Good morning, my name is Nova and I’ll be your conference operator today. At this time I would like to welcome everyone to the Park Electrochemical Corp Fourth Quarter Fiscal Year 2016 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. This is Brian. Welcome, everybody, to our fourth-quarter conference call. I have with me, as usual, Matt Farabaugh. He’s our CFO. He has a new title, Senior Vice President. So if you haven’t congratulated Matt yet, you’re way overdue because I think that was a couple months ago Matt was promoted. But other than the change in Matt’s title, the call will be as usual. We’ll start with some introductory remarks. Matt will cover the financial analysis. I’ll add a few other remarks in terms of just general commentary, then we’ll go into Q&A. All right, go ahead, Matt.

All right, thanks, Brian.

Oh, sorry. Right, one more thing I forgot to mention that – sorry to interrupt, Matt. Matt’s comments, there’s a transcript of Matt’s comments which have already been posted on our website. There’s some detail in here so you want to check the website, you can go do that. Thank you. Go ahead, Matt.

All right. 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 1, 2015, various factors that could affect the 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 fourth-quarter and FY16 P&L which are not specifically addressed in the earnings release. During the FY16 fourth quarter, North American sales were 49% of the total sales, European sales were 7% of total sales, and Asian sales were 44% of total sales. Compared to 48%, 5%, and 47% respectively for the 2015 fiscal year fourth quarter. And 53%, 7%, and 40% respectively for the 2016 fiscal year third quarter. Sales of Park’s high-performance non-FR-4 electronics materials were 94% of total electronics material sales in the 2016 fiscal year fourth quarter, 91% in 2015 fiscal year fourth quarter, and 94% in the 2016 fiscal year third quarter. Park’s electronic sales were $26.9 million or 75% of total sales in the 2016 fiscal year fourth quarter, compared to $27.5 million or 76% of total sales in the 2015 fiscal year fourth quarter. And $25.5 million or 74% of total sales in the 2016 fiscal year third quarter. Park’s aerospace sales were $8.8 million or 25% of total sales in the 2016 fiscal year fourth quarter, compared to $8.8 million or 24% of total sales in the 2015 fiscal year…

Okay. Thank you, Matt, for the introductory financial comments. Brian again. Let me give you a little perspective on the quarter, how it laid out month-to-month. So we’re talking fourth quarter, of course. December was a pretty bad month, actually. Very slow. We never know what to make of that because there’s the holiday weeks but it was quite a bit off. And fortunately, January and February came in stronger. They recovered and the quarter came in – ended up being let’s say okay top line. Not out of align with recent history, in any event. So, but at the beginning of January, we really didn’t know where we were going. And that’s, I guess, not unusual because, again, we’re coming out of the holiday period. Now the other big holiday in the fourth quarter is the Lunar New Year and that has a big impact. But nevertheless, we seemed to be able to plow through that pretty well. So you could say January and February were close but December was a very weak month, top line wise. And just follow-on to continue through the first quarter, we have nine weeks in the books for the first quarter. And for some reason, March just kind of fell back down again. We were pretty strong in January, a little bit better in February, and then March, the bottom kind of fell back down, fell out. And we were back to the December level. We’re talking weekly averages, of course, which we have five four-week – quarters. So we don’t want to distort things by just talking about full months. April came back. Not as much as we’d like but April did come back. Kind of to the average level of the fourth quarter. So May’s going to really be a horse…

Thank you. [Operator Instructions] Our first question is from Sean Hannan from Needham & Company.

So, Brian, first question. I’m not sure if I specifically heard the number that you had mentioned for what GE was this past fiscal year. Can you reference that again?

$12 million to $13 million.

Okay. So if we did 12 to 13 with them this past year, and it sounds like, if I’m interpreting this correctly, through them any involvement in programs such as Comac, Bombardier, the thrust reversals, all else, there’s really not expected to be any upside to what we had done with GE. Instead, we’re looking for half that number, roughly sixish through calendar 2017? Is that correct?

Yes. I would think sixish is probably, we’re trying to be pretty conservative here. But it’s definitely a smaller number and it – I think just in terms of rule of thumb probably good to think about half as kind of a bottom baseline. And I would suspect it would be a little better than that. But because of the inventory burn down and because of the 747, that’s going to affect us short term. Those other programs you mentioned, we’re really living off the 747 right now mostly. The other programs you mentioned, they haven’t really kicked in yet. We’re working on the A320neo. And that’s because GE’s producing engines in advance. But that airplane hasn’t really gone into production yet with the LEAP engine. Not in serious production. So that’s all in the future. So the problem we have here is we’re kind of, I don’t know how you say it. We’re kind of – we have, like, a gap period where we’re living off of some legacy programs. We have the inventory burn down. And the other – the upside part of the story hasn’t really kicked in yet. What will happen is as the inventory gets burned down, the upside starts to kick in. And then there will be some pretty quick acceleration. And just one of the things that you should be aware of is we are concerned and GE’s quite concerned as well about our ability to ramp up quite quickly when this thing starts to move upward quickly. And we know the numbers. We have a forecast, so it’s not like they’re going to blind side us. But it’s still pretty fast ramp-up. So they’re quite concerned about making sure we maintain a core group of people that can service their programs.

So for all practical purposes, the ability to get an appropriate growth inflection point, we’re really looking at your fiscal 2019 to see those types of numbers coming into the model from these other programs, et cetera?

By fiscal 2019? Yes. I think maybe might see something start to move up in the second half of fiscal 2018. I was talking calendar years.

Sure.

You could switch that to a fiscal year, of course.

Sure.

So when I – the revenues, actually the same. The last year, calendar year and fiscal year were about $12 million, $13 million. But that half number that we’re talking about applies to calendar year 2016, 2017. But like you said, you can switch that to a fiscal year terminology. I think if you’re talking fiscal years, probably the – I think we might see this thing start to move up toward the end of the fiscal 2018 year, which is basically 2017 calendar year.

Okay. Now, what is your revenue capacity to support them today? So if you’ve done $12 million to $13 million, is that kind of a cap in terms of your existing facility…

No.

– to support them? Is it something higher? Because then the next question I’d have is if we’re going to go and build another facility for redundancy, it sounds like we could create a pretty material gap in terms of idle floor space and equipment.

So the thing is that this – right. So we have a lot of extra capacity currently with our equipment. But we have one line and that’s the issue. So we’re going to end up with two lines for redundancy. And we’ll have a lot of extra capacity. The cost burden is not very high. And the reason we’re able to do that is because we’re building a factory right next door. So we really have no people cost at all. The cost burden is going to be basically depreciation for the additional factory. But that is actually a pretty good financial story when we look at the numbers. Considering the extra revenue that we’re going to receive as a result. And remember, it – this is not – and I think we discussed this before. In order for us to be able to have this kind of business and be sole-source, not only with GE Aviation but ultimately Boeing and Airbus, it’s not – they’re not – it won’t happen if we have one line. It’s just too much risk for them.

Sure.

So it’s not like: Oh, we’re doing this just because we want to. It’s really the way we look at it is part of getting the program. But the economics are quite good. Now, remember when we were originally considering doing this expansion elsewhere? And we decided to do it in Kansas. There were pluses and minuses but mostly for economic reasons, so we can keep those incremental costs quite low. As I said, the people costs are basically nothing. The additional costs would be the depreciation. But there’s also this other program we’re talking about, same equipment. And plus the development project we’re doing with GE relies on that equipment. So I don’t – I think it – this is one of those areas where you never know for sure. I’ll bet you a dollar right now that if you asked me five years from now how we feel about it, we’ll say it was a really, really good decision that we made. And it worked out very well for us. So we can take that dollar bet about any time.

Okay. So when you pull GE out of the equation and you think about the balance of other programs. You have mentioned the Scorpion program and other activity within the aerospace side of your business. Can you talk a little bit about to what degree we can offset some of that downdraft from GE? So in other words, we’re not necessarily going to be halved for your total aerospace for the year, obviously. But can you give us some sense of our ability to be able to get back to something that’s a little bit closer to what you did in fiscal 2017 in aggregate? Thanks.

Yes. I think obviously that’s a good question and obviously it’s something we’re focused on, because that’s kind of the short-term equation. I think some of the things we were just talking about. The ablative program, some of the parts programs will help a lot. Those are programs that are pretty exciting. I’m not saying we’re going to be able to fill the whole gap but I think it’s a possibility we will. We’re talking, what, like a $6 million or so gap. I don’t know. I think there’s a possibility we’ll be able to take care of that. In the fourth quarter, there was pretty much already – the reductions already much – already pretty much in place. We’re starting to trail off. We were able to kind of hold the top line at fourth quarter. So it’s hard to say. It’s a challenge. But I think based upon the things we’re working on, there’s a possibility. You’re talking this fiscal year, so you’re talking…

Correct.

Very quickly. The other things we’re talking about, those large programs, that joint development we’re in with GE, another large program. Neither of those have any impact on this fiscal year top-line revenue. That’s not for this fiscal year. So we’re going to struggle because we’re in between. We’re dealing with this 747 inventory problem, as I said. And it’s – and the other – the new programs, which are programs that GE has. Those are not speculative programs. The timing of those doesn’t really help us until maybe the tail end of that second year of the burn down. So there’s going to be a gap and we’re going to have to struggle to fill it. But I guess the – my – the best way I can answer that is that it will be our objective to fill it. And I think it’s possible for us to fill it.

Okay. Now, on – thank you for that, by the way. On the electronic side of the business, can you talk a little bit, as a follow-on to some of your earlier prepared comments, on what your feeling is the state of the current environment and how you feel that the health may be? And then as a follow-on to that, can you update us on the progress of new products? Now, I know that you folks have been very positive on those. The uptake within the market’s been a little bit disappointing, on the slower side. So wanted to get an update there as well as what you’re able to do to start driving that further with customers. Thanks.

Yes. So the electronics is so volatile, the market, and moves so quickly. So if you asked the question at the end of February, I would’ve said: Yes, looks – feels pretty good. Because the January and February were pretty strong months. Got to – asked the question at the end of March, I’d say: Oh, boy, not so good. Because all the ups and downs really are electronics and aerospace doesn’t move like that. So we’re talking down stories in terms of the big numbers for Park and it would be electronic driven and market driven. Market share doesn’t move that quickly, either. I could say at the end of April, it’s a little bit better but we’re concerned about what we’re seeing out there. And it’s all embarrassing but we go through this all the time. Whatever I say now, two weeks from now, it might be a total different story. And I always have to remind people that we’ve been in the electronics industry almost more – longer than anybody since 1960. So we’ve seen it all but our ability to predict is still pretty poor. So with that caveat, I’d say right now we’re concerned. As far as new products are concerned, I think last time we mentioned that we had a big thing going with Huawei on Meteorwave. We’re real – pretty excited about that. And not clear – not – it’s going to ramp up. All they told us is that be prepared. Be ready. It’s going to be pretty steep ramp. That would be an Asian opportunity for a product made in Asia. So our two new products are for electronics. Mostly the Meteorwave family, Dash 20 family. And so there’s been a lot of work and I guess the problem, hard to…

Sure. Understood. Thanks very much for all the color. I’m going to hop back into queue.

Thank you.

Thank you. Our next question comes from the line of Morris Ajzenman of Griffin Securities. Your line is open.

As a follow up to that question, the earlier question on GE pulling back while reducing inventory. The $8.8 million in this quarter, based on the math you’ve kind of given us, there’d probably be a decline in – running between $1 million and $1.5 million per quarter, thereabouts. Was that fully reflective in this quarter you reported? Or was that partially reflective to step up more into the soon quarters?

Partially reflected.

Okay. Thank you. Looking at, again, the previous question on your output. You’re running let’s call it about a $35 million per annual run rate composite, give or take. What sort of – what keeps that number? And what that equates to capacity utilization?

It’s very small. We don’t disclose our capacity but we have a very significant upside potential for capacity. So let’s say we’re maybe not even 50%. Now, that’s a dangerous thing to say, though, because it depends what product, of course. It’s – the capacity’s not one capacity. We have capacity for parts, we have capacity for hot melt. We have capacity for solution. We have capacity for ablatives. So but as a general matter, I would say we’re not even running half.

Okay. And a quick question for Matt here. SG&A as percent of sales 14.4% this quarter. Improved from third quarter and from last year for third quarter you had top line increase. But based on a revenue run rate, again, it’s going to be [indiscernible]. But you were $35.8 million, 14.4% SG&A. Is that what it should be normally? Is there anything unusual there or is that the normal run rate at that level of revenues?

It’s probably not entirely sustainable but it’ll be something roughly in that range. Maybe a little bit up from there.

Okay. All right, guys, that’s it for me.

Thank you, Morris.

Thank you [Operator Instructions] And next we have a follow-up from the line of Sean Hannan of Needham & Company. Your line is open.

Okay, thanks for taking my follow-up here. Just – these are a little bit more administrative, I suppose and probably more targeted for Matt. Can you talk a little bit about your gross margin? So it looks like you folks have hit 30% right on the nose for three of four quarters in fiscal 2016. So given what you could per – what you would prepare for as a potential revenue path this year, do you feel that you have the ability to hold margins in that low 30% range? Or can you provide any perspective around this? Thanks.

Well, I’ll comment. Matt can as well. Sean, gross margins are so top line driven on a short term basis. Obviously, long term, they’re affected by product mix and things like that and new development. But – product development. But short term gross margins are so driven by electronics revenues going up or down. So I think the answer is going to be, based upon the revenue, as you see, you’re an intelligent guy. Of course you figured it out. Look at the revenue number, look at the gross margin number. So we hold those revenues or move up. I think the answer is going to be yes. But if we slip below those– those revenues, the answer’s going to be we’re going to struggle to maintain that number. And obviously we’d like to push it up. And the way that we’ll – the most important contributor to pushing it up will be top line. Matt, you want to add anything?

Yes. It’s dependent on our mix at any given point in time. But mainly it is going to be those volumes. Those top line volumes.

Sure. And I appreciate all of that. I suppose the angle I was coming from is more in terms of preservation and protection. And I get that you’re going to have a revenue influence on the ability to do that. I didn’t know if there was any incremental perspective you might have based on how you feel about the business at this point. If I’m interpreting correctly, it sounds like at current point in time, you’d probably feel comfortable with that type of a margin. But caveat: Hey, look, if we have a significant dip, then the bets are off. Is that at least a fair way to start thinking about things in the absence of more granularity?

I think so. It’s not a target. It’s interesting that it has been hovering around that number. But it’s not a target. I think if the revenues are off, it’s going to – especially short term. It’s going to be difficult for us to maintain a 30% gross margin. If the revenues are up, that would be a plus. There’s a lot of leverage in the revenues, especially short term. These – there are a lot of fixed costs that don’t change that much. So it may – the revenues short term make a big impact on gross margins.

Okay. What about maintaining your SG&A? And the reason I’m really getting at all, so obviously we’re at pretty thin revenue levels here. And so it’s really going to exacerbate the sensitivity within the model. So I just want to get comfortable with where the cost points can have an impact. Thanks.

So the SG&A’s probably a little bit more fixed. I mean, there are certain aspects, the S part of it varies a little bit with commissions and things like that. But – which are fairly limited for Park. The SG&A is easier for us to work on in terms of cost control. Gross margins to some extent are what the cost of goods sold are to some extent what they are. Watch it very carefully. But SG&A’s probably where you focus more in terms of trying to control our costs. So I’m not sure that – it’s certainly not a quantitative answer. But it’s something that we have more control over. There’s certain discretionary items, as you know, in SG&A. Bonuses, profit sharing that we’d have absolute control over. And we take that – those things seriously. And we take them seriously, I mean, really every day but certainly every quarter, we take those things seriously. And people at Park know it and they live with it. If they don’t like it, they don’t work at Park.

Okay. Thanks very much for your color.

Yes.

And I’m showing no further questions in the queue. At this time, I’d like to turn the call back to you, Mr. Shore, for closing remarks.

Okay, thank you, operator. And thank you everybody for listening in. We’ll be talking a little bit sooner than our normal – interval because that’s probably the end of June for our first quarter call. Matt and I are here today in the office. Please give us a call if you have any follow up questions. And other than that, have a very good day and thanks again for listening. Goodbye.

Ladies and gentlemen, thank you for participating in the Park Electrochemical Corp. Fourth-quarter FY16 earnings release conference call. This now concludes the program and you may all disconnect. Everyone, have a wonderful day.