Christopher J. Ryan - Chief Executive Officer, President, Secretary and Director Gary Pokrassa - Chief Financial Officer and Principal Accounting Officer.

Douglas Ruth.

Good afternoon, and welcome to the Lakeland Industries Second Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions] Please note that 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 facts, which reflect management's expectations regarding future events and operating performance and speak only as of today, September 12, 2013.

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 in the company's filings with the Securities and Exchange Commission.

General economic and business conditions, the business opportunities that may be presented to you and pursued by the company, changes in law or regulations and other factors, many of which are beyond the control of the company.

Listeners are cautioned that 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..

Good afternoon to you all, and thank you for joining our fiscal 2014 second quarter financial results conference call. We're going to have a very brief opening statement and then open the floor to questions. We had a good fourth -- a good quarter ended July 31 and August looks to be on target.

Worldwide, the economy looks fairly good, as reflected by the Asian, U.S. and European stock markets, and we're not seeing any weakness out there in our product lines. We intend to continue to have a simple block and tackle running game of increasing sales incrementally in all markets and decreasing expenses where appropriate.

Reduce debt and introduce products with higher profit margins. That concludes my remarks to provide more time later for questions. I will now pass the call over to our CFO, Gary Pokrassa, to provide a review of the company's financial results for the first quarter..

Thank you, Chris. Excluding operations in Brazil, the company is reporting its best quarter in many years. The company has earned operating income in the U.S. of $479,000 in Q2 of this fiscal year, compared with an operating loss in the U.S. of $787,000 last year, second quarter.

Sales of Lakeland worldwide increased 4.9% overall and excluding Brazil increased 22% year-over-year. Gross margin for Lakeland Worldwide was 30.3%, the same as last year, but again excluding Brazil, increased from 30.9% last year to 32.0% this year.

Operating expenses worldwide decreased by $814,000 and decreased as a percent of sales from 25.0% -- to 25.0% from 29.7% last year. Operating expenses for Lakeland worldwide, excluding Brazil, decreased by $247,000 even as sales increased by $4,134,000. SGA, as a percent of sales, excluding Brazil, decreased from 28.8% to 22.5%.

Adjusted EBITDA increased to $1.9 million this year overall, from $543,000 last year. Adjusted EBITDA for Lakeland worldwide, excluding Brazil, increased from $721,000 last year to $2,704,000 this year. Most of this improvement was generated in the U.S. and China.

The company believes it has now completely recovered from the loss of the DuPont license in July 2011, as far as gross margins and profitability. Net sales, including Brazil, of $24.6 million, compared with $23.5 million last year. Operating income of $1,297,000 this year versus operating income of $152,000 last year.

This year is after reflecting $160,000 for plant relocation costs for its factory in Qingdao, China, which has been sold. Q2 of this year includes a benefit for income taxes of $3.6 million, resulting from a reversal of a deferred tax asset valuation allowance of $4.5 million.

Q2 of fiscal '13 last year was positively affected due to a $2.1 million adjustment due to the settlement of the Brazilian arbitration at less than the amount awarded than accrued. Net profit of $4.2 million, $0.75 a share this year versus $3.3 million profit, $0.61 a share last year.

The company completed its sale of its plant in Qingdao, China and one of the plants in India. Let me say also, we have had a poster on the Yahoo message board, which has generated several inquiries from investors.

Let me say this poster has long ago given up any pretense of being a concerned investor and is clearly a small group of former employees, who were former for good reason. In any case, without commenting on the substance of any of their postings, I'd like to offer some advice in the form of a direct quote from Mark Twain.

And the quote reads like this, "It is better to keep your mouth closed and let people think you are a fool, than to open it and remove all doubt." Back to you, Chris..

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

[Operator Instructions] Our first question will come from Bob Sales [ph] of LMK Capital Market [ph]..

I have a number of questions, I don't know how many calls you'll have, we're fairly new to the company and to the stock, but we are shareholders. So I'll ask a couple and then I'll get back in queue to be fair to others that might be on the call.

With the new junior debt, are there any penalties for prepayment?.

After the first year, we had the option of prepaying and it -- small penalties. I think it's 5% after the first year, 3%, and then 1 year -- 1%. 5%, 3% and 1%..

5% on the balance?.

On the balances, yes. We can prepay $500,000 increments after the first year..

Okay.

So can you talk a little bit about your objective with that debt? Whether you would prefer to keep it out there, given the rate? Or whether it's your intent to generate the cash to go at that early?.

Well, obviously, if we have excess cash that's the first thing we'll do, is pay that down. So it just depends on how good our operations are. If we keep up like we have quarters like this, I suspect we'll be able to generate some other financing that we could use to -- or just add operating cash flow that we could use to pay..

Okay. And then, we should include those warrants in the share count. So the share count, what was the total following the financing? The junior....

That's a good question. Yes, there's 566,000 shares for the warrants, there's 5,350,000 outstanding.

So the way to look at it is their -- you should look at it as common equivalence outstanding of 5,916,000 and actually -- we haven't reported this anywhere, but if you take that number and divide it into the 50,620,000 stockholders equity on the balance sheet, the book value per share is $8.56..

Yes, yes, got that. And then you've had a little more time for things to evolve. I'm sure you were very focused on the refinancing. Can you walk us through the plans -- the current plans, for Brazil? Whether -- and specifically, whether you plan to wind that down? And over what timeframe, or if there's a different plan, it'd be great to hear..

Yes. I've said previously that by the end of this fiscal year, which for us, is January 31, we want to downsize the company, in terms of expenses, to meet its current revenues. So -- and we're in the process of that. We're almost there on terms of the payroll headcount.

Now we have to do a few more -- a little bit more on payroll and a lot more on other expenses in terms of getting efficiencies in manufacturing. But on the headcount, we're almost there. Now it's a matter of really retooling manufacturing. So it's as efficient as it can be.

Brazil looks to be running around $9 million to $12 million in revenues versus what, $18 million to $20 million last year. So we've just got to bring the expenses down. The idea being is to rightsize it to a breakeven point. And we think we can do that by year-end..

Okay. So my question there is -- and I'll just ask it blankly with no criticism.

But why not, at that point, just given the lack of scale, why not just close it off instead of tying up the working capital given your capital cost?.

At this point, we're not tying up any capital at all. And that's actually -- if you dive into the details of how we did our financing, you'll see that -- it actually isn't causing anything at all. All of our covenants are set using Lakeland worldwide operations, excluding Brazil, which is why I've been reporting it this way too.

And at the same time, as a covenant in the loan agreement, the senior loan agreement, that prohibits us from sending any cash down -- they gave us a small amount of $200,000 just to pay some legal fees and others. But basically, I'm prohibited from sending any new cash investments in to Brazil. So it's not costing anything at all.

I may be reporting losses, but so far, we've been able to sustain the operations in Brazil. We've been able to get some borrowings from a bank in Brazil to help us sustain our cash flow. And it's not costing us anything in cash flow.

We have no intention at this point of investing anything significant more and -- nor could we, because we're precluded by a bank covenant. So there's really no cost to giving it a shot and seeing if we can make a go of it. And if not, if we can't make a go of it, one option is to walk away, that's a possibility. But we're not at that point yet.

We prefer not to do that. Obviously, we'd like to make a go of it, make it a viable operation again, if possible, and we're doing everything we can. And again, as long as we don't have to lay out any cash, there's no great urgency to just walk away from it, which, again, if we had to, we will. But we're not there yet..

We do look at all the options here. We look at the option if we just walked away today, how much in terms of NOL would we get? And it's a lot. So we look at that..

It's worth a fair amount of tax deductions, if we do walk away then. That is a consideration..

[Operator Instructions] The next question will come from Doug Ruth of Lenox Financial Services..

Could you talk a little bit about where the increased sales are coming from in America?.

Chris?.

No, it's you..

I think we have some new product sales. It's across the board, Doug. It's not in any one area. We have -- our disposables are up, our fire and wovens are up, chemical is about flat and the reflective is up significantly..

And what about the energy sector? That was a new market.

Are you having any success?.

We've got a lot of traction with the frac-ing and the oil operations out in Montana, I guess, and Wyoming and that area..

And that looks like that could continue?.

Yes, yes, that's looking good for us. Wherever this -- the energy operations in North America are expanding rapidly and that's a big part of our end users..

And could you talk a little bit about China and why you feel like China is continuing to perform so well?.

Well, again, it's just, it's a good sales force, it's a growing economy, but we promote our full product line in China. The only other place we really promote our full product line is in the United States, so they have -- all the product lines are growing almost evenly in China. We've got a good sales force and it's a fairly decent economy right now.

I mean, I don't know about next year, but we keep growing. But I think the important thing to really emphasize is that since we have most of our manufacturing operations in China, we sell all the products we make..

That sounds encouraging.

What about Argentina and Chile? How are those progressing?.

Well, as a combination they're profitable. Chile makes more money than Argentina loses. And the problem with Argentina is the government right now is making it very difficult to import anything that we make in China. They seem to be stumbling along. I don't think the Argentinean administration will be in power next year.

But right now, it's just a matter of recapitalizing the Argentina operation a little bit, which we'll do in the next month. That will greatly help their profitability. And the other thing will be them being able to import products made in China. So it's that they can service the market. It's a problem everybody in the world is having in Argentina.

And it's something that I -- will, I guess, disappear once the current administration disappears. And they've got essentially a vote of no-confidence last month..

Another factor in that also, is that Argentina just doesn't sell in Argentina, where there's admittedly, political problems there with imports. Our Argentine sales office sells in much of Latin America outside of Argentina. And that's doing pretty well..

Yes. Because we can import it through Chile, which is a great country to operate..

Yes. Chile has a very favorable and friendly client for business..

So while Argentina incurs the sales expenses, Chile incurs profits..

Okay. And is there any further development with Ansell....

I'm sorry, Doug, what?.

I'm sorry, is there any further development with Ansell? Do we think they still own their shares?.

I have no idea. We have heard nothing from Ansell over the month. And I don't know whether they own the shares or not..

I can only assume they still do because they would've had to file a 13D/A amended..

True..

And we haven't seen any filings. So, I assume it's status quo..

The next question will be a follow-up from Bob Sales [ph] of LMK Capital Management [ph]..

So if I look at the international business x Brazil -- just tell me if my math is right, it looks like it was -- went from $9.7 million to $10.6 million year-over-year?.

Sounds about right, yes..

And can you -- I know you talked about Chile.

You mentioned the countries, but can you just maybe rank order the revenue by country, which ones are the biggest and which ones are growing the most at the moment?.

Outside of Brazil and the U.S., the biggest one is the U.K..

Is the U.K.?.

I'm sorry, yes, China first, then the U.K., right? Right..

And what about from a growth standpoint?.

China is growing, they're both growing rapidly. U.K. is growing at 34%. China is domestically and I don't have a percentage in front of me, but it's probably in that same area..

And of that international business x Brazil, would you be able to share with us how much China is and how much the U.K.

is in that revenue?.

U.K. is maybe 30% of that. China is probably half of that..

50%? Okay. And then, my next question is where is the FX charge related to your P&L? It said FX in the U.K., I think it was FX in Brazil..

FX in Brazil is a different animal based on a quirk in the technical accounting laws. If you really want me to answer you, I'll be glad, but I guarantee you the drive for wholesale [indiscernible]....

Will that be a -- will it be an ongoing FX charge?.

In Brazil, the currency is the most volatile currency in the world..

No, no, no, the Indian currency is..

No, I'd -- well, India might give Brazil a run for its money, but I'd still put my money on Brazil. Even -- especially recently. In any case, India is tough too, but we have different accounting requirements because the -- it depends on how the functional currency of each foreign operation is defined.

Brazil, the functional currency for the accounting is the Brazilian real, but it has its main supplier as an American vendor, unrelated to us, who supplies the fabric. So they have payables denominated in U.S. dollars in Brazil.

And that combination is a different -- the foreign exchange gains and losses, mostly losses, in the way the currency is going is treated as a non-operating expense, whereas any other gains or losses are considered in operations and a part of SG&A..

Okay. And then, when I look at your -- when I just ballpark with the new debt tranches, strikes me that your interest expense doesn't look to be any higher than what your run rate was in the current quarter. Or am I mistaken that....

You have to realize we closed this on June 28. So I only have one month -- I only have the month of July at the new financing and the new interest charges. I have 2 months....

I was just taking the rates on the tranches of debt and figuring out annualized and quarterly and comparing it to your old rates.

So the straightforward question is, what do you expect your interest expense to be on a quarterly basis, with the new debt structures?.

I don't know if I have that on hand. The -- we have 12% on the sub-debt on $3.5 million. And I'm amortizing the $2.2 million originally, it should discount over a 5-year period, so that's -- so $12.5 million -- do the math here....

Well, we can follow-up on that. I don't want to put you on the spot to calculate over the phone.

Let's follow up on that after the call, if that's all right?.

Very simple. I can give you the components. It's $3.5 million at the coupon at 12%, the amortization of over a 5-year period of the original issued discount. And whatever my revolver is at 6.25%, the balance does fluctuate..

Understood. Okay. And then, you mentioned the -- I remember from the last call, you talked about the China and India movements were streamlining some of the facilities over there. And then you talked about the charges.

Can you just walk us through one more time what your -- what the charges were on the closures? And what those charges are a function of? Whether it is consolidation of facilities or something different?.

Okay. We had a plant in Qingdao, China. We closed the operations in the plant, shut down the operations, terminated the workers and that -- so we have shutdown expenses through termination. We sold it to a buyer who is in a different industry.

We moved out all of our -- we did not sell it with the inventory or the equipment, we cleaned that out and moved that to our other plants in China. So there's moving expenses.

We took some adjustments on the equipment transfers and we had about a breakeven on the actual sale itself, a slight gain pre-tax and there was a tax in China that wasn't an income tax that was figured in. So we probably had a $50,000 net loss on the actual sale. So it's a small amount -- modest amount.

Most of it was shutdown expenses, incurred over 2 quarters..

Okay.

And was there a charge related to India as well?.

India, we did -- we sold 1 of the 3 properties that we have. It's the larger of the 3. We did not book any gain or loss on that, we just deducted the proceeds from the book value at no gain or loss. And we left it with a fairly conservative valuation.

We still have 2 of the 3 plots, but the 2 smaller -- the smallest of the 3 remaining, in terms of real estate, and not much inventory. In fact, no inventory. So the remaining value was -- is about $200,000. And we should be able to either sell it and realize the book value for that, or we might even reopen the plants and use it....

Did you record any revenue in -- product revenue, in India, during the quarter?.

Not in the P&L. It's in our cash flow because we just charge -- we just took the revenue and just used that to reduce our assets. I did not take any gain or loss on the sale of that property. We have previously taken reserves and written it down to a realizable value. So now that we sold it, there's nothing going through P&L..

But my question is, are you doing business in India at this point?.

A very small amount. We have a sales office. It's a different business. The business we closed down was a glove manufacturing facility in the Noida Economic Special Zone. We have a small sales office just outside there, selling our disposables line as a sales office..

And the remaining inventory of gloves..

And there's some -- yes, there's some remaining inventory there that they're selling. So we do have some operations there. They're a very small amount of sales. And right now, that's still not breaking even. There is an operating loss coming through in India, not a huge amount..

Okay. And then I'm going to take a chance here that there's very few people on the queue, since I got on again. But I just want to circle back to Brazil. So Brazil, you had a number of issues. You had the settlement issue and you had some other country-specific related issues that impacted your operations.

And now you're down to -- arguably kind of a subscale, potentially a subscale operation in Brazil. So -- and I agree, there's no hurry on it.

But I just want to hear your thinking towards whether or not you can be profitable at these levels? Or whether you -- now that you've -- are down to this level, whether at that point, you will have the ability to regrow it?.

Yes. Right now, we have every -- our intention right now is to turn it around and regrow it and make it back into a viable operation again. And that is what we are doing now. If that doesn't work, we're giving it every effort and we're making it -- we're making a serious effort at that. That's underway. We'll give that sometime.

Again, without laying out any significant cash. And if we can do it great, and if not, we'll take a serious look at shutting it down..

Or just selling the assets..

Or selling the assets. Right..

And at this time, I'm showing no additional questions in the queue. I would like to turn the conference back over to Mr. Ryan for his closing remarks..

Okay. Well, we appreciate your participation on Lakeland's fiscal 2014 second quarter financial results conference call. As we are committed to delivering value for our shareholders, we believe Lakeland will continue to effectively manage its balance sheet, control expenses and execute a strategy for long-term growth. Thanks, again, and goodbye..

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines..