Good morning. My name is Chrystal. And I’ll be your conference operator today. At this time, I would like to welcome everyone to the Park Electrochemical Corp Third Quarter Fiscal Year 2019 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers’ remarks, there’ll be a question-and-answer session. [Operator Instructions] Thank you. At this time, I will turn today’s call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference..

Thank you very much, operator. Good morning everybody. Happy New Year. This is Brian, of course. I have with me Matt Farabaugh, our CFO. And we're going to do today since we do have a lot of things to cover in terms of our introductory remarks is Matt suggested maybe he should skip reading through the supplementary financial information.

However, it is -- that was posted on our website this morning. So I think you definitely want to refer to that information because some things that are in the news release but also some information not in the news release. So we're just going to go ahead. I'll get started with some commentary. Like I said, we do have number of things to cover.

So we want to get moving and then we’ll get to our questions of course. So, okay, so again look up the finance supplement, financial information on our website. You'll find it there.

Also, I wanted to mention something important which is that Park is presenting at the Needham Growth Conference which is I think our date is the 16th, January 16th and our time is 12:50. That's a webcast. It's an FDA event as you call it. So everybody's welcome.

And we will be updating the presentation that we did a year ago on January 4th of last year; we did a presentation when we announced our third quarter results. And in that presentation was a lot of information including a forecast, including the forecast through fiscal 2022.

We'll be updating that forecast with the presentation that we do at the Needham Conference through this time --this year - this time going up through fiscal 2023. So we'll add another year. So I think you will definitely want to check in. We're thinking about updating the forecast and the presentation for this call, but we decided we would not do that.

We'll wait for the Needham Conference which is just two weeks down the road. Like I said on the 16th. Okay, let's get started here. So let's review some of this actually happened since the end of the quarter in December. Most of it actually did. We sold our Electronics Business to AGC Inc of Tokyo, Japan on December 4 as you know for $145 million.

This is announced of course. So we won't dwell on it, I would just add from my perspective very good result for Park, for Park shareholders; for AGC; for the former Park Electronics business employees and for the customers of our former Electronics Business. So all things considered I think it's a very good result all the way around.

Next item is --this is something you are not aware of, but it is some pretty significant news. So we reached an agreement with MRAS, MRAS is the subsidiary of GE Aviation that we deal with principally at GE Aviation through fiscal --sorry through calendar 2029. This is a pricing agreement. I think we discussed this agreement.

We had a 13-year agreement was 2017, calendar 2017 through 2029 but it was three plus five plus five in terms of pricing and we were just in the first three years. So now we agreed to hard pricing through 2029. We have a hard agreement with MRAS this division of GE Aviation through 2029.

Based on the forecast, we've been right in that's worth about $425 million of business from 2017 to 2029. So that I think it's a pretty major event. Also, I think in the last call, we referred without being very specific to another opportunity that we have with GE Aviation which is potentially significant.

And there's some quite good news on that front as well. We received the POs for that program through calendar 2020. And I'm not going to be able to go into much detail except I will say the platform is G9X or triple 7X that's a wonderful program to be on really very excited about that.

We had some small content on that engine but this is now a much more significant content. This is a very incredible engine that is being developed by GE Aviation. The G9X engine with over 100,000 pounds of thrust. The fan diameter is 134 inches that's a lot of inches. That's I think the over 11 feet.

So and my feeling about this program is that it's ours. The only risk I think we have, a serious risk is that our customer gets designed out of the program. Our customer is very doubtful that that will happen, but as far as I'm concerned this program is ours unless our customer loses the program.

So we're estimating over $100 million from this program from calendar 2019 to 2029, that's based upon information provided to us by GE Aviation and MRAS. Those are rough numbers because we're still in development and when a program is under development what happens is that there's a lot of refinement in terms of the usages.

How much material is used per engine? We're not going to --it's not [under sales], I should tell you that. It's a different component, a very critical component of the engine. And I will-- we will not be in a position to discuss anything more about the program in detail. If we include the 9X program where we only have the POs.

I want to be clear through 2019 but for that same period through calendar year 2029 that would move that number from $425 million to maybe $530 million. So another item you are aware, which is we announced our plant expansion. We now said on December 7th so you can look that up. We did the news release with some detail provided.

We will provide more detail about this expansion at the Needham Conference. It was a redundant plant designed to be a redundant plant for MRAS and GE Aviation and their customers. I mean the big aircraft companies. We promised we would do this as soon as we reached an agreement, hard pricing through calendar 2029. So we reach that agreement.

We have a hard agreement through 2029 with MRAS and we're proceeding with the redundant plan. And this needed for capacity though probably starting a calendar 2021 and 2022, so the timing is really good. The plant was originally conceived as a redundant plant which is pretty critical in aerospace especially when your sole source qualified like we are.

So that's good news. Like I said, I think it's good news anyway like we said, like I said we'll provide more information about that during the Needham Conference. But just a quick review it's 19,000 square feet about $90 million cost completed next year, next calendar year. The plant should provide about $50 million.

This is approximately $50 million of additional hot melt capacity and we'll explain this more when we get to the Needham Conference, but we actually can double that amount by making an additional $4 million to $5 million investment. And that's been contemplated by the whole plan and we could explain any more details in Needham conference.

We show diagrams things like that. Our current hot melt capacity is about $40 million. So there are some numbers to think about. So a lot was done in December I must say. We sold our Electronics Business. We got our hard deal from GE MRAS for 2029. We got the POs and 9X program and we announced the expansion.

So I would just say that normally I am known to have high aspirations. And I said at the beginning November would be nice to get all those four things done by the end of the calendar year, but I'm not sure I really believed it would happen, but it did happen. So those four events especially the sale of Electronics Business.

So as you see that completes the transformation of Park from Electronics Company to an aerospace company. Words like transformation are overused to the point where they don't mean anything, big words like that but I don't think in any case that word is in any respect an exaggeration.

So we decided to go into aerospace in a serious way about 10 years ago. It's been a very long, difficult road for last 12 years, 10 to 12 years. I think we made the decision in January of 2007. So that's 12 years ago. I think we broke ground about 11 years ago on our first plant, and so it's 10, 11 maybe 12 years depending on how you want to look at it.

But no matter how you look at in terms of how much years, it's been a very difficult period. We've had to overcome a lot of obstacles, a lot of setbacks; a lot of failures; a lot of disappointments. A lot of things didn't go away. A lot of loneliness was really I think almost nobody believed we were doing the right thing.

But we didn't quit or give up and I would say maybe we were even laughed at or dismissed as irrelevant by some other companies that maybe are on the outside looking in now trying to get back business they lost to us, and have not succeeded in doing so yet. So I must say I think that what our people done are quite incredible and remarkable.

We did this on our own. We built it one brick at a time. We didn't use any fast money. This is not using somebody else's money to do acquisitions, no. We built it one brick at a time and the important thing about that in my opinion is that we own it. This is our business. We are an aerospace company as much as one could be.

It's not something that was given to us. We earned it. We did in our own one brick at a time. So it's real to me and it's substantial and it's sustainable. That's my opinion anyway. So it's not that we're saying where we are where we want to be. Because we're not. That wouldn't be true. We have a long way to go and we have a lot to do.

But I think we've laid the groundwork for doing these things that we want to do for our company for the future. Okay, moving on.

We declared I guess yesterday you heard about it $4.25 special dividend which is about approximately $86 million, that will bring us over $500 million of cash dividends since fiscal 2005 over $500 million, that's $24.75 this year.

We've been paying cash dividends, regular dividends since the 80s but 2005 when we started to pay special dividends and increased our dividend. So often we refer to that 2005 date it's kind of a starting point, but it's not true. We've been paying dividends and regular dividends since the 80s. We never skipped a regular dividend.

So how do we come up with this number? As I think you all know it's not rocket science or not a science anyway. A lot of judgments involved. We did consult with our advisors and they were very helpful to us, as our outside professional advisors. There was a question about how-- whether we should do something at all.

How much and what form? Was it --whether it would be a dividend or a buyback for instance? So there are a lot of factors. We weighed in terms of make the decision but one thing I want to highlight regarding a buyback is that we're at a point now we really would like to see new aerospace oriented investors and analysts come into our company.

Our float is already not that great. It's kind of low. So it would be kind of productive to buyback stock and further reduce our float because the low float is an impediment obviously against people coming in. And we want the investors; we want aerospace investors and aerospace analysts to come into the fold.

Let me just kind of go through the cash situation for you. This may not --you may be already done the math, but let me just help you out a little bit.

If you look at a balance sheet that's included in the third quarter earnings release which you just received today, which we just announced today, released today the balance sheets is $112 million of cash at the end of Q3. Then we have to add $145 million from the sale of electronics which took place after the end of Q3.

That gives us about $257 million. These are round numbers. I'm just trying to give you some concepts here. But then we take that $257 million, we have to subtract $22 million for taxes and expenses, capital gains taxes and expenses on the transaction. Another $19 million on the transition tax installment payments.

You'll see that in our balance sheet as well, as it's called non current income taxes payable. That relates to the overseas cash we had when the new Trump Tax law went into effect last year. So that's a $19 million tax liability that's paid over certain period of time, but that is a liability relates to cash. We think it's proper to subtract that.

Then now we have $19 million for the Kansas expansion. So we take the $257 million, we should crack those amounts that gives us $197 million. $86 million dividend that gives us about $110 million and $111 million of cash. So that's our cash position. We'll discuss this more at the Needham conference as well. We've been working on acquisitions.

We have -- we don't have anything to show for yet. It's been a real challenge for our people because the sale of electronics was a very consuming job. It took a lot of work, but we didn't stop. We looked at a number of companies. We've participated in some auctions where we are concerned that the evaluations were just too high.

We've reached out to a number of companies in the last couple of months. Companies that were not being offered to sale by the banker. Just companies that we felt would be good strategic fit for Park. And the first reaction was no which is not surprising that's kind of how these things work. But we're still out there looking for opportunities.

We're also trying to, starting to explore I should say a joint venture in Asia. And this point we've been out looking for joint venture partners to maybe build a factory with a partner in Asia and that might require some investment as well. The factory similar to our factory in the US. So let's talk about Q4. So Q4 is a 14-week quarter.

This is every four years approximately we have a 53 -week a fiscal year. This is one of them. And the way that we always worked at it's a last quarter will be 14- week quarter, a normal quarter is 13- week quarters. So just keep that in mind, but for Q4, we're looking at approximately $17million. We have, well, let me put this way $17 million booked.

There's always some risk because booking and shipping are two different things. I would think $16 million or $17 million is a good range, although, I think the low in that range is not would be surprising. I would be more inclined to believe the higher end of the range. EBITDA for Q4, we're expecting approximately $4 million.

Obviously, there's risk in EBITDA as well especially based on a top-line. So what happened here is we had a slow start to Q1 and Q2. And that was because this equates to GE and MRAS destocking.

That slowed us down, but now we're kind of correcting and I think we started to do a little correcting in Q3 but correcting is, more correcting in Q4, so restocking in Q4, and driving the Q4 number up. So just wanted to make a lot comment and lost track of it for a second here. So let me just keep moving. So we don't get bogged down.

So I just want to refer back quickly to the forecast that we gave you on January 4, 2018, when we announced our third quarter results last year. We provide a presentation along with the conference call, the investor call, and the second last page I think it was. There was a forecast for 2019-2020 -2021- 2022.

So we're not confirming that forecast right now. We're not going to do that, but just to give you a little comfort. We believe that our fiscal 2019 is going to track the fiscal 2019 forecast in terms of sales. EBITDA, I just want to remind you that the EBITDA in the forecast is a pro forma EBITDA. The EBITDA reporting is obviously actual EBITDA.

The pro forma EBITDA is going to be higher because as we explained pro forma assumes that all the legacy costs from the Electronics business and from Park as a larger company has been reduced at the beginning of the period, which obviously is not true.

And I just want to say that I believe those legacy costs will be with us, will lag with us probably through at least the second quarter of next fiscal year of the 2020 fiscal year. So just keep that in mind or it's not they are going to drop off a cliff all at once. They're being dealt with over time. So let me just see what else we have.

And I also want to mention just because it was asked last, during the last quarter conference call or second quarter call. Someone asked how we're tracking the fiscal 2020 forecast that was provided in the last year on January 4th, 2018. And just want to confirm, we believe we're still tracking that 2020 forecast.

We're not confirming it both top line and EBITDA wise. But the good news is on January 16th we'll update the forecast. We'll provide you with a new forecast which would include revenue EBITDA for 2020-2021-2022, and we'll add 2023 as well. So I guess that covers it in terms of introductory remarks. I think so.

So let's see I took 20 or some more minute sorry about that. Operator, we're now ready for questions..

[Operator Instructions] And our first question comes from [Nick Roope Estella] from NR Management. Your line is open..

Good morning. First of all, Happy New Year. And I want to congratulate you on achieving your short-term goals there, all goals welcome actually but a good job on that, and I appreciate a special dividend. So I just want to get back to the big picture on the acquisitions.

And if you could maybe further characterize what the markets like? Is it -- and I'm assuming it's more like the seller's market right now.

And are you looking for smaller things? If you could just give some more, clarify what exactly fit in good with the new Park and would you finance a potential acquisition or would you use the balance of the cash? Would you see Park ever being indebted again to achieve an acquisition strategy, okay, thank you?.

So on acquisitions, of course, size matters but I think our focus is more the strategic fit. What we're looking for is something that would be unique, different actually be added at the Park. We're not just looking for some -- more capacity or more revenue because we're thinking not just what it would look like for the next two years.

We are looking at what it look like for the next 10 or 20 years. And that's really over a lot in terms of size. So we've been looking small even looking larger. When we potentially go into debt? I think the answer is yes. But it would have to be a very special opportunity for Park.

We always had a very strong balance sheet and we liked having a strong balance sheet. It's nice to have it especially when the world is very volatile and very variable unpredictable. So reluctant to go into debt. I think if we did it would have to be something very special.

And I think we'd be pretty conservative about the type of debt and how much debt we would take on. But I wouldn't rule it out completely. So it's hard to define what it is because except defined generally by saying it needs to be added at the Park; needs to be complementary to Park.

And it needs to bring us something special, something different, something unique. And sometimes what that means is components. So we see a business that has two or three things that are unique and maybe it's missing a few things. So we need to fill those things in.

The problem is that if a business has everything filled in the valuations are sometimes going to be not so good. The bankers when they do these deals, they're looking for a company that has an EBITDA history and everything else. Our experience with auctions in the last nine months is that the valuations were troubling.

And I get the sense just a lot of money chasing these things and are not really being looked at strategically, they are being looked at from almost a banking perspective. Okay, what's the EBITDA? What are the synergies? And how does it accretive or not accretive and that's the end of it.

And we just think that would be not good for Park kind of be responsible for Park. We've been after this for a long time and whatever we do we want to do the right thing. We don't want to do a foolish thing.

We don't want to go for the short-term opportunity and three or four years from now, we scratch our head and thinking, boy, it looked good for a couple of years but now what do we have. We have something that really doesn't make sense for us.

So I'm sorry to not be able to give you too much in terms of specifics, but it's hard for me to answer that question in terms of specifics. Because, again it always goes back to those same kind of general concepts.

What's unique about this? What's different? What's special and how would it be additive to Park? How would it enhance Park? And those are tough questions that have to be asked and answered. And not by bankers either by people at Park that are going to have to live it and own it for many, many years..

And our next question comes from Christopher Hillary from Roubaix Capital. Your line is open..

Good morning and Happy New Year. I just want to ask as it pertains to how you thought about the capital allocation.

Could you update your thoughts on what you would anticipate your capital expenditures doing going forward? Do you feel like there's an upward bias or about the same or lower than what you would have anticipated 6 or 12 months ago?.

With the $19 million to $20 million, we announced $19 million; [Indiscernible] at $20 million that we have in mind for expansion. That's probably to take care of any major capital items in the near future. And that of course as assumes that thing could happen that we don't anticipate and expect right now.

As we will explain in may be little more detailed in Needham conference, when we built this factory though we left and it was even explained a little bit in our news release. We left a space available for additional equipment.

And as I mentioned we could actually double the incremental capacity from the expansion for what's called hot melt prepregs about $50 million. We could double that with another $4 million or $5 million investment. So if we feel that becomes necessary useful for Park that would be an additional expenditure.

And that's something that's kind of we have in mind but has not-- we have not made a decision on that. And we probably won't for a couple years anyway. We'll see how things play out. And see what how we feel about our needs. So what we're doing now will put us in good stead for several years..

Then maybe another question just do you feel like you need to invest more in your sales force et al to address opportunities that you see giving your product offerings or do you feel like increased awareness is actually creating some pull towards your customers are asking you to meet some needs?.

Well, I know that was or question but I'd like to answer you both, it's true. We do need to invest more in our sales activity. I think that's, I agree with that, but I also believe that there's a lot of pull based upon what we're doing and the programs are on.

We're in some important programs, some significant programs and that in itself gives a company like us a lot of credibility, increase that pull and it’s significant I think..

Our next question comes from Leonard Cooper, A Private Investor. Your line is open..

Hi, Brian. Congratulation and Happy New Year. I have three words that I've written down here and I just wonder if they connect to Park in any way. Some of it I don't really know what it means but 3D printing is one; super conductivity and 5G.

Do they mean anything to Park?.

All right. The second two probably not so much anymore since we sold our Electronics business, Len. 3D printing is something that is definitely on our radar screen. It's probably a little early for us and our applications, but it's something we're paying attention to and watching.

And I'm talking about for making composite structures for aircraft or aerospace..

Okay. I'm scribbling, then the manpower requirements, there seems to be a shortage of skilled workers.

How do we stand? Do we attract good people? And do we have enough?.

We don't have enough with the expansion we’ll be looking to hire some new people. A lot of our best people are homegrown and I think about some of the better people at Park, a lot of them are homegrown people who started on the factory floor. But recruiting is difficult probably for anybody these days.

Kansas has often not be the location people would choose to relocate to. So that's a challenge for us sometimes, but the good news, the good side of the story is as Park progresses and has more successes, it's a kind of that's the best advertisement I think we can put out for people.

In other words, so I know success breeds success I guess is what people sometimes say, but I think that as we do more and we have more successes we become more attractive as an employer. So we have a pretty good pool of manufacturing type people especially in the Newton, Kansas area, always looking to upgrade but we have a pretty good pool there.

But it is a challenge I think for anybody right now to find the right people. End of Q&A.

Thank you. I am showing now further questions from our phone lines at this time. I'd now like to turn the conference back over to Mr. Shore for any closing remarks..

Okay. Well, thank you everybody. Actually call went quickly than I thought which is good. So I don't take up too much of your time. Like to wish you a Happy New Year and please if you have time tune in for the Needham webcast. It is available to everybody. It's not -- you don't have to be at the conference.

And more information will be provided about that in the near future. Thanks again. Thank you very much. Happy New Year, everybody. And we will talk to you soon..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a wonderful day..