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Executives

Zsolt Rumy - Founder, Chairman, Chief Executive Officer and President

Andrew W. Whipple - Chief Financial Officer and Vice President

Cary B. Wood - Chief Executive Officer, President, Director and General Director of Vietnam

Analysts

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Charles DiBenedetto

Preston Foulks

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

Zoltek Companies (ZOLT) Q1 2013 Earnings Call February 4, 2013 11:00 AM ET

Operator

Good day, and welcome to the Zoltek First Quarter 2013 Results Conference Call. Today's call is being recorded. And now for introductions and opening remarks, I would like to turn the call over to Mr. Zsolt Rumy, President and Chief Executive Officer for Zoltek. Please go ahead, sir.

Zsolt Rumy

Thank you, Angela. Welcome to our first quarter conference call. We're going to talk a little bit about the quarter and then some comments on our business. But first and foremost, I'm going to have Andy Whipple, our CFO, talk about the numbers. But before he does, we'll go to the forward-looking statements, and then I'll get back on the comments about the company.

Andrew W. Whipple

Great. Thank you, Zsolt. During the next few minutes, I'll cover some highlights of our first quarter operating results. However, as Zsolt noted, I first need to provide a comment regarding forward-looking statements and certain financial measures.

During today's call, we'll refer to certain financial measures and details that explain or add to the information provided in our earnings release. We will also be making certain forward-looking statements today. Please refer -- review our Safe Harbor language found in our press release and our SEC filings, which describe factors that could cause our actual results to differ materially from those projected by us in our forward-looking statements.

With regards to the first quarter sales, the year-over-year quarterly sales decreased from $44.2 million to $35.9 million, and the sales from the prior quarter decreased from $47 million to $35.9 million or 23.7%. This appears to be primarily due to a year-end slowdown in Europe and the expiration of the production tax credits in the U.S.

On a year-over-year basis, it is worth noting that the euro weakened against the U.S. dollar by about 4%, resulting in about $0.5 million in decreased revenue. Zsolt will comment further with regards to sales in his segment of the call.

With regards to the cost of goods sold, the year-over-year quarterly cost of goods sold decreased from $33.9 million $26.8 million. On a sequential quarter basis, the cost of goods sold decreased from $34 million to $26.8 million or 20.9%. Gross profits percentage, however, increased slightly to 25.3% from 23.1% during Q4 2012, are reflecting changes in the product mix and improvements in our productivity, which decreased our cost per unit. Again, Zsolt to comment further about cost of goods sold in his segment of the call.

With regards to application and development costs, these were about $2.1 million in Q1. We continue to invest in prepreg, wind, auto, pultrusion, and our PAN/lignin program, which is supported by a grant from the Department of Energy.

With regards to the SG&A expenses, these were $3.4 million in Q1 versus $3.2 million in Q4 2012, fairly consistent over multiple periods, a slight increase in the current quarter due to year-end audit and proxy cost.

We did have a slight loss below the line, less than $0.1 million and this was due to a strengthening of the health [ph] in euro against the U.S. dollar.

Looking at income taxes, we can see that these increased to about $0.6 million, expensing -- and this was primarily due to our tax expense over in Hungary. Starting in 2013, they changed the tax law over there, and we can only use 50% of our NOL to cover our taxes due in Hungary. So we'll see a continued increase of our tax burden, primarily over in Hungary, as we continue to increase the profitability of the company.

With regards to capital spending, that was approximately $2.9 million in this quarter. That primarily relates to increased spending on our Pyron manufacturing capability down in Mexico.

With regards to our balance sheet and looking at the receivables, we saw a decrease to $29.4 million, and this was primarily associated with the decrease in the sales for the quarter. The receivables pay on average approximately 60 to 70 days, which is in line with our expectations and customer mix. We continue to monitor our receivables closely and pursue a slow pace, as appropriate, and we've noted that our bad debt expenses continue to be fairly immaterial over the last 12 months.

Looking at our inventories, we see that these increased to $79.9 million from $67.9 million in the prior quarter. This reflects primarily the slowdown in our sales in Q1, which drove up our inventories. I'd note that we have subsequently reduced our production rates in order to trim our inventory levels. Our cost per unit, however, and inventory has been pretty good as we hold production steady throughout 2012 and into 2013. And [indiscernible] production. Also our inventory does tend to have a very long shelf life, and we do tend to carry very few part duds. So we, of course, we do monitor for inventory obsolescence, but this does not tend to be a real big risk for the company.

With regards to liquidity, our cash decreased to $20.5 million versus $29.9 million in the prior quarter. This was primarily caused by the increase in our inventory levels, our CapEx spending and debt repayments.

Our cash on hand, our cash flow from operations and our anticipated credit facilities should be sufficient to fund our liquidity needs during the next 12 months.

With regards to EBITDA, we had $8.3 million of EBITDA for the quarter. We continue to have a very good cash flow from our EBITDA, and we'll continue to work to keep ourselves in a very strong EBITDA position.

Zsolt, back to you.

Zsolt Rumy

Thanks, Andy. In reviewing the past quarter and in terms of the business, all I can really say is that, obviously, we're disappointed about the revenue, but again, I can say that there's no fundamental change in our business or anything like that. It is a combination of -- December was, I think our European customers took off December, I don't think some -- well, some of them came back till January 7th. And so it really affected us. And the other disappointment was we were now unable to get our inventory down, but I think that also ties in with the December revenue was low and, therefore, the inventory continued to grow even though we cut back on our number of lines of runnings, but we have been sufficient in our production and so good that even though we cut back significantly, we continue to build inventory.

So I wanted to -- in preparation to the shareholders' meeting, which was on Friday, I looked at our performance past years and our share price for 2012, obviously, shareholders are quite interested in that. And it is really striking that we also have -- how well we did last year, our stock just basically continued to go down during the year. And then I looked at our performance during -- last year was our best year ever, and so I compared that to the previous time that our performance was similar and that was in 2008. And so then I compared that 2008 performance with 2012 and there are some interesting things that I want to share with you.

First of all, revenue in 2008 was about the same. I think it was $185.6 million versus $186.3 million, but the company today is significantly different from what it was in 2008. So I have some graphs, unfortunately, you can't see them, but then I also looked at the share price in this period, and in 2008, our share price was $30 and I guess now it's about $7-something. So it's kind of frustrating to us in the management team and, I think, also to our loyal shareholders that we seem to be in such a rut.

So I looked at -- what did we do different or what was 2012, on the financial results, what was better? Again, we had almost the same revenue, except the price in 2008 was 30% higher than it is today, it's primarily because there was some bit of a shortage on carbon fibers at that time and, really, the wind turbine just took off and there was a brand-new market for carbon fibers and, really, the defining implication for commercial carbon fibers. So basically, we had to produce 30% more carbon fibers this -- in 2012, in order to make the same revenue.

Our income is significantly higher in 2012. Operating income is 20% higher. We have concluded all expensive refinancing since that time, and net income and earnings per share was up 300%. We're stronger, considerably, financially in 2012 and limit [ph] the liabilities. We have better accounts receivable collection and control and excluding the accumulated comprehensive losses, equity is up by $12 million.

And so then I looked at what makes this difference. Certainly, we have a much more competent and significant management team. With Andrew being CFO; we got a Chief Technology Officer, George Husman; and Phil Schell, Executive VP of Wind; Dave Purcell, VP of Composite Intermediates business; Bill Regan, VP of Engineering and Technology; John White, he's VP of Global Human Resources; and we have good managers, the general managers in Hungarian and Mexican operations.

We also, in the sales and marketing, we have actually in this period proven that the strategy we're on is correct, although we're, obviously, disappointed, how slow some of the new markets developed, but we're certainly on the right track. Carbon fiber market that has changed from aerospace-centric to wind and commercial dominated market. Wind energy application now is the largest user of carbon fibers. Zoltek is the largest supplier in this market. And in 2008, we had 3 wind customers and in 2012, we have 7.

Our sales for Europe and U.S., have now -- we have global presence, and Zoltek is a well-established global brand. Aircraft brake business has increased 67% since 2008. And we established a new composite intermediate facility in St. Peters, Missouri and in Hungary. Nice pictures, but we don't have them -- sorry, we don't have it on the screen.

And looking at the operations. Operations improvements have been tremendous. The capacity of installed carbon fibers lines increased by 30%. Total installed capacity increased from 13,000 metric tons to 16,000 metric tons without any substantial capital investment. Quality has also improved substantially. Hungarian facility is now very efficient and productive operation precursor capacity is around 24,000 metric tons; matches our Panex, which is 10,500 tons; and Pyron, 1,800 metric tons of capacity. And our modernization of that facility is now about 75% complete. We removed a number of obsolete buildings and we're remodeling the leftover buildings that we're utilizing to make them up-to-date.

Mexico facility has been successfully started and established to produce precursor and carbon fiber, and now we're installing Pyron capability to support our aircraft business. And the planned additional carbon fiber -- has been moved -- some of the Abilene plant to Mexico.

Our composite intermediate business, again, we established 2 facilities. We've doubled our prepreg capacity, and I think we're here to be the largest prepreg commercial carbon fiber, prepreg facility in the world. And we've started to pull through thick profiles for -- which is hopefully going to be used in the new design of wind turbines.

Installed new weaving capacity in Hungary to, again, to support some of the automotive and the wind turbine business. And we've improved our short fiber which is chopped and mill fiber capacity and capabilities.

We developed the wind turbine business. This was the first commercial carbon fiber matted [ph] application, and we're -- and, really, this is kind of important, that one of the reasons why we got the initial contracts and since then, maintained our leadership in this whole market, is because we were the only ones that are capable to produce as much and as quick, as the wind turbine customers were looking for in a whole carbon fiber market.

In 2012, we supplied almost 10 million pounds to Vestas, the largest buyer of carbon fibers, at a 100% supply basis. We have a number of active customers and even more customers developing large blades for offshore projects. They have test blades from 56 meters to 85 meters in testing and development. We are now supplying more than just carbon fibers, we are providing solutions to end customers, entering into the carbon fiber blade production, provide engineering and production support. We have adopted [ph] -- we expensed a lot of time and effort and money on Automotive Business Development which is, again, slower than we had hoped, but it's definitely building steam. In 2012, we were working with several automakers and their Tier 1 and 2 suppliers. We have a contract with Magna for development and commercialization of carbon fiber, as I was saying, which is very successful so far. And we're now actually quoting on specific projects and parts.

And then we are developing thermoplastic products in-house and with a number of partners in Europe and U.S., and it's believed that thermoplastic is going to be the desired material for automotive, because it's easier and quicker to mold and easier to recycle.

We have dramatically increased our research and development activity. In 2008, we were concentrating on improving our carbon fibers and produce to meet our contracts. We are now working on new types of carbon fibers, lignin-based, low-cost carbon fibers, primarily for the automotive industry, and we're looking at nanotechnology and low-cost aerospace fibers. We're working with development like Wirehouse and Magna, largest concentration of R&D activity now is the development of products and processes to support business development, primarily automotive applications, thermoplastic carbon fiber and, of course, materials, fusible fabrics, pultrusion technology, for infrastructure.

And so in engineering and technology, we again, in 2008, we were concentrating solely on building additional facilities. We're now selling and supporting filament lighting equipment and software for all -- just for our carbon fiber users, while back in 2008, we're just in the equipment business, supplying to anybody including the people that were filament lining glass. We're supporting customers with their manufacturing processes, and today, we are developing composite manufacturing improvement for paperless prepreg machine, which is really a revolutionary idea, at much lower cost and much faster production. SMC production machine, compressed natural gas tanks, and production systems and pultrusion equipment.

So with that background and that improved capabilities, firstly, we continue to work on our $500 million revenue plan. Obviously, it is -- it's not going as fast as we'd like, but we're making progress and I think we're going to continue making progress.

In the shareholders' meeting, I did go through some -- how do we plan to build this business to that level, and I did go through some aircraft brake applications, our oldest application, I talk about the wind turbines and automotive, a lot of these comments were -- they have some pictures, but again, I can give you a flavor on what we think is important to build our business and these 3 applications are really representative of what we think we can do. In 1988, when we got into the carbon fiber business, we were buying precursor from Gorcal, at that time, and we were supplying BF Goodrich and NOI, saving [indiscernible, which at that time, was Bendix. The use of -- and mostly for military fighter jet programs. And we had some rocket nozzle business at the time also.

Use of carbon brakes in commercial aircraft was just beginning with the 747 400, which is supplied by Goodrich. Initially, we were not the supplier for the commercial aircraft application, but in '94, we signed a 100% contract, supply agreement with Goodrich. So we came up very fast from being outside looking in and to actually becoming the primary supplier. By '96, we qualified with Messier Bugatti which was -- which is still, I think, by now, it might be larger than Goodrich, but certainly, 1 of the 2 largest aircraft brake manufacturers in the world. In '98, we signed a supply contract for 50% of their requirements. And in 2002, we have gone through extensive qualifications, both at BF Goodrich and Messier Bugatti to qualify our own precursor which then assured us for long term, high level of supply to both of these companies since we have control over our precursor. And today, we supply us 75% of our all carbon fiber and aircraft brake business. We have a 20-year contract with Goodrich and a 6-year contract with Messier Bugatti. And so we have pretty-well capitalized on our capabilities and built this business very strong, on business connections with the aircraft brake business.

And so I -- there is a lot of things that we did right, and so I don't want to dwell on it too much, but then going on to wind turbine blades, again this is the first major commercial market. We supply 100% carbon fiber used by Vestas, the largest buyer of our carbon fibers. We got the initial contact in 2005, again, I want to reiterate that largely because no one else was able to supply the quantity and the quality of the products that they needed and, obviously, this strategy will also come back and be a real benefit to us when the automotive business starts. Again, we will be in position to be the best and the lowest cost supplier and the carbon fiber manufacturer, and we'll have ability to expand as fast as the demand will increase.

We're now working on a lot a long blades at. The wind turbine business is now shifting to offshore and that's taken a couple of years to develop, but we're very much part of it and the China market is -- took a beating last year because I think they were over manufacturing and the government put a hold and reevaluating who's going to survive and who's not, and I think now they're back into actually progressively developing new carbon fiber blades.

We now supply, not only carbon fibers, but we supply prepreg, we supply fabrics, we supply the pultrusion profiles and we also have equipment that facilitates the lower-cost production, and we have a cooperative agreement with the engineering firm that helps us -- helps our customers design their carbon fiber blades.

The automotive, which, again, we believe, is going to be the biggest application, ultimately, and hopefully, in the next 2 to 3 years, it's going to be very significant. We think by 2017, it should become a -- should be a 20,000 ton business, which is -- and that once it reaches that level, it's going to take off. We spent a lot of time initially to work with BMW on -- they were fixated on becoming the first carbon fiber automobile producer, primarily because they were aced out of being the first in aluminum by Audi and they were hell-bent to beat Audi into the carbon fiber business. I think the concept of making a carbon fiber car right away has had its problems, and I think the whole industry in the last few years, has changed to what they call light weighting, which is basically replacing heavy components, a group at a time and reducing the weight on a continuous basis, rather than one big huge step from all-metal to carbon fiber-reinforced cars and first cars and that was not a reality. So I think, BMW now is the odd, left field [ph], the only one doing -- trying to do, and they're still having some problems, trying to do a full carbon fiber car.

The lightweigthing concept involves working with various Tier 1 suppliers, basically the auto suppliers that are very interested in participating in the decision-making of fiber selection and where to put carbon fiber component with the Tier 1 and 2 suppliers are the ones that really do the development work, and we're having a very good relationship building with suppliers -- with these suppliers and also people that manufacture equipment for the carbon fiber composite manufacturing in automotive area.

So we, as a whole, I think, we have improved our company tremendously, and when you looking only all the numbers, it isn't as apparent how much progress we have made and how we are ready to actually support the new applications when they come along, and again, auto being the largest one. We have other applications, but it would take too long to kind of go through even a small discussion on it. But in any event, this is what we did, this is our presentation to the shareholders and a little extended presentation than what I just did. But I think you get the idea.

So with that, I'd like to have your comments and your questions. So Angela, whenever you're ready, ask for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Joe Maxa from Dougherty & Company.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Just wanted to ask on the inventory level, if you have a target level you're trying to shoot for.

Zsolt Rumy

Well, I think, number one, we have about requirements for close to $30 million inventory that we are committed, by contract, to maintain. And so we need some level, and those are covering our big customers. So maybe another level of inventory probably at least another $25 million -- $20 million, $25 million. So that would be a reasonable target for us, which is where we were, I guess, late last year. So we need to get back to that level.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

So if you are reducing production to get to that level, I would imagine, over a few quarters, I mean, I should we be thinking of what production down, the gross margins coming back down a bit from current levels?

Zsolt Rumy

Well, again, last year, first quarter, we had a huge quarter, and it was like a perfect storm in a positive way. And next quarter, we had the perfect storm in the a negative way. So our business last year was pretty much on average, in the mid-40s per quarter. And realistically, not much happened since last year. I mean, there's obviously some -- customers require more and some change their product mix and all that. But -- so I don't see any immediate huge jump, but I do see us getting back to those levels that we were last year, unless, of course, 2013 turns out to be a 2009 again, which some people talk about it, but I think from the indications that we have from our largest customers that doesn't seem to be the case. So I expect that our production level will go back up, and, as I mentioned, what made this difficult for us this year is that we did cut back a number of lines we were running, but our production rate was so much better. And the quality is so much higher than we actually did reduce our cost of production and also, even though we decreased the number of lines running, we did not decrease the production rate. So we're dealing with -- and it's a difficult question because we certainly don't want to be dramatically decreasing our outlook and then start laying off people or anything like. So it's going to take more than one quarter to make this correction. And I don't think that -- I think our margins are improving, and I can say that's one of the positives of our last quarter is that even though our revenue went down, our gross margins stayed at the same level. Obviously, we couldn't sustain a number of quarters at a lower level and not be affected by it, but I don't anticipate that to be the case.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

Zsolt, do you expect revenue to Vestas to get back up to current levels this year versus, they say, closer to the Q1 level?

Zsolt Rumy

No, I think they're one of the companies that indications are that they're going to have a strong year.

Operator

And we'll take our next question from Ray Kintanar [ph] from Canton Research [ph].

Unknown Analyst

I mean, part of my question was just answered, but maybe you could talk a little bit about the oil exploration industry, and then where you sit there? I know you were due a lot of testing for some -- one of the largest deep oil well drillers. And maybe add a little bit, if you possibly can, on the auto industry. The perception I believe is that you're probably going to get -- looking to manufacture smaller components for the auto industry in the beginning or maybe you can give us a better timetable for where you envision? I know it's late, but perhaps, you can add some color to that.

Zsolt Rumy

Well, okay, on the oil side, we have a very active business in the buoyancy market, and the buoyancy market is kind of an intermediate step from all steel and metal components in the drilling and production pipes and so on to a -- and also tethers and all that, by buoying the steel up either, like I say, piping and you put like a jacket on it like a life jacket on the a steel pipes, it holds them up and so it doesn't take the entire brunt of the weight of the complete line. Similarly in a tether, they can again attach these buoyancy modules and hold the chain and -- or not chain, the cable in place. So this is the intermediate part. And then the final step is going to be when they actually start replacing the metal with composites. And of course that's all going to be carbon. I don't think there's any chance of any glass or anything like that. And that is where we're doing a lot of demo projects and that has gone slower than I expected.

But we do see some other interesting things that are [indiscernible] started to see applications developing in the oil rigs because of the tires with BP oil. So there are some activity in the oil industry, and so we're expecting some increases there. And we have indication that it's going to be fairly strong this year again.

The auto industry, we're not looking to get into manufacturing parts at the moment, although we are talking and working with some people and some Tier 1s and OEMs to show them other parts might be made. And our intention right now is not to get into that or compete in other parts spaces, but we are taking our product line further downstream and that sort of composite intermediate is coming in. So instead of just selling carbon fibers, we do sell technology as well as some downstream processed material like prepregs, and again, pultrusion will have some place in the automotive. And the big thing is, and again, thermoplastic is the big goal for a lot of the auto guys because, again, on the thermal sets you got to put the carbon fiber and the resin into some sort of a mold and then you have to give it a certain amount of time to cure, and that is very time-consuming.

On the other hand, in a thermoplastic -- carbon fiber-reinforced thermoplastic, you can just heat it and mold it to shape, and you're done, and it's much easier to recycle because you can melt the resin. And you'll never get the carbon fiber back to the original quality and value, but you can downgrade its capabilities, like make chopped fibers out of them or mill fiber, relative or similar to the mill fiber product. So you can reduce the value of it, but still recover some of the carbon fibers. And this is very attractive to the car guys. And again, if it can use enough recycled product in a car to take the off fall in the production and everything and use it in the same car, this would be very desirable for other guys. And so we're also looking at how to participate in some of this recycling.

So that's kind of our activity in general terms. But we work very closely with both the Tier 1s and some OEMs on getting qualified and tested and so on and so forth.

Operator

And we'll take our next question from Charles DiBenedetto from CCD Investment company.

Charles DiBenedetto

Zsolt, I'm puzzled. Since 2008, the share price was $30, the company is growing stronger and stronger. The last 5 or 6 earnings reports have gotten better and better, and each time they get better and better, the share price does nothing and goes down. What do you attribute this to?

Zsolt Rumy

Well, again, we've talked about this a number of times. I think we have probably 2 primary things. One is that we continue to be boxed into this wind turbine market, and the bad thing is that not only -- people that put report's out on us and put us into this market, they're not even conscientious enough to look at the segments of the wind turbine business, whether the short blades and the glass blades are -- have their own life, but -- and the carbon blades are the up and coming product. So they were not even differentiating within the wind market. And right now, the wind is not an alternative energy in the U.S., is not that strong. Or at least not considered to be that strong of a market. And to some extent, that may be correct because natural gas in the United States is very cheap, and it does compete well now against renewable energy. That is not the case in the rest of the world. Europe is being blackmailed by the Russians and their gas prices are very high. Asia has -- going to have the natural gas to the level that the U.S. has, and so the market in the global is much different than it is in the U.S., but we're still getting gauged by the U.S. wind market. So that's one thing. The other -- and we're not getting credit for any of this stuff that I listed of all the work that we've done and how well we improved and strengthened our company. We're -- it's not being considered at all.

And then one other thing that has been a problem from almost the very beginning, we have had an unnatural amount of short sellers, and we have people that are hoping against hope that we're going to collapse or something. And you could see the last year, first quarter, we had a wonderful quarter, and I personally cautioned everybody that it was -- were too many good things along that quarter and it's not going to be like that. But you got to look at it from an annual basis, but sure as hell our friend from -- Michael Loo [ph], he came out and knocked us like this is just -- must have been some sort of an accident. And you can look at the curve immediately, the stock pulled back. And so these guys are trying their best to support the short sellers and nothing we can do about it. And that's -- those are the 2 biggest things that I see, the problem we're trying -- we'll try better in communicating to the market this year and hope to change that wind turbine image and show the strength of the company and see if we can convince some of the shareholders that we're an up and coming technology company.

Charles DiBenedetto

Is it possible to ask the SEC or file a complaint against naked short selling of your stock?

Zsolt Rumy

Well, I suppose it could be, but that's not my style. I mean, we ultimately need to shed these shareholders and get some people that believe in what we're doing and then start to continually perform now. We've had 6 quarters of positive earnings. And so I think that certainly they're -- the short sellers will go away, and so I'm not -- like I said, I'm not the type that will go whining to the SEC. Although I will say that very early in our time the -- when we bought the Hungarian company and the stock went crazy, the short sellers did go to the SEC and complain and claimed that we did not actually -- we're lying and we did not have a plant in Hungary. We just made that -- all that stuff up. And so when I write my book about all this craziness, there will be a chapter on how that investigation went, rather humorous. But in any event, it was very successful, obviously. It was actually doing the offering that we did at Merrill Lynch and it successfully convinced the SEC that we're doing just fine. Anyway, so maybe it would be a fair play to go back at them, but that's not my style. So I don't think I'll be doing that.

Charles DiBenedetto

Okay, one other thing. The Germans have indicated an expansion of their wind energy program. Is that forthcoming in the current year?

Zsolt Rumy

Yes, it's going to happened. There's one negative thing in Germany and that is the German -- on the German soil, the wind is very slow in relative terms. And so they tend to have glass blades although we have German customers who go either offshore or they have 2 versions: one is for slow wind velocity in the same -- made out of glass and the same blade made out of carbon for high wind velocity. And so the product mix sometimes flows in our favor, sometimes not. But definitely, Germans are going offshore and their offshore is going to be all big blades. And that's the beauty of the offshore is that there's a more constant wind, there's no obstruction and no worry about various things that people worry about on the ground. And also I think I just bought [ph] all the major cities, or most of the major cities are on the oceanfront and it makes it much lower cost to get the electricity where the users are. So offshore is going to be big in Germany, and Asia, very, very active.

Charles DiBenedetto

Good. And do you look forward to a reasonably good year in 2013?

Zsolt Rumy

Well, I think so. And like I was trying to tell you guys that we don't like the first quarter, but it's not a reflection of any change in our business. So it's just a perfect storm in the wrong way, I guess.

Operator

We'll take our next question from Preston Foulks from Princor Principal Financial Group.

Preston Foulks

I just have a couple of quick questions. One is can you highlight any -- I know in the past you had something with General Motors with the Corvette, the prior edition. They released their newest 2014 model? Does that seem to be a product that you may have some implications in the hood, in the roof of that car?

Zsolt Rumy

Yes, actually on the old model, we did participate in it. And the new model, we're the company that was doing the old one, is doing the new one is as well. And we're going through some qualification for that within that hood and roof project.

Preston Foulks

Okay. And then any expansion in Asia? I know last conference call, you mentioned future plans. You're looking to have a presence for Chinese, Asian automotive moldable companies?

Zsolt Rumy

Well, we are -- we got to solve this Chinese issue because there's a 15% import duty on carbon fibers and 17% on prepreg. And we need to solve that problem and there -- and I don't have a final solution for it yet but we're working at least 2 possibilities and saw, had more information, and possibly a third one with a new product that somebody's introduced and may have enormous carbon fiber demand. And so that's kind of a third, little more remote possibility.

Preston Foulks

Then this one, a little bit more on auto is basically last year Ford announced they're going to try to work with Dow Chemical. Do you know any developments or if they have any...

Zsolt Rumy

Well some of these announcements are more for publicity than reality. Dow is big in thermo-set products and they're well known in the auto industry. And so is every plastic, every resin manufacturer in the oil biz, I mean, all the big ones are very high on the auto industry. And so we had worked with Dow in the past, and I'm not all that impressed with them. But anyway, they're just one of the several people that are in that market, and we're working with the resin companies direct ourselves and we just have not -- we tend not to make announcements unless we have something, real serious activity.

Now we are looking at a -- starting to write articles in the trade magazines about -- that we consider to have less of a, how should I say, less stringent requirements than the financial recording and financial news releases. So we're looking at writing articles about things that we're doing and joint articles with people that we're working with. And I think, probably the first one is going come out in early March, when we'll have a kind of a joint report with Magna and I think we'll continue to write articles every month or so in trade magazines.

Preston Foulks

And the warrants you had, the expired at the end of the year?

Zsolt Rumy

They have expired. We don't have any more warrants.

Preston Foulks

Okay. And then last thing is, I know you heard a lot in the last 2 quarters about the stock price. If you guys start beating the estimates, would that probably helped the stock a little bit. Do you see that?

Zsolt Rumy

Well, except this is not our estimate. I mean, we don't -- it's hard to beat somebody else's estimate. It's taking the numbers out of the air so...

Preston Foulks

Or you surprise the Street with a higher number than what they're looking for, I guess.

Zsolt Rumy

Well, we did that a year ago and it didn't do any good.

Operator

And we'll take our next question from Demetrius Menthos [ph] with Arthur Wood [ph].

Unknown Analyst

I get a couple of questions. I saw an article...

So anyways, there was an article on the 27th from Reuters about Europe lagging behind significantly on offshore's wind turbine installations, and basically, they only installed about 1,156 megawatts. I guess, my first question, do you see an acceleration of European offshore wind turbine installations? And also this article indicates that Vestas didn't install any European offshore wind turbines last year. And most of the installations were done from -- with the Siemens turbines, and I guess, could you talk a little bit about, I know you've inclinated before, but Vestas has had some problems with offshore wind and if they're getting these problems solved.

Zsolt Rumy

Well, okay, first of all, maybe the easiest comment I can make is the Siemens turbine. Siemens has been hell-bent to use glass and they have a turbine blade that's probably twice as heavy as it should be with carbon. So they're constantly coming back and say, "Yes, we need to start looking at carbon," and they will, there's no question in my mind. Now as far as -- and then you talked about Vestas. Vestas very unfortunately, they went out of control. I think, they were doing a lot of development work, and I think it ended in a lot of cost. While the turbine market was going the wrong direction, the prices were falling, and last year, they got into a serious cash flow problem which they have been very good at correcting. And I think they're doing fine. I don't think there's any issues. And that cash flow problem interfered with their development of the offshore blade and they were talking with, I believe, Mitsubishi, the possibility to, as we say in [ph] the industries, to do a joint development of their offshore turbines. I can assure you they're back and doing development work and -- by themselves and may or may not take on a partner in the future. But they're going to be a factor. They're the biggest in the business and they're very good. So I expect them to be in that business very correctly [ph] and we're supporting their efforts in that area.

As far as in general terms, Europe and Asia, for that matter, have not gone as rapidly. There were some hiccups, some market hiccups, whether it is or isn't viable. And I think England had a huge project that they were going to do and for some other reason, it kind of petered out after a while.

But I can't -- but what you guys in the financial market don't see is the progress that is actually being made by some of these guys. As I mentioned in our presentation, we got people going from 56 meters to 85 meters that are actually being tested and built. Blades are built and what they do is they build them, design them, build them, test them stationary, then they put them on a turbine or 2, and watch it for a while, and before they actually introduce one of these blades. And that could take as much as 2 years, and sometimes less, sometimes a little more. And there's a lot of that going on right now, and as a matter of fact, there are people, they're talking about 100-meter blade. When you're talking about 100-meter blade, that's 330 feet long. That's just the blade, it's not the diameter. And that's all.

So it's like they're huge blades, and these are tremendous structures. I think at one of our annual reports we showed the overlay of a wind turbine blade or wind turbine over the 747, and these blades are much longer than the airplane's wings and they're similar structures. As a matter of fact, to some extent, they're going through a lot more -- require a lot more performance because they go from tension to compression much more than the airplane does.

So it's -- these are not minor things that somebody decides they're going to make 100-meter blade and then just start doing it. So it takes time. And so Reuters, just like most other financial guys, are looking from behind and looking what the financial performance is and know very little of what actually is going on in the development work.

Unknown Analyst

Okay. And yet that leads me to the next question about GE, and I saw another article on how they're, in the long term, looking for fabric covered blades to increase efficiency, some sort of a tightly wrapped fabric that goes over a metal space frame which would cut manufacturing cost, that would allow for a larger blade size. And they're talking up to 120 meters, which I know that this is not near term, but, I guess, any comments on fabric...

Zsolt Rumy

Well first of all, I don't really have much comments about the fabrics. It's always possible, and I'm sure they have some reason to believe that they can do that. But from the structural integrity of the blade, it doesn't make a whole lot of difference. As a matter of fact, to some extent, it's even more -- puts some more requirements on the main blade structure. In other words, the stiffness of the blade and so when you're rotating the blade in the wind, you can't have it flopping and hit the tower and then it just explodes. So the blade integrity is still going have to be there, and if you're going to hang fabric on the main structure that does not add to the stiffness or the composite strength of the blade, that may even require a more stringent spar that really is one the central spar that holds up the blade. May have to have even stronger requirements for the spar than the conventional airfoil wing made out of glass composite.

Unknown Analyst

Okay. And regarding Entec, which you mentioned in the 2012 annual report, and how it was short -- I think, it was a great short-term promise about selling the winding equipment. I guess these compressed natural gas tanks, they're obviously being manufactured. Who would you compete with -- who would Entec compete with for some of that business to -- in the winding of carbon fiber?

Zsolt Rumy

Well, we're not looking necessarily, at least certainly not at the moment, we're not looking at making compressed natural gas tanks ourselves. We're looking at designing the equipment and the whole manufacturing process around our carbon fibers. And we're working on a 100,000 unit production sell, so to speak, that would take a -- wind the tanks, secure and test them and sell it. And so that's really where we're looking at. We are selling quite a bit of equipment now to other people that are doing winding, and everybody that's doing the filament winding, we definitely try to convince them of using our carbon fibers and we're finding quite a bit of success and with people, again, that are new in the business. And so we have some fairly active customer base, and we're building on it.

And I believe personally that in the U.S., there should really be a very active market for natural gas vehicles because of the price of natural gas. But there's still no distribution and there are some companies like Lincoln Composites that does fairly large tanks for storage and for shipping compressed natural gas. And we supply them with equipment and so there are some activity. And if we have been approached by someone to do a joint venture of actually producing tanks, but so far, we have not.

Unknown Analyst

Okay, and just as a line item, is that going to be -- to keep track that, is that going to be in other in terms of sales?

Cary B. Wood

Yes.

Unknown Analyst

Yes, I know where you -- other you had $2.4 million for 2012.

Zsolt Rumy

I'm sorry, I guess it does show up in carbon sales, yes.

Unknown Analyst

It will show up in -- under carbon fibers?

Zsolt Rumy

Yes.

Andrew W. Whipple

Yes.

Unknown Analyst

The equipment, the Entec equipment?

Zsolt Rumy

Right.

Andrew W. Whipple

Correct.

Operator

And we will take our next question from Graham Tanaka with Tanaka Capital.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

I'm sorry, I missed the first half-hour. I just was wondering if you wanted to maybe help us out and give us a little bit of a forecast of what you think the mix of end markets might be 1 and 2 years out? Wind is possibly recovering, but with auto increasing...

Zsolt Rumy

Graham, you never stop trying. I mean, all I can do is repeat what we've said publicly, is that clearly, wind does represent most imminent growth opportunities, large growth opportunities. We certainly have the oil and we got these compressed natural gas tanks and all that. And -- but auto in the next 3 years is going to be very significant. And so I think, in general, we have some of our basic business growing 10%, 15% a year, and then these big applications swing back and forth. But we expect wind to be strong this year. And I think we're going to -- we're not going to sell anything significantly into the auto business, although I think we're going to start selling some product, but not to the level of wind or anything like that. But I think in 3 years, auto is going to be up there with the wind sales and in between we'll have several things that we're pursuing. We're pursuing all the applications like the oil industry, boating industry, the infrastructure, all these applications have been pending and we're working on. So I think our general sales in those areas will be increasing as well.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

That's great. What was the -- I'm sorry, you mentioned 10% to 15% growth, what was it? What area was that?

Zsolt Rumy

That was the aircraft brakes.

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

For aircraft.

Zsolt Rumy

Yes. It's new brakes as well as maintenance of the existing aircraft.

Operator

And it appears that we have no further questions at this time. I'd like to turn the call back over to you.

Zsolt Rumy

Thank you very much, and I hope to report a much better quarter year -- next quarter. Okay.

Operator

Ladies and gentlemen, this concludes today's conference. We thank you for your participation.

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