Charles & Colvard Ltd (CTHR) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Ian and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Charles & Colvard first-quarter financial earnings 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. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to Tony Schor, President of Investor Awareness, Inc. Sir, you may begin your conference.

Thank you, Ian. Good morning. My name is again Tony Schor; I'm President of Investor Awareness. We are a full-service investor relations agency that provides strategic investor relations counsel for Charles & Colvard. Should anyone like to request additional information on Charles & Colvard or be included on its e-mail list, please contact my office at code 847-945-2222 or please feel free to visit us at www.investorawareness.com.

Bob Thomas, President and CEO, and Jim Braun, CFO, will discuss operating results for the first quarter ended March 31, 2006, provide a business expansion update. At the end of the presentation, we will open up the call to questions and answers.

In the meantime, I've been asked to read the following forward-looking statements. First, let me remind you that, except for the historical information presented, the matters disclosed in this conference call include forward-looking statements. These statements represent the Company's current judgment on the future and are subject to risk factors and uncertainties that could cause actual results to differ materially. To the extent that there are any statements that could be construed as forward-looking, they should be considered in the context of all our previous releases and federal filings.

I'd know like to introduce Mr. Jim Braun. Jim?

Good morning and thank you for joining us for today's conference call.

If you have not received a copy of our release announcing our results, please contact Tony at Investor Awareness and he will fax or e-mail a copy to you.

A copy of my remarks and those of Bob Thomas will be available on our Web site at the end of this conference call. The webcast of the entire conference call, including the Q&A session, is also posted on the Investor Relations section of our Web site, which you can access via either moissanite.com or charlesandcolvard.com.

Before I get to the financials, I would like to update you on the investor relations activities of the Company. We are continuing to make investor presentations. We have made investor presentations in a number of cities over the last six months and have scheduled cities through June of 2006. These are listed on our Web site. We are receptive to visits and conference calls with current shareholders and potential investors. If you are an investment professional and would like our Investor Relations firm to include you in our meeting schedule, please contact Tony at Investor Awareness.

The Company has made a policy change with regard to providing future sales guidance. In the future, the Company will no longer provide quarterly or annual sales guidance. We believe it is better to build our business over the long-term, instead of focusing on the establishment and attainment of short-term sales guidance.

Now, on to the first-quarter financial results. Share and per share data for all periods presented have been adjusted to reflect the effect of the 5% stock dividend distributed on July 15, 2005 and the one share for every four share stock split, effected in the form of a 25% stock dividend distributed on January 30, 2006.

Sales for the first quarter of 2006 were $8 million or 29% less than the $11.2 million achieved during the first quarter of 2005. Income before taxes was $2.540 million and net income was $1.524 million or $0.08 per diluted share. This compares to income before taxes of $3.454 million, net income of $2.012 million or $0.11 per share for the first quarter of 2005.

The decrease in pretax income was caused by the decrease in gross profit resulting from the decreased sales partially offset by an 11.7 percentage point increase in the gross profit percentage. Marketing and Sales expense was up $192,000 primarily due to higher marketing and sales expenditures used to promote customer sales opportunities, partially offset by a decrease in compensation expense.

General and Administrative expenses decreased $143,000 primarily due to decreased compensation expense.

We shipped 47,000 carats of moissanite jewels in the first quarter, a 28% decrease versus the same quarter last year. U.S. sales, which represent 88% of total sales, were down 33%, due primarily to decreased sales to K&G Creations when compared to the first quarter of 2005, when K&G Creations placed orders for its initial rollout of moissanite jewelry for Finlay. Bob Thomas will discuss this in further detail. International sales were up 38% due to an increase in sales to the United Kingdom, Indonesia and India, partially offset by a decrease in sales to Thailand.

Gross profit as a percentage of sales was 73.7% for the first quarter, which was 11.7 percentage points more than the margin in the first quarter of 2005. This increase was primarily caused by lower production costs, partially offset by a slight decrease in the average selling price per carat due to a decrease in the size of the average stone sold.

Our effective tax rate for the three months ended March 31, 2006 was lower than in the same period in 2005 primarily due a reduction in state tax expense caused by the allocation of pretax income out of taxable state jurisdictions.

Cash at March 31, 2006 was $20.9 million, a slight decrease from December 31, 2005.

Inventory increased from $23.2 million at December 31, 2005 to $26.6 million at March 31, 2006, primarily due to the level of our raw material purchases.

I will now turn the call over to Bob Thomas, President, Chairman and Chief Executive Officer.

Thank you, Jim. Good morning, ladies and gentlemen.

The first quarter of 2006 was a successful one for Charles & Colvard. We were successful in generating meaningful profits despite a substantial shortfall in orders from one of our most significant customers. The lower revenue number is the result of substantially lower orders from K&G Creations this year when compared with the first quarter of 2005. In '05, K&G Creations placed orders for its initial rollout of moissanite jewelry for Finlay. It's important for you to note that the K&G shortfall was greater than the total decline in revenue.

Orders from our other customers during the first quarter of 2006 showed continued growth. As a result of the Federated-May Company merger, Finlay's leased department store retail counters and distribution of moissanite jewelry supplied by K&G Creations at Finlay contracted by approximately 20% in the fourth quarter of 2005. Although the number of counters containing moissanite jewelry at Finlay is starting to increase, orders from K&G were down as compared to the first quarter of '05. K&G remains committed to moissanite jewelry and has announced the introduction of an exclusive collection of jewelry featuring Sarah Ferguson, the Duchess of York, as its spokesperson, and it expects to introduce that range in 2006. K&G further reports it will start its marketing and public relations campaign for this range of jewelry during June of this year.

There are other examples of success during the quarter. Moissanite jewelry is now available at 139 Helzberg locations, and we are continuing special event marketing and sales activity at additional Helzberg locations. We plan to continue the rollout to additional Helzberg stores during the year. The preparation for event marketing at Peoples Jewelers, a division of the Zale Corporation in Canada, has gone very well, and we look forward to the commencement of that activity early next month. Additionally, we are pleased to announce that, in the second quarter of 2006, moissanite jewelry will be introduced into 20 stores within the 105 store Zale Outlet chain via an in-case program. Further, testing in an additional 21 Zale Outlet stores via one-day trunk show events have been added to the calendar for the second quarter.

We believe that these accomplishments, the continued success of the moissanite category at existing retail outlets, along with other meaningful conversations with other important jewelry retailers, both domestically and abroad, provide evidence that we are making solid progress toward our objective of creating the moissanite category of fine jewelry. This objective will not be reached quickly, or without effort and commitment. I have stated repeatedly that the route to our goal is not a straight line, and our growth, growth that we believe will occur in coming periods, will most likely be uneven when measured quarterly. However our confidence and enthusiasm are high. We look forward to the future fully expecting to reach new levels of success as measured by both revenue and profitability.

As Jim stated, our inventory increased from 23.2 million at December 31, '05 to 26.6 million at March 31, 2006, primarily due to increased raw material purchases. As I have previously stated, we are preparing for good news regarding new distribution and sales opportunities, and I remain confident that having this inventory will accrue to our benefit in the coming periods.

As Jim describes and as described in the press release, our gross margin for the first quarter was 73.7%, up from 62% in the same period last year. That was achieved even though the average selling price per carat was down approximately 3.5% in the like periods. The reduction in average selling price was due to a higher percentage of smaller jewels being sold in the period when compared to last year.

Our pricing structure has not changed. Our gross margin on smaller jewels is lower than on the larger sizes. Depending on the sizes shipped in any specific period, based on what we know today, we now expect that our gross margin, going forward, will fall in a range between the mid to high 60 percentages to the low to mid 70 percentages.

We are also very pleased to announce that as further evidence of our confidence in the future for Charles & Colvard, our Board of Directors has declared an $0.08 per share cash dividend, which will be distributed on June 15, 2006 to shareholders of record on May 31, 2006. We believe that the dividend is an excellent method of sharing the Company's success with its owners. We will regularly review and consider the best practices and policies for the Company, including its dividend policy. It is expected that we will review the dividend policy on an annual basis.

We will now respond to your questions and comments. Operator:

Thank you. (OPERATOR INSTRUCTIONS). Michael [Perno], AAD Capital.

Good morning, gentlemen. Just in regards to the sales guidance, are you still maintaining the yearly guidance, which you reiterated three weeks ago?

That remains our goal, certainly. When it was first brought up, it was stated in those terms as a goal. It was certainly interpreted as guidance. That was not necessarily our intent. But it does remain our internal goal.

Okay. Just from an investor standpoint, is it reasonable to think you can attain that this year?

Well, I think it is obviously more difficult, given the start we've had. But again, we are very optimistic going forward. We fully expect that things will be uneven, but we are optimistic.

Maybe just strategically, on the Zales Outlet centers, it seems like a bit -- you were keeping it more higher end. Do you think that the Zales Outlet Center is a step away from your strategy at all?

That's a great question and a good point. The issue is we don't control where our customers distribute the jewel, totally. We can have some impact on that via our cooperative marketing dollars, but we do not totally control the locations where the jewel is sold. So, we consider Zale -- that division of Zale to be a first-class operation, and the Outlet name probably has a connotation that is not really accurate, given that the demographic of their customer is more upscale than that name might imply, I guess. So, we are not disturbed by it but your question really does point to a lot of internal discussions that we have here.

Tom [Zoulus], Paulson Investments.

Congratulations on good execution. Could you give us any additional evidence as to awareness of your target market? Have you done any studies or can you share any data with us again?

Well, we certainly have done -- the initial studies were completed in January that showed solid progress, and we did two different studies and the results were materially different I think based on the methodology. So it's a little hard to compare the '06 January number to the '05 January number, but it did show solid progress in the awareness. It's still, at the most, a high single digit among our target market. (multiple speakers) -- number, so the opportunity is still in front of us is the point I want to make.

We've got less than 10% of our target market is aware of moissanite. We are solidly profitable, and we believe that the opportunity is still way in front of us and the opportunity for growth is certainly enormous in our view.

Home Shopping Network continues to carry your product Web only. Are there discussions to expand that further with their shopping channel?

Tom, I would reiterate what I said earlier -- a couple of things. We can only say what we are allowed to say by our customers and our prospects about specific opportunities. But let me expand a little bit on that. We are engaged in meaningful conversations with almost every important retailer in the continental United States and Canada and many important retailers abroad on a consistent basis.

Certainly, the fact that the account you are speaking of, the retailer you are speaking of, continues to maintain the moissanite category for an extended period of time would lead us all to believe that they have a continuing interest in the category and hopefully that interest will expand to more activity in the future, but that is as far as I can go on that specific issue.

Okay. Also, any update on your suppliers of raw material? I know you've got two additional suppliers other than Cree. Could you talk or little bit about how their progress is coming to be raw material suppliers?

They are both still in the developmental stages, and it's way too early to speculate on what their contribution, as far as capacity or volume, would be. Cree continues to do an outstanding job of giving us the material, both quality and quantities that we require. So, those are being developed; we think that they both have potential but it's way too early to speculate on what their contribution may be.

Just one last thing -- your stock buyback program could be initiated Friday. Is that correct?

When there's an open window. The Company has to act like it's an insider; it's the ultimate insider, of course. So we have to follow the rules that an insider follows, and so the first opportunity for a window to be open would be this coming Friday.

Excellent. Keep up the good work. Thank you, Bob.

Chris Terry, First Dallas Securities.

Good morning, guys. A question on the international business -- that was up pretty good here in the quarter. Can you what kind of talk a little bit about what's driving that?

There's two things that come immediately to mind. One is the UK television execution. We continue to be a regular on air in the UK on a regular basis. As a matter of fact, I will be back over there the first week of next month doing a couple days of presentations. That is driving awareness in the UK, very much like our experience here years ago with the initial Shop NBC awareness building activities and sales activities. So, our distributor there is enjoying new opportunities with retail doors and we are adding meaningful conversations with important retailers, chain retailers in the United Kingdom as well as the distribution he has established with the independents. So that's one thing.

The second thing is we've had a great roll-out in Indonesia with our distribution partner in that country. I was there a month or so ago, participating in two shop openings that are licensees of our distributor, as well as a very well-attended and important fashion event featuring moissanite jewelry, and so the increases there really are substantial. But its a roll-out phase as well down there, so we are very optimistic about the execution of our partner in Indonesia, and those are primarily the two reasons. Execution, execution, execution. When you have distributors who are doing it well, it shows up in the numbers.

Okay. You mentioned the roll-out over there. Is it safe to assume that what's happening over there is what you experienced in the U.S., I guess back maybe the first quarter of last year?

Some of that is true. Some of the sales volume is stocking, but the reports we're getting is very good as far as the sell-through in Indonesia. Those orders continue to come. In the UK, that's much more established and not a big stocking situation there. Those are sell-through numbers in the UK.

Okay. The distribution into 1,000 new doors, can you talk about where you're at in that process, excluding what you've already commented on with Helzberg and [Bells]?

Yes, I think, if you look at what we talked about today, Helzberg is a 250-plus opportunity. The Zale Outlets are 100-plus opportunity; the Peoples Canada has approximately 200-door opportunity -- (multiple speakers) -- 160 -- so we are at approximately 500 to 600 there, just in those three names.

I certainly still think that the 1,000 new doors by year-end is very possible, and I would go so far as to say that I believe it's very likely.

Okay, that's good to hear. Can you -- more specifically, can you talk a little bit about what you're seeing out there with prices at the retail level? I know J.C. Penney has had a big push here recently to discount some product in order to sell it through. Are you seeing other retailers, you know, maybe discounting product to do the similar thing or can you talk a bit about that?

Yes, what you see this time of year, when there's no events, after you get through Valentine's Day before you get to Mother's Day, jewelers will typically take their slower-moving items and run some type of promotion. That's not uncommon at all, in any business, not just the jewelry business. So that doesn't surprise me to hear that.

What we're really seeing, though, is the manufacturers would rather have that gold back and do melts. The price of gold when a lot of that jewelry was built was in the high 400, low $500, yesterday it closed at $618 an ounce. So, manufacturers are happy to take that gold back at the invoice price and melt and reset new jewelry. So, we are not seeing much discounting, other than just maybe some slow-moving pieces that a retailer owns and wants -- (multiple speakers).

If that's -- keeping the discounting in mind, what would -- you mentioned gross margins in a mid 60% range up to mid-75% range. If gross margins did come in at that mid-60% level, it seems like the progress that you've made here getting margins to where they are today, it seems like that would be a dramatic step back.

I don't disagree. We don't think that's necessarily in the cards, but it is possible if all the much, much larger percentage of our sales volume was in sizes below 0.5 carat, or 0.5-carat equivalent. That has not been our history and that's not what we think is going to happen. Our gross margins on the 5 mm to 2 mm is what generates the 70-plus% margins, and when we sell even larger jewels at 8.5, 9, 10 mm, the gross margins are even higher. So we think that will bounce around a little bit, but we're not concerned that the gross margin is going to deteriorate in a huge way.

Okay. Then my last question before I let somebody else jump in -- can you kind of walk us through maybe -- I don't want to be negative here, but maybe a contingency plan? You know, given where your inventory levels are at and the purchase commitments you have with your suppliers and also taking into the fact that the appearance out there, that the 60 million in sales this year is not going to be such a layup any more, how comfortable are you with inventories? I know there's always a potential new distribution channel out there, but if that didn't fall through --.

Well, we are committed with Cree on a quarterly basis, and as I described to the Board yesterday, my commitment to maintain our purchase levels for the second and third calendar quarters and our second and third fiscal quarters would be Cree's fourth and first quarters -- will remain approximately where they were in the first quarter this year.

If there is no meaningful distribution and sales advances over the next 30 to 75 days, then we would take a very hard look at what our fiscal fourth-quarter order flow would look like. We have the opportunity to address that with Cree at that point in time, so we can certainly cut down the flow of raw material but are not comfortable doing that today, based on the optimism I have for the remainder of the year.

Steve [Colbert], Canaccord Adams.

Stepping back, the decision to withdraw revenue guidance -- you know, obviously this is viewed as a negative by investors. Does this indicate reduced visibility on your part into orders, or what's kind of behind the decision?

It's gotten to the point, Steve, where it's very -- the fact that we have a number of additional manufacturers who have a number of additional retailers -- it's gotten to the point where we couldn't come up with guidance that we felt was within the range of -- within a reasonable range, plus or minus, until the very end of the quarter. If you notice, the guidance that we gave for the first quarter was done on March 28, which was only three weeks prior to when we have actual results. I was even worried then that I was going to be -- it's not whether it was high or whether it was low; it's just whether it was going to be accurate, giving it out on that day. The reason for that is also we turn orders into shipments. If the order is relatively small, the same day, even larger orders go out in three or four days, even if they are complicated and require things such as matching stones. So, we have a concern of giving inaccurate guidance to the point where we've had to delay it almost to the end of quarter, and we thought that that had lost a lot of its benefit to the investor community, because it was only a couple of weeks before we would be giving out actual anyway.

Okay. Then does the decision apply to the sales updates as well, or will they continue going forward?

We are going to do four calls a year, not eight. That's our intent.

So there will be no sales updates. It will just be the quarterly releases?

That's correct.

Then, without getting into the guidance but looking at Q2, typically it's seasonally down from Q1. Could you remind us what was going on last year in Q2 as it relates to fill-in of new doors?

Yes, there were still some new doors were being filled, not as many as they were in the fourth and first quarter, but there were still a few new doors going in during the second quarter last year.

I really -- I'm sort of handcuffed here of what I can say, other than to say that I'm very pleased with the activity, I'm very pleased with where we are in our conversations. We just returned from Basel, Switzerland, probably the most important worldwide trade show there is. I started going to Basel five years ago to create a presence for Charles & Colvard, maybe six years ago now. To give you some sense of it, we had people walk by and sneer. They didn't vote tomatoes at us, but if they had had a tomato, they might have.

Today, coming back from Basel, people are seeking Charles & Colvard out to learn more about the moissanite opportunity, to learn more about what we're doing. We are down the road to creating this category. Once we create the category, we will have created a franchise for this company. I can't -- I obviously cannot impart my confidence and my enthusiasm over this phone or even in person to the full extent that I feel it. We are on the right path; we have the right message; we have an incredible jewel. I don't know how I can -- without getting into account by account, I just can't express it any more forcefully than that.

Okay. If you -- kind of looking at the business in Finlay, you mentioned a contraction of doors in Q4 and then an increase in Q1. Is there any way you could quantify the increase? What are your thoughts regarding current business? Has it stabilized? How long do you think it will be until it improves?

With Finlay you're speaking about? Yes? With Finlay?

Yes.

Yes. We know that those doors are increasing; they have increased back from the low point. They don't want me to give out specific numbers at this point in time, they meaning K&G. But they fully expect to be adding new doors as they report to me. They are very optimistic with the introduction of the Sarah Ferguson range of jewelry, and they are very enthusiastic about the plans that they have developed for the advertising and public relations.

Again, I would remind everyone. This is a K&G initiative; it's not a Charles & Colvard initiative. K&G will come to us looking for some level of support, and based on our confidence and what they're doing, we will provide some (inaudible) our support. But they are very excited and very high about the opportunity and think that their partnership or their relationship with Finlay will continue to improve in this quarter and in the future.

Okay. Could you comment on the K&G/Sarah Ferguson campaign, what the timetable is? You know, when do the ads kind of start in force and when should you see orders pickup from that rollout?

Yes, I think we've already seen some activity for that range. Sales activity, I'm speaking of.

In the second quarter --.

-- in the second quarter, that's correct, and then the current quarter. We are told to expect some more activity in the coming weeks for that.

Publicly, as I understand their plans, and I think that they are still subject to some modification -- is that the effort will start with a public relations effort and then be supported with in-case, or on-counter type of material, direct mail, and then billboard and fashion book advertising in the late third/early fourth quarter is the way I understand that today. But again, it's a K&G initiative. Anything I say here is just anecdotal, passed along from them.

It's currently slated to start in June.

That's correct.

Start in June -- is there any kind of thought that it's maybe been pushed back a little bit, like as far as you think -- third and fourth? Is that what you were expecting initially?

We didn't have any expectations because we've never been at the table. We have never been privy to the actual plans. I think obviously she is a busy lady. I think getting a photo shoot scheduled took some extra time, more time than was expected. I think getting the appearances and the dates lined up where she would be available for whatever PR events are planned, all those things have taken probably a little more time than K&G first envisioned. But again I am speaking based on secondhand knowledge, and I don't want to have to have any of this read back to me (LAUGHTER) at a later date, because it's just coming to me in conversation with the folks at K&G and they are in control of the activity.

Okay. Then looking at a somewhat steady decline in ASPs, is that -- I know you mentioned it but it's just strictly a function of jewelry fashion calling for smaller stones? Is anything else going on? You know, what are your thoughts there as far as going forward?

I think that it is totally a function of the retailer. Once they have the basic range in the store, the study arranged, the three stone rings, the (indiscernible) bracelet, the large stone necklace, they put pressure on the manufacturers to develop the fashion pieces to extend the range. As designers start to work, they start thinking about side stones and accent pieces and stones, and they go to these what we call melee pieces or stones less than 2 mm in diameter.

I know that, in the fourth quarter, a circle pendant, which was very small stones, was extremely popular and sold out at a number of our major customers.

Right, exactly.

That had stones that I'm sure were smaller than 3 mm.

Yes. So it's really a function of the retailer pushing for fashion pieces from the manufacturer, the manufacturer trying to respond. The sweet spot of our business is still at 0.5 to 2-carat range and the vast majority of our sales will continue to burn that range, in our view.

Then looking at gross margin, you give the range from I guess mid to high 60s to mid 70s. If you took the carat size and kept it continuous going forward, would you expect gross margin to still be increasing slightly. Is that a fair way to look at it?

For some period, there's still some upside potential. But we are nearing the end of the yield curve, as far as what we're getting from the stones. In other words, the average cost of inventory of the stones going into inventory is not decreasing at the same rate that it was a year ago.

Okay. But is it still just decreasing, to some extent?

It is; it is more stable, at this point is a better way to put that.

Yes.

Okay. So I mean, I'm just trying to take a look at that guidance and think, you know, mid-60s, high 60s -- is that sort of envisioning a trend continuing to smaller stones? Is that kind of what you're thought is there?

No. Quite frankly, the inventory levels here are not huge on the smaller stones.

But I think it's being cautious to the investor group that if that continued, it could get into those low -- or into the mid to high 60s number. That is really a range that we are giving to be cautious to the investor group, and remember stones size is important. If stones size wasn't important, that number would be higher than what Bob had given.

All right, perfect. That's it for me. Thanks, guys.

Steven Shapiro, Intrepid.

Yes, hi, guys. I've got a couple of questions for you. The first one is just a clarification on the gross margin guidance. If I understood it correctly, your guidance is potentially the mid 60s to the mid 70s.

That's correct.

Not the mid 60s.

No, no. No, it's not the mid 60s. We think that, on a quarterly basis, going forward, it will range from possibly 65 -- I think the last quarter, that was as low as 65 was June, the June quarter of '05. It went from 65, 67, 72 to 73 plus in the current quarter. So we don't think that 65 would be broken again going forward, but we are not confident that we will break 75 on the other side of the range.

I got you. So 65 to 75, but there's no short-term reasons to think you're going to land at the middle of that range this quarter or next quarter?

That's correct.

Okay. Second question -- I just understand the lack of disability and the overall guidance, all that, but I'm just trying to get a sense for the pattern that we might see this year in terms of your likelihood of growing revenues, both on a year-over-year basis and a sequential basis. So, it seems to me that you've got three factors that are important in -- or how we think about that. The first is you've got net new store openings this year versus last year, so Q1 obviously was a very difficult one. You had a lot in Q1 last year; you didn't have as many this year. The second thing you've got going on is seasonality. The third thing that you've got going on are inventory drawdowns at Finlay, not from store closings but just on a counter-to-counter basis.

Right.

So if I look at those three factors, how do they lay out? I mean, at what point do we have an easier year-over-year comp in terms of the net new store openings? At what point, given last year we had a big pickup Q3, what is normal seasonality do you think, look at this year?

The third question is where do you think we are in the process of drawing down customer inventories to reasonable levels?

Okay, the net new store openings, the positive comparisons will start -- more likely to be more positive starting Q3. The seasonality I think Q3 is the answer as well. Q2 is going to be good, in my view, without putting any number on it, but I feel good about the quarter. But Q3 is, as we build inventories, as the manufacturers build inventories for a larger customer base of retailers, I would think the seasonality would impact Q3. We might see a similar situation that we saw in Q4 of '05 occur in '06, flattening out. That's pure speculation.

Sure, absolutely.

(multiple speakers) -- point today, but the inventory drawdown I think is about over. As far as the Finlay and the K&G issue is concerned, we are very close to the end of that; probably within the next 60 or 90 days, that will have occurred.

Got you. Okay, so, if I put all that together -- and once again, I can guess my own revenue number.

Right.

(multiple speakers) -- maybe I take it's 16; maybe I take it's 90; maybe I take it's 40; I don't know. Whatever that number is, as I think about it, sequentially it sounds to me just -- I just want to make sure I'm kind of reading you guys -- reading this right. So Q2, maybe that's kind of a flat, maybe up a little bit, because we've still got tough year-over-year comps in terms of the store openings, and we've still got a little more inventory drawdown, offset by what should be the beginning of seasonality. Q3 should be all-around good because we've got seasonality, we got the end of the inventory situation, and we've got net new store openings. Then whatever I'm using Q3, Q4 I would sort of think once again seasonality dominates and we should see sort of, similar to last year, maybe kind of a tapering or flattening out, and then we start next year again Q1 obviously with easy comps year-over-year, and then we take it from there.

I won't argue with your analysis.

Beautiful! (LAUGHTER). Thanks very much.

Peter Reiss, Paulson Investments.

Good morning, Bob. You mentioned Taiwan was down. Is there a reason for that?

Yes, just a business issue, a personal issue and a business issue there. We expect she will recover nicely. We've already seen some activity in this quarter that gives us confidence that she will be back.

Some of the times, with the countries that we're dealing with, it's timing of orders in one quarter versus the other.

Right. A big inventory build -- we're not talking about huge numbers with these guys, either. I don't want to mislead you. A $50,000 order falling on March 31 or April 2 would impact how we would have to characterize it.

Right.

You mentioned several countries where you're doing better; you haven't mentioned China. What's your outlook there?

You know, I continue to be very optimistic about China. We spent a lot of time and bother with some other good contacts and friends in China. We are working jointly with someone there to develop a slightly different strategy. We've done some market research. We funded in the first quarter; that's very helpful. It bolsters our confidence and reinforces our confidence that Asian ladies will adopt moissanite. The results of that research were very positive but it also pointed out a couple of things that we need to change in our approach. One is the Chinese name; the other is the distribution presentation, if you will. So we're working on that know.

We continue to have business in China. It's not -- hasn't really gone down, but we're not seeing the progress that we would like to see, and we think we've identified some of the issues and we're going to address those.

What are you doing in television, in your overseas markets? Are you still -- (multiple speakers)?

Well, we are still generally still at Ideal World. We still are on the Taiwan television, although we didn't have a presentation in the first quarter, I don't -- we had one presentation in the first quarter, I believe. The Lady in Taiwan is scheduled to go back on Japanese television in this quarter, I believe. We are still on the French television, a small station there, and there are other discussions ongoing in both domestically and internationally.

Very good. That's the end of my questions.

[James Mullins], DL Carlson Investments.

Good morning. Most of the subjects I was going to talk about were talked about already. I think you -- when you talk about UK and the success on TV, is that always going to be yourself or is there any strategy -- (multiple speakers)?

Oh, no, it's not. I committed to go four times a year. We are on more often than that. For whatever reason, we tend to sell a little more during those events. I think it's the definition of an expert, anybody from 50 miles away with a briefcase. I think that applies in this case! They put a little more effort into the shows when I do go, so it's important that we continue to support these guys but by the same token, they are having activity when I'm not there as well. I can't do it much more often now but I did commit for '06 to be there. I've been once; this will be the second trip.

The business model, as you've laid out it success in U.S., is you follow up the television with retailer discussions.

Exactly right.

You know, can you comment on that? Is it specifically the UK?

It's the UK. As I said in earlier, our distributor there has had -- is enjoying increased success with the independent retailers in the UK. We are in, jointly with the distributor, having very good discussions with more than one chain retailer in the UK. We are optimistic about what the outcome of those conversations will be. We can't predict timing; those are their decisions, not ours. But we are optimistic.

Is there any challenges that you -- is there any -- you know, you mentioned China changing the name and the way you present distribution. Is UK present any similar challenges, or do you believe the model that worked in the U.S. should work in the UK?

We think that, obviously, culturally, we are much closer to the UK than we are to the Chinese. So, we think that the challenge will be less. We do think that there are some issues, but those probably are more about the styling of the jewelry.

What we have to remember and I urge you to remember as a group is moissanite is the story and women fall in love with the jewel in the story but they buy pieces of jewelry. So the differences I'm referring to, Jay, are the styling differences, the range of jewelry itself. You have to make sure that you have a manufacturing partner wherever you are that is going to create pieces of jewelry that are attractive to that population, wherever they are. So that's probably the biggest difference in the UK.

Okay, okay. Is the UK -- beyond the independents, is there similar department stores -- (multiple speakers)?

Yes, yes. Department stores -- not as many, but there are department stores. But there are also several chain retailers that have over 100-plus doors. You can cover and UK with about 225 doors. You can be -- have two stores in every major market almost and a bunch in London and the London suburbs. You've got 75 million people that live pretty close together there, and so to reach those people, actually you'll probably do it more efficiently or less pennies per population or per person in the UK than you can do it here. So we are optimistic about the UK, and we are committed to growing it and spending an appropriate amount of marketing dollars when we have the right retail partner.

Right, right. Jumping back to gross margin, you talked about how mostly the progress was in the production cost.

Yes.

As I think of the cycle, you know, there's raw materials coming from Cree, and there's your own cutting, and then there's kind of a whole chain.

That's correct.

Can you comment on the progress being on one or more parts of the chain or -- (multiple speakers) -- cross --?

Well, the key element is the raw crystal. When the raw crystal is of the right quality, that allows us then to be very efficient in our cutting and then the preforming, what we do in our location, and then managing the fasteners and the people who pass it and polish.

Our production staff, led by Earl Hines, has just done an outstanding job -- better than that -- an unbelievable job of increasing the productivity and increasing the yields of the material we get to work with over the last three years -- constant improvement in every period. So I can't say you are satisfied; you're never at 100%. But we are certainly in much, much better shape today than we were three years ago, four years ago, as far as our productivity in our preform operation and then in managing those fasteners. There's probably more room for improvement at the [fasceting] level than there is back here at our preform level. But the key will always be the quality of those incoming crystals.

Okay. (multiple speakers)

That's where the vast majority is.

You declared a dividend and you also do have a buyback program that people are anxious to see the window open on.

That's correct.

Can you share any company philosophy of doing both and one over the other?

Well, we think those who want to sell, we will be happy to oblige them and take their shares. Those who want to hold, we think should be rewarded for their good judgment.

Fair enough.

(LAUGHTER).

I think I'm all set. Thank you.

[Ken Farsallas], [OverVoice].

Just a quickie -- was K&G a 10% customer during the quarter?

That's a good question. (multiple speakers).

Yes, yes.

They were a 10% customer in the quarter, yes.

Yes.

That's it, thank you very much.

James Stone, PSK Advisors.

Could you talk a little bit about -- or what you can share with us -- on the inventory in that supply chain, from K&G going out -- how that stands, when you think it begins to bottom? Etc.?

Right. That inventory is in just certain shapes and sizes. We think that it's being cleared as we speak. We think that, certainly over the next 60 days, no more than 90 days, that that will have been cleared. As Jim just said and we just answered the last question, K&G continues to buy from us on a regular basis, and we have seen some new orders surrounding the Sarah Ferguson range of jewelry from K&G just earlier in this quarter, just last week. So the K&G situation and with the Finlay backlog, we think it's clearing and our prediction is that will be behind us within the next 60 days.

In that inventory that they are sitting on, is there any problem with some items that they may have misjudged their sales and that are really -- (multiple speakers) -- or slow selling?

Yes, I'm sure there are. They don't share that with us, but as I said earlier in response to another question, the manufacturer is in pretty good shape today on most of that inventory, but just because of the price of gold. It's not unusual for manufacturers to take stones out of the jewelry and then melt. With the price of gold being at $618 yesterday, that is significantly higher than it was when most of this jewelry was built a year ago or more. So the manufacturer is really in a pretty good position as far as what he would typically lose on what they call a pop-and-melt operation in the trade. In other words, they are popping the stones out, melting the gold. They would typically expect to take a capital loss on that activity, but with the price of gold today, they actually may have a little profit in that activity.

No, I'm thinking more in terms of if they have some slow-moving items, they may be looking to swap that -- those items with you on a dollar-for-dollar basis.

No, that's not -- we would not take jewelry back; we don't do that. That's not something that would happen.

Very good then.

Thank you, sir.

(OPERATOR INSTRUCTIONS). Chris Terry, First Dallas Securities.

A quick follow-up -- if you back out K&G sales for the quarter, can you comment on the amount of increase to the other part of the business?

I don't think we've done that arithmetic.

No, I have not.

It would not be 50%. Let's don't -- you know, but it would be greater than 10, too. That's just back of the envelope stuff. I don't think we've done that arithmetic.

Okay, assuming that if it's greater than 10, is it fair -- reasonable to assume that that increase is mostly coming from sell-through rates and not stuffing the channel?

Absolutely, that's correct. There are several activities ongoing out there -- the trunk show events, many of which are repeats from same venues last year. No one has asked about J.C. Penney, but the number there is up. I can't say exactly how much because it's proprietary to Penney. But doors-over-doors, year-over-year, we are making great progress. So, the only new activities that weren't occurring in the same quarter last year that are occurring third quarter this year were the Helzberg trunk show events of which I think there were 25 or so, maybe a few more in the first quarter. So those were new activities and some Helzberg stocking, that's correct. But the rest of it was sell-through activity all the way.

Okay, great. That's all I've got. Thank you.

Thank you. Operator, do we have one more?

We have one more question from Tom [Zoulus], Paulson Investments.

Very good; we will conclude after this question.

Bob, pertaining to any additional commitments for the Christmas selling season, what is a window for that?

For the Christmas selling season?

Yes. In other words, any new retailers that may be coming on board.

Okay, now we would -- we probably have all that in-place by early third quarter, Tom, in order to get it done properly.

Okay. That's why you explained that your raw material commitments over the next 70 to 90 days would be relevant pertaining to any commitments made in the next 60-90 days?

Yes. We're going to know where we are with these 1000 doors that we've alluded to and we've stated as our goal. We're going to know in the next -- we may not be able to share it with you, because the customer doesn't want any competitive disadvantage and doesn't want us talking about it. But we're going to know in the next 60 to 90 days, 120 days certainly, where we're going to be in the fourth quarter and what that's going to look like, yes.

Are you hearing anything at all of any plans for TV advertising from either K&G or Reeves?

No, I don't believe that is in the cards, and I would not be a supporter of TV advertising with cooperative dollars at this point in time.

Okay.

The story is too complicated. Newspaper and magazine -- we can tell the story and build awareness. Television might intrigue, but it's not the right vehicle for us until we get the awareness level higher, in my view.

Okay, thank you.

Thank you. Operator, are there any other in the queue?

We have no further questions.

Very good. Thank you, ladies and gentlemen. I remind you that our annual meeting of shareholders will occur on Monday, May 22 at 10 AM, at the Imperial Sheraton Hotel in Durham, North Carolina. You are certainly invited to attend, and I look forward to greeting you in person at that event. Thanks for your participation, and good-bye.

Thank you. This concludes today's Charles & Colvard conference call. You may now disconnect your lines and have a great day.