Christopher J. Ryan - President and CEO Gary Pokrassa - CFO.

Sheldon Grodsky - Grodsky Associates, Inc..

Good afternoon, and welcome to the Lakeland Industries, Inc. Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. (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 facts, which relate management's expectations regarding future events and operating performance and speak only as of today, September 10, 2014.

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

Thank you, Good afternoon to you all and thank you for joining our fiscal 2015 second quarter financial results conference call. We're going to provide a brief opening statement on the status of operations and on our financial results for the quarter. The call will then be opened up so that we may respond to your questions.

Now I'd like to discuss our operating strategies and the progress that has been made along with a view of our objectives as we move forward.

As we discuss our results of the second quarter and reflect on the first half of fiscal year 2015 we remain very encouraged by the global growth trends we see impacting our markets and by the successful strategies we have implemented to strengthen the company's operational and financial condition.

The progress that has been made should enable us to drive improved profitability from the leverage in our business. The profitability and leveraging aspects of our financial story were only partially evident in the second quarter as our sales growth on a consolidated basis was essentially flat.

International sales growth including Brazil remained intact. While the business mix and large order flows resulted in a modest decline in a year-over-year domestic sales. Sales growth was achieved in China, Asia Pacific, UK, certain Latin American regions, Canada and Russia and Kazakhstan.

Business activity remains robust and we anticipate increased global demand for the foreseeable future. During the second quarter we continued our strategy from the first quarter to increase spending on business development activities while aggressively managing cost to drive improved profitability.

We are beginning to experience the desired results as consolidated gross margin reached the highest level in the company's history. Gross margin worldwide was 32.8% in the second quarter of this fiscal year compared to 30.3% last year. After the end of the second quarter we completed the first phase of the refinancing of Lakeland Brazil.

This represents a significant step in establishing a subsidiary that’s financially self-sustaining while maintaining financial integrity of the parent company through the non-recourse nature of the subsidiary financing facilities although the lending environment in Brazil is more difficult lately due to the recent recessionary economy.

As we announced through an agreement signed with Multiplica, a private equity turnaround specialist based in Brazil with direct experience in the protective apparel business, Lakeland Brazil has been collateralized for and assisted with securing lending facilities in Brazil.

Our subsidiary received from Multiplica assistance in securing initial financing to alleviate cash flow constraints thereby enabling Lakeland’s Brazilian unit to grow its sales and potentially return to profitability.

Additional assistance from Multiplica is anticipated to take the form of but is not limited to, loan guarantees and security pledges on behalf of Lakeland Brazil to various financial institutions; strategies relating to payment of invoices, financing of accounts receivable, factoring in negotiations with suppliers and banks, and an internal operational assistance at the subsidiary level.

We've already arranged financial lending facilities that are being collateralized by Multiplica assets. These include several smaller loans which took effect on August 27 with cumulative value of approximately US $217,000.

This has allowed us to proceed with accessing raw materials which were held in customs warehouses, pending bonding and related payments. Now that we have the raw materials, we had begun production and delivery on outstanding orders which are incremental to the increased sales level at our Brazilian subsidiary.

Fees due to Multiplica and indebtedness incurred by Lakeland Brazil through this agreement are non-transferable to the parent company, Lakeland Industries, which will remain unencumbered by the company's Brazilian unit.

Lakeland Brazil remains an important asset in our global operations, yet it is important to remind investors that Lakeland Brazil has for the most part -- has for most practical purposes been separated from the consolidated financial performance of Lakeland Industries as it relates to commercial lender negotiations.

The agreement with Multiplica maintains this strategy and represents the very acceptable arrangement for parent company, risk management purposes and subsidiary level growth initiatives. This agreement effectively addresses two of the four elements of what has now been an 18 months transition and turnaround of our business.

The two elements are sales diversification and growth strategies and financial liquidity. As outlined in our first quarter call the other key elements of our transition are leadership enhancement and manufacturing and operational efficiencies.

Within financial liquidity in addition to the Multiplica agreement another point of progress that we announced in late July was the prepayment of $500,000 of subordinated debt due in 2018.

The prepayment results in a reduction of approximately 15% of the company's total outstanding amount under secured term loan credit facility which has been $3.5 million, exclusive of accrued paid in kind or PIK interest. The prepayment penalty has been waived by the lender.

In the area of leadership enhancement we have been focused on adding key members to our staff in Latin America, particularly in Mexico.

Mexico is becoming an increasingly important component of our global operations given the organic sales opportunities in that country and the strategic value of having major manufacturing operations to address growing demand in the Western Hemisphere.

With Mexico's new spending on oil and gas exploration with foreign partners we expect Mexico's sales to grow nicely over the next few years. This is in addition to a surging auto manufacturing market there. For both E&P and auto sectors our industrial and protective garments are ideal and have been used for years in many other geographic markets.

Now more than ever Mexico is expected to be a significant contributor to our global growth. We have realigned and upgraded the Mexican sales staff to accommodate the economic growth trends in that region. Our Mexico division also is playing a part in our manufacturing and operational efficiencies.

Related incentives include the sale of one of our China locations and moving of certain manufacturing that have been there to our operations in Mexico. Another development that took place early in the year was the closure of our facility in Pennsylvania. Production from this location was also consolidated into our facilities in Mexico.

Significant fixed cost savings as well as lower cost of goods sold versus Pennsylvania are now being realized.

While some of the incremental second quarter expenses in SG&A include the overlap and start-up of course associated with the changes I've just discussed we have been a beneficiary in another way, that is our manufacturing and operational efficiencies has helped to drive our fiscal second quarter consolidated gross margin to the highest level of the company's history.

Indeed we are quite pleased with the progress we are making in the successful implementation of our strategy. Before I conclude my remarks I would be remiss in not mentioning our contribution in dealing with the Ebola crisis. Last Friday U.N.

Secretary General, Ban Ki-moon laid out plans to set up an Ebola crisis center with a mission to halt the spread of the virus in West Africa countries in six to nine months. He is counting on public and private funding from around the world of some 600 million needed for supplies to West Africa.

Over 1,900 people have died and 3,500 confirmed and probable cases of Ebola have been reported since March. Mr. Ban said in this statement the number of cases is rising exponentially. The disease is spreading far and faster than the response. People are increasingly frustrated that it’s not being controlled. Lakeland stands ready to join the fight.

With our diverse global operations and the breadth of our protective apparel we are ideally situated to assess -- assist organizations worldwide as they handle Ebola.

Within the past several weeks Lakeland has provided suits that are being used by Doctors Without Borders in West Africa, specifically our ChemMAX 1 garments are being used based on their certification to EN 14126, the European standard for protective clothing for use against infective agents and ASTM F1671 certification for protection from blood borne pathogens.

Lakeland has the same certifications for MicroMAX NS and remaining ChemMAX products. Demand for our suits for these purposes will be incremental to the existing growth that the company is experiencing internationally.

The materiality of this incremental demand is yet to be determined but rest assured that we have the appropriately qualified and specified suits and the manufacturing capacity to supply these garments. For new shareholders the likely investment thesis is that of the turnaround. We’re trading at 16% below tangible book value at $7.78.

Once our Brazil subsidiary is stabilized Lakeland should start reporting sequentially increasing profitable quarters and price appreciation usually follows. That concludes my remarks. I will now pass the call to our CFO, Gary Pokrassa to provide a more thorough review of the company financial results for the second quarter..

Thank you, Chris. Lakeland sales worldwide were $24.6 million this year and $24.6 million last year. Excluding Brazil sales were $22.8 million this year compared to $22.9 million last year. There was sales growth achieved in China and Asia Pacific, UK, Latin America and parts of Latin America and Canada.

Gross margin worldwide was 32.8% compared to 30.3% last year. Excluding Brazil gross margin increased from $32.0% last year to 32.6% this year. And as Chris said the consolidated gross margin reached the highest ever for Lakeland. Operating expenses worldwide increased by $400,000 and increased as a percent of sales to 26.8% from 25.0% last year.

Operating expenses for Lakeland worldwide excluding Brazil increased by $500,000 mainly a result of foreign exchange losses in Argentina and ongoing ERP conversion in the U.S., higher amortization of bank fees resulting from the financing closed in Q2 last year and new sales staff in Mexico.

Operating expenses as a percent of sales, excluding Brazil increased from $22.5 million to $24.7 million. Operating income was $1.5 million this year versus $1.3 million last year. Excluding Brazil operating income was $1.8 million this year versus $2.2 million last year.

Brazil Q2 operating loss was reduced to $331,000 this year versus $881,000 last year. Adjusted EBITDA worldwide was $1.8 million this year versus $1.9 million last year. Excluding Brazil adjusted EBITDA was $2.1 million this year versus $2.7 million last year. Reduction in EBITDA was due to the operating expenses as described above.

The net loss was $400,000 or $0.07 a share compared to an income of $4.1 million and $0.74 a share last year. That loss this year included a non-cash tax charge of $325,000 or $0.06 a share for a dividend from the company’s China subsidiary of $500,000 or $0.08 a share charge in Brazil for labor litigation and a VAT tax charge.

Last year's net income benefited from a reversal of a deferred tax valuation allowance of $4.5 million or $0.79 a share.

Net income this year without Brazil and without the tax and dividend would have been $0.15 a share in Q2 and $0.22 a share for the six months ended July 31, compared with $0.10 a share in Q2 last year and $0.28 a share for the six months period last year, if we exclude the reversal of the tax allowance last year.

We prepaid $500,000 towards the subordinated debt with prepayment penalty waived.

We've completed the first phase of the refinancing of Lakeland Brazil and just again as a reminder and explanation the banking covenants are mainly based on worldwide adjusted EBITDA excluding Brazil and further there is a covenant prohibiting any new cash investment or advances from the parent company into Brazil.

The bank has structured this in a way that allows management the freedom to restructure in Brazil. That concludes my remarks. I'll turn the call back over to the operator to begin the Q&A session..

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question will come from Sheldon Grodsky of Grodsky Associates. Please go ahead..

Good afternoon everybody.

Let me ask the unmentionable question, is there any remaining arbitration or are there any remaining arbitrations going on in Brazil?.

No, arbitration, no. The arbitration was that one big issue that was contained and we have a settlement agreement on that, so no..

Okay.

There was another one in this quarter, wasn't there?.

Well, wait, you asked about arbitration. There is always labor issues which are not arbitrations. That’s a different issue. There is always a roster of maybe 10 or 15 labor issues in Brazil. That’s the way they do it. In Brazil there is no, there is [inaudible] required severance charges.

What’s very typical is if you fire somebody they will just take you to court and you end up settling for a small amount. These are all small with one or two exceptions that we're working on and one of them was the one that we announced..

What happened to sales in the U.S., it sounds like that was disappointing?.

They were a little disappointing on -- there were two -- three divisions that were up and two divisions that were down. The two divisions that were down were down more than the three divisions that were up.

One of them was the reflective division where we had a large utility that came in last year and last year’s sales included the complete turnover of their stock and now it's still a very nice customer, it's a very large customer but now we are more into maintenance sales as opposed to -- and replacement sales, so that was one big issue..

One more quick question and may be it won't be a quick answer but margin improvement, is that basically replacing the supplies that you used to get from DuPont plus your own manufacturing?.

Primarily if we went -- track back 10 years from today gross margins were about 20% selling DuPont (inaudible). So now they are up to 32%. And we hope to grow them even a little bit more but it’s by introducing our own products..

Also cost reduction, the reflective division which had the move of the plant from Pennsylvania just started to show the results of that in lower operating costs..

Thank you..

(Operator Instructions). And at this time I am showing no additional questions. So this will conclude our question-and-answer session. I would like to turn the call back to management for closing remarks..

We appreciate your participation on Lakeland's fiscal 2015 second quarter financial results conference call.

As we are committed to delivering value for our shareholders we believe this is best achieved for Lakeland Industries through the continued implementation of strategies for effectively managing its balance sheet, controlling expenses and capitalizing on long-term global growth initiatives. Thank you again and good bye..

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