Park Aerospace Corp (PKE) 2004 Q2 法說會逐字稿

Ladies and gentlemen, please standby. We are about to begin. Good day everyone, and welcome to the second-quarter 2005 results conference call for Park Electrochemical Corporation. The 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. Mr. Shore, please go ahead sir.

Thank you and welcome everybody to our second quarter conference call. I have with me as usual Murray Stamer, our CFO. And we will do what we always do. I think we've probably done -- I don't know, 50, 60, 70 of these calls by now, which we will start with some introductory remarks. Then we will go into our question-and-answer section of the call. We will start with Murray, and Murray will offer some financial analysis on the second quarter.

Okay, thank you, Brian and good morning. 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 describe results of operations based on non-GAAP financial measures, as well as results determined in accordance with GAAP. We believe that the disclosure of non-GAAP operating results as a supplement to GAAP results will assist the listener in assessing the Company's performance and prospects. I would first like to summarize the financial information included in the press release for the second quarter and six-month period ended August 29, 2004 of Park's 2005 fiscal year ending February 27, 2005.

Net sales for the second quarter ended February -- I'm sorry -- August 29, 2004 were $51.1 million compared to net sales from continuing operations of $43.6 million for the prior fiscal year second quarter. Net earnings for the current fiscal year second quarter were $2.9 million. The Company's P&L was not impacted by discontinued operations or special items during the first or second quarters of the 2005 fiscal year.

Net earnings for last year's second quarter were $19 million, which included a pre-tax gain of $33.1 million related to the Delco lawsuit, pre-tax realignment charges of $6.5 million and $1.9 million of losses from discontinued operations and of taxes. As a result, net profit from continuing operations before special items was $1.1 million for last year's second quarter. Diluted earnings per share were 15 cents in the current year's second quarter compared with diluted earnings per share of 95 cents in the prior year's second quarter. Diluted earnings per share from net profit from continuing operations before special items, were 15 cents for the current year's second quarter compared to 6 cents for last year's second quarter.

For the six-month period ended August 29, 2004 net sales were $109.6 million compared to net sales from continuing operations of $87.9 million for the prior fiscal year's six-month period. Net earnings for the current fiscal year's six-month period were $9 million compared with last year's first six-month period net earnings of $10.6 million. However, the prior year's net earnings included a pre-tax gain of $33.1 million related to the Delco lawsuit, pre-tax realignment charges of $8.4 million and $8.8 million of losses from discontinued operations and of taxes.

Net profit from continuing operations before special items was $500,000 for last year's first period. Diluted earnings per share were 45 cents in the current year's six-month period compared with diluted earnings per share of 53 cents in the prior year's first six-month period. Diluted earnings per share from net profit from continuing operations before special items were 45 cents for the current fiscal year six-month period compared to 3 cents for last year's first six-month period.

Now I'd like to briefly review some of the significant guidance in our second-quarter P&L. Comparing the current fiscal year's second-quarter sales to last year's second-quarter sales from continuing operations Park's North American sales increased 20 percent. European sales increased 48 percent, and Asian sales decreased 2 percent. During the 2005 second quarter, North American sales were 58 percent of total sales. European sales were 17 percent of total sales and Asian sales were 25 percent of total sales compared with 57 percent, 14 percent and 29 percent, respectively for last year's second quarter.

Sales of North American high-temperature materials increased to 95 percent of laminated and prepreg materials sales for second quarter fiscal 2005, up from the 93 percent level in the second quarter of last year. Barring high-temperature material sales were 92 percent of foreign sales for the current year's second quarter compared to 86 percent for last year's second quarter.

On a worldwide basis high-temperature materials were 94 percent of total laminated and prepreg material sales for the current year's second quarter compared to 90 percent for the second quarter of the 2004 fiscal year. In addition to the breakout of the sales and materials classified as high-temperature materials, we would also like to add the breakout of the Company's sales of high-performance, non FR-4 materials.

Sales of North American high-performance materials increased to 44 percent of laminate and prepreg material sales for the second quarter of fiscal 2005, up from the 40 percent in the 2005 first quarter and 37 percent level in the second quarter of last year. Foreign high-performance material sales were 30 percent of foreign sales for the current year's second-quarter, up from 25 percent in the fiscal 2005 first quarter and 19 percent in the second quarter of last year.

On a worldwide basis high-performance materials were 37 percent of total laminate and prepreg material sales for the current year's second quarter up from 33 percent in the fiscal 2005 first quarter and 26 percent in the second quarter of last year. The gross profit for the second quarter of fiscal year 2005 was 18.4 percent versus 13.6 percent for last year's comparable period.

This increase in gross profit was attributable to the higher volume of sales, the improved sales mix of high-performance products and the Company's cost containment measures. Although selling, general and administrative expenses increased by $300,000 compared to last year's second quarter, SG&A expenses decreased as a percentage of net sales to 12.7 percent for the current year's second quarter from 14.3 percent for last year's second quarter. The decrease in SG&A expenses as a percentage of sales in the current quarter compared to last year's comparable period is mainly due to the increase in the sales volume during the current quarter.

As a result, pre-tax operating profit from continuing operations before special items was 7.2 percent of net sales in the current year's second quarter compared to 1 percent for the comparable period in the prior year. The effective tax rate for continuing operations of 7.5 percent for the current year's six-month period was fairly consistent with the effective tax rate for the prior fiscal year of 8.7 percent.

Turning to the balance sheet, Park's working capital at August 29, 2004 the end of the second quarter of the 2005 fiscal year was $205.8 million compared to $197.5 million at February 29, 2004, the end of our 2004 fiscal year. Cash and temporary investments amounted to $199.4 million at the end of the current year's second quarter compared to $189.2 million at the end of the prior year. As we have in the past, we invest the available funds on a conservative basis in short-term, fixed-income securities and money market funds.

During the current year's first six months, the Company had capital expenditures of $1.7 million and depreciation of $5.1 million. Lastly, stockholders equity was $250.8 million at August 29, 2004 compared to $243.9 million at the end of the prior fiscal year. This increase in stockholders' equity was the result of net earnings during the current fiscal year's first six-month period. Stockholders equity per share increased to $12.61 per share from $12.33 per share at the end of the prior fiscal year.

Thank you, Murray, and this is Brian again. Let me see if I can add a few things just to help add a little more perspective. First of all, at the end of the first quarter we announced, and I think we also explained in the conference call that we felt that the market was slowing down a little bit. We really were reluctant to quantify by what amount and the timing we did not, but we did indicate -- I guess this was probably late June I think when we would have had our last conference call that we felt things were slowing down, and that was a pretty recent event. And really didn't affect the first quarter, really started at the beginning of our second quarter meaning again at the beginning of June.

And it turns out that we probably were right about that with the benefit of brilliant 20/20 hindsight and the business levels during the entire second quarter meaning the months of June, July and August were about the same, and they were consistently lower than the business levels in the first quarter, which are the months of March, April and May. So again I guess we probably called that right; I think there were a lot of people that were a little angry with us at the time saying we're too negative and things like that, but I guess we were talking about something that was true.

In any event, so what does this mean for the future? And as we indicated in the press release, we are not really sure. It is really difficult at this point to tell, we just don't have enough information to report whether market is going to recover, let's say starting after Labor Day because that is a date that people would often target for the market improving a little bit. But we only have three weeks in the books since Labor Day. So I guess the best we can do is say maybe it is a little bit better in the third quarter, meaning the months of September, October, November better than the second quarter, but we don't have a lot of conviction about that; that kind of thing could just kind of go away on us and in the course of two days.

But based upon what we see so far it looks like maybe a little better, and I think we should underline the word little. As usual we have very little visibility. We're just doing the best we can and to help you out. But we do not want to over commit or give you the impression that we have more confidence in these indications and this input than we really do. So that is just a comment on the general market of course, and that would really be a global comment which would affect Asia, Europe and North America.

In the press release we also referred to business adjustments which we have very recently made principally in North America, and we've had redundancy totaling approximately (indiscernible) people. We of course don't like really reporting this kind of news but we also need to do what is right for the business. As we explain over and over again, we have had these kind of incidents, we make these decisions based upon what we believe is in the long-term interest of the Company. We'll never ever do this kind of thing to try to goose up a quarter or two. That is just not who we are. I think you all know that by now; you would not be investing in our Company if you were looking for that kind of management. But we felt this was in the long-term interest of the Company to do this, and again mostly in North America.

And that is a third-quarter item, actually. This all was done in the first week of the third quarter, and the way the rules work is that you are not entitled to book these kinds of expenses until you actually incur them when you're talking about redundancy costs. The total charge in the third quarter will be about $600,000, 600,000, and the improvement in terms of bottom line improvement from this change should get us somewhere to $2 to $2.5 million per year. It should be about $2 to $2.5 per year going forward, but I would caution you that I don't think we're going to see the full impact of that in the third quarter because it will take a month or two to settle in with the adjustments.

This is not about any kind of withdrawal from the market, by the way. It's not about going to customers and saying look, times are tough so we expect you to accept a lower level of service or a lesser level of service. It's not what it's about at all. It's about focusing our business, and it's about having the resources we think we need for the business levels which we need to serve. We are not really looking to grow our FR-4 business in the Western markets, Europe and North America anyway. We are looking to take very, very good care of the customers that we already have for those products, our existing customers.

Our growth, the growth we're targeting is really in the high-tech area and Murray kind of talked about the percentages. And I don't know if you noticed but in Murray's presentation we are talking about a new metric. We've always talked about high TG, high-temperature products, but it is becoming not very meaningful because it is over I think it is 95 percent of what we do now. So now we are giving you another breakdown which is FR-4 compared to high-performance products, which are more exotic or elegant products, let say.

So that's really a focus area for our company everywhere, but especially North America and Europe because we really don't believe that there is much of a future for the more standard FR-4 business and at least in terms of a driver for our future. What is going to pay for our future? What is going to pay for expansions? What is going to pay for R&D? We don't think it is a standard business; we think it is the more high-technology, elegant type business.

So those are the numbers, and I guess I'll let our analysts take it from there. We talked about the charge we expect in the third quarter. We talked about the benefit going forward although I would not want he put the full value of that in the third quarter. And that was an annualized benefit we talked about, the 2 to 2.5 million pretax of course, that is not a benefit for the quarter that is a benefit per year.

In terms of it may be getting a little better, we are talking about the top line. The bottom line, we will let the analysts work on that. You guys have gotten pretty good at doing the backing into the bottom line number. So what else we talk about? Maybe let's talk a little bit about some of those things that we continue to do that you are aware of but we'll just give you quick updates.

You know we are building a plant in China, in southern China in the Zuni (ph) area, and that is pretty much on schedule. We just broke ground recently which is nice. And the schedules that we've given you previously we'll stick to for now; about a year from now we expect the plant to be commissioned.

We have a brand-new treater, which is being installed in Singapore, I think you know about that as well. And we are doing drive runs in the treater now, I think the wet runs are imminent. That is going pretty nicely, and that is a high-technology treater. We would expect to have that in operation in the next couple of months. But really what we are doing there is we're taking our time with it because at this point we are able to hold our own with our existing treaters, the three existing treaters and what we want to do here is not just kind of get the treater in production. We want to get the treater in production at a different level of performance than our other treaters. That is why we spent all the money on these treaters, these treaters are very expensive treaters and we are looking to get the value out of them, we are not just looking to make stuff with them so we're going to take our time, at least that's our plan at this point.

But I think the treater schedule, the bringing up of the treater in Singapore is pretty much on schedule. I think we want to mention this -- just a couple little developments that I will just kind of mention tidbits maybe. We're involved in doing some R&D project work with a government agency in Singapore, and we're pretty excited about that. We've had a long and pretty close partnership with the Singapore government. They've been very helpful and supportive to our company for many, many years. And it is a good place to do business for us anyway. I can only say good things about the Singapore government as a business partner, by the way.

Looks like we are getting a little more traction on a new product we call Dash 12 which is one of our higher technology, low loss products. It's been actually out there, I think we commercialized it earlier in the year, but we had a little difficulty getting the customer to really take hold of it, but it looks like we are getting some traction now, so that's good news.

I think you already know that we have an ongoing focus on RF Microwave, that's an area where we have a lot of interest and an area where we want to grow the business. And I would say as far as product development is concerned, there is some interesting things in the pipeline certainly, we hope toward the end of the fiscal year to be introducing a new product that if we won't get into any more at this point, but it should be an exciting product. If we are successful that will be also a low loss, high speed type product for high-speed digital as well as RF applications.

And I think that kind of rounds things up. I'm sure I missed a few things, but operator, why don't we now goes to the question and answer portion of the call?

(OPERATOR INSTRUCTIONS) John McManus with Needham & Co.

Yes, good morning. Can we assume that the tax rate for the remainder of the year will be at the six month, 7.5 percent rate?

It will generally be in that area, yes.

Can you give us any directional help there about what that tax rate could be the following year?

I can probably give you a direction that I would anticipate it being higher, but I can't be more specific than that. But I think it is really difficult to say. But we certainly do not want to give the impression we are talking about significantly higher. Tax rates have become more and more complex and of course since we are international, we pay taxes in a lot of different jurisdictions, and it really is dependent to a large degree on where we make money and where we do not make money.

Could you comment on startup expenses there for the new treater in Singapore in the November quarter? Would these be material? Would they really show up, or is this pretty much their relatively small expenses involved?

The expenses are noncapitalized expenses are not significant, and I would not recommend the analysts really do anything with that in terms of putting any kind of special number in there for the third quarter.

Could you give us some idea of in the February quarter what kind of capacity you might have available from that treater for the Asian market?

The capacity is significant once we bring the treater up to its full capability. But as I said, we're not really inclined to rush it because we don't want to just make stuff. We really want to drive the performance of this treater up to the highest levels. But we -- let me make it simple for you, just use some simple metrics. We currently have three treaters which we operate in Singapore. This would represent the equivalent of two of the existing treaters which we have in Singapore. I want us to (indiscernible) to full capacity and that's not speculation. This is the exact same kind of treater which we have installed in North America. We have two now in New York and one in California, so we have several years of experience in terms of the productivity levels and capability of the machine.

Then could one assume that by the month of December that you would have production there from that treater?

It really depends on what we want to do. We certainly could. We could do it before then if we wanted to. At this point we are doing okay with our existing three treaters, so we're taking the time to not just rush it into production, but rather to do as much refinement work as possible. And to go into production more slowly. But certainly in my opinion anyway, and there is always curveballs with these things, I got to make sure you understand that we would have no difficulty getting this treater into meaningful production by December if we choose to do so.

And my last question could you comment on your top five customers, what percent they were and were there any above 10 percent and who those top 5 customers might be?

Sure, John. Our top 3 are very consistent, and they are over 10 percent. We have Sanmina, Tyco and Multek. Multek is a division of Flextronics as you know. Sanmina is our largest customer, followed by Tyco and then Multek is the third-largest. To round out the top 5, we have Wus and EIS. And just to give you some additional information, as the top 10 customers were 69 percent of our sales, and our top 20 were 81 percent of sales. And those percentages have been pretty consistent from year to year.

And the top 5, what was the percent of the top 5?

The top five was 49 percent.

Thank you very much.

Let me just add something if you don't mind. Wus, I think you know that Company, they are a Taiwanese/Chinese Company -- they have been a longtime customer of ours. But EIS maybe we don't mention them too much, they are really a good customer and they are not a typical customer for Park as they are a distributor. But the percentage of the mix with EIS is very highly weighted toward high-tech products, and we found as they have been very successful marketing our high-tech products to customers in North America particularly smaller customers that may have more (indiscernible) assignments they are working on or programs where we wouldn't have the capability to service them because we just don't have the capability of servicing 100 different customers, we're not built that way. But it has been a real good relationship. We started with them, I think about three years ago, I don't recall. But I want to really take the time to give them some high marks since we have not mentioned them before; they are a very good customer and we are glad to have them.

Thank you.

Tim O'Toole (ph) with Delta Management.

A couple of things, maybe I could get you to have a little discussion on this. I guess over the last 6 months, 12 months getting pricing probably has been somewhat challenging and maybe you can shed some light on that for your product. But by the same token raw materials including coppers, probably resins, probably fabrics or perhaps fabrics as well, have probably gotten fairly tight and have risen some. So I guess conceptually I am thinking that maybe you guys have gotten squeezed in that equation lately but I've been hearing that pricing for laminates has actually been starting to tick up. Could you kind of walk-through where you folks are at in this whole process? And both historically and kind of concurrently in terms of your ability to pass some of that stuff through or maybe get some of it back, I guess is the other way to look at it.

Let's try to get some perspective, this is a topic which comes up probably in more conference calls than not, and it is a little bit complicated because we don't talk specifically about pricing. That is a private matter between us and our individual customers. We will never announce like you see other companies with a press release we are going to raise prices by 3 to 4 percent, we would never do that. Each customer is treated on a case-by-case basis.

Raw material prices have gone up in the last year. I think that some of the raw material suppliers are really being really shortsighted in their perspective and doing things that are not in the long-term interest to do. It's just my opinion and some are actually not. Some are really thinking more long-term. So we are seeing some segmentation in terms of the attitudes of the suppliers. But in terms of supply, we've been in pretty good shape. We hear about shortages, but we work on our relationships with our suppliers over the long haul. We try to be as helpful as we can to our suppliers. We try to give them as much visibility as possible, and we are never going to be abusive with them.

And unfortunately I hear that we may not be -- we may be somewhat even -- that may not be a uniform way to treat suppliers. I suspect that the competitors who are inclined to be more aggressive or maybe even tend to be a little abusive to suppliers, they have more difficulty when supplies are a little tighter but we have not had that problem. As far as our selling prices are concerned, let me just remind you that our philosophy is not to price our product like it is a commodity, like it is pork bellies going up and down. We didn't bring our prices down nearly as much in my opinion as maybe some of our competitors did over the last three or four years. We just resisted that and resisted very, very aggressively actually. We had a lot of conviction about that and I know we made a lot of people unhappy in some cases but we were very committed to not doing that and providing our customers with more consistency in our pricing rather than bouncing our prices up and down. Unfortunately like I said some of our suppliers share that philosophy and some don't. I certainly like a supplier that is willing to work for the long-term as we are with our customers.

On the flip side we are not as inclined to just kind of be the first one to get on the bandwagon to raise prices when you hear a lot of talk in the industry that prices are going up in Asia or China what have you. And I think that's what people are listening to hear in many cases and jump on the bandwagon; that is really not what we do. We again are looking to continue to build longer-term relationships with our customers. So if we would do anything it would be private between us and our customer. We would not do it quickly, precipitously, and we are not going to be the first to jump on the bandwagon but the flip side is that we're not going to jump on the bandwagon and start hitting our prices either, bringing our prices down. And I think that people have longer memories than sometimes you realize, because when prices are going down some of our customers are more inclined to remember that we did not get abusive when prices were going up. And they will work with us with more long-term consistency in our pricing.

So I don't know how we could be more specific, but I just want to give you some kind of -- a little background philosophy. It is an issue. There are margin squeeze issues but I think we are advancing through those probably pretty well. And my guess is, although I don't know this for sure, is that my guess is better than the average bear, better than many of our competitors. Again our competitors have had a different philosophy generally about how they deal with their suppliers and how they deal with their customers on price.

Let me ask a question that's sort of historical and maybe you can help me kind of understand the dynamics to date anyway a little bit better. If you look 6 months over 6 months, year-over-year, revenues up I think around 25 percent. Can you give me any feel for how much classically that would be price volume and conceptually, I guess, also with you folks mix differentials. Can you give me any sense for how that -- how that breaks down with that 25'ish percent between those maybe 3 different categories?

Well, the thing is we're really not going to get involved in quantifying the pricing side of it, because again that's something that is private between us and our individual customers.

But it's across numerous SKUs.

It's a good question, though. It's a good one, and I would say that it's a combination of all three. It is certainly a lot of mix, maybe a little pricing and maybe a little unit volume, too. But I would think that -- let's take for a second, and I don't know if this will be helpful, let's just take the pricing point out of it, because probably a lesser component (indiscernible) much more mix than unit volume.

All right. That's at least somewhat helpful; okay, good. Now, one of the issues over the last quarter, you kind of touched on it in the prior quarter was that there seemed to be some inventory that had kind of built up in the channel. It actually seems like at end customers or whatever, it actually seems like that is working its way through; maybe it's mostly worked through. Can you give a little perspective on that? And I think Merricks (ph) was talking about a fairly interesting book-to-bill. They may not be a huge customer for you, but their book-to-bill was kind of nicely positive. It seemed to be as we go forward mostly volume for them. But I'm trying to get a sense for kind of the volume pickup and whether you are getting a sense that some of that inventory that had been built up is kind of truly worked through or if there's a little more to go?

Yes, that may be the case as we indicated kind of cautiously at the beginning of the call, maybe the third quarter might be a little better than the second, and we have some very preliminary beginning signs of that, as I indicated. We only have 3 weeks in the books in our third quarter since the beginning of September, I guess. So we are talking about a very small piece of information here. It's a little dangerous to extrapolate off of that, but it maybe true and that would be a logical explanation as to why if it is true that things are a bit little better, why they are. Why is that the inventory that maybe built up three to four months ago might be working itself out. I have heard these things as well anecdotally. I do not think we have any kind of scientific evidence though that this is absolutely the case. There is some logic to it of course, and I don't know how -- what else we can do about that.

Or just I think we explained this before; our book-to-bill is not as meaningful since our leadtimes are so, so short, but we certainly do watch our bookings and our sales very, very, very carefully. And I think you all know this, we actually do a full consolidation of our P&L every week and we have done that for many, many years so we have lots of visibility to all the key indicators of our business on a very current basis.

This is going to be kind of the last one in this sequence here, but you've also over time mentioned you kind of invest for the long haul. You're building Asian capability and Asia capacity; you're being careful about how you do that and where and how you kind of expose the family jewels if you will. And also you're not so much withdrawing, but refusing to invest in certainly the commodity side of the FR-4 part in North America also speaks to that. Could you give me some sense for as you make those and kind of roll through those investment decisions over the long haul, over a full cycle or maybe two, what metrics you use or targets you use for return on assets or return on invested capital or how you kind of reach those investment decisions.

Fortunately we don't tie ourselves to those any kind of Park formula and we're going to look at all of the different factors. Obviously we're not going to make investments unless we think the ROI is, justifies it. And by the way, for every investment we make -- I am talking about $10,000 investment in ROI is required $10,000 capital in ROI is required, and we look to the ROIs very carefully. But we also are fortunate enough to be able to look long-term and make strategic decisions as well. And we are never going to make a decision without understanding what the ROI is, but that is not the only thing we're going to look at.

We are going to look at like I said, the strategic aspect of the decision and it is very, very rarely any more be any discussion of just capacity, it has to be capability and technology, as well. Otherwise it probably is not going to be very interesting or exciting to us. Is there anything else I can help you with because there isn't any hard and fast metrics that we are always going to hold ourselves to in terms of an ROI computation as an example.

I am just trying to get some sense for what our hurdle rate is. I guess the only good news out of that is that the ROI has to have a plus sign in front of it.

We are pretty fussy about that. Some people maybe think too fussy. But we are kind of, I think maybe someone might say we are anal. I don't know many other companies would ask for an ROI on a $5000 piece of equipment, but and you know what -- we are not only asking for it, if it does not look right we're going to push it back.

Maybe I can get some cut of quantitative something back from you. What weighted average cost of capital do you think Park has associated with it, and would you at least on an ROI basis have to exceed that hurdle?

Murray, I don't know if you can answer that question; weighted average plus the capital.

As you know we have no loan, and we look at opportunity cost we invest our funds very conservatively. So we're looking at a 2 percent average return on the funds that we have invested. So we're not looking at our cost of capital as a hurdle for making investments.

Okay, 2 percent. All right. Thank you.

(OPERATOR INSTRUCTIONS) (indiscernible)

I was just hoping you could comment on any potential use of the cash on the balance sheet.

Well, those (indiscernible) questions I must say, and our answer is never that definitive. We always talk and will talk again about the opportunities that we are exploring and we continue to do that. I know that there is some skepticism sometimes from our shareholders because it is really been more talk than action. We certainly have made investments in China and in our plant and equipment, but we also are looking at opportunities to expand into other areas and related areas in our business in electronic materials. And any of those areas could end up using a significant portion of our cash. But we don't have anything in hand. I am not saying we're imminently going to announce something, but we do spend a significant amount of our energy, and we are disciplined about this. We make sure that we don't allow ourselves to get totally consumed, 100 percent consumed with just our day-to-day operation. We probably put 70 percent of our time in that. We would not want to have that 30 percent reserved to be spending some quality time on the future. And some of these things that we are actively considering are potentially expensive. So that's probably the answer you have heard a number of times before, something similar to that. And I know that some of you probably don't feel so great about that answer but that is the truth.

There really isn't anything else that we can offer to you other than the fact that we will continue to invest in our business and build factories and everything else. But in all honesty we don't expect that will be consuming a lot of our cash, because the cash we're generating on an ongoing basis should do a lot to cover those ongoing expenses that just the internal capital investment we make in our existing businesses.

Lynn Cooper. (ph)

I have to confess I don't really know what a treater is.

We should get you a tour of one of our facilities because that is an example of a picture being worth at least 1000 words. A treater is the key piece of machinery that we use for our business. A treater is where we produce something off prepreg, which is the reinforced insulation material that is used to make the copper-clad laminates which are used to make the multilayer circuit boards and that is really where 90 percent of our technology is embedded in the treater operation. This is where all our resin formulations would be involved, and that is by the way, someone alluded to in one of the questions. That is why for instance we are not putting a treater in China at this time because that is again where 90 percent of our technology is embedded and we're a little concerned about whether we can protect it there. But what we should do is arrange for you to visit one of our locations. A treater is probably about four or five stories high. It is a pretty huge piece of equipment and it costs a lot of money.

Perhaps I saw one when I visited the facility in Tempe.

Oh, yes, there is definitely a treater in Tempe. So if you went to Tempe, there is a large room behind glass. It's hard to see that, how big the piece equipment is because like I said it goes up three to four to five stories high, you would not be able to see that from your vantage point.

Okay. Thank you for that description of the treater. My question was you have three existing treaters in Singapore and you are working on one additional one. Will there be in the foreseeable future a need for four treaters in that area?

In Singapore I would not say, when you say foreseeable, I would not say in the next year. We do have a couple of treaters in reserve actually that we could install in Singapore or if we get more comfortable with our ability to protect our technology even in China. But this is going to increase our treating capacity by 60 some odd percent. When you figure that we have three and its equal to two, that is a big jump in our capacity.

Okay, so when are you going to use all that capacity?

When are we going to use it? Well, I don't know. We are not sure about that. But we certainly want to have it and I just want to go back and emphasize that we are not looking at this just as additional capacity. We're looking to really get the very most out of this machine; we're looking to get elegant levels of quality and consistency in this machine, really levels that have not heretofore been achieved in our industry. I know that is a tall order, but that is how we think. We want to think big. Hopefully there will just be lot more, to bring it to the table, a lot more than just being able to make more stuff.

That sounds good. Thank you.

(OPERATOR INSTRUCTIONS) Michael Ellis with Thomas Weisel Partners.

Good morning. I was hoping you might be able to offer a little bit of perspective; I know right now there is a fair amount of lack of visibility out there. But if you contrast kind of where we are now versus previous cycles I would be interested to hear your opinion of where we are right now.

Boy, that's a real big question, because it is so hard to say because everything is so different. I think that really the world has changed, the world as we knew it. And it is really hard to figure out where we are because I think the game has changed so much. So much of the standard technology particulars has exited the western market and gone to Asia, -- boy, that's a tough one. I don't know. It is really hard for me to come up with a good answer. We kind of play it really, really -- we just watch very carefully and we make adjustments and movements based upon whatever we feel at the time. But my best guess is that we are maybe trending upward a little bit here, but I don't feel like any kind of indication at all that things are about to explode in the electronics industry globally. I don't get that sense but you know something, it could happen next week or something else could happen next week, and I wouldn't even know it was coming in some cases. As you point out in the beginning visibility is not that great. I think for us, though, the key issue is to drive technology, not hang around and wait for the market to get a little bit better or not. That is where our future is. And even if the market is a status quo market, that's okay with us. I do not think the market is going to deteriorate very much. I don't believe that.

But we are not -- our business plan for the long term for the future is not dependent upon any kind of very impressive growth globally in the electronics industry. It is dependent upon what we do, not what the outside world does. Obviously we want to take control of our own future. And our future is based upon our ability to drive technology, which of course is easily said. The question is are we going to get it done and you have to stay tuned to see whether we will continue to be able to drive technology as aggressively as we want to.

I appreciate your perspective. Do you feel less comfortable now with your ability to predict your business going forward and if that's the case, how do you improve upon that situation?

I think it is the visibility. It is just so poor because you started the question by asking what -- started this part of the discussion by asking what part of cycle we are in, and it is just feels like it's a different world. It's hard to relate to anything that we know in the past, uncharted territory might be a good term. What we do is we do the best we can. We're very plugged in, we are very plugged in globally which helps a heck of a lot. It's not like we only see part of the picture, like okay we know what is going on in North America. And then people say, no everything is going to Asia, but we really don't know because we are not in Asia. Well, we see the whole story. We know if a program is evaporating in North America and going to Asia because we see it in Asia, we will see it reappear there.

So I think our visibility is as good as it could be because I think we are pretty well tuned in. But nevertheless, it's very difficult to predict. So what we do about it? I don't know what we can do about it because I don't know how it can improve on being more tuned in. But what we are doing about it is what I already said, which is not depending upon the market exploding or having any kind of rapid growth. What we do about it is we drive technology, and drive technology and drive technology.

Thank you.

John McManus with Needham & Co.

You indicated that revenue in the Asian geography there was down slightly. Is this a function there of you're not being able to supply demand in Asia? And are you in any way supplying Asia there from other geographies, other plants and other geographies?

The answer isn't, I am glad you brought that up, because I don't want anybody to misinterpret that. The answer is no. Our business levels in Asia are not down because we don't have enough capacity to take advantage of the opportunities. And the answer is also no, we're not supplying the Asian customers with product made elsewhere. We were working on that over the last six, eight months but we had a lot of difficulty getting North America in particular, factories, our North American factories qualified with the Asian customers. And it's not that they are better or worse.

It is just different -- there is a significant amount of engineer reluctance to take that risk of -- North America customers are much more open as to those things and in Europe and Asia not quite as open. My comment though on our Asia business being off in the second quarter is that you have to remember again what market we're serving in Asia. We are serving the high-tech market which feeds back into many of the western telecom and networking OEMs that we would be supplying through our North America and European operation as well. So in some respects all roads lead to Rome. We are not supplying it to the typical Asian market which would be into PCs and cell phones and high volume or commodity type product. We just do essentially zero of that.

My sense is that when things start to slow down a little bit and maybe because of this inventory, overbuilt as the prior caller was asking about that the big OEMs pulled back from Asia first because that's where their volume was, right? In North America they kept things going a little bit more because that (indiscernible) more where the prototype work was, the new product was for volume jobs. But in Asia when things slowed down they want to reduce inventory. The way to do it is to pull the volume work and that is where reduced their volume work and that's where their volume work is now in Asia. So that's my take on it. But you didn't ask the question but I will answer it anyway. It is not a matter of any kind of market share loss that I'm aware of. I don't think that is the story at all. It is so we would hope that the Asian business would come back a little bit and as I indicated earlier we're starting to see some beginning signs of that. We don't know what that all means.

Just so you know, I probably should say this as well. We talked about adjustments in North America and (indiscernible) I should cover. We are not thinking we have lost marketshare in North America; that is not what it's about. As a matter-of-fact its our opinion we picked up market share in North America in the last few months. So that is not what's going on here so even though we are not looking to grow our FR-4 business in North America, we do not believe we have lost any marketshare we have picked it up. And what I mean by that is we picked it up with existing customers; we are not looking to take on new FR-4 accounts really at this time.

But is it true that once you have the additional treater up and running that you have a lot more capacity and flexibility to go after additional business there in Asia?

That's true. Now that was a factor, John, let's say in the fourth quarter and the first quarter that our leadtimes are stretching out because our manufacture capacity was tight. In the second quarter with the business falling off it was less of an issue. But certainly if business levels return to where they were let's say six months ago in Asia, that would once again become a factor because we were very tight in and out, and frankly stretching leadtimes to the point where customers were a little bit unhappy with us. This additional capacity would -- it is very significant (indiscernible) additional capacity. I think you all know that we already have the capacity in the other manufacturing departments in the facility in Singapore. It is a treating area which is the (indiscernible).

Could you educate us as far as the high-performance non FR-4 business in, and I'm talking about the idea of the cost of manufacture, the type of the average system prices that you would get versus say FR-4? And what kind of demand is out there for again these non FR-4 high-performance materials.

The demand has been good. I think we might have discussed that previously but traditionally we produced these products in the U.S. anyway, in Alltech (ph) in Arizona. We transferred the manufacture of these products from Multek to New York -- (indiscernible) New York and (indiscernible) California, just because we don't have the capacity to make these products in Alltech anymore, so demand is quite good. And this is where we are able to make some money and certainly we are not going to apologize for that. And the margins are good. We are not embarrassed by them, but the margins are good in these products and the demand has been better.

As I said, we've had to -- it's a good thing but we've had to as a matter of necessity -- transfer the production of these products from Nelltech (ph) to other locations just so we are able to keep up. And that is something we hope to continue to do. It could be 3 to 4 years from now that all of our laminate plants in North America are really producing primarily the higher tech products. And that is something we are doing in Europe as well, and Europe is a little bit slower technology; when I say Europe I mean the market in Europe, but we are trying to push it. We're trying to go after that business and just push the high-tech end in Europe in my personal opinion is that more chaps (ph) that get on the high-tech bandwagon in Europe have a much better chance of having a future than the poor chaps who do not.

And one accounting question. The charge you're taking here in the fiscal third quarter as far as redundancy goes, is this going to be passed through the P&L or is this an extraordinary charge?

It will be passed through the P&L but what we will do for clarity just so that you can understand it is we will include that as a special item in the press release for the third quarter so that you can see what the results of operations would be without the special charge.

That's what we've always done, I think in the past, John we break this out as we call a special item or that kind of thing.

Thank you.

But we will do that when we report our third-quarter results. I am Murray, did you have something else on that.

No, you covered it.

Just so you know, that's been our practice for years. There is nothing new there. Operator do we have any other questions?

Jerry Shore.

I am a new investor in your company. My first time on this call. The thing I find surprising is that you haven't discussed the fact that with a market that is somewhat shaky during that second quarter, that your customers were doing their vacation activity and therefore reduced their demand. So that if I integrate something I know about which I may be wrong about, your second quarter was quite good. Am I mistaken about summer vacations?

No, absolutely not mistaken. So that's a good point. But I don't think that's the whole story. You know, we saw the business slowing down at the beginning of June and the business levels were consistently slower during the second quarter. Part of that could be explained. That is a good point by the (indiscernible) and vacations which are up I guess most significant in Europe. And then that is so I think that's why we're saying, everybody is kind of wondering what's going to happen now since we are past Labor Day. Because in addition to shutdowns business levels are just a little less robust in the summer -- people on vacation or holiday or mentally they are in some respects. So that is why as I maybe did not explain this properly, that's why a lot of people in our industry started in August started to really target and get their, start to focus on Labor Day to see whether things are going to come back. So there may be partly a seasonal factor as well. But I do believe that in addition to that there is something else going on. And that may have been this inventory buildup to one of the other callers had raised, I don't know. But it's a good point. I am glad you raised it. And it's nice to have optimists on our calls from time to time. Operator, how are we doing?

We have no further questions on our roster at this time; therefore Mr. Shore I will turn the conference back over to you for any closing remarks.

Thanks again, we actually spent a whole hour on this call; so thanks for all the good questions, and particularly that last question from one of our new shareholders. It was nice talking to you. Murray and I enjoyed it as always and you know where to reach us if you need to. And we look forward to talking to you again soon. Have a great day. So long.

And ladies and gentlemen, this does conclude the second-quarter 2005 results conference call for Park Electrochemical Corporation. We do appreciate your participation, and you may disconnect at this time.