Ultralife Corp (ULBI) 2005 Q1 法說會逐字稿

Good day and welcome to this Ultralife Batteries first-quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Ms. Jody Burfening. Please go ahead ma'am.

Thank you Bill. Good morning everyone. This is Jody Burfening of Lippert/Heilshorn & Associates. Thank you all for joining us this morning for the Ultralife Batteries earnings conference call for the first quarter of fiscal 2005.

The earnings press release was issued earlier this morning. And if anyone has not yet received a copy, I invite you to visit the Ultralife website at www.ultralifebatteries.com. You can find the release under the investor relations section of the website.

In a minute I will turn the call over to John Kavazanjian, Ultralife's President and Chief Executive Officer, who along with Bob Fishback, Ultralife Chief Financial Officer, will provide their formal marks. Management will then take questions until 11 AM Eastern Daylight Time.

Before turning the call over to John, I'd like to remind everyone that some statements made during this conference call contain forward-looking statements, including references to Ultralife Batteries' future plans and objective. These statements represent the current views of management with respect future events that are subject to certain risks and uncertainties which could cause actual results to differ materially from those contemplated in these forward-looking statements. A more detailed description of these risks is contained in the Company's filings with the Securities and Exchange Commission.

With that, I would now like to turn the call over to John. Good morning, John.

Good morning Jody. Thank you, and welcome everybody to our Ultralife Batteries conference call for the first quarter of 2005. Joining me today I have Bob Fishback, our Chief Financial Officer; Bill Schmitz, our Chief Operating Officer; and Julius Cirin, our Vice President of Corporate Marketing.

Today we reported revenues of $15.4 million for the first quarter of 2004. This revenue is in line with our updated guidance, and it reflects the move of approximately $3 million in revenue from the first quarter into the second quarter. This move was related to the $7.4 million BA-5390 contract award that was received late in the quarter. While the product was produced and ready to deliver, an unanticipated shortage of space at the receiving location caused deliveries to be received on the first day of the second quarter rather than the last day of the first quarter.

The first-quarter operating loss was approximately $1.7 million, also in line with our expectations and our business model. Bob, in his commentary, will discuss further the financial performance.

During the quarter we posted strong 9 volt sales, growth in other commercial business, and we saw a restart of shipments of 5390 batteries to the US military.

Our 9 volt product line showed strength in the first quarter, paced by the growth in the smoke alarm business, particularly in Europe. Our efforts to widen our channel and geographic coverage continue to pay off. We're also proud to say that the product is now available in over 1000 Lowe's stores in North America.

Our other commercial non-rechargeable business continues to grow. We're seeing particular strength in the search and rescue market. Many manufacturers are accelerating efforts to bring to market their new families of 406 MHz emergency beacons and transmitters as they start to phase in the new frequency in anticipation of the 2009 deadline. We have multiple design activities going on and expect yet another unit to be FAA qualified in June.

Our industry-leading D-cell continues to replace old technology lithium sulfur dioxide and lithium sianal (ph) chloride D-cells in applications where performance and safety are important. Our latest addition, our five quarter (ph) C-cell, which is a C diameter cell with a D-cell height, also continues to replace these same old technology products when cost and safety are the critical factors. It presents virtually the same capacity as the old technology, along with a smaller size and weight at a lower cost. These high rate manganese oxide products are winning designs from military and medical, to search and rescue, to automotive telematic, and are fueling this year's growth in our commercial non-rechargeable business.

We have talked for sometime about automotive telematics. In the second quarter we expect to commence shipments of backup batteries for an important automotive telematics program which we've been working on for some time, and for which we expect to see continued growth this year and beyond. This is in addition to the batteries we've been supplying to Volvo for a number of years.

While the revenue in our rechargeable business for the first quarter was below the fourth-quarter results, we maintained a positive gross margin. And we anticipate this business growing to approximately $3 million in the second quarter with further growth in gross margin. We expect to continue to improve both revenue and margin throughout the year as we expand our offerings into chargers and accessories, growing both our standard and custom products and as we mature our processes and expand these product offerings.

In the first quarter many new customers purchased our 2590 rechargeable battery and charger system. It's being applied to applications that require a high energy, smart, rechargeable system as diverse as mobile robotics, backup power for mobile hospital equipment, power for electronic surveillance and UAVs. It's also being evaluated in defense applications for unattended sensors and arrays and advanced battlefield communications products.

In the first quarter we saw a marked increase in new customer projects of more than 75%. These designs cover applications such as two-dimensional bar-code scanners, applications like portable medical imaging and chemical agent detection monitors. Of significance to us is that four, or half of the new projects, came from repeat customers who returned for additional programs.

Included in the second quarter is our first major shipment of chargers. In the last quarter, the first quarter, we added another new charger program for a defense contractor which will result in first shipment by the end of the year.

I'm sure you all know that the week before last we received the favorable news that the GAO denied a competitor's protest of the $286 million Next Gen II Phase 4 award, a contract of which we won 100%. While we did not stop our qualification work, we can now interact with the Defense Department for getting this product qualified in the third quarter. Following that, we will start with qualifications on the four other battery types in the contract for the 60% of the contract awarded to our US operation. We will also be able to commence a parallel effort in our UK operation, the recipient of the 40% award under this contract.

In March, we announced that we had received an urgent buy award from the Defense Department for the BA-5390. Approximately one-third of this contract was delivered in the first quarter, with the rest to be delivered in the second quarter.

Also in March we announced the award of 60% of a five-year contract for supply of the BA-5347 thermal weapons site battery. Later that month this contract was protested. We anticipate a ruling on this project by the end of the second quarter. Currently we supply cells to the incumbent sole-source producer of this battery.

Last month we announced an agreement to design a high-capacity lithium ion battery for the Harris RF Communications for their Falcon family of hand-held radios. This is the third major OEM development contract we have secured in the past year. It represents a growing realization by our customers of our broad capability in both development and in production. Ultralife has an unequaled ability to develop and manufacture rechargeable and non-rechargeable batteries, chargers, packaging and accessories, and to work in partnership to create superior implementations that are tailored to the needs of our customers.

In the second quarter we will complete shipment on the $7.4 million BA-5390 order, and we expect another procurement for the 5390. Based on this, our outlook for the second quarter is revenue of approximately $28 million. We expect to return to profitability with operating income of approximately $2.5 million.

Our outlook for the year remains unchanged. We expect to grow revenue from 10 to 20% over last year, and believe that we can exit this year at or around a 15% operating margin. We expect significant revenue growth into the third and fourth quarter as we qualify our products under the Next Gen contract and as we continue to grow our commercial non-rechargeable and rechargeable business. We also expect that the BA-5347 will be an important component of revenue growth in the second half of the year, either by supplying cells under our current arrangement or batteries through the resolution of that protest. We remain steadfast in our focus on becoming a $200 million business with a 20% operating margin in the next few years.

Now I would like to turn it over to Bob Fishback who will cover some of the financial highlights, after which we will open it up for the Q&A.

Thank you John, and good morning everyone. Early this morning we released the results for our first quarter that ended on April 2, 2005. Consolidated revenues for the quarter were $15.4 million, in line with the revised guidance we recently provided. Compared to the same quarter last year, revenues declined $11.6 million. The main reason for this drop in revenues was a decline in shipments of certain high rate products, specifically BA-5390 batteries. This was the result of delays in order activity from the US military as battery procurement responsibility changed within the Department of Defense. Partially offsetting the decrease were higher sales of small cylindrical batteries, 9 volts, and rechargeable products.

Gross margin for the first quarter of '05 was $2 million dollars or 13% of sales. This compares with last year's first-quarter margin of 6.3 million or 24% of sales. In our non-rechargeable operations we realized 15% margins this quarter versus 27% last year, primarily related to lower BA-5390 production volumes. In our rechargeable operations margins were a positive 51,000 compared to a $500,000 loss last year, due primarily to the increase in revenues and lower depreciation and lease costs.

Operating expenses in the first quarter of '05 totaled $3.7 million, an increase of 800,000 over the same quarter last year. This increase resulted from additional resources committed to the development of new products, higher external audit fees related to the requirements under the Sarbanes-Oxley Act for the completion of the 2004 audit and more G&A costs necessary to support the Company's growth objectives, including the development of other areas of the business, particularly in commercial markets. While the Company has monitored costs closely during a temporary decline in revenues, we remain committed to ensuring that sufficient resources are in place to support continued growth.

The operating loss for the first quarter of '05 was $1.7 million, generally in line with the revised revenue guidance we previously provided. Compared with the prior year's operating income of 3.4 million, our operating earnings declined 5.1 million, due mainly to the lower sales volumes.

Income taxes for the quarter were a credit of $300,000 related to the pre-tax loss for the Company's US operation using an effective rate of approximately 36.5% for the US taxes. This reporting is consistent with the recognition of the $23.5 million deferred tax asset in the fourth quarter of 2004 pertaining to our US net operating loss carryforwards. For our UK entity, however, we have not yet recognized a tax asset for its NOLs due to historical losses. Therefore, we are not reflecting any tax provision through the P&L for this subsidiary. This helps to explain the overall effective income tax rate of approximately 17% reported in the first quarter.

The net loss for our first quarter of '05 amounted to $1.6 million, or $0.11 per common share, compared with net income of 3.2 million, or $0.22 per diluted common share, in the previous year. Average shares outstanding for the quarter were 14.4 million shares.

Turning to cash flows for the first quarter, EBITDA was a negative $900,000 defined as operating loss plus depreciation and amortization of approximately 800,000. During the quarter working capital changes resulted in a net increase in cash of approximately $700,000, mainly due to payments received from insurance providers. Although receivables and inventories increased due to timing issues, this was offset by a similar increase in payables.

We spent approximately $500,000 in the first quarter on capital equipment additions. And payments made on debt principle during the quarter were generally financed by approximately $700,000 in cash received from the exercise of stock options.

The balance sheet at the end of our first quarter is solid. Our ending cash and investments balance was $10.7 million, down slightly from the 11.5 million reported at December. Total outstanding bank debt at the end of Q1 was $8.8 million related the 10 million we borrowed under a five-year term loan in January of '04. Total debt as a percentage of total capitalization remains at only 12%.

Looking forward for the remainder of 2005, we continue to expect to realize year-over-year revenue growth in the range of 10 to 20% over the 98.2 million reported for 2004. We expect to see sales increasing throughout the remainder of the year as commercial orders take hold and the military business stabilizes. Now that we've received word from the US Defense Department that we can actively proceed with the qualification process for the $286 million Next Gen II Phase 4 contract, we are expecting that order activity will resume, particularly for BA-5390s under either this contract or under urgent buy contracts that will help us to achieve our revenue target.

Operating income in 2005 is expected to show steady growth throughout the year, moving towards our near-term operating margin target of 15% by year end, which we believe is achievable at a revenue run rate in the range of approximately $35 million per quarter.

For the second quarter of '05 consolidated revenues are projected to reach approximately $28 million as we ship the remaining portion of the urgent buy order for BA-5390s that we received in March, as well as additional BA-5390s under urgent buys that we are anticipating from the US military. In addition, we're planning on some growth in commercial markets as activity in that side of the business accelerates. Operating income for the second quarter is expected to be in the range of $2.5 million.

Our current outlook assumes no impact from expensing of stock options. And now that the SEC has issued a ruling that delays the implementation deadline of FAS 123-R, we are planning to implement this new standard when it is required, which at this time would be our first quarter of 2006.

As a result of a change in the New York State tax code in April, our state income tax expense will be decreasing significantly over the next few years. This tax law change, however, will cause us to revalue downward the deferred tax asset that we recorded in December of 2004. An offsetting non-cash deferred income tax expense in the range of $1 million will be reflected in the P&L in the second quarter. Excluding this special adjustment in our state deferred taxes, we expect our full-year effective income tax rate to be in the range of 40 to 45% at this time. The majority of our income tax expense this year and for some time into the future will be deferred taxes or a non-cash expense to the Company as we utilize the benefit from the NOL carryforwards.

With respect to capital expenditures, we still anticipate spending in the range of $6 million during 2005. These capital programs will be for upgrades to facilities and various equipment and projects to enhance productivity in addition to expanding capacity at our UK facility related to the award of the Next Gen II contract.

The outlook for the future remains very bright. We're seeing a record level of interest in development activity in our technology and product portfolio. We have built a solid base upon which we can continue to grow the business, and we're using this base to widen our reach into both military and commercial markets and applications. We're thoroughly committed in our efforts to grow the business to reach our target of $200 million in revenues within the next few years.

That concludes my remarks, and now I'll turn it back to John.

Thank you Bob. Bill, I think we'd like to now open it up for the Q&A.

(OPERATOR INSTRUCTIONS) Steve Sanders, Stephens Inc.

A couple of questions. On the Q2 guidance, do you need another order comparable to the $7 million order to get to your 28?

Yes.

Any additional color on your level of confidence? I assume you're feeling pretty good about it.

Yes. We know that there's demand calling for it, and that their moving forward on it. A non-contract buy when there's no contract in place, it's very hard for -- DLA is not really equipped to do that. They don't do it that often, do non-contract buys. They can, as you see. And certainly once they've done it it becomes easier to work it through. But yes, we know the demand is there for the product, and inventories are low and they need to procure it.

A general question on the auto telematics. If you're shipping to various customers, are all those shipments essentially going to come in 2Q, early 3Q? Or are there customers who take deliveries more evenly throughout the year?

We think that it's pretty well spread out during the year. The normal cycle, depending on where the product is manufactured, is that the automotive year kind of goes July 1st to July 1st for suppliers. So we would anticipate starting to fill the pipeline of supply kind of in the June time frame, maybe some in May. I don't know. I think that's about right. (multiple speakers) end of May -- end of this month and into June. And it's pretty even during the year. Certainly more of their production is kind of in the fall, but it's pretty even. We don't have a lot of experience with this, to be honest with you. But from what they have told us and from what we've gotten from other people and when they looked production plans, we have some visibility to what they're planning. It looks pretty even.

A general question on the design activity and wins. Are you seeing a significant percentage of these where you're replacing an existing battery on an established product, which I assume would give you pretty good visibility on that shipment, versus the vast majority being a new product where your shipments are going to depend on the device introduction and the market acceptance? Just sort of a general comment on that would be helpful.

I would say yes and yes. But Julius might have more data than I do.

It's really a mix. One example of where we're placing existing technology is in search and rescue markets. Much of that market has been served by lithium sulfur dioxide for quite a number of years. And as John indicated earlier in his remarks, as the 406 MHz transmission frequency begins to transition between now and 2009, more and more of those products are moving over to lithium-manganese dioxide because of the additional power required.

But at the same time I would say in the rechargeable battery business we have both going on. We see a lot of work going on replacing lead acid batteries with lithium batteries for a whole lot of reasons. One is that lead acid batteries when you discharged them three or four times, they're dead. Anybody with a car knows. But the other thing is we're seeing a lot of new product introductions coming out of it. So it's kind of 50-50 in the rechargeable business.

And then a final question for Bob. I know you commented about the new product development. And R&D was clearly up pretty significantly year-over-year, but it was relatively flat sequentially. You also commented on the incremental fees on Sarb-Ox, etc. Can you give us a little directional guidance on operating expenses over the next few quarters -- a material increase, some pluses and minuses? Whatever you can tell us would be helpful.

At this point in time I think we would expect to see fairly level total operating expenses throughout the year. Maybe we expect right now probably even a little bit more slight increases in the R&D line. The G&A line may come down a little bit just because there were some special additional fees related to Sarbanes in the first quarter. Generally I think it's being relatively flat throughout the year, maybe a modest increase.

Thank you very much.

Jim McIlree, Unterberg Towbin.

John, you talked about delivering on a telematics piece of business in Q2 that is in addition to the Volvo work that you have been doing. Is that a North American customer or a European customer?

We have people asking us North American, European; is it a company from here or there. We've been delivered a pretty strong message from multiple of our customers in telematics that they really don't want us to say who they are. So I'm not trying to be cute about this. I just really have to no comment this one. They've really delivered us a strong message that they just don't want us to say who they are.

You mentioned that the 9 volt batteries were strong this quarter. Can you give us a range of how much in revenues it was, or the exact number? Either one.

Either one of those things. I don't know. Bob, what percentage of sales was it? What did we run on?

Total revenues this quarter were just right around 6 million.

So about 6 million of it.

Is a lot of that due to an initial inventory fill for the Lowe's business?

No, not all. Those stores keep their inventories very lean. We've seen strength in medical distribution, work that we've done with medical distributors. And we've seen strength, like we said, in smoke detectors, particularly in Europe, where whether it's new legislation or an increased awareness about the importance of smoke detectors, two customers in Europe have really started going. It's real repeat, regular business. We really trained, I think, our customers to keep inventory very lean because we can be very responsive in that marketplace. But it has more to do with renewal and smoke and really widening of distribution.

Is that 6 million somewhat of a new level of activity for the rest of the year? Is that reasonable? Or is there any seasonality to be worried about?

You know, every time we think there is seasonality the quarter changes. I think has more to do with inventory stocking and not distribution than it has to do with how the markets are going. I don't know, Bill, what do you --?

We still real strength this quarter too, again through the same efforts that we saw in the first quarter. So we are expecting a very strong second quarter in 9 volts also, and we will see how it looks for the third and fourth quarter. But right now we're forecasting it to be strong in the third and fourth quarter also.

We'd love to believe it's a trend, but there is occasionally this project business especially in smoke detectors where they sell a big project, a housing project somewhere or something, and then it doesn't recur the next quarter. So we try to get as much visibility as we can, but it's a pretty diverse bunch of customers and market base. So like we said, we think we're going have another strong quarter. We would like believe it will keep going.

Thank you very much.

Mark Grzymski, Needham & Company.

Just back to the 9 volt business, I'm wondering if you could talk about the gross margins on that business, specifically how it might differ along the retail channels. Are you seeing any change especially from a large retailer like Lowe's?

No, the gross margins in that business have been pretty consistent in the low 20s. As we get more business, while some of the bigger chunks of business like that may be at a lower price, it's not that much lower. And that pretty much just compensates for the overhead absorption. So we have seen it stay pretty consistent. We have a good base business there, and when we get extra business it is below usually our average. The extra business like that is below our average price. On the other hand, it's incremental so it doesn't -- it gives us a little more overhead liquidation. And that seems to cancel out. There's not big swings there.

Right. With 6 million in Q1, and you said in the third and fourth I think that you're going to be a little bit stronger there, do you think is that bumping up your kind of guidance on the 9 volt? Because I think in the past you had said it would be relatively flat to last year, but it appears like you might actually beat that.

I will tell you the way we plan the 9 volt, to be honest with you, is if we beat it it's not going to be by millions of dollars; it's going to be by hundreds of thousands a quarter or something. So we try to plan it conservatively because we have a -- it's a pretty automated process. We have a very well-trained workforce there, a lot of experience. We understand that product line better than -- we have been making it for over 10 years. We understand it real well so it's real easy for us to flex that (ph). What we don't want to do is over-plan it. So yes, there might be some upside, but I can't tell you you're going to notice it.

I think Bob, you mentioned that you're going to be at about a $35 million revenue run rate; you're operating margin should be around 15%. Based upon the estimates I would just assume that in third and fourth quarter you're going to have to be pretty much up to that 35 million to get to 10 to 20% growth. How much of the BA-5390 businesses are you going to -- in the past you were looking at about 65% of overall revenue. How much of that is going to come from that new -- the large order in Q3?

I think what we have said generally is that our business in 2004, military, was about 60% of total, which was about 60 million. In '05 we expect that level to be relatively consistent at about 60 million total revenue for military. 5390s, we were actually planning that the revenues from 5390s from '04 to '05 would decline a little bit with some strength from some of the other products that will get through, either Next Gen or even some of the small cylindrical business on the 5372. So that gives you a picture for the full year.

Just finally guys, could you just expand on the UK, how that's going over there, and your expectations generally speaking? And thanks.

The UK operation, I think we've pretty much retrenched it in two ways. Number one, I think we've finally completed, we hope, the transition over to our new cell type. We're going to make some of the old cells, but we've been able to -- we've basically said to people if you want more of the old cells it's going to cost you. So I think from a gross margin standpoint we expect to see steady improvement there because we have moved over to much more manufacturerable product. Although we will make some of the old ones we're going to get a price for that will compensate us fairly for it.

The second thing we're doing is a lot of work and qualification activity will be started with the new military products. We have a lot of experience with battery assembly over there. On the other hand, there's a lot of processes and procedures they have to learn because when you start one of these qualifications you don't want to make a mistake. You make a mistake, you go back to go. So we don't what to get 12 weeks into a qualification cycle and find out we have to start all over again. So we're going to be very methodical about it there. So we have kicked off that effort also. And it's early to say, but we have enough experience between the experience we have in the US with people helping them and their experience with battery assembly over there where they've been doing it much longer than we've been doing it in the US, that I think we should be pretty well poised.

Bill, do you have anything to add?

I think through this quarter we have sized correctly to have it be able to grow again. And we're also seeing some -- UK has provided us some real options for distribution for some of these new wins. We've got some other customers. So the UK, we're positioning that to be a battery assembly, military contract and a distribution site, which looks pretty promising.

I would also say that it's really enabling us with the unified product line to make better decisions about where to build product. There's actually some product that we built in the US that go overseas that is going to be much more economical for us to do in the UK. There is products we make in the UK that are going to be more economical for us to do in the US. So now, instead of having to have different product lines, now we have one product line and two facilities. And Bill can move stuff around to balance it properly based on workflows and the economics of them.

So we're optimistic. We've said in the past that the two areas where there's a real opportunity for margin improvement have been -- besides getting the volume up in the US, which I think we're doing to get us back to the gross margin levels we need to be at, one is rechargeable. I think we're well on our way to improving the gross margin. Get those gross margins up into the 20s is what I would like to see. And then the other one is the UK, is getting that out of around the teens; in fact, some quarters in single digits when we've build some products we've had trouble building. I think now get that up in the 20s and then we really, really, really have done what we need to do to get our gross margin rolling.

Thanks guys.

Michael French, Kaufman Brothers.

I was intrigued by the comments you made about seeing interest from the sensor and array and chemical detection area. I was just wondering if you elaborate on maybe not naming who you're talking to but any particular projects or the likelihood of the timing of orders and the magnitude, or any other details that you could share.

Probably the hottest -- one of the hottest applications -- particularly the most active applications in the military right now are robotics where we're doing some work. And I count UAVs (indiscernible) vehicle, unattended aerial vehicle there, unmanned. Thermal, where we're very well positioned. We do a lot of work in thermal and sensors. And the idea of unintended sensors, which are looking for movement and then being able to determine what that movement is either out in the middle of the desert listing for trucks and tanks, or sensors that are looking to detect things like bombs like IEDs (indiscernible) devices, or sensors that are around a facility, kind of the robotic version or the static version of a guard listing couple with radar, listing for footsteps to know is it bird, is it an animal, is it a person that's coming up on my installation.

So a very important, very hot area. We've done work with some of the security agencies before on that. But those are areas -- that area is going to move into the mainstream and we have quite a bit of or going with that. We actually have our 9 volt designed into one of those programs for sensors, as well as some programs that -- unattended sensor programs that use some of our bigger batteries like 2590.

Are you seeing demand on military and from Homeland Security or local responders, or is this still just in the military phase?

It's in the military, but we have a whole other category in Homeland Security, which isn't necessarily unattended sensors. But we had a major gas mask project, and I wouldn't call it gas masks (indiscernible) chem-bio nuclear active gas mask project, which is we're supplying on already. There are kind of mobile ultrasound units. There's discerned (ph) motion movement -- I won't say anymore -- unit. And then bombs sniffer or sniffer types of things.

Julius did I miss anything there?

No, you've covered them quite well.

That's it's pretty much what we're seeing in our Homeland Security. So yes, we're seeing applications there as well.

On to the smoke detectors in Europe, was there a particular incident? I know there was a tragic fire in Paris. Does that just happen to be a coincidence, or was there some event that caused a reaction? Or is it just a trend that is starting to accelerate?

We're not familiar with the particular event you're referring to in terms of how it may relate to the smoke detector market. But in general our smoke detector business in Europe has been growing, even in some cases with certain customers stronger growth than we're seeing in the US. We see a lot of activity throughout Europe, particularly places like Scandinavia. And we're also starting to see some Asian activity as well.

In the past there hasn't a lot of legislation requiring that in buildings in Europe. There was some I think in Sweden and Scandinavia last year; there's some in Germany now. Sometimes it's town by town. Sometimes it's the country. And as Asia develops, Asia is starting to pass smoke detector laws. I think Japan just passed a smoke detector law for the first time, which is kind of surprising, but true. So we're seeing activity there as well.

To your earlier point, events like the tragic fire that occurred in Paris recently, there's no question that events like that, as we have seen all the time throughout the world, generally inspire local and state and federal legislatures to enact legislation to require smoke alarms.

How about on the US? As far as I remember the last state to do something was Oregon. It there anything else that's in the works out there?

There doesn't appear to be. There's been a very strong lobbying effort by the people who would like to sell you a battery every year to ensure that your smoke alarms don't get legislated.

I guess I appreciate their effort. I could use the exercise climbing up my ladder.

(OPERATOR INSTRUCTIONS) Rob Powell (ph), Ardour Capital.

I have a question for you concerning the Next Gen Phase 4 contract still. Obviously we're going to start seeing some revenues from that in the third quarter and fourth quarter this year. How does that work out over the five-year contract?

First of all, I'm not sure we will see revenues in the third quarter, only because there's really a question of what the order strategy is going to be. They're buying batteries as they need them now. And so the question is how far out do they want to get order coverage versus do you want to wait until this thing gets qualified, and when do you want to phase in because the new product has a state of charge indicator. We're very anxious to get the state of charge indicator product out there because we believe that will further increase the market share. The MnO2 version only has -- still 15 to 20% of demand comes from that product. So we think really the real opportunity with the SCI. But we don't know what their order strategy is going to be.

But the answer we think on Next Gen is that I believe the demand profile that we got in the package was pretty flat; a little bit of growth, mainly based on growing market share in some of the -- on those batteries over SO2 because it's not like day one that 50% of the battery -- pilot of survival radio batteries are going to be MnO2. It's going to phase in and increase over time. But it's still not that big a slope. It's fairly even.

Concerning just a general question for all your business or product lines, how do you seeing your raw materials costs? Have you guys have pretty much a good handle on those in the past couple of quarters?

We've seen some increases and steel and nickel. But other than that as far as the basic commodities that we use to construct our batteries, we haven't seen anything that's really increased our standard cost to manufacture. Anything that we've seen we've been able to leverage efficiencies internally to offset it pretty effectively.

Thank you. One last question, or follow-up question, to the auto telematics business. What do you guys see that as drawing to be as a percentage of your overall business? Do you see that being a large percentage? Or going forward as the military revenues kind of shrink will that take over some of that?

As a really good question. Let's see. All I can tell you is there's a whole bunch of scenarios. 34 million vehicles in the US and Europe. If you tell yourself that even 5% of those say that they want to have a telematics system with a back up, it's still a pretty good-sized market. It really just has to do with adoption time, how fast you do that.

Second thing is legislation. Right now the European community is considering mandating automated crash notification systems in Europe by model year 2009. I don't know. Maybe it's going to 2010, but the proposal says 2009. If that happens that could be a big change in it.

And then, if these systems catch as an important safety system in the US certainly they will be marketed that way. It's just undeniable that you need to back yourself up somehow.

You could certainly put a second lead acid battery in the car. You would probably have to change that every three or four years just like you change your current one. So I don't know if that satisfies it.

But you can draw a lot of scenarios that go from it's a nice business to be in to it could be bigger than the Company is now by far.

Steve Gish, Roth Capital Partners.

Actually this is Rich Yen sitting in for Steve Gish.

We knew it was going to be you.

Just a quick question about automotive telematics. Wondering if you can indicate how many platforms you'll be on, that you're currently on, and also if this will be a standard feature or an option.

We're on one platform -- two platforms and one manufacturer right now. And that's Volvo, and that's not big volume because they're only putting the telematics system in the car when the customer buys it. Now, the new program is one that goes in every car of the particular platform. Is it one model?

Initially.

It starts with one model, and it goes to four models over the next couple of years with that manufacturer.

Okay great. That's it. All my questions have been answered. Thank you.

Jim McIlree, Unterberg Towbin.

Bob, what kind of working capital needs do you expect this year?

As we grow the revenues over the course of time here I'm sure we're going to have some working capital needs. But we don't anticipate they're going to grow that significantly. We believe that the cash we have on hand, plus the cash that we will generate through positive operating cash, will be more than sufficient to cover the (indiscernible) capital growth.

Okay, but just in kind of round numbers is it you might need 2 million or you might need 5 million? Is that kind of a good range, I guess?

That's probably a good range. It's probably going to depend on as you look at the timing of events for as we close quarters in the books. I think it will mostly -- we will have some growth related to revenues. The receivables would be expected to grow a little bit. Inventories we will probably try to maintain pretty close to where we are right now. There may be a little bit of growth there, but some of that will be offset by higher payables at the same time. So I think generally there would growth of maybe a couple of million a quarter but if the revenues grow as we anticipate them to right now.

Thank you.

(OPERATOR INSTRUCTIONS) Mr. Kavazanjian, it appears we have no further questions standing by at this time. I will turn the conference back over to you for any additional or closing remarks.

Thank you very much. This has been a transition quarter for Ultralife. We're very excited about the future. I think you'll see we expect to see significant growth for the remainder of this year and into 2006. You will see renewed shipments of our leadership product and our capability in the military market, as well as our participation in exciting applications in our exciting commercial markets. Those are the things that are going to fuel this growth. It's truly the time during which we think we're going to leverage the capabilities we have worked so hard to build. So thank you all for joining us today, and we really look forward to sharing results next quarter with you.

Thank you. Again, ladies and gentlemen, that does conclude this Ultralife Batteries Inc. conference call. We thank you for your participation. You may disconnect at this time.