Park Aerospace Corp (PKE) 2019 Q3 法說會逐字稿

Good morning. My name is Crystal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp. Third Quarter Fiscal Year '19 Earnings Release Conference Call. (Operator Instructions) At this time, I will turn today's call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, very much operator. Good morning, everybody. Happy new year. This is Brian, of course. I have with me Matt Farabaugh, our CFO. And what we're going to do today since we do have a lot of things to cover in terms of our introductory remarks since Matt suggested maybe we should skip reading through the supplementary financial information. However, it is -- it was posted on our website this morning. So I think, you definitely want to refer to the information that consist some things that are in the news release but also some information not in the news release. So we're just going to go ahead, I'll get started with some commentary. Like I said, we do have a number of things to cover, so we'd want to get moving. And we'll get to our questions, of course. So okay. So again, go look up the supplemental financial information on our website, you'll find it there. Also, I wanted to mention something important, which is that Park is presenting at the Needham Growth Conference, which is our -- I think our date is the 16th, January 16, and our time is 12:50. That's our webcast. It's an FD event as you call it. So everybody is welcome. And will be updating the presentation that we did a year ago on January 4 of last year, we did a presentation, when we announced our third quarter results. And in that presentation, it was a lot of information, including a forecast, including a forecast through fiscal '22. We'll be updating that forecast with the presentation that we do at the Needham Conference through this time -- through fiscal '23, so add another year. So I think you will definitely want to check in. We're thinking about updating the forecast in the presentation for this call but we decided we would not do that, we'll wait for the Needham Conference, which is just 2 weeks down the road. Like I said, on the 16.

Okay, let's get started here. So a lot to review. Some of this actually happened since the end of the quarter, end of December, most of it actually did. We sold our electronics business to AGC, Inc. of Tokyo, Japan on December 4. As you know, for $145 million. This was announced of course. So we won't dwell on it. I would just add that from my perspective, very good result for Park, for Park shareholders, for AGC, for the former Park Electronics business employees and for the customers of our former Electronics business. So all things considered, think it's a very good result all way around.

Next item is -- this is something you're not aware of, but it is some pretty significant news. So we reached an agreement with MRAS. MRAS is the subsidiary of GE Aviation, that we deal with principally GE Aviation through fiscal -- sorry, through calendar 2029. This is a pricing agreement. I think we discussed this agreement, we had a 13-year agreement. It was '17 -- calendar '17 through '29, where there was 3 plus 5 plus 5 in terms of the pricing, and we were just in the first 3 years. So now we've agreed to hard pricing through 2029. We have a hard agreement with MRAS, this division of GE Aviation through 2029. Based on the forecast we have been provided, that's worth about $425 million of business from '17 to '29. So that, I think, is a pretty major event.

Also, I think in the last call, we referred without being very specific to another opportunity that we have with GE Aviation, which is potentially significant, and there is some quite good news on that front as well. We received the POs for that program through calendar 2020. And I'm not going to be able to go into much detail, except I will say the platform is a GE9X for 777X. That's a wonderful program to be on, really very excited about that. We had some small content on that engine, but this is now a much more significant content. This is a -- the very incredible engine that has been developed by GE Aviation. The GE9X engine with over 100,000 pounds of thrust. The fan diameter is 134 inches, that's a lot of inches, that's I think over 11 feet. So my feeling about this program is that it's ours. The only risk I think we have, any serious risk is that our customer gets to design out the program, our customer is very doubtful if that will happen. But as far as I'm concerned, this program is ours unless our customer loses the program. So we're estimating over $100 million are from this program from calendar '19 to '29. That's based upon information provided to us by GE Aviation and MRAS. So those are rough numbers because we're still in development and when a program is under development, what happens is that there's a lot of refinement in terms of the usage is how much material is used per engine. I'm not going to -- it's not on the cells, I should tell you that. It's a different component, a very critical component of the engine. And I will -- we're not in a position to discuss anything more, anything more about the program in the details. If we include the 9X program where we only have the POs, I want to be clear, through 2020. But for that same period through calendar year 2029, that would move that number from $425 million to maybe $530 million.

So another item you are aware of, which is we announced our plant expansion. We announced that on December 7. So you can look that up. We did the news release with some detail provided. We will provide more detail about this expansion at the Needham conference. It was a redundant plant, designed to be a redundant plant for MRAS and GE Aviation and their customers, I mean, the big aircraft companies. We promised we would do this as soon as we reach an agreement of hard pricing through calendar 2029. So we reached that agreement. We have a hard agreement through 2029 with MRAS, and we're proceeding with the redundant plant. It is needed for capacity though, probably starting in calendar '21 or '22, so the timing is really good. When it was originally conceived as a redundant plant, which is pretty critical in aerospace, especially when you're sole-source qualified like we are. So that's good news. Like I said, I think it's good news anyway. Like we said -- like I said, we'll provide more information about that during the Needham Conference. But just to quickly review at 90,000 square feet, so about $19 million cost completed next year, next calendar year.

The plant should provide about $50 million. This is approximately $50 million of initial hot mill capacity, and we'll explain this more when we get to Needham Conference. But we actually going to double that amount by making an additional $5 million -- $4 million to $5 million investment, and that's been contemplated by the whole plant, and we can explain that in the more detail at Needham Conference. We'll show diagrams, things like that. Our current hot mill capacity is about $40 million, so there's some numbers to think about.

So a lot was done in December, I must say. We sold our electronics business. We got our hard deal from GE, rest through 2029. We got the POs and the 9X program and we announced the expansion. So I would just say that normally I am known to have high aspirations, and I said at the beginning of November, it'd be nice to get all those 4 things done by the end of the calendar year, but I'm not sure everyone believed that would happen but it did happen. So the -- those 4 events especially the sale of electronics business to AGC, that completes the transformation of Park from an electronics company to an aerospace company. You know words like transformation are overused to a point where they don't mean anything, big words like that. But I don't think at any case that word is, in any respect, an exaggeration. So we decided to go into aerospace in a serious way about 10 years ago. It's been a very long and difficult road for the last 12 years, 10 to 12 years. We -- I think we made the decision in January of 2007, so that's 12 years ago. I think we broke ground about 11 years ago on our first plant, and so it's 10, 11 maybe 12 years, depending on how you want to look at it. But no matter how you look at it in terms of how many years, it's been a very difficult period. We have had overcome a lot of obstacles, lot of setbacks, lot of failures, lot of disappointments. lot of things didn't go our way, a lot of loneliness, we're -- really, I think, almost nobody believed that we were doing the right thing. But we didn't quit or give up. And I would say, maybe we were even laughed at or dismissed as irrelevant by some other companies that maybe are in the outside looking in now trying to get back the bids they lost to us and have not succeeded in doing so yet. So I must say, I think that what our people have done is quite incredible and remarkable. We did this on our own, we've built it one brick at a time. We didn't use any fast money. This is not using somebody else's money to do acquisitions, no. We built it one brick at a time. And the important thing about that in my opinion is that we own it, this is our business, we are an aerospace company as much as one could be. It's not something that was given to us, we earned it. We did it on our own, one brick at the time. So it's real to me and it's a substantial and it's sustainable. That's my opinion anyway. So it's not that we're saying we are where we want to be because we're not, that wouldn't be true. We have a long way to go. And we have a lot to do. But I think we've laid a groundwork for doing those things that we want to do for our company for the future.

Okay, moving on. We declared, I guess, yesterday when you heard about it, the $4.25 special dividend, which is about 80 -- approximately $86 million. That will bring us to over $500 million of cash dividend since fiscal 2005, over $500 million. That's a $24.75 a share. We were paying cash dividends, regular dividends since the '80s, but 2005 when we started to pay special dividends and increased our dividends. So often we refer to that 2005 day is kind of a starting point, but it's not true, we've been paying dividends and regular dividends since the '80s, we never skipped the regular dividend. So how did we do come up with this number? As I think, you all know, it's not rocket science, or not a science anyway, a lot of judgments involved, we did consult with our advisers and they were very helpful to us, our outside professional advisers.

There was questions about how -- whether we should do something at all, how much and what form, was it -- whether it would be a dividend or a buyback for instance. So there were a lot of factors we weighed in terms of making the decision, but one thing I want to highlight regarding a buyback is that we're at a point now where we really would like to see new aerospace-oriented investors and analysts coming to our company. Our float is already not that great, it's kind of low. So it would be kind of reductive to buyback stock and further reduce our float because the low float is an impediment obviously against people coming in, and we want new investors, we want aerospace investors and aerospace analysts to come into the fold.

Let me just kind of go through the cash situation for you. So you may not -- you may be -- already done the math, but let me just help you out a little bit. If you look at the balance sheet that's included in the third quarter earnings release, which you just received today, which we just announced today, released today. The balance sheet is 120 -- sorry, $112 million of cash at the end of Q3, then we have to add $145 million from the sale of electronics, which took place after the end of Q3. That gives us about $257 million, these are round, I'm I just trying to give you some concepts here. But then we take that $257 million, we have to subtract $22 million for taxes and expenses, capital gains taxes and expenses, other transaction. Another $19 million on the transition tax installment payment, you'll see that on our balance sheet as well, it's called noncurrent income taxes payable. That relates to overseas cash we had when the new Trump tax law went into effect last year. So that's $19 million tax liability, that's paid over a certain period of time, but that is a liability related to cash, we think it's appropriate to subtract that number. And then we have $19 million for the Kansas expansion. So we take the $257 million, we subtract those amounts, that gives us $197 million. $86 million dividend, that gives us about $110 million, $111 million of cash. So that's our cash position, we'll discuss this more at the Needham Conference as well.

We've been working on acquisitions. We have -- we don't have anything to show for it yet. It's been a real challenge for our people because the sale of electronics was a very consuming job, it took a lot of work. But we didn't stop, we looked at a number of companies. We've participated in some auctions where we were concerned that the evaluations were just too high. We've reached out to a number of companies in the last couple of months, companies that were not being offered for sale by the banker. Just companies that we thought would be a good strategic fit for Park. And the first reaction was no, which is not surprising, that's kind of how these things work, but we're still out there looking for opportunities. We're also trying to, starting to explore, I should say, a joint venture in Asia, and at this point, we've been outlooking for joint venture partners to maybe build a factory with a partner in Asia and that might require some investment as well. A factory similar to our factory in the U.S.

So let's talk about Q4. So Q4 is a 14-week quarter. This is every 4 years approximately. We have a 53-week fiscal year, this is one of them. And the way that we always worked at it, so last quarter will be 14-week quarter, a normal quarter is a 13-week quarter. So just keep that in mind.

But for Q4, we're looking at approximately $17 million, we have -- well, let me put it this way, we have $17 million booked. There's always some risk because booking and shipping are 2 different things. I would think, $16 million to $17 million is a good range, although I think the low end of that range is not would be surprising. I would be more inclined to believe the higher end of the range. EBITDA for Q4, we're expecting approximately $4 million. Obviously, there is risk in EBITDA as well especially based on our top line. So what happened here is we had a slow start to Q1 and Q2, and that was because -- so this stipulates to GE and [9x] destocking. That slowed us down. But now we're kind of correcting, I think, we started to do a little correcting in Q3 but correcting -- there's more correcting in Q4. So restocking in Q4, driving the Q4 number up. So just wanted to make my comment and I lost track of it for a second here. So let me just keep moving, so I don't get bogged down. So I just want to refer back quickly to the forecast that we gave you on January 4, 2018 when we announced our third quarter results last year. We provide a presentation along with the conference call, the investor call. And the second last page I think it was, there was a forecast for the '19, 2020, '21 and '22. So we're not confirming that forecast right now, we're not going to do that. But just to give you a little comfort, we believe that our fiscal '19 is going to track the fiscal '19 forecast in terms of sales.

EBITDA, I just want to remind you that the EBITDA in the forecast of pro forma EBITDA. The EBITDA we're reporting is obviously, actual EBITDA. The pro forma EBITDA is going to be higher because as we explained, pro forma assumes that all the legacy cost from the electronics business and from Park as a larger company have been reduced at the beginning of the period, which obviously is not true. And I just want to say that I believe those legacy costs will be with us, will lag with us probably through at least the second quarter of next fiscal year, the '20 fiscal year. So just keep that in mind. It's not that it'll drop off a cliff all at once, they're being dealt with over time.

So let me just see what else we have. And I also want to mention just because it was asked last -- during the last quarter conference call, second quarter call. Someone asked how we're tracking the fiscal '20 forecast that was provided in the last year on January 4, '18. I just want to confirm, we believe we're still tracking that '20 forecast. We're not confirming it both top line EBITDA-wise, but the good news is on January 16, we'll update the forecast, we'll provide you with a new forecast, which will include a revenue EBITDA for 2021, '22 and we'll add '23 as well. So I guess that covers it in terms of introductory remarks. I think so let's see, I took 20 minutes, sorry about that. Operator, we're now ready for questions.

(Operator Instructions) And our first question comes from Nick [Ricostello] from NR Management.

I want to congratulate you on achieving your short-term goals there, (inaudible) long term actually. But good job on that, and I appreciate the special dividend. So I just want to get back to the big picture on the acquisitions. And if you could maybe further characterize what the market like is? And I'm assuming it's more like the sellers' market right now. Are you looking for smaller things? If you could just give some more -- clarify what exactly fit in good with the new Park? And would you finance a potential acquisition? Or would you use balance for the cash? Would you see Park ever being indebted again to achieve an acquisition strategy?

So on acquisitions, of course, size matters. But I think our focus is more the strategic fit. So we're looking for something that would be unique, different, actually be added to Park. We're not just looking for more capacity or more revenue because we're thinking not just what it would look like for the next 2 years, we're looking at what it'll look like for next 10 or 20 years. And that's really overall all over the lot in terms of size. So we've been looking small, we've been looking larger. Will we potentially go into debt, I think the answer is yes. But it will have to be a very special opportunity for Park. We always had a very strong -- we always had a very strong balance sheet and we like having a strong balance sheet. It's nice to have it, especially when the world is very volatile and very variable, unpredictable. So we're reluctant to go into debt. I think if we did it, it would have to be something very special, and I think we'd be very pretty conservative about the type of debt and how much debt we would take on. But I wouldn't rule it out completely. So it's hard to define what it is because except to define it generally by saying it needs to be added at the Park, it needs to be complementary to Park and it needs to bring us something special, something different, something unique. Sometimes what that means is components. So we see a business that has 2 or 3 things that are unique and maybe it's missing a few things. So we need to fill those things in. The problem is that if a business has everything filled in, the valuations are sometimes going to be not so good. So the bankers, when they do these deals, they're looking for companies that has an EBITDA history and everything else. Our experience with auctions in the last 9 months is that the valuations were troubling. And I get the sense there's just a lot of money chasing these things and are not really being looked at strategically, they're being looked at from almost a banking prospective. Okay, what's the EBITDA? What are the synergies? And how -- is it accretive or not accretive? And that's the end of it. And we just think that would be not good for Park, kind of irresponsible for Park. We've been at this for a long time. And whatever we do, we want to do the right thing, we don't want to do a foolish thing. We don't want to go for the short-term opportunity, and 3 or 4 years from now we scratch our head and think, boy, it looked good for a couple of years but now what do we have, we have something that really doesn't make sense for us. So I'm sorry to not be able to give you too much in terms of specifics. But it's hard for me to answer that question in terms of specifics, because, again, it always goes back to those same kind of general concepts, what's unique about this? What's different? What's special? And how it would be additive to Park? How it would enhance Park? Those are tough questions that had to be asked and answered, and not by bankers either, by people at Park that are going to have to live it and own it for many, many years.

(Operator Instructions) And our next question comes from Christopher Hillary with Roubaix Capital.

Just wanted to ask as it pertains to how you thought about the capital allocation. Could you your thoughts on what you would anticipate your capital expenditures doing going forward? Do you feel like there is a upward bias or about the same or lower than you what would've anticipated 6 or 12 months ago?

With the $19 million or $20 million we announced $19 million, but later on to $20 million that we have in mind for expansion. That's probably going to take care of any major capital items in the near future. And that of course assumes that things could happen that we don't anticipate and expect right now. As we'll explain in maybe a little bit more detail at Needham Conference, when we built this factory though, we left -- and it was even explained a little bit in our news release. We left some space available for additional equipment. And as I mentioned, we could actually double the incremental capacity from the expansion for what's called hot mill, brings about $50 million, 5-0. We could double that with another $4 million, $5 million investment. So if we feel that becomes necessary, useful for Park that will be an additional expenditure. And that's something that's kind of -- we have in mind, but has not -- we have not made a decision on that. And we probably won't for a couple of years anyway. We'll see how things play out, and see how we feel about our needs. What we're doing now will put us in good stead for several years.

Maybe another question just -- do you feel like you need to invest more in your sales force at all to address opportunities that you see given your product offerings? Or do you feel like increased awareness is actually creating some pull towards you or customers are asking you to meet some needs?

Well, we always said, or question, but I'd like to answer both. It's true, we do need to invest more in our sales activity. I think that's -- I agree with that. But I also believe that there is a lot of pull based upon what we're doing and the programs we're on. The -- we're on some important programs, some significant programs, and that in itself gives the company like us a lot of credibility and creates that pull and it's significant, I think.

(Operator Instructions) Our next question comes from [Leonard Cooper], a private investor.

I have 3 words that I've written down here and I just wonder if they connect to Park in any way. Some of it I don't really know what it means. But 3D printing is one, superconductivity and 5G. Does they mean anything to Park?

The second two, probably not so much anymore since we sold our electronics business, Len. 3D printing is something that is definitely on our radar screen. It's probably a little early for us in our applications. But it's something we're paying attention to and watching, and I'm talking about for making composite structures for aircraft for aerospace.

Okay, I'm scribbling. Then the manpower requirements, there seems to be a shortage of skilled workers. How do we expand? Do we attract good people? And do we have enough?

We don't have enough. With the expansion, we'll need to -- we'll be looking to hire some new people. A lot of our best people are homegrown. I think that some of the better people at Park, a lot of them are homegrown people who started on the factory floor. But recruiting is difficult probably for anybody these days. Kansas is often not the location people would choose to relocate to, so that's a challenge for us sometimes. But the good news, the good side of the story is that as Park progresses and has more successes, it's a kind of -- that's the best advertisement I think we can put out for people, other words, I don't know, success breeds success, I guess is what people sometimes say. But I think that as we do more and we have more successes, we become more attractive as an employer. So we have a pretty good pool of manufacturing type people, especially in the Newton, Kansas area. We're always looking to upgrade but we have a pretty good pool there. But it is a challenge, I think, for anybody right now to find the right people.

And I am showing no further questions from our phone lines at this time. I'd now like to turn the conference back over to Mr. Shore for any closing remarks.

Okay. Well, thanks everybody. Actually call went more quickly than I thought, which is good, so we don't take up too much of your time. I'd like to wish you a Happy New Year, and please if you have time, tune in for that Needham webcast, it's available to everybody, it's not -- you don't have to go to the conference. And more information will be provided about that in the near future. Okay, again, thank you very much. Happy new year, everybody, and we'll talk to you very soon.

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