

There's an alternative to a couple of million in this share buyback I think would be that it's spent that way and I think there's actually been more bang for the buck on the share price (inaudible). Anyhow, there's my two cents statistically that is generally what does happen, but we think it also gives you relief. Thank you very much.

Operator

Thank you. (Operator Instructions). Our next question is a follow-up from Sam Rebotsky from SER Asset Management. Please go ahead.

Sam Rebotsky - SER Asset Management

Yes, hi. Okay, I guess it's difficult this far as the dividend or a stock buyback, I guess, just to point your stock is showing at a discount from books, so that appears to improve it. But do you appear at various investor conferences during the year and what have you done during the past year? What do you expect to do this year?

Alexander W. Millar

We haven't done any -- we did not any in 2012. I will be talking to Cameron about what we're going to do during 2013. It normally takes a few months to get into the second quarter to see how our year is progressing and dig it out and tell the story. So we'll continue to talk to Cameron about that and get out when the time's right.

Sam Rebotsky - SER Asset Management

Okay. Now the further thing is you've been doing conference calls twice a year and I would think that if you did it four times a year, people would have a better handle from quarter to quarter how things are going and it would seem to be based on a cost of a conference call, you'd get a lot more bang for the buck because I know (inaudible) follows you and various other maybe market letters might write about you. And as the investors have more information and frankly it also would be helpful, I guess, if you could file the 10-Q about the same time you're – more information in the press release, more to discuss and better to understand as you have the conference calls but that would be a little helpful. This is the end of the year, so the K maybe a little more complicated. Hopefully that during -- it appears you're in two of the right businesses. Do you need to buy anything or you just develop everything internally as you're doing?

Alexander W. Millar

No. We continue to develop our own products.

Sam Rebotsky - SER Asset Management

Okay. And it seems that you feel that the Building Supply is more growth or what's your -- because that's what is increasing more in everything?

Alexander W. Millar

Well, it is at this time. We take a pretty good kick in the pants when we lost the large part of our apparel segment, but it's growing back nicely and continuing to improve.

Sam Rebotsky - SER Asset Management

Okay. I will vote for more conference calls to sort of give some kind of -- in other words instead of waiting at the length of time to the next one which would be in June, so if you could have one after the March quarter, you'd have more information that would come up. People could develop more relationship with the company and then you could sort of get a basis of doing road shows as more information is being developed.

Alexander W. Millar

Exactly. We've certainly kicked that around with Cameron and I would like to point out that our lines are always open. Any time you want information that we can legally give you, we'll certainly pass that along. So feel free to give us a call at any time.

Sam Rebotsky - SER Asset Management

Sure. No, I understand that. But basically when you do have a conference call, those people that can't participate or don't feel like participating or they're not listening can listen to your call on your website or whatever and so there's more information out. I mean to me that would sort of be helpful and you might have an ability to get more of a following which I assume is desirable. And then hopefully the stock can trade above book value and hopefully if the earnings come in, then you can kick around more of the dividend and stock buyback, et cetera. So anyhow that's my thoughts. Good luck. Hopefully we see more consistent earnings.

Operator

Thank you. Ladies and gentlemen, I am showing no further questions in the queue. I'd like to turn the conference back over to Mr. Millar for closing comments.

Alexander W. Millar

I want to thank everybody for joining us today. We'll look forward to updating you in the real near future. So thanks very much.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference for today. This conference will be available through replay until April 5. You may access the replay system at any time by dialing 877-870-5176 and international participants 858-384-5517 and entering the access code 4601352. Thank you for your participation. At this time, you may now disconnect.

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