Park Aerospace Corp (PKE) 2015 Q3 法說會逐字稿

Good morning, my name is Sammy and I will be your conference operator today. At this time I would like to welcome everyone to the Park Electrochemical Corp. third-quarter fiscal year 2015 earnings release conference call. (Operator Instructions) At this time, I would like to turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, operator. Good morning, this is Brian Shore. Happy New Year, everybody. I have with me Matt Farabaugh, our Vice President and CFO, as usual. And we'll begin our third-quarter conference call with our introductory remarks then we'll go to questions. Why don't we get started, Matt?

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 March 2, 2014, 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'd like to briefly review some of the items from the third quarter ended November 30, 2014, P&L, which are not specifically addressed in the earnings release.

During the fiscal year 2015 third quarter, North American sales were 50% of total sales, European sales were 9% of total sales and Asian sales were 41% of total sales compared to 51%, 6% and 43% respectively for the third quarter of the 2014 fiscal year and 46%, 6% and 48% respectively for the 2015 fiscal year second quarter.

Sales of Park's high-performance non-FR-4 printed circuit materials were 92% of total laminate and prepreg material sales in the third quarter of the fiscal year 2015, 89% in the third quarter of 2014 fiscal year, and 92% in 2015 fiscal year second quarter.

Sales of Park's electronic materials were $25.4 million or 73% of total sales in the third quarter of the 2015 fiscal year, compared to $31.5 million or 79% of total sales in the third quarter of the 2014 fiscal year, and compared to $33.7 million or 80% of total sales in the 2015 fiscal year second quarter.

Sales of Park's aerospace materials and parts were $9.3 million or 27% of total sales in the third quarter of the 2015 fiscal year, compared to $8.2 million or 21% of total sales in the third quarter of the 2014 fiscal year, and compared to $8.6 million or 20% of total sales in the 2015 fiscal year second quarter.

Investment income net of interest expense for the third quarter of the 2015 fiscal year was negative $139,000 compared to negative $48,000 in the third quarter of the 2014 fiscal year, and negative $134,000 in the 2015 fiscal year second quarter.

Depreciation and amortization expense for the third quarter of the 2015 fiscal year was $890,000 compared to $1,012,000 in the 2014 fiscal year third quarter, and $865,000 in the 2015 fiscal year second quarter.

Capital expenditures for the third quarter of the 2015 fiscal year were $148,000 compared to $161,000 in the 2014 fiscal year third quarter, and $179,000 in the 2015 fiscal year second quarter.

The effective tax rate before special items was 10.1% in the third quarter of the 2015 fiscal year, compared to 3.3% in the 2014 fiscal year third quarter and compared to 13.3% in the 2015 fiscal year second quarter.

During the second quarter of the 2015 fiscal year, the Company had no customers that were more than 10% of total sales.

Top five customers were GE, ISU Petasys, Sanmina, TTM and Viasystems in alphabetical order. The top five customers totaled approximately 39% of total sales, our top 10 customers totaled approximately 53% of total sales and the top 20 customers totaled approximately 67% of total sales.

Okay, thanks, Matt. This is Brian again. And a transcript of Matt's remarks are already posted on our website in case you want to check it out.

So I have a few things I'd like to cover this morning before we go to questions. First of all, let's talk about the numbers for Q3. I think the bottom line doesn't require much discussion. It's really the top line, because the bottom line is driven by the top line in this case, with nothing unusual about the bottom line except the revenues which are way off.

So, let's talk about the revenues in the third quarter. Let's back up a little bit to the second quarter call, because based upon the comments we made in the second quarter call, the revenues really should not be a surprise. Let's go through that.

Okay, so remember we discussed that in the first quarter and also including -- the first quarter including, as well as the first month of the second quarter which is June, the revenues are quite strong. But we feel that was really an inventory build that was artificial based mostly in Asia. Then we commented that in July, the revenues fell off further and then in August even further than that.

But also we explained that in June, the June revenues were at the level of the first quarter. So we knew what the June revenues were. We knew what the total was for the second quarter. We knew that July was the middle month, August was a down month. So it would've been pretty easy to figure out within a small range what the August revenues were.

Then we said in the second quarter call that the first four weeks of September, because we had four weeks on the books, were tracking August. We also said that we don't know -- we always give this caveat about the electronics industry, probably in the last 20 years probably 100 times now, how unpredictable it is and how it can turn on a dime, and how a lot of smart people get fooled by the changes in the patterns in the electronics industry.

But we were talking about going through that inventory correction and we were at that low level in August and September. We also said that we don't know, but this is the unpredictability part about it, the caveat part about it. And we said that we, of course, ask and ask and ask what people in the industry think in terms of customers and OEMs, and they were talking about maybe a recovery by the end of the calendar year.

The recovery meant that the inventory would have been normalized; we'd be back to normal levels. Now at that time, I think we said and which I still believe to be correct, that normal is somewhere between the levels of the first quarter and the levels of the third quarter. The first quarter was artificially inflated; the third quarter was artificially depressed because of the inventory work off or work down.

So, we pretty much knew what the revenues were in September. And we also indicated we didn't see any recovery until the end of the year. At least that's based upon what people were telling us, with the caveat that we could have been wrong.

So I think it would've been pretty straightforward to get a pretty good feel for the revenue levels in Q3 based upon our Q2 call. The bottom line is really driven very much -- in Q3 the bottom line is really driven very much by the revenues, which were quite a bit off.

So let's take -- so I'm just going through my notes because we want to make sure that I don't miss anything important. Here's something else you should know, that it's often something you ask. If you look at August, September, October, November, it's uncanny how flat it is. It's very -- there is very, very flat month over month over month. Those four months are very similar. I've never seen anything like that; it's uncanny.

So if you take August and you take September, you extrapolate to October and November, you have the third quarter.

Now, remember I said that people were telling us in the second quarter, I said that during our second-quarter call rather, I said if people were telling us that maybe there would be a recovery by the end of the year, maybe the inventory would be worked out, and we don't know that yet. What I can tell you is the facts. And I always am very careful to explain, we don't forecast; we just give you the facts that we know. So, often we tell you what we have on the books for the current quarter.

So, as far as the fourth quarter is concerned, we've got to look at the month of December, which unfortunately is a difficult month to draw conclusions from. But what I can tell you is the last week of November and the first two weeks of December were up as compared to that pattern for the last -- the prior four months which is so flat. Those three weeks; last week of November, first weeks of December, which is a five-week month, were up. And the last three weeks of December go down.

Now why is that? A lot of people would say, well, we had the holiday weeks, Christmas and New Year's, and the pattern would be consistent with that, that during those weeks things fall off. So it's hard to read what's going on, because we're trying to figure out what's going on in the context of these holiday weeks.

What I can tell you is that last week of November, first two weeks of December were up. Then the last three weeks -- week three, four, five of December, our fiscal weeks in December were down, but that I don't think is surprising, and it could be explained by the holiday situation. We just don't know that.

So at this point, we have very little visibility because of the confusion of the holiday situation. And we have on the books so far the four-week -- sorry, the five weeks of December; our five fiscal weeks of December. So, as usual, we're not making any predictions or forecasting. But we thought you'd be interested in that information, which is the most current information we have in terms of our revenues.

As I indicated in the last few quarters, we don't really talk about our bookings anymore because we have such lumpy bookings in aerospace that they could be misleading, so not helpful often to talk about bookings. And we don't want to give information, even though it would be factually correct, which could cause us to reach the wrong conclusions.

All right, let me just see -- okay, so I guess that covers that. And then there's a couple other things I want to go over with you. And last quarter, one of our analysts was asking about electronics and how our market broke down. And it's a question that's come up from time to time, so we decided to provide some information.

This is our market. This is not the electronics market. This is our revenue. Our revenue is electronics, nothing to do with aerospace, how they breakdown.

The biggest segment for us is -- let's call it service providers, Internet telecom service providers, sometimes called infrastructure. That would be somewhere around 50% to 60%. That's the biggest segment for us.

Now, normally people include base stations in that segment. But we separate it, because for us, base stations is RF only and that might be 10% to 15%. Enterprise, that's something that's talked about quite a bit. But for us, it's a small portion of our revenue; it's only 10% to 15%; semiconductor, small -- maybe 5% or more.

Aerospace and defense, that's 10% to 15% and that's going to be mostly in the US. And there's a small portion of other things like medical instrumentation, industrial, which is -- we all lump into one category; not significant. But we thought it would be helpful for you to understand those dynamics, because it's a question that comes up from time to time.

The big driver for us is service providers, Internet service providers, and that's where you're going to see the highest end materials, the highest tech product and we are talking often about very large backplanes which go into service providers. We used to call it Internet service providers, but now it's just service providers, I guess. This is also sometimes referred to as infrastructure. We are talking about core hub routers, high-speed switches and base stations. But we separate base stations, because for us, it's an RF story.

Enterprise, you know, servers and networking equipment, which is a small portion for us, and although a lot of high-end product, not quite as high-end as the service provider market, where we are talking about highly loss-sensitive and SKU-sensitive back panels and backplanes, for instance. Highest data transfer rate servers and switches -- this is the highest end product with the highest performance requirements.

So, sometimes, you know if people ask about comparables, and it's confusing because they talk about a company that's really an RF company, and RF is actually an area where things have grown for us a little bit. But unfortunately, it's a small piece of our pie; as I said, maybe 10% to 15%. So it's not going to drive our top line as much as Internet service provider or the infrastructure market will.

So there isn't really a good comparable for Park in electronics, not -- no public one anyway. And even the private companies are not good comparables. Park is very unusual in terms of its market focus.

If you look at the other -- our competitors, they are going to have large exposure to markets that we just really don't spend much time in, and for good reason. It's not an accident. It's a part of our strategy. We can try to focus only in the high-end area where we can distinguish ourselves and protect ourselves a little bit. Okay, hopefully that was helpful, because we haven't done that before.

And I should say, I want to say that these are estimates. It's important that I explain that, maybe even a little bit guesstimate. So why is that? Because often, when we sell to a circuit board company, we don't know every sale where it's going, who the end market is, who the OEM is, what application or program it's on. So this is based upon a lot of work with the OEMs where we can't tie it to POs.

So there are some estimation and guesstimation involved here, but we never less -- as long as you accept the information without understanding, felt it would be useful information and try and understand Park, and why Park might be different than other companies.

Okay, let me give you a little bit of an update on General Electric, which is a top five customer of ours. We've commented in the last couple of quarters, we are on the 747-8 program. Revenues for the 747 program is going to be a function of how many 747s Boeing sells and that's through GE -- through GE Aviation, I should say.

These are engine programs for the 747-8. And you know, right now, it doesn't seem like 747 is a real hot seller. But we always cross our fingers that maybe Boeing will get a big order for 747s maybe for cargo, we don't know.

A320neo, the LEAP engine for the A320neo, we discussed that I think in our last call. That's just ramping up now. That's a very big program. That is a new program, and we're going to be starting to supply into that program this year. And that is a new program and quite a large program.

Let me share with you a little news that we haven't discussed before. It's actually been in the news recently, a couple things. I don't know if you noticed but the ARJ21, a regional airliner made by the Chinese aviation company called COMAC, recently received its type certification in China. The airplane uses a CF34-10A engine, I think; yes, that's right, which is a GE engine. We are on that program.

There's other news that you might be interested in, which is that GE Aviation is flight testing what they call their Passport engine. And that's used for -- on Bombardier aircraft -- 7000, 8000 Global aircraft. And actually they put it on a testbed, a 747 testbed, that's being flight-tested now. We are on that program.

There's another airplane that this COMAC Company is working on and hopefully will certify soon. And that's a big deal, but the airplane we just certified is a regional jet. The next one is a COMAC919, and that's a competitor, I believe, to the single-aisle aircraft made by Boeing and Airbus. That is a LEAP engine that will go on that program, similar to the LEAP engine that's used on the A320neo. We are on that program.

There are other programs which we are not -- we don't think would be appropriate to discuss right now. But since those two or three programs are in the news, just in the last week or two, you might look it up or Google them. I thought you'd be interested to know we are on those two programs.

Sorry -- the Passport program as well as the ARJ -- they call it the -- this is the Chinese regional jet ARJ21, CF34-10A GE engines.

Last item I want to cover is two new products are expected to be commercialized this month. One in electronics, one in aerospace, and these are significant products -- both of them. Both, I would say, quite high-end, new-technology-type products, so watch out for announcements on our new products. Like I said, they're scheduled to be commercialized -- that means announced this month, and hopefully we'll make that target. I'm not promising, but that's our schedule now.

I think I mentioned this to you before, but Park has a little bit of a different philosophy about commercializing products than maybe some other companies. We hold back products much more than others probably would. When we commercialize a product we feel very confident in the product, has been tested and tested and tested, and it's ready to go. That means the day it's commercialized, a customer can call up customer service and order the product, and we will say okay fine; we'll have it for you next week. It's not like, well, we don't really have that product yet. That's what commercializing means to us.

Okay, so those are some updates, and that's all I have for now. Operator, can we go to some questions please?

(Operator Instructions) Sean Hannan, Needham & Company.

So, Brian, your top five customers seem to be down maybe 9% quarter over quarter, looks like everybody else was down closer to 20% or so. I think you did a good job in terms of referencing what you've seen as dynamics on the electronics side of the business.

If I make the right assumptions, it looks like GE really was the only, perhaps, closer to growth customer, certainly being on the aerospace side there. So just wanted to verify that for us, the magnitude, perhaps that GE was a grower for you. We have certainly heard some positive comments around them from you just a moment ago.

And then, if we could also get a little bit more of a sense of how you expect they could contribute sequentially or through the course of this year, it seems that they would be on track for getting to be perhaps a 10% customer at some point down the road. Thanks.

Not quite 10%; GE was up a little bit, but like you pointed out already, aerospace is quite a different story than electronics. Electronics is a special story for us, especially in the third quarter. Aerospace -- I think Matt indicated aerospace was up a little bit as a whole. GE was kind of flat as compared to the second quarter.

The difference with a company like -- a customer like GE as compared to an electronics customer is there is significant visibility over many years based upon the nature of the business. It's not the electronics OEMs don't want to tell us; they just really don't know. It doesn't work that way. It's a very different dynamic.

So when we talk optimistically about GE, we're not talking about the next month. We're talking about three years, four years, five years, six years down the road. And ironically, those expectations are probably more hard and firm than the expectation we might have from electronics companies three months down the road.

And again, it's because the nature of the business, the nature of the business is such that there are long-term contracts and the production schedules and cycles, rather, for aircraft are quite long. The order patterns are quite long. The backlogs are quite large. So you could reference Boeing and Airbus and the other aircraft companies just as an example.

But I would say that GE, just in answer to your question, was more or less flat in Q3 as compared to Q2. They're not quite at that 10% level. But the expectations and forecast that we have for GE are -- well, they are quite encouraging, let me put it that way, although we're talking about a longer-term timeframe than we would be if we're talking electronics.

Sure. Well, Brian if we were to look really at the rest of -- or here at calendar 2015, I believe that there have been some prior thoughts that we should see growth with them, as well as within aerospace as we progress through the course of the year. So I wanted to check on that assumption, if that still stands to be relatively valid, and any color you could perhaps provide around that.

Yes, GE, like I said, is more predictable. So we're expecting some growth in calendar 2015. The big spikes will come maybe 2017. So we'd see some growth in 2015, some growth in 2016. Then we see -- let's call it spikes in 2017, 2018, 2019. That's based upon programs that are in place. These are meaningful forecasts, I would say.

As far as aerospace in general is concerned, yes, Sean, I would very much hope that we can see some real revenue growth in aerospace outside of GE. There are hundreds and hundreds of other customers out there that we are calling on. And I think maybe you or somebody asked this question last quarter about it. They asked me if I would be disappointed if we didn't see significant growth in aerospace this coming year, and I certainly would be.

And we all have a lot of pressure on us, internal pressure, but it's proper pressure. We've paid a lot of dues, you know, over the last five, six years in aerospace. We have made major investments and my feeling is that we should see some really meaningful growth in aerospace this coming year. And if we don't, then I would say we failed. Give us an F.

Okay. All right, that's helpful color. Next question I have or topic is really more related to SG&A. This was a fairly contained number that came through in the quarter. Wanted to get a sense from you or Matt, the degree that this level is able to be maintained, or how should we think about movements versus that November quarter number?

Correct, it was contained. A number of people took salary cuts during the quarter. So -- and we were careful. Now, we didn't compromise Park's future. We don't cut back on R&D and that kind of thing for instance. We are still pretty active with our marketing efforts.

But we did try to control our SG&A, especially in the US where business levels were very poor, in electronics anyway, not in aerospace electronics. So, I would say that there's some level of growth in the SG&A in the coming quarters, but it's not significant. We are not saying it's going to spike up, but maybe the third-quarter level is not totally sustainable. And maybe it shouldn't be, maybe it's not healthy for Park to try to make it sustainable.

Okay, that's helpful. Last question here and then I'll jump back in the queue. Can you talk a little bit, Brian, about the cost environment, both on the electronics side as well as on the aerospace side? Are there any variables that are impacting the business today? And to what degree can they be mitigated, managed, or are there even some positives that may be helping you as well? Thanks.

Sean, when you say cost, are you talking about raw material cost or something else?

That's correct, raw material costs.

Raw material costs really not much of an issue in electronics; nothing to write home about. Obviously copper is our big story, but right now nothing special; no impact copper-wise Q3 versus Q2 for instance. We'll have to see where copper goes, but right now no significant impact out of copper, and the rest of raw materials I think are not really -- nothing significant to talk about.

In aerospace, it's quite a bit more dynamic. We use -- even though the revenues are smaller in aerospace electronics, we probably source -- I don't know, maybe 5 or 10 times more raw materials from different suppliers. It's a very different kind of business.

And that's definitely a dynamic situation which requires a lot of management on a day-to-day basis. And that's something, you know what, we need to do better at and I'm hoping that's an opportunity for us in the future to do better at it.

Our pricing with aerospace is different than electronics. Electronics pricing is really stuck in place for a long time. We don't move it. Aerospace we get quotes, re-quotes all the time, so we tend to adjust our prices. But I think it's a bad pattern we were in.

We really need to focus more on our raw material costs and our input costs that just assume that whatever they are we're going to re-price our product accordingly. I think it's a lazy and not a good pattern for Park and mindset for Park to be in, so we need to work on that. And I do believe there is some opportunity for improvement there, too.

The rest of the costs, the non-raw material costs, especially in electronics I think we try to be screwed down pretty tight, but not to the point where it would compromise Park's ability to be an effective supplier for our customers. But we have our costs screwed on pretty tight. Although, you know we are always looking at ways to optimize, especially out West by -- what we've done out West is -- even though we have two locations for electronics, Arizona and California, we've really combined the operations or two locations. But it's one operation with basically one overhead, one staff that covers the two locations. And there are opportunities to do more of that, we believe.

Yes, okay. Great, thanks very much for all the color, Brian.

You're welcome.

Morris Ajzenman, Griffin Securities.

A question back on composites. You kind of spoke about the trend during the quarter and you mentioned GE being flat sequentially. Can you just give us any color if there's any change in the purchase orders, either for GE or composites overall in this quarter versus the past quarter?

Okay, Morris, go check out the transcript of Matt's comments; they are posted on our website. But Matt did explain what our aerospace revenues were for the quarter. I think they were $9.3 million, which was up a little bit from the prior quarter.

So there's some movement in the right direction. GE, we already commented on. We have a lot of visibility with GE. That's kind of a long-term situation.

And the rest of the opportunities, we certainly -- let me say this. I think our sales guys and even some of our folks in Kansas have gotten the message. So they are out there hitting the pavement pretty hard, and we are doing just from a quoting perspective -- I see all the quotes actually. The volume is quite a bit higher.

This is anecdotal. It's not a scientific report for you. But the volume of quoting is quite a bit higher than it had been. So that would normally be an indication and function of the sales guys out there in the market pretty aggressively looking for business.

And that's why, in response to Sean's question, I said yes, I'd be pretty disappointed if we don't see a meaningful up in the current calendar year, rather, in aerospace, because I think the opportunities are there. The opportunities with GE are long-term and more definable, more predictable. The opportunities for the hundreds of other customers -- and some are small. It's not all the big OEMs. Some are small, but there are opportunities with them. They are there, and I think that we just haven't done an effective job in the past of going after those opportunities.

Now if you want to be -- we want to be fair to ourselves and say, okay, fine, until about even a year ago we were still going through a transition startup. We were working through those difficulties. But that's all behind us. We don't have that excuse anymore. So it's time for us to go out and get the business.

I don't have any quantification for you. I just have anecdotal input, which hopefully is a little helpful.

Okay, all right. Thank you.

(Operator Instructions) [Leonard Cooper], private investor.

I have a question. Does GE presently have the facilities and personnel to provide the projected growth in businesses that you speak of? Will big investments be required by Park for facilities?

For Park -- so Len, Happy New Year by the way. We have spoken for several quarters about discussions we are having regarding building a redundant facility based upon GE's request. This is really not only capacity, but redundancy, because some of the -- the big aerospace OEMs are a little uncomfortable being sole source with a supplier that only has one location, for obvious reasons. There's a lot at stake and the qualification process is very complex and time consuming.

So if there's a supplier that an aircraft OEM is working with and they're a sole-source basis, and that supplier has one facility and their building burns down or something like that, it's a real serious issue because you could take up to two years to qualify a new supplier in some cases. In our case it takes a long time because what we're building is really complex materials that require very extensive testing. It's not something that could be qualified overnight. So that's the reason for the request for redundancy.

But we are still waiting to hear back. We are prepared to proceed and we've been going through a site selection process. But we are waiting to hear back. We need some more information from GE before we could proceed, before we could make a decision and move forward.

I think it's highly likely that we'll do that. I thought it already would've been started, but really the ball -- we're kind of waiting for more information. Let me put it that way.

Okay, well, I understand the problem of redundancy having been in the aerospace business before the moon landing. Another question, does 3D printing affect Park?

Well, you've asked this before. You're a smart person. I don't really think it does directly at this point, except to the extent that it might require more infrastructure, more data being processed. Just like you talk about the cloud, well, maybe we are not directly working on cloud equipment, but it requires more bandwidth in terms of the Internet service providers. And that would indirectly impact Park and be a benefit to Park's business.

Okay, thank you.

(Operator Instructions) At this time I'm showing no further questions. I'd like to turn the call back to management for any further remarks.

Well, thank you, operator, and thank everybody for listening to our third-quarter conference call. Again, I wish you all the very best in the New Year. Matt and I are here today. So if you have any follow-up questions, please feel free to give us a call. Thank you. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.