Good day everyone and welcome to the Lakeland Industries Inc. Announces Q3 Fiscal Year 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note that today’s event is being recorded. At this time I would like to turn the conference call over to Mr. Christopher J. Ryan, CEO. Sir, please go ahead.

Good afternoon to you all and thank you for joining our fiscal 2017 third quarter financial results conference call. We’re going to provide brief opening statements on the status of operations and our financial results for the quarter. The call will then be opened up, so that we may respond to your questions. Before we go any further, as you may know from our press release issued earlier today and from our most recent quarterly calls, we present our financial results based on our continuing operations. That will be the case with today’s conference call unless otherwise specified. The continuing operations financial results reflect our ongoing business following our exit from Brazil, which was effectuated in the third quarter of fiscal 2016 with additional issues addressed thereafter. Now I’d like to discuss our financial highlights, operating strategies, and overall business with a view of our objectives as we move forward. Our performance in the third quarter of fiscal 2017 continued the momentum we began to experience in the first quarter of this year. This is evidenced by our consolidated revenues of $23.2 million in the third quarter, increasing 4% from $22.3 million in the second quarter of fiscal 2017, and by nearly 14% from $20.4 million in the first quarter of our fiscal 2017. Although there have been economic challenges and sluggishness in the industrial sectors around the world for over a year, particularly for oil and gas markets, we have been successful in positioning Lakeland Industries towards next phase of growth. This is what I talked about on last quarter’s conference call and we have executed on our plan. I’ll talk more about that – this today. The company’s financial performance in fiscal 2017 third quarter ended October 31, 2016 reflects the strategic advantages of our unique operating platform,…

Thank you, Chris. The following addresses my review of the third quarter of fiscal 2017 ended October 31, 2016. The fiscal 2017 financial results that I discuss on this conference call will be from continuing ops unless otherwise noted. Net sales from continuing operations were $23.2 million, down from $24.9 million for the prior year period. Third quarter revenue of $23.2 million was 4% higher than $22.3 million in Q2 FY 2017, 14% higher than $20.4 million in Q1 FY 2017 and 13% higher than Q4 FY 2016. So our most recent quarterly revenue was the highest since the third quarter of last fiscal year, which marks the fourth consecutive quarter in which we had higher margin contributions of emergency sales associated with Ebola and/or the bird flu outbreaks. Although we reported the highest revenue in four sequential quarters, we continue to be subject to softness in the global industrial sector, partially resulting from the oil and gas industry, as well as currency headwind in several of the foreign countries in which the company has operations. The gross margin was 37% this quarter, compared to 37% in Q3 of FY 2016. In addition to lower sales volume in the most recent period, which weighed down margins, last year’s same period gross margin was favorably impacted by higher margin sale of products used in dealing with the bird flu, which we consider to be somewhat one-time in nature thus making comparisons difficult. As compared to the first quarter of the current fiscal year, the third quarter gross margin, as well as the second quarter gross margin of over 38% benefited from higher revenues and included cost reductions relating to a reduction in force in the U.S. implemented in the first quarter to move production to more cost effective facilities in Mexico…

[Operator Instructions] And our first question comes from Mark Rosenkran from Craig-Hallum. Please go ahead with your question.

Great. Thanks for taking my questions and congrats on a really solid quarter.

Thank you.

Just a real quick. I was hoping you could give a little more on the customer inventory levels that’s been kind of an issue in the prior quarters. Where do you kind of see those? Do you think they’ve stabilized a little bit, or how do you kind of see the order flow, as we enter into 2017 here?

In terms of inventory levels…

Yes.

We anticipate they’ll rise some in Q4, not significantly as a rule. We have inventory in the pipelines right now, preparing for Chinese New Year, and then going into our – going to spring, which is generally one of our strongest times in terms of volume. There’s a kind of a change in the mix if you notice between raw materials and and finished goods and then there’s more raw material in the pipelines and finished goods, which would indicate that is the case, as we move into our busy season.

Okay, great. And then on the new geographic markets you announced in South Korea and Indonesia. Could you just discuss a little more on the opportunities you see there and kind of what’s the size you can see that coming in the next, two, three, four years down the road?

Well, that was virgin territory for us. We’ve sold into those countries previously, but now we have actual salesmen in those countries. Southeast Asia is growing a lot more quickly than Europe or the United States. So there the areas are really greenfields, and they’re also less expensive to operate in than the United States or Europe So you get more bank for your sales buck in terms of investment in those countries.

Okay, fair enough. And then last question for me, just on the U.S., another solid quarter. Just kind of describe where you see the main opportunities as we enter 2017 here, you’ve been pretty successful across a lot of new verticals and focusing on new customers, where do you kind of see the main focal points as we enter the new fiscal year here?

Well, the main focal points will be continuing block and tackle sales on the new products that we started up over the last year or two. And that is primarily looking at how far into the utility industry. It’s just block and tackle sales. One of the salesman we did hire is also a specialist in that industry and we only hired him recently. So we don’t expect him to be really profitable until about a year from now.

Okay, that’s helpful. Thanks for taking my questions.

Our next question comes from Shoon Huggett [ph] who is a private investor. Please go ahead with your question.

Hi, everyone. You hired a significant amount of new salespeople in those areas that in those greenfield areas you described. When do you expect their sales efforts to have a significant impact on top line revenue?

About a year.

A year. Do you have an idea of what kind of sales impact they will have?

Well, I think starting in about a year from now, you’re going to see organic growth of the consolidated global sales increased by about 10%. Now a lot of that will depend on the economy The GDP is the global countries that we really operate in. And if it’s really slow and we continue to have rising dollar and oil continues to stay 50 or below, that could be 8%. On the other hand if the United States GDP takes off, that could be 12%. So it’s somewhere between 8% and 12%, so I would like to say 10% organic growth, you’re going to start seeing about this time next year.

And have you seen impacts of the rising price of oil, any indications from purchasers that they might ramp up purchases or stock up on their inventory levels, any indication so far since the announcement a few weeks ago?

Not quite yet, because at $50 it’s good for the Permian basin, but it’s not good for Gulf offshore oil drilling. And a lot of the drillers have really basically lowered their operating profit level. But as an easy way to say, you’re only – people only started hiring workers back at the rig – the exploration rigs. When you’re going to see the price of oil stay above $50 for, at least, a couple of months, then the Gulf will probably go on once oil is above $60 for a couple of months. So it’s going to be very slow. You’re not going to see a lot of these oil companies hire people back probably for three to six to nine months.

And in the next few quarters, are you targeting zero debt balance, or is the strategy of paying down debt going to continue, or are there other uses for that cash that will be coming up CapEx programs or share repurchases, acquisitions perhaps, can you comment on that?

We’ll continue to drive debt down, but we’ll also continue to invest in inventories in these new products that we’re going to be offering over the next year. On CapEx?

CapEx, we are looking at a global ERP solution that will – we still don’t anticipate CapEx exceeding $1 million in the next year, even with the global ERP implementation and some of the growth initiatives that we’ve taken on.

Okay, that’s helpful. Thank you, all.

Our next question comes from Jeff Briggs from Singular Research. Please go ahead with your question.

Hi. So this is a little bit of a follow-up on the comment you made sort of about the 8% to 12% organic growth. And so, there’s a couple of things that come from, it could be from new products, growth in existing products, or geographically. Can you comment a little bit on sort of what the main driver you see of that organic growth, is it sort of growing existing product lines, or is it predominantly the new products?

It’s going to be growth in new products and probably growth in international sales.

Okay.

In fact, our international sales picked up this quarter.

And then as a little bit of follow up on the international side. So you mentioned sort of some of the strong dollar hurting the dollar impact after you convert those sales back to dollars on top line growth. Are there any additional opportunities in terms of – I know you talked about moving some production to lower cost manufacturing areas. Is there any additional opportunity to lower production costs or cost of goods sold with current suppliers, as the dollar gets stronger against those currencies?

Yes, that automatically happens. I mean, as the dollar strengthens, it does two things. It makes our manufacturing cost lower, but it makes our sales lower also okay. And we – since we’re operating all over the world, it’s hard that you got to go country by country. But yes, we plan on lowering our manufacturing costs for getting currencies okay, by expanding further in India, which we have done. As China becomes more expensive, India is – one of the answer is, Vietnam is also another answer to lower actual manufacturing costs. Did we lose everybody?

You actually cut out for a minute there, but you’re back now.

Okay.

Okay.

India is – right now, India and Vietnam are our answers for lowering manufacturing costs despite what the currencies do.

Okay. Thank you.

[Operator Instructions] Our next question comes from Geoffrey Scott from Scott Asset Management. Please go ahead with your question.

Good afternoon. A couple of follow ups on the the additional salespeople. For the three in the U.S., you said, one was going to focus on the utilities. Are the other two going to focus on new verticals, or better geographic coverage?

New verticals.

Can you tell which ones?

Well, it’s fire, utilities and those three and we’ll probably be hiring another one in the United States next year and one in Germany next year. And the three guys in Southeast Asia, they’re pushing all products.

Okay. Going to Southeast Asia, of the four countries you mentioned, which one will be the first to get up to your target sales goals, and which one do you think will be the laggard?

Malaysia will be the first one and probably Vietnam will be the laggard and that’s based on the time that these salesmen have had to run with the ball.

Okay, all right. In both the U.S. and the international, you said it will take about 12 months to start seeing some reasonable revenues. Is that because the sales process, is that long, or is that because once a customer has decided to change to your product, they have to run down their existing inventory before they can buy meaningful amounts of years?

Both.

Is either one more…

It’s a balancing act, more so, it takes a while to get the customer comfortable enough to start put in his first PO and then you generally have to wait, at least, three months while they run down their current inventory. So it’s really both, that’s why it takes about a year. This is an industry that people do not make quick decisions.

So it’s essentially six months for a sale decision and then six months to run off inventory, 12 months before you start supplying?

It’s more like nine months, three months to run off their inventory.

Okay. So nine months from now, you’ll have a much better idea of your degree of success?

Yes, we will.

Three months you will not, six months, you may or may not, nine months, you will?

Yes. And we’re – we’ve got seven people this year with two more next year. So and they’re all being hired at different rates. Next quarter, I’ll try to tally that up for you now that I know, you’re asking this question. I can actually sit down and maybe do some percentages for you.

Okay. Chris, I look forward to the call. Thank you.

Okay.

[Operator Instructions] Our next question comes from Larry Negrin. [ph]. Please go ahead with your question.

Hi, Chris, a pleasure to talk to you guys. And my question, as I’m looking at the balance sheet, specifically the property and equipment and the assets held for sale. And I’m curious, I’m assuming it’s not a reduction of $730,000 in depreciation between for the property and equipment. So I’m curious how much of the property and equipment account is actually property, real property that the Corporation actually owns? And what also with regard to the assets held for sale, what was actually sold in there, because that had a decline of about $125,000. And then if you don’t mind, I’m curious for the amount of property that’s probably on here as part of that property and equipment that’s being shown obviously at a historical cost, what would you say the fair market value of the real property would be that the company owns? Thanks.

With respect to the asset held for sale, that is a property that our corporate area still holds in Brazil, it’s land, and a building. And we have – we’re responding to the – what we perceive is the market value there, the management estimate was reduced due to the economic situation in Brazil. So we’re writing that that property down to what we believe is market value. So we’ll probably take it down another $75,000 or so in Q4, which we believe is appropriate thing to do with that equipment. As far as property and equipment in other places, we have, of course, we have machinery in the U.S. and property in the U.S. and Alabama. We’ve got a facility we own in Weifang, China. We have a Mexico property that we own, as well as equipment in both of those places and the manufacturing facility in India and the warehouse and office space in Canada. So with respect to these properties, I don’t believe we have any properties anywhere else that don’t reflect something approaching fair market value on – currently on the books. We don’t routinely shop our equipment, because we’re not looking to sell it and we haven’t shopped any of the properties, because we’re not looking to sell those either, but I don’t know…

Well, the only – the reason I was asking was really more a curiosity on the actual, should we say, cost basis versus a fair market value based on stock price?

Well, I think the property that we own in China, we’ve owned it since 1996. Property you don’t depreciate the raw property, but the value of that property has gone up. We don’t do mark-to-market on real estate. But I think it’s fair to say that that what we have in China is a 50-year lease. That lease is assignable. We had a factory in Qingdao a couple of years ago that we sold and we signed the lease and we made a profit on the sale. But this property is probably worth three or four times more than what we paid for it.

Okay.

Simply, because we’ve owned it for 20 years, and property values have expanded in China. With Mexico, probably worth the same; U.S., probably worth a little bit more; in the U.S., real estate prices haven’t boomed, but they’ve gone up 1% or 2% a year.

So if you were actually valuating the stock using fair market value, should we say, where it closed at $11.40 today, how close would that theoretically be if the asset, especially the real state was priced at its fair market value? I mean, would the book value – I mean, would the stock, the value of the stock be closer to $12, $13, or are we taking – is book value somewhere around the $10 or $11?

Well, the tangible book value is, when we look at the numbers is what $9.20, $9.75, okay. In order to get rid of the real estate, well, you could do sale leasebacks without closing down the company. But I believe if we were to close down the company and liquidate it and we had two years, you’d take a hit on the inventory, but you’d make a lot of money on the real estate. So I think it could be liquidated for $8 a share. If it was just sale leaseback, you could probably pick up some significant book value.

Got it. Thanks, Chris.

Okay.

And ladies and gentlemen, at this time I’m showing no additional questions. I’d like to turn the conference call back over to management for any closing remarks.

Well, we appreciate your participation on Lakeland’s fiscal 2017 third quarter financial results conference call. As we are committed to delivering value for our shareholders, we believe this is the 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. We’re very encouraged by our growth prospects as we will are well-positioned to grow organically through overall market expansion and as well as capturing market share. Thank you, again, and goodbye.

Ladies and gentlemen, that does conclude today’s conference. We do thank you for attending. You may now disconnect your telephone lines.