Good morning and welcome to the Lakeland Industries, Third Quarter Fiscal Year 2018 Earnings Release and Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]Please note that this event is being recorded. 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 reflects management’s expectations regarding future events and operating performance, and speaks only as of today, December 15, 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 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, Lakeland Industries’ Chief Executive Officer, Christopher J. Ryan. Mr. Ryan, you may begin.

Good afternoon to you all, and thank you for joining our fiscal 2018 third quarter financial results conference call. We are going to provide 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. Now on to my formal remarks. We are very pleased with our performance in the third quarter of fiscal 2018, which demonstrates the momentum of our core business while we gear up for accelerated growth and continued market share attainment. Similar to the second quarter, we showed effective management in all facets of our operations, and improved our profitability in the third quarter as compared to the prior year. For the fourth consecutive quarter, we delivered very solid performance which resulted from the implementation of the diversified growth strategy. Here are some of our more important aspects of our third quarter performance. Revenues continued to increase; we had sales growth in all major operating regions; our Amazon distribution strategy has gained meaningful traction; our gross margin, operating margin and net margin, all increased; our cash balance at the end of the quarter was up more than a 100% from the beginning of the year; subsequent to the end of the quarter, we paid down all of the $2.3 million of debt; new lower cost manufacturing operations are underway in India and Vietnam; new products and vertical markets are showing progress as part of our strategy for achieving permanent increases in our consolidated gross margin levels. During the last call, I mentioned that 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. In the third quarter, we advanced our…

Thank you, Chris. The following addresses my review of the third quarter of fiscal 2018 ended October 31, 2017. Net sales from continuing operations were $24 million, up from $23.9 million in Q2 2018 and $23.2 million for the prior year period. As compared to the earlier periods, overall sales volume was higher as economic growth seems to be positively impacting the industrial sector on a global scale and there has been a rebound from the oil and gas sector. On a consolidated basis, for the third quarter of fiscal 2018, domestic sales were $12.9 million or 54% of total revenue and International sales were $11.1 million or 46% of total revenues. Sales in the US increased 11% primarily due to increased sales of disposables products to national accounts and in response to hurricane clean-up efforts. Additionally, there was an increase in sales of chemical line products into the oil field services and refinery sectors along with demand from other industrial sectors as the U.S. economy continues to improve. Sales of disposable products in the U.S. increased $1.2 million, chemicals increased $0.5 million, woven products increased $0.1 million and gloves increased $0.1 million. Sales of reflective products remain level at $2.1 million and sales of power products decreased $0.5 million as there were large orders in the comparison period last year that did not repeat during the three months ended October 31, 2017. The increase in woven sales is mostly due to focused penetration of fire retardant or FR cover all into the pipeline industry where activity is increasing. Among the company’s larger international operations, sales in China and to the Asia Pacific Rim increased $3.1 million or 29% as compared to the prior year period. This growth is attributable to improving industrial activity and several larger customers beginning to…

Thank you. We will now begin the question and answer session. [Operator Instructions] First question will come from Dave King with Roth Capital. Please go ahead.

Thanks and good morning. I guess, first off on the revenue side. How much of a benefit do you think you had from the hurricanes? And then, on the China side, it seems like the – reducing the backlog, I think has been a benefit now. How big is that backlog versus normal, how many more quarters do you think that should provide a benefit as you sort of work that down? Any color there would be appreciated. Thanks.

On the hurricanes, we did not see a lot of business. They cleaned up Houston very, very quickly. I think we’ll see more business over a long period of time when we look at Puerto Rico, the Dominican Republic and the Virgin Island. They’ve don’t even have power yet for the most part has been the – almost six to seven weeks. So they can’t fix anything. So that will probably go – probably over the course of a year or two to do the fix ups in those places. They will use a certain amount of governance. But I don’t think it will be enough to make a big swing in sales. As the backlogs, we work them down pretty well. We probably have seven months of backlogs right now, okay.

Okay. That’s seven months, sorry, go ahead, Chris.

Seven months, it’s about $7 million.

So we are seeing it ease up and that was part of the improvements you saw in China was the easing of backlog. It reached a high earlier in the year of almost $13 million. So we are working through it.

Okay. And then, what’s typical versus that seven months?

What’s typical is, is more like a half of the backlog that we are looking at right now.

Okay.

So we also have to keep in mind that we are getting towards the end of the year. So people are depleting their inventories, but it will start picking back up in January and February as people begin to restock. So that’s why we are saying, probably seven months, because it’s going to get larger before it really runs down.

Okay. Okay, that helps. And then on the gross margin side, what’s driving the mix improvement within the disposables category and is that a sustainable trend there, just within that category?

We think it is sustainable. We are saying as we are – as we work through some on – we have a very specific initiative where we are running down some of our SKUs. We are streamlining the processes. We are seeing improved margins in some of the markets we haven’t been before. We are moving into clean rooms. So we are specifically targeting higher margin products in our mix. So it is an intentional improvement in the margins and we do think it’s sustainable.

Okay.

And when you’ll have blips from quarter-to-quarter, it’s totally on product mix.

Some of which we are obviously have nothing to rollover.

Okay. And then I guess lastly from me, where is the cash balance now as of December 15, versus where it was at quarter end? Where are you on the deployment of capital raise proceeds? It sounds like, you expect CapEx to ramp, but that’s for the ERP system and then I think, Chris, you said, where debt might be as of now. I know there is lots of parts to that question, but I am also – I think another piece of that as when we spoke last I think, Vietnam, you’d already rented the facility. I guess, I am just trying to get a sense of where we are in this whole process? Thanks.

As far as the cash balance, I can answer that part of the question. The mix of the cash hasn’t changed significantly. We still have a large portion of cash in China. We have not declared dividends intentionally. We don’t need the cash in the U.S. and we are waiting on the – to see what’s going to happen with changes in the U.S. tax codes if we do bring in dividends, we do take the – even though there is no there is no cash taxes, as I stated in the U.S., it’s still is a non-cash charge to expense. So, we are kind of waiting – we are sitting on tall until we see what’s going to happen with this move on, this new tax overhaul.

Understood. Okay.

As far as deployment of the cash, you are going to see that really start picking up in the January, February, timeframe. We won’t be hiring people in Vietnam until late February, early March and you are going to see a lot of capital expenditures there for setting machines and air-conditioning and cutting tables, things like that. India probably won’t pick up for about another six months. So we’ll probably be hiring in India out in the July, August timeframe. And then you will see a lot of the capital expenditures as deployment of the cash at that point. The ERP is an ongoing thing for the next two years.

Right, right, and we will probably ultimately see a cash outlay of approximately $2 million on the ERP. We are already done maybe $600,000, $700,000 entering that. So it will be a gradual phasing of CapEx.

Okay, okay. That’s great color. Thanks for taking on my questions and good luck closing out the fiscal year.

Thank you.

The next question will come from Alex Fuhrman of Craig-Hallum Capital Group. Please go ahead.

Great, thank you very much for taking my question. Just a little bit more, kind of curious about the new facilities you are putting together in India, in Vietnam. Do you have a timeline in mind of when we are actually going to start to see finished products coming from those facilities? And thinking about the different opportunities to improve margin there, I mean, it sounds like you guys have talked about improved manufacturing cost and lower tariffs in certain instances and as well as potentially being closer to some of your customers and presumably saving on shipping cost. Can you kind of give us a sense just an order of magnitude between the manufacturing cost, the tariffs in the shipping, what is the biggest bucket of potential savings and what could be actual net impact to gross margin be and would that be kind of a back half 2018 event or more of a 2019 when we could see that in the numbers?

It’s certainly going to be 2019. I mean, we’ll probably be hiring ladies in Vietnam as I said in March. We probably won’t be hiring in India until July or August. So you are going to see them really up and running at full speed, probably about a year from now, okay? Where you will have everybody hitting a standard, what we call a standard in the selling industry. What this does to is, really reduce our direct labor cost substantially, okay. So, if we look at something like, a $2 million total investment in Vietnam, and we can save $3 a box, we only have to have ship 700,000 cases to pay for the whole thing. So the direct labor is going to be a substantial savings, not only in Vietnam, but also in India, okay. Over current Chinese costs, which are really just continuing to go up and up and they will be up higher next year. So, we will see a very, very big change in our direct labor cost which will increase our gross margins. And I said, the payback will be probably within 18 months on the investment. So they are very sort of high return investments. The ERP is going to be the same thing in terms of being able to knock down our inventory, okay, be able to process everything much more efficiently. We spent too many man hours pooling with Excel and Spreadsheets whereas once this system is totally implemented, and it will take a year or two to really be – to where everybody is operating at a top level, it will save lot of money. I can’t put my finger on that, because what it does is that just saves hours and hours of white collar time that can be…

Great, that’s really helpful, Chris. I appreciate that. And then, if I could also ask just about the European market and in general from a demand perspective, I mean, it sounds like, things, you said have picked up a little bit now, kind of after some of the post-Brexit slowdown, it also sounds like maybe, I am not sure if that was new distributor relationships, it sounds like there was a sell-in there. During the quarter, do you feel like, Europe and the UK has finally kind of started to turn the quarter and would you expect that region to be back to growth next year?

Yes, we do, because, a large segment of our sales in Europe are in the UK. That’s where our warehouse is. We hired a guy in Germany. He is now signing on new distributor, new customers. The Brexit thing, I guess, will sort of solve itself, but that’s another thing. The currency dropped by 15% the day Brexit was passed. That should change over time. But Europe looks good, right now. And we really just have to work harder on, really the sales management. In terms of customer pricing and customer acquisition, which we are doing at this very moment. So, yes, I expect Europe to improve over time.

Great, that’s really helpful. Thank you very much.

The next question will be from Jeff Briggs of Singular Research. Please go ahead.

Hi guys, very good quarter.

Hi.

Hi.

So the question I have is, in regards to the investments and sort of maybe some of the operational changes that go along with the Amazon strategy that you guys have. I know there is lot of different ways to go about it, whether it’s filling individual orders around your own fulfillment centers versus having it sort of their warehouses and things of that nature. Can you describe a little bit sort of, what you have to do to make that work and maybe how the margins compare with other sales channels and any additional expenses that might go along with that sales channel?

Well, typically what we are really interested in is Amazon’s new B2B platform. But they’ve always had a consumer platform where guys like you and me might order something be it a book or one of our suits. But as the B2B platform, it’s the business is – real business is starting to order off the Amazon platform which really interests us, because, in the consumer type situation, Amazon buys our goods, puts it in their own inventory, stores it, picks it, ships it, bills it, okay. And we agree on a price between us. In this, in the B2B, we are keeping the inventory. We ship it. We pick it. We bill it. So we know where the – at least the end-user is in all of this, okay. Margins are better in the B2B platform, because we get to set the price at the end-user and we generally set prices that are typically the same or even higher than our own distributors. The difference being is, is that we pick up and then another 5% to 10% in margin on this B2B business as opposed to, say, a typical distributor. I mean, that might change, but right now, it’s very, very attractive, because it increases our margins and it also gives us a view at the end-user, so that we can really talk to the end-user about what they want in terms of new products. This is very helpful. Because in many instances, when we are dealing through distributors, we don’t know who the end-user is or where our product is going.

Yes, it’s very helpful. One very short follow-up to that. How do you see, since you are selling to end-users in this case, how do you see sort of the average order size? Is it – are you guys picking and packing for selling a lot of smaller orders? Or are they generally good size? I know you said it’s everything from one unit to cases, but.

Well, assuming typically when you are servicing the consumer market, it’s 1Z, 2Zs. So, but that’s what Amazon serves. On the B2B, you are looking at – you are really looking at small businesses. So, rather than 1Z, 2Z is all I want a pair of gloves, I mean, it’s ridiculous. But, when you are dealing with small businesses, they are going to be ordering boxes, cases of 25, cases of 50 and that’s even a small construction business. If you get in and occasionally, I’ve seen General Electric go out there and do Dutch auctions on $5 million bids, that’s the type of thing you’d really want to go after is the larger end-users just placing orders directly, because then you are able to call on that end-user and you are able really to create a relationship, brand your products with the end-user and also really have some on, what’s wrong, what’s that you need. This is the greatest way to develop new products is when you have a big end-user like a General Electric telling you, this is what we need.

And one more quick question. So, is the way that, you pay Amazon, right, is it basically just like a commission, if there is orders placed through the platform?

Yes, as a percent of the sale price.

Okay. Sounds good. Thank you very much.

Okay.

The next questions will come from Dennis Amato a private investor. Please go ahead.

Hey, Chris.

Hi.

Would you be able to comment on the progress if any in penetrating both utility and pharma markets that was initiated a while back?

Okay. The pharma is about three or four months behind, but we will be penetrating, we will be in there in the spring. Utility again, we’ll be in there in the spring. It’s only about a month or two behind. You run into these problems primarily because, fabric suppliers are not very efficient. I mean, we have guys to sit there and tell us, well, that’s a 12 week lead time. I mean, our customers want it next day. We never tell them 12 weeks from now. But that’s what most of the loss of a couple months has been. So they are both going to be introduced very hard in the spring.

Okay, thanks.

[Operator Instructions] The next question will come from Peter Muckerman with Raymond James. Please go ahead.

Hey, good afternoon you all and you’ve answered the questions that I had. So, I was here thinking what can I ask. So, I guess, I’ll ask this. It’s two-fold. When you are talking to manufacturers out there, are they a little – I guess, I would love to hear some feedback in regards to what they are thinking. I am speaking mostly to your foreign customers in relation to what’s going on in Washington. And then, to follow-on to that, does any of the, this makes me a little bit nervous, so I just thought I’d ask, does the re – kind of jiggering of trade policies that have been in place for so many years, all of a sudden they are all going to be renegotiated. Do you see any impact in 2018 and beyond in regards to that?

Not for us specifically. The most active negotiation is NAFTA, okay. And we are not seeing any real negotiation going on in the apparel business, simply because, apparel has not been made in this country for close to thirty years. So there is no jobs, there is no job issue. What you are seeing in NAFTA is a big, big to do about the automobile industry and a lot because Mexico has made deals with Europe all over the world, much like Vietnam has, to be able to export automobiles duty free. So Mexico has built about 20 auto plants and lot of them being American, but not only American, it’s German, it’s Korean, it’s Japanese and I think that’s what Mr. Trump is after, to try to get some of those auto jobs back, because those are the high paying jobs that Americans have done historically. As to the rest of the world, the European, they look at the – it’s hard to say, most of them are not too happy. But it doesn’t affect trade simply because, we operate in ten countries. So the fact that the United States is dropped out of the Pacific, the PAN Pacific agreement or Trans-Pacific agreement, it doesn’t affect us at all, because we will be manufacturing in Vietnam and they are a member, okay.

Gotcha.

We are manufacturing in Chile. We sell out of Chile. They are a member. So, the fact that the Trans-Pacific agreement, we’ve dropped out of, it doesn’t affect us at all.

Okay, all right. Thank you and congratulations on all your progress.

The apparel business is not what Mr. Trump is trying to change.

Gotcha, okay.

Ladies and gentlemen, as there are no further questions, this concludes our question and answer session. I would like to turn the conference back to management for closing remarks.

Okay. We appreciate your participation on Lakeland’s fiscal 2018 third quarter financial results conference call. As we are committed to delivering value for our shareholders, we believe this is the best achievement for Lakeland Industries through the continued implementation of strategies for effectively managing its balance sheet, controlling expenses and capitalizing on long-term global growth initiatives. We have made significant progress in the year-to-date toward optimizing our balance sheet, improving our cost structure and importantly, enhancing our competitive market position. It’s our intent to continue on this path. Thank you again, and goodbye.

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