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Lakeland Industries (NASDAQ:LAKE)

Q4 2013 Earnings Call

May 21, 2013 4:30 pm ET

Executives

Christopher J. Ryan - Chief Executive Officer, President, Secretary and Director

Gary Pokrassa - Chief Financial Officer

Analysts

Quinton Mathews

Douglas Ruth

Operator

Good afternoon and welcome to the Lakeland Industries Investor Conference Call. [Operator Instructions] Please note this event 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 fact, which reflect management's expectations regarding future events and operating performance and speak only as of today, May 21, 2013.

Forward-looking statements are based on current assumptions and the analysis made by the company in light of the 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 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 regulation and other factors, 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' President and Chief Executive Officer, Christopher Ryan. Mr. Ryan, you may begin.

Christopher J. Ryan

Okay. Good afternoon to you all, and thank you for joining our fiscal 2013 fourth quarter year-end financial results conference call. We are going to have a very brief opening statement and then open the floor to questions. We had a difficult time in Brazil starting with a judgment against the company in the amount of approximately $12 million, followed by a precipitous drop in sales as an indirect result of the judgment there. We are working diligently on rightsizing the Brazil operations. We are looking into potentially selling this operation, while at the same time working on restructuring the operation. Investors should consider that most of the problems we have encountered over the last year result directly or indirectly from the Brazilian operations, thus, we plan to either resolve or extricate ourselves from the situation as quickly as possible. Besides being a tremendous distraction to management, Brazil has caused the U.S. parent to incur a tremendous amount of additional legal, travel, investment banking and banking expenses among other expenses to deal with all the falling domino problems caused by Brazil. The rest of the company's operations, excluding Brazil, are meeting targets, and the company is aggressively addressing the Brazilian situation. In the fourth quarter of fiscal 2013, the company, excluding Brazil, essentially broke even and Brazil lost $1.4 million at the operating income level. The company expects to be profitable and cash flow positive going forward, excluding Brazil, and management does not anticipate making further investments in the Brazil operation.

Cash flow has been stable and the company has not borrowed against the TD Bank loan since July of 2012. Operating cash flow has been sufficient to run the business. In addition, the company has paid down a portion of the TD Bank loan by $2 million, following the sale of certain assets in China and made payments totaling $1.6 million on the Brazil settlement agreement. Thus, the company hopes to refinance in the coming weeks and solve the Brazil issue. What should not get overshadowed here is that we are on target with the turnaround plan from losing the DuPont license. It should be noted that although DuPont, Tychem, Tyvek represented $19.9 million of our total sales in FY 2012 DuPont, Tyvek, Tyvek sales were only $2.8 million in FY '13 and yet total sales worldwide only declined by $1.2 million. This means that we replaced all but $1.2 million of those sales with new products and new markets. If not for the patently unjust judgment of $12.5 million against the company in May of 2012, things would be proceeding relatively smoothly right now.

The rest of Lakeland's business is now generating operating profits and should be on a solid ground just as soon as we can stabilize the finances. As for the financing in progress, let me point out, we have signed a commitment from a potential senior lending bank. They have done all their due diligence. We are working through the issues remaining to close it.

We will now open the floor for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Sam Yake [ph] a private investor.

Unknown Shareholder

I just had one question. I was wondering if you could give us an update, you made a reference again in your latest release about efforts to sell the company? I'm just wondering if you could give us some color on that effort? And any response you've gotten from potential buyers?

Christopher J. Ryan

Unfortunately, we can't comment on that right now.

Unknown Shareholder

Okay. And I'm just wondering, does Ansell still own a substantial amount of Lakeland stock?

Christopher J. Ryan

To the best of my knowledge, I haven't seen them file a change on their 13D.

Unknown Shareholder

Okay. My only thought on it is, with your market cap is down around $22 million, $23 million, it just seems to me at some point that the value you're getting from being a public company versus the cost is a little bit skewed. And as a shareholder, it makes sense to me to sell the company. That would be my only comment.

Christopher J. Ryan

Okay. I mean, I pretty much agree with you. I mean, the terms certainly of being a public company. And of course, if we can get a good price for the shareholders, we would be open for sale.

Operator

Our next question is from Quinton Matthews of QKM.

Quinton Mathews

On -- just all my questions are on the sale and one on the -- will piggyback on that and say, can you -- I know you won't be able to discuss anything surrounding the deals that are going on. But are they mutually exclusive from each other in the sense that when you have -- when you first announced that you were going to have the Special Committee or hire Raymond James, it was we're looking at different alternatives, maybe selling the company, maybe giving new financing terms and the recent press releases have made it sound like we've been looking at financing terms. Is that just because that's what's precedent right now? And all options are still on the table? Or is everything pretty much been geared toward getting the financing and rightsizing Brazil? And the talks of acquisitions really have kind of fizzled out?

Christopher J. Ryan

No, you pretty much put your finger on it. I mean, right now, the primary goal is to get it refinanced, fix it, and we are open to selling the company. We're open to all options. But we really have to get the financing done immediately. We have to get TD out, then we'll have long-term financing, then we can redirect ourselves toward either selling assets in the company or selling the company or if we can't do that at a reasonable price, fixing it.

Quinton Mathews

Okay. Do you just see -- I mean, Brazil -- I guess, I would say South America there was a lot of growth opportunities obviously in the last couple of years. I mean, that's where a lot of the enthusiasm was with management, is that only tempered in Brazil? Or is your experience down there kind of put a damper on a lot of the South American growth prospects? And I guess the last part of that is, where do you see the growth? Assuming you don't sell and assuming that the U.S. and the other business turns around and your restructuring works, how do we get to the point to where we're generating a decent return on the invested assets? Where's the growth?

Gary Pokrassa

I will -- this is Gary, let me respond to your question first I guess about South America. Brazil is giving us all kinds of headaches obviously. We're having difficulties dealing with it, but the rest of Latin America, I mean, there are issues there. But Chile is going great guns. Chile is actually a pretty decent business environment to run a business. Our sales are growing very rapidly. It's profitable. Argentina has some other issues, some challenges there, but then nothing on the order of Brazil. And if we can stabilize our financing and get a little bit more working capital in Argentina, I have high hopes for that, and I think our sales will grow very rapidly if we can just see a little bit more capital into that. We're servicing much of Latin America outside of Brazil from those 2 offices, and we have the plant in Mexico, which is doing very well. So actually, if we can just deal with Brazil and resolve that, the rest of Latin America is actually quite a good opportunity for us.

Quinton Mathews

Okay. And so when you made the comment that going forward you intend to be cash flow positive and profitable, assuming you mean profitable coming from a GAAP continuing operations standpoint, any guidance to how profitable you can be? And I guess I would also -- are we getting to the point to where we've replaced -- we getting to the point where we corrected and replacing the DuPont sales? And then America can actually be -- U.S. can actually be a growth environment for your sales? Or is it all going to come from kind of South America and China?

Gary Pokrassa

You take it. Take the latter.

Christopher J. Ryan

On the latter part of your question, we will get new sales in North America as a result of introducing new products. When -- we will continue to get sales growth overseas. So we'll get it in both places. But in the United States, Canada primarily, you have a fairly mature market. So what you have is everybody else getting into everybody else's business. You really have to introduce new products that perform better in order to grow your sales and grow your margins. Otherwise, you're just trading business with other people. On the other hand, if you look on the foreign markets, there's some real growth in Asia. There's better growth even in places like Argentina than there is in the United States, which is pretty pathetic. But as far as dealing in Brazil, we deal in a lot of tough countries like China, Russia and India and Brazil is by far the worst. And so we are just going to extricate ourselves from that. And once we do extricate ourselves from that, if we can, we probably will be able to give you guidance.

Gary Pokrassa

Yes, let me add one other thing in terms of the U.S. market. Chris spoke to the top line. I think we've also -- pretty comfortable that we'll be able to get some much better margins in the U.S. compared to our recent history in the U.S. going forward.

Quinton Mathews

Okay. And then any -- do you guys have any estimate -- besides the actual acquisition cost of how much -- outside of the acquisition cost and the settlement cost, how much money has been pinned down in Brazil? I mean, what are the assets down there? What could it be worth? I mean, what you spent on it? I don't know if that's a good -- to ask for what it's worth in the end, but I mean, anything that you can give around the value of the asset.

Gary Pokrassa

A big chunk of our inventory is in Brazil. It's roughly $8 million of our just under $40 million of inventory sitting in Brazil. So that's a big part of it. Other than that, the other major assets we have receivables of about USD 1 million -- USD 1.8 million or so, and the plant and equipment $2.5 million in that book value in that range.

Quinton Mathews

Okay. Well, I know you guys probably are frustrated like everybody else. I appreciate the hard work. And hopefully, good things come around the corner. I appreciate it.

Christopher J. Ryan

One thing I can tell shareholders is, I own 7.7% of the company. And believe me, I feel the pain too along with all the shareholders, personally.

Operator

Your next question comes from Doug Ruth of Lenox Financial Services.

Douglas Ruth

Do you have a goal as far as a target date when you think the refinancing might be done?

Christopher J. Ryan

Well, we would hope to get that done within 60 days. Give or take a couple of days.

Gary Pokrassa

Give or take. Give or take.

Douglas Ruth

And would that be considered to be a normal period of time for the -- to close?

Christopher J. Ryan

Yes, yes. I don't think this would be an extraordinary event. From time we're signing the commitment letter until we can close, 60 days is not unreasonable. I mean, the lawyers, the bank, the bank's lawyers and the other lawyers generally take 30 to 45 days just to do the paperwork.

Douglas Ruth

Okay. And how do you feel the relationship is with TD Bank now?

Christopher J. Ryan

We hope it's good. They allowed us to operate. We paid them down almost $2 million, so we hope they're happy. We think we can get a new senior lending facility in place. And so I think they'll be happy to be taken out and didn't wait that long. But they've been a wonderful bank to work with, really good people, so we're just crossing our fingers.

Douglas Ruth

Can you offer any commentary on the relationship with Ansell any kind of conversations that have happened with them?

Christopher J. Ryan

We can't comment on any conversations because they filed a 13D. But there haven't been too many conversations between us.

Douglas Ruth

Okay. And have you received -- is there a level of interest of people that would be interested in the Brazil assets?

Christopher J. Ryan

We are looking into that in the next week or 2. Yes, there would be -- I think a couple of people who might have a strategic interest in the product lines who are not in that country, who might want to take the dive and do it because they're bigger than we are perhaps. I mean, companies like 3M have done well in Brazil. It's a little difficult for smaller companies like us to grease the wheel, so to speak.

Gary Pokrassa

Interesting choice of words.

Douglas Ruth

And what -- how would you describe or what is your status do you think now with Raymond James?

Christopher J. Ryan

We are still retaining Raymond James full time. They are committed to closing this deal on the senior financing, this bank financing. At which point they may be done or they may join us in selling off some of the assets like Brazil.

Douglas Ruth

Okay. And the Mexican facility, you mentioned that, that -- that the build out of that has been doing pretty well.

Christopher J. Ryan

Yes, the actual physical construction was completed about 1 year ago. And it took us a couple of quarters to work into it with hiring people, bringing the products in. It's pretty close to normal production now at this point.

Not quite full capacity yet.

Douglas Ruth

And what about regaining sales in America? How do you think that's been going? And maybe could you give us any specific examples?

Christopher J. Ryan

Yes, we're converting a lot of our old Tyvek and Tychem business to our own branded products, particularly on the chemical suit line, but we're also -- what we want to do is introduce new products, primarily to the utility market, where you have good solid buyers who want to pay a premium for really good product. And you don't have any credit problems with and whoever, it's a long-term contract. That's our primary goal is to go into the utility business in the United States. The best markets we've seen in the growing energy markets out in the Dakotas, where they're drilling for gas. These are the new business -- really the good business in the United States.

Douglas Ruth

And have you been happy with the way you've been able to convert the people from -- over to your product line?

Christopher J. Ryan

Yes, we're fairly happy. As I said, we -- 5, 6 years ago, we had about $80 million of DuPont, Tychem, Tyvek business, and we've completely rotated out of $80 million. I know a lot of people must think we're horrible managers, but I don't think many people could have done that is to replace 80% of your business in 5 years with one of the largest companies in the world doing everything they could to put you out of business.

Douglas Ruth

I appreciate what you're telling me. How big could the sales from Chile and Argentina be?

Gary Pokrassa

I don't know that I put a limit on that, Doug. I mean, it's a question of -- they're both growing -- Argentina right now is capital constrained. So as soon as we get our financing stabilized, we'll put a few hundred thousand in at most, and that's all it needs. And then they'll be on really solid footing. Chile right now is doing extremely well. They're growing 30%, 40%, 50% year-over-year. And so -- and they -- between Chile and Argentina, they don't just sell in those 2 countries. Between the 2 of them, those are sales offices. They service pretty much the rest of Latin America outside of Brazil. We have sales from those 2 countries into several of the other Latin American countries, and there's lots of market out there.

Christopher J. Ryan

You see with the new free trade deals going up in Latin America like the Pacific Alliance, we can make in Mexico and sell pretty much duty free to every country in South America except of course, Brazil.

Douglas Ruth

Yes. So these countries really could be meaningful contributors in the not-too-distant future?

Christopher J. Ryan

Yes, they could.

Gary Pokrassa

Yes.

Christopher J. Ryan

I mean, there's -- we have the ability to make in China, make in Mexico and sell throughout, Colombia, Ecuador, Peru, Chile, Argentina, and Colombia. And then you get into the Mercosur people, who are Argentina, Paraguay, Venezuela and Brazil. And that's the grouping that's very difficult to do business with. Because they're very protective on -- even if you're a member of Mercosur, it's not really being a member.

Gary Pokrassa

Yes, Brazil and Argentina are both members. And it's tough to trade -- we have operations in both countries. It's tough to trade back and forth even.

Christopher J. Ryan

So we, the Chile and Argentina are concentrating on that Pacific Alliance, which is Mexico, Colombia, Peru, Chile and Chile. And since Chile is a member of Mercosur and a member of the Pacific Alliance, they consider trade both ways. Chile is a really nice place to do business. It's got a free trade agreement with about 85 countries. It's a hands-off regulatory atmosphere. It's a great place to sort of vault out of to hit the rest of South America.

Douglas Ruth

I believe in the 2 of you. And I believe that this is a low point and that the next fiscal year is going to be substantially better. And I'm grateful for your effort.

Christopher J. Ryan

Thank you, Doug.

Operator

Our next question is a follow-up from Quinton Matthews of QKM.

Quinton Mathews

Just a lot of people are focused on the -- on Ansell because they own shares. I mean, that's an easy one to focus on. And I don't mean to beat a dead horse. I actually would rather see you guys succeed than just sell. But can you tell us anything, about how many people would be interested or have expressed interest? I mean, can you give anything because everybody focuses on Ansell, but I mean, it wouldn't seem crazy to me that DuPont may be an interested buyer or a 3M or someone. I mean, it seems there you can rattle off pretty easily a handful. And I would assume that these people have been approached, but without mentioning any names, can you give, "Hey, we've talked to this number of people or people have actually come to us and expressed interest, but the terms just weren't right or the timing wasn't right"? Or anything along those lines?

Christopher J. Ryan

I mean, we have canvassed a lot of people. But I think as a general statement, whether it's private equity firms or financial buyers or even strategic acquirers, they're all looking for EBITDA, okay? And if you don't have EBITDA, their attitude is your worth 0, okay? But if you were a buyer of commodities, they -- gold has no EBITDA but it does have some value on the market. This -- it is a preoccupation with EBITDA. If you have 0 EBITDA, therefore, you're worth 0, okay? Wouldn't matter whether you had $100 million in cash if you had 0 EBITDA, you're still worth 0. This is the attitude out there. Of course, it's a negotiating attitude because if you look at our company, we have receivables that are convertible into cash relatively quickly. We have sold some real estate assets at book value. Jesus Christ, everybody is saying we're not worth book value, but we can sell our real estate at book value. So if we can sell real estate at book value and you can collect receivables at their stated value, then you have cash. And again, you have people saying, "Well, if you're a company with $100 million of cash but no EBITDA, you're still worth nothing." That's their attitude. So what can I say? I guess we have to build up some EBITDA, and then they'll have another reason why they can't pay at the market price.

Quinton Mathews

Yes, well, I understand the frustration. So I mean, is it fair to say that you guys have got -- I mean, if you really haven't gotten past the first date with anybody maybe is a fair way to say it. Because there's just -- they're playing hardball in the EBITDA and if you don't have that, what's the point of really exploring it or trying to convince them otherwise? Or there've been...

Christopher J. Ryan

That might be a fair statement. Also keep in mind, the timing of that judgment in Brazil hit us just as we were working our way through the DuPont issue and just trying to dig our way out of that hole, and then it hit us at the worst possible time. And the EBITDA vanished because of the DuPont situation in addition to the issues we had in Brazil. Now we're starting to work our way through that, and if we can carve out Brazil, then we should be able to build up the EBITDA again in a relatively short time.

Quinton Mathews

And is the -- are the real estate assets that you've sold, they've been sold to people that are kind of outside the business?

Christopher J. Ryan

Yes, third-party, third-party. You see, before the problem in Brazil, which arose almost overnight and was catastrophic, we made the decision to expand our sales force particularly in the United States and to expand our sales force elsewhere to grow the sales quickly. We knew we would be taking a hit to earnings, a hit to EBITDA in doing that. And it has worked. In other words, our sales are really beginning to expand to the point where we're profitable on all fronts. But you don't go out and increase your sales force at a cost of $700,000 and have them immediately return $1 million in earnings. Now they're about to do that, but just as we were doing that, we got hit with the Brazil problem, which just was a domino effect, particularly with the finances of the company. And we should be able to replace TD Bank, they're a wonderful bank, but I think they want out. And that we feel very confident that we have a bank that's -- that will take them out, and that bank has been doing its due diligence since Christmas, and they've done it all. So they know where they are, and they've given us a firm commitment letter. So that's where we are. We have to work toward the documentation and fulfill a few conditions.

Quinton Mathews

Are you guys getting enough sleep right now?

Christopher J. Ryan

I've had better. I've had more comfortable evenings in the past.

Operator

This concludes our question-and-answer session. I'd like to turn the call back over to Mr. Ryan for any closing remarks.

Christopher J. Ryan

Okay. No, I have no closing remarks if there's no other questions. It's been a tough quarter for us, and we hope we can do better next quarter. Thank you.

Operator

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

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