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Zoltek Companies (NASDAQ:ZOLT)

Q2 2013 Earnings Call

May 13, 2013 11:00 am ET

Executives

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

Andrew W. Whipple - Chief Financial Officer and Vice President

Operator

Good morning, and welcome to the Zoltek's Second Quarter 2013 Results Conference Call. Today's presentation is being recorded. And now, for introductions and opening remarks, I would like to turn the call over to Mr. Zsolt Rumy, President and CEO Chief Executive Officer for Zoltek.

Zsolt Rumy

Thank you, Jill. Welcome to our second quarter earnings call. It's going to be an abbreviated call. As you're all aware, we're going through this review of any strategic alternatives, so we're kind of restricted in going off the reservation on discussions. And so that's why we're not going to have a Q&A, but Andy and I will try our best to give you some flavor as to what's going on within the company. And so I'll turn the call over to Andy, and he's going to start off reciting the forward-looking statements, and then he'll give some further information on the numbers. And I will give you some information on what the company is doing. Andy?

Andrew W. Whipple

Great. Thank you, Zsolt. During the next few minutes, I'll cover some highlights of our second 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 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 the forward-looking statements.

With regards to second quarter sales, the year-over-year quarterly sales decreased from $47 million to $33.3 million, and the sales from the prior quarter decreased from $35.9 million to $33.3 million. This appears to be primarily due to the slowdown in the wind energy market. Zsolt will comment further with regards to this in his segment of the call. With regards to the cost of goods sold, year-over-year quarterly cost of goods sold decreased from $36 million to $26.3 million. On the subsequent quarter basis, the cost of goods sold decreased from $26.8 million to $26.3 million. Gross profits percentage on a sequential basis also decreased from -- slightly to 21.1% from 25.3%, reflecting changes in the product mix and reductions in our production levels that are driving excess capacity cost to flow into our cost of goods sold. Again, Zsolt will comment further on this in his segment of the call.

With regards to application development costs, these were about $2.2 million in Q2. We continue to invest in prepreg, wind, auto, pultrusion in our PAN/lignin program, which is supported by a grant from the Department of Energy. With regards to the SG&A expenses, these were $3.1 million in Q2 versus $3.4 million in Q1, fairly consistent over multiple periods, a slight decrease in the current quarter due to year-end audit and annual meeting cost that we incurred in Q1.

We did have a significant currency gain below the line of $1.7 million due to a weakening of the HUF against the U.S. dollar and the euro. Looking at income taxes, we can see that these decreased to a benefit of $40,000. This was primarily due to the weakening of the HUF, which created a currency loss in Hungary, which offset our tax liability in Hungary.

With regards to capital spending, that was approximately $3.5 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 $25.2 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 any slow pace, as appropriate, and we have noted that our bad debt expense continues to be fairly immaterial over the last 12 months.

Looking at our inventories, we see that these remained relatively flat from the prior quarter at $79.9 million. Our slow inventory turn reflects primarily the slowdown in our sales in Q2, along with the reduction on our production rates during the quarter. Please note that our inventory does tend to have a very long shelf life extending into years, and we do not tend to carry -- or we do tend to carry very few part codes. So we do, of course, monitor for inventory obsolescence, but this does not tend to be a significant risk for the company due to the long shelf life of the product.

With regards to liquidity, our cash increased to $25.3 million versus $20.5 million in the prior quarter. This was primarily caused by decrease in our receivable levels and the timing of payments. Our cash on hand, our cash flows from operations and our anticipated credit facilities should be sufficient to fund our liquidity needs during the next 12 months. Our current ratio is at 6.7, which would indicate that the company has a very good liquidity position, i.e. lots of current assets relative to our current liabilities. Zsolt, back to you.

Zsolt Rumy

Thanks, Andy. Okay, well, first of all, let me give some color to the sales decline, as we mentioned in our earnings announcement. It is primarily essentially 100% due to the wind business reduction, and there are several factors. Three markets that are the biggest in the wind turbine business are U.S., Europe and China. And each one has a unique situation that doesn't do well for our current revenue, but I think, overall, long-term, we see this changing back to a significant growth.

First of all, in the U.S., there was a production tax credit was such that you have to finish the job, finish the project at the end of 2012 in order to be eligible for the tax credit. So everybody rushed to finish the jobs opened in 2012. And consequently, when 2013 came along, although we have the investment tax credit back, there were no projects ready to be sold, and I think that has hurt us in both our first and second quarters. Since, for the installation on projects in the last calendar quarter of 2012, most of the plays were pretty much under manufacturing or almost complete by really the third calendar quarter, which was our last quarter of the year.

In Europe, Germany is quite active. They're eliminating their -- they have programs that eliminated nuclear power generation. And so that market is fairly strong, except unfortunately for us, the wind velocity in Germany is rather low. And therefore, the material demands on wind turbine blaze is not as strong. And therefore, a lot of people are using glass.

China is a unique situation. As you all know, about the way I feel about politics, China is still a communist country, and is still -- strings are being pulled by a central government. And essentially, they have all rebuilt on their turbines over the past few years, and they're trying to catch up with the grid system now and connecting the existing turbines. And so they've kind of -- the government put a hold on a lot of projects, and they are supposed to come out with some policy. I think, this month, the plans are, for this month, on the offshore policy and all that's been built out, and we think it's going to be positive. And there's several projects that we're working on in China whenever the offshore market starts developing.

Rest of the world, the offshore market has some technological difficulties, which also slowed down many of the other projects in the deeper ocean areas, and including [indiscernible], a huge program that's kind of slowed down. So this has kind of taken a technological -- kind of a slow down. So all things combined reflects negatively in our market.

We are very strongly pursuing new applications and -- to develop some new materials, new products and new uses for carbon fiber. There are many indicators -- indications that the market is getting very active, both in auto and offshore, drilling and electronics. And so we're very positive and looking forward to the future developments.

We had a -- we participated in the JEC show, which is a big composite show in Paris. And we're very active, a lot of interest in our thermoplastic activity, our lignin project. And also we introduced the pre-impregnated carbon fiber tow, which improves the workability and improved production capabilities with our carbon fibers, and those products were very much of interest to the industry.

On the talk about the cost of goods sold, there are -- as you can see, we used to talk about the excess capacity cost, which we no longer use. And part of the margin decline was because the excess cost of carry with a lower production rate. However, even at the lower production rate, our continued efficiency improvements are paying off, and our cost is not completely out of line even with a lower capacity.

Also, ACN prices, which is our main raw material, it's about 40% of our cost. That has declined in the past few months. So all in all, I think we're maintaining a reasonable cost of goods, and which is being a positive trend.

On the R&D side, again, lignin is a very important -- lignin-based carbon fiber is very important for the auto industry, primarily because it's expected to produce somewhat lower properties than our current thermal fibers. But it also has a significantly, or at least a noticeable lower cost base we haven't fully calculated because we're not done with the production runs. But in any event, it should make our progress much more competitive. The auto industry is still very interested in our developments. We are now doing full pilot plant runs and plan to have a commercial trial sometime in this month. So this is progressing, and we're looking at 25% to 35% lignin content replacing ACN. We've spent a lot of time and effort in the thermoplastic development, and then it started to show some fruits. And we expect that it will improve, that it will actually do much better in the next months. Certainly, this is very interesting for the future development of carbon fiber usage. Thermoplastics have a much easier way to -- quicker way to process thermoplastics, all in it's heated and compressed and -- or pressed into a mold, and a part is done versus thermostat at a time to cure 2 to 3 minutes minimum or parts to cure. So thermoplastic can be a very important new product for the auto industry.

We have spent a lot of time and efforts and some capital in fultooted [ph] products. And we have successfully introduced a very difficult part, a 200-millimeter-wide slack that replaced the carbon fiber, tier carbon fiber in the wind turbine blade manufacturing because it uses carbon fibers much more efficiently and much quicker installation, low labor, no additional tooling, so this could be a very interesting improvement in the wind turbine production, the blade production.

We also spent some money this quarter. We finished our Mexican expansion of our Pyron products or oxidized fibers. And the big strategic reason for doing this is that we are a very significant supplier to the aircraft brake industry. And they do require 2 sources, a supply to be certain that availability will not be interrupted due to somebody going out of some plants being shut down for some reason. So with this facility now being qualified by our turbine customers, this could be a significant improvement for our stability in this business and maintain a very high percentage of the market. And so this is very positive, and I think it will pay off in the long term.

So that's all I have to say. And I am sorry to have to not answer questions for you. But -- been a lot of legal potholes and trying to add, talk about certain things that -- because of the activity in the strategic alternative opportunities or possibilities. But anyway, I appreciate your interest for dialing in, and I look forward to your continued support. Thank you.

Operator

This concludes today's call. We thank you for your participation.

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