Park Aerospace Corp (PKE) 2017 Q4 法說會逐字稿

Good morning. My name is Terrence and I will be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. Fourth Quarter Fiscal Year 2017 Earnings Release Conference Call. (Operator Instructions)

At this time, I will turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, Terrence. This is Brian. Good morning, everybody. Welcome to our fourth quarter conference call. I have with me as usual Matt Farabaugh, our CFO. Matt, and I will start with some introductory remarks, of course then we'll go to questions. Matt, why don't we get with the financial commentary? And -- Sorry, I always forgot to tell you this. A transcript of Matt's comments were already posted on our website. So if you want to go look at the details, you can do that on our website as well. Go ahead, Matt.

Okay, Thanks, Brian. 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 28, 2016, 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 in our fiscal year 2017 fourth quarter ended February 26, 2017, P&L, which are not, specifically, addressed in the earnings release.

During the fiscal year 2017 fourth quarter, North American sales were 55% of total sales, European sales were 7% of total sales and Asian sales were 38% of total sales compared to 49%, 7% and 44%, respectively, for the 2016 fiscal year fourth quarter and 49%, 10% and 41%, respectively, for the 2017 fiscal year third quarter.

Sales of Park's high-performance non-FR-4 electronics materials were 94% of total electronics materials sales in each of the 2017 fiscal year fourth quarter, 2016 fiscal year fourth quarter and the 2017 fiscal year third quarter. Park's electronic sales were $19.4 million or 70% of total sales in the 2017 fiscal year fourth quarter compared to $26.9 million or 75% of total sales in the 2016 fiscal year fourth quarter and $19.0 million or 72% of total sales in the 2017 fiscal year third quarter.

Park's aerospace sales were $8.2 million or 30% of total sales in the 2017 fiscal year fourth quarter compared to $8.8 million or 25% of total sales in the 2016 fiscal year fourth quarter and $7.5 million or 28% of total sales in the 2017 fiscal year third quarter.

Park's electronics sales were $82.5 million or 72% of total sales in the 2017 fiscal year compared to $106.7 million or 73% of total sales in the 2016 fiscal year. Park's aerospace sales were $32.1 million or 28% of total sales in the 2017 fiscal year compared to $39.2 million or 27% of total sales in the 2016 fiscal year.

Gross profit for the 2017 fiscal year fourth quarter was $7.4 million or 26.8% of sales compared to $10.7 million or 30% of sales for the 2016 fiscal year fourth quarter and $6.6 million or 25.1% of sales for the 2017 fiscal year third quarter. Selling, general and administrative expenses for the 2017 fiscal year fourth quarter were $4.7 million or 17% of sales compared to $5.1 million or 4.4% (sic) [14.4%] of sales for the 2016 fiscal year fourth quarter and $4.6 million or 17.4% of sales for the 2017 fiscal year third quarter.

Investment income, net of interest expense, in the 2017 fiscal year fourth quarter was $105,000 compared to $55,000 in the 2016 fiscal year fourth quarter and $87,000 in the 2017 fiscal year third quarter. Before special items, earnings before income taxes for the 2017 fiscal year fourth quarter were $2.8 million or 10.2% of sales compared to $5.6 million or 15.8% of sales for the 2016 fiscal year fourth quarter and $2.1 million or 8% of sales for the 2017 fiscal year third quarter. Before special items, net earnings for the 2017 fiscal year fourth quarter were $2.5 million or 9.2% of sales compared to $4.9 million or 13.6% of sales for the 2016 fiscal year fourth quarter and $1.9 million or 7.3% of sales for the 2017 fiscal year third quarter.

Depreciation and amortization expense in the 2017 fiscal year fourth quarter was $733,000 compared to $845,000 in the 2016 fiscal year fourth quarter and $720,000 in 2017 fiscal year third quarter.

Capital expenditures in the 2017 fiscal year fourth quarter were $48,000 compared to $78,000 in the 2016 fiscal year fourth quarter and $100,000 in 2017 fiscal year third quarter. Effective tax rate before special items was 9.1% in the 2017 fiscal year fourth quarter compared to 13.8% in the 2016 fiscal year fourth quarter and 8.2% in the 2017 fiscal year third quarter.

For the 2017 fiscal year fourth quarter, the top 5 customers were GE, including its subcontractors, Sanmina, Shennan Circuits, TTM and Wus, in alphabetical order. The top 5 customers totaled approximately 38% of total sales during the 2017 fourth quarter. Our top 10 customers totaled approximately 51% of total sales, and the top 20 customers totaled approximately 67% of total sales for the 2017 fiscal year fourth quarter.

Thanks, Matt. This is Brian, again. Okay, let me get started with the Trump factor we talked about that in our third quarter call, and this relates to the surprise for the -- with the election and the impact that it may have on the tax laws. So I'm not sure things are more clear now than they were during our third quarter call before the inauguration, but obviously taxes are still a front-burner topic. I guess, the -- most people say it's a matter of when more than if and then of course, what will happen. But the expectation is that the corporate tax rate will go down and there will be some kind of a repatriation, provision or holiday, we don't know.

As we mentioned last time, once that does occur, once the new tax law goes into effect, whenever that is, we're hoping it would be this year. And now, I don't know, maybe it's still will be, but it's very difficult to tell. Everybody seems to have a different opinion. At that point though, we would expect to repatriate a significant amount of our funds overseas. We have about $240 million overseas. If we repatriated those funds now, we would have about $60 million tax bill, which obviously, we don't want to have.

At that point, we would expect to do a large return of capital to the shareholders. This is basically what we've been waiting for. We don't need the amount of cash that we have, but we have kind of locked overseas, whether that be in a dividend or buyback or probably mostly dividend, but maybe buyback as well. We mentioned that last time -- I just want to update you. And the update is we're just kind of still in the wait-and-see mode.

All right. So that's that one. Copper is something we've talked about every now and then. There was a little over $200,000 unfavorable impact from copper in Q4 versus Q3. So let's talk about the Q4 from the point of view of electronics, and then aerospace separately. It's really difficult to combine them in our discussions.

So in Q4, remember, December started out pretty strong and we had our third quarter call after December, we were pretty optimistic. But then -- now, that was also a holiday month, and that made us even more optimistic. This is electronics we're talking about, but then things kind of flagged out in January and February as we didn't get the momentum that we thought we are going to get coming out of December. And electronics really flattened off in January and February without, like I said, the upside that we were expecting.

Aerospace, a little bit better in Q4 than Q3, but that's really a matter of program timing more than anything else. So Q1, let's talk about Q1 then we'll go into more details on electronics and aerospace, of course. Q1, we have 8 weeks in the books so for. Aerospace should be up against Q4, not significantly, but somewhat and again, that's program timing, it's not really reflective of anything other than that.

Electronics is still flat so far in Q1 versus Q4. So obviously, it's not what we hope to see. We're starting to feel like electronics is going to be more of a second half story in terms of the upside. Let's talk about why. Remember last time we talked about -- with the last call rather, third quarter call, we talked about our new OEM program, marketing efforts and it had been quite successful so far. Chris is spending enormous amount of time in Asia, and I thank him in doing really a very special job, incredible job, a lot of hard work, more probably than anything else. But I gave you a few numbers last quarter call. So I'll take those numbers at this point.

This relates mostly to our Meteorwave product line. It's a -- Meteorwave, I think, is an excellent product line, but until Chris and the guys really got to Asia -- starts spending a lot of time in Asia with the OEM program marketing. We really weren't making that much progress, the end roads weren't that significant. It's like a tree falls in the forest, nobody hears it -- is there a sound. But now there is a sound. So we have 7 OEM agreements at this point; 19 OEM agreements under negotiation; 15 OEMs are qualified Mercurywave -- sorry, Meteorwave product line; 22 OEMs are under qualification process; and 54 board shops have tested Meteorwave and that's all going well. So those are updates of numbers that I gave you when we've had our third quarter call, all moving in the right direction.

As far as I'm concerned, there is definitely something very significant going on. We talked about Huawei before, they're kind of the big dog in Asia, but there are couple of other significant OEMs that we've made significant inroads with and that's been really helpful to us. Once some of the big OEMs got on board and it seems like some of the other ones want to follow. And also some of the board shops want to get on board as well.

There is a lot of, I would say, maybe buzz is kind of a funny word in Asia about Park and our Meteorwave product line at this point, but I think it's probably going to be more of a second half impact. It's not that we don't see some impact now, but it's not enough to offset the loss of the legacy products. So we're kind of neutral there. I think the revenues in Q4 were not that -- a little bit up from Q3, but not significantly.

So we're looking really, I think, the second half of the year before we see a more significant impact from the marketing efforts, which are real as far as I'm concerned, anyway. It just may take a little while longer for them to come to fruition, in other words, in terms of seeing them in clear revenue. The revenue is there, but we want to see enough revenue to offset the loss of legacy of product revenues.

So let's see -- just looking at notes here, I think I'll move on, because we're already 15 minutes of the call. That's Asia electronics, and then U.S., of course, the big story is the restructuring, which was announced on April 18. It's not a big surprise to you. Because, we've been taking about the fact, we've been planning restructuring for a while. It just took a little longer to get everything in place, so we can go forward. So we said at that time, we will take about 4 to 6 months to complete. By the way, the news release announcement, the restructuring, on April 18 was very detailed, thorough and detail. So you might want to take a look at that news release if you have questions about the restructuring. We're not going to go into all the details here, we just don't have time.

But there is a $5 million to $5.5 million charge expected in connection with the restructuring. And once restructuring is complete, a go-forward benefit of $3 million to $3.5 million per year. And charge in the first quarter, probably, $1.2 million, $1.3 million, the second quarter maybe $2.8 million, these are estimates, because it really is a question of timing. Some event could straddle at the end of the quarter or beginning of a new quarter and that could affect the timing. Third quarter maybe about $1.1 million, that's the charge.

The benefit should be fully realized in the third quarter, that's our prediction at this point, anyway. A small benefit in the second quarter, no benefit in the first quarter. The important thing about this restructuring and if you look at the news release, you'll probably get that sense, is that it's not just restructuring that matters, we really need to reinvent the new Nelco Tech business into a niche company. Because if we just do restructuring and move the pieces around the chest table, it will have a temporary effect. But long-term, we really won't be doing what we need to do to be successful in the U.S. market.

So I believe, that with the things we are doing, we will be successful in the U.S. market, and we'll have a sustainable future, but it's not based only on restructuring, it's based upon reinventing who we are into a niche company and that is in progress now. We believe it's more of a niche market in the U.S. And Asia, we're talking like ForEx again, when they gets more volume market, and the U.S. more of a niche market. So we need to focus our activities towards the end market and the nature and characteristics of that end market.

Aerospace. So the news continues to be good and positive with aerospace. We've been talking about this for a long time, but we did sign, I guess, I don't remember a month or 2 ago, a long-term agreement with GE Aviation, the MRAS division that makes the -- of GE Aviation that produces the thrust reversers and the cells. That's our main customer with GE Aviation, that's where most of our revenue is derived.

It's a 13-year agreement, but it's a 3-plus, 5-plus -- 5-year setup, that's the way it works. So after each term, under the agreement both parties are obligated to negotiate in good faith in terms of an extension, if you will. We set up that way actually to accommodate us, that was what we wanted. Now, I'm going to the reasons at this point. GE had proposed, I think, a life-of-program agreement and actually to accommodate us, we did it this way.

The agreement contemplates hundreds of millions of dollars of revenue, and that's based upon the forecast we have from MRAS GE Aviation and MRAS division of GE Aviation. Okay, and that's MRAS only, again thrust reversers and the cells. The GE Aviation long-term agreement, this is for other parts of the engines, that's to be negotiated this year. So we don't have that agreement yet. And there are peculiar reasons, which won't go into -- as to why the 2 agreements are staggered and weren't done the same time. So the hundreds of million dollars of revenue is based upon MRAS only. It does not take into account the GE Aviation revenue, the non-MRAS GE Aviation revenue.

So we have talked about a joint development agreement that we have with GE Aviation to develop a new product that is not a niche product, if you will. It's a high revenue product. It's a very mainstream, mainline product, important for aerospace structures, and that's going well.

But the good news is that, there were 2 other product opportunities that we're working on with MRAS. These are not speculative or something that just being discussed, these are real. They are in progress. They are happening as far as I'm concerned. So we're probably going to add 2, maybe even 3 items to our revenue line items with MRAS that are significant revenue generators.

Redundant factory, we talked about that before. That's still in discussion. There is a meeting in another couple of weeks with MRAS GE Aviation. And all of these things are kind of linked together not just the long-term agreement, but these other 3 projects that we're talking about, they are all linked together with the redundant factory.

And also, last time, I mentioned, something new with GE Aviation, there's actually a Park's opportunity, a large Park's opportunity. That's going well. The initial phases have been funded and we're pleased with that. It seems like that, it's a good chance of materializing for Park.

There is another major aerospace company that we've been working with, that mentioned that, I think, in the last quarter or 2. This is one of the big aircraft manufacturers in the world. I think that we talked last time about we signed a qualification agreement, but that qualification is well in progress now. The company had their team into audit our facility in Kansas a few weeks ago. That audit went quite well. There are couple of other specs that are being pursued also.

And then with the same company, there are opportunities for legacy aircraft parts, both military and civilian. The civilian aircraft parts were going through a qualification for the civilian parts now, actually qualifying our materials so the parts would be made with our materials.

Scorpion. We touch on this from time to time, that continues to go well. It's a program we're really very happy to be on. I can tell you because it’s about our public record that Textron flew their second production conforming of Scorpion jet recently. And we're involved with that aircraft as well, with parts and assemblies and low-volume tooling. We're not really in a position to say more about the program, Textron asked us to keep it pretty close to the vest.

And I think, there is something else I just moved through, won't cover that, because, again, we're running a little late. So I want to sum up my introductory remarks here by saying, I think the big strategic story for me, anyway, is Park is now well positioned for the future in electronics and very pleased with the progress that we're making in Asia with our Meteorwave product line. Obviously, we don’t have time to go into all the details, but the details I think are very compelling.

In the U.S., we're resetting our business and our operations and our business focus to be more tuned to the market opportunity, again, as a niche company. In aerospace, that continues to be a good story. It's not a second-half story, because I think it just keeps improving and improving. I think we have very solid team with aerospace and that really helps us a lot too. I think we have something pretty special in aerospace. And I got to tell you, I'm not the only one that thinks that, I'm not talking about people inside our company either. So as I said, the second-half should be better for electronics with the Asian opportunities and also of course, the restructuring benefit as I said. It's probably going to be more realized in the third quarter and the fourth quarter. And the Asian opportunities should be turning more into revenue.

Aerospace, like I said second, not so much of a second-half story, more of an ongoing story, which is a positive story as far as I'm concerned. Okay, operator, that I think concludes Matt's and my introductory remarks. Why don't we go to questions?

(Operator Instructions) And our first question comes from Sean Hannan from Needham & Company.

The first question I'd have here is in terms of the progress that you show you're making on the electronics side. You've been securing a number of customer agreements. You've secured a large OEM customer. Just trying to get a sense of, to what degree, other than the statistics that you've laid out there Brian, that you feel that you can keep that momentum moving forward, so in essence, continue to grow those numbers in terms of calls, et cetera, et cetera, as we progress through the year. And then, kind of as a Part B to that, other than being able to get the opportunity for a, perhaps a bump -- some growth within electronics in the back-end of this year, the degree that you see that there is some sustainability to that, on perhaps a little bit more than a few quarter basis?

Okay. Sean, thank you. And first of all, it's not just 1 OEM agreement. You're probably referring to Huawei that sometimes I referred them as a big dog, but there are other OEM agreements we have. So the momentum sustainability, I think that's really the key question. My opinion is that the momentum is growing and growing, but it's about matter of effort. If we back off and we stop spending all time, especially Chris and his guys in Asia, that momentum will not continue. In other words, it's not like a self-perpetuating momentum.

But as long as we keep doing what we're doing, my sense is, clearly, that the momentum will keep growing and growing. And we're building on what we've done and the more we do, the more interest there is and it kind of -- is a contagious thing. So like I earlier, the circuit board shops, they want to get board, because they want to make sure that they're working with the key OEMs, right? And some of the larger OEMs, and some of them maybe more niche OEMs or small OEMs in Asia, they hear that we made significant inroads with larger OEMs. So they don’t want to miss the boat either. I think the product is performing really well. It's a very good -- we're talking Meteorwave. And I think it's got a very good reception in Asia. It's very highly thought of, not just by us, not just by the OEMs, not just by the circuit board shops but by our competitors as well. I'm not speculating about that either.

So as long as we keep doing the right thing, I think the momentum will keep growing. And we talk a lot about the quarters, because I think that's what the analysts are more interested in. But that's more for the analyst, Sean. We're not looking for just the second half or 3 or 4 quarters, we're looking long-term. And we expect that once we get going -- as we get going, which we are, that momentum will grow and grow. I use the analogy of the tree falling in the forest, we had I think a very outstanding product line, but we just weren't really make inroads with it. Now the inroads are being made and I don't really see the momentum slowing up. I mean, it seems like -- from my perspective, anyway, it seems like every month, the momentum grows and grows and grows and grows. There is more companies that are getting on board. So there is some self-sustainability about it, because the more we do, the more people hear, the more kind of buzz there is out there and the more people want to go on the train, they don't want to get left behind. But we would believe that will be a bad mistake to kind of back off and think, "Okay, fine, everything is in place, and it's just going to have a life of its own." We think that would be a bad mistake. So our efforts will never end, as far as I'm concerned. As long as we keep going what we're doing, I think that the sustainability is good and I think the growth is good beyond the next 2 or 3 or 4 quarters.

Okay, that's very helpful. And then switching gears over to the aerospace side. Can you talk a little bit Brian, about how you're thinking of the business continuing to grow from here? In the past, you've talked about some -- provided some general comments around the degree of growth and magnitude, say, of ramp that could start to materialize in '18, as an incremental in '19, as an incremental, et cetera. As we've step back, can you help us to kind of either reconfirm or reset or recalibrate how you're thinking about growth within this aerospace business given all of the progress that you are making. And particularly, as you think about your internal planning efforts moving forward from here?

It's difficult to quantify a little bit, but, I guess, I would say the news continues to be better and better all the time. The opportunities keep coming, they keep compounding. I mentioned in notes, 3 different new product opportunities we're working on with the MRAS. Each one those product opportunities has significant amount of revenue behind it. So once we get qualified with these new products, there's a significant -- we're on these programs, there's a significant amount of revenue. As you know, we're self-source with MRAS and the products that we do provide them and that seems to be the mindset.

So we haven't -- we really haven't put the GE Aviation or the equation into discussion very much at this point. As I said, we're working on it. This year, we plan to do the long-term contract with GE Aviation, expect for that one-part opportunity we talked about. This other big company. So we had a successful audit, if you will, a few weeks ago. Well, actually, the company was quite complimentary. I think they said they're quite surprised at how well did or maybe even more than surprised. I forget, it was kind of funny adjective actually. And 2 other specifications that we -- that are coming behind that, that were planning on working on. Timing is difficult for me to nail very well. So I'm reluctant to try, because I think to some extent, I would be guessing. The ramp with MRAS, we commented on that before, that really hasn't changed very much. Every now and then, it seems we got pushed out to the right a little bit. I think we commented previously that there was some inventory correction issues, and we're still dealing with that this year. We hope in the next few months, that will be out of the way. The big story with MRAS is the A320neo with a LEAP engine, actually driver. And my sense is that we're getting into a mode now where the issue is going to be keeping up, not so much us, but maybe their customer, because the ramp is pretty steep with the A320neo.

As I mentioned in the introductory comments, Sean, we need to go back and talk about the redundant factory. That's still very much on the table. Now, that we have the long-term agreement behind us, and especially since these other 3 opportunities are very much on the table. So I suspect you're looking for more quantification, and I'm giving you more of a qualitative answer, but I think that's probably about the best we can do at this time.

Well, I suppose in a general sense are we still expecting that there is going to be -- the way that the numbers play out next year, calendar year, that we should still observe or experience some material growth within aerospace. However you might define material, but that it's going to be pretty standout versus what we've been looking at more recently?

Yes. Based upon the forecast, that's correct. I don't like to using words material, because they have legal significance, such as -- let's just say, significant. So based upon the forecast, are we just looking at it? Yes, we are looking to see some significant growth next year. And next year, we really should have all of the inventory issues absorbed and adjusted, so they will no longer be holding down the revenues.

And to what degree do you feel that, that's still suppressing revenues right now? My impression had been that it's gotten pretty marginal.

No, unfortunately not. We thought the same thing. I think a few months ago or so, and then some additional inventory kind of turned up at a supplier. So that became an issue as well. I think it's still suppressing revenue to, let's say, a significant extent, but I think that should be gone, out of the way, behind us within 2 or 3 months.

And at this time, I'm showing no further questions. I would like to turn the call back to Mr. Brian Shore for any closing remarks.

Okay. Well, thank you, operator, and thank you, everybody for listening in today. Matt and I are in the office in Melville. So if you have any follow-up questions, please give us a call. Anyway, thank you, again, and have a day. Goodbye, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.