Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Zoltek Companies Inc (NASDAQ:ZOLT)

F1Q08 Earnings Call

February 11, 2008 11:00 am ET

Executives

Zsolt Rumy – President, CEO

Kevin Schott – CFO

Analysts

Stephanie Wang – Merrill Lynch

Michael Lew – Think Equity

Stuart Bush – RBC Capital Markets

Nic Capuano – Imperial Capital

Joan Lappin – Gramercy Capital

Michael Carboy – Signal Hill

[Herb Bubender] – Wachovia

[Bill Brigadeski] - Capstone Financial

Operator

Good day and welcome to Zoltek’s first quarter 2008 earnings results conference call. Just as a reminder today’s call is being recorded, now for an introductions and opening remarks, I would like to turn to Mr. Zsolt Rumy, President and Chief Executive Officer for Zoltek, please go ahead sir.

Zsolt Rumy

Thank you, good morning welcome to our first quarter conference call. Excuse my voice I’m under the weather, probably looking for a little sympathy from you guys. Obviously our last quarter was somewhat of a disappointment, and against a great quarter we have fourth quarter last year. Just want to make one thing clear is that this is no reflection of any changes in the market or any future [infestation].

Basically our revenue for Carbon Fiber was more or less the same as the fourth quarter we missed several significant orders due to some of our customers reducing their inventory as they became more confident they were able to supply them on a continuous basis. One single customer reduced their purchase last year, last month by 100 plus tons.

Other sales were affected by a small customers, [andre season] and so on, so there’s nothing structural, nothing long term that is indicated by our shortfall or disappointing revenue. [Technical] fiber, some of our great customer over built inventory last year, primarily because of bankruptcy of the supplier, the precursor that we use to use and they reserved some material for qualification of our [modolyn] based product and so that cause some catching up and in general arms so I can say nothing that I would consider to be a long term.

Gross margin certainly got affect when the sales aren’t there but at the same time we’re building inventory, the tendency is for the gross margin on sales to go down and of course we recapture that on the sale of the next product. So that basic overview let me turn the call over to Kevin, Kevin Schott our CFO for giving you the disclaimer and then followed by some detailed financial information, then I’ll come back with some comments and reserve a lot of time for questions and answers at the end.

Kevin Schott

Thanks Zsolt, real quickly as usual go through our disclaimer, this conference call contains statements that are based on the current expectations of our company, you’re cautioned at any such forward looking statements are not guaranteed future performance and all risk and uncertainties. Of these factors, includes things as successfully resolving our pending litigation, continuing to improve the efficiency of our manufacturing facilities, continued investing application market development, manufacture carbon fiber and properly market them and then successfully recommending a recently acquired Mexican facility manufacturing carbon fiber precursor and carbon fiber production line.

There are other risk factors if you would like to go to our 10K and read them you are more than welcome to. I think Zsolt basically covered the revenue and margin side. You know a couple of other areas our SG&A was up a little bit over the entire fourth quarter. So of that is a little cyclical that our first does get impacted somewhat from professional fees related our auditors [serving doc this week], so you will see that come down a little bit.

Also we did have about a $200,000 increase in our non cash costs related to FAS 123R due to some options that were issued as of October 1st going forth so that $200,000 will be an additional cost but it is a non cash cost. During the quarter we had about $3 million worth of debt that converted out and that basically ended up at about $2.1 million worth of cost related to convertible debt expense which is down from both the fourth quarter and for the prior 1st quarter of last year.

Related to that, on the cash flow side, nothing real significant there, we continue to spend on expansion we spend about $13 million on cap ex building the new four carbon fiber lines over in our Hungarian operation and started to see some cap ex down in Mexico operation as we start to retrofit them there. During the quarter we have acquired the Mexican facility that for approximately $35 million that all shows up in the since it was an asset acquisition shows up in our property equipment line item in our financial statement and you know the capital related to those expansions is obviously going to continue at fairly higher rate of $13 - $14 million a quarter going forward.

With that being said, that’s about all I have for the quarter and still kind of cover the revenue and the margin issues and I’ll throw it back to Zsolt.

Zsolt Rumy

Okay, thanks Kevin, I want to cover a little bit about, say a few comments about sales. Our current long term contracts cover approximately 50+% of our capacity. We continue to negotiate new annual and long term contracts. As we have said in the past, we like to bring that up to 70+%. We expect to meet our sales goals for 2008 and 9 and 10 which nothing then has changed for long term outlook. We’re making significant effort in Asia and we are ready booked 700 tons of business and we’re continuing to our activity and establish a personnel in Asia which we do not have at the moment.

I think there’s a huge opportunity there and we have more or less stayed away from them as we were not able to supply them as we’re capacity restrained now because we have capacity so we’re looking to get very active and aggressive in that area.

We’re adding more staff, sales staff globally both in Asia, Europe and in the US as well. The technical fiber sales by year end we expect to actually exceed the fiscal 2007 sales so that will recover as well. Our outlook, talking about our operations in Hungary, all projects are essentially completed at the end of January. We’re starting out all the lines and everything’s seems to be fine so our expansion activity in Hungary will top at this moment in whatever we may do related to value added business opportunities such as we’re increasing our [sales effort] and increasing our production capacity for fabrics with recently for the job short fiber line and Hungary which is also started up.

And so we see that kind of activity going on but the capital expenditure for those items are not that significant. [Evelyn] has stabilized and constantly improving. We’ll be bringing Mexican crew for training within the next 30 to 45 days. I believe the foreman and supervisors will be coming over and then shortly thereafter some of the actual operators. We also have some ongoing short fiber projects in [Evelyn] to increase our capabilities and capacity in processing short fibers which is also fairly significant part of our business and is growing.

And one other item, I’ll talk about personnel in a few minutes but we have a new general manager and for global prefab sales and operations in Salt Lake city, a guy named [Rolls John] and he’s coming to his Zoltek for the significant amount of experience in [prefag] business and we’re welcoming him and again we’re concentrating on value added business increase our revenue and margins and so he should be a significant addition to our management team.

Mexico the projects are proceeding reasonably on schedule, peekers are expected to be actually coming up the line in not only in June and carbon fiber expected to start no later than July. The joint venture that we talked about in the past we’re assembling our transfer team and we’re actually preparing instrument documentation for our process to be able to be ready to act upon accomplishing our signing contract and continuous interest from potential partners.

I want to just touch on the general market conditions. Demand continues to be strong. New capacity including ours gives industry confidence of to build business and new projects. I mean this was on concern I had last year is that the carbon fiber availability was so tight that people were getting turned off and I think they’re getting back on and they’re getting energized and I hope that we’ll never be in that kind of a schedule or that type of a production globally so that this start, stop and start on the new developments is kind of a stressful and it can too negative impression about our carbon fiber business, not just ours but in general of the market.

Currently there are some small quantities of carbon fibers are more readily available that somebody wants to buy 10, 20,000 pounds of carbon fibers I think they can get it like last year they couldn’t. On the other hand, if somebody wants to buy a half a million pounds or more, they can’t, there’s nobody out there who’s supplying.

Back to the market to absorb our added capacity without any problem I think we’re continuing to be bolstered by adding capacity. On the personnel side it’s the last part of my comments we have negotiated the, they have a new COO come on board, her name is Karen Bomba, she was with [Mesa Begoti] and she was the CEO of [Mesa Begoti], US and I think she was going to be an fantastic addition. We’re not 100% sure exact starting date but it’s the, her leaving was announced within [Mesa Begoti] on Monday or yesterday so we’re trying to figure out what the timing is and conclude the discussions and all the bringing her on board.

I mentioned the GM for our preferry operations, again is a senior guy that has had a lot of experience, he was the CEO of a preferry operation in Salt Lake City, so he’s also bring a not only a vast knowledge but management talents so we’re looking forward to him giving us a boost in that area. We have a supply team manager starting on the 25th, he’s also coming form MEMC and prior to that Intel, so the guy has got a lot of experience and with our objective to reach $500 million revenue base we obviously need to sharpen up our purchasing and supply logistics and so on.

We also have a new young man David [Parcell] he’s in the marketing support area where I think he’s doing some projects right now with the, I think that’s where he’ll probably end up in, in the next 12 months, that will be his primary activity. And then we have a couple of marketing technical support people coming on board as well. One of them is a polymer chemist area and the other one is a project manager. So given all the projects we have coming on I think we’re staffing up in that area and I think that’s also going to be a very instrumental in our long term growth.

So with that those are the quick comments I wanted to make and I want to turn the call over to you for questions and answer. I ask our monitor Chris to give preference to investors, analyst and I hope that everybody can ask their questions before we’re done. Go ahead Chris.

Question-and-Answer Session

Operator

Thank you Mr. Rumy. (Operator instructions). Our first question is from Stephanie Wang of Merrill Lynch.

Stephanie Wang – Merrill Lynch

Hi Zsolt, hi Kevin how are you? Can you give us a better color as to I know you said a comment on your carbon fiber side that you missed several significant orders due to some of the customers existing inventory. Can you just provide more color about that?

Zsolt Rumy

Well, all I can, the major one that I reference is one of our wind turbine customers probably sort our which one I don’t want to name it but they have been actually behind in their production because of prime molds and so on and so forth they continue to buy their contracted quantity until December when they had so much carbon fiber and they began they were confident that it’s no longer a problem with us supplying they asked us to suspend shipment for the rest of the year. They’re back on buying on contract level so again it was a temporary judgment on their part. And that’s the most significant one. There were other little guys, 20-30,000 pounds to hold and which again on the last conference call I mentioned that given where the holidays fell, we expect that it would be some of this going on.

We have increased our finished product inventory by about $4 million so I think that’s a good news in two respects one is we now have a somewhat of an inventory we can take advantage of immediate spot sales and also it takes a lot of pressure off of everybody and so I don’t again it’s not a long term issues.

Stephanie Wang – Merrill Lynch

So that doesn’t give you any concern that maybe there’s waning demand in the market and that’s why you’re seeing some of the customer’s resisting some of the inventory.

Zsolt Rumy

No I don’t think so because I’ve been through things going on it’s like I say the last year or so some people have kind of cut back on their activities because they were concerned about the ability and also this year including ourselves there are several other carbon fiber guys to come up with new capacity so I think that gave everybody some relief and as far as the long term requirements I don’t think it changed anything, I think it’s the capacity is catching up and so I don’t read anything more into it.

Stephanie Wang – Merrill Lynch

Okay and I guess when you look at your new capacity plans what markets did your expecting to, what markets are you expecting to take your product? Do you think it’s predominantly going to be in the wind and energy market or are you looking at other applications can you just kind of give a color of maybe the break out of where you see the new applications for?

Zsolt Rumy

Well, on wind energy there’s a lot more to the [half], there’s you only have two major ones and the smaller wind turbine guy the smaller wind turbine customer is actually licensing their technology in China so actually that may by itself grow organically but then we’re also looking at two more significant wind turbine manufacturers that will probably go to carbon soon. What makes their entry a little slower is that they’re using a different process and that’s one of the reasons why they have project manager that they hired just to support had a [pinch] of our fibers to that manufacturing process.

On top of that, we got some demonstrations projects going on in the oil drilling area, and so we think that’s going to be a significant and there are some constantly increasing demand in the auto industry, nothing like a carbon fiber car but there are a lot of components and we have a significant project pending with one of the US car manufacturers as well. And so on top of that the natural gas tanks and hydrogen tanks are building up and we’ve got several projects in that area so and then on top of that, all the existing markets we anticipate growth in all of them so that’s kind of an overview.

Stephanie Wang – Merrill Lynch

If I may just ask one more question and then I’ll pass it on to others, but can you just remind us or just tell us what the yield levels were at each of your facilities in the quarter?

Zsolt Rumy

I find that difficult to come up with but I’ll give an estimate. On an average it was about 80%. And so that will give 100 from 85 and in Hungary or [Evelyn] probably 70 or something like that.

Stephanie Wang – Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from Michael Lew of Think Equity.

Zsolt Rumy

Hi Michael.

Michael Lew – Think Equity

Hi Zsolt thanks for taking my question. Could you elaborate on a little bit more on the gross margin decline. It was a bit of a dramatic drop and like what kind of improvements should we expect in subsequent quarters. What will be the drivers behind the improvement and do you think we’ll be back at full 2007 levels by the close of the March quarter?

Zsolt Rumy

Yeah I think I think we’ll be back to the levels that were before and actually increasing and as I mentioned, if you look at the financial statement you’re on the cost of goods sold, you’re passing off all your manufacturing costs and some those into inventory but you don’t get any revenue so consequently, you got the cost and the no revenue so to speak and so that’s what hurts when you see our finished product inventory growing generally the margin on the sales will go down. Once we on the other hand sell that inventory then margins kind of go back up and catch up with what it should have been.

Michael Lew – Think Equity

Okay so 29, the 29, 30% level should be something we should model for in the March quarter and also you mentioned all for lines in Hungary and up and running at full blast. I mean could you comment on the yields for these two lines, they’re in line with existing lines or slightly below the 85% level in Hungary?

Zsolt Rumy

Well the new lines actually two of them are actually operational, the other two are in the process of start up and the ones that are operational they become operational and when they reach the standard production level. And so they are running at the same level as the old ones.

Michael Lew – Think Equity

Okay, Zsolt you mentioned the additional wind customers you’re in negotiation with, when is the soonest you could have them on board?

Zsolt Rumy

I don’t really want to project a time but you know definitely we’re looking for this year.

Michael Lew – Think Equity

Okay, thank you very much.

Operator

We’ll take our next question from Stuart Bush of RBC Capital Markets.

Zsolt Rumy

Hi Stuart.

Stuart Bush - RBC Capital Markets

Hi, good morning Zsolt I understand your comfort around the annual sales level but there seems to be some confusion about the timing of when this inventory build and tech and carbon fiber rolls through in the next couple quarters. I believe the investors may benefit if you could give us some more granualarity of quarterly guidance. Can you help us with your expectations for revenue for the Q2 quarter?

Zsolt Rumy

Stuart I really don’t want start we haven’t done it in the past and it’s bad enough that there’s some anticipation out there and we disappoint that expectations. The last thing I want to do is put some numbers out there for whatever reason we miss the top of our, the fact I think we’re and I think you’re in the same position I think we’re looking for the achieving the longer term objectives and there’s always going to be a little hitch again in the market we got seven manufacturer worldwide we got a fairly tight composite manufacturing group and there are some variation of variability in how they’re, they behave and that may or may not have effect on our immediate results so I really don’t want to get into, we’re not at the point where you know we have ability to exactly pinpoint what our quarterly results are going to be. I think we’ll probably be there in a couple years but not until then.

Stuart Bush - RBC Capital Markets

And two, to dig down a little deeper on the gross margin issue, I mean some of it was the timing shift on sales but you know was there a cost increase that you hadn’t expected in the quarter. And how will that match to the higher volume and pricing you’re going to see in Q2 so I guess the crux of my question is, is there upside to that 29 to 30% level in the Q2 period and rolling forward?

Stuart Bush - RBC Capital Markets

The answer there is only one seasonal cost that has a small impact, shouldn’t have a major impact but in Hungary we use steam for heating the buildings and facilities and so our steam cost in the steam usage in the winter months is always higher than in the summer so we actually have a two different sets of standard cost based on winter and summer, but that’s a seasonal thing. Again it’s not significant enough to be concerned about and actually we could probably even out our standard costs and not even show and impact but that’s the only thing that there is that is let’s say has an effect in the last quarter. Otherwise there was nothing happening where our pricing increases I think they were 15% to 20% price increases for moment they’re a thing of the past but we are getting 5 or so percent increases and we are obviously enjoying some benefits of the selling a lot of products in Euros so I think overall I think we’re in pretty good shape on pricing.

Stuart Bush - RBC Capital Markets

Okay great and one last question, you know I guess I’m just still confused on where SG&A expenses should trend. Kevin mentioned some professional fees and options impact in the quarter. But you’re also hiring a significant amount new staff with sales and some of these other management position. Where should we expect that level to be on a quarterly basis going forward?

Zsolt Rumy

I don’t if I want to give you a number but I think there are two things that impact that’s obviously again we’re building staffing and we’re building the company to grow into a $500 million business that’s our first major goal and then of course hopefully start working going to beyond that starting next year. So in order to get there we need to get some staffing but I think that as a percent of sale I would think that the SG&A is going to either stay at the level or go down. The only other thing that affects it is we are spending a little more money on R&D and again that is we have three kinds of R&D, one is to improve our products meaning primarily in the area of precursor development. We’re also doing some work in improving or making the use of our carbon fibers simplified to our customers and thirdly we do some application development such as the nitrogen tank, the compressed natural gas tanks are right now 3000 PSI and there’s a significant amount of work being done in the industry to get ready for the nitrogen, I’m sorry the hydrogen technology to be ushered in and they’re looking at minimum 5,000 possibly 7,000 psi tanks and so we’re doing some work in developing those application. So there is going to be some R&D cost increases and I think that’s natural for the type of business we’re in.

Stuart Bush - RBC Capital Markets

Okay, thanks a lot Zsolt.

Zsolt Rumy

Thank you Stuart.

Operator

And we’ll go next to Nic Capuano of Imperial Capital.

Nic Capuano - Imperial Capital

Hey guys, just a couple questions, you know first relative to the ramp in Mexico, just wanted to clarify in the MD&A I know you can be more conservative in the queue but MD&A on your 10Q suggests precursor ramping the September quarter in carbon fiber in the December quarter. Just want to reconcile that with I know you say it’s ramping according to plan just want to kind of clarity the nature of the ramp.

Zsolt Rumy

Well as we talked about in Hungary we’re at 20,000 metric tons and holding. In Mexico, before this fiscal year is over, we plan to have 28 to 30,000 metric tons of production starting with 18 by June 1, June start up. Okay that will more than enough to support both our technical fiber costs and the fiber needs globally. And then we’re building a 5 million pound capacity of carbon fiber plant in Mexico and that should come on line starting July. So that’s kind of the ramp up.

Nic Capuano - Imperial Capital

And after that July carbon fiber, after that 5 million pounds in July, should we expect that you’re patterns been you’ve been adding in Hungary about every six months should we expect that type of rate of adding capacity or is it going to be dependant on getting more long term orders or should it be just what beyond that first [prod] to capacity, how should we think about that?

Zsolt Rumy

I think that our current plan is that again for us to reach this target of $500 million revenue in, for the three years after this year, four years really in the next two years that is kind of our, that’s our primary objective. To reach that, and have to produce over 40 million pounds of carbon and that is and our technical fiber capabilities plus some of the value added and that’s how we’re going to get there. So after 500 million pounds we’re going to have 29 million pounds capacity in our system. So we need to add another r11 million or so between now and the end of next year.

So or maybe then first quarter of the following year. So that’s kind of the time frame that we’re looking for and as things are, I think that’s a reasonable schedule if things get heated up, we may end up speeding it up and I’m hoping that’s what’s going to happen but we’re on that timeframe or that kind of extension.

Nic Capuano - Imperial Capital

Okay and on the, on your sales objectives in the release you mentioned that you’re optimistic you can reach your sales objectives for fiscal ’08, and I just wanted to clarify I think was that the $250 million I think is what you mentioned as your objective in the last call I just wanted to make sure that that was the objective that you still.

Zsolt Rumy

That has been kind of the gross number that we have mentioned. I think to reach that $500 million actually we’re looking for 50% a little over 50% annual so if we do 225 this year and add 50% on next and 50% the following year, we’ll get us over 500 and so we’re in that ballpark, yes.

Nic Capuano - Imperial Capital

Thanks and final question, we talked about you talked about the margin hits that you took in the quarter you just reported I just wanted to just clarity that going forward you’re still looking on about, you still think you’re only looking at a up one percent or so in terms of your costs versus a 5% or so in terms of your price hike that went effective in January so you should be able to bring that incremental margin down.

Zsolt Rumy

Our continued stated goal is still 35%. And we’re haven’t given up on that which the way we’re going to get there is really improving our productivity in which is why we’re getting some new people on and it’s I think Karen will bring a kind of discipline that we need and kind of management style that will I think help the situation and that’s how we’re going to get there. Also of course a higher volume and dividing the overhead a higher volume also adds a little bit so I think in general terms just process improvement and higher volume is what should get us to that 34 – 35%.

Nic Capuano - Imperial Capital

Alright, thank you.

Operator

We’ll take our next question from Joan Lappin of Gramercy Capital.

Joan Lappin - Gramercy Capital

Good morning gentlemen. I’m wondering I mean it seems as if you did just fine year over year in the quarter in carbon fiber. $34 million versus $21 million. We couldn’t have asked for better. The problem is all in the technical fiber and I’m a little confused as to why, I mean those sales according to the K dropped a $3.5 million and I’m not exactly sure I understand to whom you were selling that because the client that we think of or that I thought was being blamed I though was buying carbon fiber not technical fiber. So if you could explain that.

Zsolt Rumy

I’m not sure which.

Joan Lappin - Gramercy Capital

I’m looking at page 13 of the K.

Zsolt Rumy

I don’t have it in front of me but anyway.

Joan Lappin - Gramercy Capital

The numbers it says technical fiber in the December quarter of ’06 were $18 million and 519 and this quarter, we $5.033 million, okay that’s a decline of essentially $3.5 million.

Zsolt Rumy

Yeah I’m not I understand numbers I didn’t know what else was in that paragraph but basically in the aircraft brake business we have the primary quantity of sales that we make is a technical fiber which then gets processed by a brake manufacturer and are carbonized into carbon fibers. We also sell some carbon fibers into that market and the same single customer buys both in then we have a third major customer the third customer only buys our carbon fiver products for a military brakes so where the deficiency came was one of our major customers basically bought a tremendous amount of inventory, unfortunately not all of it from us which is kind of a sore point but anyway they were panicking because there was a bankruptcy of the [roman center] supplier and they were not ready to 100% switch to our own precursor based product and they panicked and lost a bunch of stuff and until they used it up they basically bought very little.

And they were going through that they’re going through that material and we started to ship this quarter and be back to full shipments the following quarter. The same time we have new business and the non aircraft brake area by the end of the year will do as much or more in the fibers than we did last year.

Joan Lappin - Gramercy Capital

Okay, and as far as Karen is concerned. I would assume she’s coming soon, was she involved in the selection of any of these other people that you’ve announced today?

Zsolt Rumy

She was not. I talked to her about things, but until I made the announcement then she’s able to let me talk about we didn’t do much coordination but she’s aware of what’s going on and also I think the people that will be reporting to her she’s already met and so there’s a relationship started already.

Joan Lappin - Gramercy Capital

Good, now can you give us an update on the legal on your various legal proceedings?

Zsolt Rumy

Well, the only big things is of course the SP lawsuit and we’re going through the appeal our argument and we’re confident that we’ll prevail and we have one extra surprise for them in the stars as well.

Joan Lappin - Gramercy Capital

Say that again.

Zsolt Rumy

We have a little [NASA] surprise planned for them as well.

Joan Lappin - Gramercy Capital

Okay. Well I’m glad I’m giving you an opportunity to let them know. and now you did this under the convertible debt section. Is this kind of, do you have the sort of an unused shelf that you do at any time or?

Kevin Schott

We have available the ability to raise additional capital under the shelf that we filed we refilled the shelf for $300 million and we used basically a little over half of that for this last filing so yes under that shelf we have the availability to do additional financing of any sort.

Joan Lappin - Gramercy Capital

I don’t think you want to do that Kevin at $28.

Kevin Schott

I understand but I just explaining that we.

Joan Lappin - Gramercy Capital

And it also says in there that some portion of that can come from insiders.

Kevin Schott

I’m sorry saying that again Joan.

Joan Lappin - Gramercy Capital

I think in here that some portion of any offering can be from insiders.

Kevin Schott

Yes, just like the last one that we did, there was a portion of what was a portion of that was sold from inters.

Zsolt Rumy

Well nothing yet, no intention of indicating any new financing. All of the convertibles of course are all the old stuff that’s just been converted.

Joan Lappin - Gramercy Capital

Okay and when do you think you’ll next need money for all these activities that you have underway, Hungary.

Kevin Schott

I don’t anticipate anything, certainly not this fiscal year.

Joan Lappin - Gramercy Capital

Okay that’s a good thing. And I was also it’s there was an item in here about your, the voting at the annual meeting about the option programs and stuff and it looked like your shareholders weren’t thrilled about how you guys are doling out.

Kevin Schott

There were two options.

Zsolt Rumy

How do you vote Joan?

Joan Lappin - Gramercy Capital

Not telling. Just like Hillary and Obama, I’m not telling either.

Kevin Schott

There were two options for either.

Zsolt Rumy

I though you were going to vote for John McCain.

Joan Lappin - Gramercy Capital

Oh you would probably put me down for Huckabee. Can’t fool me.

Kevin Schott

No there were two options programs that were approved at the annual board at the annual shareholders meeting one for the employees and one fro the directors.

Joan Lappin - Gramercy Capital

Right and it didn’t look like they passed in an overwhelming, it wasn’t’ kind of a 90/10 kind of vote was it?

Kevin Schott

No the investors weren’t happy about the directors options the employee options were pretty reasonable, they weren’t too happy about me being elected on the board either and I’m bet you were on that.

Joan Lappin - Gramercy Capital

I love you darling so you don’t have to worry about me on that.

Kevin Schott

Anyway I think there might have been a misunderstanding to be honest with you. I don’t want to speculate too much but they way you have to report the director earnings nowadays they have to include their earnings on buying Zoltek shares and or converting some of those convertible loans that give the company back in 2003. so in some respects if you didn’t know the company looked at how much shares and how much money some of these directors have made and you transfer that to having all made because of their director services, that would have been excessive and I think that’s the reason that I had singe latter that came in from one of these guys I can’t remember which one that watches these governance issues and I’m going to answer that letter but that they felt it was highly diluted of them frankly 7500 shares for 5 directors per year on the price at the closing day or the closing price of the day of the annual meeting I don’t think is highly diluted so I must believe that they’re thinking something else.

Joan Lappin - Gramercy Capital

Anything new on BMW?

Zsolt Rumy

Actually BMW’s has progressing no grand activities but actually there’s some more exciting stuff happening now at other car companies as well, so the like I mentioned the US company which I can’t really leave for the moment nameless but.

Joan Lappin - Gramercy Capital

What are they using it for?

Zsolt Rumy

Well they’re using it for body pedals and they’re looking at making several body pedals essentially all body panels with carbon and if you think hard you could probably sort out what car is that.

Joan Lappin - Gramercy Capital

Okay so in total summary you’re saying you’re clinging to you estimates for the year, you think the margins will come back up, the customer who annoyed you is back, and the overall summary is that you’re moving on schedule for all of these expansions.

Zsolt Rumy

Yeah I don’t think anything has changed and just so you know that this particular customer we really didn’t have any good grounds to get nasty with them because we disappointed them in parts of the contract and we were unable9 to fill their demands so I think we’re very flexible about the contract.

Joan Lappin - Gramercy Capital

Okay well I hope all the new people are really additive and.

Zsolt Rumy

And you know we need, we got a young lady coming on board so we’re going to make it a challenge for her.

Joan Lappin - Gramercy Capital

Right, well I love what you said the last time, sometimes the best man for a job is a woman.

Zsolt Rumy

That’s right. so I’m forward to you meeting her, I think you’d like her.

Joan Lappin - Gramercy Capital

Okay, thank you very much.

Zsolt Rumy

Thanks Joan.

Operator

Well go next to Michael Carboy of Signal Hill.

Michael Carboy - Signal Hill

Good morning Zsolt and Kevin and ladies and gentlemen. Couple of questions, wanted to go back and clarify a comment that you had made just a moment ago, Zsolt and that was regarding the technical fiber the brake customer. Kind of getting back on track, did you say when you said next quarter were you referring to this quarter or the following quarter.

Zsolt Rumy

I meant this quarter.

Michael Carboy - Signal Hill

This quarter. Okay, so they’re getting back on track or you think they may get back on track this Q.

Zsolt Rumy

They’re starting to release according to their expect schedule yes.

Michael Carboy - Signal Hill

Okay so what it sounds like between the events that happed in the tech fiber business and the carbon fiber business, it sounds like this just a supply chain realignment dislocation that occurred here. Would you agree with that?

Zsolt Rumy

Exactly.

Michael Carboy - Signal Hill

How do you as a manager structure the company to be a little bit more dynamic and enjoy in managing around these challenges. What actions can be taken operationally to make the business a little more stable.

Zsolt Rumy

The answer to your question is that if you look at like our last year, when we were doing 8o+% on long term contracts and we had a number of smaller customers on a annual purchase order, so things were no repair available to supply any new customers and so our ability to make promises to any potential new customer too insane so when some material freed up we didn’t really have like a group of customers lined up ready to take to the access.

As we go forward now that we have more capacity our two major long term contracts are not as significant of the total sales as they were before. Now we have a ability to build up a much more wider and significantly longer list of customers and that tends to start at these kind of variations in demand by a few customers. And so I think a person to look at what happened as a potential benefit for us because now we actually have inventory and we can quote somebody and say okay you want 20,000 pounds it’s out the door so we can actually more aggressively solicit orders and build our customer base.

Kevin Schott

Yes, there is not contract so we were able to get 700 tons, 1.5 million pounds plus in the first couple of weeks of the year and are actually negotiated mostly in December but they, the payment terms are letters of credit so those are coming in now so we’re able to now start building this customer base.

Michael Carboy - Signal Hill

And on that Asian business, was that with an agent subsidiary of one of you existing customer relationship or was that a new account?

Zsolt Rumy

Brand new account.

Michael Carboy - Signal Hill

Brand new account, okay. And Zsolt can you give us a little bit of background on Karen Bomba’s expertise at [Mesa Bogati] and her role there?

Zsolt Rumy

Well she was as I mentioned the CEO, she started off trying to give you a short history at [Mesa Bogati] had a US representative for a long time and he and I were kind of sort of relationship and he has been pushing the Paris office to establish manufacturing plant here in the United States. And I want to say about 6 years or something like that something like 6 years ago is when it finally decided they’re going to do that and at that point Bernard who’s this particular individual was the CEO and hired Karen as the general manager for the new facility.

And basically this guy and Karen built up the whole company and now, and then he retired I want to say about 3 years ago so maybe they started 6 or 7 years ago. So he retired a few years ago and Karen became the CEO of the [Mesa Bogati], US and she has built a company to the point where she was actually recently promoted to also be in charge of the plant, [Mesa Bogati] plant in Leone, so she was the essentially not responsible for 80% of [Mesa Bogait]’s production operations. And she’s matter of fact going back on, she has worked in the carbon technology most of her career and continually increasing responsibilities and just one sharp woman. She’s in there at mid forties and I think she has a matter of fact [Mesa Bogati] US has approximately 30% fewer cost that [Mesa Bogati] those in France, so she’s done a wonderful job and she got frustrated with that it’s a French company and her next move would have been to move to France and she was not willing to do that and so it just happened that I picked up on the fact that she was unhappy and was able to get tougher and I’m very happy because I’ve known her since the whole operation started and I watch her build it very successfully. So I’m very enthusiastic and happy about he whole process, the whole idea that she’s coming to work with us.

Michael Carboy - Signal Hill

Do you think that there’s any scope for potential client friction given the Goodrich and [bogati] I think compete in the aerospace brake market. You think there’s any possible friction there between Goodrich and now Zoltek given the [Mesa Bogati] heritage?

Zsolt Rumy

No I don’t think so, Goodrich has stolen some of our people in the past and it’s common and there’s a gut too from Goodrich before so it’s and I have made peace with Karen’s boss and I think I think’s it’s, I don’t think it’s, it’s a natural progression in her career so I think it’s a great opportunity for her and a huge challenge and I think we’re all excited about it.

Michael Carboy - Signal Hill

Okay and two financial questions if I may. For Kevin, Kevin could you quantify for us the impact the Euro had on the top line here this quarter. And also could you break down for us the degree of under absorption that’s manifested in gross margin that was attributable on the one hand to under utilized lines that were still sort of in ramp process in Hungary versus the cost that have been accrued in finished good inventory.

Kevin Schott

Well on the first one, quarter over quarter, there wasn’t a large impact in the Euro, the Euro was fairly constant quarter over quarter so you didn’t see a lot a huge effect in the top line revenue related to that. I mean as the majority of our sales currently are in the, are in Euros so there is, can be some volatility to that if that happens but a majority of our cost is essentially in our Hungary operation is also in Euros so we kind of have a natural hedge at that bottom at the margin number side of things. So there wasn’t a whole lot of effect there.

On the other issue related to that, the cost incurred for the four new lines that are going in this quarter. The majority of that cost is during the construction phase is capitalized so you didn’t see a whole lot of impact related to that for this past December quarter whatsoever and as far as the other piece of it, you know I would say that the company analyzes its variances and does capitalize some variances related to its production if it’s in accordance with GAAP so I don’t think you saw a lot of impact related to what I recall huge underutilization of the existing machines that were going on.

Michael Carboy - Signal Hill

So you weren’t carrying a quarter’s worth of depreciation on two lines that were not up and running.

Kevin Schott

No. because we don’t start depreciation of any of our cap ex cost until that line actually goes into manufacturing, I mean goes into starting manufacturing.

Michael Carboy - Signal Hill

Okay. Alright, thank you very much.

Operator

Our next question come [Herb Bubender] of Wachovia

[Herb Bubender] - Wachovia

A couple of quick questions, you made a comment about the days of 10% to 15% price increases are over but what is going on prices at least in the current quarter and going further as the year what you think the impact of price increases will be and will the increased capacity might there be even some price discounting going on in your case to get more business?

Kevin Schott

Well yeah I think you’re touching on a possibility that if as I mentioned in many of our calls before we try to maintain a cost or a selling price that is that covers our profit margin requirements to justify expansion and at the same time, try to maintain our progress to be attractive to potential customers so that we encourage them to continue to grow their carbon fiber use.

And so that’s always a kind of a challenge to maintain a good balance there. And eventually we will arrive in a price differential that people will find attractive to buy our fibers versus lets say the aerospace fibers even if the aerospace fibers become available. So I think that’s always a challenge like I said. On the other hand I agree with you that at some point if it may come and particularly if there’s a better balance between the demand and the supply then at certain times, you can pick up a significant order by doing a price discount and or support a certain development effort or certain markets by differentiating pricing according to our bids.

And I don’t see that happening at the moment but it’s been a question going forward.

[Herb Bubender] - Wachovia

What do you think the projected pricing increases was in this quarter versus the estimate for the full year to get to your $225 million plus in revenue.

Kevin Schott

I think we’ve achieved what we had set out to do. They, what I consider those double digit increases were more of a price adjustment than really price increase so to speak as a, the market conditions were right and costs were going up so it was just survival to have those kind of increases but right now, between last year and this year, costs are roughly stable and variable to approximately 5% increase and I think that’s kind of reasonable for this year.

[Herb Bubender] - Wachovia

Five percent price increases, the other question I want to ask you the impact of some of these tax credits that may or may not expire and some incentive and I don’t know what the status is in other countries, but can you just comment generally about some of the incentives that are out there and if what might happen if those incentives are not continued particularly in our country.

Kevin Schott

Well I can only give you my opinion and there’s a it’s like if you got two people you got three opinions but generally for our where our strong point is in the larger turbines, wind turbines, they are competitive with fossil fuel as is. So while investors that invest money in lint farms they would love to get any incentives they could get their hands on because all it does is increase their marketability but in general it’s profitable in Europe actually they don’t have incentives but they have some people volunteer extra to get green electricity. And I know our utility here in St. Louis is trying something similar to that. I don’t know what kind of success but there’s some people that are willing to pay extra money to get so called green energy.

So in each country a little different. China has gangbusters, they’ve got about 35 companies that are expressed interest, or expressed that they will get into wind turbine business. Many of them are the smaller blade turbine so it doesn’t affect us for the moment but in any event there is a huge demand globally so I don’t see that slowing down but the US not having incentives.

[Herb Bubender] - Wachovia

Okay so you’re not concerned if the incentives are expiring next year.

Kevin Schott

No personally not, although I’d probably be probably look at that to say we’ll continuing anyway.

[Herb Bubender] - Wachovia

Okay thank you very much.

Zsolt Rumy

Thank you.

Operator

We’ll take our next question from [Bill Brigadeski] from Capstone Financial.

Zsolt Rumy

Hi Bill,

[Bill Brigadeski] - Capstone Financial

Hey guys, can you I guess with your customers it looks like [best of] was over 60% of your carbon fiber sales in the quarter, can you kind of talk about what [gamesa’s] doing and where there’s any other significant or potentially significant customers coming from outside of wind?

Zsolt Rumy

You mean last quarter [gamus] was 60%. [Vestus] was 60% I don’t

Kevin Schott

I think that’s a little high Bill, I’m not sure where that.

[Bill Brigadeski] - Capstone Financial

It says there was $21.8 million to a large wind turbine customers so I was saying the 60% of carbon fiber sales.

Zsolt Rumy

Okay, yeah. [Gamus] is about the projected sales for this year is about half of what [vestus] is.

[Bill Brigadeski] - Capstone Financial

So they’re a 10% customer but they should be soon?

Zsolt Rumy

Yeah.

[Bill Brigadeski] - Capstone Financial

Okay.

Kevin Schott

This past quarter there were a little, they were not quite at 10% customer.

[Bill Brigadeski] - Capstone Financial

Okay and how are you guys dependent on getting new wind customers?

Zsolt Rumy

Well I’m not sure the pattern.

[Bill Brigadeski] - Capstone Financial

Well I guess to like you were saying you wanted 75% of your capacity under contract are you depending on wind to get that do you think?

Zsolt Rumy

Well I think wind would be certainly a good welcome but there’s other applications and we’re not we’re partial to wind as a matter of fact I think I would prefer to diversify.

[Bill Brigadeski] - Capstone Financial

Can you then maybe talk about what the Asia customer that you just signed what they do?

Zsolt Rumy

Well there’s several of them and they’re in various markets, I don’t think they’re intermediate manufactures and they service a number of markets and one of these customers we’re looking to actually establish a relationship where they would be supporting some of our customers wind funnel customers, wind turbine customers in Asia so but it ended up they probably I would say I would guess mostly the sporting goods either that’s not.

[Bill Brigadeski] - Capstone Financial

Okay. That’s all I had. Thanks.

Zsolt Rumy

I think we’ve gone over an hour. And maybe if there’s any hot questions, we can take that and try to complete them in the next few minutes. Sounds like no more question so thank you very much for participating and if anybody has any questions please call Kevin or myself. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Zoltek Companies Inc F1Q08 (Qtr End 12/31/07) Earnings Call Transcript
This Transcript
All Transcripts