Lakeland Industries, Inc. (LAKE) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Lakeland Industries’ Third Quarter Fiscal Year 2016 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 questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Ryan, CEO. Please go ahead.

Okay, 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, December 15, 2015. 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 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. Good afternoon to you all and thank you for joining on our fiscal 2016 third quarter financial results conference call. We are going to provide brief operating statements on the status of operations and on our financial results for the quarter. The call will then be opened up so that we may respond to your questions. Now, I’d like to discuss our financial highlights, operating strategies and the progress that has been made along with our view of our objectives as we move forward. As you may know from our Press Release issued earlier today and from our most recent quarterly calls, we present our financial result based on our continuing operations. That would be the case with today's conference call unless otherwise specify. The continuing operations, financial results reflect our ongoing business, following our exit from Brazil, which was effectuated last quarter. With this back drop, now let's now turn to our prepared remarks regarding our continuing operations. We delivered solid improvements across the board for our continuing operations in the third quarter of fiscal 2016, which is a period that is notable for being the closest we've had to a normalized quarter in quite a long time. Absent were large onetime charges, significant event driven sales increases and financial or capital modifications. More evident was the leverage we have in our model and the investments we've made to capture greater global market share, given our unique operating platform, which we believe is a competitive advantage amid persistent industry capacity constraints. These industry constraints in our opinion provide us access to market share gains from an estimated 500 million in disposal personal protective apparel revenues half in the U.S. and half in the rest of the world, roughly. We believe we have already begun to chip away at this opportunity, but it's far more pronounced when viewed within the context of the recent bird flu situation, as well as earlier during the Ebola crisis. Third quarter fiscal 2016 sales in the U.S. increased by 1.7 million or 13% from the prior year due to orders for protective apparel related to the Company's response to the U.S. bird flu, while the fiscal 2015 period benefited from 1.4 million in orders relating to the Ebola crisis in our U.S. and European businesses. I note that these emergency or event driven situations avail us to increment orders beyond the 500 million in PPPE revenues I mentioned moments ago. We are very pleased with our performance in the third quarter, which for the most part did not contain a material event driven or crisis situation impact on sales that distorted year-over-year comparisons. On a consolidated basis the Company’s top-line grew by 6% despite international revenues reported in U.S. dollars being weighed down by the strength of this currency against foreign denominations, including the devaluation of the Chinese RMB and the weakening currencies globally against the USD. International revenues were 10.2 million or 41% of total sales in the third quarter of fiscal 2016, as compared to 10.5 million or 45% of total sales in the prior year. Unit volume sales for our international operations increased as a whole, which demonstrates the true progress we have achieved in strengthening our global brand, but is obscured by the declining value of international currencies against the USD. Furthermore, our consolidated sales were impressive given the cyclical and dramatic downturn of the oil and gas sector, which has represented nearly 5% to 10% of our total revenues globally. As these trends moderate or reverse we believe the traction we have gained in the markets in which we operate worldwide will further bolster our growth profile. Importantly all of our major country operations were profitable in the third quarter. Lakeland continues to benefit from its international diversification and broadening customer base from which we derive somewhat recurring sales. Approximately 90% of our quarterly revenues are recurring in nature, meaning that they come from our traditional customers and are not orders that pertain to crisis or event-driven circumstances. However, in light of recent high profile crisis situations we have proven our ability to deliver large quantities of protective apparel in parallel with the satisfaction of orders for our traditional customers. The difference typically is that more urgent order flow maybe subject to higher prices and improved margins for us depending on the situation, particularly when there are industry capacity shortages which apparently has been and is expected to be the case if our channel checks are accurate. Over the last several quarters, we implemented strategies to enhance our marketing presence and scale production. Now we have the manufacturing capacity and operational expertise to respond to market demand while improving our profitability. As a result of higher volume improved gross margins and selling and general administrative expenses largely being fixed other than freight out and commissions, as well as overall cost control efforts. Operating profit from continuing operations increased to 3.2 million for the third quarter from 1.3 million in the prior year. Operating income as a percentage of sales increased to 13% this year as compared with 5% last year. This improved performance has not been easy. It required a lot of hard work and long hours from our growing global management and operational teams. We are gratified to have such a dedicated group supporting Lakeland and its shareholders. Yet it was the completion of our exit from Brazil that finally allowed us to focus on our core business. Last quarter with our exit from Brazil we set our sights on the implementation of global organic growth initiatives. Driving sustainable long-term profitability and enhancing our overall financial position. We continue to seek ways to strengthen our management and sales teams, while deploying information systems and other capital investments to help respond to market demand and maximize our resources. A great amount of effort has recently been put toward online marketing campaigns to highlight and promote Lakeland products, as well as to develop two new products which we will be introducing in 2016. Amid these investments and strategic spending, we are pleased to have reduced our total liabilities by nearly 8 million or 26% since the beginning of the fiscal year. At the end of the third quarter, our current ratio improved by 25% from the beginning of the fiscal year despite the inventories rising to 43.5 million. As we have built up our inventory levels to capitalize on the anticipated continued industry capacity shortages, we believe we have made strong progress this year and are well-positioned for continued long-term improvement in all facets of the business. No other near to intermediate term growth opportunity may be more important than the U.S. led viral epidemic preparedness spending which stems from the Ebola outbreak last year. Future Ebola situations may arise before the anticipated spending on stockpiling of reserve equipment and garments, new Ebola cases have surfaced in Liberia as recent as last week, this country had been the worst hit of all Ebola effected nations and had been declared Ebola-free along with Sierra Leone. The new cases in recent healthcare industry studies in which it was found that the Ebola virus can persist in carriers’ bodily fluids longer than previously thought, suggest that the U.S. preparedness spending is justified as the fight against the disease is more challenging unpredictable and longer lasting than originally perceived. To this end we are now in an even better position to contribute. Comprehensive MicroMAX and ChemMax disposable product lines using our proprietary in-house technology and manufacturing processes have been specified for use by the CDC’s National Institute for Occupational Safety & Health. In this medical response guide, the CDC lists our personnel protective equipment apparel which are said to comply with the stated protection standards. They note that controlling exposures to occupational hazards is the fundamental method of protecting workers. As of one of the largest leading healthcare agencies we believe many other countries will follow similar protocols and we have been actively putting our garments in front of other leading agencies so that we are front and center if and when the time comes. Despite some 90% of our revenues being derived from what we term recurring customers there has been and likely always will be exigent requirements, regardless of these needs from being oil spills, natural disasters or viral outbreaks which occur at least on oil spills almost every day. In the third quarter as in the second quarter our order flow reflected the quality and defensibility of our recurring revenue base which was evident despite seasonality and periodic slowdowns such as the ongoing economic circumstances in China and the sluggishness of the industrial sectors of Europe, as well as globally from the oil and gas downturns. Similarly to the second quarter the persistently strong U.S. dollar against most foreign currencies that are relevant to our business units has resulted in reduced financial results as reported in U.S. dollars, this is only optics as our performance has across our business units been steadily improving. We will continue to effectively deploy our capital in our human resources as well as in product development, marketing and information systems to drive continued growth and market share gains. That concludes my remarks. I will now pass the call to our CFO, Teri Hunt to provide more thorough review of the Company's financial results for the third quarter.

Thank you, Chris. The following addresses an overview of the third quarter of fiscal year of 2016. First, with the discontinued operations accounting that the Press Release has presented it will be far easier to understand our financial results. The fiscal 2016 third quarter financial results that are discussed on this conference call will be from continuing operations unless otherwise noted. The discontinued operations relate to the operating results and Brazil. As Chris mentioned, we’ve completed the details pertaining to our exit from Brazil but prior thereto we had already exercised discontinued operations accounting for Brazil. Discontinued operations accounting entails the reclassifications of all of the financial results of the Brazil operations within the consolidated financial results of the parent Company and a restatement of prior periods to reflect the same treatment. The global operations of Lakeland Industries excluding Brazil, is shown in financial reports as continuing operations. As of July 31, 2015, Lakeland sold ownership interest of its business in Brazil and effective with the fiscal 2016 third quarter that began August 1, 2015, the Company expects no further losses from those discontinued operations or charges or expenses relating to Brazil beyond the existing accrual of 900,000 which was recorded in the fiscal 2016 second quarter financial results and the items referenced in our filings on subsequent events of third quarter which I’ll address later in my remarks. Onto now review the third quarter results. Net sales from continuing operations increased to 24.9 million for the three months ended October 31, 2015, compared to 23.5 million for the three months ended October 31, 2014, an increase of 6%. U.S. sales increased 1.7 million or 13% due primarily to the strong sales levels in the chemical division related to the Company’s response to the U.S. bird flu, which exceeded the Ebola related orders that contributed to the increase in sales during the prior year period. USA sales of disposables used for Ebola last year decreased by 0.1 million and chemical sales used in connected with the bird flu this quarter increased 1.4 million. Sales in China into the Asia Pacific Rim were up 9% organic growth and a shift to higher bounding products. This growth would have been more pronounced on a reported basis absent currency headwinds. Canada sales experienced a modest decrease of about 5% due to currencies. In Canadian dollars, Lakeland Canada just finished its highest third quarter ever, which followed its highest second quarter ever. For the third quarter, Lakeland Canada is up over 22% year-over-year in local currencies. This is particularly notable given that last year’s period benefited from Ebola related sales. Among other pockets of strength, the current year period saw increased sales to refineries amid low oil prices as they shut down for maintenance which requires our protective clothing. We believe our marketing efforts have had an impact in Canada with progress made in attracting new distributors with a combination of price and most importantly service that’s enabled us to take market share away from some competition. In the UK, sales decreased by 16% due primarily to the significant increases in sales resulting from the Ebola crisis in the prior year, a weaker currency this year and a softened economy. Russia and Kazakhstan sales combined decreased 23% off of a relatively small base which as Chris mentioned resulted from the significantly lower currency rates against the USD. Latin America sales decreased 2% also off of a relatively low base as their economies experienced negative currency fluctuations against the U.S. dollar. The regional exception to sales growth as reported in USD was in Mexico where revenues were materially higher impart due to new accounts in the mining industry. Moving onto margins and expenses, gross margin was 37.2% this quarter compared to 34.9% last year. Despite the increase in margins we charged off an amount relating to a sizeable donation of PPE supplies. We’re pleased to have donated industrial gloves and disposable coveralls and chemical suits to the emergency response teams in connection with the Tianjin explosion. Aside from being the right thing to do during the time of crisis in the country that’s been very good to Lakeland, this provided us with added goodwill locally along with very positive media coverage. Operating expenses decreased by 0.9 million and decreased as a percent of sales to 24% from 29% last year. The main factors attributable to the decrease in operating expenses are a 0.9 million decrease in equity compensation due to the change in the performance level of the 2012 restricted start program from zero to maximum in the three-months ended October 31, 2014, and 0.3 million decrease in currency fluctuation expense as the Argentinean peso stabilized briefly in anticipation of the election. Trade out increased 0.3 million with the increased sales volumes, and research and development increased 0.1 million with new product development activity. The 5 percentage point decrease in operating expenses as a percentage of sales is also a function of the increase in sales volumes, and the fact that operating expenses are primarily fixed in nature other than trade out and sales commissions. In total, operating income increased to $3.2 million from operating income of 1.3 million last year. Operating income as a percentage of sales increased to 13% this year versus 5% last year. Adjusted EBITDA this year was 3.6 million versus 2.8 million last year. And free cash flow, defined as adjusted EBITDA less cash paid for taxes and less capital expenditures, increased from 2.2 million last year to 3 million this year. Please refer to the EBITDA disclosures in our press release for reconciliations. Third quarter net income of 2.1 million or $0.29 per share significantly increased from a loss of 1.8 million and $0.29 per share last year. All of our major country operations are profitable, including Mexico, which was the only unprofitable country in the last quarter. The deduction for the Brazil work was filed on our October 2015 income tax returns for the FY15 tax year, which generated tax loss carry forward allowing us to write the amount off against real cash U.S. taxes that would otherwise be paid given our improved operating performance and income in the U.S. Further on to Brazil business, the stock of which was transferred on 7/31/2015, the arbitration settlement was paid in full in June ’15 for a negotiated buy out of $3.4 million. Here is an updated range relating to Lakeland Brazil subsequent to the end of fiscal 2016 third quarter. In November 2015, the Company's former Brazilians subsidiary, referred herein as Qualytextil or Lakeland Brazil, settled the largest labor case or the Lana dos Santos case for BRL1 million, or approximately 250,000 USD, which approximates the reserves on the books of the Company. Several other smaller cases also were settled for immaterial amounts. The Company does not anticipate any significant further charges for labor issues beyond what has been accrued. In VAT claims, the Brazilian economy has been faltering since the execution of the shares transfer agreement, and has now reached a point where the federal government and state governments of Brazil alike, are suffering revenues shortfalls due to this decreased economic activity. As a result, the State of Bahia in Brazil, where Lakeland Brazil has operations, is now perusing VAT cases aggressively and has declared an amnesty beginning November 01, 2015 and expiring December 18, 2015. As previously disclosed, Lakeland Industries maybe exposed to certain liabilities in connection with the prior operations of Lakeland Brazil, including without limitation, from lawsuits pending in the labor courts of Brazil and VAT taxes. The Company entered into a loan agreement on December 11, 2015 with Lakeland Brazil for the amount of nearly BRL8.6 million, or approximately US2.3 million, for the purpose of providing funds necessary for Lakeland Brazil settling the two largest outstanding VAT claims with the State of Bahia. Settlement of the VAT claims under amnesty would benefit the Company and that it eliminates these large VAT claims which the Company believes will render the continued viability of Lakeland Brazil immaterial to Lakeland Industries. It should also eliminate the possibility of the transfer of the shares of Lakeland Brazil that effectuated our exit from the country. It's being found fraudulent on the basis of evading VAT claims and would subsequently eliminate the possibility of future encumbrance of the real estate by the State of Bahia in connection with any VAT claims. It is expected that Lakeland Brazil will complete the amnesty agreement with the State of Bahia on or before December 18, 2015. The VAT loan agreement will be accounted for by the Company in its fiscal 2016 fourth quarter ended January 31, 2016. The Company has not yet determined the collectability or reserve needed in connection with the loan agreement, which will result in an additional charge to the loss on disposal of discontinued operations. Any additional such losses will be available as additional tax loss carry-forwards to offset cash taxes payable against future taxable income in the U.S. Moving onto the balance sheet, we have further bolstered our capitalization and improved our financial condition. Cash and cash equivalent decreased by 800,000 from the end of the second quarter to 4.3 million at the end of Q3 with the payment of the arbitration settlement of 3.4 million in June of 2015. Yet the Company's current ratio improved by 31% from the beginning of the fiscal year. Book value per share at October 31, 2015 was 9.71, an increase of 4% from July 31, '15 and a decrease of 5% from the beginning of the fiscal year. Stockholders’ equity increased by 9.7% from the beginning of the fiscal year. This concludes my remarks. I will turn the call back to the operator to begin the Q&A session.

Thank you. [Operator Instructions] And our first question will come from Alex Fuhrman of Craig-Hallum Capital Group.

Congratulations on another very strong quarter here. First off, Teri I'd love to just get a little bit more color on what you were saying about Brazil and the VAT taxes that the State of Bahia is coming after you for, is there a dollar amount that they claim that you owe them, I'm not sure if I missed that and I know you said that not yet willing at this point to commit to an opinion on the collectability but anything you could give us just to kind of frame up for us kind of the best and worst case scenario here would be helpful? Thank you.

Under the amnesty the payment of 2.3 million covers the -- there is significant reductions in overall VAT itself due to the amnesty. So the 2.3 covers the two largest VAT claims which we have previously felt that we could drag these out in court for a number of years without being seriously concerned with them. The change in the economic climate in Brazil changed our opinion on that particular strategy and with opening of the amnesty it made much more sense to clean this up now. It's difficult to estimate exactly what the reserves will be, we'll calculate those with our outside counsel and outside accountant in the fourth quarter and determine the cash flow in Brazil and our expectation as to their ability to be able to repay that loan. Does that answer your question or should I elaborate further?

That does help Teri, thank you. And just thinking about the overall business here, I mean is 24 million or 25 million in revenue as you kind of look forward to Q4 and next year, is that kind of a reasonable solid run rate to be thinking about for revenue in the absence of any really significant one-time event?

For the, you said for the year, for the fourth quarter?

Well, I was just looking for the fourth quarter and then…

Okay, I am sorry.

…and then for the next four quarters as well, next year?

Yes, yes I think so.

Okay…

I mean, I think that’s a reasonable assumption.

And then just thinking considering most of the big manufacturers in this space are U.S.-based companies. I mean if the U.S. dollar stays as strong as it’s been the last couple of quarters, do you see local currency prices in international markets eventually going up to catch up with the stronger dollar?

I'm not sure how to speculate on the...

When you look at the U.S. dollar, say from the time Reagan became President to to-date it's gone up and down some five or six times. And ultimately, it will swing back and then we'll be getting foreign sales jumping by huge amounts that don't reflect unit increases, just like the unit increases now, are not being reflected in the currencies. A good example might be Russia whose revenues were down 23%, but whose currency was down 54%. So it's obvious that Russia's units were growing, but the currency really took it down 23%, but it was really probably gained 23%. When this changes? I don't know. The head currency guy at HSBC thinks the euro will be at $1.20 next year, not $1.13. But he is not the majority opinion. But eventually it changes, when, I can't tell you.

The next question will come from Doug Ruth of Lenox Financial Services.

Congratulations, this is a really nice report. Could you expand a little bit more, you’ve really are boosting the inventory year-over-year by a pretty significant amount and you seem to have a strategy. Could you maybe share with us that a little bit more?

Okay. The reason we consciously boosted the inventory in our core products, so in anticipation of basically capacity shortages. Now if we turn out to be wrong on that score, we will just give our ladies in China a three week vacation instead of a one week vacation and everything will come back into balance in February. But we believe that if there is any demand anywhere in the world that's out of the ordinary that the capacity strengths in our industry will not be able to address it but we will.

And I'm looking at the inventory from October 31, 2014, you were at 38.9, so we have a 4.6 million increase. Are you anticipating that much of a demand?

Well, over the course of the next two or three quarters, I think if you look back last year our inventory was the same as it is today.

No, the inventory a year ago was at 38.9 million.

Was it? Okay. Sorry.

But that would have…

Right, okay. Now as I said, we're anticipating growth out till spring, and if it does not occur, we can easily cut back our inventories.

Is there a large pending order?

No, there is not and if there was, I couldn't tell you anyway.

And what about the flame retardant product line and the cold weather product line, is there any update on that?

Other than the fact that the oil business is slipping but that’s exploration, what we see is the shutdowns for maintenance are actually increasing. So it's not a complete wash. We're seeing the exploration go down. It's not being completely replaced by the maintenance. But the maintenance is up over normal. That's the only thing we're really seeing in the FR, because so much of the FR is sold into the petrochemical industry. Other than that, FR is growing.

Okay. And what about the cold weather product that you're developing for China, so…?

Well, that's only for China, and it's not cold enough there yet to really know.

Were there sales for the South Carolina flood?

Yes, there were. It's hard to identify exactly what we sold. But in the case of any flood, any hurricane, typhoon, or cyclone, there is usually flooding. And yes, in Carolina, sales are up because as the waters come down you have a tremendous mold problem and a lot of these mold remediations in residential or commercial housing is insured, so the clean-up gets done eventually and they use our garments; the workers going in cleaning the mold are usually wearing respirators and our type of garments.

Is there an update on the new green product that you’re developing at all?

Yes, we hope to come out with it next year.

Our time with the first half of fiscal year…

I can’t get that granular.

What about the computer system, is there an update on that at all?

We are working towards that and it will be next year; I wouldn’t put an exact date on it, but before the end of next year, let’s say that, that will be in place, rolled out in the U.S.

And one of the reasons that got slowed down is because we’re very lean here and between the Ebola, the bird flu and Brazil we really didn’t have the human resources to get it done as quickly as we wanted.

We’re making every effort to make sure that we dot our Is and cross our Ts and don’t disrupt the business putting in the system.

That’s all appreciated and I think you have your priorities in order and I am grateful for what you’re doing there. I also thought that what you did in Mexico was especially impressive. Can you give us any more color on what you’re doing with the mining industry?

We’re hired three sales people in Mexico they’re all engineers, they all formally worked at a Fortune 500 company. It’s really those three salesmen who were just at the beginning of generating business there. And the only thing again that is really holding them back is the oil and gas business Timex in Mexico generates a lot of revenues for us out of the oil and gas business that obviously slowed down. But nonetheless they’re forging ahead in other industries like mining, and mining is also slowing down but we’re doing quite well in it. So once they are able to penetrate some of the industries that are not basically headed down, we should do even better. So, they’re getting slammed by oil and gas, they’re getting slammed by mining going down, they’re getting slammed by a weak peso, and yet they’re still growing and profitable. So it is a good story but it will even be better next year.

Yes, they’re doing a terrific job for the Company. And my last question, what about the profits in China more than doubled. Could you tell us a bit more about that that was also terrific?

Well, the revenues in China increased okay but I don’t think the profits doubled, I don’t know.

The operating profit went from 540,000 to 1.16 million?

For external sales in the Beijing area quarter-over-quarter, is that what you’re looking at?

Yes, that’s what I am looking at.

Well, I think that they have hired potential another sales person in China and they did have the Tianjin exempt but I think for the most part you’re talking a shift to higher value products and organic growth.

Well congratulations, it’s a terrific story. You folks are really have the Company operating at a much higher level and I am grateful for the management team’s effort.

Thank you Doug.

Thank you for answering my questions.

The next question will come from Bob Evans of Pennington Capital.

A couple of them have been already asked. But getting back to the inventory question, just can you remind me how you revenue things in terms of -- is it basically revenue once it goes to the channel?

Revenue is recognized on ships.

Okay. So the inventory that you’re showing is predominantly out in the channel is that right so that’s been shipped?

The inventory on hand, no that’s Lakeland owned inventory globally, so we have inventory in each country as well as in the U.S. and every country that has a sales office has some level of inventory locally.

See our sales are up so we’re not having a problem with inventory. We plan to have this greater inventory.

No, no and I understand that and you’re up to the previous caller, you are up about a little over 10% year-over-year and you are saying you’ve got it for an anticipated demand that might come if certain events occur. I am just wondering if we see a -- if those events do not occur, will we see some potential slowdown as you have to bleed off revenue?

The inventory…

…bleed off inventory excuse me?

The inventory that we would stock in the event of a spike in demand are primarily the products that we sell day-in and day-out, anyway these are our strongest volume products. So they would not -- we would not anticipate a slight slowdown in sales resulting in a large reserve because these are products that we move every day.

Okay.

We built out our very, our core, our big movers, we built out. So, if there is another event, we can then service our bread and butter customers on 90% without any problem whatsoever. On the other hand, since these are our core, the ones that move every day that we sell hundreds of thousands of cases of, if we’re wrong and we go into a recession, we just run it down. And the net-net of it is, is that we have the rental expense and the capital cost during the three months we run it down, which is not a big deal.

Okay. And do you expect any bird flu revenue in Q4?

In Q4, we can't say, because it all depends on where it breaks out. There has been a small outbreak in France of bird flu. There has been an outbreak of swine flu in India. It's whether these things really get out of hand where they start using some real volume. Generally, the bird flu depends on the temperature. And if the temperature goes below 73 degrees, you can see it. There is a possibility. But I know being in the Northeast it was 66 degrees in New York last Sunday. It's not cold enough for bird flu to breakout yet. It needs a lot much lower temperature.

No, so there’s nothing out there in the...

Nothing out there that we can see except the usual stuff, you see pockets of avian flu and pockets of swine flu around the world. It's whether they get them under control. That’s what they did not do that with Ebola, they did not do that with avian flu a couple years ago in Europe, nor did they do it with avian flu in this country, they just let it go.

Okay. And then with the, back to Alex’s question on the -- again just to clarify the max exposure on the VAT and then potential max exposure on any additional legal expense?

We paid -- we think that we have the legal expense already accrued. The 2.3 million that we paid of course would be the maximum exposure, but it would -- we don’t anticipate having to reserve that full amount. This also removes a lane from the property and the assets held for sale owned by a corporate in the U.S. With those lanes removed, we expect to be able to sell that property 1.1 million is withdrawn on the book for and that's below appraisal. So we anticipate this freeing up some cash flow for the business there in Brazil. There is an encumbrance that's placed on businesses there who have claims in process with the government that's now been removed and they should be able to bid other jobs that they can't currently bid. They should be able to collect on existing receivables, which they lost the right to do with these VAT claims. So we do expect their cash flow improve to the point that they should be able to repay some of this loan, if not all. So the maximum exposure is the whole amount $2.3 million, but that's not management's expectation that we’ll have to reserve that full amount. But again we can't know until later in the month when we are able to discuss this with our accountant.

We expect to be conservative with that. And if we’re overly conservative and we do collect the money in the future, then it will just be booked as miscellaneous income.

The next question comes from Michael Hebner of IFS Securities.

Yes it looks like this Brazil situation was a huge prompt. How do we stop that and what have you learned to make sure it doesn’t happen in Mexico or Russia or some of these countries in the future?

Well, you really can't. But Brazil was an extraordinary situation, which doesn’t really happen that often. We have been operating in China since 1993 and never had much of a problem. We've been operating in South America for years, for 10 years and nothing's happened. We've been operating in Europe and Russia and Kazakhstan, nothing of this nature has ever happened. The only thing I can compare this to is Ecuador where Chevron got an $18 billion judgment for not cleaning up an oil well and of course they'll never pay that but we're not in the situation they are. We're basically just cleaning this up, we felt we got screwed at the arbitration that people were bribed and we got screwed. So we've cleaned it up, I mean this is it, this is the end of it. There's no more Brazil from this point of view, before we said there was some tail liability and we've decided just to clean up this tail liability because many investors particularly prospective ones were saying well you know what about Brazil, what about Brazil, well Brazil is finished now. By doing this the VAT goes away, we've already reserved for all the labor problems and the labor problems are coming out -- in fact we'll probably, I will say we'll probably get away with actually having to reverse some of the reserve on the labor problems. I can't guarantee that but the way it’s going it looks that way.

The accounts receivable, comfortable with that number and what's the turn on that, I mean because you are at 14.5 million in sales what 25 million or something so put some color around your accounts receivable and your thoughts?

We are comfortable with that as a rule we write off less than $100,000 a year in bad debt on almost 100 million in revenues. So I would say we are comfortable with that.

Yes. And some of the receivables go out 90 days on international sales which may you know we do big container sales so you know the customer even though it ships it's got to go across the ocean that's 35 to 40 days. Then we have got to wait 35 to 40 days to get paid so it's out there 70 days a lot of those receivables and some by their terms are 90 days.

We did have some direct ship customers in the U.S. who are, they're approximately 90 days at ordering, our best customers are ordering container loans.

But as Teri said I can't remember a year where we've ever had more than $100,000 of bad receivables, like in the last ten 10 years.

And we have a very good track record on collection.

Now with everybody, the Syria and Russia and other nuclear testing and nonsense are we seeing any uptick in like some of the protective equipment for nuclear stuff out there.

We are seeing it in the Middle East.

Nice.

We're seeing a good chemical suit sales growth there in the Middle East, coming out of places like Saudi Arabia.

Okay, thank you.

And the next question will come from Pete Muckerman of Raymond James.

And I believe that my question may have been answered. The only question I had was I've been reading about municipalities around the country doing these emergency preparedness exercises in relation to bioterrorism, is that something that you are seeing and that's my only question? Thank you.

Well are calling on the municipalities particularly the fire departments with regard to their stockpiles of chemical suits most of which were bought between 2003 and 2006 and that was in response to 9/11. Most of those chemical suits are beyond warranty so we are beginning to call on people saying if you are thinking about the possibility of a terrorist event like the country was between '01 and say '07 then you should look at the age of your chemical suits to see whether they still even fulfill their certification. Most of the warranties we gave at the time and most of the other major suppliers were five years. They have long since expired.

My thought was more than anything that you know God forbid of course that is would happened but I think there will come a day when these terrorists decide that marching into a nightclub and just shooting people be behind them and they will be looking to do something on a larger scale, hopefully that doesn’t happen but of course it seems to be how things progress in like anyway I appreciate you taking the time and congratulations again. Thank you.

And the next question will come from Jim Gentrup of Val Vista Capital.

Earlier there was a question asked about sales run rate, I am going to turn that around a little bit and talk about your profit potential going forward, you said this quarter it was kind of a clean quarter I think may be just a word you used, you did about…

Well…

Go ahead.

Well do you want to answer that?

No, thanks.

Yes, it did not contain any Ebola events I mean Ebola was started really going for us around mid-September through the end of October of last year. So we were comparing -- last year was relatively high because we has six weeks of Ebola and this year we even out did that, we had a little bit of bird flu in August but what we didn't have is we didn't have losses coming from Brazil, we didn't have a lot of things that were going on, when we say this is a fairly normalized quarter, it is a fairly normalized quarter, there were no huge events like bird flu or Ebola, there was a little of bird flu in August and that's it, so this is somewhat of a normal quarter.

So, it's about $1.16 run rate on an EPS basis, just curious if that's a sustainable or do you think you can have even more efficiency improvement, so can you…

Well, you do -- it's possible but you do have seasonality in this business. So there are certain quarters that are much stronger for instance our spring quarter is much stronger, I think estimates out there for us are $1.04 we don't give guidance but I feel very comfortable with that, guidance for this quarter was $0.26 and we did 0.29 so we did 10%, roughly 10% better. So…

$1.04 for this year?

Yes.

And then my next question is that just looking out fourth quarter and also beyond, where do you see incremental growth, revenue growth coming from?

We see that basically in the new products that we will be introducing further penetration of existing business organic growth, now that the top-five people are now spending 50% of their time dealing with Brazil, those people can really go after organic growth and introducing new products and that's where the growth is going to come from.

And the new products, what markets are they targeting?

They are targeting many of our markets, they're targeting our municipal fire gear, they are targeting FR, they are targeting chemical, they are targeting disposals we even have a new glove product. So they're targeting all five areas that we operate in.

Okay. So this is really a market share gain versus a…

Well, in the United States it is market share gain, in the United States it's a very-very big market. The U.S. is probably 40% of the world market for our products. However when we look into Russia or Kazakhstan China, they're growing organically. They're going from what was a zero base 10 years ago and sort of heading towards with the United States is today and it took the United States about 40 -- and about the first 30 years of OSHA they came into compliance but if you looked at something like disposable gallons in 1970 when OSHA was enacted it was probably a $15 million market, now it's a $500 million market. So it increased by 10 times and that's what is basically happening in the developing countries and will happen over the course of the next 30 years. Be it India or Russia or Kazakhstan, or China or many of the Southeastern countries be it Vietnam, Malaysia they are growing I mean they're using more and more. In the United States it is more you got to take market share from somebody else.

And I know you said, you don't give guidance but what -- I mean does -- looking three to five years out, do you see your Company being doubling sales, I mean, how do you look at your company…?

We feel that we can grow organically at about 10% a year.

10% and that's based on market share gains from new products and international [Multiple Speakers].

Right. In some quarters it will be 6% other quarters it will be 13%. It's not just 10% every quarter but on an average -- the year is the best measure of this Company.

And Chris, we're not talking about the one-time emergency type right, we're talking about base level type, just want to make that clear, right?

That's right.

Okay, thank you.

The next question comes from Mike Distler. Please go ahead.

As you know as a real long-term shareholder that I am I just want to say and this is not a question, because I’ll cross that, congratulations to you and the team and without any slur to go at the crowd great job Teri on the call. Judging from the number of folks on this call obviously interest is up because consistency of earnings looks to be there, so terrific. As you know our go overall with the financials come later. In any case though I am looking forward to the new products and since it’s the season I just wanted to say have a great holiday and happy, healthy and prosperous New Year you have deserve it and just perfect. Thank you very much.

[Operator Instructions] I am showing no additional questions. This will conclude the question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Okay. We appreciate your participation on Lakeland’s fiscal 2016 third quarter financial results conference call. As we are committed to delivering value for our shareholders, we believe this is best achieved for Lakeland Industries through the continued implementation of strategies for effectively managing its balance sheet, controlling expenses and capitalizing on long-term global growth initiatives. We are very encouraged by our growth prospects, as we are well-positioned to grow organically through overall market expansion, as well as capturing the market share. Thank you very much. Good bye.

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