Park Aerospace Corp (PKE) 2009 Q1 法說會逐字稿

Good morning. My name is Rebecca and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corporation first-quarter earnings release conference call. (OPERATOR INSTRUCTIONS).

At this time, I would like to turn today's call over to Mr. Brian Shore, President and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, operator. This is Brian Shore. Good morning, everybody. Welcome to our first-quarter conference call. With me this morning is Matt Farabaugh, who is the VP and Controller of Park. We will start with some introductory financial comments from Matt. I will add a few comments of my own, and then we will go into our Q&A. Go ahead, Matt.

Thank you, Brian. Certain statement we may make during the course of this discussion which do not relate to the 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 March 2, 2008, 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.

I would first like to summarize the financial information included in the news release for the first quarter ended June 1, 2008. Net sales for the 2009 fiscal year first quarter ended June 1, 2008, were $59.8 million compared to net sales of $57.1 million for the prior fiscal year first quarter. Net earnings for the 2009 fiscal year first quarter were $7.6 million compared to net earnings of $7.4 million for the prior year first quarter. Basic and diluted earnings per share for 2009 fiscal year first quarter were $0.37 compared to the same amount for the prior year first quarter.

Now I would like to review some of the significant items in our first-quarter P&L. Sales volumes increased 6% in North America, 5% in Europe and 3% in Asia during the fiscal year 2009 first quarter compared to the sales for the same period in the prior year. Sales of high-temperature laminate and prepreg materials comprised 99% of total laminate and prepreg sales during both the first quarter of fiscal 2009 and the prior year's first quarter.

Sales of Park's high-performance non-FR-4 printed circuit materials, which are a subset of high-temperature printed circuit materials, were 60% of total laminate and prepreg material sales in the first quarter of 2009 compared to 50% in the first quarter of the prior year. Sales of Park's advanced composite products comprised 11% of total sales in the first quarter of 2009 compared to 9% in the first quarter of the prior year. The gross profit percentage for the first quarter of fiscal 2009 was 24.4% compared to 24.7% for the prior year first quarter.

Selling, general and administrative expenses were 10.6% of net sales for the 2009 fiscal year first quarter compared to 11.5% for the prior year's comparable period.

Investment income for the first quarter was $1.7 million or 2.8% of net sales as compared to $2.3 million or 4% of net sales for the first quarter of 2008. The decrease in investment income was attributable to decreases in prevailing interest rates, partially offset by an increase in average available cash.

Earnings before income taxes declined to 16.6% of net sales for the 2009 first quarter compared to 17.3% for the prior year first quarter. The effective tax rate for the 2009 first quarter was 23.75% compared to 24.7% effective tax rate for the prior fiscal year first quarter.

As previously reported, during the first quarter of fiscal 2009, the Company completed the acquisition of the assets of Nova Composites.

Turning to Park's balance sheet, cash and marketable securities increased to $214.3 million at June 1, 2008, from $214 million at the end of the prior fiscal year. We continue to invest the available funds on a conservative basis in highly rated fixed income securities and money market funds. Working capital was $239.9 million at the end of the 2009 first quarter compared to $239.1 million at the end of the prior fiscal year.

Capital expenditures were $5.8 million for the 2009 first quarter, primarily for Park's new facility in Newton, Kansas, compared to $1.8 million for the prior year comparable period.

Depreciation expense was $1.9 million for the 2009 first quarter compared to $2 million for the prior year first quarter.

Stockholders' equity was $276.6 million at June 1, 2008, compared to $269.2 million at the end of the prior fiscal year.

Finally, stockholders' equity per share increased to $13.53 at June 1, 2008, compared to $13.23 at the end of the prior fiscal year.

Okay, Matt, thank you very much. It is nice to do the first quarter, because the financial discussion is always a little simpler because we don't have that many comparisons. And in both first quarters there were no special items, which makes it simpler as well.

This is Brian, of course. A few more comments. First of all, I would just like to say I think we are working in a fairly difficult economy. I am not an economist, but it's just my opinion based upon our experience. The economy itself is soft. But what makes it more difficult is the raw material inflation that we're dealing with. It is kind of a woodsaw effect -- again, I am not an economist, so I'm not going to give you any brilliant analysis on what that all means, except as it relates to us.

And it seems like the raw material inflation is going at a pace that we are not -- that is different than the historical pace. I'll just give you an example. I think you know that our policy is to protect our bottom line and our margins, so that when we have raw material increases, in particular after we give our customers the proper amount of notice -- we don't ram these things down their throats -- so when there is a little lag period, we usually adjust our prices to accommodate the increase in raw materials.

And just one little anecdote is I believe that we had our copper foil increase -- a copper foil increase -- there has been probably two dozen of them, for all I know, in the last few years. The copper foil suppliers really operate as if they're trading on the Chicago Commodity Exchange almost, because they will do an increase and then three weeks later there might be another increase. And that is what happened to us.

I think at the beginning of April, there was an increase in our copper foil costs. So we notified our customers. We discussed it with them. We advised them that we would be putting through what we call an [adder], which is basically an adjustment for selling prices to accommodate for the increasing copper costs effective June 1, which is what we did.

But of course, what happened is on June 1, there was another increase in copper costs. So we are kind of behind, trying to catch up, catch up, catch up. And while there is that lag effect, it affects our margins, of course, at least during that period.

And now we are also seeing the increases in our resin and solvent costs. It is kind of a snowball effect. First of all, they are petroleum-based, and we all know about petroleum. But then, these things have to be moved from Point A to Point B to get to our factories, so there are costs involved in moving product, raw materials, from Point A to Point B, transport costs, which go into our raw material costs as well. Plus our utilities, of course, are affected. That should also not be a surprise.

So it seems to be coming at us from a lot of different directions. And the pace is difficult to keep up with. So we find ourselves always, in the last couple of months, and it seems like that is continuing now, just trying to catch up, trying to catch up, trying to catch up, because like I said, unlike maybe some of our suppliers who have a different attitude about the business that we are in, we don't just call a customer and say, well, tomorrow your price is going to go up. We wouldn't do that. That is not how we work with our customers.

Our customers aren't happy with these things, of course, and I wouldn't expect them to be. But we try to treat them with respect, which is what we think they are entitled to. And so that is our policy. And we end up with these lag situations.

Right now, that lag situation has become a real factor, because we are just always a little bit behind. And the copper example I just gave you is I think a good one to give you some insight into what we're dealing with. So eventually, we will get there, but we're not going to force the issue by doing things that we don't feel proper and we'd don't feel is consistent with our attitudes about how we run our business and how we treat our customers.

So I just wanted to mention that the economy is interesting and a little challenging right now for us to deal with.

Now, okay, so I guess I would say that if anything, Park has probably demonstrated pretty effectively that it's able to operate and work pretty well through difficult economies. And I'm not telling you these things to whine or complain about it at all; I just wanted you to know, since you probably want to know and you're interested, I'm sure, what is going on in our little corner of the world.

We also have a couple of other special things I want to mention to you that would have impacted our first quarter. And in France, in Mirabeau, which is outside Dijon, we had a major boiler problem. We had a catastrophic boiler failure in I guess the early part of May or mid-May. And that really shut the operations down for a while. It is a little different in Europe, trying to get things done quickly, and it took quite a while to get that operation up and running again.

Meanwhile, in France, your costs are basically fixed. You don't have the ability to send people home. You could, but you pay them anyway. So that was actually unfortunate because that didn't help us in our first quarter very much. And we are still kind of paying for that, because we have the operation up and running, but we are using a rented boiler, which we have to pay for while we are going through the repair process of our existing boiler. And we're still paying the rental on that.

Another problem I want to mention to you, which is a little bit -- it is not so much an economic problem -- which is, remember last summer we announced -- maybe it was September, I don't remember when we announced it -- that we were going through another one of these restructurings in France. This is the same location, in Mirabeau. And we did that, and I think it went into effect sometime last -- the fourth quarter. We put up a charge. And that was well designed to help that operation get back to something close to breakeven. But unfortunately, the currency moved against us in a significant way since last summer. So it kind of put us back behind the power curve in France, because we sell in dollars and our costs are pretty much in euros.

And we also are in the process of looking at our manufacturing footprint, which is something that we do from time to time. And it is something we have to do. We don't really like doing it, because that is kind of a code word for talking about people, of course. And that is something we feel pretty -- we have a lot of passion about our people. But nevertheless, it is our responsibility. So I just want to let you know that we're looking at our manufacturing footprint right now in a couple of different areas to decide whether we need to make adjustments. And we might. We might.

And we wouldn't do that, by the way, just -- I want to make sure you understand -- because we feel the economy is down for six months or nine months. We only make adjustments when we feel that on a long-term basis it would be necessary -- I shouldn't say of course. We are really talking about the manufacturing base for our electronic product line. And we would be talking about North America and Europe, not Asia. Asia, the market is still relatively strong, I would say, for even our electronic product line.

So I just wanted to highlight just one comment Matt made, and that was the 60% high-performance mix for our electronic product line. That is, I think, still quite something. I think the last year's first quarter, Matt says it was 50%. Going from 50% to 60% is very important. And that is really why our bottom line continues to hold together, even in difficult economic circumstances or working through a difficult economy.

That is really a critical part, because in the electronics product line, that is where we make our money. The non-high-performance product line, as I've said to you a number of times, that pretty much just pays the light bills. The high-performance product line is where we make our money.

And I think I have also commented, and I will say it again, because I believe it is true -- in the electronic product line, it's almost like there are two different product lines, because the models, the financial models, the economic models for those product lines are quite different. Like I said, the high performance means high margin; the non-high performance means you pay the light bills on a good day.

Let me give you some updates on some of the other activities we have been talking about for I guess the last few months. By the way, I should mention that our Annual Report just came out, I think, yesterday. So probably some of you haven't seen it yet. But when you get it, you might want to take a look at the Annual Report, because there will be more discussion about some of the activities that I will be just covering very briefly here.

First of all, the Pioneer Plant -- remember the Pioneer Plant? That is a plant we built in Singapore for the advanced composite product line for the emerging aircraft industry in Asia. I don't remember if we reported this already, but in case we didn't, we will report it now, that that plant was completed. We had our grand opening several months ago. We are going to ramp that plant up slowly, because the market is just emerging. I think I have explained before the strategy is to get in on the ground floor ahead of the market. But the good news is we have already shipped some product for sale. So we are getting that started.

That Kansas plant is coming along very nicely. We have had our share of weather issues. I don't know if you have noticed what the weather has been like in the Midwest in the last few months, but it has made it a little more difficult for construction. But nevertheless, we are pretty much on target. The building is complete. That is the good news. And we are well into the process of equipment installation. And we are still targeting a calendar year-end startup for that plant.

Again, I think that is pretty good news. And a lot of people at Park, anyway, are excited about that, as well as, I believe, the market seems to be taking notice.

We reported that we purchased a company called Nova Composites a few months ago. It is now called Park Aerospace Structures Corp., located in Lynnwood, Washington, right outside Seattle. And that seems to be going well. I think that was a good move for Park. That company, which is now called PASC, Park Aerospace Structures Corp., produces composite structures and parts and components for airplanes rather than the materials, which is the product line that we have been in historically. So that is forward integration, if you will. And I think, so far, I feel pretty good about that move.

Another thing that we are working on -- we touched upon this, I believe, in the last conference call, which was not too long ago. Our fourth-quarter conference call was a little bit later in the cycle. It also was written and discussed in the Annual Report. In the last month, we have been putting -- Park has been putting a lot of time and effort into a plan to build a plant in Mexico to make volume composite parts for the aircraft industry.

We have not made a final decision. We are looking at the area of Chihuahua, which is about 200 or so miles south of El Paso. And like I said, I want to be clear -- we have not made a final decision. But we are putting a lot of effort and work into that, and it is looking pretty encouraging. We are pretty excited about that prospect. As a matter of fact, the week after next, we have another large team going back into Mexico to do some more research on the details of setting up a facility there.

And the last thing I would just say, related to our aircraft-type product line, which is both materials, the prepregs and other parts, is, I could be wrong about this, but I just want to share with you. And I'm getting a sense that maybe we are finally seeing some real ignition. I don't know if it's because we've added the parts or maybe we've just been at it for a year or so now, but we have seen some RFQs from some major aircraft manufacturing companies that are household names. You definitely know them.

And that is something we hadn't seen before. We were basically nobodies. We were not really even considered by serious companies until recently. So it took a little while, I think, to kind of introduce ourselves to the real world there. But I have a sense that is happening now. And I do think in part, it might relate to adding the parts product line -- some of the RFQs relate to parts, some relate to materials. But again, this is something new just over the last couple months. We had not seen these kind of things from --significant, large RFQs from very major aircraft manufacturing companies, again, that you would know of.

So I'm feeling encouraged, and I don't know what will happen. But like always, we don't mind sharing with you what we know as long as we are open about qualifying our statements by just being clear that we are just telling you what we feel, and we are not talking about hard facts here.

And I think that is it for the introductory remarks. Operator, can we now go to the questions, please?

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

The first thing I want to see if I can dive into, and Brian, thinks very much for providing a couple of pieces of color that I think get at gross margins. Sequentially you declined by about 170 basis points, while at the same time your advanced composites group was up as a percentage. Non-FR-4 was up as a percentage. That usually helps gross margin.

Is there a way if you can help to quantify the impact of copper within the quarter, and then some of the other impacts from what you had referred to on the resin and solvent side, and then also the impact from the boiler failure?

I think the boiler failure was maybe $150,000, $200,000 in Q1. That is a little easier to quantify. You probably noticed that normally we do give quantitative indications on these things. And it wasn't a mistake or an oversight that we didn't do it this time. The reason is that it's moving around, and we're having a little trouble getting a point at which to quantify it. So I think we're going to pass on that.

I think you obviously know our Company pretty well, because you cited really important factors, which are the advanced composites product line grew, and also the high-performance mix grew considerably. Obviously, without those factors, the gross margin would be worse. But that is always the story. The only way we'll grow our gross margin is by continuing to move up our technology into our higher-margin product line.

So the good news is we continue to have some success in that area, but not enough in the quarter-to-quarter, Q4-to-Q1 timeframe, to totally offset the difficulties that come at us pretty hard with the economy.

I think we are going to decline on quantifying it. But I think you also, being a good analyst, could pretty much figure it out, because that is really the difference in the gross margin right there. And then obviously, you have to add to that the benefit that we did receive from the better product mix. So you have to take those basis points, add something to it for the product mix advantage. And that is going to be your GAAP. And that would be -- all these things is going to be the -- not just copper, it's going to be raw materials in general. Utilities are not a minor thing. We normally don't talk about utilities. But utilities have had an impact.

And freight -- boy, freight out, and of course freight out doesn't affect our gross margins; that is an SG&A thing. But freight in, freight in normally is not a broken-out item because normally it is built into raw material costs, because the supplier normally pays the freight. But either way, we are paying for it one way or another.

So the boiler thing, obviously, is a one-time incident, so we don't mind helping you with that. These other things are ongoing. As you know, it is our strategy to catch up, but we are definitely into the lag effect in Q1 and Q2 as well. And hopefully, we will catch up at the end of Q2. But it is hard to say, because the raw material inflation is going at a little different pace than we have seen recently.

Well, is it possible, just from an order of magnitude, in order to differentiate between the copper impact versus all other, is there a way to get a sense of that? Was that, if you where to look at your inputs there, utilities, freight, resin and solvent versus copper, was copper, say, in order of magnitude kind of 50% of that impact there, or how do we think about that?

I would rather not respond to that question, except to say it was less than 50%. I can tell you that. But I would rather not quantify these different elements. And I'm hoping at the end of the second quarter, we will have a little more of a stable situation. And then we could go back and review, even if we could do a review of the impact for Q1 and Q2 at that point.

And you had indicated that on June 1, you had communicated an increase basically tied to the copper foil increases that you had in April. You had communicated that to your customers. But then at the same time, on June 1, you got another copper foil increase. Have you already had conversations with your customers on when that will be passed through, when that takes effect?

Yes, it's not going to be -- the earliest it would be would be August 1. It might even be September 1. It may depend upon which customers. It has been a little more difficult to -- we want to quantify this impact with a line in the sand, if you will, and we don't want to have three or four discussions with customers over the course of a week about different things that are happening. It's not just the copper. We want to capture everything, the other raw materials as well.

So we are trying to do that. And it is a little more difficult, because there are more raw materials involved, and not everything was a June 1 event. And the last thing we want to do is go in and talk to our customer today, and then tomorrow or next week call them back and say, well, sorry, we've got some more news for you.

So it is not going to be July 1, I can -- the earliest it would be would be August 1. And I have a feeling it may be September 1, at least in some cases, depending upon when we get ourselves organized enough and comfortable to feel we have something serious and factual to discuss.

When do you expect the boiler failure to be repaired and back online? When does that come out of the picture?

I think the end of this month, it should be -- we are incurring a -- it's not all that significant. We are incurring a rental cost of I think about $8000 a week, which is just after cost. And that is the only continuing impact, because the real impact, of course, is not being able to run a factory and all those costs, all these people, an appreciation and no production to recover. So I just wanted to mention that, but I don't think it's significant enough to really put into any kind of equation or calculus for your Q2 model, for instance.

And then if I can just ask one last question on the RFPs or RFQs from the aircraft companies, and then I will jump back into the queue, how many different companies are we talking about? And then, is there a way to differentiate how much of that interest is within parts and how much of that is within materials, just in terms of order of magnitude?

It is three that we have in hand, and one parts and two materials, which isn't surprising, because we just started on the parts. So the instance with the parts, we were way ahead with this customer, even talking to them -- actually, before we even closed the transaction, we said we've got something coming here and we just want you to be aware of that. So they were pretty much cued up to work with us on the parts product line.

Okay, that's very helpful. I'll jump back into the queue. Thank you.

Jiwon Lee, Sidoti & Co.

A couple of quick housekeeping questions for Matt first, please. What was the geographic sales breakdown percentagewise for the quarter?

Matt's script is on our website. I just wanted you to be aware of that. Did you cover that in your script, Matt? Maybe not.

Well, no. We talked about the increases in the --

Okay, so could you give that breakdown? Do you have that?

Yes. The sales breakdown is 52% North America; 11% Europe; 36% Asia.

And then a top five customers list as a percentage, and if you could cover top 10 and 20 as well.

The top customer was Sanmina at 12.8%; and then we had TTM at 12.4%; Pegasus, which was 11.1%; TAPCO was number four at 8%; and Moltech was number five at 7.4%. The top 10 totaled just short of 70%. Top 20 was just short of 80%.

And if I could go back to, obviously, the relentless commodities costs, I guess the question is more for Brian. What was the magnitude of percentage of the copper foil pricing that you experienced in June, or let's say beginning April and June?

Like I said earlier, I don't want to quantify it this one time. I think we have been pretty open about quantifying these things in the past. I think what I would like to do is wait until we announce the second quarter, because hopefully things will have settled out and then maybe we can give you more specific detailed numbers on these different elements of the commodity escalation, if you will.

Then let me ask you a question differently. Sequentially, your FR-4s in terms of the dollar contribution, I can see it went down by several million dollars. Was that a matter of a weakness in markets, perhaps a little bit of a share loss, or a conscious decision as your raw materials costs went up?

The reduction of the FR-4 sales, I think it is really just an ongoing thing that we have been dealing with for years now. But maybe it is accelerating a little bit. So we definitely have lost market share, but it is always a conscious decision to lose market share. And the way that happens is that we are asked to adjust our price. We say no, and then a customer will do something else if they want to.

And we always say, look, if you feel you can get what you need at a lower price, you really should do that, because it is not really our future. It is not something we want to focus on. Now, we are absolutely not exiting the FR-4 product line. We have actually introduced some new products in that area as well, because some of our customers are still very interested in working with us in that area. But we don't hold on to lower-margin product on price. We don't chase the price down the tubes.

And I think we discussed this numerous times over the last few years. Once you get into that mindset and that mode, I think you are in big trouble -- well, if you want to be a public company, you are in big trouble, because there's really no bottom, there's no land. It is very seductive to trap yourself that way because it's just a little bit, we will get more business. Well, it doesn't really work that way.

But the share of FR-4 I don't think is really related to the economic conditions we have been describing. I think if you want, it's more just an ongoing continuing process, which like I said may be accelerating. More and more, this work -- and the way that we really would lose share, by the way, is our customers lose share. That is what really happens. Our customers lose share, to where? To the Asian manufacturers, Chinese manufacturers. We don't really do very much except in Asia or except with a couple of special cases where the customer really needs something that we provide that would be more unique even than an FR-4.

But those are the exceptions. And the Chinese are [coordinated factories], have invested so much money in their factories. They are good at what they do. They have good quality. And really, why wouldn't a customer want to source their FR-4 needs from a lower-cost area? And if they can get what they need, if the quality is fine and the delivery responsiveness is okay, it is in their interest to do that. And we are not going to stop them -- or we are not going to try to stop them.

So obviously, you make less money on FR-4s, but when you put in these adders, percentagewise, is that pretty uniform or is there differences between FR-4s and non-FR-4s?

The thing is the adders we've talked about before, that relates to copper. And copper is copper. And it is an interesting question, because let's say we have a laminate that is a [-13 or a -6 fastener] laminate, if it has a half an ounce of copper, it is going to be -- the actual unit cost for the copper is going to be the same, or one ounce of copper is going to be the same. So the adder is not a percentage. It would be let's say $0.0031 per square foot for that type of copper. And it is not going to make a difference what kind of product it is, because the copper is going to cost the same generally. You understand that?

Yes, I do, that is helpful. Two more questions, please. In terms of the PCB materials, how is the quarter tracking so far? What kind of a market do you see out there as you see them now?

I'm sorry, could you repeat that question?

How is the quarter tracking on the PCB materials side?

Do you mean the second quarter?

Yes.

Yes, the second quarter seems to be a continuation of the first quarter -- nothing remarkable. Of course, we have a few weeks, three weeks of sales on the books. So it is pretty early to tell you about the second quarter. But so far, we are not seeing anything remarkable. It seems to be a continuing type situation in terms of the top line. So like I said, I think the economy in general is a little weak, but this story is really the commodity escalation in terms of our particular little corner of the world and our operations and our business and our gross margin.

And finally, on the composite materials, your sales there sequentially grew at least $1 million. Was the sales gain mostly domestic or was the Singapore adding on a little bit?

Mostly domestic. We're just really bringing Singapore up. And as we, quarter to quarter, hopefully we will have some good news here. But it is consistent with our expectations. We did not commission a plant and expect to fill the plant up or anything close to it. We felt that it is almost like there is a movie of -- build it and it will come -- something about baseball, I think. But that is kind of the theory, is let's get on the ground, let's have the capability.

We have been marketing in Asia in advance of this for several -- I should say maybe about a year and a half -- I think about a year and a half, pretty aggressively. So the Asian market, to the extent that it is there, already knows about us, knows who we are, knows what we are doing. And so I think we have a little bit of a head start. But it is still going to take a little while.

And I missed, Brian, your commentaries on the new customers. Did you say three new customers on the composite materials side?

No, I said we received -- our RFQs often are very -- requests for quotes, or RFPs, requests for proposals -- the way the aircraft industry works is a little different. You go out with these very large, could be for five-, six-year agreements, requests for proposals regarding products, whether it is for us materials or parts. And the amounts could be quite significant. It is not just one item, and it is usually a large array of items for large programs. So these are big events.

It is different than the electronics industry and electronics product line. We don't really see that kind of thing very much. The aircraft industry is different because they start new programs and they want to get their supply base set up for the new programs. And that is different. We have not seen -- in the past, when the Company, when the operation was called FiberCote, it was not really, I don't think, a strong player. We were kind of nobodies, I think, actually.

I think that is changing. And in the past, we would supply not even directly to the OEMs. We'd deal with these kind of contractors. And I don't think we were taken seriously, and probably rightfully so, because I don't think we were a real strong -- we didn't have a real strong offering at that time. But we've worked pretty hard at this for the last year and a half.

It has been a little frustrating for me, actually, because the aircraft industry is a little conservative, for a good reason, I guess. So it is a little slower than I would like. But I told you just because I thought you should know, that I am starting to sense that maybe something's happening. Maybe there's some sense of ignition. And these three -- actually, these four RFQs from companies, all of which you would know, that we have received recently -- well, one we haven't received. It is supposed to come in the next couple of weeks, but we know it is coming.

And those often could be many, many, many -- it could be -- I don't want to throw numbers out, but big numbers per year, very significant numbers per year -- for five years is fairly typical, actually.

And you're on track for sort of a year-end completion over at the Kansas, right?

Say that again?

Your Kansas plan, you are on track to I guess build out the facility by year end, calendar year?

Yes. We hope to have the -- well, hoping -- the plan is to have the facility done by the end of the year, operating by the end of the year.

I know this growth was not that easy for you, so congratulations, and that is it for me.

Buzz Zaino, Royce.

The Singapore plant is up and running now. And I would guess you are booking costs. Is that a net negative loss situation?

Absolutely. You've got depreciation. Let me just comment on that, because I think it is a pretty good situation for what it is, because we didn't set it up as a separate business unit. It is really run as part of Nelco Singapore, which has been around for 20 years, has very robust infrastructure in terms of engineering, in terms of facilities, in terms of quality, in terms of accounting, in terms of HR. We're not duplicating any of those costs at all, and even the labor costs, even the direct labor.

Another thing about Singapore is you can never give employees enough overtime. If you give them seven days a week, they will take it. We try not to do that. So our plan is to -- it is a treating operation, by the way, which is what we already know, which we were already doing in Singapore with some wrinkles and twists. Our plan is to use the existing labor when we run the factory, which is certainly not every day -- we bring them over to the Pioneer Plant, new plant, and we use the existing labor. We just pay them overtime.

The costs, though, are, of course, going to be the depreciation. That is going to be a big one. There is some rent involved. There are fixed costs involved. And those are going to through our P&L now.

And is that under $100,000 a quarter?

We should get back to you on that. I think yes, but I don't have that in front of me, and I would rather not -- I think the answer is yes, $100,000 a quarter.

And when would you start booking costs against the Kansas plant?

Probably January. That is our guess. If the plant is actually producing -- it will be when we sell our first product. That is when the plant is commissioned, so to speak. And that is when everything would start to go through.

And who is doing the cash management on your cash portfolio?

You mean outside? We manage it internally, but who helps us?

Yes, I was just curious as to who is making decisions. We haven't done anything foolish to date.

Well, we make the decisions at Park. And we are very careful not to do anything foolish. Some people think we don't get a very good rate of return on our investments, and that is probably a fair criticism. But that would be the criticism, not that we're taking any risks.

So basically, this is liquid, short-term securities?

Yes, you are right. It is a pretty solid portfolio, absolutely. We make all of the decisions. We have people that actually do the work for us outside, of course, because we don't have brokers' licenses or anything. But yes, we make every decision.

Mona Eraiba, TCW.

You mentioned that there is a lag in increasing pricing. What kind of a lag? And it appears like you might not have too many options if you get commodity increases to pass it to your customer, even if it is not really what you want to do.

The options are not different. It is just that the lag is an ongoing thing, because it's not just one commodity.

Right, but how long of a lag do you usually have?

I think what we have explained previously is we want to give our customers at least a month notice of our intentions. So if we get an increase, often we don't give them any notice at all or effectively no notice. It takes us a little while to sort through it and try to determine what it means and what the impact actually is, because we want to make sure we're doing this precisely and correctly. So it is going to be at least two months, because it is going to take a couple weeks for us to sort it out. And then we need to give the customer a month to absorb the bad news, so at least two months in any particular instance.

But you can also make this process -- if it is going to happen this way, you might have no option except to get your customers to sign some agreements with you to pass through the commodity costs.

That is not how we treat our customers. We are not going to --

But that is how your suppliers are treating you.

That is right, but that is not how we treat our customers. Just because somebody else might treat us that -- and not all of our suppliers. But just because somebody else might treat us that way, that doesn't --

I am just saying you might not have the option down the line, because if you continue to have pressure on your margins --

I think I answered the question to my best of my ability. And I feel that we're doing the right thing. So I don't know what else to say about that.

So you usually have a month to two months' lag between what you get and once you increase your pricing.

It wouldn't be a month. It would probably be more like two months.

So there is nothing you could really do to reduce your costs as it relates to these commodities or to have more, like hedged -- hedge the pricing for some of the stuff that you have.

We have always looked at that. The hedging would really relate to copper. That is the only thing that would make sense to hedge. And we haven't done it, although we have evaluated it. It is probably, looking back with the benefit of hindsight, Monday morning quarterbacking. It has probably been the right decision for us, because the people that have done that have not been successful with it.

That is always a guessing game. But no, I don't know what else we could do. I do believe, and I should say, because I think it's unfair for me to just give you the impression that all our suppliers are misbehaving and that our suppliers are responsible, because I don't want to convey that information. I think that also, you all could talk to our suppliers about this and ask them, but I think that we have very good relationships with our suppliers, long-term relationships with our suppliers.

So I don't think there's a lot we could do to improve that. Obviously, this is a real thing for them, and they are dealing with real cost increases in their operations and in their raw materials as well. So it's not something they're just making up. It is not something that they're just kind of abusing us with. Sometimes we would wish that there would be a little more time to deal with these things, and sometimes we wish that it wouldn't come so frequently. But I don't know what else we could do, I really don't.

[Going to] sign long-term contracts with the resin guys?

We have been dealing with the resin guys, and they are good companies, for a long, long time. When it is in our interest to have a long-term arrangement, we will, and when it's not, we won't. But like I said, anybody who wants to could talk to our suppliers and ask them what they think. But I think that we manage our suppliers pretty effectively. And that doesn't mean abusively; that means effectively. And I think that our suppliers would probably back me up.

What about the RFQs you are getting? What's your estimate of knowing what is the leadtime on the requests for quotations that companies will make decisions?

It would be over a lot. But I think normally when an RFQ is received, you're talking about several months before final decisions and awards are made. Not a year or anything like that, but it could take a few months. We're talking about large companies. They have a lot of different internal controls and processes that they go through with different departments involved with these things.

You mentioned also the restructuring plans for reducing costs. When do you think that is going to be cemented?

What I was talking about is evaluating our manufacturing footprint.

But you're still evaluating that; you haven't come to a conclusion?

I think that is a correct statement, we have not.

But you started several facilities in countries like the U.S. and Europe, so you are --

We started several facilities?

I mean one facility, Kansas.

Okay. I guess I should repeat, because I wasn't clear. The evaluation of the manufacturing footprint relates to the facilities that produce the electronic product line.

Okay, so it is not a broad-based kind of -- okay, I got it.

Operator, any more questions?

Sean Hannan, Needham & Co.

So if I could just dive into CapEx, I think off the last call you had some expectations that shouldn't exceed $10 million for the fiscal year. You did $5.8 million in May. So should we assume that this plan stays and we are looking at roughly $4 million over the next three quarters? And if you can provide a little bit of color and what the linearity of that, it would be helpful.

That was an incorrect indication. I don't remember exactly, but if we said $10 million, that was incorrect. It is going to be more than that, because the Kansas plant itself is $15 million. And most of that spending will be done this year. Some of it was last year, but most of it this year. The first quarter, as Matt said, was mostly the Kansas plant.

I think we have indicated a number of times that's a $15 million plant, so that should really be the big one this year. But of course there are other things that we are looking at that haven't been approved yet. And then of course you have to add just the maintenance capital to that item.

The spending with the Pioneer Plant is done, of course. That is all complete. But there is no way that we're going to come in under $10 million. And our guess is it is going to be somewhere between, probably closer to between -- somewhere between $15 million and $20 million, maybe somewhere in the middle there, between $15 million and $20 million. And the large majority of that will be the Kansas plant, as we said.

And I know that you haven't made any specific decisions around how you address Mexico and so forth, but is there a way to at least get a sense in terms of the size of the facility that you'd install there, and just a little bit more color around that might be helpful.

Okay, let me try. Again, as long as everybody understands that we haven't made a final decision and we're working at this very hard, where we are still developing the concept. It is something that a lot of us are putting a lot of time and effort into. I just want to make sure everybody is clear on that.

But now that you understand that, or I have repeated it, anyway, yes, it is fairly -- the concept is a fairly large facility, because again, it would be for volume manufacturing, unlike the Washington -- Lynnwood, Washington, facility, which is more for first articles and engineering work or prototypes and more technically challenged work, do tooling design and part design. Mexico would be more for volume manufacturing. So it would have to be a much larger facility.

And we are talking at this point in excess of a 100,000-square-foot building. The budget -- I will just throw a round number out there, but under the condition that nobody is going to hold us to it, because this is just a round number, maybe about $20 million, including everything, including the facility itself.

And the timeline, people always want the timeline -- it actually could happen pretty quickly, because it is a different kind of facility than, for instance, the Kansas facility. A parts facility is basically a big building with big -- it is like a big box and you put ovens and setup areas and layup areas and things like that, and autoclaves in it. But there's not a lot of additional infrastructure. The equipment actually has fairly short leadtimes, unlike a treater, for instance, which is always custom-made, very expensive. If we order a treater now, it could be 18 months before it is even delivered. And then you've got to go through the installation process.

So once we make a decision, obviously we will give you all the details. But if we go forward, it could actually happen relatively quickly.

That's very helpful. Thank you.

Jiwon Lee, Sidoti & Co.

Just a quick follow-up question. Brian, in your inventory, you seem to keep this fairly low. But just on the copper foil again, typically how many months of inventory do you keep?

How much do we keep? How much do we have?

Yes.

As you pointed out, we don't keep very much inventory. We try to keep our inventory fairly low. And one of the things, since I've been -- I didn't mean to, but I have probably been saying some maybe not-so-favorable things about our suppliers. One of the things I should say as a positive is that, because of the good relationship we have with the suppliers, we are really comfortable not running with very much inventory at all because we work very closely with our suppliers logistically. So we really don't need to keep a lot of raw material in-house in order to be ready to move when we need to move. And particularly with our electronics product line, our selling leadtimes are very, very short. So we just have to have the raw materials available that we need when we need them. But that has been a good thing with our supply base.

In other words, when they are raising pricing, it hits your bottom line pretty much right --

I know that this is the same discussion almost about when we hedge. And you tell me where copper is going to be one month from now, two months from now, three months from now. I mean, everybody has an opinion, and that is not our business. So we try to stay out of the realm of being speculators. We have done some things in the past, Jiwon, hedging or long-term agreements, longer-term agreements. But you get these guys, they go on these TV shows, financial TV shows. I don't know how much money they make, but I can tell you one thing, they make a lot more money than I do. And they are brilliant, except half the time they are wrong about everything. So you show me the genius who knows where the copper is going to be one month or two months or three months from now, give me his phone number and we will talk.

That's very fair.

Maybe I am a little bit cynical, probably a sign of getting older.

(OPERATOR INSTRUCTIONS). Mr. Shore, at this time you have no further questions.

Well, we ran for almost a whole hour. So we thank everybody for listening. Thank you for your interest. Have a wonderful summer. Our annual meeting this year is actually at our office in Melville. That is a change. So maybe some of you will make it out for that. And thanks again. Matt and I will be around today if you have any follow-up questions. Have a good day. Bye.

This concludes today's conference call. You may now disconnect.