Park Aerospace Corp (PKE) 2008 Q3 法說會逐字稿

Good day, everyone; welcome to the third-quarter earnings release conference call hosted by Park Electrochemical Corporation. Today's conference is being recorded. At this time I would like to turn the call over to Brian Shore, President and CEO. Please go ahead.

Thank you, operator, and happy holidays, everybody. This is Brian Shore. This is our third-quarter 2008 conference call with Jim Kelly of course who is Vice President of Taxes and Planning. Both Jim and I have a little bit of a cold, so if we start coughing you just have to bear with us; we'll apologize for that in advance. Why don't we start off with some financial commentary, Jim? And then when Jim is done I'll maybe give you a couple comments as well and then we'll go into our Q&A of course. 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 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 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 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 news release for the third quarter ended November 25, 2007. Net sales for the 2008 fiscal year third quarter ended November 25, 2007 were $63.7 million compared to net sales of $68.2 million for the prior fiscal year third quarter. Park's sales for the first nine months were $181.3 million compared to sales of $197.6 million for last year's first nine months. Net earnings for the 2008 fiscal year third quarter were $8.8 million compared to net earnings of $9.5 million for last year's third quarter ended November 26, 2006.

As previously reported, during this year's third quarter the Company incurred approximately $0.5 million in out-of-pocket expenses related to the Company's due diligence efforts in preparation for its participation in the bidding for certain of the assets and business of Columbia Aircraft Manufacturing Corporation. For the nine-month period ended November 25, 2007 Park reported net earnings of $25.3 million compared to net earnings before special items of $26.9 million for last year's first nine-month period.

During last year's second quarter the Company recorded a pretax 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 termination charge, a tax 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 nine-month period ended November 25, 2007. Accordingly net earnings were $25.3 million for the nine-month period ended November 25, 2007 compared to net earnings of $31 million for last year's first nine months.

Park reported diluted earnings per share for the 2008 fiscal year third quarter and first nine months of $0.43 and $1.25 respectively compared to diluted earnings per share before special items of $0.47 and $1.32 for the prior year third-quarter and nine-month period and compared to diluted earnings per share after special items of $0.47 and $1.52 respectively for last year's third-quarter and nine-month period. Now I'd like to review some of the significant items in our third-quarter P&L.

Comparing the current fiscal year's third-quarter sales to last year's third-quarter sales, Park's sales volumes decreased 15% in North America, decreased 8% in Europe and increased 10% in Asia. During the fiscal year 2008 third quarter North American sales were 50% of total sales, European sales were 13% of total sales and Asian sales were 37% of total sales compared with 56%, 13% and 31% respectively for last year's third quarter.

Sales of high-temperature laminate and prepreg materials comprised 99% of total laminate and prepreg sales during the third quarter of fiscal 2008 compared to 97% during the prior year's third quarter. Sales of Park's high-performance non FR-4 printed circuit materials, which are a subset of high-temperature printed circuit materials, were 54% of total laminate and prepreg material sales in the third quarter of fiscal 2008 compared to 41% in the third quarter of the prior year. Sales of Park's advances composite materials comprised 9% of total sales in the third quarter of fiscal 2008 compared to 8% in the third quarter of the prior year.

The gross profit percentage for the third quarter of fiscal 2008 was 25.3% compared to 25.3% for the prior year third quarter. Selling, general and administrative expenses were 10.4% of net sales for the 2008 fiscal year third quarter compared to 9.9% for the prior year's comparable period. The increase in these operating expenses as a percentage of sales was primarily attributable to the out-of-pocket expenses incurred in connection with the Company's due diligence efforts in preparation for its participation in the bidding for certain of the assets and business of Columbia Aircraft Manufacturing Corporation and the lower sales level.

During the 2008 fiscal year third quarter the Company recorded a pretax expense of $357,000 relating to the amortization of previously granted employee stock options pursuant to the provisions of FAS 123R compared to $350,000 in last year's third quarter. Investment income for the third quarter was $2.2 million or 3.5% of net sales as compared to $1.9 million or 2.7% of net sales for the third 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 in highly rated fixed-income securities and money market funds. As a result of all of the above pretax operating profit was 18.4% of net sales for the 2008 third quarter compared to 18.1% of net sales for the prior year's third quarter. The effective tax rate for the 2008 third quarter was 25% compared to a 23% effective tax rate for the prior fiscal year third quarter.

Turning to Park's balance sheet, cash and marketable securities decreased to $202.2 million at November 25, 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 a cash balance decrease for the nine-month period. Working capital was $232.7 million at the end of the 2008 third-quarter compared to $237.3 million at the end of the prior fiscal year.

During the current year's first nine months the Company had capital expenditures of $5.1 million and depreciation expense of $6.1 million compared to capital expenditures of $3 million and depreciation expense of $6.7 million for the prior year's first nine-month period. Stockholders equity was $259.5 million at November 25, 2007 compared to $264.2 million at the end of the prior fiscal year. Finally, stockholder's equity per share decreased $12.76 at November 25, 2007 compared to $13.08 at the end of the prior fiscal year.

Thank you, Jim. This is Brian again of course and I have a few comments I'll add as well before we go into Q&A. As Jim mentioned and I think we also reference this in our press release -- we just want to remind you again that we had the expense related to the due diligence regarding Columbia Aircraft Corp. By the way, I also should remind you before I continue that Jim's script of financial comments are on our website. There's a lot of detail in his script, so what I recommend is you check our website for the details. We'll be happy to answer questions about it of course as well.

So there is the $500,000 item, there was a small negative impact relating to the copper foil situation, about $100,000 approximately in the quarter. We did have a (inaudible) pass through that went into effect on November 1 related to a prior increase in copper oil that went into effect a couple months earlier. But the negative impact was carried in the first two months of the quarter meaning September/October. That negative impact has been eliminated -- it's pretty small, though; like I said, $100,000.

Europe performed badly, continues to perform poorly and I think you know we already announced the restructuring of our Mirebeau operation which is outside of DeJean and that's still ongoing. I think you know that in Europe these things take a little while to see through, but it's basically on track and basically what we expected. I think we mentioned previously that we're estimating at a $1.5 million expense or charge that will record in the fourth quarter in connection with that restructuring and that still sounds about right to us. That's the Europe situation.

By the way, Europe is not helped very much by the dollar. Most of the sales of European manufacturing companies are in dollars; of course the local costs are in Euros. Fortunately most of raw materials are in dollars, but we have to pay the people and the rent and the electric bill and everything else, of course that's paid in Euros or Euro as they say -- they don't use the plural, do they?

Okay, a couple other updates -- Pioneer plant in Kansas, that's coming along nicely, but we're really just beginning, we're moving dirt around and I guess we've been doing that more about a month. I think we have our official groundbreaking next month and I guess that's just to help people, make people feel good about what we're doing. But actually the project is pretty well underway already. Did I say Pioneer plant? I'm sorry, the Pioneer plans -- I think I said that. I was talking about the Kansas plant.

The Pioneer plant of course is the plant in Singapore and that plant is done, that plant was completed in the last month or two. At this point we're getting the permits, like the fire permit and everything else. The Pioneer plant in Singapore is our new plant, it's actually on Pioneer Road in Jurong which is a same area that our current plant is located in and that plant will be producing prepreg for advanced composite air -- particularly aircraft structures as well and that is also the focus of the Kansas plant. As you know, the Kansas plant is slated to be online by the end of the next calendar year.

I think we already talked about China being converted for PTFE lamination so that's moving forwards. And of course we probably should just touch on some M&A activity. You know a little bit about the activity with Columbia Aircraft Manufacturing. The Company was actually in bankruptcy and there was an auction that was conducted through the Bankruptcy Court and the Federal Bankruptcy Court in Portland, Oregon.

We did bid on that business, however another company actually ended up buying that company, which is okay with us but we did put a lot of time and effort into it, a lot of due diligence. We were taking it very seriously and we looked at it as a very meaningful potential opportunity for Park. For reasons that we won't go into we ended up not being the ultimate buyer of the Company. Nevertheless it was an important activity for Park during the third quarter.

And I should mention, since I brought it up, that we actually are looking at three other situations at this time which are in different stages of discussion, development, etc., some small, some maybe not so small. So those M&A activities continue -- and that's always been the case where we don't do an acquisition just to do an acquisition, but it has to be right for the Company, it has to be the right company, it has to be the right price. And sometimes, as you know, it takes a little doing to get that special combination of the right company, the right time and the right price but we're working on it.

And I think that's about -- oh, yes, sometimes you like to know how the new quarter is going and we're always willing to tell you what we know. So we have three weeks in the books in Q4, the Q4 which ends basically the end of February. And by the way, we should remind you that Q4 is a 14-week quarter, isn't that right, Jim?

That's correct.

Yes, every I think maybe four years it almost is like a leap year thing. We end up with a 53-week year and when we do we have -- the last quarter would normally be our 14-week quarter. So Q4 is a 14-week quarter, just keep that in mind. But we have the first three weeks in the books of the fourth quarter. And as far as the business levels and bookings are concerned, they're about at the average levels of Q3 and I'll just leave it at that. And I really don't have any other comments about what to expect in Q4.

As some of you who've known us for some years know, it's particularly difficult to get visibility in Q4; in the electronics part of our business it's difficult in any case. But the problem with Q4 is it's really hard to see through the new year because often there could be a -- not often but sometimes I should say I guess, there could be a break between the business activities and December as compared to January and February because people come back from the new year and they have different attitudes, either better or worse, what have you.

So for that reason Q4, from where we're sitting now which is still in December, it's difficult to give you much insight into. And operator, I think that concludes our introductory comments, so why don't we take some questions now?

(OPERATOR INSTRUCTIONS). Sean Hannan, Needham & Co.

Good morning, Brian and Jim. So if I could just follow on to some of your commentary for bookings, is there a way to perhaps discuss how bookings were through the November quarter in terms of how did they trend? Was this linear or were they a little bit more front-end loaded? Because if I recall correctly I think they were fairly strong entering the quarter?

Right. Let's talk in terms of revenues because our revenues of bookings really match because our -- generally match very well because our lead-times are so short. And you remember correctly, September was the strongest month and then October a little bit less and November a little bit less than that. So there was that month-to-month downward trend during the quarter.

What I'm saying is our average bookings during the first three weeks are similar to the average levels for the whole quarter. I'm not talking about continuing the pattern of November, I'm taking you the whole quarter and saying okay, hold our average bookings during the quarter, let's say weekly bookings, and then we're looking at our current bookings level for the first three weeks and we're saying about the same.

Okay. So perhaps they've picked up marginally but not meaningfully?

You know what? We do this because we know we can talk about it and I think the analysts are at risk by extrapolating all three weeks. Because you could have a weak week, a good week and is that going to help you understand the quarter? I don't know, maybe it does. Obviously that's for the analyst to decide, but the facts are what we just indicated.

That's understood. Let me see if I can ask a little bit on the gross margins you had for the quarter. You dropped almost about 200 basis points but you grew your non FR-4 business. And what I'm trying to see if I can do is perhaps just reconcile -- my assumption had been that this is probably a better margin driver within your business, you grew revenues, you grew the productline, is there a way to help give a little color around this?

Yes, we try to do this scientifically, but sometimes we could over scientific it. When you're looking quarter-to-quarter, 100 or 200 basis points it's risky because there are a lot of things, special things that are going to affect a quarter that aren't significant enough that we're going to discuss them. But every quarter there are certain things that are going in and out. But there are a couple of comments we will make.

Of course we talked about the copper impact, not significant but it was there. And another thing that I think it's important to just keep reminding ourselves about is that we look at Park as a whole business, as one business. We look at the top line and then we look at the bottom line and that's sometimes, Sean, oversimplifying things because you have to get into where was the top line and where was the bottom line. There could be more ideal allocations of the revenues and less ideal allocations of revenues.

In this last quarter the European business actually the revenues were okay where the bottom line was not. The bottom line has really eroded in Europe for a lot of reasons and there are intercompany sales as well that affect that. But the European situation really would explain completely and probably even more than completely the margin loss because it probably would more than compensate for those 200 basis points when we look at the whole company together and then as you said the high-performance percentage actually went up and that would have counteracted that a little bit.

And obviously you know what we're doing in Europe, we've already discussed that. Europe is kind of a gloomy place. I'm not saying North America is a rosy place to manufacture anymore either. And of course Asia, we all know that's where manufacturing is -- not heading but mostly has already headed. Europe is a gloomy place, Europe is a highly regulated environment, the costs are high, there's not much flexibility. And I'm not talking about our particular business; I'm talking my opinion, if you're interested, about Europe as a manufacturing location in general. Just the way Europe is set up has not been encouraging for manufacturing; it's made it more and more difficult.

So we're dealing with it to the best of our ability by doing things like restructurings. I wish we could come up with something more positive for Europe but at this point we haven't. So what we're trying to deal with is our cost structure and it's not easy either. Because at some point, you talk about critical mass levels and things like that and different people argue differently about when you get there.

But I think the problem or shortcoming with looking at the Company as just one company is that it isn't that simple. And you have to look really location by location, region by region and sometimes it's not going to actually pan out exactly right. So what I would say in terms of the explanation is that we gave you a couple of special things, but then you need to understand that the European operations did not do well in the third quarter.

I guess another way of looking at it, Sean, is that in the second-quarter European sales were 10% of the total; we're now at 13%.

Okay, that's helpful.

Wait a minute, yes -- 13%. However that's sales, that doesn't mean that the product was produced in Europe, that's why it's kind of difficult to get into these discussions because they get more and more complex. And when a product is produced not in Europe and sold into Europe, which is often the case, the bottom-line impact is usually shared more by the producing entity rather than the European entity.

So like I said, we could go down a slippery slope here of getting pretty complicated. But I think, again, what Jim and I are saying is if you look at the big picture European operations would have held back the gross margin to some extent.

Now I just want to point out that the comparison to the prior year's third quarter I think is favorable because the prior year's third quarter, the top line was quite a bit higher, the gross margin percentage is nevertheless the same. So we're not apologizing, and I want to be clear about that, for our performance in the third quarter. But I do want to still try to explain to the best of our ability our understanding and the answer to your question.

That's helpful, Brian. Lastly and then I'll just kind of jump off-line, you had discussed or mentioned that there are potentially three other businesses that you're looking into, is that correct?

Yes.

And so some being small, some not so small, when you state the size of that how do these size up in relation to Columbia because I think that ultimately sold for about $26.5 million, right, to Cessna?

I was talking in terms of their revenues, not in terms of their purchase price. The purchase price would, because obviously I don't know that, that's speculation. But I was talking more about the size of the business rather than how much they might sell for when I made that comment. But either way actually it probably would apply that there are three of them that I meant you were looking at and one is smaller and two are larger.

Okay, from a revenue standpoint versus Columbia?

Yes, because we have no idea what they'll sell for, so it's very hard to make that comparison. I'm talking about from -- yes, exactly, from the perspective of the business size.

Okay. All right, that's very helpful. Thanks so much for your time.

(OPERATOR INSTRUCTIONS). Jiwon Lee, Sidoti & Co.

Just going back to this gross margin question. Brian, if I asked you how much of this margin decline sequentially was attributable to your unprofitable French operation last quarter?

I think we're saying pretty much if you're looking at Q2, Q3 will explain it. There are other factors as well, but that was the big one.

Okay, so that was the majority of it.

Yes, that explains it.

So going forward, shouldn't we go ahead and expect that much of a benefit next year as you ramp down that operation considerably and essentially exiting from that class, how should we look at that?

yes, we should be clear about that. Our plan is not to exit from the plant (multiple speakers) to continue the business. What I was commenting on earlier is that it's just very difficult to do that and we're not gods here. Of course we'd like to continue everything we have, we'd like to continue the employment for everybody, but we're not gods and sometimes we have to face reality. One could argue as to where you've got your critical mass level and that's not a black and white analysis. However, our current plan is not to close the facility in Mirebeau, it's to downsize and restructure the facility and that is in progress.

These things are by definition I guess difficult in France, that's just how it is and we have some experience with that. But considering that I would say the process has gone well. Ron Brett who is our boss over there I think has done a real nice job and we're basically on track to complete this in the fourth quarter. And obviously the objective is to improve the bottom-line otherwise we wouldn't be doing it and we wouldn't be going through the pain.

And when I mean pain I'm not even talking about the $1.5 million we talked about earlier, it's just a very difficult complex process to go through in France in particular. It's difficult anywhere to downsize a facility because when you're talking about people who have lives and jobs and families and houses and things like that and these are people we know. But in addition to that it's even more difficult in France because of the let's call it the regulatory environment.

Right. But with this restructuring and the charges that you're taking, would you expect that operation to be profitable from an operations standpoint next year?

I don't know that because that really will depend upon the business levels, Jiwon. But apples-to-apples it will be considerably better than if we did nothing. So if you just look at the delta it would be considerably better than if we didn't do something. But whether it's actually in the black or not is going to depend on the business levels. And like I said, it's difficult to anticipate and one could make a case that it's not really a rosy picture for the future of European manufacturing in general. But that really is something -- I just don't feel comfortable answering that question because I don't think we know.

And the thing is that -- let's just talk reality here. I don't really believe we have another one to go here, I think this is probably it. I think we're at critical mass, that's my opinion. So if we're still not working then we're going to have to make other tough decisions so we've bid basically everything I think we can do, let's look at it that way. And now we're going to cross our fingers a little bit and hope that things go well. We're not just sitting around doing nothing. Obviously we're working on whatever market there is, but there's not a very significant market here.

Okay. And the three deals --?

I just want to emphasize -- for the product that we would choose to sell at the prices we would choose to sell them, that's the key thing. We're really all focused on the high-performance (multiple speakers), anything lese doesn't make sense. I think Jim mentioned what was it, over 60% sales in the third quarter (technical difficulty) sales are high-performance, is that right? What was that, Jim?

I didn't provide it, but yes.

Jim didn't provide it, but okay. So that's where we're going, the (inaudible) performance sales in Europe are becoming less and less and are less and less attractive to us as well.

All right. And the three deals that you mentioned, Brian, that you're looking at, is that all in sort of a composite space?

Yes, the answer to that -- let's say composites and aerospace.

Okay. And are they all domestic or any of them outside here?

They're all domestic.

They're all domestic, okay. And the Pioneer plant in Singapore, when did you sort of plan to produce composite out of that plan?

Say it again, please.

The Singapore plant?

Yes, what about it?

Are you planning to produce any composite materials there any time soon?

I hope so. That's the point of building it. But seriously, as I mentioned, we're going through getting the fire permits and the other permits the have to get from the regulatory authorities in Singapore which really is an any day now thing. And then the processes we need to go ahead and ramp -- we're not allowed to even run the treater wet as they say without these permits. So we need to go do an internal qualification, that's the first step, then we need to make samples to send to customers so we can do external qualifications and that's a process that will take a little while.

But yes, we hope that we'll have actual revenue from that facility fairly soon. I'm not expecting that to be significant soon because some of the qualifications for the larger programs could take a while to get done. We don't believe it will be -- I think we reviewed this previously, but let me quickly just explain. We don't believe there's much of a cost reg though and that's because it's really tucked into our existing Singapore cost infrastructure. So other than the depreciation let's say and maybe a little rent we don't really believe there's going to be a big cost reg while we're ramping up the facility.

It is a strategic move and there's no question about that, but I think it's a little bit of a win-win because sometimes with strategic moves you have to be willing to really bite the bullet for a long time, like when we first went into Singapore. But now we have a very significant infrastructure to leverage off of. So I feel that it will work well. I think it is kind of a win-win because I don't think there will be much of a drag as we're ramping up. And of course the purpose of having the facility is so we can exploit the Asian market as it develops over the next five years especially and especially for aircraft structures.

Okay. And the (inaudible) customers that you're trying to qualify in Singapore, are they very different than the ones that are here?

Well, in some cases, yes. In some cases, no. There are some U.S. companies that have operations over there or are building operations there, maybe small operations or looking to grow them. So we're trying to encourage that happening by putting the basic infrastructure in. And there are some companies in China, like I said we've both got costs here so or we're struggling a little bit.

But there are some countries in China that we would not do business within the U.S. but we're looking to do some business with them. And these would be maybe some very large company -- aircraft companies in China that were previously military oriented and now there's a pretty major push in China to emphasize more civilian aerospace and aviation.

Okay, great. That's all for me. Thank you.

(OPERATOR INSTRUCTIONS). [Len Cooper], private investor.

The lady who preceded me already asked one of my questions. The other statement -- I noticed in the paper that Cessna is going to build a new small aircraft entirely in China.

Yes.

Does that have any implications, positive, negative or neutral, for Park and as a potential customer?

Okay, so I don't really want to talk specifically about Cessna except to say that it's a company that we have worked closely with and we have (technical difficulty) believe is very good relations with them. And we work on opportunities with that company and others in many different areas. I would say that it's a really interesting move on their part and I think it's the right move and I believe that it's going to be a trend.

I don't know if you're aware of this, but that's the first complete airplane, western airplane that will be actually made in China. Some of the other companies -- many of the other aircraft companies -- Western aircraft companies actually (technical difficulty) parts made in China, but this is a complete airplane. So that's a new thing and this is what we've been thinking about for the last couple years where what we've been saying is that more and more of the global aircraft industry is going to migrate to China.

That's the point of the Pioneer plant, by the way; these are the types of things we've been anticipating. And the thing is that often the -- at least for the Western companies the way they do these things is they'll qualify the material suppliers in the Western world, maybe the U.S., and then go ahead and build a product in Asia. It's very interesting because that's really very much the same pattern that has occurred in the electronics industry over the last 10 years as well.

Okay, thank you.

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

Thank you, operator. And thank you all for listening in. On behalf of Jim Kelly, Brian, everybody at Park, we went to wish you a very Happy New Year, Happy Holidays, all the best in 2008. We have a little Christmas party that Jim and I need to go to in about half an hour, but we'll be here for the rest of the day so give us a call if you need us. Take care, everybody. Good-bye.

Thank you for your participation. This concludes today's conference. You may now disconnect.