Brian Shore - Chairman and CEO Matt Farabaugh - CFO.

Sean Hannan - Needham & Company.

Good morning. My name is Terrance 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 2017 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. [Operator Instructions] Thank you. At this time, I will turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference..

Thank you, Terrance. This is Brian. Good morning everybody, welcome to our fourth quarter conference call. I have with me as usual Matt Farabaugh, our CFO. Matt and I will start with some introductory remarks and of course then we’ll go to questions. Matt, why don’t we get started with some of the financial commentary.

Sorry, I always forget to tell you this, a transcript of Matt’s comments are already posted on our website, so if you want to go look at the details you can at our website as well. Go ahead, Matt..

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 28, 2016 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 fiscal year 2017 fourth quarter ended February 26, 2017 P&L, which are not specifically addressed in the earnings release.

During the fiscal year 2017 fourth quarter, North American sales were 55% of total sales, European sales were 7% of total sales and Asian sales were 38% of total sales, compared to 49%, 7% and 44%, respectively, for the 2016 fiscal year fourth quarter and 49%, 10% and 41%, respectively, for the 2017 fiscal year third quarter.

Sales of Park’s high performance non-FR-4 electronics materials were 94% of total electronics materials sales in each of the 2017 fiscal year fourth quarter, the 2016 fiscal year fourth quarter and the 2017 fiscal year third quarter.

Park’s electronics sales were $19.4 million, or 70% of total sales, in the 2017 fiscal year fourth quarter compared to $26.9 million, or 75% of total sales, in the 2016 fiscal year fourth quarter and $19.0 million, or 72% of total sales, in the 2017 fiscal year third quarter.

Park’s aerospace sales were $8.2 million, or 30% of total sales, in the 2017 fiscal year fourth quarter compared to $8.8 million, or 25% of total sales, in the 2016 fiscal year fourth quarter and $7.5 million, or 28% of total sales, in the 2017 fiscal year third quarter.

Park’s electronics sales were $82.5 million, or 72% of total sales, in the 2017 fiscal year compared to $106.7 million, or 73% of total sales, in the 2016 fiscal year. Park’s aerospace sales were $32.1 million, or 28% of total sales, in the 2017 fiscal year compared to $39.2 million, or 27% of total sales, in the 2016 fiscal year.

Gross Profit for the 2017 fiscal year fourth quarter was $7.4 million, or 26.8% of sales, compared to $10.7 million, or 30.0% of sales, for the 2016 fiscal year fourth quarter and $6.6 million, or 25.1% of sales, for the 2017 fiscal year third quarter.

Selling, general and administrative expenses for the 2017 fiscal year fourth quarter were $4.7 million, or 17.0% of sales, compared to $5.1 million, or 14.4% of sales, for the 2016 fiscal year fourth quarter and $4.6 million, or 17.4% of sales, for the 2017 fiscal year third quarter.

Investment income, net of interest expense, in the 2017 fiscal year fourth quarter was $105,000 compared to $55,000 in the 2016 fiscal year fourth quarter and $87,000 in the 2017 fiscal year third quarter.

Before special items, earnings before income taxes for the 2017 fiscal year fourth quarter were $2.8 million, or 10.2% of sales, compared to $5.6 million, or 15.8% of sales, for the 2016 fiscal year fourth quarter and $2.1 million, or 8.0% of sales, for the 2017 fiscal year third quarter.

Before special items, net earnings for the 2017 fiscal year fourth quarter were $2.5 million, or 9.2% of sales, compared to $4.9 million, or 13.6% of sales, for the 2016 fiscal year fourth quarter and $1.9 million, or 7.3% of sales, for the 2017 fiscal year third quarter.

Depreciation and amortization expense in the 2017 fiscal year fourth quarter was $733,000 compared to $845,000 in the 2016 fiscal year fourth quarter and $720,000 in the 2017 fiscal year third quarter.

Capital expenditures in the 2017 fiscal year fourth quarter were $48,000 compared to $78,000 in the 2016 fiscal year fourth quarter and $100,000 in the 2017 fiscal year third quarter.

The effective tax rate before special items was 9.1% in the 2017 fiscal year fourth quarter compared to 13.8% in the 2016 fiscal year fourth quarter and 8.2% in the 2017 fiscal year third quarter.

For the 2017 fiscal year fourth quarter, the top five customers were GE including its subcontractors, Sanmina, Shennan Circuits, TTM, and Wus, in alphabetical order. The top five customers totaled approximately 38% of total sales during the 2017 fourth quarter.

Our top 10 customers totaled approximately 51% of total sales and the top 20 customers totaled approximately 67% of total sales for the 2017 fiscal year fourth quarter..

Thanks Matt. This is Brain again. Okay, let me get started with the Trump factor, we talked about on our third quarter call and this relates to the surprise with the election and the impact that it may have on the tax laws.

So, I’m not sure if things are more clear now than they were during our third quarter call before the inauguration, but obviously taxes are still front burner topic.

I guess the most people say it's a matter of when more than if and then of course what will happen, but the expectation is that the corporate tax rate will go down and it will be some kind of repatriation provision or holiday we don’t know.

As we mentioned last time, once that does occur, once the new tax law goes into effect, whenever that is we're hoping it would be this year, and now I don't know maybe it still will be, but it is very difficult to tell, everybody seems to have a different opinion.

That point though we would expect to repatriate a significant amount of our funds overseas. We have about $240 million overseas, if we repatriated through those funds now, we’d have about $60 million tax bill which obviously we don't want to have.

At that point we would expect to do a large return of capital to the shareholders this is basically what we’re waiting for, we don't need the amount of cash that we have, but we have it kind of locked overseas, whether that being a dividend or buyback and probably mostly dividends but maybe buyback as well.

We mentioned that last time, I just wanted to update you and the update is we're just kind of still in the wait and see mode. All right, so that's that one. Copper something we talk every now and then, there is a little over $200,000 unfavorable impact from copper in Q4 versus Q3.

So let's talk about the Q4 from the point of view of electronics and then aerospace separately it's really difficult to combine them in our discussions. So in our Q4, remember December started out pretty strong and we had our third quarter call after December, we're pretty optimistic.

But then you know that was also a holiday month and that made us even more optimistic.

This is electronics we're talking about, but then things kind of flagged out in January and February, so we didn't get the momentum that we thought we were going to get coming out of December and electronics really flattened off in January and February without like I said the upside that we were expecting.

Aerospace a little bit better in Q4 and Q3 but that's really a matter of program timing more than anything else. So Q1, let's talk about Q1, I'm going to more details on the electronics and aerospace of course.

Q1 we have eight weeks of the book so far, aerospace should be up against Q4, not significantly but somewhat and again that's program timing, it's not really reflective of anything other than that. Electronics is still flat so for in Q1 versus Q4, so obviously it's not what we hope to see.

We're starting to feel like electronics is going to more of a second half story in terms of the upside. Let's talk about why. Remember last time we talked about with last call rather third quarter call, we talked about our new OEM program, marketing efforts and they have been I think quite successful so far.

Chris is spending enormous amount of time in Asia and thinking doing really a very special job and an incredible job, lot of hard work more probably [indiscernible] than easing else. But I gave you a little bit - a few numbers last quarter call, so I’ll take those numbers at this point. This relates mostly to our Meteorwave product line.

Meteorwave I think is an excellent product line but until you know Chris and the guys really got the Asia, started spending a lot of time in Asia with the OEM program marketing. We really weren't making that much progress, the inroads weren’t that significant. It’s like a tree falls in a forest, nobody hears it, is our sound, but now there's a sound.

So we have seven OEM agreements this point, 19 OEM agreements under negotiation. 15 OEMs are qualified, Meteorwave product line, 22 OEMs are in a qualification process. And 54 board shops have tested Meteorwave and that's all gone well.

So those are updates of numbers that I gave you when we had our third quarter call, all moving in the right direction. As far as I'm concerned there's definitely something very significant going on.

We talked about Huawei before they're kind of the big dog in Asia but there are a couple other significant OEMs that we've made significant inroads with and that's really helpful to us. When some of the big OEMs going on board and it seems like some of the other ones want to follow and also some of the board shots want to get on board as well.

There's a lot of kind of say it maybe buzz is kind of funny we're in Asia about Park and our Meteorwave product line at this point. But I think it's probably going to be more of a second half impact, it's not that we don't see some impact now, but it's not enough to offset the loss of the legacy products.

So we're kind of neutral there I think revenues in Q4 are not that little bit up from Q3 but not significantly. So we're looking really I think at the second half of the year before we see a more significant impact from the marketing efforts which are real as far as I’m concerned anyway.

It just may take a little while longer for them to come to fruition, in other words in terms of seeing them in clear revenue. Revenues there, but we want to see enough revenue to offset the loss of the legacy product revenues. So let's see - just look at the notes here, I think I’ll move on, because we’re already 15 minutes into the call.

That's Asia electronics and then US, of course the big story is the restructuring which was announced on April 18, is not a big surprise to you because we've been talking about the fact we've been planning restructuring for a while, it just took a little longer to get everything in place so we can go forward.

So we said at that time it'll take about four to six months to complete. By the way the unusual lease announcement to the restructuring on April 18 was very detail thorough detail. So you might want to take a look at that news release if you have questions about the restructuring not going to go into all the details here, we just don't have time.

But there is a $5 million to $5.5 million charge expected in connection with restructuring. And once the restructuring is complete, a go forward benefit of $3 million to $3.5 million per year and charge in the first quarter, probably 1.2 million, 1.3 million.

The second quarter maybe 2.8 million, these are estimates because it really is a question of timing. Some event to straddle the end of the quarter or beginning of a new quarter and that could affect the timing. Third quarter maybe about 1.1 million that's a charge.

The benefits should be fully realized in the third quarter that's our prediction at this point anyway. A small benefit of the second quarter, no better from the first quarter.

The important thing about this restructuring and if you look at the news release, you’ll probably get that sense is that it's not just restructuring that matters, we really need to reinvent the new Neltec business into a niche company because if we just do the restructuring and move the pieces around at a chess table it will have a temporary effect, but long term we really won’t be doing what we need to do to be successful in the US market.

So I believe that with the things we are doing, we will be successful in the US market and we will have a sustainable future. That's not based only on the restructuring, it’s based upon reinventing who we are into a niche company and that is in progress now.

We believe it's more of a niche market in the US and Asia, we're talking electronics again, but I think it's more volume market, in the US more of a niche market. So we need to focus our activities toward the end market and the nature and characteristics of that end market. Aerospace, so the news continues to be good and positive with aerospace.

We’ve been talking about this for a long time but we did sign I guess I don't remember month or two ago, a long term agreement with GE Aviation, the Emirates] Division that makes the GE Aviation that produces the thrust reversers and the cells that's our main customer GE Aviation that's where most of our revenue is derived.

It's a 13-year agreement, but it's a three plus five plus five year set up that's the way it works. So after each term under the agreement both parties are obligated to negotiate in good faith the terms of an extension if you will.

It was set up that way actually to accommodate us that was what we wanted, I won't go into the reasons at this point, GE are propose, I think a lifer program agreement and actually to accommodate us, we did it this way.

The agreement contemplates hundreds of millions of dollars of revenue but that’s based upon the forecast we have from Emirates GE Aviation, the Emirates division of GE Aviation, okay and that’s Emirates only. Again for us, [indiscernible] the GE Aviation long term agreement, this is for other parts of the engines, that's to be negotiated this year.

So we don’t have that agreement yet and there are peculiar reasons, which I won't go into - as to why the two agreements are staggered and weren't done at the same time. So, the hundreds of million dollars of revenue is based upon Emirates only, does not take into account the GE Aviation revenue, the non-Emirates GE Aviation revenue.

So we talked before about a joint development agreement that we have with GE Aviation to develop a new product, that is not a niche product if you will. It's a high revenue product, it's a very mainstream mainline product, important for aerospace structures.

That's going well, but the good news is that there were two other product opportunities that we’re working on with Emirates, these are not speculative or something that are just being discussed. These are real, they're in progress, they're happening as far as I'm concerned.

So we're probably going to add two, maybe even three items to our revenue line items with Emirates as our significant revenue generators. Redundant factory, we talked about that before. That's still in discussion.

There's a meeting in another couple of weeks with Emirates GE Aviation and all these things are kind of linked together, not just long-term agreement, but these are the three projects that we're talking about, they’re linked together with the redundant factory.

So, and also what, maybe last time I mentioned something new, with GE Aviation, there is actually a parts opportunity, a large parts opportunity. That's going well. The initial phases have been funded and we're pleased with that, it seems like that's a good chance of materializing for Park.

There's another major aerospace company that we've been working with that we mentioned that I think in the last quarter or two. This is one of the bigger aircraft manufacturers in the world. I think that we talked last time about, we signed a qualification agreement, but that qualification is well in progress now.

The company had their team into audit our facility in Kansas a few weeks ago. That audit went quite well. There are a couple of other specs that are being pursued also. And then with the same company, there are opportunities for legacy aircraft parts, both military and civilian.

The civilian aircraft parts, we’re going through a qualification for the civilian parts now, actually qualifying our materials for the part to be made with our materials. Scorpion, we touched on this from time to time. That continues to go well. It’s a program we have been very happy to be on.

I can tell you, but it’s about a public record that Textron flew their second production, confirming a Scorpion jet recently and we’re involved with that aircraft as well with parts and assemblies and low volume tooling. We're not really in a position to say more about the program. Textron asked us to keep it pretty close to the vest.

And I think there's something else I just moved through, we'll cover that because again we're running a little late.

So I want to sum up my introductory remarks here by saying I think the big strategic story for me anyway is Park is now well positioned for the future in electronics and very pleased with the progress that we're making in Asia with our Meteorwave product line.

Obviously, we don't have time to go into all the details, but the details I think are very compelling. In the US, we're resetting our businesses and our operations and our business focus to be more tuned to the market opportunity. Again, as a niche company in aerospace, that continues to be a good story. It's not a second half story.

I think it just keeps improving and improving and we have a very solid team with aerospace and that really helps us a lot too. I think we have something pretty special in aerospace and I got to tell you, I'm not dealing with the things that I'm not talking about people inside our company either.

So as I said, the second half should be better for electronics with the Asian opportunities and also of course the restructuring benefit as I said is probably going to be more realized in the third quarter and fourth quarter and the Asian opportunity should be turning more into revenue.

Aerospace, like I said, not so much of a second half story, more of an ongoing story, which is a positive story as far as I'm concerned. Okay. Operator, that I think concludes Matt’s and my introductory remarks. We’ll now go to questions..

[Operator Instructions] And our first question comes from Sean Hannan from Needham & Company. Your line is open..

Yes. Thanks very much for taking my question here folks and good morning. The first question I’d have here is in terms of the progress that you are making on the electronics side. You’ve been securing a number of customer agreements, you've secured a large OEM customer.

Just trying to get a sense of to what degree other than the statistics that you had laid out there, Brian that you feel that you can keep that momentum moving forward. So in that sense, continue to grow those numbers in terms of quals, et cetera, et cetera as we progress through the year.

And then kind of as a part b to that, other than being able to get the opportunity for a perhaps, some growth within electronics in the back end of this year, the degree that you see that there's some sustainability to that on perhaps a little bit more than a few quarter basis..

Okay. Sean, thank you. And first of all, it’s not just one OEM agreement. You’re probably referring to Huawei, sometimes I refer them as a big dog, but there are other OEM agreements we have. So the momentum sustainability, I think that's really the key question. My opinion is that the momentum is growing and growing, but it's about the amount of effort.

If we back off and we stop spending all the time, especially Chris and his guys in Asia, that momentum will not continue. In other words, it's not like a self-perpetuating momentum.

But as long as we keep doing what we're doing, my sense is clearly that momentum will keep growing and growing and we're building on what we've done and the more we do and more interest there is and it kind of is a contagious thing.

So, like I said earlier, the circuit board s hops, they want to get on board because they want to make sure that they’re working with the key OEMs, right. And some of the larger OEMs and some of the maybe more niche OEMs or smaller OEMs in Asia, they hear that we made significant inroads with larger OEMs. So they don't want to miss the boat either.

I think the product is performing really well. It's very good with our Meteorwave and I think it's gotten a very good reception in Asia. It's very highly sought of and not just by us, not just by the OEMs, not just by the circuit board shops, but by our competitors as well. I'm not speculating about that either.

So as long as we keep doing the right thing, I think the momentum will keep growing and we talk a lot about the quarters because I think that's what the analysts are more interested in, but that's more for the analysts, Sean. We're not looking for just the second half or three or four quarters.

We're looking long term and we expect that once we get going, as we get going, which we are, that momentum will grow and grow. I used the analogy of the tree falling in a farce. We had, I think, a very outstanding product line, but we just weren't really making inroads with it.

Now the inroads are being made and I don't really see the momentum slowing up, I mean, it seems like from my perspective anyway, it seems like every month, the momentum grows and grows and grows and grows. There's more companies that are getting on board.

So there's some self-sustainability about it, because the more we do and the more people hear, the more kind of buzz there is out there and the more people want to get on the train and don't want to get left behind if they’re left behind, but we would believe that will be a bad mistake to kind of back off and think, okay, fine, everything's in place and it's just going to have a life of its own.

We think that will be a bad mistake. So our efforts will never end as far as I'm concerned. And as long as we keep doing what we're doing, I think that the sustainability is good and I think the growth is good, beyond the next two or three or four quarters..

Okay. That’s very helpful. And then switching gears over to the aerospace side, can you talk a little bit Brian about how you're thinking of the business continuing to grow from here.

In the past, you’ve talked about some, or provided some general comment around the degree of growth and magnitude say of ramp that could start to materialize in ‘18 as an incremental, ‘19 as an incremental, et cetera.

As we’ve stepped back, can you help us to kind of either reconfirm or reset or recalibrate how you’re thinking about growth within this aerospace business, given all of the progress that you’re making and particularly as you think about your internal planning efforts moving forward from here? Thanks..

It's difficult to quantify a little bit. But I guess I would say the news continues to be better and better all the time. The opportunities keep coming. They keep compounding. I mentioned, there are now three different new product opportunities we’re working on with Emirates.

Each one of those product opportunities has a significant amount of revenue behind it. So once we get qualified with these new products, there's a significant, we are on these programs, there is a significant amount of revenue. As you know, we’re sole source with Emirates and the products that we do provide them and that seems to be the mindset.

So and we haven’t - we really haven't put the GE Aviation part of the equation into discussion very much at this point. As I said, we’re working on - this year, we plan to do the long term contract with GE Aviation, except for that one part opportunity we talked about. This other big company. So we had a successful audit if you will a few weeks ago.

Actually, the company was quite complementary. I think they said they're quite surprised at how well we did or maybe even more than surprised, I forget it was a kind of pretty adjective actually. Your two other specifications that are coming behind that we’re planning on working on, timing is difficult for me to nail very well.

So we're reluctant to try, because I think to some extent, I’d be guessing. The ramp with Emirates, we’ve commented on that before. That really hasn't changed very much. Every now and then, it seems they’ve got pushed out to the right a little bit.

I think we commented previously that there were some inventory correction issues and we're still dealing with that this year. We hope in the next few months, that will be out of the way. The big story with Emirates is the A320neo, the LEAP engine.

That's really a driver and my sense is that we're getting into a mode now where the issue is going to be keeping up. Not so much us, but maybe the customer, because the ramp is pretty steep with the A320neo. As I mentioned in the introductory comments, Sean, we need to go back and talk about the redundant factory. That's still very much in the table.

Now that we have the long term agree behind us and especially since these other three opportunities are very much on the table, so I suspect you're looking for more quantification, and I’m giving you more of a qualitative answer. But I think that's probably about the best that we can do at this time..

Well, I suppose in a general sense, are we still expecting that there's going to be, the way that the numbers play out next year, calendar year that we should still absorb or experience some material growth within aerospace, however, you might define material, but that is going to be pretty standout versus what we’ve been looking at more recently?.

Yes. Based upon the forecast, that's correct. I don't like using words material because they have legal significance. So let’s just say significant. So based upon the forecast, I was just looking at it, yeah, we are looking to see some significant growth next year and next year, we really should have all the inventory issues absorbed and adjusted.

They will no longer be holding down the revenues..

And to what degree do you feel that that’s still suppressing revenues right now.

My impression had been that it's gotten pretty marginal?.

No. Unfortunately not. We thought the same thing I think a few months ago or so and then some additional inventory kind of turned up at a supplier. So that became an issue as well. I think it's still suppressing our revenue to let's say a significant extent, but I think that should be done all the way behind us within two or three months..

And at this time, I’m showing no further questions. I’d like to turn the call back to Mr. Brian Shore for any closing remarks..

Okay. Well, thank you, operator and thank you everybody for listening in today. Matt and I are in the office of Melville. So if you have any follow-up questions, please give us a call. Anyway, thank you again and have a good day. Good bye everybody..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day..