Good afternoon, and welcome to the Lakeland Industries Second Quarter Fiscal Year 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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 speak only as of today, September 13, 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 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 that 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’ Chief Executive Officer, Christopher J. Ryan. Mr. Ryan, you may begin.

Thank you. Good afternoon to you all. Thank you for joining our fiscal 2018 second quarter financial results conference call. We’re going to provide opening statements on the status of operations and then our financial results. The call will then be opened up so that you may respond to -- we may respond to your questions. Now, on to my formal remarks. Our solid financial performance in fiscal 2018 second quarter resulted from the implementation of the diversified growth strategy in the nearly $7 billion market for personal protective equipment, otherwise known as PPE, along with effective management in all facets of our operations. The consolidated results are a continuation of our performance from the fourth quarter of our last fiscal year. Moreover, in the more than 30 years that I have been involved with Lakeland, the Company has never been better positioned and presented with more global opportunities than it is today. Here are some of our more important financial highlights for the second quarter as compared to the prior year same quarter. Revenue growth is 7.4%. Sales growth in the Americas, Asia and the rest of the world offset softness in Europe. Net income increased 29%. Basic and diluted earnings per share increased 25%. On August 22nd, we completed the public offering of 725 shares of common stock for net proceeds of approximately $9 million. I’d like to welcome to the conference call all of our new shareholders that participated in this offering and thank them for their support of Lakeland Industries. To give these and all our other shareholders a more comprehensive view of our performance, while we are pleased with our results and the outlook for the Company, there are some challenges we have been facing. Sales in Europe, which have been dominated by England, remain…

Thank you, Chris. The following addresses my review of the second quarter of fiscal 2018 ended July 31, 2017. Net sales from continuing operations were $23.9 million, up from $23 million in Q1 2018 and $22.3 million for the prior year period. As compared to the year earlier period, overall sales volume was higher as economic growth seems to be positively impacting the industrial sector on a global scale. In the quarter, we saw a moderate level with increased demand from the oil and gas industry. Currency headwinds in several of the foreign countries in which the Company has operations, which had negatively impacted prior quarters, abated in the second quarter. On a consolidated basis, for the second quarter of fiscal 2018, domestic sales were $12.6 million or 53% of total revenues. International sales were $11.3 million or 47% of total revenues. This compared with domestic sales of $11.8 million or 53% of the total and international sales of $10.5 million or 47% of the total in the same period of fiscal 2017. Sales in the U.S. increased $0.8 million or nearly 6%, primarily due to increased sales to strategic fire distributors of turnout gear and fire retardant garments, disposable products and chemical protective clothing due to demand from the oilfield services and refinery sectors. Among the Company’s larger international operations, sales in China and to the Asia Pacific Rim increased $1.3 million or more than 11% as industrial activity improved and several larger customers began replacing depleted inventories. Sales in Canada increased to $2.3 million, setting another record quarter for the Company amid strong demand for disposable garments. Some of our most significant growth on a percentage basis, although smaller contributors to our consolidated numbers at this time, came out of Russia, Kazakhstan and Latin America. Gross profit increased…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Dave King with Roth Capital.

This is Phil Klados on for Dave. I guess, first off, can you talk about the gross margin and what drove it down about the 220 basis points? What are the various puts and takes between product mix, line utilization? I guess, if there is any more color than what was in the press release? And then, how are you thinking about the outlook for gross margins, and what are the various drivers there?

We have an expectation that the gross margins are going to hold the disposables, as I mentioned in the U.S. and in Canada, by far our largest line. We are seeing some pricing pressure in that area and we are focusing on some of the higher margin products within that product line and looking to increase the mix on the higher margins where possible, we’re also -- it was offset by the chemical gross margins increasing 4.5 percentage points as their volume has really picked up. We believe that’s moving with -- a lot of that with the oil and gas industry, and we’re seeing that globally as well. And again –throwing that into the mix does tend to push the margins up as well as the reflective gross margins which continue to prove and hold on most of their products. So, our expectation is that the gross margins will at least hold steady and would likely improve.

And then, in terms of the recent capital raise you completed, can you talk about where you’re planning to spend all of the proceeds? I guess, in other words, of the items you originally targeted, like capacity additions, R&D investments, clean room equipment, is there anything you are no longer planning to invest in or anything you plan to spend less on?

No. We’re still focusing on overall the growth strategy to improve our -- increase our capacity, is a big push. Our IT infrastructure is a priority project right now as well. And we have not backed off of the clean room project. We do plan to launch and enter that market, either Q4 or Q1 -- Q4 of this year or Q1 of next, but it’s likely before.

Yes. And three weeks ago, we signed a letter of intent to build out our Vietnamese operations in a rather large facility, about 141,000 square feet. We can hire up to 1,000 people in that facility. The reason why -- the major reasons we’re moving there is not just because labor has become very short in China and quite expensive, but that Vietnam has great tariff advantages coming to it in 2020. To give you an example, into Canada, the tariff is 20%; by 2020, it will be zero. So, you can increase your gross margins by 20% in Canada just by exporting out of Vietnam as opposed to China. The only thing that we are not really looking at right away that would be postponed is really heavy equipment, like laminating machines. We’re going to build out Vietnam, we’ll probably start in India about a year from now, and that is where heavy, heavy equipment might go. It provides the least, let’s put it -- we’re looking at everything to be a 30% return on investment on the cash that we have, and the heavy equipment does not provide that. So that will come last.

Okay, great. That was great color. And then, just one last question for me and I’ll step back. Then how should we think about modeling the deployment of that capital? When should we see an uptick in COGS, depreciation, SG&A, and when should you start to see some of the potential revenue benefits?

Potential revenue benefits on the new money, basically, that’s going to be lowering cost of goods sold. Okay? For example, going into Vietnam will probably save us $1 million next fiscal year, minimum and then by 2020, another $2 million or $3 million just in tariff. So that gives you an idea of just what expanding to another country will be. But in terms of -- what you’re really asking is what quarter our revenues and earnings going to pick up as the result of the money invested. And I would probably say that would be starting in the second quarter next year. Because for instance, it will take us nine months just to build out the Vietnam facility. And we’re hiring new salesmen too. And that was one of the reasons operating expenses went up this quarter versus last year, is that we put on a couple of salesmen who were not yet covering their nut, guys in Germany, Southeast Asia, other parts of the world. So, that will continue. But if you stage them properly, such that one starts three months and they’re covering their nut in six, then you start another one, rather than starting 10 all at one time and taking a huge hit. We’re trying to stage them that way. But as far as the new proceeds, probably second quarter next year you’ll start to see some real results of that money being really utilized and getting that 30% return on investment. We’re looking -- there are certain capital equipment that gives us the 30% return, but it takes six weeks to eight weeks to get it and then to install it and then actually start producing. And that’s going to be the quickest ROI. If we -- the machinery and equipment, we might get installed by December; it will start returning probably first quarter of next year. Salesmen take six to nine months to start really covering their nut. And the new facilities in Southeast Asia and Asia will be on line in nine months. So that’s what you get. Nine months is a good number from today.

Your next question is from Mark Rosenkranz with Craig-Hallum Capital Group. Please go ahead.

First off, I just want to start, looking at the quarter, you’re seeing nearly half of the revenue now coming from international sales. And then, with the kind of continued investment, you’re beginning to see across the seas. Just wondering if you could just talk about the two growth buckets and kind of how you see those two markets moving forward between the U.S. and international sales, and where you’re kind of excited about seeing the future growth in the next one, two and three years as these investments start to take more of a hold?

Clearly, the international side, revenues are going to grow more quickly than the United States. The United States is a mature market. OSHA started in 1970 here, and the reason we’ve moved into places like Russia and China is that their enactment of OSHA just started eight and five years ago. So they’ve got another 30-year run for this to sort of grow. But the international markets, I mean a lot of developing countries are obviously growing quicker than the United States. So, I see the United States probably growing at 5% to 7%, depending on the year. And the international spot is growing at 10 plus percent. So it should average out to about 9% to 10% organic growth over a period of the next two years. That’s our goal. I mean, for instance, it’s doing 7.5% this quarter, but we’re still -- it’s still slow in the oil and gas market and we still have not implemented our two new product offerings, which is into utilities and the aseptic clean room market. That’s where the growth is going to come from in revenues and certainly in earnings, it’s the new product introductions and the developing country growth. Just the momentum is there.

And then, just back to the U.S. side of things, I’m wondering if you could discuss any impact you’ve seen from the hurricanes we’ve seen in last few weeks in the U.S., just in terms of any test product lines that are being more impacted now that it’s been kind of the impact you’ve maybe recently seen versus what you could expect to see over the next 6 to 12 months, similar to other natural disasters that we’ve seen in the last couple of years in the U.S.?

Certainly, it’s going to impact our disposable line of products, which are the light throwaways, which will be used to do cleanups. Probably for the next six months, we’re looking for cleanup extensive in -- in Houston, it was extensive. So, there’s going to be a lot of building going on and what you get is a lot of fungus and mold remediation where the people use our garments. If I’m looking at a roundabout guess, probably $750,000 in additional sales to a high of a $1 million over the next six months is the probability that we’re looking at.

[Operator Instructions] Our next question is from Shoon Huggett with Clarke Inc. Please go ahead.

I just like to ask a question about I guess the variety of global opportunities you see in front of you. And what return you were targeting on the ones that you chose, the two new facilities that you plan to build, what kind of profitability, what kind of payback, what kind of return are you looking at for those projects?

Basically, they all have a target of 30% or more. Okay? 30% return on investment. That’s the target for everything we’re doing right now. As I said, a year and a half from now, we may run out of 30% type returns, at which point we’ll have to make a decision on whether we won’t, will accept the lower return on invested capital. When we build the new facilities, basically we’re looking at lowering our costs substantially.

That sounds like a great return on investment. If those returns are expected, why wouldn’t you utilize leverage to go after more of them?

Well, we’re thinking about it. We’re considering it. But we want to use the cash in the till first; and then, we have about $20 million on a bank line of credit. It’s really how fast can you utilize it. You don’t want cash burning a hole in our pocket. We want to be really careful to make sure that we invest it very, very well and that we get the returns. If you’re going to make a good investment, you really have to do your due diligence.

Absolutely. With regards to the new facilities, you said that they can -- they will essentially double your capacity. What’s your current utilization at now, and how quickly are you forecasting you fill this new capacity that’s coming on line?

We’re at almost full capacity right now. Okay? And we will probably get a lot of this new capacity on line nine months from now -- 9 to 12 months. In 12 months, we will have all of the new capacity built out. But, we’re going to build -- building our capacity is basically building a building or renting a building, buying the machinery and equipment, sewing machines and cutting tables and things like that. And the really -- the long-term -- the difficulty of it is hiring and training the ladies who are doing the sewing. It takes about six months for them to get up to standard, what we call the standard allowed hour. So for our 14x14 style, which is a hood and boot, we would expect that that would be cut and sewn in 2 hours. But, when we start out, it’s more like 3 hours, okay? And it takes six to nine months to train the workers to get to what we call standard allowed hours, so the standard of what can be done. So, what we’re really going to see, I think, significant cost reductions in our cost of goods sold 9 to 12 months out because we’re going to see both a labor improvement, labor costs will improve, and tariff costs will improve.

Okay. Understood. I guess more of what I was touching on was, obviously your capacity builds up over time, like you said. But, was the Company tapped out as far as -- you’re at 100% utilization and customers are demanding more products and you can’t fulfill that. Do you have contracts in place, where you plan to fill additional contracts as your capacity builds out? How quickly are you going to be eating into that new capacity?

We will build out to people as fast as our revenues grow. That’s the one beauty of this business is you only need to put on so many -- if you say, suppose we don’t grow at all, well, we wouldn’t have to put on -- we wouldn’t be putting on very many people. The only reason capacity is strained right now, it’s strained throughout the industry, throughout our entire industry, is that nobody expected the Chinese government to come out and say that Chinese ladies could now have two babies. And when they said that, lo and behold, nine months later, a lot of ladies were pregnant, and they left work. And I mean, a significant percent of the ladies were pregnant and left work. And a lot of people were not expecting that. And it’s not only our problem, it’s all our competitors’ problems too. So China’s become a very difficult place to find labor, and we’re moving very quickly into other Asian and Southeast Asian areas that present lower labor and lower tariff opportunities for us.

Is there an opportunity to do private label products and just smash the -- just blow out the capacity close to 100%?

Yes. And by the way, we’ve done that in the past. And now, we’re sitting debating whether we want to take a lower margin on private label, which generally, if you have excess capacity, you might choose to do that. But if you don’t have excess capacity, like we do now, we don’t choose to do it. So, we have done private label for some very big names that you would recognize in the past, but it’s not at the same margins that as when we sell it ourselves.

And the new product coming out of the facilities, is that going to stay in Asia and go towards your new kind of global customer or is that going to be shipped back to U.S., Canada? How is that going to play out?

The way plays out is where we use specialized or highly technical fabrics that are pretty much made only in the United States, we use our Mexican facility and the NAFTA regulations and tariffs to control that. So, if I’m buying something like DuPont Nomex at $14 a yard, I will send it down to our Mexican plant where it’s cut and sewn. Because if I send it to our Chinese plants, I have a long travel over the ocean, probably 45 days because they go over slowly, then I’ve got an 8% tariff on it coming back on a very expensive fabric, think of $30 of fabric getting an 8% tariff, that’s significant in and of itself, and then the very long turn time. Whereas in China, if I can buy the textiles in China, I’ll make them in China. If I can buy the textiles in India, I’ll make them in India, and we have an Indian operation currently. And Indian textiles are beginning to come up to Chinese textile production. So, it’s really who the customer is, really when you come down to it. And we sell in 40 countries. And the first thing I always ask is what’s the tariff into that country? If it’s coming into a fair amount to our disposable line, if it’s coming into the United States from China, it’s zero. If it’s coming into Canada though from China, it’s 20%. If you bring it into Mexico from China, it’s 30%. If you bring it into Brazil from China, it’s 40%. So, what you want to do is look and say well, where in the world do I not have to pay those types of tariffs? Well, there are countries in the world like Myanmar where I might want to pay a 0% tariff into Canada, but it’s a 20% tariff out of China. So, we do utilize contractors in Southeast Asia that have a tariff deal with the EEC, for example. So it’s a complex thing, but we do have manufacturing facilities in the U.S., it’s small though, substantial ones in Mexico, India, China and now Vietnam. So with those four operating countries, we can usually move stuff to most countries in the world other than the Mercosur countries of Argentina, Brazil, Paraguay. So, we have small manufacturing operations in Argentina to counter that because the Mercosur -- I mean, they just want 40% on everything.

That’s fascinating. It’s good to hear that you’re managing your product like that. That’s it for my questions.

It’s like managing a bunch of airplanes with a lot of international flights.

Our next question comes from Larry Niegeran, [ph] a private investor.

I am a long-time shareholder, second-time caller; good to get through and talk to you. Hey, of the $9 million that you raised, how much would you actually expect to eventually spend on the expansion? Because my concern is, obviously the short-term impact on the stock price. And then, I’m just curious if you see having to do another raise down the road.

We do not anticipate having to do another raise down the road. And quite frankly, we have -- we’re in a situation now where we have cash and we have lending lines. And it would not be inconceivable for us to make a small acquisition that is opportunistic and perpetuous. But, we’re not going to let the money burn all in our pocket. We’re going to be very, very careful about approaching an acquisition, but now we have the ability to do it. And a lot of people are -- our industry is consolidating, so we could be a consolidator or a consolidated.

Got it. And then, since you kind of brought that up, can you speculate at all on what the DuPont-Dow merger would actually mean to Lakeland?

That’s a good question. I know for the last couple of months, it has been sort of a negative because the people, they’re going to spin Nomex, Kevlar, Tyvek, Tychem into a third company, and I think they’re calling it the protection company or a safety company. So, everybody’s sort of on hold there for the last year or so, awaiting all the things that they have to do. And I think -- I know what they’re putting in the safety business. That’s who’s going to compete against me, and there’s going to be three companies, and this is the third company. And the third company seems to be the company with all the older products, like Nomex, Kevlar, Tyvek and Tychem. I mean, these products are all 50 or 60 years old, along with the older employees who have a guaranteed pension plan, and the funding of that or the liability to fund that is going with the third company. And apparently, they will spin it off into a separate public company in 9 to 12 months. And I really can’t predict that date. But, it will go out on its own. Maybe at that point in time, maybe they will probably really concentrate more on their various businesses. But my feeling so far is I haven’t seen them invest in machinery and equipment now since 1992. So, my guess is, they’re going to run it as a cash cow.

And just out of curiosity, with all of this repatriation talk, does that impact Lakeland at all?

It can. We have at our Board’s discretion, the ability to declare dividends and bring cash in from some of our countries. We have a significant amount of cash in China. So, it’s -- should there be the change to the U.S. tax code, so the repatriation on results and something south of the 36%, you’d have to pay right now in corporate income tax and/or should there be an amnesty or a semi-amnesty of some sort, then we would probably bring some cash back. But there’s no point doing it. Right now, it wouldn’t make sense. You just take the hit to earnings, and we don’t need the cash here.

No. That makes sense. And just out of curiosity, do you have a theoretical number in your head, because it certainly seems like the 15% really isn’t going to be a real number? Would you see doing it if that number was a 20%, perhaps?

I would say -- we would say, considering it, but at the same time, there may be investment opportunities in Asia that make more sense to invest there, rather than paying a 10% withholding tax in China and whatever that number is, 15% to 25% here. It might make more sense to figure out an investment in that country where we can better utilize the money without taking the big tax expense.

China was very quick to impose a 10% sort of surtax on all dividends leaving the country. Well, that effectively makes it sort of not that advantageous to move money out of China. Thing is they were reacting to what President Obama did long, long ago when he started talking about changing the tax structure of the foreign corporations because they were hiding tax, profits overseas, and first, as China have the lower tax rate. Indeed, just about everybody in the world has a lower corporate income tax rate. I mean, China’s 25%, Russia’s 20%. These are communist countries that are 15% to 20% below us. So, one asks, who are the capitalists and who are the socialists. But it’s not probably as advantageous. Some countries, I mean, some guys, like Apple and Google, have lots and lots of cash sitting in Europe. And it’s easy to bring that cash back. There’s no surcharge, there’s no income tax surcharge, there’s no currency permissions like you have to go through with China. So, it would be good for us, but maybe not necessarily because, as I said, the Chinese, we’ve already paid 25%, and then they tag us with another 10%, almost would be equal to paying taxes in the United States. So, we would really be looking in other countries that have a lot of cash, like Canada or the UK perhaps, where the movement of cash is simpler. I don’t think we have mountains of cash in those countries, but it’s where you have cash in countries that are not hitting you with a surtax, where there are no currency regulations, where you can wire money the next day, and we’ll have to see. But my guess is the corporate income tax comes out of the 25%, and that’s not going to be much different than the rest of the world. In fact, the rest of the world will still be lower. They have to take the 20% to be comparable with the rest of the world.

So. really, the 20 percenter would be the benchmark to work with? Okay.

That’s right. I mean, that’s what it is. 20% to 25% is where most countries are. Even the Canadians, they’re down to 22%, 23%; Chile, 20%. I mean, we’re the highest in the world.

Right. And welcome to California, there you go. Okay. Well, thank you, both. I appreciate it.

Okay.

Our next question comes from Peter Muckerman with Raymond James.

Most of all my questions have been answered, and I appreciate that. I just thought I might jump in real fast. If you could just expand upon your clean room push in regards to, I don’t know if you can talk about who you’re talking to or what the plan is there. I’m assuming clean room applies to both tech and pharma. And I just thought I’d ask that real fast. Thanks very much.

Okay. We are a couple of months behind in that. Not terribly far behind, but we’re not hitting the schedule we thought we’d hit. It is not to tech. Technology uses woven garment. This is primarily the pharma. Okay? So, we’ll probably be a few months behind on that. It was encountering some technical difficulties, but we’re already lining up customers and sending out samples starting next two or three weeks. But we did miss the mark here in our own internal terms by about two or three months.

So, you feel good about the indications you’re getting...

Yes, still feel good. I mean, we’re seeing good indications of interest, and we’re even seeing demand for it outside the United States. We were very surprised to have a pharma company in Argentina want us, look at our stuff and really is interested in it. So, we just have to be able to deliver is what it comes down to.

This concludes our question-and-answer session. I would like to turn the conference back over to Christopher Ryan for any closing remarks.

Okay. We appreciate your participation on Lakeland’s fiscal 2018 second quarter financial results conference call. And 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. We have made significant progress in the year-to-date toward optimizing our balance sheet, improving our cost structure and importantly, enhancing our competitive market position. It is our intent to continue on this path. Thank you again, and goodbye.

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