EXHIBIT 99.1
Except for the historical information contained herein, the matters set forth in
this transcript, including those about our future financial results, including
revenues, sales, sources of revenues and expenses, our gross margin,
profitability, operating losses, need to raise additional capital, our goals and
business outlook for 2005 and thereafter, accuracy of forecasts, market trends,
growth and market opportunities, non-domestic market opportunities, product
introductions, product development, efficacy of our illuminator, expansion of
our customer base, our intention to significantly reduce operating costs through
consolidation of our U.S. operations, ability to manage growth, moving some
assembly oversees, the expected restructuring charge and expected annual cost
savings, expected benefits and timing of restructuring, our evaluation of
potential programs for cost reductions of EFO and expected benefits of cost
reductions, the outlook and growth prospects for EFO, benefits of the newly
passed energy bill, decrease in government funding, the expectations that our
pool and spa business will decrease, increase in personnel, expected testing of
the EFO freezer case lighting system and timing of EFO installations, constitute
forward-looking statements for the purposes of the safe harbor provisions under
the Private Securities Litigation Reform Act. These forward-looking statements
and all other statements that may be made on this call that are not historical
facts are subject to a number of risks and uncertainties that may cause actual
results to differ materially, including, but not limited to, our ability to
retain and obtain customer and distributor relationships, our ability to
maintain relationships with strategic partners and ADLT, our ability to increase
cash balances in future quarters, risks associated with the evolution and growth
of the fiber optic lighting market, the impact of technological advances and
competitive products, the slowing U.S. and world economy and its effects on
Fiberstars' markets, failure to develop marketable products from new
technologies, failure of EFO or other new products to meet performance
expectations, unanticipated costs of or difficulties in implementing
restructuring, the ability to evaluate and implement programs for reducing the
cost of EFO, our ability to integrate new management, delays in manufacturing of
products, increased competition, other adverse sales and distribution factors,
greater than anticipated costs and/or warranty expenses, and other risks
detailed from time to time in our SEC reports, including our Annual Report on
Form 10-K for the year ended December 31, 2004, and our Quarterly Report on Form
10-Q for the quarter ended June 30, 2005, in particular to the section entitled
"Factors That May Affect Results." These forward-looking statements speak only
as of the date hereof, and we disclaim any intention or obligation to update
these forward-looking statements.
FIBERSTARS, INC.
Moderator: John Davenport
August 11, 2005
10:30 am CT
Operator: Good morning. My name is Michelle and I will be your
conference facilitator today. At this time I would like to
welcome everyone to the Fiberstars, Inc., Second Quarter
Earnings Release conference call. All lines have been
placed on mute to prevent any background noise.
After the speakers' remarks there will be a question and
answer period. If you would like to ask a question during
this time simply press star then the number 1 on your
telephone keypad. If you would like to withdraw your
question press the pound key. Thank you.
Mr. Davenport, you may begin your conference.
John Davenport: Thank you very much, (Michelle), and I'd like to add my
welcome to those attending Fiberstars' second quarter
conference call. The structure is that I'll make a short
opening statement and then I'll turn it over to Bob
Connors, our CFO, who is with me here who'll talk about
the financials and give some further guidance for 2005 and
some for 2006. And I'll follow that up with a business
discussion and then open it up for questions.
But first ,of course, I'd like to remind you that
forward-looking statements made on this conference call
are pursuant to the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995. Such
forward-looking statements include statements regarding
the goals and business outlook for 2005 and thereafter,
future pool and spa market sales, the benefits and
customer expansion plans involving EFO expected revenue,
profitability in margin including the benefits of offshore
production, expected results from the University of Idaho
study, expected benefits from the energy bill and its tax
benefits and expected benefits from the alliance and
partnership with Gensler and any other alliance or
partnership.
Investors are cautioned that all forward-looking
statements involve risk and uncertainty. Actual results
may differ materially the results predicted.
Having said that I'd like to say that the quarter is down
as we pre-announced at our conference call a few weeks ago
- August 11th, I believe - and Bob will talk about that in
some detail.
2
We began to implement our restructuring plan and it is
going as expected early in the game but things are looking
very positive and we expect to begin to realize the
benefits of that restructuring next year. We are also very
encouraged by the growth in the EFO business and I'll talk
more about that in a moment.
First I'd like to turn it over to Bob for the financials.
Bob Connors: Thanks, John. Revenue in the second quarter came in at $7
million 645,000, down 11% mainly due to slowdown in the
pool sales of 14% which came primarily in two niche
markets in the pool business; the spa market and Jazz FX
market. The in-ground fiber market was actually up in the
quarter.
The short-fall was mostly accounted for by the pool
business as I said although EFO did grow appreciably; we
had $456,000 compared to $95,000 last year but that growth
was not enough to offset the decline in traditional fiber
optics business.
Our gross profit was 38% compared to 42% last year. This
lower gross profit was due to not covering the
manufacturing overhead expenses due to lower sales and we
also had some lower margins in Europe due to lower sales
there.
Expenses were up mainly due to additional spending in
sales and marketing and R&D on EFO..
We also incurred some additional restructuring expenses,
related to severance costs . That led to a loss of
$763,000 or 10 cents a share compared to a profit of
$461,000 or 6 cents a share the previous year.
Looking at the first half, revenue was virtually flat with
the growth in EFO which grew to $766,000 for the half
compared to 223,000 the previous year offset by the
slowdown in the traditional fiber optic business.
Gross profit of 38% nearly equal to what we did the
previous first half in 2004, 39%. The decrease came due to
lower margins in the core commercial business.
3
Expenses were up $1.4 million as we put additional
$900,000 into sales and marketing and R&D for EFO. Some of
the R&D increase is due to lower credits for the DARPA
contract this year and we're in the third year of our
DARPA agreement so the amount the government is paying us
is scheduled to go down in year three slightly.
We also had the restructuring expense and higher G&A
related to additional accounting and legal fees. The net
result is a loss of $1.8 million or $0.24 per share
compared to a loss of $303,000 or $0.04 per share for the
first half last year.
Looking at the balance sheet cash came in at $3.3 million
which is about flat on what we did at year-end; cash
coming up after the end of the first quarter where we came
in just under $1 million in cash as it usually does in the
second quarter due to seasonality of the pool business.
We also decreased inventory slightly, coming down just
below $8 million, down from $8.4 million at year-end and
about two days turns or excuse me, turns of inventory on a
yearly basis to two which is still not where we want it to
be but we're making progress on getting to three turns
which is our current goal.
We also took in $1.3 million in cash from the exercise of
options and warrants which also helped our cash position.
As a result the balance sheet remains strong; with
liabilities at $4.3 million, still fairly low and the
total shareholders' equity of $20.7 million.
The outlook for the balance of 2005 is for pool sales to
be down as we stated previously. This will be more than
offset by growth in EFO that we expect this year. We
expect EFO to still be between 5% and 10% of overall
revenues but revenue as a whole will be flat to up
slightly. We expect not to be profitable as a result of
operating losses due to the continued investment in EFO
this year combined with the restructuring charges which as
we stated before, most of the restructuring charges we
expect to hit in 2005 as we move our California operations
and close down this facility write-off the balance of the
lease that we have in Fremont this year.
4
In 2006 we are currently looking at the traditional fiber
optic business revenues to be flat or down slightly as the
pool business to continue to be a little bit soft in some
areas however we do expect strong growth to continue in
EFO. Our expectation is that it would be 15% to 30%
percent of total revenues for the year.
Expenses - the benefits of the restructuring should begin
next year so operating expenses would be down except for
the fact that we will be complying with Sarbanes-Oxley so
we'll have some expenses related to that along with
options expenses. The restructure expenses which are split
between this year and next will mostly be incurred in 2005
and the balance of any restructuring expense next year.
However we do expect to be positive on an EBITDA basis.
Having said that I'll turn things back over to you, John.
John Davenport: Thank you very much, Bob. And now I'd like to just have a
kind of a brief business discussion. We had just a few
weeks ago, a fairly extensive discussion so I'm just going
to highlight things that have changed a little bit. Let me
start out by saying that the environment really is right
for products like EFO. World energy demand is growing at
nearly 2% a year and of course the cost per barrel of oil
is at an all time high.
We have Saudi Arabia saying that while they can increase
production, they don't anticipate being able to meet the
demand so the pressure for conservation are going to be
pushed ever...
Excuse me.
The pressures for conservation are going to be further
increased as energy becomes one of the defining issues of
the 21st Century in the words of David O'Reilly, Chairman
and CEO of Chevron.
Just this week President Bush signed the Energy Policy Act
of 2005, an effort really to encourage conservation and in
fact, one provision in that Act allows for tax incentives
for people who can say commercial and residential
installations where energy can be saved beyond the
regulations that are in force and that's saving is
substantial. And we expect that will become an opportunity
and a further reason to install EFO.
5
I was at two places of interest that I'd like to talk
about this week. On Tuesday I was at the Department of
Energy. Of course last time we had announced that there
was $1-1/2 million in awards that we received, Phase II
small business R&D awards that we had received from the
Department of Energy.
The Department of Energy has also noted that we have
product right now that saves energy and is encouraging
their customers, government customers, to take a look at
EFO. And in fact while I was at the Department of Energy
they brought in the folks who operate the commissaries
around the world, government commissaries.
It's actually a Department of Defense function and these
commissaries are like supermarkets. Some of them are very
large. There's a new one being built in San Diego that's
120,000 square feet so that's a very large supermarket
indeed.
Again, and what we are going to do is participate with
them in doing an energy audit of those facilities and see
where we might use EFO to help bring down energy usage.
Very exciting to see that the Department of Energy is
helping us within the government with customers.
The second thing that happened this week was DARPATech;
this is the annual R&D show for the Department of
Defense's research arm. Of course we have a major program,
the HEDLight program, ongoing with DARPA. We're pleased to
be able to light their booth and I must say, it was
actually very well lit. We placed probably more than 100
points of light, points that would have normally used
50-watt MR16's or fluorescent lamps and saved a
significant amount of energy. We are about one quarter the
energy usage of a conventional lighting system.
The signage that the DARPA used at the booth to describe
this technology was as "a new paradigm in shipboard
lighting" and it was very nice to see that. It listed all
of the advantages," improved maintenance and safety" -
again this is the Department of Defense talking -
"significant space and weight savings ... daylight
spectrum in color." Again we announced that at Lightfair a
few months ago. And the use of large core plastic optical
fibers to get the light where you want it and not the
heat.
6
So that was very encouraging. The response at the show was
very positive and we look forward to doing ship
installations sponsored by DARPA which probably won't
occur in the fourth quarter as we hoped which is beginning
October of course is the new government fiscal year and
this is to be funded in the new fiscal year because of the
agreements that have to be signed off by various branches.
So that may move into the first quarter but again, the
response that we got was very positive.
Let me turn now and say a few words about Whole Foods. I
mentioned on our last call that we expected to be in four
Whole Food regions in this quarter and in fact we are. The
fourth one is the Pacific Northwest and we'll be doing an
audit there this quarter.
We incidentally are installing a unit today in Florida
which was our third Whole Food region that we sold in the
second quarter. We had four Whole Foods sales in the
quarter and that's continuing to grow.
We are encouraged by the early reports of results from the
Department of Idaho study. There were several different
kinds of lighting that were compared against EFO including
MR-16, two kinds of fluorescent lamps and ceramic metal
halide. EFO performed significantly better against all of
these different lighting alternatives and so really in a
situation where you're trying to preserve produce, this
test indicates that EFO should be the choice.
We're looking forward to seeing those results published in
some form this month but of course that's up to the
University and the researchers involved. That's what they
tell us the schedule that they're on.
I'd like to say a word or two about commercial buildings
that we talked about last time. I said that there was one
commercial building that we expected to do in the quarter
and that is pretty much on track and there might be a
second.
7
It looks as though in fact there will be a second building
in Europe and there'll be a small test going on in the
third quarter, a small segment of that building as a
starter installation and of course there are other
commercial buildings in progress.
I mentioned on the call that our dock light new product
was very promising and in fact that is under evaluation at
one food chain and there may be - we're hoping for a
chain-wide order on that.
I guess I would close by saying that we are encouraged.
The EFO opportunity is in fact as large as we imagined it
to be when we first began this project. And in fact if you
looked at just the customers that we've identified to-date
and said well, if you could get 25% of the lighting that
we feel is accessible to EFO, that number could exceed
$300 million.
So EFO is real. We are forecasting in a conservative
manner but we are positioning the company for, you know,
for the growth that we see as it comes. I said last time;
our plan is to do this the old fashioned way;
quarter-by-quarter and account-by-account. I was very
pleased to see that our second quarter for EFO exceeded
our first quarter and that growth structure that we see
now we're tracking it for about six quarter, that growth
structure is the basis really for the projection that Bob
gave a moment ago.
Thank you and I'd like to open it up at this point for
questions. And I've been receiving word that it's been
very difficult. This phone is - there's a problem in the
phone and I apologize for that. So I'll try to continue to
speak up.
Thank you.
Operator: At this time I would like to remind everyone if you would
like to ask a question press star then the number 1 on
your telephone keypad. We'll pause for just a moment to
compile the Q&A roster.
Your first question comes from (Michael Horwitz) with
Pacific Growth.
8
(Michael Horowitz): Hi, fellas.
John Davenport: Hi.
(Michael Horwitz): To follow up on how you just finished there, John, when
you look at that growth next year or the guidance on the
15% to 30%, how do you break that down internally? Does
that include some more Whole Foods, then some dock lights
and some freezer lights and maybe some Navy or like can
you kind of get a little bit more specific?
John Davenport: Well, you did pretty well. I think in terms of outlining
it I'd say that the food business would probably lead that
because we're beginning to really understand that market
and it's becoming kind of regular the way that we go about
it.
The freezer cases next year will be just beginning.
There'll be things that we'll learn, customers will want
to take a look at these things and we don't know what that
process is going to be like so that'll be less impact.
We expect to see dock light as part of this so you're
description was a pretty good description. We have taken a
look at this on an account-by-account basis and tried to -
I'm reading a new book, Bossidy's new book called Facing
Reality, and it makes you take a conservative look
financially, something I also learned at GE, and position
yourself for growth. Take a conservative view and position
yourself for growth and we are building capacity beyond
the projections that Bob gave and we'll do of course
everything in our power to be able to meet any demand that
we see.
(Michael Horwitz): Okay. And then maybe a follow up to the last call with
regard to the reduction in costs that you think you can do
within EFO and Wayne Platt coming in to help out. I know
it's early on but are there any other comments there?
John Davenport: Yes, we have a very well defined program taking us to the
end of this year in terms of reducing EFO costs. That out
of the kind of speculative phase into kind of engineering
and manufacturing tasks, we are moving forward on those
tasks and we expect to see significant reduction in costs.
9
The restructuring will also, of course, add to reduced
costs. We are going to be doing some assemblies, EFO
sub-assembles at our offshore - the plan is to do some
sub-assemblies at our offshore facility in India and that
will all add to reduced costs.
We have plans beyond the end of this year. That will
continue cost reduction process going forward and some of
that will involve more development. And one of the things
that we're doing next year is we're continuing to fund
development of EFO. Fortunately, the government is
continuing to provide significant help.
(Michael Horwitz): And then lastly, maybe a little housekeeping on Whole
Foods and maybe I heard it wrong on the last call but
you're in four regions. Is there a fifth region expected
in this coming quarter?
John Davenport: No, I think you heard it wrong on the last call.
(Michael Horwitz): Okay.
John Davenport: The Pacific Northwest was the fourth region. We have the
Mountain region, the Southwest Region, we're putting in a
store right now in Florida today. That's a region. And
that leaves the Northeast, the mid-Atlantic, the Midwest
and the Pacific Southwest.
Now having said that, they went a few months ago from six
to eight regions so they can change the way that game is
played. But we are in four and we are aggressively working
with the other regions. So that's where we are right now.
(Michael Horwitz): And then lastly, new hires within the sales department for
EFO? Have there been any or what's the plan?
John Davenport: There have not been any new hires in the second quarter.
The plan is in 2006 - we will be doing hiring in EFO
because of the restructuring and so of course that will be
going on but there will be new hires in 2006.
(Michael Horwitz): Okay, great. Okay, good. Thank you very much.
10
Operator: Your next question comes from (Bill Gibson) with
Nollenberger Capital.
(Bill Gibson): Hi, John.
John Davenport: Yes.
(Bill Gibson): With regards to the legislation, the Energy Bill, what
does that do to the payback on EFO? Do you have any - have
you worked through any math in the sense of...?
John Davenport: Well, there are only 1734 pages in the Energy Act, the
Energy Policy Act. We're still working out the math but it
looks very promising and I think that it will be a
significant reduction in payback.
Now there is a window on this. It begins in January 1st I
think of 2006 and goes through December 31st of 2007 so
there's a two-year window to take advantage of this
further reduction against 90.1 and it's a significant -
for lighting it's 25% reduction over 90.1 and so remember,
a lot of the world is at 10 watts per square foot and
getting to 1.9 watts per square foot and still having any
light left has been a chore for a lot of people. EFO has
helped.
This cuts in if you can reduce it 25% beyond that so for
retail that would be somewhere in the range of like 1.5.
EFO can do that and still give you significant lighting
and that's why I think this is going to be helpful
especially for builders will want to take advantage of
this, supermarket chains, anybody doing any building will
want to take advantage of this.
(Bill Gibson): Good. Now did I hear you say that also applies to
residential and does that potentially speak up...?
John Davenport: That applies to government buildings and of course the
government can't get a tax incentive for itself however
the lighting designer gets the tax incentive personally.
(Bill Gibson): Oh.
11
John Davenport: So I mean I'm thinking about going out there and doing
some lighting designs for the government. I mean it sounds
pretty good actually.
(Bill Gibson): Good, good. And then just one question for Bob. What's
your best estimate as to the option expense in '06?
Bob Connors: Yeah, best estimate currently, (Bill), is between $500,000
and $600,000, right in that range for the year.
(Bill Gibson): Okay. And on SOX have you given further thought to the
expense there?
Bob Connors: Estimate originally was about $600,000 and that's coming
down given the extra time we have so it'll be below that
number. I don't know exactly how much but it'll be below
that number.
(Bill Gibson): Okay. Well, maybe because you're a company - let me just
warn you, it's cost every company I cover more than they
expected.
John Davenport: I think I'm going to ask Bob to keep in the $600,000.
(Bill Gibson): Okay. Thanks, Bob. Thanks, John.
Operator: Your next question comes from (Lenny Brecken) with
(Brecken Capital.
(Lenny Brecken): Guys, just to follow up, John, on your comments on the
approach of, you know, the forecast in terms of what the
overall business and EFO. I mean what sort of besides
you're reading your book, has changed in terms of
improving the forecast of the business and how do you
think it's going to change in the future?
12
And John, I ask that question because historically you
know I think the company hasn't done a very good job at
that and, you know, I know it's difficult because the
numbers are so small and can swing so that, you know, as
an investor I understand. But, you know, as we start
growing the business I just want to make sure that we're
on top of making sure the expectations are correct and we
don't run into a situation where the expectations get
ahead of themselves and then we continually have to
readjust.
John Davenport: Well, that's my -- my intention is to do the best job that
we can in terms of forecasting. That's why you've gotten a
range. The other thing is to have them grounded and the
approach that we've taken is both historical and then
forward-looking. Historical by looking at a quarter over
quarter growth and the forward-looking by looking in
detail at account-by-account and then kind of discounting
the optimism of the sales guys, the sales force a little
bit to try to bring - this is where the book comes in - to
try to bring reality in play. So we are trying to apply a
procedure, a grounded modeling approach to forecasting the
business.
The flat or slight decline that we're talking about, we
took a look in the conventional traditional business, full
business, we took a look at what we've actually done
historically in those businesses and although there is
swing you can see we've done trend lines and that's the
basis for Bob's comments. So we're doing statistical
analysis. That's more amenable to historical analysis.
(Lenny Brecken): Okay, but one of the things that I look at is, you know,
analysts have I think overall growth as well over the
assumed 30% implied high end to your forecast in the next
year. And I guess I don't know whether they think you're
being conservative or not. We'll soon see when they make
adjustments but, you know, that was the reason for the
question.
Just a follow up question as well; can you give us an
update on other chains besides Whole Foods in terms of
progress there and did you comment on the Navy order and
where that stands?
John Davenport: Yes, I did comment and let me start with the Navy, okay?
The Navy order, it actually will come through the DARPA
because they're sponsoring this. But the Navy order is
progressing. This is the government. It probably will not
begin because the paperwork is taking longer than
everybody expected. Probably will not begin in the fourth
quarter; probably will begin in the first quarter.
13
(Lenny Brecken): Okay, that's what I thought you said.
John Davenport: Yes. However that's not - there's nothing going on there.
It's just a matter of getting everyone onboard ship or
whatever that you have to do to make that work.
In terms of other things going on, let me say a word or
two about Albertson's. Albertson's, we have an ongoing
test with Albertson's in the wine department. We are on
the spec for two types, I think it's a Type 45 and Type
45A (or something) store so when those stores are built
they also come up as remodels. We are in the seafood
section so we're on the spec.
The other thing going on that's very exciting with
Albertson's is they're participating in a test with
Southern Cal Edison and we expect to participate as well,
of course, to provide a first freezer case installation.
That will occur - there's been a site identified - that
will occur in the Los Angeles area. We will modify a
complete section of the freezer case system. It'll be an
entire freezer case loop.
In September the plan is, is that Southern Cal Edison will
begin instrumenting in September to get the baseline
performance using the conventional fluorescent systems and
then we would probably the following month begin
installing the EFO system and then that would be monitored
again by Southern Cal Edison.
So the energy savings will all be documented by the
utility and not by us and it'll include taking a look at
the, at actually what goes on inside the freezer case.
Beyond that Albertson's has some stores in California that
we'll be doing some installations in. So that's
Albertson's.
We are looking at a number of other major food chains
where the prognosis is very positive. They've seen the
results that we've gotten in Whole Foods. That Austin
store gets a lot of visitors and we get comments like we'd
like to avoid having our ice melt on us as well.
So that's encouraging.
14
(Lenny Brecken): John, did you say the Navy order was, the Navy deal was
signed and not...?
John Davenport: No, I didn't say that. The "fat lady" has not yet sung on
that but what's going on is, is that they're getting the
appropriate admirals and so forth signed up. That's all
done on the DARPA side. The reason that we're not just
doing a simple install is that the folks who are
sponsoring this R&D want it to be used afterwards and
they're getting a commitment that, you know, if this works
the way that we expect it to work, this becomes the
lighting. Just as in a supermarket, we're on the spec, we
want to get on with spec for new ships and for refitting.
(Lenny Brecken): Well, that's encouraging.
John Davenport: Right. So that all takes time.
(Lenny Brecken): Okay. Then the delay is warranted. I want to congratulate
you on despite that delay, maintaining your 5% to 10%
expectation. That's a testament of improvement in
forecast. Thank you.
Operator: Your next question comes from (Walter Schenker) with Titan
Capital.
(Walter Schenker): Thanks, two questions. The first one is, I know you've had
a couple of EFO installations outside the United States in
Europe. Is there any likelihood of any contribution of
non-U.S. sales of any consequence next year? And then I'll
ask the second question.
John Davenport: The answer is yes and I don't have a forecast for the
percentage but it'll be a significant percent. Right now
our non-U.S. business is a total of our - of our total
business is about 30%, is that right, Bob?
Bob Connors: Yes.
15
John Davenport: And so my expectation is a number in that range. We'll
see. I'm in the process of going over these account by
account. There are many, many encouraging projects in
Europe that are using EFO so we can probably talk more in
detail about that next time.
(Walter Schenker): Okay. And the second question which has lots of caveats
and moving pieces and obviously is a function of how this
grows, but what type of gross operating pick the number or
the term you want, margin year X down the road when you're
really producing in volume, are you budgeting toward for
EFO as you price it versus your expected costs?
John Davenport: I'm going to let Bob handle that.
Bob Connors: Yeah, (Walter), are you asking specifically about EFO or
overall?
(Walter Schenker): Well, specifically about EFO because hopefully there'll be
a point where the pool business won't be that relevant
versus the contribution from EFO.
Bob Connors: Well, as we've stated, our target operating model is one
which is three to five years out....
(Walter Schinker): Hold on one second.
Bob Connors: We're expecting pretax margins in the order of 15% of
sales. Obviously it's probably at this point more than
likely that's at the far end of that range. And at that
point EFO would be we expect the majority of the business.
So that target operating model would apply to EFO as well.
(Walter Schenker): Okay. And that number is a number based on competitive -
because there really isn't a lot of competition other than
the fluorescents - but the different application in some
cases or just what you think generates appropriate returns
for you?
Bob Connors: Well, it has to do with setting a target of 40% is our
gross profit margin which, as John mentioned, looking
aggressively at decreasing the cost but at the going in
level the proposition is to be at or near the cost of
(traditional) lighting which is incandescent, halogen
lighting. So generally we pass on cost savings to the
customer and reduce the cost of the product.
16
But we would set a goal of holding the line at 40% gross
profit margin and as the business grows we would leverage
the fixed expenses of sales and marketing, G&A, et cetera,
against that model.
(Walter Schenker): Okay, thanks a lot.
Operator: Your next question comes from (Robert Smith) with Center
for Performance.
(Robert Smith): Hi, good morning. How are you doing, John and Bob?
John Davenport: Very well.
(Robert Smith): Yeah, the Idaho study. How quickly can you take this to
the bank because it seems that the numbers will be
compelling especially for food?
John Davenport: As soon as we get a report.... I've actually seen the data
but I don't want to comment on it. The interpretation of
that data is up to the researchers involved. It's an
independent study. They're telling us that there'll be
some kind of public information coming from the University
of Idaho in August. But again they're R&D, I mean they're
university folks so - I used to be university folk myself
some time in the distant past but we're expecting to see a
statement from them. Then we can take it to the bank.
(Robert Smith): Yes. What I'm after is the implementation, in other words
to get additional business - are there supermarketers that
are waiting this.
John Davenport: Yeah, there are. Well, for example as you might expect,
Albertson's is in Idaho, in Boise, and they know all of
these folks. So they are becoming convinced and they're
beginning to let us use in our analysis, payback analyses,
for them, beginning to allow us to use reduction and
shrinkage numbers.
17
(Robert Smith): Mn-hm.
John Davenport: And we expect to be able to go to other food chains, who
are not based in Boise, Idaho, and with data, university
data, in addition to the other data that we have. To be
able to get that is kind of a line that we can put in our
analyses.
(Robert Smith): Would the data help you gain the rest of Whole Foods
regions?
John Davenport: No. Hopefully they're convinced. All we had to do was stop
melting the ice and they figured it out, stop. You know,
they don't need this data. We got them by showing that we
could keep the seafood from drying and so forth. There
it's a matter of getting the attention of the regional
manager, then going through and convincing him because he
makes the decisions.
It's not a corporate decision although corporate because
we've got the Austin store, clearly is impressed with what
we're doing, they don't mandate things so it doesn't
happen from the corporate office. Each regional manager
makes his own decisions.
(Robert Smith): But we weren't speaking of (Tipping Point) in that
respect.
John Davenport: Well, they all go to Austin. They all go through that
store and so we are moving more quickly in Whole Foods as
a result of that.
Albertson's is a different structure. There there's a lot
more centralization and so we expect to get this much
larger chain. So that's part of the reason for the
centralization.
(Robert Smith): Okay. And just circling back to the estimates of 5% to
10%, looking at the almost 50% sequential growth in the
second quarter, the low end - the 5% - doesn't leave much
room for growth in the last six months, at least looking
at the numbers as I see them. So that must be largely
conservative.
John Davenport: We gave you what we had forecasted about this time last
year, I think it was actually in October, the 5% to 10%.
And we said we were going to meet that forecast. My goal
is for quarter-to-quarter growth.
18
(Robert Smith): Yeah.
John Davenport: Okay, having said that - now you can draw conclusions
you'd like from that.
(Robert Smith): M-hmm. Okay. And essentially - all right, the technology
is here. It's a question of working through a bureaucratic
system.
John Davenport: Yeah, this is the way lighting is. It's lots of people in
the decision process. It's something that as its applied
it becomes easier to apply. In the regions where we are
it's becoming easy. When they build a store there's EFO's
in the store. Now it's a matter of how many of the
different sections in the store. We're growing in those as
well.
(Robert Smith): Well, I certainly believe you're in the right place at the
right time and it's all going to be I guess a question of
execution and I wish you well.
John Davenport: Thank you.
Operator: Your next question comes from (Chris Ryder) with (Leukrum)
Capital.
(Chris Ryder): Good morning.
John Davenport: Good morning.
(Chris Ryder): Just a point of clarification first. In the body of your
presentation you talked about Albertson's and (Freezers)
being '06. I thought that the testing for freezers was
happening in fourth quarter '05.
John Davenport: That's correct. We're talking about doing more than
testing in '06. We're talking about commercializing in '06
so '05 is where we begin the process of showing the
customer what the performance is, documenting it, going
through all of the folks to participate in the decision
and there are lots of folks that participate in these
decisions.
19
So yes, we're beginning in '05. Actually we will be in
more than just this test at Southern Cal Edison. Our plan
is to do - we have a couple of other tests to do in fourth
quarter.
(Chris Ryder): Does that 15% to 30% of '06 revenue guidance contemplate
commercial contracts with Albertson's and (Freezers)?
John Davenport: To some extent. That's one of the paths. Again there is
some conservatism built in. If you develop a plan that's
based upon hitting every single item in the plan, the
thing you can be sure of is not meeting the plan, okay? So
we can make it without that but obviously it's harder.
(Chris Ryder): And specifically with regards to Albertson's, if you don't
melt the ice and as a result, you're in the seafoods for
stores 45 and 45A, why not the other stores?
John Davenport: That's the question we asked and in fact, there are some
other stores that we're going to be doing the seafood
section and some other sections I think in California.
(Chris Ryder): And what percentage of the store bases is represented by
the kind of specs that you've been approved for?
John Davenport: It's a number like 10%.
(Chris Ryder): Do they have the same kind of dispersed purchasing
decisions as say a Whole Foods?
John Davenport: No. No, it's centralized at Albertson's.
(Chris Ryder): And when you asked the question, why not others; what
response?
John Davenport: The response is, okay, here's something to try. And it's a
matter - getting in and getting some installations will go
a long way because then it becomes a matter of well, it
works; why don't we do it. Then it becomes an internal
discussion, then it becomes a matter of allocating funds.
It goes through their normal process. That's the stage we
want to get to.
20
There is a desire on Albertson's part to really try out
this technology and so far they've been very positive.
(Chris Ryder): In July when you talked about taking over one of the
things you had discussed was that you had an interest in
having this be a $100 million business. Today you're
talking about it being $300 million if you only hit 25% of
your addressable current target market.
John Davenport: I was afraid of saying to you what I just said. It's
simple, right. The math is really there. I know where
you're heading. That's where I'd like to go too but I'm
trying to stay with the cover of my new book.
(Chris Ryder): Well, it just seems that what's happening with the
commercial contracts is that we're rapidly going from test
phase to commercial deployment. Are you going to help us
with any sense of backlog or commercial orders or any of
those kind of benchmarks that we can monitor your progress
over the next couple of quarters?
John Davenport: We'll be announcing things as they occur, sure. As we have
- for example I talked about looking toward getting a dock
light order chain-wide for a small chain. If that occurs
you'll see an announcement on that in this quarter. But
when we have substantive events you'll know about.
(Chris Ryder): Okay. And back in July you had talked about trying to size
the dock light market?
John Davenport: Yes and a number - now there are lots of docks, okay?
There are "glass sensitive docks," for example food
warehouses are very glass sensitive. There's a safety
issue of course but beyond the safety issue there is also
getting the glass in food. This occurs also in cosmetics
and furniture and other areas.
21
The estimate I have right now for the U.S. in the
"glass-sensitive" docks is about 1 million and in fact I
have folks working on that as a result of our discussion
last time. I'll probably - I'll have a better number for
you as we go forward. We're trying to do a real
forecasting job there. The mix though that will be most
sensitive of course is where breakage is a real issue.
(Chris Ryder): In the ASP, the average selling price per unit?
John Davenport: We talked about what the competitive was last time and the
competition I think is on the order of $200 per door.
(Chris Ryder): So it's a $200 million addressable market for dock lights?
John Davenport: There you go.
(Chris Ryder): Thanks for your time.
John Davenport: Okay.
Operator: Your next question comes from (Brian Freckman) with Crown
Capital.
(Brian Freckman): Hey, guys, how are you?
John Davenport: Hi.
(Brian Freckmann): First question, you mentioned the Florida install of Whole
Foods being something that you are installing currently
but you also mentioned that it was part of this quarter's
revenue so do I get this straight - that...?
John Davenport: No, no, I didn't - actually it was last quarter's revenue.
(Brian Freckmann): Oh, okay, so you - okay.
John Davenport: Q2, sorry; not Q3. So it was part of the historical
quarter, yes. We sold it at the end of - it was one of the
four Whole Foods I guess we sold in the second quarter.
22
(Brian Freckmann): So just so I get this right; revenue recognition is on
sale or install or how do I look at that?
John Davenport: It's when we ship the product.
(Brian Freckmann): But not when it's - okay.
John Davenport: Not when it's installed.
(Brian Freckmann): Okay. The $456,000 from this quarter - how many EFO
shipments I guess what would be, are involved in that
number?
John Davenport: Good question. On the order of 700 or 800.
(Brian Freckmann): Seven or eight hundred EFO shipments, okay.
Then here's another question. You know, most sort of
industrial as companies in the lighting industry pretty
much are valued on a basis of 'to book.' You guys are
trading at about 6-1/2 versus most other deals in the
space that go off at like 1 and 2 times. Given where your
stock is trading, you know, at a huge multiple to most
deals in the space, are you guys going to go out and raise
money given you have $3 million on the balance sheet right
now?
Bob Connors: I'll answer that one; this is Bob. I think we've said in
the past that we're continuing looking at this mainly from
the point of view of just being able to manage the growth.
If things really do take off we want to be in a position
to be able to do that both from the standpoint of having
the infrastructure to manufacture but also being (able to
raise) capital so the board has an ongoing project you
could say, looking at this issue.
And obviously when there's something to announce if there
is an announcement we do have but it's at the top of the
pile as far as the thought process goes.
23
(Brian Freckmann): Okay, okay. And then finally someone else mentioned this
but I guess I'm trying to figure out, the $300 million
number you guys threw out there, what's the math in that
number - ASP units, so on and so forth? I mean I know its
sort of an estimate but, you know, what am I...
John Davenport: I can give you a little bit of the math, okay? In that
math I had 12 supermarket chains with 9000 locations and
there was over $100 million of that so more than a third
of that. I have 18 retailers with 15,000 locations and I
had nearly $200 million of that and a little bit in the
Navy beginning and a little bit in - a very little bit in
commercial building. So it'll be easy to get there.
(Brian Freckmann): And then last question - of EFO next year non-retail, I
guess I'm looking at the DOE and DARPA, correct? And what
have you guys talked about that revenue number being in
'06 and what have you announced so far in press releases
that you've got booked per se for 2006 from non-retail?
John Davenport: I'm not sure that we have anything in press releases on
non-retail.
(Brian Freckmann): Okay, so the DOE and DARPA are all this year? There's
nothing that - I mean I guess right now you guys are at
zero revenue for 2006 for non-retail, is that right?
John Davenport: No, that will be a part of our number next year. We're
talking about what is announced and what isn't announced.
(Brian Freckmann): Okay, okay.
John Davenport: The forward-looking statement that Bob made earlier, some
portion of what we expect to do for example on these Navy
installs will be included. We'll have a third quarter
DARPA installation realized this year, a small
installation, so they're part of the thinking right now.
(Brian Freckmann): Okay, okay. All right, thank you very much.
Operator: Your next question comes from (Bruce Pate) with (Pate)
Capital Partners.
24
(Bruce Pate): Good morning - two questions if I may. Number one, can you
make any comments on the manufacturing efficiencies of
converting to a continuous versus batch?
John Davenport: Sure. This is for the fiber manufacturing I presume.
(Bruce Pate): Correct.
John Davenport: Okay. Yeah, it's significant. The batch process: ,What
happens in the batch process is that there is shrinkage
that occurs in the monomer as it becomes a polymer. It
gets more dense. And that shrinkage is like 20% so there
is - you fill a tube with monomer and the 20% of it you
throw away doesn't get filled.
In the extrusion process and you have finite length tubes
because you can just fill a tube, it's so long, so you
have a number of tubes that you have shrinkage on. In the
continuous process you extrude into the Teflon tube that
you're making so the polymer is going there fully
densified so it doesn't really shrink during
post-processing and so you avoid that loss completely.
There is a start-up and an end loss but since we make
thousands of feet in a reel, those are small; those are
relatively small numbers. So we see on the order of about
a 20% improvement in the reduction in the losses.
(Bruce Pate): And we're well on the way in terms of being able to
commercialize that into the whole manufacturing process?
John Davenport: Order a system and you'll get it. That's what we're
selling.
(Bruce Pate): Secondly as it pertains to the last gentlemen's question
on raising capital, as a shareholder could I assume that
at least potentially that you would raise capital as a
function of orders in hands and needs to grow your
production base or do I have to look to you to potentially
raise capital just because of the stock price?
Bob Connors: Well, I think we're really focused on the operations here.
Jeff?
25
(Bruce Pate): No, this is (Bruce). Go ahead.
Bob Connors: (Bruce). And so what we - we can't wait to get a large
order from a major chain to build capacity because we
wouldn't be able to meet that order. But we have to be
looking forward and doing what ifs and things like that.
So if we raise capital it would be to meet that
requirement going forward.
(Bruce Pate): It may for a little bit of both.
Bob Connors: Could be, yeah.
John Davenport: Yeah, the last thing we want to do is be in a position
where we receive a large order and we can't fulfill it.
But we are building ahead of our projection, building
capacity ahead of the projection.
(Bruce Pate): Very good. Thank you.
Operator: Your next question comes from (Lenny Brecken) with
(Brecken) Capital.
(Lenny Brecken): Just to review, your current capacity for EFO I think is
still like at $9 million in revenues, thereabouts? I know
it's hard to calculate.
John Davenport: It's a number like that.
(Lenny Braeken): Okay. And without any money raised where do you think that
capacity could be next year?
John Davenport: That's a good question. We haven't - Bob said earlier that
we think that we could go along for the next 12 months,
you know, based on the forecast we gave that we could
fulfill that expectation. If we have a demand that's
materially larger than that, if we see that coming then we
wouldn't have the cash to meet that demand next year.
(Lenny Brecken): Then I hope that $9 million or $10 million upper range I
think in EFO next year seems to be pretty damned
conservative I hope, anyway.
26
Hey, John, is this the hockey stick year in '06? I know
you talked about it in the past.
John Davenport: Yeah, that's anybody's guess. I mean what we're doing is
we're trying to do this account by account and customer by
customer and build up a history so that the projections
that we make don't surprise anyone except in a positive
way. That's what I'm looking towards.
(Lenny Brecken): That's what we're looking for as well. Thank you.
Operator: Your next question comes from Seth Gelsthorpe with (Welch
and Forbes).
Seth Gelsthorpe: Hello. I just wanted to make sure - two questions
actually. I just wanted to make sure that I understand
precisely what the forecast of 15% to 30% means. Is that
top line revenue growth, is it quarter to quarter, is it
year to year? I just didn't quite understand exactly what
you were trying to convey. That's question number one.
Question number two is, where are you in progress towards
the next generation of the EFO Illuminator with regard to
improved efficiency?
Bob Connors: Yeah, I'll answer the first one. The 15% to 30% really has
to do with the percentage of overall sales that we expect
EFO to be next year. If you do the math on the 5% to 10%
this year then you're getting roughly a 3X growth off of
that.
And I'll let John answer the second part.
John Davenport: Yeah, we're making substantial progress - this is the
question about the efficiency in the Illuminator? We're
making substantial progress towards meeting the forecast
that we had for improvement in efficiency that we've shown
and we expect to meet our 2005 forecast.
We have in the laboratory and in tests we have parts that
look very, very promising towards meeting that and we
expect that we'll have a significant improvement in
efficiency probably toward the end of the year.
27
Seth Gelsthorpe: And so how do we express that? If the current generation
is - what is the efficiency number for the current
generation versus the next generation?
John Davenport: Well, it's not generational. We have a - if you remember
the numbers that I've shown it was about 45 LPW.
Seth Gelsthorpe: Right.
John Davenport: The kind of number that was saw for 2004 and in 2005 which
we're selling. And the next increment is a number like 50
and we expect to meet that number.
Seth Gelsthorpe: Okay. Great.
Operator: Your next question comes from (Michael Horwitz) with
Pacific Growth.
(Michael Horwitz): A follow up on the $300 million number. You mentioned
apparel and, you know, you announced that the daylight
lamp and you fixed the color. So since you mentioned
apparel within that $300 million number can you explain
kind of what else is going on out there, give us some more
specificity on what you're seeing within that niche? Or
retailers is what you mentioned.
John Davenport: Yeah, retailers we're really just beginning with
retailers. We now have a product that is acceptable in
their space. Now we're going through the process of taking
it to retailers, showing the opportunity and we're making
progress in several large chains actually.
And it'll be, you know, I expect it to be similar to the
supermarkets. We're looking, of course, towards finding
that account that will be an early adopter and be an
anchor for us as Whole Foods has been in the food industry
and we're making progress, making progress but nothing to
announce at this time.
(Michael Horwitz): Then how about within that number, do you include the
discounters - Wal-Mart, Costco, other people of that
nature?
28
John Davenport: No. No.
(Michael Horwitz): Okay. And then lastly following up on the cost question
earlier...
John Davenport: We'll take the business if we get it...
(Michael Horwitz): Yeah. There was a question about the cost earlier and you
said I think you said about I think a 20% reduction based
on the various manufacturing processes. How about on the
materials? What kind of reductions do you see sourcing
better materials?
John Davenport: We see significant reduction in materials for the
extrusion process in particular. And in fact we have a
Phase II (SBIR) program which addresses that with the
Department of Energy. We've convinced them that it's
promising in our Phase I work. So that is a very
significant opportunity, so significant I'm not going to
quantify it. It does involve some R&D.
This 20% kind of number, 30% kind of number, those numbers
we'll see just as we scale. But I think there's even more
opportunity that we're growing after that.
(Michael Horwitz): Great. Thank you.
Operator: Your next question comes from (Brian Freckman) with Crown
Capital.
(Brian Freckman): Hey, guys, just a follow up and I think maybe I'm the only
one who didn't quite understand - I think a previous
caller did - about EFO guidance. Am I correct; 15% to 30%
EFO guidance based on the end of the year numbers or - I'm
sorry, I guess missed what you guys were guiding to on the
EFO. If you could repeat that, that would be great.
John Davenport: Yeah. It's 15% to 30% based on end of the year numbers.
(Brian Freckman): Based on end of the year numbers.
29
John Davenport: Two thousand and six end of the year annualized.
(Brian Freckman): I'm sorry - wait, wait, I'm sorry. You're saying based on
end of the year...?
John Davenport: End of the year 2006, 15% to 30% of that number.
(Brian Freckman): Okay, okay. Okay, maybe I'll just have to follow up with
you guys later. Thanks so much.
John Davenport: Okay.
Operator: Sir, at this time there are no further questions. Do you
have any closing remarks?
John Davenport: Yes. I want to thank everyone who participated in the call
for some very good questions and for being very patient
during the audio, some of the audio problems that we had
earlier in the call. And I look forward to further
discussions on our Q3 call.
Thank you.
Operator: Thank you, ladies and gentlemen. This concludes today's
conference call. You may now disconnect.
END
30