Christopher Ryan - Chief Executive Officer, President, Secretary and Director Teri Hunt - Chief Financial Officer

Mark Rosenkranz - Craig-Hallum Capital Group Peter Muckerman - Raymond James Financial Services Advisors, Inc.

Good day and welcome to the Lakeland Industries Fourth Quarter and Year End Financial Results 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 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, April 26, 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 Securities and Exchange Commission, general economic and business conditions, the business opportunities that may be presented to you and pursued by the company, changes in law or regulations and other factors, many of which are beyond the control of the company. Listeners are cautioned that these statements are not guarantees of future performance and the actual results or developments may differ materially from those projected in any forward-looking statements. All subsequent forward-looking statements attributable to the company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. At this time, I would like to introduce your host for this call, Lake Industries' Chief Executive Officer, Christopher J. Ryan. Mr. Ryan, you may begin.

Good afternoon to you all and thank you for joining our fiscal 2017 fourth quarter and full year financial results conference call. We're going to provide brief opening statements on the status of operations and on our financial results. 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. Let me start by saying that the two major differentials from last year, FY 2016 to this year, was first peeling off of lower margin product offerings to increase our gross margins, and the loss of one-time revenues and very high profit margins connected to our Ebola and bird flu sales in FY 2016. Now, I'd like to discuss our financial highlights for the fourth quarter. Most notably on a 1% reduction in sales from the prior year period in Q4 FY 2017, we increased our gross profit by 30%, while decreasing our operating expenses by 6%, and went from the loss of $0.3 million to a net profit of nearly $1 million. Our financial results reflect the company's concerted efforts to layer in higher margin and new products. Consolidated gross profit for Q4 FY 2017 was $7.8 million, up from $6.0 million in Q4 2016, driven by sales of higher margin products and targeted at new vertical markets and successful labor and raw material cost management. Gross margin as a percentage of sales in Q4 FY 2017 was 38.2%, up from 29.4% in Q4 FY 2016 and 37% in Q3 FY 2017. Operating expenses decreased to $5.9 million in Q4 FY 2017 from $6.3 million in Q4 FY 2016, despite higher sales and marketing spending for entry into new markets and new product development in the second half of FY 2017. Operating income increased to $1.8 million or to 8.5%. As a percentage of sales in Q4 FY 2017 from an operating loss of $0.3 million or negative 1.5% as a percent of sales in Q4 FY 2016. Net income increased to $0.9 million from a net loss of $0.1 million in Q4 2017. Earnings per share of $0.13 in Q4 2017 was up from a loss per share of $0.01 in Q4 2016. Another key strategic initiative was our focus on cash flow and we delivered there as well. Q4 FY 2017 free cash flow was $1.4 million, up from a negative free cash flow of negative 0.6 million in Q4 FY 2016. Cash at the end of the fourth quarter rose to $10.4 million, up 22% from $8.5 million at the end of Q3 FY 2017. Debt was reduced by more than $1 million in the fourth quarter of 2017 or 18% from Q3 FY 2017. Finally, among the financial highlights, shareholders' equity increased by $4 million or nearly 6% in FY 2017. Above all else, these highlights demonstrate the significant traction for our strategic initiatives focusing on profitability, cash flow and expense management, while investing in future growth opportunities. We have markedly bolstered our global presence and competitiveness, while executing with operational effectiveness. We have been leveraging the advantages of our unique operating platform to deliver growth in profitability and cash flow even as global industry conditions remain somewhat stagnant. Now, let's drill down on some of our more notable initiatives and business conditions. Much of the improvement in our gross profit metrics is attributable to modifications in our sales mix, resulting from the company's efforts to introduce new higher margin products, while better managing our cost and supply chain. On this front, we are excited by our cleanroom product, our continued penetration of the utilities market in the U.S. and the global marketing of an expanding line of Arc and FR products. The cleanroom product is directed primarily at the pharmaceutical industry. The product is an extension of our disposable garment segment, but we made enhancement to our traditional line of disposables. In the fourth quarter, our product passed the sterile testing standard and is now moving forward with production. We showcased it in late March to the very good response, at an INTERPHEX pharma show in New York. We also recently hired specialized salespeople to bring it to market, given this product is directed at a new vertical for Lakeland. In large part, we're talking about selling into Big Pharma here, where they often need multiple suppliers. We intend to be one of them with what we view to be the best-in-class product for this application. The ownership of our manufacturing and using our own fabric construction as opposed to using outdated or off-patent materials in contract manufacturers, give us a much better competitive position to meet the needs of the world's largest pharmaceutical companies. Many of these companies are located in the U.S. and India, where we have our own production facilities and which also provide us time-to-market advantages. During FY 2017, we invested to expand our pilot facility in India. Substantial opportunities remain in the U.S., which in large part a market share game in our primary business for disposable products. Another relatively new product line is for electric arc protection and fire or heat resistant purposes. Three salespeople were added in the U.S. during FY 2017 to help get our new cleanroom products into the market as well as to broaden our reach into the utility and fire resistant apparel markets. The primary markets initially targeted for arc and FR products are the utility market in the U.S. and for many different industrial markets in the rest of the world. Other new products for FR purposes are made from Modacrylic blends, which are now available and from Polartec knit fabric, which should be available this year. We are increasingly targeting markets outside of the U.S. for our growth. This has been an intricate component to our overall growth and diversification strategies. Many South American and Asian markets represent greenfield opportunities. In FY 2017, we hired three salespeople targeting Asian markets, including Indonesia, Malaysia and Thailand. Lakeland will be formally entering Germany this year and adding a new salesperson in Mexico this month. In addition, we have made progress in Russia with new product licensing, added a new distributor to accelerate activities in the Philippines, and brought an additional manufacturing capacity in India, as I mentioned earlier. These investments have been or will be modestly incremental to our overhead with minimal contribution to revenue thus far. Therefore, we expect more meaningful benefits as the year progresses. I'd like to remind everyone that new sales hires typically do not pay for themselves for about a year after hiring, which is the anticipated timeframe based on our past experience. Yet, amid these new investments which have not yet materialized on the top line, we decreased operating expenses in Q4 by 6%. Lakeland also is going digital in a more pronounced way. We made investments during the year. This will be something ongoing for the next few months, as we overhaul all our global websites. We will be placing more emphasis on digital marketing strategies, including inbound marketing campaign and with the world's most venerable online retailer, in Amazon. Lakeland is making great strides to be an even more recognizable and branded player with new online training and webinars for our sales people, our distributors, and other sales channel partners as well as customers. This will be particularly helpful as we go into more specialized and higher priced, yet relatively high-volume protective apparel. Another front, during 2017 we implemented global cost savings programs, MIS systems and other measures to enhance performance. A portion of our CapEx in fiscal 2017 and continuing into 2018 is earmarked for Enterprise Resource Planning systems. This has already been deployed in whole or in part to certain areas of our business, and we are already seeing improvements in our business practices that are leading to reduced costs and more efficient planning and processes. The balance sheet benefits alone are impressive, as inventory levels decline by $5.3 million or 13% during FY 2017. Some of the progress made throughout the year was massed through the first three quarters of FY 2017 by the Ebola and bird flu emergency demand for our products that led to an unusually strong FY 2016. Foreign currency fluctuations, continued softness in the oil and gas sector have also negatively weighed on our results in the year. At the present time, with oil trading at about $50 per barrel, there is some recent anecdotal relief. According to the recent Baker Hughes report, while oil prices remain under pressure, five oil rigs were added in the week ended April 21, bringing the total of 688, which marks the 14 straight week with oil rigs coming online. Despite this information, we are not sitting back and waiting for this business to return to true traditional levels and have pursued other avenues of growth. With the pullback from oil and gas sector, and amid the investments being made to drive our future growth, we are pleased to have increased cash flow from operations and free cash flow. Our excess cash generation has been applied towards the strengthening of our financial position. Cash flow from operations in FY 2017 was $11.5 million, an impressive turnaround from cash used in operations of $0.5 million in the prior year. All of our debt in China was paid off in fiscal 2017. Total company debt was reduced by $7.6 million or nearly 57% during the year. After reducing our debt and funding our CapEx and growth initiatives, our cash balance at the end of the year was increased by $3.3 million or nearly 48% from the end of the prior year. Based on our fiscal health and outlook for continued progress on an operational basis, our board authorized a $2.5 million stock purchase program in mid-calendar 2016. Through the end of FY 2017, we did not purchase any shares, but have the flexibility in cash and our Board and banker's approval to opportunistically repurchase shares. I will also comment that we could not repurchase shares for the last six weeks on [advice of the counsel] [ph]. With the close of FY 2017, I'd like to acknowledge the efforts and dedication of our global workforce management team and Board of Directors. We are in a competitive business, and we have some of the most experienced people in the industry working for our shareholders. I'd also like to recognize the contributions of Stephen Bachelder, who recently retired from an executive position with the company, but remains on our board, whose leadership position have enabled us to resurrect our U.S. presence, including the establishment of a strong and respected Lakeland brand. Steve leaves behind a number of solid Senior Executives: Charlie Roberson, Todd Moncrief, and Dan Edwards to take this segment of our business to the next level. Collectively, Lakeland begins fiscal 2018 with a healthy financial position and many catalysts for growth in most economic climates. 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.

Thank you, Chris. The following addresses my review of the fourth quarter and full-year of fiscal 2017 year ended January 31, 2017. The financial results that I discuss on this conference call will be from continuing operations unless otherwise noted. In Q4, net sales from continuing op for $20.3 million, down from $20.5 million for the prior year period. As compared to the year earlier period, overall sales volume was modestly reduced due to global softness in the industrial sector, partially resulting from the continued downturn in the oil and gas industry as well as currency headwinds in several of the foreign countries in which the company has operations, partially offset by increased sales of new products and from entry into new geographic markets. Gross profit increased $1.7 million or 29% to $7.8 million for the three months ended January 31, 2017, from $6 million for the three months ended January 31, 2016. The gross margin was 38.2% this quarter compared to 37% in Q3 FY 2017, and 29.4% in Q4 FY 2016. Gross margins for disposable products, the company's largest product line, improved 14.6 percentage points in spite of the lower year-over-year volume as the company continues to contain costs and maximize production efficiency. Further driving gross margins is the introduction of higher value products to new vertical markets. Reflecting the company's ongoing effort to reduce costs and operate more efficiently, operating expenses decreased to $5.9 million for the three months ended January 31, 2017 from $6.3 million for the three months ended January 31, 2016. Operating expenses as a percentage of net sales was 29.1% for Q4 FY 2017 as compared with 30.8% for Q4 FY 2016. The successful initiatives to lower operating expenses are partially offset by the additional sales force, digital marketing spending and information systems in connection with the company's domestic and international expansions. Operating profit was $1.8 million for the three months ended January 31, 2017, up from an operating loss of $0.3 million for the quarter ended January 31, 2016. Fourth quarter net income was $0.9 million or $0.13 per share, up from a net loss of $0.1 million or $0.01 per share in Q4 FY 2016. The results for the three months ended January 31, 2017 as compared with the same period of fiscal 2016 are primarily due to an improved product mix, manufacturing cost reductions and effective expense management. 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 plus years, depending on our profitability in these periods and assuming no changes in the U.S. tax rates. We do however pay local taxes on certain country operations when those operations are profitable. The most material tax was paid in China in the amount of $1.1 million, which has an effective tax rate of 30%. For the full year, net sales from continuing op was $86.2 million compared to $99.6 million for the fiscal year ended January 31, 2016. As compared to the year earlier period, overall sales volume was reduced due to the elimination of Ebola and bird flu emergency sales prior year, global softness in the industrial sector as well as currency headwinds in several of foreign countries in which the company has operations, partially offset by increased sales of new products and from entry into new geographic markets. Gross profit was $31.6 million for the year ended January 31, 2017, from $36.3 million for the year ended January 31, 2016. Gross profit as a percent of net sales increased to 36.7% for the year ended January 31, 2017 from 36.5% for fiscal year 2016. Operating expenses marginally increased to $24.8 million for the year ended January 31, 2017 from $24.5 million for January 31, 2016 year end. Operating expenses as a percent of net sales was 28.8% for fiscal 2017 as compared with 24.6% for fiscal year 2016. Operating profit was $6.8 million for the year ended January 31, 2017, down from operating profit of $11.8 million for the prior year. Operating margins were 7.9% for January 31, 2017, compared to 11.9% for the year-ago period. Net income was $3.9 million for the year ended January 31, 2017, down from $7.8 million for fiscal 2016. Earnings per share for fiscal 2017 were $0.54 as compared with $1.09 for the prior year. The results for fiscal 2016 were elevated in the first three quarters of the year due to higher margin emergency sales relating to Ebola and bird flu outbreaks. On the balance sheet, cash and equivalents at the end of the fiscal year increased to $10.4 million from $8.5 million at the end of the third quarter, and $7 million at the beginning of the fiscal year. Our cash balance reflects efforts to improve our overall financial conditions. At January 31, 2017, the balance of borrowings under our revolving credit facility stood at $4.9 million, a $4.6 million reduction from $9.5 million at the beginning of the year. $3 million of other debt was paid off since January 31, 2016, as we repaid all loans in China. With our current assets decreasing primarily from lower inventory and our current liabilities decreasing since the beginning of the year, our current ratio improved to 4.9 to 1 from 3.1 to 1. Total shareholders' equity also improved from the beginning of the year, going from $67.9 million to $71.5 million. That concludes my remarks. I'll now turn the call back to the operator to begin the Q&A session. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Our first question comes from Mark Rosenkranz with Craig-Hallum Capital Group. Please go ahead.

Hi, great, thanks for taking my questions and congrats on a really solid 2017.

Thank you.

First question, on the gross margin side, it's certainly better than our expectations. You mentioned some new vertical markets and some improved costs. You just talk a little more about what specific vertical markets are kind of aiding that as well the cost structure?

Okay. Well, we're not really following a lot into the cleanroom market, but we are expanding our utility market, and that has a very high gross margin in the U.S. Essentially, what we're doing is we're peeling off some of the very, very low margin businesses in disposables, and just holding on to the high margin business that raises our margins overall. And I think it makes us a more attractive investment. But that's it. We're looking - we're just peeling off low margin stuff and we're going to start filling in with higher margin stuff. We were going to make a real effort and penetration of the utility business, which is very high gross margin, and the cleanroom business without having to expand our production facilities.

Okay, great. That's helpful. And then, on the other side, the geographic market expansion, maybe you can talk a little more. How are the sales people hires, how are they been ramping over the last three months here? And if you could say a little more on which specific markets you'd say you're most excited about going through and coming into the next year here?

Yes. If we separate out, our manufacturing operations in China, because they are sort of grouped together, but if we separate them out because they sell to our sister companies, and we just look at our Southeast Asian sales, they're up about 6%. And one of the reasons - one of the things we are doing is we're - as we said hired salesmen in Malaysia, Thailand, and Indonesia. And it's relatively inexpensive to hire a salesman there as opposed to Europe or the United States. And they tend to get off to a faster start, because there's not as much competition in those countries, again, as there is in the United States or Europe. So sales were up about 6% in Southeast Asia, and that was with a couple areas down a little bit. So China is back in spades, the economy there is very strong. And in most of the Southeast Asian countries, business is very strong. And we still have a lot of greenfields there, because we're just penetrating them. We just opened up our first distributor in the Philippines. Philippine buyers love American products, so it's a lot easier sale there. But Southeast Asia is growing. Their GDP is growing much faster than the U.S. and Europe. And as I said, there is not a lot of competition. So again, we get much higher margins, say, in Southeast Asia than we do in the United States.

Okay. Great. Now, thanks for the color there. That's certainly some exciting developments. Thanks for taking the time.

Okay.

[Operator Instructions] Our next question comes from Peter Muckerman with Raymond James. Please go ahead.

Hey, everyone. Thanks again also for taking my question. I just had a country-specific question. In regards to China and their kind of recent experiences with the bird flu, I was wondering if that benefited you in the last quarter, number one. And then, number two, there's also been a fair amount of chatter in the news world about potential for bioterrorism. And I'm just wondering - hopefully, it doesn't happen, of course, but I was just wondering if there's - if you guys have any leads into homeland security or if that's a market. I'm assuming it's a market for you. But I was just curious to whether if you could add a little color on that maybe. I appreciate it. Thanks.

So, the first one was bird flu in China. Indeed, it is breaking out in China, not to the extent that we saw in the United States in FY 2016. It's spotty, it's all over, in fact it's broken out in Europe too. But these are not the type of situations we saw in the Midwest in FY 2016, where you had 200 farms shut down and 6 million birds killed. These are individual spots. They hit them hard and they hit them fast. Also China, the Chinese government has a big reserve of equipment and garments that they've used for prior things, going all the way for prior bird flu. So they got to run through a lot of those before we see new demand. On the chemical suits, we are seeing some real demand coming out of the Middle East. Okay. Not so much out of the U.S., but we are seeing real demand coming out of the Middle East on our chemical suits.

Okay. Thank you.

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

Okay. We appreciate your participation on Lakeland's fiscal 2017 fourth quarter and full year 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. Important progress has been made in fiscal 2017 and we believe the company is well positioned for fiscal 2018. Thank you again and good-bye.

This concludes the conference. Thank you for attending today's presentation. You may now disconnect.