Park Aerospace Corp. (PKE) Q2 2009 Earnings Report, Transcript and Summary

Welcome everyone to the Park Electrochemical Corp. second quarter 2009 earnings release conference call. (Operator Instructions) At this time I would like to turn today’s conference over to Brian shore, President and Chief Executive Officer.

I am with Matt Farabaugh. Of course, as usual, Matt is VP and Controller. Matt will start with some introductory financial remarks and then I will offer a few comments of my own and then we will go into Q&A.

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, 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 second quarter ended August 31, 2008. Net sales for the 2009 fiscal year second quarter ended August 31, 2008, were $55.6 million compared to net sales of $60.5 million for the prior fiscal year’s second quarter. Park’s sales for the first six months were $115.4 million compared to sales of $117.6 million for last year’s first six months. Net earnings for the 2009 fiscal year second quarter were $4.9 million compared to $9.2 million for the prior year’s second quarter. Park’s net earnings for the first six months were $12.5 million compared to net earnings of $16.6 million for last year’s first six months. Park reported basic and diluted earnings per share for the 2009 fiscal year second quarter and first six months of $0.24 and $0.61, respectively, compared to basic and diluted earnings per share of $0.45 and $0.82 for the prior year’s second quarter and six-month period. Now I’d like to briefly review some of the other significant items in our second quarter P&L. Comparing the current fiscal year’s second quarter sales to last year’s second quarter sales, Park’s sales volumes decreased 8%…

I will offer a few comments as well. Also, I just want to remind you that Matt’s comments are posted on our website as of many about two or three hours ago. There’s a lot of detail in Matt’s comments so you may want to check out the website to just make things a little easier for yourself. As far as my comments are concerned, first of all I will say that it’s a pretty difficult environment to offer any kind of perspective in considering the financial crisis that it seems like the world is immersed in at this point in time, but we will do our best, as always. First of all, why don’t we talk a little bit about Q2 as compared to Q1. I think a comparison to Q1 is probably more meaningful because it’s more recent. If we go back to the classic Q2-to-Q2 there are a lot of different things that have transpired during the year so it is kind of hard to track. Let’s talk Q1-to-Q2 or Q2 compared to Q1. And let’s talk about the differences which impacted the bottom line. First of all, you know the top line is off and that’s pretty straight forward and the analyst can figure out what kind of bottom-line impact would result in the top line. Raw material costs, you know our policy is that we pass along increases in our raw material costs in the form of selling price increases but we also have a lag effect because we give our customers a little time to figure out what to do to digest the problem and to respond itself. This quarter was hit particularly hard because we had raw material increases that went into effect June 1 and our related selling price increases, to kind…

(Operator Instructions) Your first questions comes from Sean Hannan with Needham & Company. Sean Hannan - Needham & Company: So I think that you folks typically have a pretty challenged outlook. Visibility is often fairly difficult for you. Can you provide a little bit of commentary for us right now for how incrementally more challenging this outlook has become for you, with the demand environment?

I think the situation is Q2 is challenging and I think we’ve talked about some of the things we’ve done already to meet those challenges. And that was consistent with my comment that I think Park knows how to operate in a difficult environment. I think the real question is not what’s happened so far because, fine, we’ll take it, we can handle it, probably better than most. The real question, in my mind, and maybe you should answer that question, you’re probably smarter than I am about those kinds of things, is what is going to happen over the next months, or the next month. And that’s why I opened my comments by saying this is really an interesting day on which to do a conference call and try to offer any perspective. So the fallout from the Lehman situation and what is that, two weeks old now? Not even. We haven’t seen that yet, we don’t know where that’s going to go. The credit environment, as I said, and so far in Q3 it looks kind of like Q2, in terms of order patterns and our revenues and that sort of thing. So it’s really hard to say about the future, of course. The existing situation, yeah, we know how to deal with those kind of things. And we will, we don’t need to be prompted, we know what our responsibility is. Of course, meanwhile, we are continuing to try to do everything we can to drive our new product lines for our future. Sean Hannan - Needham & Company: So I suppose if I can just kind of work off of that, if the current environment, from a demand perspective, looks similar to the prior quarter, but through the course of the quarter we saw the direction of the mix change, right? With your FR-4 and non-FR-4 materials, is that trend, has that stabilized or is it possible that that trend is actually continuing, based on all the larger macro news that we’re hearing with infrastructure build-outs and at the end of the day, kind of networking, [inaudible], etc.?

The answer is we haven’t seen it continue at this point, but let’s see what happens here. I’m not going to name names but a lot of these big Internet networking companies are saying, hey, watch out, because our customers may not be ordering big-ticket items. Whatever we have so far in the last month or last few weeks is consistent with the quarter. So we’re not seeing another step down, at this point. I was just saying, and kind of speculating, that reading other people’s, the big Internet companies, IT companies, restructured companies, news releases and they’re saying they’re concerned, probably rightfully. So we’ll have to see what happens, but in terms of what’s impacted us so far, we haven’t seen anything over and above what we saw in Q2. Sean Hannan - Needham & Company: So based on some of these pressures that might be out there, are you seeing any ramifications on pricing within the market place?

Pricing meaning what? Sean Hannan - Needham & Company: Product pricing for your customers.

You mean our selling prices? Yeah, well, we’re not very popular right now because we’re sticking with our policies. Now, we haven’t done anything with our utility costs and utility costs have become a real factor and so far we’ve decided to just eat those. But in terms of our selling prices and raw material costs, we are sticking with our policy. Of course, just in the electronics industry we’re talking, I think there is just so much more tension out there now. As far as I was concerned it was never a very happy place anyway, but the level of unhappiness has ratcheted up so we’re not very popular, not very liked. I do hear that there is capacity in Taiwan and China and places like that. And I think we’re pretty unique, actually, as far as an electronic material supplier for circuit boards is concerned because I think we’re probably about the only real specialty company out there. The rest of them work commodity-oriented and I’m not knocking that but when you are a commodity-oriented operation you really trade based upon supply and demand. Capacity utilization and things like that. So the first thing some of these guys are going to do when they get nervous about demand and they have excess capacity is they are going to start changing their prices. And we’ve heard about these things. And you know what? We’ve said before that we are going to continue to lose market share and I suspect we will, partly because of the competition. And the competition is better, too. You know, in the old days, maybe three or four years ago, maybe they weren’t that robust. Maybe some of the OEMs weren’t willing to use the competition in Asia for their programs because of their concerns about quality, reliability, supply. But I think they’re pretty good. So those concerns have gone away, the prices are better, to some extent anyway. To a large extent, I believe, their prices are better and there goes our full market share. Sean Hannan - Needham & Company: You also had commented on their being a number of factors that had pushed the raw material pricing up for you, which then resulted in a lag for your price pass-through on September 1. Is there a way to either quantify or qualify the order of magnitude for what the different contributors were in raw materials, assuming that copper was probably the largest, but just wanted to see if we could get a sense from you?

You are absolutely right, copper is the big story here. And that’s the wild card. I read things about copper still might go up, because of what’s going on in China or India, even though the economy is down, but you are absolutely right, copper is the large majority of the story. I think we quantified the impact. We told you $700,000 in the quarter. And that impact, at least as of September 1, goes away. But that doesn’t mean that there won’t be additional increases in our cost during the third quarter. We don’t know that. Sean Hannan - Needham & Company: And then lastly, you will typically provide the names of the top five customers you had in the quarter.

The top five customers for us were Sanmina,TTM, [Wu’s], Tapco, and [Multech].

Your next question comes from [Jawan Lief] with Sidoti & Company. [Jawan Lief] – Sidoti & Co.: Just to be sure that I understand and are on the same page as you, what was the dollar decline of your non-FR-4 sales during the quarter?

I think Matt has given us the percentages.

The high performance, for the quarter, was 57% of our total electronics.

And in Q1 it was 60%?

Yes, it was just a hair under 60%.

Could you just back into it, because we don’t have that in front of us. But you know what the top line is so you can kind of back in. Obviously we’re talking about the non-high performance, but I think you have enough to do that math. [Jawan Lief] – Sidoti & Co.: So according to my calculations I get to about $4.0 million quarterly fall from the non-FR-4 side, which attributed to almost all of your sequential sales fall. Am I understanding it correctly?

I think you’re probably right. However, as I said, we continue to lose market share with non-FR-4. Is that what you’re saying? [Jawan Lief] – Sidoti & Co.: You continue to lose market share in the non-FR-4s or the FR-4s?

Sorry, now I’m getting mixed up because we don’t usually say non-FR-4, we say high performance. We continue to lose market share with FR-4, however, our market share of high performance in Q2 was down because of the factors we discussed. [Jawan Lief] – Sidoti & Co.: I thought you mentioned something about the $0.5 million sales impact on the non-FR-4 side, that’s why I was asking.

What we were saying, let me just go back and do it again. I know it’s pretty difficult to kind of parse through all this. We are saying that the impact of the loss of high performance, the reduction of the high performance percentage of our sales, the impact of the mix, was $500,000 in Q2 for the period to Q1. It’s the high performance mix. Matt just said it was close to 60% in Q1 and in Q2 was 57%. So that 3% difference had an impact of $500,000 Q2 to Q1, which is negative in Q2. [Jawan Lief] – Sidoti & Co.: And as for your composite material, you do have Kansas plant hopefully coming on board sometime in calendar 2009. If I go back and do the 12-month trailing sales, you are just about $25.0 million on annual run rates. Would this capacity addition, on an organic basis alone, how should we look at this business in terms of dollar increase or in terms of percentage of sales? Could you give us a little more color?

It’s really not a capacity question so much because we currently have capacity up in Waterbury. It’s really capability and focus. The Kansas plant should be our plan, our objective, that should be the best plant in the world that makes this kind of product. It is situated in the Wichita area where a lot the aircraft companies are located. So that’s really what it’s about. It will have capability that is quite a bit in excess of the capability of the Waterbury facility. So the capacity question is not really the issue, that’s not the right question because we actually have capacity. What we’re trying to install is capability which will attract more business. It will be a very, very long day in the future where we will be talking to you about not having enough capacity to work America to make a dense composite prepreg materials. [Jawan Lief] – Sidoti & Co.: On your [inaudible] building you are looking at, what else can you tell us, how would it change potentially if you are successful. I’m trying to just get to how you view this business, what do you think you can take this business to? Could you give us a little more color on how this might add to your composite business and how big this deal might be?

We’re not going to comment on the size. You could say it’s quite a bit larger than the acquisition we did earlier this year, which was more an acquisition about capability and technology, a very small operation. This is actually quite a bit larger. But it’s a larger operation and it actually would be an operation that has much more effective and spun out manufacturing capability, whereas the smaller operation we purchased, we didn’t buy for manufacturing capability. It was, again, technology know-how. But I think the key point here is that we decided to focus a lot of our sales and marketing effort in the parts side of composites as compared to materials. Parts is just new to us, parts structures of aircrafts can last maybe 5-6 months. Since we purchased Nova, which is Nelcote PAFC in Lynnwood. The plant in Mexico also would be to produce parts and we decided we are going to go after parts most aggressively. We’re not backing off the materials side of the composite story but we believe that’s much more of a long-term situation, it takes a long, long time to become qualified for materials. Usually you have to wait for brand new programs to get your materials qualified. We’re the new kid on the block in the aircraft industry. I’ve told this over and over again. It’s kind of one of my frustrations. The aircraft industry is very slow, very conservative. It’s very difficult to get it. It’s kind of like the opposite of what we have, I think, of electronics where I suspect we are the lead in high performance and other companies are trying to knock off our market share. The tables are turned when it comes to aircraft. But we believe that with parts and structures that even though it does take some time and we have to try to be patient, we believe that our opportunity to grow that aspect of the composite product line for aircraft, that opportunity is more immediate. So that’s why we decided to focus on that. And this is all new because we weren’t even in that product line until we bought Nova, which I think was in March. Maybe four or five months. But again, that’s what we’re emphasizing. That’s what this acquisition would be about. It’s not materials, it’s parts and structures of aircrafts. The Mexico plant that we’re researching and studying, again, composite parts and structures of the aircraft. [Jawan Lief] – Sidoti & Co.: Matt, could you give us the percentage sales for each of your top customers, the top five?

I can give you the percentages for Sanmina, it was 14.8%. TTM was 11.2%, [Wu’s] was 10.8%. The total top five was 50.9%. And the total top 10 was 67.2%. [Jawan Lief] – Sidoti & Co.: And the 20 please?

The top 20 would be 77.8%.

Your next question comes from Mona Eraiba with TCW. Mona Eraiba – TCW: I just want to get some color about the end markets for your top line, the decline in the revenue, what was the end market that was weaker and which ones stayed stable, etc.?

The only markets that we think were really stable were military and maybe medical. But that’s small. It’s a big margin but small. The main market for our electronic product, particularly the high end product, which is really most of our story anyway, is going to be Internet infrastructure, IT infrastructure. We’re dealing with the household name companies that lead that industry. And again, it’s based upon capital spending, it’s not based upon consumer spending. We don’t make anything electronic-wise, if you will, that would end up being purchased by a consumer, I wouldn’t think. It doesn’t go into cars, it doesn’t go into PCs, it doesn’t go into laptops, it doesn’t go into cell phones. It goes into big installations, big infrastructures, $1.0 million to $2.0 million to $5.0 million boxes. Mona Eraiba – TCW: But you don’t have the figures like servers, network equipment?

No, we don’t have that broken down. They’re all going to the same place. And actually, just so you know, because we’re not being obtuse, when we sell a product to a company, using Cisco as an example, we don’t even know necessarily exactly what kind of end equipment it is. But we know generally the market it’s going into. Mona Eraiba – TCW: You haven’t seen further deterioration? It says business similar Q3, the first three weeks.

Exactly. I’m just telling you the facts that we know. I guess I would leave it up to you and others to decide how much you want to read into that. But we often report what we know for the first few weeks of the quarter. Mona Eraiba – TCW: When do you think this French situation is going to be out of your numbers?

I think we reported when we announced the proposed closure, by the way, that it would be treated as a DO if the plan is implemented. It is going to be Q3 or Q4 we suspect. Mona Eraiba – TCW: So you’re waiting for what, an agreement, to implement the plan? What are you waiting to make it a discontinued operation?

If you ever operate in France you will know that it’s quite difficult and there are many procedures that are required by law they want us to go through. It’s not really agreement so much, but there are a lot of very complicated and time-consuming procedures. We unfortunately had two other restructurings in the same location over the last three or four years so we’re quite familiar with the procedures. This time we’re proposing a closure. Mona Eraiba – TCW: So you tried to restructure it, that didn’t help that much, so now you’re just shutting it down.

Exaclty. We tried twice and the market kept moving away from us. I mean, it helped, but whatever benefit we got, the market deteriorated further and now it’s at the point where, you know, we’re at critical mass anyway so we didn’t think another structuring. Mona Eraiba – TCW: Any other benefit out of this when you close it down? Are you going to sell land, sell anything, or is it whatever you get for that you are going to use for compensation and so forth?

I think that when we did our announcement, I think we said $5.0 million to $6.0 million was the estimated charge. That’s a P&L charge. The cash is quite different. We expect the cash might be almost neutral, actually. Mona Eraiba – TCW: But you don’t have a real estate benefit of selling that.

We do. We own real estate but that is a net number that we have. Mona Eraiba – TCW: Okay, that’s in this number.

Your next question comes from Leonard Cooper, a private investor. Leonard Cooper – Private Investor: I was wondering about the sphere of influence that Park is having, or trying to grow, in the aircraft industry and what progress is being made along those lines.

That’s really a key question for us. And I must say that my feeling, my opinion, is that our sphere of influence, to use your term, is coming along very nicely. We seem to be getting a lot of attention. I mentioned the last time we spoke that we had been asked to quote on probably half a dozen large RFQs for the aircraft industry, which was kind of a new event. We never saw one of those RFQs until just about four or five months ago. So I think that’s an indicator. Of course, I like to see the revenues, I like to see the top line. That’s where it’s a little frustrating for me. And I think I mentioned before that I am counseled by my counterparts in large aircraft companies that I just need to understand that I have got to be a little patient, that the aircraft industry doesn’t move like the electronics industry. So every now and then I want to bang my head against the wall a little bit, but I think the objective and issues are that our sphere of influence is doing very nicely. And I think that the aircraft companies are recognizing that we have something a little different to bring to the table. There are a lot of complaints about the supply chain for aircraft being quite weak, under capitalized, immature, unsophisticated. We hear this over and over again. This is what is being told to me and what they are also saying to me is we are very different so they see us as an opportunity so they see us as an opportunity. And then my next question is why don’t we have more business from you yet. Well, that’s the part that takes a long time. That’s the frustrating part for me. But I do believe that there is a recognition and as I mentioned in my introductory remarks, I’m hoping that the fact that we have a balance sheet and cash will actually widen the gap between Park and some of our competitors in the aircraft supply chain. Leonard Cooper – Private Investor: I think it’s rather interesting. When I was in engineering, in the 50s, there were reports coming out of aviation research saying that the wing tips should be bent up. It took about 50 years before they started to do that on airliners.

I think you know we’ve done some parts, our composite wing tips, winglets, whatever they call it. Leonard Cooper – Private Investor: I didn’t know that.

I thought I had mentioned that before, but that’s one of the things we’ve done. Even with the small operation we have and with Washington.

Your next question is a follow up from Sean Hannan with Needham & Company. Sean Hannan – Needham & Company: So this is on a separate topic but there is another materials company out there, Izola, that has begun to initiate a couple of IP protection suits basically towards some Asian players. In looking at your offering and some of the efforts that Izola is starting to move forward with in their protection, is this anything that you’ve looked into in terms of something to be concerned about and looking into the line a little bit more specifically?

I don’t think you should be too concerned about it. We know the people at Izola pretty well and I think we have good relations with them. And let it suffice to say we’ve had our little informal discussions in which were very friendly in nature. It’s interesting what they’re doing and more power to them and I hope they do well, I wish them well. I could be wrong, but from everything I know I wouldn’t recommend you get too concerned about that. For Park.

There are no further questions.

Thank you all for listening on this very difficult day, very difficult time. Hopefully the next time we speak there will be a little more clarity as to the condition of the world, better, worse, or indifferent. A little more clarity, anyway. But thanks for listening, have a good day and feel free to give us a call anytime.