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Zoltek Companies (ZOLT)

Q4 2012 Earnings Call

November 28, 2012 11:00 am ET

Executives

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

Andrew W. Whipple - Chief Financial Officer, Chief Accounting Officer and Vice President

Analysts

Avinash Kant - D.A. Davidson & Co., Research Division

Jay Steinhilber

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

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

Herbert C. Buchbinder - George K. Baum & Company, Research Division

Charles DiBenedetto

Presentation

Operator

Good day, and welcome to the Zoltek Fourth Quarter 2012 Earnings 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 of Zoltek. Please go ahead, sir.

Zsolt Rumy

Good morning. Thank you, Brian. Welcome to our fourth quarter and fiscal year-end conference call. I can say that this has been the best year that we've had in many ways, certainly, financially. And so we'll talk about some of the details and define what we'd look forward to in the future. But first, let me introduce Andy Whipple, our CFO, and he's going to do his normal duties to read the forward-looking statement to make sure we don't get into trouble and then go through some of the -- add some color to the numbers that we have in our press release, and then I'll get back and talk about the business. Andy?

Andrew W. Whipple

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

During today's call, we'll refer to certain financial measures and details to 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 our forward-looking statements.

So with regards to the fourth quarter and highlights, as Zsolt noted, with regard to the sales, we had our highest yearly sales ever in the history of the company at $186.3 million versus $185.6 million back in 2008. The year-over-year quarterly sales increased to -- from $43.1 million to $44.2 million, and the sales decreased from the prior quarter from $48.1 million to $44.2 million. On a high-level basis, I think it's worth noting year-over-year that the euro had weakened against the U.S. dollar by 7.2%, resulting in about a $5.9 million decrease in year-over-year's revenue.

So Zsolt will comment further about sales drivers in his section of the call. With regards to cost of goods sold, the year-over-year quarterly cost of goods sold decreased from $36.4 million to $34 million, and the gross profit percentage increased from 15.6% to 23.1%, reflecting increases in operating efficiencies as we continue to improve the productivity of our operating lines.

The cost of goods sold decreased from the prior quarter from $36.8 million to $34 million, and the gross profits percentage decreased slightly to 23.1% from 23.5%, reflecting a change in the product mix.

Again, on a year-over-year basis, it's worth noting that the HUF weakened by about 15.9% during fiscal 2012, decreasing our costs in Hungary. Again, Zsolt will comment further about cost of goods sold drivers in his section of the call.

With regards to application and development costs, we can see that we had $8.6 million in fiscal '11, and that was down to $7 million in fiscal '12. And the decrease was primarily due to reduced spending in our prepreg development, which is now into production.

In Q4 -- Q3 and Q4, we had $1.7 million in development costs. We continue to work [ph] in prepreg into the wind, auto and then in the PAN/lignin area, which is supported by our grant from the Department of Energy. So we have a lot of application development work that we continue to work on and progress on.

In the SG&A area, we see that in fiscal 2011, we had $13.9 million, and in '12, it went down to $13 million. The decrease was primarily due to a $0.5 million decrease in consulting costs and the strengthening of the U.S. dollar against the HUF, which resulted in about a $0.6 million decrease in our HUF-denominated costs. So we find that our SG&A costs, as the revenues go up, are very leverageable costs.

Below the line, we can see that we had a loss on foreign currencies of approximately $0.8 million in Q4, and this was primarily due to the HUF strengthening against both the euro and the U.S. dollar. This causes an offset against our euro and USD based receivables over in Hungary. It's important to note that our functional currency is the HUF over in Hungary, so currency movements of the HUF against the euro and USD tend to have that type of effect.

Again, below the line, we see that we had a gain on our fair value of liabilities. It was only $100,000 -- about $100,000, but it's worth noting that this relates to 828,000 warrants that we have outstanding, which expire in December 2012. These have a strike price of $28.06. So come December, those warrants will go away and that'll be the last of the warrants that we had outstanding associated with the convertible debt.

Looking at income taxes, we had about $100,000 expense in Q4 versus $300,000 in Q3. This expense is primarily driven by a 2% local revenue tax in Hungary. With regards to Hungary, it's important to note that we do have a 10% flat tax rate in Hungary, which is going to be applicable next year up to our first $2.3 million in taxable income. The rate then increases to 19% beyond that. While we do have an NOL that we will be able to offset against that taxable income in Hungary, but it's only applicable up to our first 50% of taxable income. It's important to note that we have 100% valuation allowance carried in the U.S., Mexico and Hungary. But the U.S. NOL, at this time, is approximately $63 million; in Mexico, it's about $33.5 million; and in Hungary, it's about $46.9 million. So as we generate taxable income, we'll use these NOLs to their maximum to offset any taxes that are due.

With regards to capital spending, we had $22.4 million of CapEx in fiscal 2012 versus about $8.2 million in 2011. So we saw a lot of increase in the current year. In Q4, we have $4.3 million versus about $5.8 million in Q3. So these investments primarily represent investments into our downstream operations, including prepreg, pultrusion and fabrics where we've made some great progress. And we also have invested in further operational efficiencies.

With regards to our balance sheet, we can see that the receivables decreased to $35.9 million in Q4 from $37.8 million in the prior quarter, reflecting the decrease in sales. Receivables paid on average in approximately 60 to 70 days, in line with our expectations and customer mix. We continue to monitor the receivables closely and pursue slow payers as appropriate. During all of 2012, we had approximately $200,000 of bad debt expense against $186 million in revenue. So as you can see, we have a very small amount of bad debt expense.

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