Park Aerospace Corp (PKE) 2006 Q2 法說會逐字稿

Good day everyone, and welcome to the second-quarter 2006 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, and welcome, everybody, to our second-quarter conference call. This is Brian Shore and I have with me Jim Kelly who is our Vice President of Planning and Taxes. Also is Lee Newton, and Lee Newton is a guy who used to be Senior Vice President of Finance of our Company about four or five years ago; he's come back to work with us just in the last couple of months.

Anyway I just want to start by apologizing getting you the invitation so late. I think it was after the close on Monday, that's not in our normal practice. Some people would like us to do it even earlier than our normal practice, but that's even not good for us for our standards. And I really don't have any excuse or explanation, just that we had a little coordination issue with some of our orders who were traveling overseas -- it's just one of those things, but we'll try to do better next time.

Anyway, what we'll do is we'll proceed with our normal format for our quarterly conference call. We'll start with our financial analysis and Jim Kelly is going to do that for us, then I'll chime in with some comments as well. Go-ahead, Jim.

Thank you, Brian. Certain statements we may make during the course of the 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 27, 2005, 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 the results of operations based on 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.

I would first like to summarize the financial information included in the press release for the second-quarter and six-month period ended August 28, 2005, of Park's 2006 fiscal year ending February 26, 2006. Net sales for the 2006 fiscal year second quarter ended August 28, 2005, were 52.4 million compared to net sales of 51.1 million for the prior fiscal year's second quarter. Park's sales for the first six months were 108.1 million compared to sales of 109.6 million to last year's first six months.

Net earnings for the 2006 fiscal year second quarter ended August 28, 2005, were 6.1 million compared to net earnings of 2.9 million for last year's second quarter ended August 29, 2004. Net earnings before a restructuring charge for the 2006 fiscal year first six months were 12.4 million compared to net earnings of 9 million for the prior year's first six months.

During the 2006 fiscal year first quarter the Company recorded a 1.1 million restructuring charge for employment termination benefits relating to a workforce reduction at its Neltec Europe SAS subsidiary in Mirebeau, France. There is no tax benefit related to this restructuring charge and there were no restructuring charges or other special items for the prior year's first six months. Net earnings including the restructuring charge for the 2006 fiscal year first six months were 11.4 million compared to net earnings of 9 million for the prior year's first six months.

Basic and diluted earnings per share for the 2006 fiscal year second quarter were $0.30 compared to basic and diluted earnings per share of $0.15 for the prior year's second quarter. For the six-month period ended August 28, 2005, Park reported earnings per share before the restructuring charge of $0.62 compared to basic and diluted earnings per share of $0.45 for the first six months of last year. The 2006 fiscal year's first quarter restructuring charge equated to $0.05 per share on both a basic and diluted basis. As a result basic and diluted earnings per share were $0.57 for the six months ended August 28, 2005, compared to $0.45 for last year's first six months.

Now I'd like to review some significant items in our second quarter P&L. Comparing the current fiscal year's second-quarter sales to last year's second-quarter sales, Park's sales volumes increased 1% in North America, decreased 10% in Europe and increased 15% in Asia during the fiscal year 2006 second quarter compared to the sales for the same period in the prior year. During the fiscal 2006 second quarter North American sales were 57% of total sales, European sales were 15% of total sales and Asian sales were 28% of total sales compared with 58%, 17% and 25% respectively for last year's second quarter.

FiberCote's advanced composite material sales comprised 9% of the Company's total sales for the fiscal 2006 second quarter compared to 7% for the prior year's second quarter. Sales of high-temperature laminate and prepreg materials comprised 97% of total North American laminate and prepreg sales during the second quarter of fiscal 2006 compared to 95% for the prior year's second quarter. The high-temperature portion of foreign laminate and prepreg material sales was 94% of total foreign laminate and prepreg sales for the 2006 second quarter compared to 91% for the same period in the prior year.

On a worldwide basis high-temperature material sales were 96% of total laminate and prepreg material sales for the second quarter of fiscal 2006 compared to 93% for the prior year's second quarter. Sales of Park's North American high-performance, that's non FR-4 printed materials which are a subset of high-temperature printed circuit materials, were 46% of total North American laminate and prepreg material sales for the second quarter of fiscal 2006 compared to 44% for the second quarter of the prior year.

Foreign high-performance printed circuit material sales were 32% of total foreign laminate and prepreg sales for the 2006 year's second quarter compared to 29% for the second quarter of the prior year. On a worldwide basis sales of high-performance printed circuit materials were 39% of total laminate and prepreg material sales for the 2006 year's second quarter compared to 37% in the second quarter of the prior year.

The gross profit percentage for the second quarter of fiscal 2006 was 22.1% compared to 18.4% for last year's comparable period. This improvement in gross profit is attributable to, among other things, the restructuring of the Company's Nelco California business unit during last year's third quarter.

Selling, general and administrative expenses were 11.3% of net sales for the current year's second quarter compared to 12.7% for the prior year's comparable period. The decrease in these expenses as a percentage of sales was a result of, among other things, reduced expenses for salaries, benefits and freight.

Investment income for the second quarter was 1.4 million or 2.8% of net sales compared to 0.8 million or 1.5% of net sales for the second quarter of 2005. The increase in investment income was attributable to an increase in prevailing interest rates. We continue to invest the available funds on a conservative basis in highly fixed -- highly rated fixed income securities and money market funds.

As a result of all of the above pretax operating profit was 13.6% of net sales for the 2006 second quarter compared to 7.2% for the prior year's second-quarter pretax operating profit. The effective tax rate was 15% for the 2006 second quarter compared to 10% in the 2006 first quarter. The increase in the effective rate during the second quarter was attributable to a less favorable jurisdictional tax mix and expected full utilization of net operating loss carryforwards in the United States during the current year.

Turning to Park's balance sheet, cash and marketable securities increased to 199.9 million at August 28, 2005, from 189.6 million on February 27, 2005, the ended of the prior fiscal year. Working capital was 215.5 million at the end of the 2006 second quarter compared to 201.5 million at the end of the prior fiscal year. During the current year's first six months the Company had capital expenditures of 2.2 million and depreciation of 4.9 million.

Stockholders' equity was 252 million at August 28, 2005, compared to 242.9 million at the end of the prior fiscal year. Finally, stockholders' equity per share increased to $12.55 at August 28, 2005, compared to 12.19 at the end of the prior fiscal year.

Thank you, Jim Kelly. This is Brian again, and I will offer a few introductory remarks as well. Let me just tick off a few things. I think we talked about our China project last conference call; there's really not much new to report, it's about the same. I think we might have discussed last time that we had adjusted the focus of the plan more toward a high technology product and lower volume. Originally we had designed it more as a volume operation. But all those adjustments have been made and we're still on schedule based upon our last indication which is sometime probably early in the next fiscal year for the plant to be commissioned.

The FiberCote treater, we've been talking about that I think for a quarter or two. That treater is fully functional and operating at producing production product. So that's a good thing I would say. Let's see -- just ticking off here -- we've been talking a lot about our advanced material reinvention. And we have been making inquiries, shall we say. We've been talking to people about whether they'd be interested -- companies whether they'd be interested in joining up with Park and that's just an ongoing process, but that shouldn't be a surprise to you. Obviously at this point we have nothing to report otherwise you would already know about it.

So, in terms of a little guidance. I know the analysts -- we know the analysts are always interested in what we do -- we can help you with there. In the press release I think we commented that in the last few weeks the bookings seemed to come up a little bit, maybe about 10%. So it's not a major earthshaking thing, but we're always happy to report to you what we know, those are facts.

In terms of what happens in the future, is it sustainable? That's where we really can't help you too much because of -- we've explained this numerous times I'm sure in the past to the point where you're tired of hearing it. But the visibility on the electronics side of the industry anyway of our business is poor and probably will not get better. That's not a temporary situation. So we really don't have a good feeling as to whether that improvement will continue or not. But we can at least report to you the facts in the last few weeks the bookings have come up a little bit.

On the advanced composite side of the business, that industry continues to be strong. And as we indicated in our press release, we expect that to continue at least for the short-term. Tax rates, I spoke -- we have spoken about this quite a bit. These are getting to be more and more difficult to really bracket. But we're still looking for 10 to 15% for the year. But we have to offer the caveat and cautions there that tax rates are subject to a lot of variabilities over which we do not have control. But that's our best guess at this point for the year. And next your obviously there would be more uncertainty in terms of the tax rate.

So you've probably noticed that there have been a lot of people changes in the Company in the last I guess couple months or so; we've made a lot of announcements. And most all the people that have gone, I really like those people and I miss them. But I would say that all the changes are for the better long-term.

We've been talking quite a bit about reinventing the Company and when we say things like that we mean it. We're not playing around or playing games. And obviously reinventing the Company means changing the Company quite a bit. And that's good for some people and maybe not good for others. And all I can say about that is we're not here to be right for everybody; we're just here to do what we think is best for our business and every employee needs to make their own decision.

I'll probably miss Emily and Murray the most. But even for them I'm sure they made the right decision and that all these things are for the better. The bottom line is for us that even though it's been a little difficult in the last few months just moving -- keeping everything moving forward, that's exactly what we're doing. We're moving forward, we're not playing defense or playing offense and we're not going to allow these changes to set us back. They're really part of the natural process, I think anyway, of the reinvention of the business.

Those are all the little items that I had written down to cover. So, operator, why don't we go into the question-and-answer segment of the call at this time?

(OPERATOR INSTRUCTIONS). Rich Kugele, Needham & Co.

Hi, gentlemen, it is actually Rebecca Epedian (ph) for Rich today. I guess the first question, gross margins; they continued to tick up in the quarter. I'm kind of curious just on some of the pushes and pulls that go into it. I'm sure you wouldn't want to break out the electronic materials versus the advanced composites, but any insight you could give there. And then also, if you could talk a little bit about any of the pricing pressures you might have seen in the quarter?

The biggest single factor or event, let's call it, which affects the gross margin comparison from second quarter of '06 to the prior year would have been the restructuring in California -- Nelco California which Jim alluded to which occurred I think September of last year. So second quarter of last year was before the restructuring; of course second quarter this year is after the restructuring.

The California business is doing really nicely. The boss out there, Marty Kendrick, is doing a real nice job, we're very happy with how she is doing. So there's a pretty nice improvement in terms of the operating performance of our California business.

I think the rest of the story is just all over the board -- across the board. We understand, and we've said this over and over again, that it's our job to make money for our shareholders every quarter, not the expense of sacrificing our long-term future, we will not do that. But we understand what we're here for and that's to make money for our shareholders every quarter.

So, whether the Company is making reasonable money or not reasonable money that's obviously for the shareholders to decide. But we look at every expenditure carefully; we don't spend money casually at all and that includes a $500 item as well as a $500,000 item. That's not going to change and that's the way we run our business. But I think the biggest thing we could single out would be the change in Nelco California and then there's just probably dozens of other small contributing factors that we really wouldn't be able to enumerate here.

Okay. And any comments on pricing pressures?

Pricing pressures. Yes, it's an ongoing discussion. I think that -- on the electronic side you're probably talking about, is that right?

Yes.

Yes. I think the market understands who we are pretty well by now. we've made our intentions very clear, we're not apologizing about them, we're not looking to get business on price, we're not looking even to hold business on price. In terms of our pricing, we don't have standard pricing, we don't have published pricing, our pricing is a confidential and intimate matter between our Company and each of our customers and we deal with each customer on a case-by-case basis, okay?

But I guess the best way to answer that question generally would be that our Company's strategy is very well known by our customers right now that we're just not the low-priced offering on the block, we never will be, we don't want to be. We're not saying that's a bad thing, it's just not for us. And like I said, we don't try to gain business with price; we don't try to grow marketshare with price. And we're not even looking to hold marketshare with price.

As far as the pressure coming from the outside world, though, I think that's probably unchanged over the last few quarters. I don't think it's very different. In other words it's pervasive, but I don't think it's any more or less than it was three months ago or six months ago.

Okay, that's helpful. And then I guess just lastly more a housekeeping type of question. Just your top customers, are there any meaningful changes there? And then your percent of sales for your 5, 10 and 20?

Jim, would you like to answer that please?

Yes, as far as the top five customers it's pretty much the same group, Sanmina and Tyco are number one and number two, followed by Multek, Wooze (ph) and Petasys.

Multek, Wooze and Petasys. Multek is part of Flextronics, right?

That's correct.

Okay. And what's the percentage of the top five and the top ten?

The percentage on the top five -- top five customers make up 53% of sales, our top ten is at 72% of sales.

Okay. And do you have the top 20 handy?

Top 20 is 81%.

Perfect. Thank you.

Jiwon Lee (ph), Sidoty & Co.

Good morning, gentlemen. Now, Brian, you attributed the gross margin ticking up to mostly restructuring of Nelco in California. Now when you say restructuring are you meaning the utilization is pretty up there? And if you could comment on the utilization rate currently?

Capacity utilization, that's something that we generally don't comment on for competitive reasons. But let me just remind everybody that last -- I think it was September, we had a workforce reduction at California I think of about 75 or 80 people. I think the workforce was reduced from about 280 to 200. And what's really very, very nice about this -- gratifying in terms of the management in California is that we haven't missed a beat. Our production numbers are right there, the production levels are up a little bit as compared to the prior quarter but with a lot, a lot, a lot, less cost.

Waste is better -- obviously productivity is better, that goes without saying -- if our production numbers are up a little bit with far less labor, it goes without saying that productivity has improved quite a bit. So that's not the only thing, that's the only big thing that we can point to in a meaningful way. Then after we get beneath that item, as I said earlier, there are probably dozens of little items which are too numerous to really mention here.

Okay. And --.

Is that helpful or are you looking --?

Yes, it definitely helps, thanks. And you said working wise the business is up a little bit. Where do you see strength in printed circuit materials business? And again, you really try to grow the proportion of your upscale materials geographically or you're end market wise, if you could sort of add color to that.

In terms of the bookings that have just come up in the last few weeks?

That's correct.

Okay. Well you know what, let me just say we put that out there because it's true and it's something that I believe people would be interested in knowing. But I don't think we want to overplay that because next week the thing could come back again to the prior level. But in terms of where it's coming from it's not from any one region, it's not from any one end market, it's not any one program, it's across the board.

Okay, if I could just have (indiscernible). Now you mentioned as for China expansion the Company is really trying to focus on high temperature and high-end materials. Any particular reason for this shift in focus? Do you see some opportunities out there?

It's a very fluid world of course and when we started the project, which was a while ago, I think we had a little bit of a different perspective about China. We always were really focused on the higher end. But what we believe now is that in the future there will be -- new programs will actually be introduced in China. The prior model is that the new programs are introduced in the Western markets generally, let's say the U.S., and then once the programs get some legs under them the programs will be transferred to Asia for cost reasons.

What is happening, it's pretty clear to us, is that -- and this is obviously what the OEMs want to do, is they're interested in introducing new programs in Asia. That means that the design of the factory has to be really geared towards small production orders and quick turns than volume production of high-end materials. Okay? And it's kind of the business model that we have in our Neltec facility in Arizona. And a lot of the equipment that we decided to put in China is very similar to the equipment design which we use in Arizona as compared to our volume circuit operations in California and New York for instance.

Okay, that's definitely helpful. Now let's move on to the FiberCote. The treater -- and I saw that in Connecticut and it's quite impressive -- is fully functional and in full production now if my understanding is correct. Last year you generated probably a couple million dollars short of $20 million. With this treater fully functioning any thoughts on how much you can expend organically this year?

We could talk about that a little bit. I think we generally don't talk about our manufacturing capacity. But I believe last year the top line for FiberCote was about 17 -- 1-7 million. And I think we mentioned that we were running pretty close to our manufacturing capacity at that point. By installing the second treater we effectively doubled our manufacturing capacity. So we have a significant amount of available manufacturing capacity for a solution coated products at FiberCote.

Now that's capacity; in terms of actually utilizing that capacity that's probably going to be a little bit of a longer-term process. Because our composite business is, like our electronics business, is focused toward the high-end where the margins are better. And in composites that normally means Aerospace. That's a two-edged sword, the margins are good but the qualification timeframes are quite long.

So what we really need to focus on is getting qualified in new programs. To break into an existing program is extremely difficult and the more sensitive the application the more impossible it gets. So it's good if you're onto programs, so there are certain programs we are on. And that means unless we do a real bad job we're probably not going to get off those programs.

But the corollary is true as well, it's difficult for us to break into an existing program. The risk is just too high for the engineering people that are building Aerospace equipment because they change a supplier and something goes wrong and there will be a lot of explaining to do, of course, at the risk that these companies aren't willing to take normally.

So we're not looking for a dramatic one up in volume out of FiberCote. And this is something we're kind of learning as we go so I'm sharing these observations with you as we go. I think what we will see, if anything, in terms of the increase in volume and a significant increase in volume on the composite side will be through acquisitions obviously, that's one-way.

We're also putting a lot of time now focusing on expanding our business organically in Asia in the composite prepreg manufacturing area. And the reason for that is we believe that it is a little more open in Asia, it's more of a new industry. There aren't that many competitors especially in South Asia where we're located in Singapore actually. So we're looking to really get ahead of the game there on the composite prepreg side.

Okay, that's great. Now in terms of your acquisition candidate. Provided that you are actually looking for it, how do you see the market out there? Are you finding interesting candidates?

The concern we have is that there's a perception, and I'm not sure I buy into it, that the composites industry is very hot. Well, that's true now but there's also a perception that somehow be industry has transitioned from a cyclical industry to an industry that's going to grow forever. And that kind of perception I think is very dangerous and it kind of reminds me of what people were believing the electronics industry of the late '90s and you know what happened there.

Unfortunately what that does is it leads to valuation concepts and attitudes that are, in our opinion, potentially not very realistic. And we're not going to overpay for a business. I mean, we'll maybe pay 10% more then we think the fundamental value of a business is, but we're not going to pay double just to do an acquisition.

So it's too early to say, we've put -- we've made a number of overtures, but I just wanted to share with you that we're getting some vibes, if you will, that are a little concerting. And again, it's this attitude that this industry is going to grow forever. And when people start believing those things, in my opinion anyway, the do some very foolish things if that believe ends up not being true. We are not going to get into that kind of thing of the mob hysteria. We've learned how that works on the electronic side of the business back in the late '90s.

Okay, that's great. Finally, again in terms of FiberCote, you see some immediate opportunities in Asia, as you say. And I mean -- let's see how I phrase this -- what do you feel like you're missing? What is the main attribute that you're looking for in terms off the candidate? Or as you think about the plans going forward, is that the capacity that you feel that you're missing? Is that the customer list? I mean, in your mind on the composite -- correct.

Okay, it would be technology, like you said, it would be customer qualifications and approvals. It's not really capacity. It also would be different manufacturing capability. The composites industry is a pretty multifaceted industry and there are different kinds of composite materials which we currently do not have the capability to produce. So those would be the angle, it's certainly not manufacturing capacity. Asia, like I said, it's a little bit of a different equation and it's we believe much more wide open. And I think we're really not looking so much in the acquisition arena in Asia although we would be interested, we're really looking at putting a stake in the ground ourselves and getting in maybe ahead of some of the other folks.

Great. That's all my questions. Thank you for answering my questions.

Thank you. Thank you for your questions.

Greg Ramsby, Deprince, Race & Zollo.

Good morning, Brian. Congratulations on a nice quarter.

Thank you.

Most of my questions were related to FiberCote and I think the previous caller covered that pretty well. Can you talk about your facility in China and what that's going to add to your existing capacities in Asia? Can you use some of that Chinese capacity for FiberCote-related stuff if you need to? And when is all this going to be up and running?

The Chinese facility will certainly add lamination capacity, that's not really the purpose of it. The purpose of it is to have local support capability in China so we can better exploit that market. It's not that we're maxed out with manufacturing capacity for laminate product in Singapore at this time. This will add capacity but, again, that was not really the objective from day one.

The lamination capacity, if you want to look at it that way, it's significant. And I'm reluctant to offer a number right now but it's significant. We're not expecting that the facility will be filled up very quickly though, that's not our objective. Our objective is to use the facility so that we can be there to -- to compete, I guess we should say, for new programs as they're introduced in China, especially new technology or more advanced technology programs.

The plant that we're building in China is not suitable for composite manufacturing, although we have equipment currently in Singapore which is. But we're very open and interested in installing composite manufacturing capacity in addition to what we have now in Asia. Was there another question -- I think I might have missed one there, Greg?

Just when do you think the (multiple speakers) is going to be ready?

I knew there was one. Like we said, we believe it will be in the first quarter of the next fiscal year. So I think we're talking February, March. And I would want to put a two-month or three-month China factor there. There are so many variables and surprises that you end up dealing with in China, at least for us, that I wouldn't be surprised if that slipped a couple months.

Okay, thanks.

You're welcome.

(OPERATOR INSTRUCTIONS). Leonard Cooper (ph), a shareholder.

Hi, Brian.

Hello there. How are we doing?

Okay, how are you?

We're doing pretty good.

A little honey with tea for that cough might be good.

Thank you very much -- that's a first by the way. Medical advice coming from a shareholder conference call. But I appreciate it.

Well, I'm not a medical person. My real question was with regard to the advanced composites. What is Park offering in that field that attracts people that have been dealing with other companies?

Could you repeat the question please? Maybe speak up a little bit, Len.

I'd like to know what Park is offering that makes companies that already have arrangements be interested in Park for advanced composites.

In other words, why would a company sell a company which owns an advanced composite -- material business want to sell to Park?

No, I'm thinking of customers. What technological advantages are we offering that interests these customers that we're apparently attracting?

On the composite side?

Yes.

Okay, we specialize in aerospace and we have certain capabilities and qualifications on the aerospace side and we also have a specialty in the rocket motor side which is for both military and civilian purposes. It's -- FiberCote is somewhat of a niche business and we want to expand outside of being completely a niche business. So we have certain capabilities and certain specialized limited areas. But then we don't have capabilities in other areas that we're interested in.

So we want to open up this business and get it out of the phase or the situation where we're just more of a niche business. And what we're hoping to do is take what we have now and leverage that as well, particularly overseas where the market is just really developing. So we're hoping to take our capability and our technology we have in these areas at FiberCote and leverage that overseas rather than just starting from scratch.

We also have customer qualifications and market qualifications and approvals with aerospace customers and that should be a good thing for us. Because we're hoping to be able to use those qualifications overseas because we believe that in the future some of these aerospace parts, if you will, will be manufactured overseas.

And are these special capabilities in the area say of higher temperature performance or --?

In the what's called ablative or rocket motor area, also for furnaces, that would definitely be the case, yes.

Okay, thank you.

You're welcome.

And gentlemen, at this time there are no other questions in the queue. Mr. Shore, I'll turn the conference back to you for any additional remarks.

Okay, I think that wraps it up. Again, as usual, thank you very much for spending time with us. Thank you for your questions, thank you for your interest. And we're here the rest of the day; if there are any further questions please feel free to give us a call. Have a great day and we will be talking to you again I guess in a few months. Take care.

That does conclude today's conference call. We thank you for your participation. You may disconnect at this time.