Park Aerospace Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 5, 2023

There are 2 speakers on the call.

Operator

Good afternoon. My name is Alicia, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Aerospace Corp. 2nd Quarter 24 Earnings Release Conference Call and Investor Presentation. Thank you.

Operator

At this time, I would like to turn the call over to Mr. Brian Schor, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Speaker 1

Thank you, Alicia. So welcome, everybody. This is Brian, of course. Welcome to our fiscal 'twenty four second quarter investor conference call. With me as usual, Matt Fierbauer, our CFO.

Speaker 1

Make sure you're accessing presentation. We announced our earnings just a little while ago and there are instructions that's how to access the presentation we're about to go through. Also, it's posted on our website if you want to do it that way. So what we're going to do with this presentation, maybe a little bit of a different approach is that we'll focus on our Q2 dynamics and then our longer term outlook dynamics for our future and we'll skip over some things like the trend information regarding industry trends. And then we'll go right to questions.

Speaker 1

And but it probably still take 45 to 50 minutes to get through our presentation. Of course, before we proceed, I want to just remind you, mention to you that we're in our 70th year in business. So let's go do it. Slide 2 is our forward looking disclaimer information. Let us know if you have any questions.

Speaker 1

Slide 3 is our table of contents. Slide 1 is our Q2 presentation and we have supplementary financial information in Appendix 1. And we don't intend to cover that or discuss it. If you have any questions about it, please let us know. A picture of the Airbus AR sorry, A321 XLR, which is an important program, future program for Park.

Speaker 1

Let's go on to Slide 4. Let's slow down here a little bit. Our quarterly results, so let's go right to the right hand column there for Q2. If you notice, the revenues are way down from Q1, about $3,100,000 and we'll discuss that in detail, of course. But I also want to highlight for you and it is highlighted actually to make it easier in yellow, the gross margin is 32.7%, which to me is Quite outstanding when you look at comparison to Q1 with a $3,000,000 top line loss and a 32.7% gross margin.

Speaker 1

That doesn't happen by accident, I don't think. We always comment that we don't like our gross margin going below 3%. It does every now and then, we tell you that. I was actually a little bit surprised myself with a top line loss of $3,000,000 I thought, boy, gross margin isn't going to look so good. So I was very pleased with at that number.

Speaker 1

And we have an EBITDA margin of 21.4% as well, which is pretty good. Let's go on to the text at the bottom of Slide 4. So what did we say about Q2 during our Q1 investor call? You remember, We said, well, we didn't provide any sales or EBITDA estimates for Q2. Why is that?

Speaker 1

Because we knew there's a burn down coming. We told you about that, but it was kind of new information for us and we didn't have any quantification of it. So we said, to give you a forecast for Q2 during our Q1 call. We would have been just guessing and that's kind of doing you with your service. We warned you in a sense we said, hey, something's coming, but we didn't know yet.

Speaker 1

We had to spend time with Our customer, MRAS, to understand the scope of the burn down. So now we understand that and we can discuss it with you in detail, which we will. The second check item, why their sales dropped $3,100,000 from Q1 to Q2. Well, just a coincidence, but the Zelle drop is explained cleanly 100% by a $3,100,000 drop in GE Aviation's Jet Engine Program sales. It just so happens it's exactly the same number.

Speaker 1

And if you do the math, this is not stuff for brilliant people, but the non GA Aviation Jet Engine Program sales were essentially identical in Q1 and Q2. Obviously, that would make sense. So, let's keep going. Let's go on to Slide 5. Since all the GA Aviation Jet Engine programs, which park supplies into are ramping up and going strong, which they definitely are, why the steep drop in GA Aviation program sales in Q2.

Speaker 1

What's going on here? Well, you already figured it out. It's about the MRAS inventory burn down, which we'll discuss in great detail later in the presentation. So we'll get to that. We'll go into detail about the burn down.

Speaker 1

But let's just go back to our Q2, a couple of things we want to mention. What other considerations are there related to Q2? How things going with supply chain, freight disruption and staffing challenges. We talk about those three things every quarter for, I don't know, you tell me a couple of years at least, Because they've been really important factors for Park and running our business. The challenges continue, but things seem to be improving.

Speaker 1

So, what does that mean? It's not like they were before the pandemic. The lead times are longer, but it's something that we can count on more. During the worst part of this deal, it didn't matter if the lead times were or we wouldn't begin lead times. We said, look, we'll get it to you when we get it to you.

Speaker 1

We don't even know Or we'd be given the lead time and we belong. And it made it very challenging to run our business from a production management perspective, from a supply chain perspective, from staffing perspective. So a lot better, we still have longer lead times, but as long as we kind of take those into account, we're able to manage our business much better than over the last couple of years. Total missed shipments in Q2 approximately 220,000. The number is down.

Speaker 1

We still would like to be 0. Our people think they did an outstanding job in bringing the number down. And what is it about? I want to guess, probably you can guess already, international freight, that's been the thing that's really been the toughest for us. Think we're doing better with that as well, but we still got surprises with international freight.

Speaker 1

Our margins continue to be affected by inflation and cost slate recently commissioned new planting in Kansas. We'll go into details about those things, which we covered those in the last 2 or 3 presentations. You want to go back and take a look, Got questions about the list. No, but I just want to flag those things continue. Let's go on to Slide 6.

Speaker 1

Important here, before we move on, I believe you must give a special shout out to Parks' people for their outstanding job, my opinion, in delivering the margins they achieved in Q2 considering a 3,100,000 dollar drop in revenues compared to Q1. So there always will be some quarter to quarter variability based on product mix. And it was in our favor. So let's say that Was in our favor in Q2. But notwithstanding all of that, our Park people did an outstanding job in Q2 in my opinion.

Speaker 1

Park, you probably know us by now pretty well. We're not the fanciest company in town. We don't have a lot of people doing the fancy B Schools. But our people We're old school and our people know how to make money for owners. And to me, that's probably pretty important for our owners.

Speaker 1

I mean, you could tell me if you disagree, but if I was an owner, I would think I want people dedicated to making money from me. In my opinion, our Q2 was one of our best park quarters. Why do I say that because When things are going great and the sales are up and everybody is a hero, everybody's going to get the employee of the year, sorry, the company of the year award, To me that doesn't mean anything. When the chips are down, you're still delivering perform. That to me is an indication of a very good Solid Company.

Speaker 1

So it's just my opinion and you could disagree. Let's go on to Slide 7. I won't talk about Slide 7 too much. In every presentation, just kind of for perspective and reference, let's go on to Slide 8. Okay, we always do our top 5 customers every quarter.

Speaker 1

So we're continuing this tradition. AeroSpears, they're a rep in Israel, they rep Israeli aircraft for us. Israeli aircraft makes the Gulfstream G280. I don't know if you're aware of that. That's actually made on a contract with Gulfstream.

Speaker 1

So they made the top 5. Kratos is in our top 5. I think pretty much every quarter wonderful, wonderful customer. We love them. And we got a great photo here of the Valkyrie and it's doing a loyal Wingman demo flight with guess what, The F-thirty five and F-twenty two.

Speaker 1

So I would think of the 3 different airplanes, the Valkyrie is probably a lower cost of the 3. So I'm being a little sarcastic, I guess. Middle River, We use we could use a lot of programs here, but we used to come back 9 19, Lifeword. They kind of threw some circuitous means, took over some of the AAR structures business that we used to supply into. NORDAM, we chose the 730seven-eight 100, that's for the WeatherMaster radome, which is on 737 line.

Speaker 1

Let's go on to Slide 9. Our pie charts, I always like these. I don't know If you got any opinion, but let me know, but let me know, I think you're useful. Look at the difference, 2021, the pandemic year, 2022, 2023, very similar. 6 months of 2024 commercial down a little bit, why is that?

Speaker 1

That's because the burn down, burn down was all commercial in Q2. So, okay, let's go on to Slide 10. Another one of our traditional slides, we love niche military Space Programs, which we certainly do. This is Elena's project every quarter. She's our Head of Customer Service.

Speaker 1

MK125 Warhead, that's on the SM2, Standard Missile, you probably know that. This is a picture of the Standard Missile 6. These are some outstanding missiles. I believe the SM-two was hypersonic missile. The Alenia C-twenty seven J Spartan, Radon Materials, Sikorsky.

Speaker 1

We just have a lot of stuff a lot of materials on Sikorsky. And the K41 vertical launching system, a little bit different here. Park choosing our material, it's actually not ablative. So we have the pie chart. Rock and nozzles, drones, radones, we consider those to be niche markets for Park.

Speaker 1

But even for us, aircraft structures is a niche market. We don't go for the big programs for our structures where it's a lot of margin pressure. It's just not really for us. Okay, let's go on to Slide 11. And here's what we're going to skip.

Speaker 1

Slide 11 through what was it? Let's figure it out. Yes, through 15 pretty much as very few changes from Q1. So if you want to ask questions That's fine. But let's just skip over it.

Speaker 1

I included we included just for perspective and context. Let's jump to Slide 16. Okay. So this is a slide that we Every quarter just to kind of give you the lay of the land, GE Aviation's Jet Engine program is obviously very important to Park. So we have that For those who don't know, firm pricing LTA, that's a requirements contract from 2019 to 29 with MRAS Middle River Aerostructure Systems, which is a sub of ST Engineering Aerospace, large Singaporean aerospace company.

Speaker 1

We built a redundant factory. We said we'll build you a factory if we signed the LTA. So of course, We live up to what we say. The factory is complete. It's in production.

Speaker 1

You know all that. So let's go into next item, sole source for composite materials, for engine installs and TRs, rest of our stores, all these programs. So you're probably thinking if you don't know us too well, what's going on here? These are all GE Aviation programs. What's the connection?

Speaker 1

Well, that would be an excellent question because they are all GE Aviation programs. So the connection is that when we first got involved and did the LTA and everything, MRAS was a sub at GE Aviation. Subsequent to or getting on these programs, GE Aviation sold MRAS to ST Engineering, that's the little secret there. Boeing 747, those are spares. They terminate they cancel our program.

Speaker 1

We're still making spares. Let's go on to Slide 17. So let me explain something. Park Composite Materials are sole source and primary structures on a primary structure component for the Passport 20 engine for the Global 7,500-8000, not included in the MRS LTA. This is a little confusing Because for the nacelles and thrust reversers that is included in the MRAS LTA, this is a different structure.

Speaker 1

This is a primary structure in the engine and that actually is not part of that's not an MRES program. That's a GE Aviation program. That's why That component is not included in the MRAS LTA, but you shouldn't believe that the FAST-four twenty engine program is not in the MRSA, but it's for all the cells and TR materials, it is in the LTA. And fan cased containment wrap for the GE9X engine for the 777X aircraft that's produced with our AFP composite materials, Not included in the MRES LTA, not yet anyway. And the reason I say that is this program seems like it's about to move and MRAS has already said they want to get into the LTA, so let's see what happens with that, but not at this point.

Speaker 1

I mean it is to MRAS, it's just not in the LTA yet. MRAS qualification of 2 proprietary Filmesa formulation is in progress. That's wonderful news that the qualifications in progress. Park, MRAS, I always put them first, MRAS Park LTA through 29, It's recently amended to include 3 Park Filmmunisa product forms for composite bond, metal bond, again, very wonderful news. And then the LIFO program agreement, we talked about that last time.

Speaker 1

It was requested by them. What's it worth of Park? I don't know. I mean, program, 20 years, 25 years, I don't know. And if you look at, I think it's our outlook, which is Slide 34, we say it's about $55,000,000 a year.

Speaker 1

So you could do your own math and Now starting if we continue after 20 29, which most betting people would say, yes, we're going to continue, that Normally higher vis a vis pricing would go up at that point, of course. But just do your own math if you want to, a little calculator on your iPhone. So Slide 18, update on GE Aviation jet engine programs, the A320neo aircraft family, The CFM LEAP-1A engines, that's the 319 Neo, 320, 321 and the HP 20 1 LR and XLR. This is a big dog. This is a big kahuna in the GE Aviation in terms of our GE Aviation work.

Speaker 1

Airbus has a huge backlog and I would say that's huge of A320neo family aircraft of 6,720 airplanes. That's a lot of airplanes, I mean, I'm sorry. During the Airbus' Q1st half earnings call on July 25, 23, They just reaffirmed their plan to achieve a rate of 75 basis per unit Neo aircraft family deliveries per month in 2,006. You got a little nuance there? Did you because they were saying the end of 2026, not saying that anymore, they're just saying 2026.

Speaker 1

I don't know if I'm reading too much into it, Just not saying end of 2026 anymore. So I don't know. I'm not sure what's going on there. Maybe it's nothing. Will our bus achieve that rate in 2026?

Speaker 1

Hard to say, but based upon their huge backlog, huge backlog, there's very good reason to believe they'll get there in 2026 for some time in the not too distant future thereafter. Here's a nice picture of A321neo. That's their biggest seller in that family at this point. How is Airbus doing with your planned ramp up? Let's go on to Slide, what is it, 2019.

Speaker 1

Not too bad. According to reports, 23 year to date through August. I don't have September in here yet. It was just too I've been working the presentation for a couple of weeks. September's info was not, I don't think reliable yet, so I just didn't go there.

Speaker 1

Airbus delivered an average of 43.5 Neo aircraft for months. So we're getting there. But here's something interesting. We delivered an average of 50 in The last 4 months through August. So you would say that's moving in the right direction.

Speaker 1

I think you would say that. Clearly though, based upon their huge backlog, they would already be at 75 a rate of 75 per month, if not for supply chain restrictions limitations. That's probably obvious to you. What about the engines though for the A320neo aircraft family? What about those engines?

Speaker 1

While we are reviewing the A320neo aircraft family offers 2 approved engine options, namely the CFM LEAP-1A engine and the Pratt 1100 gs GTF engine. Now we supply Park supplies into the A320neo aircraft family using the CFM LEAP-1A engine. We have no content on the A320 EO family using that Pride engine. Now here's something really, really interesting. The CFM LEAP-1A's market share of firm engine orders for H-twenty Neil, a family of aircraft that's been hovering around approximately 60% the last 2 years or so.

Speaker 1

You know that because every quarter we talk about it. So you people that are preregulate Park. You've heard that 60% more or less number that kind of 59%, 60%, 61% range for a while now. But what happened, let's go on to Slide 20. That's all changed.

Speaker 1

In the last few months, the LEAP-1A has broken out as a clear market share winner for the A320neo aircraft family. Now in red, the CFM Leaf 1A market share firm orders for the 20 Neo aircraft family has jumped to 66% to July 31, 2023. Well, that's a huge jump. Why is that? This huge jump in market share is quite remarkable when it considers there are 12,000 348 firm engines sorry, firm engine orders for the A320neo aircraft family.

Speaker 1

I mean, there's so much ballast in the market share, a significant change like a 6% of market share would be considered to be highly unlikely. In other words, if there are 20 engines ordered, somebody gets 5 orders, well, that's good. You really move the needle. But you Over 12,000 engine orders, it takes a lot to move that needle. 6% is just shocking, huge number.

Speaker 1

What's going on here? Shocking to me anyway, that's my opinion, I mean, maybe the people don't agree, but let's go on what's going on here, though, why? Slide 21. Just a little side, the delivery rate is 75 A320neo family aircraft for months, a 66% LEAP 1A market share translates into 1188 LEAP 1A Engine Security. I'm just doing math, sorry.

Speaker 1

I mean, if you got a little calculator on your iPhone, you can do that yourself. Would that work to Park? Well, According to our outlook, it would be worth $36,000,000 per year. Yes, just do the math again, Good math. If we know what our content per engine is, dollars 36,000,000 per year, that's just for the 20 Neo family.

Speaker 1

Currently, our 8,144 firm LEAP-1A engine orders, What are those firm orders worth to Park? Well, that's a little bit more difficult to say because some of those airplanes will be delivered after 'twenty nine. And like I said, if you're a betting person, you're going to bet we'll continue after 20 29. Now the prices also go up in 25, so maybe an offset. So this year and next year, price will lower, they go up 25.

Speaker 1

So you're trying to fix 1,500,000 other, but you could do your own math. You can multiple 8,144 by you want 30.5. So that's how much is per that's $30,500 per unit, not million, that's about $250,000,000 So that's just kind of rough kind of guesstimate. That's not the program. The program will continue and there More orders, I would expect.

Speaker 1

What happened anyway, so back to the main point here. Why is the market share affirm engine orders for the A320 aircraft family? Why is it shifted so abruptly and dramatically in favor of the CFM LEET-1A engine? Very serious issues with the Pratt 1100 gs engine. Now we talked about this a little last time to go at durability, but we're talking about a different category of issues now.

Speaker 1

These issues have been extensively reported and as a result, We will not attempt to cover them in detail here. However, the Pratt 1100 gs engine issues are expected to ground 350 A320neo Airplanes per year through 2026, which has met with as many as 650 groundings in the first half of twenty twenty four. That's not some analyst or commentator, that's from the company. That's what they're saying. You run an airline, you don't make that much money to begin with.

Speaker 1

You don't want airplanes grounded. That is death for an airplane. You can't have airplanes grounded. That's why it's such a serious issue. Let's go on to Slide 22.

Speaker 1

And this also comes from the company. It's not somebody's opinion. The inspection and repair work is expected to take up to 300 days engine. So we're talking about grounding airplanes for a long time, very tough situation. It's difficult to fully comprehend the full implications of the crisis and where it's going, but the story may not be over, maybe far from over.

Speaker 1

My take on it is whenever it seems like a crisis can't get any worse, it does. That's just my take on it. Will this crisis lead to significant additional A320neo aircraft family market share gains for LEAP-1A engine. Many believe it will. What do you think?

Speaker 1

I mean, the dilemma is that people are ordering these airplanes, a lot of them, they got to choose which engine they're going to go with. So think about that a little bit. Let's go on to Slide 23. So the top item, Still on the A320 Neo family, this is the A321 XLR, just want to highlight that. That's That is supposed to be what entry into service in the Q2 next year.

Speaker 1

Boeing doesn't have a response. And this is Real important program for Park. We see a lot of writing about it now. I think people in the industry are getting pretty excited about this aircraft. We covered in more detail in the past and I won't do that for you, but it's definitely we would say a plus.

Speaker 1

Our COMAC 919 with those LEAP-1C C engines. Tomac plans to achieve a production rate of 150 C919 aircraft a year within 5 years. That's what they say. That's Some analysts, that's what they say. Note, when we get to our outlook, I think on Slide 34, we're only assuming 100, so just keep that in mind.

Speaker 1

They currently have over 1,000 orders and 2919 aircraft are currently in service with China Eastern. Let's go with a nice picture of it here. Let's go on to Slide 24. Still in the 9/19, China Eastern recently announced an order of 100 additional 919 aircraft to be delivered between 20 4/31. This is the largest 919 order Today, and then Gallipierre of Brunei recently announced order 15.

Speaker 1

Why would I even tell you that? 15 orders don't sound that much. The reason is because Until now, the Comec airplanes have been considered to be China market airplanes only, like to sell a lot of these, but only into the China market. Well, obviously Brunei, if you know your geography, that's not part of China. So that's why I thought I'd highlight that, very interesting.

Speaker 1

And then let's talk about the COMAC ARJ21, that's the regional jet with those G CF3410A engines. According to COMAC, 112 aircraft have been delivered in service, 775 open orders. And here you go, Gallip Air Brunei, They announced an order of 15 of these airplanes. So again, previously thought to be a China only kind of market, but Verano is not in China. So here's a nice picture of the Air J21 original chip.

Speaker 1

Let's go on to Slide 25. Okay. So the 777X with GE9X engines, We talked a lot about last few quarters about the issue with the fan case redesign. If fan case redesign is successful, then the case wrap won't be needed. I'll give you my perspective based upon things I know, which is, I guess, considerable.

Speaker 1

I think that chances of that happening are kind of fading away. So, I think, my opinion is this will be a real important exciting program for Park for a long time to come. Enter into plant, entering into service 25, currently an active program for Park, as you know that. It's early and active program for Park. I don't want to say too much more about it, but I feel quite encouraged that this is not going away and it's going to be moving up Potentially significant program for Park.

Speaker 1

So we're happy about that. Always got to give Arnold mention the 747, we're still making spirits for the 747. Slide 26, The slide you're familiar with, a couple of changes though to it. GE Aviation Jet Engine Program sales history, won't go into the history, just look at the right hand column though, Look at Q1 to Q2, $6,200,000 to $3,100,000 There's a $3,100,000 difference and I think that's about half, isn't it? For Q3, we got $4,000,000 booked, but we're not it's not a forecast because there's so much uncertainty, which we'll talk about a little bit more when we get into burn down Got it in Q3 and Q4.

Speaker 1

So I mean, look, we would expect to be less than that, but we're not giving you that as a forecast. We're just saying this is what we know and we're We're not giving you a forecast. We just don't feel comfortable. Now one thing I want to add is on the right hand little box here, see 9.4 Remember, we said earlier, same amount of non GA aviation programs in Q1 and Q2. So that annualized at $37,500,000 And I just want to just remember that number, dollars 37,500,000 if I forget when we get to our outlook.

Speaker 1

So we'll talk about that again when we get to that outlook, I think on Slide 35 or something like that. Okay. Let's go to Slide 27. Okay. Now this is the painful part of the presentation.

Speaker 1

GE Aviation sales are all about the Amres inventory burn down. Times are sharp, drop off and Q2 GE Aviation Program sales It's all about MRAS's burn down of park inventory carried by them and its subcontractors. Now this is a really key point. The MRAS calendar year 2022 build plan. That's their build plan, not our plan, their build plan.

Speaker 1

This is their say this is what they plan to build in 2023. We got a build plan through, think 20 or 29. This comes from them, not us. It translates into approximately $23,000,000 of calendar year 2023 Park GE Aviation GE Program Sales. It's very easy to do the math.

Speaker 1

Once we know how many units we're going to build, we How much materials used per unit? We know we sell the material for, so it's very easy to do that math. It gets 23,000,000 number assuming the build plan is correct and normally it is. That's approximately $5,750,000 per quarter. So The MRAS calendar 2023 build plan has reduced to some extent.

Speaker 1

This is just a side point because MRAS is carrying excess finished structures inventory as well. I was reluctant to put this in, because it could be confusing. This is just saying their build plan would be more except they have their own inventory. That's nothing to do with Park inventory. As far as Park is concerned, what matters is their build plan, okay?

Speaker 1

That's what matters. That says this is how many units they're going to build and that We'll drive how much material they park material they're using. So but since MRAS' 2023 build plan translate to $5,750,000 in Park G Program sales per quarter. Why were Park's G programs sales only $3,100,000 in Q2? Well, I guess we already kind of gave away the little secret, but what explains $2,650,000 that's just math, that's taken $5,750,000 subtracting 3.1 We have placed a $2,650,000 gap during Park's expected Q2 GE program sales based upon the build plan and Park's actual Q2 gs program sales.

Speaker 1

Well, again, you know, it's all about the burn down, the MRAS burn down of Park's inventory carried by MRAS and its subcontractors. The trackers. The inventory burn down explains 100 percent of the GAAP or shortfall, which makes sense because as we've heard the programs are ramping up, the programs are going strong. So why would our number be down? Well, that's the explanation.

Speaker 1

That's 100% of the explanation. Let's go on to Slide 28. Why the inventory burned down? Why surprised by the excess Park inventory being carried by MRAS? Now I'm going to say something, I mean, very sincerely.

Speaker 1

MRAS is a wonderful customer. The relationship between MRAS and Park is very special and unusual and Park is very fortunate to have such a wonderful customer as MRAS and that's such an unusual relationship with MRAS. And this is not just BS, no way, it's not true. I've been Doing this job for a long time and I've dealt with lots of customers over the years. Some were really good, some were not so good.

Speaker 1

Well, this customer is special, I would say quite special and the relationship with them is quite special to really a true partnership. If you're around a while, you get nervous when a customer talks about being partners because that means when they want something you're partners, when you want something you're not a partner anymore. But with MRAS, I give you a dozen examples without even thinking about it. It's been a true partnership, win win, true. No, there's the sourcing people are very enlightened, I would say, very enlightened people.

Speaker 1

But to put it kindly, maybe inventory management is not the aerospace industry's strongest suit. What's going on here? I'll give you my opinion. I'm not an expert in the aerospace industry. It's a strange industry, no doubt.

Speaker 1

It's very risk averse and versus the change, but that's for obvious reasons because of safety. The FAA doesn't want some OEM or contractor to make and change willy nilly to airplanes or structures or systems. That would be like chaos would be dangerous. But there are some collateral effects in my opinion again related to this Being risk averse and resistant to change. So what happens in the aerospace industry, my opinion again, is the players tend to go on autopilot too They tend to overshoot.

Speaker 1

They just kind of get something locked in and they're not paying attention to the signals that much. They're not that much agility, let's So it may be a little bit of a byproduct of being risk adverse and resistant to change, which is good, be fast for safety. So what happens is that can lead to increasing oscillations with these overshoots. You wait too long, you wait too long, you're not reacting. And then by the time you realize You're 6 months late in React and then you have to the correction is could be pretty extreme.

Speaker 1

So So for Park, I mean, we're not going to change the aerospace industry. We chose to be in the aerospace industry. What does it mean for us? We need to be really agile, flexible and have a lot of urgency in and how we manage our business. We're certainly not singling out MRAS.

Speaker 1

They're probably better than a lot of other companies in the aerospace industry. But this is, I guess, I'll try to be kind of delicate about this is what's going on here and why we have Surprise this inventory burned down. Will this kind of inventory surprise happen again? Likely will happen no matter how closely with MRAS. We work with them really closely.

Speaker 1

There's nothing hidden or anything like that. It's very transparent. It's happened before, likely to happen again at some point in the future. So there may be like it will be some degree of quarter to quarter volatility in our GE program sales because of inventory management challenges, Maybe somewhat of a roller coaster from time to time. That's just the way it is, in my opinion.

Speaker 1

Slide 29. But considering all the wonderful things, which resulted from the relationship with MRS and the many wonderful things still expected to come from the relationship. Unbalanced, there's no question whatsoever in our minds that we are extremely I've never missed that as a customer on balance, not even close when you consider the pluses and minuses, not even close, No, nothing to talk about, not even close. No, there may be quarter to quarter GE program sales volatility in the Sure. We're happy to work through and deal with the volatility and challenges presented by it because to us the overridingly important consideration long term is long term outlook for GE program sales, which was explained in Slide 34.

Speaker 1

Yes, it causes it we have to causes challenges with our production management, Supply Chain Management with our staffing management. We're happy to deal with it. We're happy to deal with it. I'm balanced, not even close. So where are we going with the burn down?

Speaker 1

Based on the information we have, we have a lot. We believe the burn down will likely be completed in our Q3 and our park inventory The Park inventory at Cabaret Amherst will be normalized by the end of Q3. We put normalized in quotes for a reason because that's kind of a complicated term. Let's go on to Slide 30. One more consideration regarding inventory management.

Speaker 1

As a general matter, we kind of touched this already, it's very important to avoid over correcting As doing so kind of overshooting can create additional volatility with increasing sine wave amplitudes and inventory swings like oscillations. So you probably know what that means. Sine waves that kind of go up and down, you've seen that. This is a concern of ours and others. We're not the only ones.

Speaker 1

And I won't mention who, but not we're not alone in this concern. If our concern is well found, it could result in a significant spike in demand In our Q4 and into 2025. So that shouldn't be a real surprise. We shall see, but in the meantime, we're keeping our antenna up and our ears to ground. Let's go on to Slide 31.

Speaker 1

This is kind of, I think kind of summing it up for us, for me anyway. In any event, what do we think about all this? What do we think about all this? We think Mostly short term noise and static. Now we like I said, we have to deal with from a managed perspective, the oscillations, the ups and downs.

Speaker 1

But terms of what matters to Park, long term, mostly short term noise is static. We think the freight train, the juggernaut is coming down the tracks That is 100 miles per hour and it cannot be stopped. See the outlook on Slide 34. We're not pulling around here. We think we better be ready or we too will be overrun.

Speaker 1

That's what we think about it. So let's go on to Slide 32. Okay. Financial outlook, are we doing with time? Financial outlook for Park and GE programs, a little bit of an update.

Speaker 1

Okay. Because of uncertainty with Q3, because of burn down, Q4, because of the spike, Very difficult for us to provide meaningful forecast for Q3 and Q4. We're not going to what's the point of guessing? We're not going to we're just doing you a disservice. When will we be able to resume providing quarterly longer term forecast estimates?

Speaker 1

I'm not sure. We'll definitely keep it posted. But We are able to provide the following updated revenue outlook for GE Aviation's Jet Engine programs and financial outlook for Park Generally. And we believe that GE Aviation programs and Park outlooks are much more meaningful and significant than quarterly forecast estimates because The quarters go up and down because who knows why, but the key thing to us is what is the long what's the long term outlook, what are the long term prospects That's more meaningful for us and that we have a better feel for as well. What's the timing for the outlook?

Speaker 1

We have the outlook and when one of the years back, when people say, what year is that? It's like, Not sure what year it is. I mean, if the CEO of Airbus says that you're going to be a 75 Hey, 320neos in 2026. What am I supposed to say, no is wrong? I don't know.

Speaker 1

But I mean, so we don't know. Why play the guessing game? I'm not sure, but as I said, and this is a key thing for Park, the freight train is coming, it can't be stopped, we better be ready. And Slide 30 Preen. These are the assumptions we use.

Speaker 1

I won't go through them. This is the same assumptions that we shared with you last quarter. Go to Slide 34. I'm going to stop here. I know we're running late, but this slide requires a little bit more discussion.

Speaker 1

The $55,000,000 number, is that an aggressive number? Well, let's go through it. Let's go through the math. A320neo, 1188, remember we talked about number before? We're just doing the math.

Speaker 1

We're 75 per month, 66% market Sure. We're not assuming that market share is going to go up. It might. We're not assuming that. And we know what the revenue per unit is.

Speaker 1

There's $36,000,000 per year from A320neo. This is assuming $25,000,000 to $29,000,000 25,000,000 to $29,000,000 $25,000,000 to $29,000,000 pricing. PAS-four twenty, that's for the Global 7,500, 8000 aircraft. 90 airplanes, That's the low end of the build plan. We have low numbers and high numbers from the MRAS for the build plan.

Speaker 1

It's a low end, but we're being aggressive. C-nine nineteen. What I tell you, it was the sorry that Yes, which is not that Comex, sorry, Comex said they're going to be at 150 in 5 years. That means 300. These are you got to convert 2 engines per airplane, okay.

Speaker 1

We're just using 100 equivalent, 200 engines, 100. Now let's talk about that. The A320, they're predicting 900 airplanes per year. The 737, you just talked now about they're going to go to 57 per month at 684 airplanes per year. We're talking only 100, which is 50 less than what Comex says.

Speaker 1

Is that aggressive? I don't know. Again, the revenue per unit, those numbers we know. Hey, RJ21, that's the Realjet. We are 55 is lower than the low end of the build plan range.

Speaker 1

There's Two numbers high and low. This is lower than the build plan range. Are we being aggressive? GE9X, We're not going to give the unit numbers, but I can assure you it's conservative. Now the number the total numbers went up.

Speaker 1

Why is that? Because the revenue per unit went up because we have new pricing and the price is we're taking into account the new pricing That gives you the $77,500,000 per year, pretty conservative number of units, I would say. So let's talk a little bit about some of the footnotes here. Okay. So item 3, item footnote 3, A320neo aircraft, Parkinson's film and these materials qualify in the use of this program.

Speaker 1

Is that aggressive? Well, I know you tell me we're qualifying and that's a lot of money for MRAS as well, qualifying our film adhesive products with them. They're hiring engineers. They got a Because that's why would they be doing that if they don't plan to put the film needs on the programs? Is that aggressive?

Speaker 1

Well, I don't think so. Let's talk about some more. Item 5, Passport 20. Item 6, which relates to the 919 and Item 7, which relates to ARJ. We're assuming in every one of the cases our film adhesive is not used in the program.

Speaker 1

Why is that? Because I mean, clearly, Emirates wants to get their film adhesive products in all these programs. They don't want to have to buy film adhesive from brand X and also from brand Y. Why we doing it? Because we're being conservative.

Speaker 1

Why are we assuming rather we're not they're not in the programs, we're being conservative. So you tell me $55,000,000 Is that an aggressive number? An aggressive number? I don't think so. We're just doing math here folks.

Speaker 1

So if people think that we're kind of overdoing it or promoting or hyping, I don't know where that I don't know where you see that. Let's go on to Slide 35. Okay, Dow. Park Aerospace Core Financial Outlook principally based upon growth estimates of programs on which Park is sole source qualified, an update. All right.

Speaker 1

We will this is pretty much very similar, although we've updated the GE estimated GE programs for your criminal sales to 32.7%. That's just doing the math again. In the footnotes that on the next slide, Slide 36, which explain the math here, which Lori, pretty much know these not too many changes. It's $20,000,000 for the ADL, Kratos, PAC-three. Some of you said you thought that number was high, it's like, Okay.

Speaker 1

I know where you get that information from. To me, this number is conservative, quite conservative. But I guess we'll see about that. Non GE programs incremental sales. Well, that's interesting because remember we're using baseline of 2023 where this non GE Aviation sales were $32,000,000 and $8,000,000 brings it up to 40,000,000 That's the assumption here.

Speaker 1

$32,000,000 plus 8 is $40,000,000 That seems like, what, we say 5% a year over 5 years, something like that. Where are we in Q1 and Q2? We're $37,500,000 So 5,500,000 of $8,000,000 has already been achieved. Now that's Q1 to Q2. It could go down.

Speaker 1

I mean, I'm not saying that's we're going to that number will move up and down, but it still always does based on timing of programs. It's just how aerospace works. But I just want to point out, again, are we being aggressive? I don't know. I don't see it.

Speaker 1

In the rest of the math, you could The follow through and I mean follow on yourself, you can see how we get to $36,500,000 of EBITDA for outlook. Let's go. So Slide 36, I'm not going to go through these items. These items just kind of explain detail the kind of things we already talked about, how we could do the math. If you have any questions, let us know.

Speaker 1

Slide 37, let's stop there for a second. Just remember, very importantly, this is an outlook. This is not a forecast. Why do we say that? Because the outlook does not take into account lots of other programs we're working on.

Speaker 1

We're not still sort of qualified on yet, we're working on. Now some will hit And what maybe some won't, but some will. And some of them are pretty big, significant revenues. The bullet items, the first one, boy, that's we're talking big stuff here. The second one, okay, we announced we have a new film adhesive product line.

Operator

What do you

Speaker 1

think, we don't want to sell any of it? The only film heater sales in any of the outlooks It's for an A320neo. Nothing else. Nothing else in GE. What about other customers?

Speaker 1

You think we're not approaching other customers? Of course, we are. We have a lot of interested customers. So kind of like, yes, we are actually planning to sell that product to others. It helps a lot by the way to say, yes, we're getting qualified in a big program in terms of credibility.

Speaker 1

The Asian JV, we talked about that before. Structures, assembly, integrations project, that could be a big one. Technology license could be big. Israeli Aero 3 missile defense system could be big. So just want to make the point again, none of that stuff is included in our outlook.

Speaker 1

And we're not going to do that. We're not going to quantify Because some will hit, some won't. But some of these are big ones. They're like binary. It might be 0.

Speaker 1

It might be a lot more than 0. But it probably won't be somewhere in between. Let's go on to Slide 38. Okay. These are updates just I guess by coincidence almost On the 3 programs that are that total at $20,000,000 in the outlook, the ADL program, The Kratos program and the factory.

Speaker 1

I won't even read through it for you. I think all everything is positive. I guess the only thing to highlight Is the Kratos the replicator program, that's something that DoD has announced recently. This is, I think, very positive news for Kratos and the Valkyrie, Very positive news. It seems like the government is really going forward with these automated unmanned Systems.

Speaker 1

And the Valkyrie seems to fit right in there. Whenever these any article I see about it, Valkyrie has always mentioned, I mean about the Rapid Data program. You know about the PAC-three missile, everybody wants it and know what's holding it back, I guess, is supply chain. Let's go on to Slide 40, okay. Slide 40, Going long on time, we're getting there.

Speaker 1

Hang in there for a second, please. So this is a slide we shared with you before, $74,200,000 So we're paying down that transition taxes to loan payment. We paid $3,200,000 in our Q1 $9,300,000 as far as I'm concerned, you should consider that to be money spent. I mean, that's money that's It's almost like debt. We don't have any debt, but it's almost like debt.

Speaker 1

And that money and that gets paid. There's 2 more installments. The last one is in June 25. That money will be gone in June 25. So you got to consider that money gone.

Speaker 1

The $6,000,000 for the Treated project, and we'll see about that. And there are a lot of other projects, some of which we I kind of referenced in some of the outlook discussions that programs that would require investment. So we'll see about it. But it looks like kind of conceptual number $58,000,000 $59,000,000 That's not a forecast, but it's kind of how we look at things in terms of, okay, this is how much money we have, this is kind of how much money is committed. And We hope to be generating cash as well.

Speaker 1

So that's why I said it's not a forecast, but for us, it's conceptually important. 41, balance sheet, cash dividend history and buyback. Every quarter we cover this. We got 0 long term debt, dividend history, Well, there is Carter canceled the dividends. Park maintains regular quarterly cash dividends throughout the pandemic and economic crisis.

Speaker 1

Park 38 consecutive years of uninterrupted regular quarterly cash dividends without skipping a dividend, reducing dividend amount The big one in blue, Park has paid $586,000,000 $586,000,000 or $28.60 per share in cash dividend since beginning of 2, 2005. And as I always say, that's a hell lot of money for a little company like Park. And as announced on May 23, 2022, Our Board authorized Park's purchase of up to 1,500,000 shares in company's stock. Then on May 12, 2023. Park implemented a Rule 10b5-1 program, which expired by its terms on July 7, 2023.

Speaker 1

Under that plan, we purchased 221,099 shares of our common stock, an average price of $13.02 total cost of 2 $79,000 On August 11, 23, we implemented another 10b5-1 program, which expires by its terms today. Under that plan, no Park stock has been purchased. And we're just about wrapping up here. The Park family, Sorry, slide was it 43? Yes.

Speaker 1

The secret continues. The secret to our success continues. Okay. We've given you an update on our customer flex program. We haven't done that in the last couple of quarters just because we're trying to for brevity, but total participation is 62%.

Speaker 1

Don't read something negative in that. We have quite a few new people and it takes a little while for them to be qualified to be in the customer flex program. So Still a very important program, very, very important for our success now and in the future. Park family current people count 119. That number a little higher than you're used to.

Speaker 1

Our short term plan is Another 15 employees and increase our park people count to 134 park people. So what's going on here? But before we get to that, just be advised that doing this will cost about $1,000,000 per year extra cost or if you want to use 110 As a baseline, which is kind of where we have been for the last couple of quarters, that's $1,500,000 of extra cost to our P and L we're And here's something interesting. This could happen relatively quickly, particularly for your production workers. And why is that?

Speaker 1

Well, to my shock, we started using social media for recruiting people, Corey, Courtney, Nancy, they come up with really great ideas. I said, oh, whatever. But what do I know? I mean, I'm not I'm just not very good at this stuff. It's really helped a lot.

Speaker 1

It's made a big difference. And I think the other thing that's more important is that the Park family culture is taking hold. Courtney says it's a great place to work. And we really believe that, not an easy place to work, great place to work. And I was a little frustrated because boy, we're doing all the right things.

Speaker 1

We don't lay people off. We love our people. People are family to us. We treat people as family. Why is it hard to group people.

Speaker 1

I think we just had to stick with it a little while longer and now it's taking hold. The word I think is out and we got light out the door people looking to come work for us right now. So that's good news, but watch our cost because we could get up to 134 number pretty quickly, especially for production workers. Half the 15 is going to be production type workers. So Okay.

Speaker 1

That's good news. Let's go on to Slide 44. I guess it's good news. I mean, depending on how you look at Slide 44. As previously stated, we need to get ready for the juggernaut.

Speaker 1

We too will be overrun. So our great Park people are committed to making money for owners every quarter. We run our business for Park's future for long term, not for next quarter. That kind of commitment is maybe what you call enlightened self interest, I think that's a term, where people realize for us to future. We need to make money for owners every quarter.

Speaker 1

If you're an owner, you want people making money for you. But what do we mean here? We run a business not for the Park's future. In other words, we're hiring people or planning to hire people in advance, so we're ready for the juggernaut. We don't get overrun.

Speaker 1

So in other words, you're not running for the quarter, running for the future. And our intermediate plan is to increase our Park people count to 143 people. So let's see what happens with that. Park, we're very so very fortunate and blessed to have the great Park people we have. Park where people have been playing for a play for Keeps And we now have been on our 70th year plan for keeps.

Speaker 1

And our tradition is we always feature some group or crew from Park. This is our Aerospace Composite Structures crew. So really emphasizing this because we're looking at significant of Structures and Assembly Program opportunities we're working on right now. So this crew is very important, we're adding to it a little bit. This is also a very great group because they do other things.

Speaker 1

They do ITAR work. I can't explain that to you. That's not I'm not allowed to do that. They're in the customer flex program, so they could do 2 or 3 other jobs. So very wonderful to have people like this.

Speaker 1

Anyway, operator and everybody else, thanks for listening. That concludes our presentation, and we're ready to take any questions that might be out there.

Operator

Great, great. Thank you. We will now be conducting a question and answer session. Space. One moment please while we poll for questions.

Operator

All right, Brian, I'm not seeing any questions at this time. I would like to turn the floor back over to you for closing comments. Okay.

Speaker 1

Well, this is Brian again. Thank you very much, operator. Thank you all for listening in. Feel free to give Matt or me a call if you have any follow-up questions. And you have a good day and we'll talk to you again soon.

Speaker 1

Take care. Bye.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your

Powered by Quartr
Earnings Conference Call
Park Aerospace Q2 2024
00:00 / 00:00