Park Aerospace Corp (PKE) 2008 Q2 法說會逐字稿

Welcome to the second quarter fiscal year 2008 earnings call, hosted by Park Electrochemical Corporation. Today's call is being recorded. Now at this time, I would like to turn the conference over to the President and CEO, Brian Shore. Please go ahead.

Thank you, operator. This is Brian Brian. Welcome everybody, to our second quarter conference call. I have with me, of course, Jim Kelly, Vice President of Planning and Taxes. And we'll start as we usually do. Jim will give us some commentary from a financial perspective, I'll offer a little more commentary and then we'll going in to the Q&A portion of the call. Go ahead, Jim.

Thank you Brian. 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 constitution 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 25, 2007, various factors that could affect future results. Those factors are found in item 1A and 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 finance at 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 news release for the second quarter ended August 25, 2007. Net sales for the 2008-fiscal year second quarter ended August 26, 2007, were $60.5 million compared to net sales of $66.5 million for the prior fiscal year second quarter. Park sales for the first six months were $117.6 million compared to sales of $129.4 million for last year's first six months. Net earnings for the 2008-fiscal year second quarter were $9.2 million compared to net earnings before special items of $8.5 million for last year's second quarter ended August 27, 2006.

During the prior year second quarter the Company recorded a pre-tax charge of $1.3 million in connection with the termination of an insurance arrangement and recognized $0.5 million tax benefit related to this insurance germation charge. During the prior year's second quarter, Park also recognized the tax benefit of $3.5 million relating to the elimination of certain valuation allowances previously established relating to deferred tax assets in the United States, and a tax benefit of $1.4 million related to the reserves -- I'm sorry, relating to the elimination of reserves no longer required. Park recorded no special items during the current year second quarter. Accordingly, net earnings were $9.2 million for the second quarter ended August [26,] 2007, compared to net earnings of $12.5 million for last year's second quarter ended August 27, 2006.

For the six-month period ended August 26, 2007, Park recorded net earns of [$16.6] million compared to net earnings before special items of $17.4 million for last year's first six-month period. As mentioned above, last year's six-month period included a pre-tax charge of $1.3 million in connection with the termination of an insurance arrangement and a tax benefit of $0.5 million relating to the insurance elimination charge, a benefit of $3.5 million relating to the elimination of valuation allowances and a tax benefit of $1.4 million relating to the elimination of reserves no longer required. Park recorded no special items during the six-month period ended August [26], 2007, accordingly net earnings were $16.6 million for the six-month period ended August [26], 2007, compared to net earnings of $21.4 million for last year's first six months.

Park reported basic and diluted earnings per share for the 2008 fiscal year second quarter and first six months of $0.45 and $0.82 respectively compared to basic and diluted earnings per share before special items of $0.42 and $0.86 for the prior year's second quarter and six-month period. Basic and diluted earnings per share were $0.45 and $0.82 respectively for the second quarter and six months ended August 26, 2007. Compared to $0.62 and $1.06 respectively for last year's second quarter and first six-month period.

Now I would like to review some of the significant items in our second quarter P&L. Comparing the current fiscal year second quarter sales to last year's second quarter sales, Park sales volumes decreased 7% in North America, decreased 35% in Europe, and were flat in Asia. During the fiscal year 2008 second quarter, North American sales were 51% of total sales, European sales were 11% of total sales, and Asian sales were 38% of total sales compared with 50%, 15%, and 35% respectively for last year's second quarter.

Sales of high-temperature laminate and prepreg materials comprised 99% of total laminate and prepeg sales, during the second quarter of fiscal 2008 compared to 97% during the prior year second quarter. Sales of Park's high-performance, non-FR-4 printed circuit materials which are a subset of high temperature printed circuit materials were 52% of total laminate and prepreg material sales in the second quarter of fiscal 2008 compared to 41% in the second quarter of the prior year. Sales of Park's advanced composite materials comprised 9% of total sales in the second quarter of fiscal 2008 compared to 7% in the second quarter of the prior year. The gross profit percentage for the second quarter of fiscal 2008 was 27.1% compared to 24.1% for the prior year second quarter. The improvement in gross profit was mainly attributable to a favorable product mix.

Selling, general, and administrative expenses were 10.9% of net sales for the 2008 fiscal year second quarter, compared to 10.3% for the prior year's comparable period. The increase in these operating expenses as a percentage of sales was primarily due to the decrease in sales volumes. During the 2008-fiscal year second quarter, the Company recorded a pre-tax expense of $330,000 relating to the amortization of previously granted employee stock options pursuant to the provisions of FAS 123R compared to $288,000 in last year's second quarter. Investment income for the second quarter was $2.5 million or 4% of net sales, as compared to $1.8 million of 2.7% of net sales for the second quarter of 2007. The increase in investment income was attributable to increases in prevailing interest rates and available cash. We continue to invest the available funds on a conservative basis and highly rated fixed-income securities and money market funds.

As a result of all of the above, pre-tax operating profit was 20.2% of net sales for the 2008 second quarter, compared to 16.5% of net sales for the prior year's second quarter. The effective tax rate for the 2008 second quarter was 25.2% compared to a 23.0% effective rate for the prior fiscal year second quarter before adjusting for the tax benefit from the insurance termination charge, the elimination of certain valuation allowances in the U.S. and the elimination of certain tax reserves no longer required.

Turning to Park's balance sheet, cash and marketable securities decreased to $195.8 million at August 26, 2007, from $208.8 million at the end of the prior fiscal year. During the 2008 second quarter, Park paid a special dividend of $1.50 per share, or $30.5 million resulting in the cash balance decrease for the six-month period. Working capital was $224.1 million at the end of the 2006 second quarter, compared to $237.3 million at the end of the prior fiscal year. During the current year's first six months, the Company had capital expenditures of $3.6 million and depreciation expense of $4.1 million, compared to capital expenditures of $2 million and depreciation expense of $4.5 million for the prior year's first six month's period. Stockholders equity was $250.8 million at August 26, 2007 compared to $264.2 million at the end of (audio difficulties).

I find it interesting recording and maybe responsible to say -- at the bottom of the article, maybe there was a little mention and last year's second quarter and pretty significant special items. I thought the news might be the sales were down but the margins were up considerably quarter-over-quarter but they missed that one. Anyway, I just thought I would say that because I'm here and I have the floor for the minute, so I thought I would mention that to you. But on the updates, I don't think too many surprises this year, but let me update you in a few of the vents that we're dealing with.

First of all Neltec Europe, I think we announced about a month ago, that we are involved with a restructuring process there, and the way these processes work in France is we enter -- we propose a restructuring plan to the work force. We enter into consultation with the work force, which we are doing now, and that consultation process is expected to go another two or three months. We believe that the process will be finalized in our fourth quarter. And we've estimated in our press release to you when we announced this that we -- if the plan that's been proposed is adopted, there will be about $1.5 million charge. That's an approximate number and, of course, it depends upon what happens after the consultation process. I wanted to just flag that to make sure everybody picked up on that. And there really is nothing surprising as far as I'm concerned there. This is just another example of the continuing erosion in the electronics industry in the Western markets, where the industry continues to migrate toward Asia, and this is just another example of that, as far as I'm concerned.

So, a couple of other updates. We have been telling you about our Pioneer plant in Singapore, for, gee, I think about a year now. That's the new plant that is under construction in Singapore for the purpose of making advance composite prepreg materials for the aircraft industry. The good news is that plant is coming along nicely. It's really on track. We have already done some dry runs on the treater. Next month, meaning October, I guess that would be, we'll start to do wet runs on the treater. And we hope that by November we'll actually be doing production -- sorry, we'll be making samples for qualification, qualification purposes with the Asian customers. So that's good news, and we're excited about that of course. We call it Pioneer plant because it happens to be on Pioneer Road, but also because we feel like we're pioneers, because we're moving ahead of the market, and as we have explained previously, that's really very similar to the strategy we employed back in the '80s with the electronics -- with the electronics facility that we built in Singapore at that time.

We also have our Kansas plant. We haven't come up with a name for that one yet. We have a little raffle going inside the Company. So we'll tell you soon what we decide to call that business unit in Kansas. That facility is being built at Newton airport which is about a 20-minute drive North from Wichita. The reason for the location is because of the aircraft industry in the Wichita area. This facility will be focused on the aircraft industry, the general aviation manufacturing industry in Wichita, and elsewhere, of course, as well, but just at this point anyway there is a high concentration in that industry in the Wichita area. So that's an exciting new project for us as well. And, when I say that, I'm really speaking for a lot of the employees in the Company to feel very happy about the fact we're moving in that direction. As Jim noted to you in his introductory remarks, I just wanted to play again that the percentage of high performance materials was 52%. That moved up from I think 50 in Q1 and I think it was -- I don't remember -- low 40s, what was it Jim?

45% in Q4.

Q4?

Yes, last year at comparable period I think it was 41%. It has gone up significantly, Brian.

Right. So that's good, of course, for us, the non-high performance sometimes called FR-4 product is becoming more and more of a commodity. And that's true everywhere. It's not just in the Western markets, it's true in Asia as well. Fortunately we do seem to have a high-performance product line that -- that is appealing to the market. And that's the very good news here. That's of course the product line which would generate more margins as well. Interestingly in Europe, I think that it was over 60% high performance last quarter. And again, it's very difficult for us to really even be -- to the extent there is any -- any non-high performance business left in the Western market, it's becoming less and less attractive for Park. So that's -- just -- again, evidence of this continuing migration toward Asia, toward -- which means toward high performance for Park. And that includes in Asia as well, as I said. Even in Asia, the high-performance percentage of our sales is quite high.

Just -- I know you folks are always interested in the current market environment for our business, for our product line, and I must say that -- let's say in the last four, five, six weeks, the market has been quite strong for our business, and we always would have to add a caveat, that we are just telling you the facts as we know them. We know all of those weeks in the books, so we can report factually on those weeks, but we are not commenting on what we expect for the future. And the reason we're not commenting is because we would be foolish to do so, based on the past history, particularly the electronics market and industry where the visibility is very, very poor and we really don't know what the market will be two weeks down the road. But we at least can report to you what the -- the facts that we know, and you can reach your own conclusions, make your own judgments about what they means going forward, because we don't know, and we don't have an opinion about it. I think, operator that really ends my introductory comments? Why don't with go to the Q&A portion of the call at this time.

Very good. (OPERATOR INSTRUCTIONS) We'll first go to [Sean Hannen] with Needham & Company.

Yes, thank you. So certainly had a -- a solid quarter on the gross margin line, and you had attributed a lot of that to mix. So I'm assuming -- and correct me if I'm wrong, this is essentially due to the higher mix of the high-performance product going to that 52% again, sequentially over that 50% last quarter. Is there anything else in there that I should be or we should be thinking about?

Thank you for noticing that, by the way, that our margins are a little bit stronger this quarter as compared to the first quarter. I think that the top line is up a little bit as well. Of course that helps, but you hit on it. That high-performance percentage means a lot. I think I have commented previously, that in a sense it's almost as if they are two different business models with respect our electronic product, high performance and other. And the characteristics of those two different product lines are quite different, especially when you are talking about margins. So as the high-performance percentage moves up, that would be good news for our gross margins.

So Brian, it is possible -- is there a way to kind of remind us for the non-FR-4 products, exactly -- well not exactly, but at least qualitatively, where that stands in terms of the Corporate margin, and say, versus your commodity FR-4 product as that is a drag, and are there any kind of deteriorating changes there where that could be a head wind for your gross margin profile going forward? Do you understand the question?

Yes, we're not going to be able to quantify it. Well, we could, but we're not going to quantify the exact margins on high performance as compared to non-high performance. But we have said before and I'll say again, that they are quite different. It's not like a continuum, it's almost like a different product line. As far as going forward is concerned, I think the drag would be with respect to the non-high-performance aspect of the product line. That's becoming more and more commoditized and that's where the competition can be very aggressive.

Our strategy for years now has been not -- to not hold on to the non-high performance business. If a customer has a better alternative and usually almost always at a better price, they really should go in that direction, but we don't chase those prices down. So rather than chasing those prices down, we'll just let go of market share. We have done it before, and we'll certainly do it in the future, I think, because the trend is clear. And you know what, in Asia, I remember the arrogance of the electronics industry 10 years ago, people would laugh at the Asia suppliers, competitors, customers, and they are not laughing anymore. These companies are very competent, very capable, they have very significant investments, they are good quality. So, there are viable, realistic, practical alternatives for the non-high-performance product, and when a customer is able to use those alternatives, they may elect to do so. And if they do so in the future based on price, we will say, that's the right decision for you.

Okay. So more so in the near term, aviation aside, from a strategy standpoint, from a strategy standpoint as you are moving more toward the non-FR-4 product, in terms of mix, so you have moved from about low 40% to now over 50%, in the last two quarters. Is there anything -- or any reason to believe that this can improve by another 10% over the next 12 months? Is there anything that would prevent that?

The percentage?

The percentage.

I think it will continue to move in that direction. I just think I should explain that it's not exactly something where we're forcing it. It's a natural progression because of the global trends. Fortunately our high-performance product is well accepted in the industry, and it's certainly by certain OEMs. So that's good for us. And the non-high performance product, as I said it becomes more and more competitive, and we're willing to let go of that. When a customer has a viable alternative at a better price.

So I don't believe that -- I think the trend will continue, and quite the contrary, I think there's -- I don't see any reason why the trend won't continue. And it's not something -- as I just repeat, where we're really -- we're forcing the issue. We're just, the trend is affecting our business, and it's global trend that relates to things that are much bigger, and much more significant than we could ever control. We just have to -- as far as the high performance is concerned, we just have to be there with the right product line. We have to be there with the right company behind the product line. And if we do that I -- my guess is that many of the OEMs around the world will continue to be interested in our high-performance product line.

Okay. Then lastly, if -- if you can comment just on the copper foil pricing or raw materials pricing in the quarter and what you are seeing today, and then I'll jump back into the queue.

The -- at this point, the large majority of all of the increases in copper foil, which we had over the prior -- maybe 15 months or so, and I think there were maybe four or five different incidents, those are -- the large majority -- very large majority of those increases are now reflected in our selling prices. So we have by and large neutralized the impact of the copper foil cost increases. Of course that has inflated our top line a little bit. Some of that top-line growth is a little artificial, because it just is reflective of the price adjustments.

On the horizon, it's a little surprising, confusing, I know that for not only for us but for some of our customers, because there's a lot of talk globally about, concerns about housing and things like that, which obviously uses a lot of copper, and the OME and I think Tacomax have backed off a little bit in terms of the commodity prices. The copper foil producers have not backed off yet, so everybody is interested to see what will happen. And we don't know what will happen. We hope that they have had enough, and they are not interested in moving their price up further, because it's really agitating for us and our customers to go through this process continually of having to adjust prices. Nobody is really happy with it. So we'll see what happens. I think that at the end of the day, at some point the cooper foil prices have to start to reflect the trends in the copper commodity prices.

Okay. Jim, and Brian, thank very much, that's helpful.

You're welcome.

Your next question is from Jiwon Lee with Sidoti & Company.

Good morning, Brian.

Hello Jiwon, how are you?

Pretty good. This is the first conference call in five quarters that you did not mention copper until it was brought up. Just a couple more questions related to this issue. Last time in the conference call, I recall hearing that the cent copper foil pricing increase was supposed to have a negative pre-tax profit impact, and I think you have quantified that as about $400,000. Was there a profit impact in terms of the dollars in the second quarter?

Yes, you are right. And we didn't -- we elected not to highlight that, but it was one of those lag effects that was in the second quarter, which was not significant. I think it was a few hundred thousand dollars as we recall. Where we had a copper foil cost increase and I think it was maybe not until maybe July 1, or maybe even August 1, where we changed our selling prices. As you know the practice we have had is to -- to -- there's a lag effect. Because when we have a cost increase, we usually allow our customers a couple of months to get adjusted to the new -- new prices, so that they can do whatever they need to do. We don't really like cram it down their throats, so we try to take the high road with that. I believe you're right, I think there was a few hundred thousand dollars negative impact in Q2 as a result.

Okay. Do you expect the lagging pricing increase to sort of neutralize that in -- by and large in the upcoming quarter?

Yes, I think you are right. And I guess the way we should describe it is that -- rather than talk to you about the whole second quarter, talk point in time, which is now. And at this point, we are -- to a large extent caught up, and we don't have any other significant plans at this time. So to a large extent caught up and that's not -- and I have to say to a large extent, and I have to qualify everything, because there have been some movements, which we're dealing with, but we would consider those to be less significant.

And -- excuse me. As the cooper pricing, sort of kind of remains persistently high, I mean, it has fallen somewhat, but it is still fairly high. What sort of impact on your non-FR-4s? What kind of pricing power that you have? And assuming copper pricing stays where it is now, where do you see that type of product and the profit going?

Well, we have made these adjustments in our prices to the FR-4 and the high performance laminate product line. I think what we might have shared with you last year was we started with the FR-4 product line, because that's where the margins are thin and we just felt we needed to move more quickly. But ultimately we actually did deal with a high-performance product line as well. We made the adjustments we intended to make by and large already with respect to both product lines.

Also, Brian, you mentioned that the first few weeks for the third quarter, the bookings were fairly strong, how do you compare that to the level of activities that you discussed with us a quarter ago?

We're going to elect not to quantify it, I know we have done that before--.

Yes.

We use qualitative terminology, I think I said quite strong. And it was particularly in the last five weeks. So it's very noticeable, and we -- of course -- I'll just repeat. We don't know what that means for the future, but -- and we don't even know why it is happening either. People always have these theories, maybe it's coming back from the summertime. I don't know. We really are not sure, but the facts are the facts, and we won't quantify at this point, but we'll say qualitatively quite strong.

Okay. I guess a few housekeeping questions for Jim. Can I get the first quarter -- last quarter's propulsion of Asia sales first? It was 38% this quarter. But what was it a quarter ago?

Yes, hang on a second, Jiwon. I do have it here.

While Jim is looking that up, hopefully everybody knows by now that we post the script from Jim's commentary on our website. Pretty -- I think around by 8:00 in the morning, so you all have access to that script if you want it. There's a lot of detail in Jim's commentary. Go ahead, Jim.

Jiwon, it was 37% a quarter ago.

Terrific. Thank you. Then the top 5 customer list and top 10 and top 20 on the propulsion?

We only have one greater than 10% customer and that would have would have been Sanmina, kay. TTM and Tapco round out the top 3. Our top 5 customers were 51% of sales, top 10 is 70%, top 20 is 80% in the second quarter.

That's all for me. Thank you.

Thank you Jiwon.

(OPERATOR INSTRUCTIONS) We'll return to Shawn Hannen with Needham & Company.

Thank you. Just one quick follow-up, so your -- the EP product, are there any further details you can provide on how that performs in the quarter? I know it has been kind of gaining some momentum as a new product within your offering. Details around that could be helpful?

I don't think we want to quantify the revenues, but the progress continues, it's -- and the activity is probably more in the area of getting qualified new programs. Although it is a real product with real revenues at that point, but the -- we're hoping, anyway that the upside is really ahead of us here. And it could -- I mean, just off the top of my head, but my guess is it's probably a one or two-year process for this product to -- if we are successful, for this product to become let's say entrenched, where we would like it to be entrenched. So the revenues are in the millions, but they are small millions. Not anything near the Dash 13 product line. The news is similar, that we continue to work with customers and OEMs to get this product line qualified on the new programs. It is currently on some programs that are interesting programs and we're not going to mention which ones. So I guess I'm not going to be able to be too much more helpful at this time.

Okay. That's all that I have. Thanks very much.

You're welcome.

And with that there are no further questions. I would like to turn the call to Brian Shore for closing comment.

Okay. So short but sweet today, and that's nice for us. Anyway thank you very much for listening in, and thank you for your questions. Nice talking to you as always. We'll be here the rest of the day if you have any follow-up questions. And we look forward to talking to you soon. Have a good day, everybody. Good-bye.