Below is transcript of the Park Electrochemical Corp. (NYSE:PKE)’s Q3 FY 2015 Earnings Conference Call, held on Thursday, January 08, 2015, at 11:00 am EST. Royce & Associates, Bryn Mawr Capital and Gamco Investors was among Park Electrochemical Corp. (NYSE:PKE) shareholders at the end of the second quarter.
Park Electrochemical Corp. (NYSE:PKE) through its subsidiaries, is a global advanced materials company, which develops, manufactures, markets and sells high-technology digital and radio frequency (RF)/microwave printed circuit materials products principally for the telecommunications and Internet infrastructure and high-end computing markets and advanced composite materials, parts and assemblies products principally for the aerospace markets.
Host:
Brian Shore, Chairman and Chief Executive Officer, Park Electrochemical Corp.
Company Representative:
Matt Farabaugh, Vice President and CFO.
Analyst:
Sean Hannan – Needham and Company
Morris Ajzenman – Griffin Securities
Lenard Cooper – Private Investor.
Operator
Good morning, my name is Simeon and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Park Electrochemical Corp. Third Quarter Fiscal Year 2015 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one key on your touch tone telephone. If you’d like to withdraw your question, please press the pound key. At this time I’d like to turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.
Brian Shore, Chairman and Chief Executive Officer, Park Electrochemical Corp.
Thank you operator. Good morning this is Brian Shore, Happy New Year everybody! I have with me, Matt Farabaugh, Vice President and CFO as usual, and we’ll begin our 3rd quarter conference call with our introductory remarks and we’ll go to questions. When we get started Matt.
Matt Farabaugh, Vice President and CFO
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, 2014 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 third quarter ended November 30, 2014 P&L, which are not specifically addressed in the earnings release.
During the fiscal year 2015 third quarter, North American sales were 50% of total sales, European sales were 9% of total sales and Asian sales were 41% of total sales, compared to 51%, 6% and 43%, respectively, for the third quarter of the 2014 fiscal year and 46%, 6% and 48%, respectively, for the 2015 fiscal year second quarter.
Sales of Park’s high performance (non-FR-4) printed circuit materials were 92% of total laminate and prepreg material sales in the third quarter of fiscal year 2015, 89% in the third quarter of the 2014 fiscal year and 92% in the 2015 fiscal year second quarter.
Sales of Park’s electronics materials were $25.4 million, or 73% of total sales, in the third quarter of the 2015 fiscal year compared to $31.5 million, or 79% of total sales, in the third quarter of the 2014 fiscal year and compared to $33.7 million, or 80% of total sales, in the 2015 fiscal year second quarter. Sales of Park’s aerospace materials and parts were $9.3 million, or 27% of total sales, in the third quarter of the 2015 fiscal year compared to $8.2 million, or 21% of total sales, in the third quarter of the 2014 fiscal year and compared to $8.6 million, or 20% of total sales, in the 2015 fiscal year second quarter.
Investment income, net of interest expense, for the third quarter of the 2015 fiscal year was negative $139,000 compared to negative $48,000 in the third quarter of the 2014 fiscal year and negative $134,000 in the 2015 fiscal year second quarter.
Depreciation and amortization expense for the third quarter of the 2015 fiscal year was $890,000 compared to $1,012,000 in the 2014 fiscal year third quarter and $865,000 in the 2015 fiscal year second quarter. Capital expenditures for the third quarter of the 2015 fiscal year were $148,000 compared to $161,000 in the 2014 fiscal year third quarter and $179,000 in the 2015 fiscal year second quarter.
The effective tax rate before special items was 10.1% in the third quarter of the 2015 fiscal year compared to 3.3% in the 2014 fiscal year third quarter and compared to 13.3% in the 2015 fiscal year second quarter.
During the second quarter of the 2015 fiscal year, the Company had no customers that were more than 10% of total sales. The top five customers were GE, ISU Petasys, Sanmina, TTM and Viasystems, in alphabetical order. The top five customers totaled approximately 39% of total sales. Our top 10 customers totaled approximately 53% of total sales and the top 20 customers totaled approximately 67% of total sales.
Brian E. Shore
Okay, Thanks Matt, this is Brian again. The transcript of Matt’s remarks are posted in our website in case you want to check it out. So I have a few things that I like to tell you this morning before we go to questions. First of all let’s talk about the numbers for Q3. I think the bottomline doesn’t require much discussion it’s really the topline because the bottomline is driven by the topline and in this case there’s nothing unusual about the bottomline except the revenues which were way off. So, uhm, let’s talk about the revenues in the third quarter, let’s back up little bit to the second quarter call because based upon the comments we made in the second quarter call revenues really should not be a surprise, let’s go through that.
Ok, so remember when we discussed that in the first quarter and also including, the first quarter including, as well as the first month of the second quarter which is June. The revenues were quite strong, but we feel that was really inventory that were artificial based mostly in Asia, then we commented that in July the revenues fell off further and then on August went further than that. But also we explained that in June, the June revenues were in the level of the first quarter, so we knew what the June revenues were. We knew what the total was for the second quarter. We knew that July was the middle month, August was a down month. So it would have been pretty easy to figure out within a small range what the August revenues were, and then we said in the second quarter call that the first four weeks of September, four weeks in the books, were tracking August. We also said that we don’t know we always have been this about the electronic industry probably the last 20 years, probably a hundred times now. How unpredictable it is, and how it could turn into a dime, how a lot of smart people gets pulled by the changes in the patterns in the electronics industry but we were talking about going through that inventory correction and we’re in that low level in August and September. We also said, that we don’t know but this is the unpredictability, a part about the we said of course ask and ask and ask, what people in the industry think in terms of customers and OEM’s and they were talking about maybe a recovery by the end of the calendar year. Recovery meant that the inventory will normalize we’ll be back to normal levels. That time I think we said which I believe to be corrected, normal is somewhere between the levels of the first quarter and levels of the third quarter. The first quarter was artificially inflated, the third quarter was artificially depressed because of the inventory work off or work down. So, we pretty much knew what the revenues were in September and we also indicated, we didn’t see any recovery until the end of the year, leave that based among what people were telling us about the capped us we could have been wrong. So I think it would have been pretty straight forward to get a pretty good feel for the revenue levels in Q3 based upon our Q2 call. That the bottomline is really driven very much in Q3 the bottomline is really driven very much by the revenues which were private off. So let’s take, so I’m just going through my notes just making sure that I don’t miss anything important. Oh, here’s something else you should know, that I thought something you’d ask, that in August, September, October, November it’s uncanny how flat it is. It’s very, very flat, month over month over month, those four months are very similar. I’ve never seen anything like that. It’s uncanny, so if you’d take August, September, extract late October, November you have a third quarter. Now remember I said people were telling us in the second quarter I said people were telling us during our second call rather I said that the people were telling us that maybe there will be a recovery by the end of the year, maybe the inventory will be worked out. We don’t know that yet, what I can tell you are the facts, and I always very careful to explain, you know we don’t forecast, we just give you the facts that we know. We so often tell you what we have in the books for the current quarter. So as far as the fourth quarter is concerned, we got to look at the month of December, which unfortunately is the difficult month to draw conclusions from, what I can tell you, is that the last week of November, and the first two weeks of December were up as compared to that pattern for the last, for the prior four months which is so flat. Those three weeks, last week of November, first weeks of December which the five week month were up. The last three weeks of December go down, now why is that? A lot of people would say, well we had the holiday weeks, you know Christmas and New Year. The pattern would be consistent with that, that during those weeks things fall off. So it’s hard to read what’s going on because we’re trying to figure out what’s going on in the context of these holiday weeks. What I can tell you is that, last week of November first weeks of December were up, then the last three weeks, week three, four and five of December or fiscal weeks of December are down but, that I don’t think it’s surprising and it could be explained by the holiday situation, we just don’t know that. So at this point we have very little visibility because of the confusion of the holiday situation. Now we have in the books so far are the four week sorry the five weeks of December or five fiscal weeks of December. So as usual we’re not making any predictions or forecasting but we thought you’d be interested in that information which is the most current information we have in terms of our revenues. As I indicated in the last three quarters, we don’t really talk about our bookings anymore because we have such lumpy books as an aerospace that they could be misleading. So not a help at all when we talk about bookings and we don’t want to get information even though it’s actually correct which could cause us to draw conclusions.
Alright, let me just see. Ok so I guess that covers that, and there are a couple of things that I want to go over with you and last quarter one of our analyst was asking about electronics and how our market broke down, and it’s a question that’s come up from time to time so we decided to provide some information. This is our market, this is not the electronics market, this is our revenue, and our revenue is electronics, how we do aerospace, how they break down. The biggest segment for us, let’s call it servers providers, internet telecom service providers sometimes called infrastructure. That would be somewhere around 50-60%, that’s the biggest segment for us. Now, normally people would include bay stations in that segment we separate that because for us bay stations is REF only. That would might be 10-15%. Enterprise, that’s something that’s talked about quite a bit but for us it’s a small portion of our revenues, it’s only 10-15%. Semi-conductor, small maybe 5% or more, Aerospace and defense that’s 10-15% that’s going to be mostly in the US and a small portion of other things like medicals, instrumentations, industrial which is, you know we all lump in one category not significant. But we thought it would be helpful if you’d understand those dynamics because it’s a question that comes up from time to time.
The big driver for us is service providers, internet service providers and that’s where you’re going to see the highest end material, the highest tech product and we are talking all about from a very large back plane which call us do service providers. We used to call it internet service providers but now it’s just service providers I guess, which is also sometimes referred to as infrastructure. Talking about core hub routers, high speed switches and bay stations, but we separate bay stations because for us it’s an RF story. Enterprise, you know servers and networking equipment which is a small portion for us and although you know a lot of high end product not quite as high end as the servers provider market. We were talking about sensors, Q sensitive back panels and back flames for instance.
Highest end transfer rate servers and switches this is the highest end product with the highest performance requirement. So sometimes you know people ask about comparable and it’s confusing because they talk about a company that’s really an RF company and RF is actually an area where things outgrown for us in a bit and unfortunately it’s a small piece of our pie, I said may be 10-15% so it’s not going to drive our topline as much as internet service providers or the infrastructure market will. There isn’t really a good comparable for Park and Electronics not on public one anyway, and even the private companies are not good comparable to use Park and it’s unusual as part of its market focus. If you would look at it our competitors have large exposure with the markets that we just really don’t spend much time in. And for a good reason or a sudden accident it’s a part of our strategy we could try to focus only on the high end area where we could distinguish ourselves or protect ourselves a little bit.
Ok, hopefully that mood was helpful if we have not done that before. Now I should say, I want to say that these are estimates, It’s important that I explain that. Maybe a little good estimate, why is that? Because we sell to a certain board company, we don’t know every sale, where it is going, who the end market is, who the OEM is, what application or program it’s on. So this is based on a lot of work with the OEMs where we can’t tie it to PO’s. So there are some estimation and “guesstimation” involved here whenever less, as long as you accept the information without understanding dealt it with a useful information and try to understand the part and my part might be different in other companies.
Ok, let me give you a little bit of an update on General Electric, which is a top five customer of ours. We committed on last couple of the quarters, we are on the 747-A program, and Revenues on the 747 programs should be on how many 747s Boeing sells, and GE through GE aviation I should say. An engine program for the 747-A, and right now it doesn’t seem like 747s are really hot seller but we’d cross our finger that maybe Boeing will get a big order for 747s made for cargo we don’t know. H320 Neal, the lift engine for the H320 NEAL we discussed that I think in our last call, that’s just ramping up now, that’s a very big program, that’s a new program, we are going to be starting to supply to that new program this year and that is a new program and quite a large program.
Let me share with you a little news that we have not discussed before, it’s actually been in the news recently, couple of things, I hope you noticed but the ARJ 21 original airliner made by the Chinese aviation company called COMAC recently received its flight certification in China and the airplane uses a CF3410A engine I think, yes that’s right, the GE engine, we are on that program. There’s this other news that you might be interested in, which that GE aviation is flight testing what they call their passport engine, that’s used for bombardier aircraft 7000/8000 global aircraft, and actually put it on a test bed of a 747 test bed that’s being flight tested now, we are on that program. There’s another airplane that COMAC Company is working on and hopefully is going to fly soon that’s a fifty year old, the airplane we did that we just certify as a regional jet. The next one is a COMAC 919, that’s a competitor I believe to the single liner aircraft made by Boeing and Airbus, that’s a leap engine that were going in that program so much leap engine that were used on the H320 NEAL, we are on that program. There are other programs which were not, I don’t think we have properly discussed right now, but since those two programs were in the news in the last week or two you might want to look it up or google them, I thought you might be interested to know where we are in those two programs. Sorry, the passport program and the RJ Chinese regional jet RJ21 CF2410-A GE engine.
Last that I want to cover is two new products are expected to be commercialized this month. One in electronics, one in airspace, and these are significant products both of them. Both, I would say are high end technology type products so watch out for announcements on our new products, like I said they are scheduled to be commercialized this month and hopefully we can make that part. I’m not promising but that’s our schedule now. I think I mentioned this to you before that PARK has a little bit different philosophy about commercializing product maybe some other companies, we hold back products much more than others probably would, when we commercialize our product we feel very confident on the product we test it and test it and test it until it’s ready to go, that means that the day it’s commercialized, our customer can call, our customer servers can order the product and we’ll say ok fine we’ll have it for you next week. It’s not like well, we don’t really have that product yet but that’s commercializing means to us.
Ok, so those are some updates and that’s what I have for now. Operator can we go to some questions please.
Operator
Thank you! Ladies and gentleman if you have a question at this time please press star then the one key on your touch tone telephone. If your question has been answered or you wish to move yourself from the cue, please press the pound key.
Our first question comes from Sean Hannon the line is now open.
Sean Hannan – Needham and Company
Yes, good morning thanks for taking my question. So Brian your top five customers seem to be down maybe nine percent quarter of a quarter like when everybody else was down, closer 20% or so, I think you did a good job in terms of referencing what you’ve seen is dynamics on the electronic side of the business. If I make the right assumptions looks like GE really was the only, perhaps closer to growth customer certainly being on the aerospace side there. So, just wanted to verify, that of course the magnitude perhaps that GE was a grower for you, we certainly heard some positive comments around them from you just a moment ago. And then, if we could also get a little bit more of a sense of how you expect they could contribute sequentially or through the course of this year it seems that they would be on track for getting to be perhaps a 10% customer at some point down the road. Thanks
Brian E. Shore
Not quite 10%, GE was up a little bit but like you pointed out already aerospace was quite a different story than electronics. Electronics is a special story for us especially in the third quarter. I think aerospace was up a little bit as a whole. GE was kind of flat as compared to the second quarter. The difference with a company like, a customer like GE as compared to what electronic customer is there is significant visibility over many years based upon the nature of the business. It’s not the electronics you know, OEMs they don’t want to tell us, they just really don’t know, it does not work that way, it’s a very different dynamics. So we talk optimistically about GE, we’re not talking about the next month, we’re talking about, three years, four years, five years, six years down the road and ironically those expectations are probably more hard and firm than expectations we might have on electronics company with three months down the road. Again it’s because of the nature of the business by the nature of the business as such that you know there are long term contracts and you know the production schedules and cycles rather of the aircraft are quite long, the order patterns are you know quite long, the backlogs are quite large so you know you could reference all the airbus and the other aircraft companies are just as an example. I would say that GE, just to answer your question which is more or less flat in Q3 as compared to Q2 they are not quite on the 10% level but the expectations and forecast that we have with GE are, well, they are quite encouraging if you want to put it that way. Although we are talking about long term return timeframe then we would be talking electronics.
Sean Hannan – Needham and Company
Well, Brian if we look, really at the rest of, or your calendar 2015, I believe that there have been some prior thoughts that we should see growth with them as well as with aerospace as we progress through the course of the year. So I wanted to check on that assumption if that still stands to be relatively valid in any color perhaps you can provide around that.
Brian E. Shore
Yes the key here is more predictable so we are expecting some growth in the calendar 2015. The big spikes will come maybe 17, so we should see some growth in 15, some growth in 16 then will see some spike in 17, 18, and 19 that’s based upon the programs that are in flight, these are meaningful forecast I would say. As far as aerospace in general is concern, yes, I would very much hope that we could see some real revenue growth in aerospace outside of GE. There are hundreds and hundreds of other customers out there that were calling on, and I think maybe you or somebody asked this question last quarter about you know they asked me about if I would be disappointed if we did not see skipping growth in aerospace this coming year, I surely would be, and we all have a lot of pressure on us, I mean internal pressure but it’s proper pressure. We pay a lot dues you know over the last five, six years in aerospace, we’ve made major investments and my feeling is that we should see some meaningful growth in aerospace this coming year and if we don’t, and then I would say we’ve failed, give us an F.
Sean Hannan – Needham and Company
Ok, alright that’s helpful color. Next question I have or topic is really more related to SGNA this was a, it contains number that came through in a quarter wanted to get a sense from you or matt, the degree that this level is able to be maintained or how we should think about movements versus that November quarter number.
Brian E. Shore
Correct, it was contained. A number of people you know took salary cuts during the quarter so we were careful and we did not compromise Park’s future, we don’t cut back on R&D, we’re still very active with our marketing efforts. But we did try to control our SGNA especially in the US where business level is very poor in electronics anyways. So I would say there are some level of growth in SGNA in the coming quarters but it’s not significant, we’re not saying to spike off or maybe the third quarter level was not totally sustainable, or maybe it shouldn’t be or it’s not healthy for Park to make it sustainable.
Sean Hannan – Needham and Company
Ok, that’s helpful. Last question and I’ll jump back in the cue, can you talk little bit about Brian about the cost in environment both on the electronics side and the aerospace side. Are there any variables that are impacting the business today and to what degree can they be mitigated, managed or are there even positives that maybe helping you as well. Thanks
Brian E. Shore
Sean, when you say cost you’re talking about raw material cost or something else.
Sean Hannan – Needham and Company
Yes that’s correct, raw material cost.
Brian E. Shore
Raw material cost really not much of an issue in electronics you know, nothing to write home about, obviously you know coppers are a big story but right now nothing special, no impact copper was on Q3 versus Q2 for instance, we’d like to see where copper goes but right now no significant impact on copper and the rest of the raw material I think are not really, nothing significant to talk about. Aerospace is, quite a bit more dynamic we use, even though the revenues are smaller in aerospace electronics probably source I don’t know maybe five or ten times more raw materials from different suppliers to bring in different kind of business and that’s definitely a dynamic situation in which it requires a lot of management on a day to day basis and that something you know what we need to be better at and I’m hoping that’s an opportunity for us in the future to do better at it and our pricing in aerospace is different in electronics. Electronics pricing is really stock in place for a long time we don’t move it, aerospace we move point to point most of the time, we tend to adjust our prices I think that’s a bad pattern we are in. We really need to focus more on raw material cost and our input cost they just assume wherever they are we are going to re-price our product accordingly. I think it’s a lazy and not a good pattern for Park, a mindset for park to be in so we need to work on that. I do believe there is some opportunity for improvement there too. The rest of the cost especially electronics I think we tried to screw it down pretty tight, not to the point where it’d compromise Park’s ability to be an effective supplier for our customers but we have it screwed down pretty tight although you know we always looking at ways to optimize especially out west by even though we have two locations for electronics Arizona and California we really combine the operations or two locations plus one operation with basically one overhead you know one stay of it that carves in two location and we can do more with that I believe.
Sean Hannan – Needham and Company
Yes, ok! Great. Thanks very much for all the color Brian.
Brian E. Shore
You’re welcome.
Operator
Thank you, our next question comes from Morris Ajzenman as Griffin Securities your line is now open.
Morris Ajzenman – Griffin Securities
Good Morning guys. Question back on composites, you kind of spoke about the trend in the quarter you mention GE being flat sequentially. Can you give us colors or any change in the purchase orders with GE or composites overall in this quarter versus the past quarter.
Brian E. Shore
Ok Morris you go check out the transcript of Matt’s comments that are posted in our website were Matt did explain whether revenues were for the quarter I think there were $9.3 million which is up a little bit from the prior quarter. So there are some movements in the right direction, GE were you commented on we have a lot of visibility with GE that’s kind of a long term situation and the rest of the opportunities, we certainly, let me say this, I think our sales guys and even some of our folks in Kansas have got the message they are out there hitting the pavement pretty hard and we are doing just for a coding perspective I see all the codes actually the volume is quite a bit higher, this is anecdotal it’s not a scientific report for you but the volume of coding is quite a bit higher that it had been so that would normally be an indication of function of the sales guys out there in the market pretty aggressively looking for business. And that’s why you know in response to Sean’s question that I’d say I’d be pretty disappointed if we don’t see a meaningful op in the current calendar year, rather in regards in the aerospace. Yes I think the opportunities are there, the opportunities with GE are long term and more definable and more predictable. The opportunities for the hundreds of other customers, but some are small, it’s not all you know the big OEMs some are small but the opportunities with them they are there I’d think that we’d just have not done an effective job in the past of going right after those opportunities. Now if you want to be you know, if you want to go themselves ok fine you know a year ago we were still going through a transition, start up and difficulties but that’s all behind us, we don’t have that excuse anymore, it’s time for us to get that business. I don’t have any quantification for you, I just have an anecdotal input which hopefully be helpful.
Morris Ajzenman – Griffin Securities
Thank you!
Operator
Ladies and gentleman if you do have a question please press star and one on your touch tone telephone. Our next question is from Lenard Cooper a private investor. Your line is now open.
Lenard Cooper – Private Investor
Hi Brian.
Brian E. Shore
Hi Lenard.
Lenard Cooper – Private Investor
Hope all is well, you sound good. I have a question, is GE presently have the facilities and personnel to provide the projected growth in businesses that you speak of. Will big investments be required by Park for facilities?
Brian E. Shore
So Len, Happy New Year by the way. We have spoken for several quarters that about discussions were having regarding building redundant facility based upon GE’s request. This is really a capacity of redundancy because some of the, you know the big air space OEMs are a little uncomfortable being a sole force with the supplier that only has one location, you know for obvious reasons we have a lot in stake and the qualifications of process is very complex and time consuming so if there’s a supplier that you know an aircraft OEM is working with and it’s a sole force basis, then that supplier has one facility and their building burns down or something like that, it’s a real serious issue because it could take up to two years to qualify in suppliers in some cases and in our case it takes a long time, just like our building is really complex, materials that require very extensive testing you know something that could be qualified overnight. So that’s the reason for the request for redundancy but we’re still waning their back, we’re prepared to proceed, and we’ve been going to a side sledging process but we’re waning their back, waiting for more information from GE before we could proceed, before we could make a decision and move forward. I think it’s highly likely that we’ll do that, I thought the worry would have been started but really the balls, we’re kind of waiting for more information if we put it that way.
Lenard Cooper – Private Investor
Ok, Well I understand the problem of redundancy having been the aerospace there is before the moon landing. Another question, does 3D printing affect Park.
Brian E. Shore
Well you’ve asked us before, well you’re a smart person. I don’t really think it does directly at this point except the extent that it might require more infrastructure you know more data bin process just like you know we talked about the cloud well, we’re not directly working on the cloud equipment but it requires more bandwidth in terms of its service providers and that would indirectly impact Park and be a benefit to Park’s business.
Lenard Cooper – Private Investor
Ok, thank you.
Operator
Thank you again Ladies and gentleman if you have any questions please press star and one on your touch tone telephone. If your question has been answered or if you wish to move yourself from the cue, please press the pound key. At this time I’m sure no further questions, I’d like to turn the call back to management for any further remarks.
Brian E. Shore
Well, thank you operator and thank you everybody for listening to our third quarter conference call, I’d like to wish all the very best in the New Year. Matt and I are here today, so if you have any follow up questions please feel free to give us a call. Thank you and have a good day.
Operator
Ladies and gentlemen, thank you for participating in Today’s conference. This does concludes today’s program. You may all disconnect. Everyone have a wonderful day.
