Christopher Ryan - Chief Executive Officer Teri Hunt - Chief Financial Officer.

Alex Fuhrman - Craig-Hallum Capital Group Jeffrey Briggs - Singular Research Geoffrey Scott - Scott Asset Management Denis Amato - Ancora Advisors LLC.

Good day and welcome to the Lakeland Industries, Inc. Fiscal 2018 First Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question.

[Operator Instructions] 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 speaks only as of today, June 14, 2017.

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 factors in the company’s filings with the Security 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. Please note, this event is also being recorded. At this time, I would like to introduce your host for this call, Lake Industries’ Chief Executive Officer, Christopher J. Ryan. Mr.

Ryan, you may begin..

revenue grew by 13%, gross profit improvements of 26%, operating expense decreased nearly 8%, operating income increased $2.3 million, net income increased significantly from just about break-even to $1.7 million, earnings per share were $0.23 against break-even in last year’s comparative quarter, and free cash flow was $2.2 million in the first quarter of fiscal 2018 versus $740,000 in the first quarter of fiscal 2017.

We have been leveraging the advantages of our unique operating platform to deliver top line growth in excess of our addressable global market, while demonstrating operating leverage as one of the most advanced and lean PPE manufacturers with a global presence. We peg our global market growing at an estimated annual rate of between 2% and 7%.

At the midpoint of that range, our growth in the first quarter was nearly three times the industry. We’re performing well and have been positioning the company to take advantage of the significant opportunities for continued growth on a global basis.

Both domestic and international revenue increased in the first quarter, as the dollar modestly strengthened from the prior year in many of the markets in which we operate, while consolidated in-country sales and local currencies increased from the prior year period.

Among the more interesting points within our growth story is the strong improvement in sales albeit on a smaller scale for our Latin American operations.

And as we’ve noted in the past, takes about 12 to 118 months for new salespeople to build the book of business that gets them to the point of hitting their sales growth and breaking even and earning commissions. Similarly, it may take that long or more to get a new geographic business unit to profitability.

While we saw terrific sales growth for our relatively new Latin American operations, all of our major operating regions were profitable in the quarter. In the U.S., approximately $8.5 million in domestic sales for disposables and chemical product lines remain flat in the quarter, primarily due to continued weakness in the oil and gas sector.

However, our profitability was enhanced as we transitioned away from lower margin subset markets. We have been focused on allocating our resources toward higher margin products using modifications of existing product lines to create new, higher margin garments sold into vertical markets.

This capability is somewhat unique to Lakeland, because we own our own manufacturing facilities and employ a highly trained workforce for expanding five countries in three continents. Our goal design and manufacturing team is responsible for developing our cleanroom product, which we are really excited about and spoke out during last quarter’s call.

Products for the utilities market in the U.S., including arc and FR products, new dual certified fire gear and new sleeve product programs with the item made of a 100% armament. The cleanroom product is directed primarily at the pharmaceutical industry.

The product is an extension of our Disposable Garment segment, but we’ve made enhancements to our traditional line of disposables. We also recently hired specialized salespeople to bring it to market, given this product is directed at new verticals for Lakeland.

Lakeland is making great strides to be and even more recognizable and branded player, with digital marketing campaigns and online initiatives that showcase our new products. The investment we have been making in new products and marketing strategies are having a positive impact on our business.

Yet we have not lost sight of the importance of effectively managing the company. Along with the top line increases, we have delivered higher gross profits and gross margins as a percentage of revenue in the first quarter.

These performance measures were driven by sales of higher-margin products targeted at new vertical markets and more favorable product mix along with successful labor and raw material cost management. Operating income improvements reflect lower costs overall. For a second consecutive quarter, we decreased our year-over-year operating expenses.

Higher revenues and improvements in our cost structure have allowed us to further strengthen our balance sheet even while we invested in our future. Inventories declined by 10% from the beginning of the year, while methodically introducing new products, which have seen gradual ramping of sales.

I should note that inventories levels declined by $5.3 million during fiscal 2017, though in the current fiscal year, we expect inventories to trend up with approximately 5% as a result of all the new product introductions.

Free cash flow absent exigent revenue generating circumstances came in at the highest quarterly level in years at $2.2 million, an increase of approximately 200% from the first quarter of fiscal 2017. And the company’s cash balance at April 30, 2017 was in excess of $11.8 million, and total debt was reduced to $3.1 million.

Our outlook for improved performance was evident to us in mid-2016 when our Board authorized a $2.5 million stock repurchase program. Through the end of the first quarter, we did not repurchase any shares, but had the flexibility in cash and our board and bankers approval to opportunistically repurchase shares.

In conclusion, Lakeland’s strategic imperatives directed at improving our global presence and competitiveness, while executing with operational effectiveness are being executed upon with success.

As a result, we delivered as expected with growth and profitability in cash flow, which benefited from our ability to take greater control of our costs and expense levels.

At the same time, while we continue to optimize our balance sheet, we have been able to enhance our position through investments in product development, additions to our global sales force and penetration of new vertical markets, which is the strength in balance sheet, all major global operations turning a profit in the first quarter and productivity and market share enhancement in place, we are well-positioned for continued growth during the balance of the year and beyond.

That concludes my remarks. I will now pass the call to our CFO, Teri Hunt to provide a more thorough review of the company’s financial results.

Teri?.

Thank you, Chris. Yes, thank you, Chris. The following addresses my review of the first quarter of fiscal 2018 ended April 30, 2017. Net sales from continuing operations were $23 million, up from $20.4 million for the prior year period.

As compared to the year earlier periods, overall sales volume was higher as economic growth seems to be positively impacting the industrial sector on a global scale despite continued softness in the oil and gas industry.

Currency headwinds in several of the foreign countries in which the company has operations, partially offset the growth as reported in USD on a consolidated basis. Overall, international revenues increased by 25% year-over-year and contribute 45% of reported consolidated revenues, up from 40% last year.

Gross profit increased $1.8 million to $8.6 million for the three months ended April 30, 2017 from $6.8 million for the three months ended April 30, 2016. Gross margin increased to 37.3% for the period ended April 30, 2017, from 33.3% for the period ended April 30, 2016.

Gross margin for disposable products, the company’s largest product line improved 2.1 percentage points despite last year-over-year volume in the U.S. as the company continues to contain cost, maximize production efficiency and realizes the benefits of the aforementioned selectively reduced areas of revenues.

Further driving gross margins is the introduction of higher-value products to new vertical markets, including FR, arc rated, turnout gear and specialty disposables, which Chris spoke about earlier in this call.

Reflecting the company’s ongoing efforts to reduce cost and operate more efficiently, operating expenses decreased from $6.6 million for the quarter ended April 30, 2016 to $6.1 million for the quarter ended April 30, 2017.

Operating expense as a percentage of net sales was 26.5% for the three months ended April 30, 2017, an improvement from 32.4% for the same period in FY 2017.

The main factors for the decrease in operating expenses relate to administrative and management compensation modifications, partially offset by increased commissions based on higher sales volume and salaries from the sales force additions.

Operating income increased to $2.5 million in the period from $169,000 for the same period last fiscal year, mainly as a result of stronger sales volume and reduced operating expenses. Operating margins were 10.8% for the three months ended April, 30, 2017, compared to 0.8% for the three months ended April 30, 2016.

Net income increased to $1.7 million from break-even for Q1 FY 2017. The significant improvement from last year reflects our operating leverage on higher sales and reductions in our cost structure and other strategies to enhance profitability.

As a reminder, relating to our tax rate, we don’t expect any significant changes year-over-year in the effective tax rate. We do have the benefit of the tax credit from the worthless stock deduction relating to our exit from Brazil. So there should not be cash taxes in the U.S.

for the next two years, depending on our profitability in these periods and assuming no changes in the U.S. tax code. We do, however, pay local taxes on certain country operations when those operations are profitable on a local basis.

On the balance sheet, cash and cash equivalents at the end of the fiscal quarter of the first quarter of fiscal 2018 increased by 14% to a $11.8 million from $10.4 million at the beginning of the fiscal year.

At April 30, 2017, the balance of borrowings under our revolving credit facility stood at $2.4 million, down about 51% from $4.9 million at the beginning of the fiscal year. For reference, we’ve reduced the $15 million revolving credit facility by $4.6 million in the last fiscal year.

Total debt outstanding at April 30, 2017 was $3.1 million, down from $5.8 million at January 31, 2017 and $13.4 million at January 31, 2016. In May 2017, the company entered into a new loan facility providing for greater availability and improved terms.

The company incurred capital expenditures of approximately $141,000 during the first quarter of fiscal 2018. Total CapEx for the fiscal year is budget at approximately $1.5 million, which includes the cost for a phased global roll out of a new enterprise resource planning or ERP system.

With our current asset at the end of Q1 FY 2018 decreasing primarily from lower inventory and partially offset by the higher tax balance and our current liability decreasing at the beginning of the year, our current ratio improved to 5.9 to 1 from 4.9 to 1.

Total shareholders’ equity also improved from the beginning of the year, going from $71.5 million to $73.2 million as a result of profitability. That concludes my remarks. And I’ll turn the call back to the operator to begin the Q&A session. Thank you..

Thank you. We will now open the floor to questions. [Operator Instructions] Our first question comes from Alex Fuhrman of Craig-Hallum Capital Group. Please go ahead..

Great. Thank you very much for taking my question, and congratulations on a really nice quarter here. One thing I wanted to ask about is, oil and gas sounds like that’s probably going to remain under pressure as long as oil is down here.

What are some of the other sectors that have been picking up the slack for you in the first quarter? And then, assuming there’s no real reason to think that the oil and gas sector is going to come back, perhaps this year.

What are some of the other sectors that you’re focusing on that you think can make up the difference throughout the balance of 2017?.

Well, it’s basically been general business demand. The economy is up. GDP seems to be running at around 3%, which is way up from where it was. We’re just seeing a lot of demand all of a sudden come out of nowhere, because it was pretty slow for four or five quarters.

Growth is going to come from the new verticals we’re going into, which is cleanroom and utilities. That’s where the real organic growth is going to come over the next two to three years. But we were surprised, China is really picking up the only area that was slow in probably globally was Europe. And I think that demand is just sitting back.

What we saw is, I think a lot of distributors, it’s easier to gauge in the United States make a whole bunch of small orders for the last year. And then all of a sudden, they started coming back making very, very big orders this spring.

So things have gotten back, I guess, to somewhat normal in the economy, at least, in the United States, but it’s globally that the oil patch really hit some of the economies that are dependent on it, Russia, Kazakhstan, Mexico, we operate in those countries.

But a general business has come back roaring sort of in every other area other than the oil patch..

That’s really helpful, Chris. Thanks.

And then, I guess, thinking about Latin America and the business that you’re building there, what are the sectors that you’re selling into in Latin America? Are there any big differences between there and the rest of the world, in particular, I guess, curious about the exposure to your business in Latin America to the oil and gas sector? And then I’m curious, what do you envision being your best markets there within Latin America?.

Well, Argentina and Chile did really well this quarter also. Most of their sales are in what we call, fire retardant garments. They’re going out to big names, large multinationals, but business has really picked up there. Business is picking up in Mexico. Business is picking up in Russia.

So it’s across the board other than Europe and it’s across the board about 5% to 15% growth this quarter..

That’s helpful. Thanks. And my last question just looking at the strong cash flow that Lakeland generated in the first quarter, it looks like some of that was from the lower inventory levels. This is the lowest, I think, we’ve seen inventory in, at least, a couple of years.

Does that need to be replenished as the year goes on? I know, you’re able to take down inventory as quite a bit throughout 2016, just wondering where we should expect what a normal level of inventory for you as….

Well, normal level might be about a $1 million or $2 million higher than now, because we will have to build inventories to get into once we really penetrate the utility sector and the pharmaceutical sector for just cleanroom disposables. We will pull up inventory a little bit, but I’d say, we got by the skin of our case. We didn’t lose any real sales.

This is the way it should be, okay? But one has to debate whether you – if you go after new customers or new market, one of the ways to do is to be able to deliver tomorrow. And you also have to be in that position to work within the Amazon market and the Alibaba market. So you do have to carry inventory.

But if you do, you want to get a much higher margin on it, if you’re forced to carry it. Otherwise, most of the industry can deliver – deliveries are about eight weeks, turnout gear will be a good example. Normally, when you put it in order for our municipal fireman’s turnout coat, you said, we can deliver it in eight weeks.

With disposables, it’s a different story. A lot of people seem to think that they can just get them overnight. But inventory shouldn’t be – should be up by about not this summer, but come fall by about $2 million, and it’s primarily, because we want to take – we want to really take advantage of opportunities to break into new verticals.

And one of the ways you do that is to respond to the instinct gratification of buyers these days if I have to have it yesterday. So that’s my answer..

That’s great. Thank you very much, guys..

Our next question comes from Jeffrey Briggs of Singular Research. Please go ahead..

Hi, guys, very good quarter, great to see. So my question has to do with the historical line for the cleanroom application. Can you just kind of give a quick update? I know, we discussed it for about – while about the sort of cleanroom [Technical Difficulty]..

I didn’t hear that last part, but….

There’s some different distributors that you’re getting into, so to distribute our product line in comparison to some of the other products.

Could you describe sort of how that works differently for this industry, compared to the other lines you’re selling to? And is it different companies in the distribution, or are there specific people that you don’t accept from and how does that work?.

Okay. Well, we’re talking about cleanroom disposables. The primary difference between them and why our regular disposables is that, they’re irradiated with nuclear radiation to completely kill any bacteria, any virus, any spores, anything that’s alive. Then they’re packed in a cleanroom, they’re packed very differently.

But when you get – what you’re really asking about is, what’s the distribution? And the distribution is different than, say, the typical industrial distributors. I mean, we’re going to distributors who basically distribute to pharmaceutical companies. So these are people who do things like this are Medline, Kimberly-Clark.

But most of the distributors are really specialty hospital medical type distributors as opposed to our historical industrial distributors. So that’s the real difference.

And we have hired people who are experienced in this industry, no – have called on these people before, so it’s really just getting in, getting them tested, which is a long period and getting a major, major reference from one of the major pharmaceuticals.

It’s easy if Bristol-Myers is buying your stuff for Merck to say, well, it probably works pretty well. They’ve tested it. They’ve been through all those things. It’s a lot easier than for Merck to say, yes, we will try it too. I mean, it’s a long slows sell, but there are not a lot of competitors in this industry, and the margins are very, very high.

And there has been a lot of demand from some of the pharmaceuticals to have a back up. And that’s, because the other two players have on occasion not delivered. And when they don’t deliver, then they have to close down a laboratory that might cost them a million dollars a day to close..

Got it, that’s helpful. So basically, yes, it’s the specialty distributors as opposed to – they’re not buying the stuff, something like that..

Right. I mean, like the chasm might be one that’s more into the medical..

Right, right, yes, [indiscernible]..

Okay, thank you..

Our next question comes from Geoffrey Scott of Scott Asset Management. Please go ahead..

Good afternoon, Chris, solid quarter..

Thank you..

Couple of questions. You talked in the press release about the supply chain issues for Latin America, and you said, they were resolved.

Can you put a lot more color on exactly what the issues were and how it was resolved?.

Okay. The country of Argentina for about two years essentially barred all imports, period. They broke every treaty they had with every country in the world, because they were running out of hard currency. And as they got closer and closer and this also sort of coincided with the bond issue that they wouldn’t repay on the bond that they owed.

So they were running out of hard currency and they just put a halt to all X imports into the country other than key things like oil and food that they needed. So they were just telling us, hey, you can’t import anything. So, that really hurts. We quickly started making internally and domestically and we still are.

But a lot of those essentially when the new government came into Brazil, they lifted most of the import restrictions. So things got considerably better over time. I think, Argentina grew at about 200% this quarter from last quarter, last year when things were just coming out of the block. So they’re doing quite well, they’re profitable.

Chile’s never really had any problems and were completely out of Brazil. And that country just keeps going down the tubes further and further. So I guess, we’re sort of glad we did get out. It’s almost impossible – there’s very little business going on there right now.

So without any business in Brazil and Argentina, I guess, sort of on the men’s, we’re doing quite well in South America. And I hope it continues for another couple of years. And I think it will in the countries that use capitalism as opposed to countries like Venezuela..

The Argentina products that you’re selling, are they manufactured in Argentina?.

We’re manufacturing a lot of them in Argentina, and we now can bring stuff in from other places like Mexico or China, whereas for almost a two-year period, you couldn’t bring anything in..

Okay, that was very helpful. The Far East revenue was a surprising gain.

Was that purely a reorder book from existing customers, or if the salespeople that you hired out there ahead of schedule?.

I think, while we’ve hired a couple of new salespeople in Southeast Asia. But essentially Chinese, the Chinese economy has picked up. It’s – and we’ve seen nice sales increases in the Chinese economy. But we’ve also put on a number of new salesmen in places like Malaysia and Indonesia and their sales are beginning to pick up also.

I mean, we’re starting from a low base so….

Are they ahead of schedule, or pretty much on schedule?.

I think they’re ahead of schedule in two of the countries and on schedule in one..

Okay.

$23 million revenue for this quarter, what are your expectations for Q2 and part of that, which geographic area will be most problematic and which will show the largest growth?.

Q2 seasonally will be a little bit less than Q1 simply because of the summer months. July and August tend to be the months, everybody in the northern hemisphere takes vacation. And if they’re not working at a factory, they’re not wearing our garments. So Q2 will probably fall just a little shy of this quarter on the revenue side.

Earnings and margin should remain the same okay? Third quarter, it seasonally will pick up again, get close to this quarter, if not exceed it. And if we exceed it, it will be because of new product introductions and some new verticals.

As I said, the only thing that’s sort of sitting back there that could pop on is the European market and it may very well, but not in the second quarter. The Europeans take the whole month of August off so..

Yes, they do, you’re right. Okay, last question, the payroll administration was down $200,000 for the quarter, which is $800,000 annual run rate. That sounds like a huge, huge number.

Is that going to be recurring, or was this…?.

No, it’s not going to be recurring our COO retired in March and one or two other people retired. But we’ve also put on some new salesmen. So but it is – this is not going to go down any further, it’s not going to continue. I mean, it will continue at this rate..

The press release talks first broke out the officers salaries going down and it was different from the $200,000 decrease in payroll administration you talked about?.

Well, people did not get the bonuses that they got last year..

Yes, we had a reversal on deferral too, because their bonuses were reduced and there was a big pay that left last year that’s not there now..

Were they bonuses in payroll administration? I would have thought they would been in officers’ salaries?.

Well, they paid – they’ve been about not everybody is an officer salary, because they’re not officers. Payroll….

Okay.

Payroll administration, I guess, I define is something else?.

Probably because there’s a lot of corporate and direct of the management..

That’s in payroll administration. Okay, thank you very much. I appreciate. I’ll hop off. Thanks..

Thank you..

[Operator Instructions] Our next question comes from Denis Amato of Ancora. Please go ahead..

Hi, Chris, great progress..

Thanks..

I guess, I have one question. I’ve been seeing some spotty recent news reports about some limited return of Ebola and also bird flu.

Have you seen any reaction from anybody building in that regard, or what do you think about that?.

No, not really. I mean, Ebola has broken out a couple of times on the African continent in the last two months. Bird flu is sort of constant, it’s really how far does the epidemic go. Ebola really blew up back in 2014, now they jump right on it the minute it breaks out.

So it’s – I think they only had 200 reported cases of Ebola in Africa over the last three months, whereas the last time it occurred, it killed something like 4,000, 5,000 people, so big difference.

Bird flu is the same thing either they hop right on it when it shows up immediately, or they don’t do anything and it spreads all over a state to multi-state, which is what happened in the United States in the spring of 2015. So no, we haven’t been seeing much on that at all. There’s sporadic outbreaks, they’re not big.

It’s when people do not jump on them immediately that they spread and then they become uncontrollable..

Okay.

So you haven’t benefited from any of that recently?.

Not at all. Total of zero of that in this quarter, and really from the last three quarters..

All right. Okay, good. Thanks..

There are no further questions. I’ll turn the call back to management for closing remarks..

Okay. We appreciate your participation on Lakeland’s fiscal 2018 first quarter financial results conference call.

As we are committed to delivering value for our shareholders, we believe that this is the best achievement 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.

We have made significant progress in the first quarter toward optimizing our balance sheet, improving our cost structure and importantly, enhancing our competitive market positions. It’s our intent to continue on this path. Thank you, and goodbye..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..