Park Aerospace Corp (PKE) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to the Fourth Quarter 2004 Results Call for Park Electrochemical Corporation. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Brian Shore. Please go ahead sir.

Thank you, operator. This is Brian Shore. Good morning to everybody. Welcome to our fourth quarter conference call. I have with me, as usual, Murray Stamer, Park's CFO, and I'm the CEO of the Company.

And what we'll do for this conference call is what we normally do, which is we'll start with some introductory remarks and then we'll be happy to try and answer your questions. And I think what we'll do is we'll ask Murray to get started. Let me just warn you, Murray has a fairly lengthy financial discussion today. So hopefully most of you will still be awake by the time you get to me.

Right, Murray. Without further ado.

Okay. Thank you Brian, and good morning everyone.

First of all, certain statements we may make during the course of this discussion which do not relate to historical financial information may be deemed to constitute forward-looking statements. Any forward-looking statements are subject to various factors that could cause actual results to differ materially from our expectations. We have set forth in our most recent Annual Report on Form 10-K for the fiscal year ended March 2 2003 various factors that could affect future results. Those factors are found after item 7 of that Form 10-K. Any forward-looking statements we may make are subject to those factors.

In this discussion I will refer to non-GAAP financial measures as well as financial results determined in accordance with GAAP. We believe that the disclosure of non-GAAP operating results as a supplement to GAAP financial results will assist the listener in assessing the Company's performance and prospects.

During the fourth quarter ended February 29 2004, the Company discontinued financial support for its Dielektra GmbH subsidiary in Germany as a result of the continued erosion of the European market for the Company's high technology products. Without Park's financial support Dielektra filed an insolvency petition, which may result in the sale or liquidation of Dielektra. In accordance with GAAP, Dielektra is being treated as a discontinued operation. I will attempt to clarify the Company's results in this discussion by segregating the normal operating results, the special items and the losses from discontinued operations for the fourth quarter and then for the year.

Net sales from continuing operations for the fourth quarter ended February 29 2004 were $55.3m compared to net sales of $45.1m for the prior fiscal year's fourth quarter. The continuing operation sales do not include Dielektra's sales of $2m for the portion of the 2004 fourth quarter Dielektra was supported by Park and $4.6m for the prior year's fourth quarter.

Net profit from continuing operations before special items was $4.1m for the 2004 fourth quarter compared to $505,000 for the prior year's fourth quarter. Pre-tax special charges were $31,000 for the 2004 fourth quarter compared to $49m for last year's fourth quarter.

The prior year's fourth quarter special item was a $49m charge related to the impairment of fixed assets of the Company's North American FR-4 operations. The loss on discontinued operations of $23.2m for the 2004 fourth quarter is comprised of $1.2m of operating losses for Dielektra and $22m for Dielektra fixed asset impairment charges. The net loss inclusive of the net profit from continuing operations, special items and the loss on discontinued operations was $15.4m for the 2004 fourth quarter compared to $46.4m for the 2003 fourth quarter.

Earnings per share from continuing operations before special items were $0.21 basic and $0.20 diluted for the 2004 fourth quarter as compared with $0.03 basic and diluted for the prior year's fourth quarter. Earnings per share from continuing operations including special items were $0.39 basic and $0.38 diluted for the 2004 fourth quarter compared with a loss per share of $2.24 basic and diluted for the prior year's fourth quarter.

The impact of treating Dielektra as a discontinued operation for the 2004 fourth quarter was an increase in basic and diluted earnings per share before special items of $0.06 and $0.05 for the 2003 fourth quarter. The loss per share including earnings from continuing operations, special items and the loss from discontinued operations was $0.78 basic and $0.76 diluted for the 2004 fourth quarter as compared with $2.36 basic and diluted for the prior year's fourth quarter.

Net sales from continuing operations for the fiscal year ended February 29 2004 were $194.2m compared to net sales of $195.6m for the prior fiscal year. The continuing operation sales do not include Dielektra's sales of $14.4m for the portion of the 2004 fiscal year Dielektra was supported by Park and $21.2m for the prior year.

Net profit from continuing operations before special items was $7m for the 2004 fiscal year compared to $3.6m for the prior year. Pre-tax special items netted to a gain of $25m for the 2004 year compared to a pre-tax net loss of $50.7m for last year.

The 2004 year's special items net, pre-tax gain of $25m included a $33.1m gain on the Delco lawsuit, a $400,000 gain on the sale of real estate in the UK and a charge of $8.5m relating to realignment charges for the Company's North American FR-4 operations. The prior year's net, pre-tax special items charge of $50.7m included a $49.2m charge relating to the impairment of fixed assets of the Company's North American FR-4 operations, a $4.7m charge for the closure of the Company's manufacturing operations in the UK, and a gain of $3.2m on the sale of the Company's Dielectric Polymers Inc. subsidiary.

The loss on discontinued Dielektra operations of $33.8m for the 2004 fiscal year is comprised of $5.6m of operating losses, $6.2m for termination and other costs and $22m for fixed asset impairment. The loss on discontinued operations of $6.7m for the 2003 fiscal year is comprised of $5.5m of operating losses and $1.2m for fixed asset impairment.

The net loss inclusive of the net profit from continuing operations, special items and the loss on discontinued operations was $3.9m for the 2004 fiscal year compared to $50.8m for the 2003 fiscal year.

Earnings per share from continuing operations before special items were $0.36 basic and $0.35 diluted for the 2004 fiscal year compared with $0.18 basic and diluted for the prior year. Earnings per share from continuing operations including special items were $1.51 basic and $1.50 diluted for the 2004 fiscal year compared with a loss per share of $2.23 basic and diluted for the prior fiscal year.

The impact of treating Dielektra as a discontinued operation for the 2004 fiscal year was an increase in basic and diluted earnings per share from continuing operations before special items of $0.28 and was also $0.28 for the 2003 fiscal year. The loss per share including earnings from continuing operations, special items and the loss from discontinued operations was $0.20 basic and $0.19 diluted for the 2004 fiscal year as compared with $2.58 basic and diluted for the prior fiscal year.

Now I'd like to review some of the significant items in our fourth quarter operating P&L that reflect the reclassification of Dielektra's activity as a discontinued operation.

Sales volumes increased 10% in North America and 8% in Asia during the 2004 fourth quarter compared to the 2004 third quarter, while continuing European sales declined by 7% for the same period. Continuing 2004 fourth quarter sales increased by 13% in North America, 16% in Europe and 49% in Asia compared to the 2003 year's fourth quarter. The trend towards a greater mix of high performance products continued in the 2004 fourth quarter.

The sale of high performance laminate and prepreg materials comprised 94% of total North American laminate and prepreg sales during the fourth quarter of fiscal 2004, up from 90% for the prior fiscal year's fourth quarter. On a worldwide basis, high performance materials were 88% of total laminate and prepreg material sales for the fourth quarter of fiscal 2004 compared to 78% for the prior year's fourth quarter.

The gross profit for the fourth quarter of fiscal 2004 was 22.4% compared to 13.4% for the prior year's fourth quarter and up sequentially from the third quarter gross profit of 19.1%, the second quarter gross profit of 13.6% and the first quarter gross profit of 10.4%. The 2004 year's gross profit increased due to the adjustments made in the operating costs to conform to market requirements, improvement in the realigned plant utilization resulting from higher sales volumes and the growth in the higher margin, high performance material sales.

Selling, general and administrative expenses were 13.9% of net sales for the 2004 year's fourth quarter compared to 14.3% for the prior year's comparable period. The reduction in these operating expenses as a percentage of sales is the result of the partially fixed nature of these expenses. Pre-tax operating profit increased to 9.9% of net sales for the 2004 fourth quarter compared to 0.7% for the prior year's comparable period. The pre-tax operating profit does not include any special items.

The effective tax rate on profit from operations before special items for the 2004 year was 8.6% compared to a tax benefit on profit from operations before special items of 30% for the prior year. With the segregation of the Dielektra losses as discontinued operations, these effective tax rates were the result of an income mix dominated by taxable profits in lower tax jurisdictions and losses with tax benefits in higher tax jurisdictions.

Moving to Park's balance sheet, cash and temporary investments increased to $189.2m at February 29 2004 from $162.9m at the end of the prior fiscal year. As we have in the past, we invest the available funds on a conservative basis, in highly rated fixed income securities and money market funds.

Working capital was $197.5m at the end of the 2004 fiscal year as compared to $170.3m at the end of the prior fiscal year. The capital expenditures were $4.5m for the 2004 fiscal year compared to $6.2m for the prior year. Depreciation expense was $10.6m for the 2004 fiscal year compared to $16.5m for the prior year.

During the 2004 fourth quarter ended February 29 2004, an impairment charge was recognized to write-off the assets of Dielektra. However, there were $19.4m of liabilities related to Dielektra still on Park's consolidated balance sheet at the end of that quarter. The Company expects to recognize a gain of approximately $17m relating to the reversal of these liabilities when the Dielektra insolvency proceedings are completed, although it is unclear when the proceedings will be completed.

Stockholders' equity was $243.9m at February 29 2004 compared to $245.7m at the end of the prior fiscal year. Stockholders' equity per share was $12.33 per share compared to $12.48 per share at the end of the prior fiscal year.

Park is starting to benefit from the significant realignment actions taken to get its business synchronized with the current market conditions and is poised to take advantage of new opportunities. With the Company's strong cash position and balance sheet, and its focus on serving the needs of its customers, Park is prepared to improve its performance in fiscal 2005.

Thank you Murray. This is Brian again. I warned you it was a long one. And by the way, I know it's a lot to absorb. Murray's statement is on the website. I think it's posted ready. If you look at the Company website, if you want to look it up.

For my statement you have to actually listen, because to be honest with you I never really know what I'm going to say until I get on these calls, so you have to listen to me.

So there's a number of things I want to cover and I'll try to move quickly, because Murray's introductory remarks took a little bit of a while here.

Why don't we talk about the market conditions? And like I said, there's a few things I want to hit, so I'm not sure I'll do it in any logical order. The market is okay, and I think we should say there are probably some big signals. It's certainly a lot better than it was a year ago.

We had a depression that really hit this industry a little over three years ago. As I think you know from our prior conference call, we started to see some improvement maybe last August, September timeframe. And that improvement continued into the third and fourth quarters. And the market is, I'd say it's not too different in the current quarter, the first quarter, as compared to the fourth quarter, although there are some mixed signals out there. And I guess that's not a surprise, because there almost always are mixed signals.

This industry is an industry that I think you all know has very little visibility. So we just do the best we can and we tell you what we know. What we don't know, we can't tell you.

In terms of the analysts out there, let's try to sort this out a little bit to help you. If you go to the last page of our earnings release, what I would focus on is the fourth quarter continuing operations net sales and earnings from continuing operations before income taxes as a starting point and jumping off point for Q1. And it looks like the net sales from continuing operations in Q4 were (I think) $55.289m. It looks like the earnings from continuing operations in Q4 before income taxes were $5.420m. $5.450m, Murray said, sorry about that, I said 20.

But in any event-I'm looking at this thing here probably from the wrong line but I'm only off by $30,000. In any event, I would expect that Q1 would be a lot different than Q4 in terms of the basic numbers - top and bottom line. If you compare it to the Q4 continuing operations numbers, I'm talking pre-tax now. And I think the analysts - you'll have to make your own judgments about the market impact. As I've said, it's not too different, and the signals are somewhat mixed, but I don't think the market is significantly different in Q1 as compared to Q4.

So you'll have to take it from there, but I would use the Q4 basic numbers of continuing operations top line and bottom line as your jumping off point.

The only specific thing that we'd like to give guidance on, though, was the tax rate because we believe the tax rate in the 2005 fiscal year will be somewhat different than the historical tax rate. And the best we can do is guesstimate that it will be somewhere between 5% and 15% for the 2005 fiscal year. It's very complex and I'm not going to go on to an explanation as to why it is.

If you have questions about that I'm sure Murray can help you with it, but it's certainly complex. But I did want to give you that basic guidance, and I think that should be enough for analysts out there that have gotten pretty good at figuring our business out to work on their Q1 earnings estimates.

So we covered the guidance, at least as much as we're prepared to discuss it. We talked about the market conditions. That's short term, of course, you're talking about the mixed signals.

For the future for us, it's very clear. The future is in technology and in Asia. That's a long-term future we're talking about, technology and Asia. And we believe, as I think we've commented previously, that there are not only cyclical changes that have taken place obviously in the industry, but also fundamental changes. We believe the industry is fundamentally different now than it was before the industry depression started a little over three years ago.

I guess we'd say there's some recovery but it's different. And what I mean by that, as I think we've indicated previously, is for us anyway we think the future, the important future, the important drivers for our business will be in Asia and in technology. The standard FR-4 business outside of Asia, we don't think that there's much of a future for it in terms of really being the driver of the business.

We're not exiting those businesses. We're still committed to those businesses, but in terms of what will pay for our future, what will pay for our capital, what will pay for our R&D, it'll be the earnings from technology and the earnings from Asia. From high-tech products, when I say technology. The products that we make in Neltec, for instance, but we also produce elsewhere. We produce in Asia, in Europe as well. In other locations, in North America.

I guess I should say before I forget - because I know our people at FiberCote would be unhappy if I do forget it - FiberCote is doing relatively nicely at this time. And I think they're doing a good job internally. It's a well-managed business. I like what they're doing. I think we're benefiting from some wind in the aerospace and military markets as well at FiberCote.

Okay. In terms of some major changes, I want to just remind you that three years ago, a little over three years ago, let's say January - that would have been of 2001 - we had 3,100 employees. We now have 1,200 employees. I just wanted to report those facts to you, because I want you to understand how much of a wrenching, a dramatic change, we've gone through. It's not that okay, everything's back to where it was, and we need to deal with reality. It doesn't matter what we want. We only need to deal with reality. Reality as it exists, not what we'd like it to be.

And when I say the future is in Asia for standard products or FR-4 products, and not in North America, it may not be what I want but that's the reality which we have to recognize, we have to deal with, if we're going to have a future. And it's our job to have a future. That's what we do for a living, to see to it that we have a future.

Let's bring you up to date on a couple of events; a few events which have taken place since our last conference call, which I think would have been in December.

Murray's spoken at length about the German situation, so you know about that. We've cut our ties with Dielektra, I think at the end of January. That was not an easy decision. We studied it extremely carefully. We looked under every rock, and this was the only decision that we felt was available to us. We felt there was no hope. There's no future. And that's how we would deal with something like this.

And we make a decision like this, and we've made other decisions which are similar in the past, it's only based upon our long-term thinking. We will not do something like this to help the short-term P&L of the Company, to make it [a couple of] quarters. It's only because we felt long term there was no future for this business, at least not for us. And that was the base upon which we made that decision.

We had our 50th birthday on March 31 2004. The Company was founded March 31 1954 by my father, Jerry Shore, and Tony Chiesa. I think you might know about that, because we had a little press release and we had a couple of little parties at different locations within the Company. So that's something that we feel good about.

But not that we feel complacent about it, and as I've said to anybody who's interested in my opinion, the fact that we've been here around 50 years doesn't mean anything in terms of the future. It doesn't mean we'll be around another 50 years. It doesn't mean we'll be around another ten years. It doesn't mean we'll be around another one year. It's up to us to see to it we have a future. And the fact that we've been around 50 years is a nice thing. We certainly have a lot of experience to draw on but it doesn't mean we have any security in our future. It's up to us to see to it that we have a future.

We announced that we're going forward with building our plant in China. So you know about that. I think that was a non-event news event, because it was something that was generally known, I believe, within the investment community as well as the industry. But our plant is going forward. It's in Southern China, in an area called Zhuhai. And we're looking forward to that plant opening up approximately somewhere around October - September, October - of next year.

It's a green field situation. We had to build a building and everything. So it's going to take a little while, but we're going forward with that. At this point we have the land and we're going to start construction, which will happen (I believe) in the next month or two we'll break ground.

I think you know that we completed our major expansion of our Singapore facility. We call it 6 Gul Crescent. The original Singapore facility is at 4 Gul. Now we have 4 Gul and 6 Gul, and we're also installing another treater in Singapore.

I'm not proud of this, but you just need to know that we actually have some capacity limitations in the two areas where the business is strongest. One is in our Singapore facility; the other one is in Neltec. Remember the emphasis - technology and Asia, technology and Asia, technology and Asia.

In Asia, in Singapore, the capacity, our limitations, will be relieved when our new high-tech treater - state-of-the-art next-generation treater - is commissioned. Which is somewhere between September and November, I would say. I know I'm being vague with that, but we've been through these things before, so I know how many curve balls get thrown at you when you're building a new technology piece of equipment. And then the capacity limitations in Singapore will be significantly relieved and opened up.

In North America, the way we're approaching it is we're trying to get the California and New York facilities qualified on the Neltec-type products. Because we already have opened up the new facility in Neltec that we constructed about three years ago. And I think you know about that.

I think those are the key things I wanted to bring you up to date on. Am I missing anything, Murray, that we should talk about by way of introductory remarks?

I think you've covered it.

We've covered it? Okay, operator. Can we go to questions now, please?

Thank you sir. The question and answer session will be conducted electronically. [Operator Instructions].

We'll take our first question from [Curtis Jenson] with Third Avenue Funds.

Good morning guys.

Good morning.

What's the CAPEX plan for the calendar year, or the fiscal year going out?

Well, the implication is that CAPEX will actually be less than our depreciation expense for the 2005 fiscal year. Looking at $8m for capital expenditures for the 2005 year, and approximately $12m depreciation for 2005.

I just want to add that the depreciation number is not a bad number. The CAPEX number - that's a very preliminary number, so you can't hold us to it. We have not approved the capital budget yet. We're still working on it. So we'll give you that information, because we think you should know. We know. But you have to take that information understanding that we're not going to be held to it.

Understood. Thank you.

Sure.

[Operator Instructions].

We'll take our next question from [John Rice] with Deprince, Race & Zollo.

Good morning gentlemen. A very good quarter. Looks like things are turning, although I know, Brian, you'd never admit that.

Anyway, I just wanted to ask you, capacity utilization in North America and Asia. Can you break that down for us?

In Asia we're really fully utilized in our capacity, and it's-- Why don't we talk about it in a little more detail, to help out here.

The two major aspects of our manufacturing operations are treating and lamination. There are other aspects of the operation, which are less capital intensive.

The capacity limitation in Asia is now in treating. Remember we lost a treater in the tragedy of a little over a year ago. We had an accident. And what we're doing is we're replacing the lost treater with a new treater that will have a good solid 2X of the manufacturing capacity of the treater that was destroyed. So in a sense you can look at it like we're replacing the one treater that was destroyed with an equivalent of two treaters.

We have a significant amount of available lamination capacity in Asia already. So that's really not the constraint. It's treating. And once we have this new treater online, which we've already indicated we're expecting sometime in September or a little bit later than that. We're pushing for earlier, but I want to be realistic in our indications and our expectations. At that point we will have available more capacity than we currently need, based upon market requirements.

We are also in the process of trying to supply prepreg to Asia from US manufacturing sites. But that's very tedious and difficult, because we always go through a very careful qualification process with each customer. We would never just do that. I don't know, maybe other suppliers would, but we would never just do that. We have to be upfront with our customer on that. We get samples and there may be some subtle differences in the products. And it's a very time-consuming and tedious process.

So we're really working hard with that. I'm not real optimistic that that's going to make a major impact. I think the major impact will come when the treater comes on board.

In North America we have a very significant amount of available manufacturing capacity. At Neltec, which is our high-tech business in Arizona, we also are constrained in treating capacity, although we have some amount of additional lamination capacity since we opened up Neltec North. But we are constrained with treating capacity.

Now the solution there is actually to offload some of that capacity to the New York and California plants. That is being done already. Some of it has been accomplished, and we're in the process of doing more of that. It's the same story. It involves qualifying with customers. However, in North America - maybe I shouldn't comment too much on the cultural differences, but suffice it to say that it's much easier to get that done in North America than it is in Asia. So we've had some good success with that so far and we're working on it more.

Unfortunately, our lead times are not really very good and I feel bad about that. And our customer is a little bit upset with us, to be honest with you, about our lead times on high-tech products coming out of North America.

But the New York and California plants have - it's almost unlimited capacity. And the capacity, we'll never use that capacity fully in my opinion. So I would consider that to be, the limit to be almost theoretical.

And in Europe, since we cut our ties with the German operation, and we closed the UK operation about a year and a half ago, we are running fairly close to our capacity. But the major challenge for us in Europe is really to converting and reinvent the business into a technology business, which will be driven not so much by top line but by the product mix and the technology offering. Because it's my opinion in Europe that it doesn't matter what the top line is. There's no breakeven point for us on standard products. I think that market is - at least as far as we're concerned in how we run our business - that market has, it's gone. It doesn't, there's no opportunity for us.

So we don't really-- We're not really too concerned about capacity limitations in Europe. We're concerned about converting and reinventing the business into a technology business in Europe.

So - does that help a little bit?

Yes, it does. I was just going to also ask you, are you seeing anything, any movement in pricing at all here recently? Or does it continue to be challenging?

We're asked that question almost every quarter, and every quarter we disappoint the audience because we generally don't talk about pricing, because we have this philosophy called customer intimacy. And that means we deal with each customer on an individual basis, and our discussions with them are very private and intimate and confidential. So we would never discuss our pricing with any particular customer. And we don't have-- You'll never see an announcement from us, that our pricing is being raised by 5% or reduced by 3%. Each customer we have our own private arrangements with and we deal with it that way.

But let me just give you a little bit of help here. We see generally in the market that on the lower-tech margin end of the industry, which is the part we don't really play in very much, that pricing has come up a little bit. Especially in Asia. But it was down so low that - I don't know who figures this stuff out, but to me it's at a level which nobody could ever justify. There's a lot of insanity in our industry. There's a lot of very smart people that collectively do very foolish things, in my opinion.

But in the higher-tech end where we would play, the pricing doesn't swing as much anyway. And certainly that's not our philosophy. We don't treat our products like commodities or pork bellies. They don't go up and down every week anyway. We try to give our customers consistency in good times and bad times.

But I think the general answer is there probably is some firming of prices in the lower-tech end of the spectrum, but that doesn't impact us very much anyway.

Okay. And just one other thing on the volume numbers. Can you run down those again? I think I missed-- You had North America, Asia and Europe, in terms of your sequential increase. Can you give me that again?

In terms of the--

Sequential increase.

I didn't give you that, actually.

Did you give that, or did I--?

Let me give it to you now.

Is there another question that you have?

No, no, that's it. I appreciate it.

[Operator Instructions].

And it appears there are no further questions at this time. I'd like to turn the conference back over to Mr. Shore for any additional or closing remarks.

Well we haven't finished our answer to the current question yet, so just give us a minute on that.

Well I would say that the sales volumes increased 10% in North America, 8% in Asia, in the fourth quarter compared to the third quarter, while Europe went down by 7%. And the fourth quarter sales compared to last year's fourth quarter sales were up across the board. There was a 13% increase in North America, 16% in Europe and 49% in Asia.

Operator, are there still no further questions?

Yes sir.

There are none?

No more.

Okay.

I guess you confused everybody. Everybody's asleep.

Yes. Or they couldn't hang in there and listen to the introductory remarks. And we apologize if it's somewhat confusing, it wasn't really, it's not really what we want or enjoy, but these reporting requirements are becoming more and more complex it seems to us.

In any event, so what we'll do is we'll end the call here, and we'll thank everybody for listening in. And actually we'll be back in touch with you in the fairly near future, because we report our fourth quarter a little bit later because we wait until we have our closing and our signoff from our outside auditors. The first quarter actually ends at the end of May approximately, so toward the second half of June we'll be back in touch with you to let you know how we did in our first quarter.

So again, thank you very much for listening. It's nice catching up with you. And have a good day and feel free to give us a call. We'll be in. Murray and I will be here all day if you have any further questions.

Thanks again.

That does conclude today's conference. You may now disconnect at this time.