Park Aerospace Corp. (PKE) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Derrick, and I will be your conference operator for today’s call. At this time, I would like to welcome everyone to the Park Electrochemical Corp. Third Quarter Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions] Thank you. At this time, I will turn today’s call over to Mr. Brian Shore, President and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, operator. Welcome everybody to our third quarter conference call. I have with me Matt Farabaugh, our CFO, as usual. So Matt and I will start with some introductory remarks regarding the quarter and our business. And then we’ll go into our normal Q&A session. So Matt, why don't you get it started with financial commentary?

Okay, very good. 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 26, 2012, 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 financial information included in the news release for the third quarter ended November 25, 2012, and in some cases and a comparison to the second quarter of the 2013 fiscal year. Net sales for the 2013 fiscal year third quarter ended November 25, 2012 were $41.3 million compared to net sales of $47.3 million for the prior fiscal year’s third quarter and compared to net sales of $46.4 million in the second quarter of the 2013 fiscal year. Park sales for the first 9 months were $133.7 million compared to sales of $149.6 million for the prior fiscal year’s first 9 months. Net earnings before special items for the 2013 fiscal year third quarter were $5.1 million compared to net earnings of $5.4 million for the prior fiscal year’s third quarter and compared to net earnings before special items of $5.8 million in the second quarter of the 2013 fiscal year. During the current year’s third quarter, the company recorded pretax charges of $600,000 in connection with the closure of its Nelco Technology (Zhuhai FTZ) Ltd. facility located in the Free Trade Zone in Zhuhai, China and its Park Advanced…

Well, thanks a lot Matt, I appreciate it. By the way everybody, Matt and I are not in the same location right now. So we’ll try to coordinate as best as we can, we’ve done this before, of course. Just one other introductory comment, Matt's comments or a transcript of Matt’s comments are posted on the web early this morning, and I just want you to be aware that. I have a question for you all, which you can let us know later on if you want, I'm not suggesting you answer right now, but it’s been at least raised that maybe some of you would rather not have Matt go through these comments at the beginning of the call since these comments are posted on the web, but let us know whether you like Matt to actually read the comments or whether you would rather defer that for the conference call and just read them off the website. So if you have any opinion about that, feel free to let us know. Thank you. So let’s see. Before we get into the quarter, I wanted to talk a little bit about the dividend declared yesterday. So and put that in context a little bit, because there is some additional commentary in the press release, which is a little unusual for a dividend news release for us and I want to explain. By the way, also my comments might be a little bit longer today because we're covering a lot of territory here. So please bear with us. So the dividend that was announced yesterday will probably end up being a return on capital rather than it’s actually distribution, which will be treated as a return on capital rather than as a taxable dividend that’s because our accumulated earnings and…

[Operator Instructions] Our first question will be coming from the line of Sean Hannan, Needham & Company.

So first, if I can follow up on some of your commentary, Brian, around the advanced composite, the aerospace business there. The opportunity that remains active, can you give us a little bit more clarity around your thinking for timing of that? And how far along are you within that process? You had commented there was an earlier opportunity you looked at where the numbers didn't work out. Are you at a point with this activity where you're able to be partially through the numbers? Any color around how we should interpret progress and expectations. Thanks.

No. I don’t really have much of an update. These discussions have been ongoing for a while at the highest level, but I don’t really have much of an update on whether the numbers are going to work or not. And obviously, when we have something, we’ll let you know, but it would be premature at this point. But I guess my comments, Sean, were just based upon the scale and dimension of the opportunity. And the other aspects of the opportunity, which I won’t go into, it would be highly inappropriate for me to do that, which would also point to the opportunity being very -- a very exciting potential opportunity for Park. And I will say again it may not pan out, but the opportunity for lot of reasons is quite -- has quite a lot of potential.

Okay. All right, then to switch over to the electronics side, just to get a little bit more color from you, I think that geographically, you certainly had some variations of performance, North America versus Asia. I'm not really as focused around Europe. I don't think that there's any surprise in terms of what's going on there. And it's obviously a much smaller piece of your business, but to get a better understanding -- or could you help us to get a better understanding of the decline that you saw in Asia quarter to quarter versus the activity you saw in North America?

Well, as you noted, Asia was the weakest market relatively speaking for us over the prior quarter. Other than just stating the fact that you’ve already noted, I don’t really know what else to say. It’s hard to really understand the whys of that, sometimes it don’t make sense to us because we look at our market very much as a global market. There has been some -- I don’t want anybody to get too excited about this, but there has been some movement back in the U.S. from Asia. That could be a temporary thing. There were a couple of special situations where business that was being sourced and manufactured in Asia came back to the U.S. And I don’t know if we should get excited about that. I mean from an American perspective like, while the U.S. markets going to really start to grow, I wouldn’t say it’s a trend, but there were some instances. As a general matter where people talking about maybe bringing a little bit business back. And there were special situation or 2 where a large contract manufacture moved some of its own business from Asia back to the U.S. for maybe their own particular reasons. That may or may not have anything to do with global trends. So I don’t know, Sean, you probably more intelligent about that question than I am, as the facts are noted and you are correct about the facts.

Okay. Well, that color is helpful. Then in terms of the new products, you're certainly encouraged around the -20 and -22, particularly the -22. Just trying to get an understanding of where you are with customers at present with the kind of qualitative ramp for those products, number one. And then, number two, any perspective that you might be able to share around perhaps the customers' requirements to move to that next-generation material, and perhaps if there are any risks around the actual need to move to that next-generation material. There is sometimes thoughts or speculation around extending the life and the usability of existing lines, and just wanted to get some perspective around that.

Well, those are really good questions. It actually happened with our -13, it was longer than when we might have thought of 5 years ago just because what you said. The major investment to upgrade technology and sometimes the OEMs want to squeeze as much out of the old technologies as they can. Our -20 product is really a follow-on to -13, it’s not a -- it’s not a departure product, it improved the electrical to some extent, improves the thermals reliability to a significant extent. That’s one of the weak points of -13. When it was first introduced they were strong in that regard, but as technology advanced, -13 started to have to have an Achilles' heel in terms of some of its reliability properties, which are measured by different tests that I won't go into now. So -20 is not an earth shaking new product that is a leading technology. -22, I made the comment and I believe this, I’m sure people disagree, that I think that’s a best product in a high-market at this time. But it’s an interesting question you ask about the speed at which the new technology will be embraced. The new technologies were more expensive usually at least it is a part. And then the question is, are people going to try to squeeze out a couple of extra programs with the old technology or design around the new technology so they can still kind of get what they want almost or get by with the old technology. But after the first of the year, we plan to go out with more aggressive marketing campaign I believe and I will see we get done. At this point, there has been extensive sampling activity with both products and that’s good news, that’s what we want to see. And I commented, that’s one of the reason our SG&A is a little higher than we’d like is because of all the sampling activity because we usually provide our samples for qualification with no charge and that goes through our sales line. So I don’t know the answer. Again you are raising good questions and I guess the good news I would say is if you want to think long-term, I feel quite good about -22 because it’s clear the industry is moving in a direction of needing higher speed materials. I don’t think anybody would debate that. The question you are raising, which is a good one, is the timing for it, and will it go quickly, will it go little clump’s, will certain programs switch over, some not. But the timing will be interesting. But from our end, of course, we can’t affect the world. We are a little company. We are not going to be able to affect what the world does. From our end, though we intend to get out and market the product more aggressively and see what we get done.

[Operator Instructions] Your next question is from the line of Jiwon Lee, Sidoti & Company.

Brian, I just wanted to kind of circle back on the aerospace components again. The joint venture opportunities that you have, those are, I believe, targeting new OEM programs, so how far are we, roughly, from at least any initial introduction of these OEM programs, as far as you can see?

Well, let me just talk generally about aircraft development, I don’t really think we should get into anything specific about either of these 2 programs that we return to joint venture on, one as I said has been deferred for 2 years anyway. But normally you would expect about 5 years from the point at which a program is designated a go program. That means there is a commitment to develop and introduce an aircraft and until they get the aircraft--until the aircraft is certified to certify and you have your first sale in that point, the revenue would spike up, because these programs usually are very well known the OEMs start selling these aircraft and anticipation of the certification date. The key thing for us is to partner with OEMs who had very good track records, and they vary, some OEMs have done terrible jobs, I mean these programs are get to be hundreds of millions dollars of over budget, years and years and years late and some of those OEMs don’t do well to all and maybe don’t last. Some OEMs have very excellent track records of getting programs done on budget on time. Obviously we would rather go with the latter, but when I say 5 years that’s assuming that the OEM is doing a good job of executing that that’s not a late program, that isn’t clean sheet program would normally take 5 years. So for our company like Park, if you are just looking at the revenue ,there will be some revenue for prototypes during that period, but most, but not-- but the real revenue would be like year 5 to year 25 or year 35 probably often in many cases. So when we look at these kinds of programs, we do very careful return on investment discount, the investment as well as the return, and the numbers are going to speak for themselves. So, the one thing I guess, I’m trying to convey is that both these programs are quite significant and scale for Park.

Are there any prototyping activities going on with any of these programs right now?

No.

Okay, it’s a little early. Okay.

If there were then we probably would've announced it because that would mean that the program was-- we had formed a joint venture.

Okay. And just switching gears onto the PCB side, that level of revenue was quite deep, especially since your commentary on the September order trends last quarter. So wonder whether this is purely on the demand side or whether, perhaps, you are sort of kind of resetting at least the PCB side of the revenue expectation?

Can you ask that question again, I’m not sure, I understand the first part, there was 2 choices, one demand side, what’s the second option?

You sort of perhaps -- let's just put it simply. Are you sort of, perhaps, letting go of some businesses in pursuit of the composites or the profits or the competition? You have certainly done that in the past.

Yes, so market share, I think that probably a market share out limit, but I can’t tell you something that would have been a factor in the third quarter. I think that’s been something which has happened over a long period of time. I mean for one thing, Matt talked about high performance we have very, very little FR-4 business left, so we’ve lost lot of market share in FR-4 and I think that was a good decision. We also have had a little bit of a gap, I think we’re kind of that let’s say [indiscernible] right now, because our existing product line electronics, we still think it’s a good product line, but it’s a mature product line, and a new products haven't legged in yet. So there is a little bit of kind of gap were the existing product line is not going to see a lot of upside, I think it’s still a good product, but it's mature so it's not going to see a lot of upside. The upside will come with the new products, but I think we’re kind of in between right now a little bit and that’s affecting our revenues as well. So if we can go back and play it over again, you would say these, we should have introduced these new products a couple of years ago or couple of years earlier and that would probably been the right decision. So, but that didn’t happen for a lot of reasons, and one of them was maybe we touched on a little bit is that we’re a small company and our focus has been to some extent in aerospace, because with the new market like that you really have to -- for us we had to give it all, if we just did a half baked effort, it would have been worth nothing. So we have to give enough effort to kind of break through and become somebody if you will, go from a nobody to somebody and if we did anything less than that the whole effort would have been wasted, it wouldn't have been a percentage thing, we do wasted our whole effort. So that probably affected our timing of introducing new products just from our company focus perspective. But we're talking -22, and just taking our route here, we are saying well maybe it's too early, maybe recently or maybe it's too early, so I don't know. But right now, I think your observation is correct that our existing product line is mature and our new products haven't legged in yet, so we're kind of in between a little bit in terms of revenues. Again I want to say that I have no idea whether that’s a factor in the third quarter though, I'm not saying that it is, and I don't know that it is.

Where there any share buybacks during the quarter?

Not, very, very little I think right after we announced it that is the buyback we get into a blackout period and Matt do you remember the number ,it’s very small?

Yes, it was less than 4000 shares, very little.

I think, we are on the market for couple of days and then we had us get out for certain reasons though we got until the blackout so we never got very far.

Okay. And then lastly for Matt, if we could discuss the top 5, 10 and 20 please?

Sure. We had 2 customers have more than 10% customers, CTM and Sanmina, rounding out the top 5 was WUS, Viasystems, and EC Petasys. The top 5 made up 50% of our total sales, top 10 made up 60%, just about 67% of our total sales, and the top 20 made up about 77% of our total sales.

Your next question is coming from the line of Morris Ajzenman, Griffin Securities.

Just kind of a follow-up, kind of alluding that you were kind of late in introducing new products, specifically on the electronics side. Any comment, any thoughts to where you might be during the interim losing market share?

Yes, that's what we have been talking about, I think we’ve lost a lot of market share with lower-end product, the FR-4, and if you look at the market for high-end, what 7, 8 years ago we were very dominant in that market and lot of companies have come into the market, now the market is growing as well, so our market share has gone down over the last 7 or 8 years, but the market has grown. And I don't think that’s a result of the timing of the new products as I commented that whenever new products might be earlier rather than late. It just the reality that we have some significant and serious, companies have come into this high-end market. So I don't know what we could have done to prevent them from coming into the market, I don't think that Park would have been in position to prevent that so the loss of market share, I think was going to happen. For me the question is, do we have a future in electronics, and I think we do, I think we can continue to be successful in electronics. We have to work harder, because we have some serious competitors and again we have to work harder with having very good and maybe even the best products, and also we have to have relationships with our customers and service to our customers, at least they'd want to do business with us maybe more than Brand X.

At this time I'm showing no further questions in queue, I would like to turn the call back over to Mr. Brian Shore for closing remarks.

Thank you very much, operator. Thank you all for listening, appreciated and thank you for indulging me with the comments about our business and general rather in just a third quarter. Appreciated, I thought those comments have been made. And the only other order business for today is I want to wish you all a very Merry Christmas, Happy Hanukkah, Happy Holidays and wish you all the very best of luck in 2013. Please give us a call if you have any questions, and we’ll talk to you soon. Good day.

Ladies and gentlemen, that concludes today's conference. We thank you for your participation. You may now disconnect. Have a great day.