Park Aerospace Corp (PKE) 2004 Q1 法說會逐字稿

Good day and welcome to the first-quarter 2005 results conference 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, everybody. Welcome to our first-quarter conference call. I have with me as always as usual Murray Stamer, the Company CFO, and we will do our normal standard conference call, which means that we will start with some introductory remarks from Murray and then maybe a few from me and then we will go into our questions and answers.

So, Murray, why don't we just get started.

Good morning, everyone. 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 February 29, 2004 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.

Net sales for the first quarter ended May 30, 2004 were $58.5 million compared to net sales from continuing operations of $44.3 million for the prior fiscal year's first quarter. The continuing operation sales for the prior fiscal year's first quarter do not include the sales of the Company's Dielektra GmbH subsidiary in Germany of $5.7 million. As previously reported, the Company discontinued financial support of Dielektra during last year's fourth quarter ended February 29, 2004. Dielektra has filed an insolvency petition which may result in the reorganization and sale or liquidation of Dielektra. In accordance with GAAP, Dielektra was treated as a discontinued operation.

Net earnings for the 2005 fiscal year first quarter were $6 million, and there were no special items or P&L impact from discontinued operations in the quarter. For the prior year's first quarter, the net loss from continuing operations before realignment charges was $586,000. During the prior year's first quarter, pretax realignment charges of $1.9 million resulted in a $1.1 million after-tax charge related to the realignment of the Company's continuing operations. The loss from discontinued operations net of taxes was $6.8 million for the 2004 first quarter.

Earnings per share for the 2005 fiscal year first quarter were 30 cents basic and diluted. For the prior year's first quarter, the basic and diluted loss from continuing operations before realignment charges was 3 cents per share, the realignment charges equated to 5 cents per share and the loss from discontinued operations equated to 35 cents per share.

Now I would like to review some of the significant items in our first-quarter P&L. Sales volumes increased to 28 percent in North America, 18 percent in Europe and 50 percent in Asia during the 2005 first quarter compared to the sales from continuing operations for the same period in the prior year. The trend towards a greater mix of high-performance products continued in the 2005 first quarter. The sale of high-performance laminate and prepeg materials comprised 93 percent of total North American laminate and prepeg sales during the first quarter of fiscal 2005, up from 90 percent for the prior year's first quarter. The high-performance proportion of overseas laminate and prepeg materials sales was 91 percent of total foreign sales for the 2005 first quarter compared to 84 percent for the prior year's foreign continuing operations sales.

On a worldwide basis, high-performance materials were 92 percent for the total laminate and prepeg materials sales for the first quarter in fiscal 2005 compared to 88 percent for the prior year's continuing operations first quarter.

The gross profit for the first quarter of fiscal 2005 was 23.4 percent compared to 10.4 percent from continuing operations for the prior year's first quarter and 22.4 percent for last year's fourth-quarter gross profit. The gross profit percentage increased in the 2005 first quarter due to the improvement in the Company's utilization of its manufacturing plants resulting from higher sales volumes, the growth in the higher margin high-performance material sales, and adjustments made to streamline operating cost.

Selling, general and administrative expenses were 14.3 percent of net sales for the 2005 year's first quarter compared to 14 percent for the prior year's comparable period. The increase in these operating expenses as a percentage of sales was the result of an increase in freight costs required to meet demands resulting from the rapid upturn in business at certain locations and the increased provision for performance-based incentive programs.

Earnings from continuing operations before income taxes increased to 10.3 percent of net sales for the 2005 first quarter compared to a loss of 1.9 percent for the prior year's pretax operating losses before realignment charges and a loss of 3.6 -- I'm sorry 6.3 percent inclusive of the realignment charges during the prior year's comparable period. The effective tax rate for the 2005 first quarter was 0 percent compared to a tax benefit of 30 percent on the operating loss before special items for the prior year. The 0 percent tax provision for the 2005 first quarter was the result of a favorable jurisdictional tax mix and the release of foreign tax provisions that were no longer required.

Turning to Park's balance sheet. Cash and temporary investments increased to $201.3 million at May 30th, 2004 from $189.2 million at the end of the prior fiscal year. We continue to invest the available bonds on a conservative basis and highly rated fixed-income securities and money market funds. Working capital was $202.9 million at the end of the 2005 first quarter compared to $197.5 million at the end of the prior fiscal year. Capital expenditures was $0.4 million for 2005 in the first quarter compared to $1.2 million for the prior year's comparable period.

Depreciation expense was $2.5 million for the 2005 first quarter compared to $2.9 million for the prior year's first quarter. Stockholders equity was $249.3 million at May 30, 2004 compared to $243.9 million at the end of the prior fiscal year. Stockholders equity per share was $12.55 at May 30, 2004 compared to $12.33 at the end of the prior fiscal year.

Park continues to focus on growing its business in the high-performance electronic materials arena and benefited from the moderate improvement in the electronics industry during the fiscal 2005 first quarter compared to the prior year's first quarter and from the reduction in the earnings drag caused by Dielektra. Park is expanding its position in the markets that are growing, while continuing to maintain a strong cash position and balance sheet for the Company's future.

Thanks, Murray. Thank you. This is Brian again, and maybe I will just limit my introductory remarks to a few things.

First of all, on the market conditions, there was a comment in the press release that the market seems to have slowed down to some extent very recently. We are talking just really in the last few weeks, and we are just reporting that to you because it is factually correct. I'm sure that everybody is going to want to know what it means, and we don't know so we cannot say. We will speculate that it might be an inventory adjustment, and I would describe it as maybe a relatively small inventory adjustment. The only reason we really get there is because we believe that the end markets are fundamentally pretty strong. The economy, the global economy seems to be in pretty good shape. So it does not feel that it's an end market thing.

And you know there are anecdotal things and you hear things and you read things. I mean some of the stuff you people read as well. They are publicly reported in newspapers or press releases whatever, so that is what we think. We are really talking about something pretty recent, and of course everybody would like to know including us whether it is going to be a month or three months or whether this is the beginning of another disaster that's going to go three years. I am not at all of the opinion that it is in that latter category. But as I point out, the visibility in our industry has always been poor, and it is probably never going to get a lot better. And we really cannot lay that at the doorsteps of the OEMs even because (inaudible) the OEMS also the same thing, that visibility is poor with their customers as well.

So I'm sorry to put that out there and get everybody kind of confused and worried and nervous, but hey, it's my job to tell you the truth and I only can tell you what I know. If you read my letter to shareholders, which just came out recently, I mentioned that that is what I do. I tell you what I know and tell you the truth whether you like it or not. I suspect other people would try to say things and make people feel better that they are not really sure they know, but I'm not going to do that. So all we can tell you is what we know, and again whether this lasts for a little while or a little while longer we just don't know. And the thing is that we're reporting this to you because I think you would want to know that, of course. But in terms of what we do everyday here, it does not really make that much difference. We're still focused on the same things for the long haul, and we don't really change our strategy based upon these temporary ups and downs, cycles, many cycles, inventory adjustments what have you.

This is not a major major event at this point, but it is worth reporting because it is certainly something that is noticeable. We watch our bookings certainly every -- well most of you know that we take our internal financial reporting pretty seriously. We do consolidations every week. Certainly we know where our bookings and billings are every week, but we do more than that. Really we would know daily.

So again I'm not in a position to tell you what it means or what whether it is a trend or not a trend or tomorrow it will be different. All we are in a position to do is tell you this is a fact and you should know about it. I am sorry that we cannot tell you more, but we will tell you what we know and we cannot tell you what we don't know.

Just one other thing I want to cover which is a tax rate. A little confusing I think. We still are guesstimating what we said previously, that it is at the end of the year probably between 5 and 15 percent. But we tell you that just because that is what we think at this time. It's very difficult to predict a tax rate these days because it is subject to so many different variabilities. But we are doing the best we can, so we share that with you. But I want to share it with you with very express caution that that is the best we can do to guesstimate now, but we don't have a lot of confidence that we're right about the tax rate. But that's the best we can do for now. I do believe, though, that when we get back to you after our Q2 that we will have our arms around -- we will have a much better sense of our tax rate for the whole year at that time.

And I think with those brief introductory remarks, what we should do is turn this call over to our listeners, operator, and ask for some questions.

(OPERATOR INSTRUCTIONS). John Roberts, Buckingham.

Good morning, guys. Murray, you are probably the only person that's going to be happy about higher interest rates given your investment portfolio out there. But as the business improves, do you start to rethink the kind of cash cushion that the balance sheet needs?

Well, I would not say it is so much a question of cash cushion that the balance sheet needs. We do try to deploy our cash on a conservative basis and that cash is there, as you know, not only to enhance our business organically, but also for the possibility of strategic acquisitions when we do come across them.

So, as I've said to you before, the cash is not burning a hole in our pocket and we are not going to jump on anything because we feel that the returns that we're getting on the conservative investment we have are just too low. But you're right. We don't have any debt, so we are not bothered by higher interest rates at this time.

And secondly, Brian, an inventory correction I would suspect would not take more than a couple of weeks to sort of work its way through, unless inventories were really high, which did not sound like they were. So this is something we ought to expect you to think in your bookings you see a resumption in growth pretty quickly?

John, I don't think I could sign up for that. I don't think an inventory correction would necessarily be limited to a couple of weeks. You know if the fundamentals are good and the industry has not gone nuts -- and I don't think it's going to do that again anytime soon because people still remember what happened a few years ago -- but there still could be enough inventory that it would take a little while to work through the pipeline.

Remember now there is a pipeline, there's so many different layers of manufacturers that supply into the electronic equipment industry. And I sense that the OEMs actually have tried a little bit, try to be more disciplined than maybe they were in the past. And I'm not saying I am right about this. It is kind of like, what is it called? Inductive logic or something like that, process of elimination. But if it is true, I suspect that there might be some inventory at different levels of the pipeline.

I'm not hearing anything which is shocking which would lead to those kind of huge publicly reported events of three years ago with these huge write-offs. But my guess is, and again maybe it's based upon process elimination again, that maybe some levels of the industry got a little ahead of themselves, and that is my best guess. But I cannot sign up for just a couple of weeks event, though, because certainly even with a moderate amount of inventory, it could take a little bit longer than a few weeks to work through.

Obviously that is the question, what is this about? I think it is something real, but it also could be a very short-term real event, and the question is, well, how long are we talking about here? I also need to clarify that in terms of the degree of the event we're not talking about something that is earthshaking, but it is something which is to me anyway clear and it is noticeable, and therefore, we should tell you. You should know -- we should know probably I think you should know, I am sure you would want to know things which we believe are important.

So that's the best we can do on that topic. I also would tell you that it was a little bit of a private little personal objective of mine to get 200 million in cash. I never shared that with anybody; that was just in my own little mind. And, you know, frankly it was not that we tried to get 200 million. We have just been running our company with a pretty tough attitude about things recently, and we're playing for keeps here. We are not going to start throwing our money around and spending on foolish things.

But on the other hand, as Murray said, we look at opportunities all the time including now, and we have been pretty tough about these things. If they don't make sense, if the numbers don't add up, fine let somebody else buy these things, and we will wait until we find something that does make sense and we can look at ourselves in the mirror and say we've looked at this thing pretty carefully and we feel that it is a reasonable investment for the shareholders, and it is not just, let's buy something just so we can tell everybody we bought something.

We have our other internal investments, but you already know about those, like our plant in China that we are working on. I think we've already reported we expect that to cost about 5 to 7 million. So that's not going to eat a huge hole in our cash, but those kind of programs continue as well.

Did June run below the average for the May quarter?

Yes. The bookings -- really we have four weeks of information on June. June is actually -- I don't know how much you want to know about our accounting details. June is a five-week month for us, four weeks started Monday and ended Sunday. We have four weeks in the books, and for our topline and our bookings both for June, those two numbers ran below the average for the first quarter.

John McManus, Needham & Co..

Good morning. Brian, could you share with us, is the majority of the information coming there from your customers, the fabricators, or is it also directly coming from the OEMs, especially in the Telecom and datacom sectors?

Well, John, I want to be clear again that I am not saying I'm sure or right about this; it is just our opinion, and it is partly based upon process of elimination as I even explained in the press release. And what I mean by that is we don't see anything fundamentally different with the end markets. The global economy seems to be pretty good. So if things are backing off a little bit, you would have to look at is this an inventory thing.

John, you probably know more about this stuff than I do, though. You are out there talking to little different companies in the electronic supply chain, as we are as well. But it is not like we have any consistent evidence. We have anecdotal things. We talk to people; people talk us at all levels, of course -- customers, OEMs, CEMs. And there is some -- you know there is some anecdotal stuff out there, but I cannot tell you that we have done a proper industry survey, where it is scientific at all. And also this is pretty recent, so I don't think it would be possible to do it anyway.

But really, John, I bet you that I should be asking you that question. You probably know more about it than I do, about what is going on at the different levels with different companies in the industry.

Brian, is it geographic at all, or is this primarily in the U.S.?

Not for us because you see, we have a little bit of an unusual business since we are only focused on high-tech, and what is interesting about our business is when you talk about our business in Europe or Asia, if you look at the end customer, the OEM, usually they have the same names. So it does not really matter now.

The industry in Asia would be very different than the industry in North America for most people because most people working and supplying into the Asian market would be more working on a consumer and in commodity, more commodity-oriented products, which could still be very strong. But we do really -- we are out of that supply chain obviously I think you know by choice. So that's the thing that is a little unusual I think about our company, is that when you go back to trace it back to who the OEM is, it is just the same names come up whether you are talking Europe, North America or Asia.

Well, how do you think this might affect the fiscal second quarter? Do you think you might have a larger seasonal drop in the fiscal second quarter than normal because of this?

Well, I don't really know what a normal seasonal drop is anymore because you know we have not had a very stable industry for so many years. It's either going up or going down. But I would say that we would expect that the topline for the second quarter to be lower than Q1. But it is really really difficult to quantify that unless we are just going to give you a, well, do you know what guess, and I don't think that's very productive.

We are not talking about a major earthshaking, earth shattering situation here. But I think my best guess sitting where Murray and I are sitting right now, looking at it everything up through last week, would be that the topline in Q2 will be less than it was in Q1.

And what would you assume the tax rate to be in the fiscal second quarter? What I am saying is that some of the factors there which reduce the tax rate to effectively zero in the first quarter still going to be in place in the fiscal second quarter, or --?

No, there's two factors here. One is that our prevailing tax rate is going to be considerably lower than it was because of where we are making money and the tax rates in those jurisdictions. The other factor is that there are special events, you know, which cause our tax rate to adjust which we don't want to really get into.

But an example would be that something is resolved which we had a provision for just as an example. You know so there is -- part of that that was affecting our tax rate in Q1. So part of it is an ongoing thing where we are going to have a lower prevailing tax rate, and that is why we're saying that we think going forward we were targeting a 5 to 15 percent rate and then there were other special events.

Unfortunately I know this makes your job kind of miserable, John, but we're not going to be giving guidance on our tax rate for Q2. And the reason is we just don't have enough confidence in what it is, and that is because we're seeing these kind of up-and-downs quarter to quarter. The best we can do for now is to give you our perspective for the year. I know it does not help you very much, but when we get to the end of the quarter, the second quarter, I think we will have a much better feel as to what the tax rate will be, not only for the year but also for Q3 and Q4.

And last question from me, could you bring us up-to-date on the progress of the treater in Singapore? Do you think that that would be in volume production there by, say, November?

Yes. If I think you know -- on schedule three weeks on schedule and we track it on a weekly basis. And so I am trying to remember, I think we actually start to produce samples and get the treater qualified in, our current schedule anyway in the September timeframe. So I would think by November we would be seeing some good volume off that machine, assuming that we stay on our current schedule.

Paul Krueger (ph), Situs Investment Management.

Could you describe or could you quantify the leadtimes and the products that you sell to your customers where you are seeing this kind of pause?

We did not quite hear that question. Could you repeat it?

I'm sorry. Could you quantify the leadtimes, how long it takes you to normally deliver this product to the customer set that is experiencing a bit of a pause?

Okay. Well, leadtimes are a pretty hot topic in our company. The leadtimes got pushed out too far, and we were not really happy with that. So we've been working hard to bring them down. But we have all kind of arrangements with different customers. We have quick turn arrangements, and often the way we work is that for any given customer there would be a certain amount of quick turns that we would do for the customer during any week, let us say, and the rest would be what we would call standard leadtimes.

But on FR-4 product, for instance, you know quick turns would be as little as 24 hours and standard leadtimes could be up to a couple of weeks. We manage this with our customers very very actively though. There is constant interaction back and forth with our customers on how we can move something around. We will take this off the schedule and put that on the schedule based upon the dynamic additions of their business. So we don't really have like quoted standard leadtimes that we would just be able to refer you to.

It is a very dynamic process. We are on the phone all the time with all of our key customers trying to manage manage manage. So that is their situation change because again it is quite dynamic. They can shuffle things around, move things around, pull something in and push something else out.

The thing we have been really focused on also more recently is they are bringing our leadtimes down on our more high-tech products because that is where we got into trouble. Murray commented that one of the reasons the SG&A was up is because we had extra freight costs, and that is really just a band-aid. In other words, we will put something on a plane rather than have it go by some other means or we will have to partial ship, cost us a lot more money. But that is really mostly related to our high-tech products where the leadtimes have gotten out to the point we're not comfortable.

It's not a good thing either because the company -- as I think you know, we really try to focus on technology, and it does not help very much to introduce new product and with everybody all excited about including the OEMs and then tell a customer it will take you six weeks to get it. So there has been a lot of attention that we have paid to bringing our leadtimes down overall in the high-tech area.

But we cannot just give you a number because it would be misleading to do that because it is different for each customer. We have different arrangements for each customer, and even then it is not -- it would be misleading because the real where the rubber meets the road is the dynamic daily and hourly interactions back and forth with the key customers helping manage their needs.

I understand that. I am just trying to gauge is it in terms of days or weeks that we are dealing with?

It would be in some cases -- we're trying to move it more and more and more of the product into the days category. Some would be in some cases the weeks, but those are the cases we are not happy about and trying to squeeze down.

Just so you know, I don't know if we have discussed this previously, but one of the things we are doing, which is helping a lot, is moving production from our Neltec facility in Arizona to New York and California because New York and California have very significant available manufacturing capacity where Neltec really does not. That has been one of the key problems for us is that Murray mentioned that the high-tech business is quite strong, and traditionally we have handled most of that out of Neltec. Even though we opened up our Neltec North plant about six or eight months ago, we still have been stretched pretty thin on manufacturing capacity.

Thank you.

Doug Radish (ph), Brookside Capital.

I was just curious about your speculation about inventory build. Not to beat a horse dead, but a number of the industry analysts that cover your space have done a lot of work looking at all the contract manufacturers and OEMs that would be your customers, and their charts show that inventory days at your customers are at all-time lows. So in the context of that data how could there be inventory build?

I don't know. I'm not sure. I'm just telling what our opinion is. Now when you say they are at all-time lows, I think that could be compared to what their business volumes are. The industry has gone through a pretty incredible contraction in the manufacturing industry, electronics manufacturing industry.

I'm talking about inventory days as a measurement which captures --

I cannot explain that. I think upfront we said we might not be right. We are also talking about a very current event, so I am not sure how current that information is. But you know I'm not going to debate thing. We may not be right. It is just that when we look at the situation and we hear the anecdotal stories which are not completely consistent, I got to tell you to that.

Is there some chance -- is it possible that there is some demand softness?

That is not what I think. That is not what I am hearing. If we are wrong on that score, then fine. We are not perfect at this, but that is not our opinion and that is not what we're hearing.

I understand. Okay. I just wanted to push you a little bit. I appreciate it.

(OPERATOR INSTRUCTIONS). Steven Fox, Merrill Lynch.

I was wondering if you could just go back over some of the seasonal trends that you could anticipate? Is it possible that what you're experiencing now is a seasonal softness in demand and that given a lot of your end markets are sort of back-end loaded for the year that it would remain soft through the summer and pick up later on?

Yes, it is possible. And you know, I think this is a little early, you know, in other words June, a little early for our seasonal patterns. But the problem is we have not had a stable market for so long it is hard for us to really remember even what a normal summer seasonal pattern is.

I think we have made comments recently and I will stand by those by the way. I think maybe in the (inaudible) or elsewhere we believe the industry has fundamentally changed. With this last cycle, it was so devastating that the industry is not just coming back from a normal cycle. So what will be interesting for us to try to figure out is as the industry reemerges from this depression, and I don't think that is an exaggeration by the way to use the D word, what new patterns will arrive is because the patterns of the industry of the late '80s -- sorry, late '90s and 2000. I'm not sure that we could look to those patterns and assume that we are going to go back into those patterns.

So I've got to tell you that I think we are a little bit in unchartered territory here. And you know what? That is a good point. It could prove to be a seasonal thing, and we could end up being wrong. We're still saying this is our opinion, but I think we have to be real open and say, we are not actually sure we are right either.

And then one last question. Could you just comment on pricing for your products? How it has trended in the last few months and how you expect it to trend in the next several months?

For those of you veterans on our conference calls, you know that we don't discuss specific pricing related to the raw materials we purchase or our selling prices and that we have private and special arrangements with each customer. We don't have any standard pricing, just like we don't have standard leadtimes across the board as an example.

But I guess I would say as a general matter, we have been over the last few years even we have been very tough on pricing. We do not look to run our business or grow our business or hold market share based upon pricing strategy. We try to avoid doing that. So our company is a much less proactive company when it comes to pricing.

When the industry is getting hit hard or down, we don't go jump in and try to price down to maintain share. We don't believe in that.

And the flipside is true as well. When things are getting a little better, we're not the first to run out there and try to push through price increases. Our pricing philosophy is to be a long-term player, which can supply real value and really help to our customers and really help them succeed. We don't really look at our product as commodities that should go up and down like pork bellies. But I guess if you think about it, the best I could do for you is that there is not a significant -- the pricing is not a significant factor at this point in time, and the selling price is in our P&L.

Shawn Severson, Raymond James.

I wonder if you could maybe give a little color on the broadness of the slowdown or inventory correction, however you want to label it? Was it real specific with just a couple of customers, or would you characterize it as across the board slowdown?

It is more than just a couple of customers, but it is not across the board. Less so on a high-tech area, and really the high-tech area is fairly strong at least today. But I would not say it was just a couple of customers at all. I think it's a little more broad than that. And as we indicated previously, we see it in all three geographies as well, which has been surprising considering that a lot of the roads are leading rather to the same road, meaning the same end customers.

Do you feel as you look at the different products, the materials themselves, do you have a pretty good idea specifically of what applications and what customers those are going to? Is that fair to say?

I think so. When it comes to end customers, we don't have detailed current information down to the last sales dollar. We're just not in a position to have that kind of information. But I think we have a pretty good feel as to where the product is going in terms of end markets.

I just wanted to touch on the lead time issue again. I know it's kind of a customer by customer basis, but generally if your typical customer came to you for upside today, let's say, is it easy to facilitate? Were you talking just a couple of days? I know you can dropship stuff or however it needs to be done. But I mean are they getting to you with more cash that give you a six weeks or eight-week forecast that you can kind of depend on? Are they really coming back every other week or so?

No. We have not been living in a world where there are dependable six or eight-week forecasts for as long as I can remember. Now that is not blaming the customer. We do receive four-week, six-week, eight-week, whatever we want, forecasts from our customers often. We just are in their MRP. We don't even ask for it. Just electronically we know everything which the customer knows.

So that is not the problem. It is not that we are being -- the customer is not being opened with us generally. The problem is that their visibility is very poor. So, yes. We will get them four or six or eight week depending on whatever. It could even be more than than depending on the customer, but it is subject to lots and lots of adjustments all the time. So it gives us a little bit of health and prospective. But really we go into each week not really having great visibility on what will be happening over the next couple of weeks.

Then just one last question. If we look back to where things were pretty hot for the board business earlier this year, or even just a couple of months ago, do you think that there was a sense of urgency in the board business whether they were concerned about shortages and may have been building up inventory at that point? Were they not concerned about being able to get product from you?

(multiple speakers) -- a generation of these kind of cycles, these ups and downs is that people, their emotions swing back and forth. I did think I commented before that I believe people in our industry still do remember what happened a few years ago and they haven't forgotten about that. So I think there is a lot more -- what is the term? Like, sobriety or something? Just thinking about what we're doing rather than running of and going wild here. So if this is any kind of inventory thing, I don't think it is an extreme situation.

Your question was?

If you look back a couple of months ago, did you get that there was maybe a little more of a sense of urgency from customers in terms of (multiple speakers) shortages or they want to make sure they get stuff from you?

Sorry. Yes. I think we have always -- we never got on board with the -- there were a lot of people in our industry who were coming out with extremely positive announcements and outlooks and estimates earlier in the year. We never got on board with those people. We were questioned, well, how come so and so just reported last week; what is wrong with you?

You know we have been around a little bit longer than some of these other guys, and we have seen all the ups and downs. Literally we have seen them all because I think the electronics industry was born in 1959, wasn't it? We have been around since 1954. And so I think we are a little more likely to have a little more ground in what we do. And so there may have been that.

I think you might be hitting on something. Earlier in the year maybe some people were getting a little bit overly optimistic, and I think you probably saw it also with some of the estimates that went out there as well. It's all part of the same kind of mindset, right? Everybody gets a little too bit excited. So there may have been some of that.

But like I said -- I just want to keep going back to this point -- I don't think it is anything as extreme or not even the same category as to what happened several years ago where the industry just basically lost its mind in my opinion.

Dave Miller, Tradition.

I just wanted to know if you could remind us how tied in are your IT systems with your customer base whereby you have an idea of what inventory looks like on a daily or weekly basis?

It is not always just a simple IT tie-in. Sometimes it is. It depends on what kind of (inaudible) the customers have, of course. But very tied in. We have very good knowledge -- and let me talk particularly in North America -- of what our customer's inventory situation is. If we did not, we just would not be able -- if we did not have that kind of openness with our customers -- I am glad to say to our customers credit really we do, and it is a lot of trust there -- we would just not be able to service them very well at all. You know, if the customers were playing things close to the vest, we would just continually be in a state of getting blindsided and we just could not -- we just would not be doing a very good job.

Okay. And then what percentage of your business goes directly to the PCB fabricators versus how much goes through distribution?

We don't sell very much to distribution. We have actually a significant distributor in North America. But we have never really been a company that has been oriented toward selling through distributors, so it is pretty insignificant. Like I said, there is one customer, which is a distributor in North America, a really good customer. We have been working with them for two years, but we have always had a philosophy of focusing our business towards a direct sale.

And both the direct sales method and through distribution you have seen this kind of a little bit of slowdown in June?

I don't really want to comment on the distribution side because there's just really one customer and I don't think it's (inaudible). But I think it's more on the direct side frankly.

(OPERATOR INSTRUCTIONS). Paul Krueger (ph), Situs Investment Management.

In a downtick in volumes going into the summer, what type of gross margin impact will it have given your utilization rates will drop?

Really, that is obviously a key question, but we don't have an answer for you on that. It really depends upon so many different things. It will depend, of course, on how much. Let's say this current business volume persists throughout the quarter. We are not saying it does. We probably would be able to back into a number, but there is so much uncertainty as to what the business levels will be that it is very difficult.

The other thing that is really key here is where the business is, you know. Is it in high-tech? Is it in more standard product? I think I mentioned to you the high-tech business continues to be pretty good. We don't see as much of a change there as compared to the FR-4 business.

I apologize. Could you just explain that more? Maybe I don't understand. You are basically saying some of your high-tech customers are fine, but the FR-4 customers are seeing a slowdown?

It is not broken down by customer because we have customers which purchased both high-tech products and FR-4 products. We're saying that the FR-4 side of the business seems to be a little slower than the high-tech side of the business. The high-tech side of the business doesn't seem to be changed very much at this time.

And the end application for the FR-4 products?

Well, the applications could be the same for instance. They could both be going into a telecom system, and ironically your question is, well, how could this be? There could be FR-4 as well as high-tech circuit boards, which go into like a sophisticated telecom type system. And also to make it even more confusing for you, there are sophisticated circuit boards, which are called mixed Dielektra circuit boards, which have layers of FR-4 and layers of high-tech product right in the same circuitboard.

You are right. I am confused. Thanks.

Is there something I could quickly try to help you with, or have I just totally confused you?

You are highlighting -- okay -- you're being very open. There is some slowdown in your business, and you have even highlighted in which part of the business it is. I'm trying to figure out if you had this conference call, say, two weeks ago, would we be having this discussion, or --?

That is a good question. I don't have an answer for it because, you know, we probably would not be talking about something like this after one week of results in our own business where we see the topline and the bookings change. I don't know what the number is, but it is a judgment we made, and you know it has been the month of June here and we felt we'd talk about it.

And just so you know, in terms of the difference in bookings and topline, there is very little difference because our leadtimes are so short. In some cases, the way we work with our customer is there is no difference because there is an arrangement under what your customer will just pull something from inventory. And at that point, there is a booking and a sale at the same time. So there is no difference in timing between our -- often in any case between our bookings and our topline sales.

Okay. I will follow-up. Thanks.

Alvin Hoffman (ph), Boenning & Scattergood.

I missed the percentage of business that is U.S. and foreign.

For the high-performance materials?

Overall.

Just a breakout, a geographical breakout. North America in --

Okay. (multiple speakers)

I don't think we discussed it.

I may have missed it.

No. (multiple speakers)

You are still sharp, Alvin. 55 percent of our sales were in North America, 16 percent Europe and 29 percent Asian.

Okay. Now in the U.S., how much of that was FiberCote, or is that not included in this?

We don't breakout any one of our business units, but FiberCote is part of the North American operations exclusively. FiberCote is doing well, and we are pretty happy with FiberCote. They are really not seeing these trends. This is I think really more related to the electronics industry, and that is not FiberCote's real market. So FiberCote continues to do nicely.

Doug Radish (ph), Brookside Capital.

It was answered. Thanks.

Shawn Severson, Raymond James.

I wanted to touch on the issue. I know you guys don't really give a book-to-bill or talk about it that way, but could you help us understand the size of the slowdown and the magnitude of the slowdown in June? We only talk in a couple of percentage points?. I know you said it is not a major thing, but I'm just trying to understand what that means in your mind when you say it's not a significant change. Is it a couple percentage points down versus a run-rate you would have seen in May, or is it more like 10 or 15 percent?

I think that we're going to not quantify at this point. There have been a lot of questions already about would we even have brought this up if this was a couple weeks ago. We don't know. We think it's the right thing to do to bring it up because we feel that you would want to know about it. But this is such a short-term event that I think it would probably not be helpful to start quantifying it.

And then the next question is, what do we compare it to? Are we talking about sales bookings? I think we would probably do more harm than good by trying to be more specific. So for now I think what we will do is leave it in terms of describing it in these more subjective (inaudible) and numerical terms.

Thanks. We do appreciate the information. Just maybe to put it into perspective, it certainly was not big enough to make you question your own assumptions about the underlying demand trends? Is that correct?

That is correct.

Okay, so it did not scare you very much?

No. We are not scared at all, and frankly we are spending more time -- and I'm not complaining about it; it is just a fact of life -- discussing this event right now than we have in the last couple of weeks because we evaluate, we try to figure out what it is, and then we keep running our business. We are not even scared a little bit. But nevertheless we understand our investors would be interested in this kind of input, and that is why we are sharing it with you.

Paul Krueger (ph), Situs Investment Management.

One last question. What is the split between FR-4 laminates and high-tech laminates in terms of volumes or dollars or whatever you want to communicate?

Sure. (inaudible). In terms of on a worldwide basis, we have 92 percent of our worldwide sales are high-performance products.

I think we are being asked for a different split, though, because we are not talking FR-4 versus high-tech, and we have not really discussed that kind of split before. I think really what we should do in the future is we probably should start talking about that because the definition that I guess is used by the IBC, which is our trade organization for high-performance, is really FR-4 product that has a we call it TG or glass transition temperature over a certain amount. So it is a more thermally resistant type product. But nevertheless we consider that to be FR-4.

So I think what we ought to do is starting maybe next conference call is start to break it down between FR-4 and real high-tech product because we have not -- even though we talk about it a lot, the information that we have provided you with is a different kind of information.

I mean is the ratio 2 to 1, 1 to 1, 3 to 1?

I do not think it is proper to do that. We are not in a position to give you the breakdown, and to say anything other than that what the actual breakdown is is not correct.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. I would like to turn the call back over to Brian Shore for any additional or closing comments.

Okay. Well, thank you, operator, and thank you everybody for spending the time with us this morning. It is always nice to talk to you, and we really do appreciate your questions and your input very much actually. And you know where to find us. If you have any further questions or follow-up, please feel free to give us a call. And have a great day and have a good summer also to the extent we don't speak to you between now and the end of the summer. Take care.

That does conclude today's teleconference. Again, thank you for your participation. You may disconnect at this time.