Park Aerospace Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 6, 2023

There are 2 speakers on the call.

Operator

Morning. My name is Sherry, and I will be your conference operator today. At this time, I would like to welcome everybody to the Park Aerospace Corp. First Quarter Fiscal Year 20 24 Earnings Release Conference Call and Investor Presentation. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. At this time, I will turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr.

Operator

Shore, you may begin your conference.

Speaker 1

Thank you, operator. This is Brian. Good morning, everybody. Welcome to Park's fiscal 'twenty four Q1 investor conference call. With me as usual, Matt Farbaugh, our CFO.

Speaker 1

This morning, we announced our earnings and in the earnings release, there are instructions as to how you can access and should access the presentation that we're about to go through. So you probably want to do that if you haven't done it so far. It's also on our website. So just a comment about presentation generally. We put a We take them quite seriously.

Speaker 1

We'll look at them as an opportunity to provide you with information that We think it will be useful and helpful to you in better understanding Park, better understanding our company. That includes challenges, that includes things where we've come up short, That concludes things where we've done fine. We're just trying to help you understand our company better. We don't need to look at these or these presentations as an opportunity to hype the company to promote it. We're not trying to hustle you.

Speaker 1

That's not what we're here for. That's kind of insulting. We're not trying to tell you what a great job we're doing. That's not the objective of these calls and presentations. I think you know these things.

Speaker 1

We mentioned them before in the past, but I thought it would be useful just to remind you a little bit about these things. The presentation probably will take about an hour to go through. These tend to be long. One reason is that every quarter there are new people dial in. So we want the presentation to stand on its own to We don't want a new person to have to go back and come new to Park to look at the last five presentations to figure out what the heck we're talking about.

Speaker 1

We think that's a little bit That's me too much. So I had a couple of comments. Most comments are quite positive about our presentations and many of our A very good shareholder, tell me they really appreciate the information that we provide to them. I've had a couple of comments that it goes on too long And I understand that. We're all busy.

Speaker 1

I guess my suggestion to you if you're in that camp is maybe you want to listen to the replay and then you could fast forward Through the parts of the presentation that are of less interest to you. Obviously, we'd be delighted to take questions at the end of the presentation. We always like the questions actually because it Kind of brings out what maybe other people are thinking, one person asked a question and probably 10 others are thinking that's exactly what I was thinking too. At the bottom of the first page of the cover page, I guess, of the presentation, it says it's Park 70th year in business. I just I thought you might be interested in that.

Speaker 1

If anybody has a question about the secret to longevity for Park, Probably not, a lot of brilliant stuff, maybe not even very imaginative stuff. We don't take shortcuts. We don't cut corners. And you may not like hearing this, but we do most things the hard way. So, okay, having said that, why don't we proceed?

Speaker 1

Let's go on to Slide 2, Which is our forward looking disclaimer language. If you have any questions about Slide 2, please let us know. Slide 3 is the table of contents. And the photo here was taken of the 777X, was taken by Donna at the Paris Air Show. Let's see.

Speaker 1

Let's go on to Slide 4, quarterly results. So if you look to the right hand side of Right hand column Q1, you can see the numbers there. I guess I won't go through each one, but let's kind of read the Q1 numbers in conjunction with the Language at the bottom of the slide. What did we say about Q1 during our Q4 investor call? The sales estimate was 14.75 to $15,250,000 So we came in, it looks like a little bit above that range, but EBITDA estimate was $3,000,000 to 3,500,000 We came in kind of in the middle of that range.

Speaker 1

Also we note back to the numbers in the right hand column, our gross margin 31.1%. As I think you know By now, we don't we get pretty upset when the gross margin is under 30%, but we're still feeling that the margin is lower than Should be and we feel our margins are somewhat under pressure. And you could say that just by looking at the numbers, did you say, well, we exceeded top line by a little bit, Why don't we exceed the bottom line a little bit, it kind of wouldn't fit. So we'll talk about that in the next few slides. I think that covers it more or less for Slide 4.

Speaker 1

Let's go into Slide 5, a little discussion about the quarterly results, Next few slides, Rob. First of all, I have to tell you, I have to say outstanding job on Park's people to exceed at least by little our Q1 sales estimate and to make our Q4 EBITDA estimate. Under difficult circumstances, especially considering Significant challenges and I'll stop here. Somebody said, well, you go over the same stuff every quarter. Yes, we go over the same stuff for 10 minutes every quarter.

Speaker 1

We live with it 20 fourseven every quarter. And seriously, we think you should know these things. Even if they haven't changed that much, we think you should know what's going on in Park and what we're kind of living with. So Yes, it is somewhat repetitive, but as soon as these things stop being an issue for us, we'll stop telling you about them. Our supply chain The first time we talked about that.

Speaker 1

The situation seems to be beginning to improve, but we still have our surprises and We just got a big one a couple of weeks ago with suppliers. I just want to stop here and explain. We are talking about Park supply chain. Very important, we'll get into this later in the presentation. We're not talking about the supply chain generally related to the old aerospace industry.

Speaker 1

That's a different story, a very different story. We're just talking about our supply chain on Slide 5 here. We're managing I want to say, I believe we have excellent relationships with our suppliers. That's been to our benefit. Tables always change turn, whatever you call it at some point.

Speaker 1

If things are going your way or the dynamics are in your favor and you treat people not so nicely when those dynamics reverse, Watch out what will happen. Well, we always try to treat people including our suppliers with dignity and respect and I think that helps us when Things are challenging and difficult as they are now. We're managing the challenges by building inventory where possible and appropriate providing suppliers with longer lead times where appropriate, But supply chain disruptions continue to be challenging and difficult. Now there was a comment that maybe we're kind of late To dealing with supply chain issues or mediation actions have been Week or something like that. And I just want to say I've been doing this a long, long, long time, a long time.

Speaker 1

And I think our people do an outstanding job And managing the supply chain challenges, an outstanding job between Mark and Corey and Chris and then also we got all the production plan that feeds into it as well because if something one raw material component doesn't arrive on time, we got to go We've got a change of production schedule around, a lot of juggling and I think an outstanding job by our people, outstanding. Freight, Particularly international freight disruptions and unreliability. That's still a challenge. And last quarter Q4, remember we told you we missed $1,200,000 of international shipments to what was it to Japan and Italy, Japan and Italy, yes, blame shipments because of the international freight forwarders. This is a big, big challenge.

Speaker 1

But again, I would tell you our people are doing an outstanding job in my opinion. Corey, John and others, the team, outstanding job under very difficult circumstances. And there is some comment that maybe our people weren't doing a great job. I totally disagree with that. I totally disagree with it in terms of the international freight forwarders.

Speaker 1

And I I guess I just want to make that point because I disagree with a comment that maybe weren't on top of our game. I think we're really doing a great job In a very difficult environment with international freight forwarding, especially international. Staffing shortages, yes, they're ongoing. They continue to be challenging for us. Doing more with less, that's kind of what we do at Park.

Speaker 1

That's not new. We've always done more with less at Park. Even when things are better, we do more with less. So let's go into shipments, about $400,000 in Q1. And guess what, most of that was, guess what, international freight forwarding.

Speaker 1

So that challenge has not gone away. Let's go on to Slide 6. Continuing here, factors which affected our margins in Q1. Inflation, I won't read off all the different items that have Inflation is affected, but it's still a factor for us. It's leveled off to some extent, but we're still dealing with Leveling off at that higher level and sometimes people missed that point, all inflation is only up X amount this Quarter.

Speaker 1

Yes, but it's up all for higher base. That hasn't gone away. If we have deflation and prices start going down, Maybe get back to where we started from, although that's not something that most economists would wish for is deflation. Let's go on to Slide 7. Some of the increased costs were passed on to our customers in Q1 in the form of selling price increases.

Speaker 1

This is something we've discussed in the last few quarters. It hasn't changed. We're still discussing it. 1 at all, the lag effect, and we discussed the lag That's a lag effect many times, it's still something we live with and LTA pricing. This is a big deal, LTA pricing, because that doesn't change.

Speaker 1

And that's the point about Inflation may not be up so much this quarter, but it's up off an elevated level and our LTA pricing hasn't changed with I think you know this, but MRAS for instance, Which is one of our big LTAs, of course. We have fixed price increase in 2025, but we're sitting here with the current prices until 2025. So let's go on. Supply chain disruptions causing inefficiencies in our manufacturing operations, absolutely. We talked about that in the prior slide where those changes, those challenges with supply chain not only causes us to have to deal with supply chain issues, It also causes us to ask to deal with production issues, production planning and management, staffing shortages.

Speaker 1

So, yes, it's an efficient deployment of our workforce, increased expenses, cost related to commission a new plant. So we have the new plant. We're very delighted about that. It's Wonderful plant. But obviously, the day we commission it, it started absorbing the course, the plant will be fully utilized.

Speaker 1

That's not a surprise. That was part of the planning, but it's still A factor which impacts our P and L. Let's go on to Slide 8. We don't really have to talk much about Slide 8. This is the historical annual data that we share with you pretty much every quarter.

Speaker 1

Just for perspective, let's go on Slide 9. The top five customers, this is something we do every quarter. So who do we have? Avio FDA that relates to the Vega launcher, ablative materials, Kratos, actually Dynetics, the X61A Gremlin, that's an aircraft that an unmanned aircraft that Kratos produces under contract. So next one is Middle River.

Speaker 1

You know who they are. I think that's the Airbus XLR. That's also a photo That was taken by Donna at the Paris Air Show, Mega PLC that ties to the Growlr, That's of course for radomes. And the Norden Group, we're choosing this feature this time with the Norden Group, one of our real good customers, Bombardier Global 8,000. This is the we talk about later, the Passport 20 engine component That we work with the Orion mine.

Speaker 1

So and the PAS-four twenty is the engine on the Bombardier Global 8,000. Yes, I should explain that. Let's go on to Slide 10. So we have our pie chart here. I I guess the interesting thing to me is I just look at this, look at each number, look at just the graphical depictions that fiscal 2021 that was The big pandemic year where commercial went way down, military kind of health zone.

Speaker 1

But if you look at 2022, 2023 and Q1 of 24. The pie charts look pretty similar in terms of commercial, military and business aircraft. Let's go on to Slide 11. This is was an interesting slide. This is actually something Alina does for us every quarter.

Speaker 1

Alina is ahead of customer service. Park loves niche military aerospace programs. These aren't necessarily the biggest ones. These are ones that we think are interesting and Might be kind of nice to share. The Predator, you've probably heard about the Predator.

Speaker 1

We do materials for structures on the Predator. Going to the right side of the page, the Lockheed Martin long range anti ship missile radome materials for that program. Bottom left is really ARO-three missile defense system ablative. This is a really Big opportunity for Parq, very big opportunity, just starting on it. But if you read about it, there's a lot of talk about this missile defense So not just for Israel, but also for Europe as well.

Speaker 1

The JSTARS, so the right on which growth for the JSTARS And the top center MK21A, that's a future ICBM Technology being tested, I think by the Air Force that carries the W87-1 reentry warhead. So I'm not going to say what that's for, but I'm sure you know what it's for and we supply into that program our ablatives. So let's go on to Slide 12. Here we go, 2 updates for the price of 1. So, what we're doing is combining the update about the plant expansion and the new film Niza product that we recently introduced.

Speaker 1

And What we're doing here is running the new film laser product on our new film lines in our new plant. So there's your two updates for the price of wine. Let's go on to Slide 13. So let's talk a little bit about trends and considerations for aerospace, the aerospace industry. Starting with the military markets.

Speaker 1

Military markets continue to be very strong, fueled by the ongoing war in Europe and major global tensions. There's talk about winning the war and I'm not sure what that even means, but there's talk about it. There's certainly a lot of people in The government is very gung ho for military right now. Optimism abounds about foreign military sales, that's a big deal. We think in terms of Our U.

Speaker 1

S. Defense budget, but that's kind of only part of the picture. So much demand for foreign sales that has a big impact on especially U. S. Military contractors.

Speaker 1

So what will happen when we're in? So that's an interesting question. See, I told you, sometimes we just want to share with you some things to think about World Wars End at some point one way or another. It's not something that seems to be discussed very much, especially in terms of the Defense Industry and what kind of impact it will have on the defense industry. Will the countries in Western Europe return your spending focus to domestic Welfare Programs.

Speaker 1

What about Eastern Europe? What about the U. S? Maybe it depends on who's run the place. What about defense spending in Asia?

Speaker 1

That's kind of a different dynamic there. I don't have an answer. I'm just saying it's something to think about that could be important and it could be an important factor. Let's go on to Slide 14. Commercial, talking about Commercial Aerospace Markets, optimism abounds, Paris Air Show, we just showed you a couple of photos from the Paris Air Show Advise, we're a borderline euphoric, almost getting maybe, almost getting claims from the show about the commercial aircraft industry being back and with quotes.

Speaker 1

I I just thought my fingers up, you couldn't see that and put a quote. And putting the horrors of the pandemic in the rear view mirror, Indigo Airlines, India's leading domestic carrier kicked off the show, kind of took the oxygen out of the show in a way with the announcement of a record breaking 500 A320 Family Aircraft Order. That's not just record breaking for the Neo, that's record breaking for any order, I understand anyway. It was a big, big, big 500 airplanes, a lot of airplanes. Now what's interesting here about it is to be delivered between 2,030 35, that's a long time.

Speaker 1

Would you order something? Would you order a car whether you're not going to get it for, what, 8 years? Probably not. So what's going on here? Is this a sign of market capitulation?

Speaker 1

Jim, maybe. I think the backlog for the A320neo in particular is very, very huge, but it had been kind of stalled out. It wasn't really growing. And the reason was the backlog was so, my opinion, so large, the lead time is so large that The airlines were reluctant to order more. But I think what's happened here, my opinion again, is airlines realize That it's not going to get better and they better get the orders in now for after 2,030 or they're going to miss out even on those orders.

Speaker 1

So it seems like maybe that's there might be a little bit of a market capitulation that airlines are realizing. We better go and order airplanes. This pipe dream about getting an airplane delivered in 3 years, that's a pipe dream. That's not going to happen. We'll single aisle orders, Which have been somewhat stalled out due to huge backlogs and extremely long lead times now accelerate.

Speaker 1

We'll have to watch for that. But it's possible to This big 500 aircraft order, which delivered not until the 2030s, maybe a sign of things to come. Let's watch for that. The optimism of borderline euphoria are good things for the industry, right? Well, just think about that.

Speaker 1

I don't know. Something to think about. I'm not saying I have the answer. What think about times in any industry where there was Kind of very comprehensive euphoria and what that led to In any industry. So just think about it a little bit.

Speaker 1

It's just something to think about in terms of where we are in aerospace. I don't know what it means. I'm just saying it's something to think about. Yes, we have something down the bottom of the page here, very, very little tight, but there may be one little issue, minor detail to be concerned about. Let's go on to Slide 15.

Speaker 1

Supply chain, so this is what I was talking about before. When we talk about supply chain things getting better for Park supply chain, We're not talking at all about the industry supply chain. That's a totally different story. And it's a huge, huge, huge story as far as I'm concerned. Main impediment to recovery ramp back for both military and commercial aerospace industries.

Speaker 1

Demand is certainly there, there's no question both on the military side and commercial side, But when will the industry be able to produce the commercial aircraft and military hardware needed to meet the demand? To me, that's like the $4,000 question. Boeing and Airbus seem to be saying supply chain issues will again there is that quote normalized whatever that means toward the end of 2024. Is that realistic or is it in part wishful thinking? I know the answer to that question, just asking the question, Just an answer, but I will remind you that according to some, the supply chain crisis was supposed to have been resolved by the end of last year.

Speaker 1

I mean the track record of predicting the end of supply chain crisis isn't perfect. Let's go on to Slide 16. According to Airbus, the 3 key supply chain issues are electronic components, meaning semiconductor chips, engines and raw materials. I'm not sure what raw materials means. I'm just quoting from what an Airbus representative said.

Speaker 1

One thing I can tell you There are no issues for Airbus with raw materials from Park. But here's the kind of key thing here for me and the key question. What is the supply chain crisis Really about anyway, when we talk about supply chain, supply chain, supply chain, what are we really talking about? Is it really systemic workforce shortages and staffing issues? I think it might be.

Speaker 1

With so many people having left the workforce, we now have what is called full employment in this country. So So much money being pumped in the system, so many people are encouraged to leave the workforce maybe prudently. Let's go into Slide 17. According to Airbus, This is really a big thing as far as I'm concerned. The aerospace industry used to be able to hire back 8 out of 10 employees, Let go.

Speaker 1

Aerospace very cyclical up and down, up and down. So a pattern of letting people go, hiring them back, letting them go, let them go. We know we don't do that, but that's the pattern And Aerospace Industry, we don't like it very much, but that's how it's done. But now the industry has only been able to hire back listeners, 2 out of 10 employees Let go during the pandemic. Wow!

Speaker 1

Of course, as you know, Park let none of our people go in during the pandemic. So no issue for Park about calling about people. But this is not about Park. This is about the industry. A real human tragedy in our opinion.

Speaker 1

What do you mean by that is broken people. People left the workforce And don't have the ability to come back to work. They've been they've lost their edge. They've not worked for so long. The lives have really maybe been destroyed.

Speaker 1

There's a really sad thing. We see these people. I'm not speaking theoretically. I'm not watching financial news and telling you this, these are people we see to try to come back to work and just don't have the ability to do it. They've lost their edge.

Speaker 1

It's a real sad thing. To me, it is anyway. It's a tragedy. How does this end? How does this get resolved?

Speaker 1

Any ideas? I mean, that's a real question. I don't really understand how it gets resolved. If the supply chain issue really is a workforce issue, And where is the workforce going to come from if we have this full employment because so many people have left the workforce. So I'm just saying that there's a real question mark I just want to mention one anecdote here in terms of supply chain.

Speaker 1

We have a customer that supplies into a very important military program, which is real hot. I mean, everybody wants this hardware, everyone Everyone's a system, it's in the news all the time. They call us and say, well, the orders today placed For our Q2, meaning through the end of August, we want to push out to Q3. We're saying, what do you mean? Why would you want to do that?

Speaker 1

And the program is so hot. These are good people. They don't play games with These are really good people. When they say to us, you won't believe this. They said, yes, but we can't hire the people to make the components.

Speaker 1

We can't hire the people who make the components. So as far as their customers are concerned, they say it's a supply chain issue, but what's the real issue? Real issue, they can't hire the people who make the components. It's a mess if you ask me. Let's go on to Slide 18, changing gears totally, GE Aviation Jet Engine Programs.

Speaker 1

So this is a slide that we use or we include in every presentation, although we expanded a little bit. So we went on to 2 pages, sorry about that. We had that firm pricing LTA as a requirement contract through 29 with MRAS Middle River, which is a sub of SD Engineering Aerospace at Singaporean Company. We built a redundant factory that was part of our understanding. The factory is completed in production.

Speaker 1

So, what we basically told Middle River was once we signed that LTH for 2029, We'll build that factory for you. We'll build that redundant factory for you. So we signed we entered into the LTA. We built a factory. We do what we said we're going to We're sole source for composite materials for engine nacelles and TR thrust reversers, TRs for multiple programs.

Speaker 1

I I won't go through all of them. The first five, let's go to A320neo family with those LEAP engines and the 747, the progress in cancels, Still making some spares though, not too many, but some. Then we got the 2 Chinese aircraft, the 919, the AirJ21 and then the Bombardier Global 7,500 and 8,000. Got the nice picture here, we kept a picture of the 7478 engine nacelles You know the program has been canceled. Let's go on to Slide 19.

Speaker 1

So we can skip over the first one. We cover that And the second item on Slide 19, there's a little bit of an update here, fan case containment wrap for the GE9X engines for 777X aircraft that's produced with our AFP composite materials. It's not included in the MRASLT, not now, But we've been told that piamirast, they want to include it in the LTA. We're kind of waiting to see what happens With the program, remember we talk every time we discuss every time we mention this program, the redesign risk, the issue here is that the fan case Was not able to pass what's called the FBO test, which is a critical test. It's a non negotiable test.

Speaker 1

The only thing that's been certified so far has been a fan case with the case wrap with our materials, Which has passed the FPO test. So the suppliers of the fan case is trying to redesign the fan case to pass the test without the case wrap. So far that has not succeeded. And if it doesn't succeed, then the fan case wrap that we're on will continue Throughout the program, I suspect. Next item, these are 2 new items at the bottom of the page.

Speaker 1

MRAS is qualifying 2 Parq proprietary film adhesive formulations, one of which is the ARO here that we announced recently. But there's another formulation that we developed that Amyris is just taking off the qualification of as well. Here's a big one, life of program agreement requested by Amyris and SDE, Not by us, requested by executives, MRAS and SCE. Just saying, yes, we after 2029, that's not good enough. We want to change that into a life of program agreement.

Speaker 1

Life of program means until the program ends, you tell me when these programs are going to end, 2045, 2050, and these programs are a little different, but it's a long, long, long time in the future. So how much of it worth to Park? I don't know. If you look at the outlook later on the presentation, it says once these programs ramp up, we had $50,000,000 but that's in 2025 to 20 29 period. After that, the numbers will be higher.

Speaker 1

So you do the math to figure out how much is this is worth to Park. Now we what we've done, they've asked us to do this. We provided them with a draft of a life of program MOU and we're going to start to negotiate, I guess, or work on the details in the next couple of weeks. So, I think it's a win win. It's good for Park, but it's also good for the customer.

Speaker 1

Let's go on to Slide 20. Update in GE Aviation's agenda program. So let's talk about some of the programs. A through San Diego, we always start with that program because it's The Big Dong in the GE Aviation Program Portfolio. We're talking about this Indigo Airlines placed a record 500 A320neo family aircraft order to Paris Air Show.

Speaker 1

Now assuming a 60% leap Market share, we discussed a little bit for a down in the presentation, that's worth over $20,000,000 of revenue in Park. Airbus already had A huge over 6000 A320neo aircraft family backlog at the end of 2023 and then we had this 500 aircraft order. At the Paris Air Show, Airbus reaffirmed their plan to achieve that, remember that 75 rate, 75 A320neo aircraft family deliveries per month, we're saying now by the end of 2026, will Airbus achieve the rate by the end of 2026? Hard to say, but based upon your backlog, which is so huge, there's a high degree of confidence they'll get there at some point. Maybe not, I mean, it's just my opinion, No, the Airbus CEO said it's going to be then 2026.

Speaker 1

If it's not, my guess is it won't be too long thereafter because there's so much Energy behind on the part of Airbus to get there. How are they doing so far with the planned ramp up? Now this is where it gets a little complicated. Let's go on to Slide 21. Challenging growth for them so far according to reports in 2023 year to date through May, Airbus delivered an average of about 40 A320 family aircraft per month.

Speaker 1

That's not what they want. Not that we want with that kind of backlog. That's not what they want. Remember, middle of last year, I think they expressed or stated target Our objective to get over 50 deliveries per month by the end of last year and they did. I think in November, December, they exceeded 50, But here we are, the 1st 5 months of this year back to 40.

Speaker 1

So really struggling now in May, I think they got back 50, I don't know if that's a trend or that was just the month of May, really struggling. I mean, they could be at 75, they'd be at 75 right now. So there's what? There's a supply chain issue and it's very significant holding back their ability to ramp up as quickly as Thank you. A320 Neo aircraft family offers 2 proof engines, you know this, the LEAP engine, which is the one we're on and then the Pratt 1100 gs engine as well.

Speaker 1

As of the end of April 2023, CFM LEAP at a 60.0 That's a precise number by the way, market share of firm engine orders for the A320neo family of aircraft. Now, recently why this is kind of maybe it's important, recently widely reported serious durability issue with the Pratt 1100 gs engine. All new engines have rolling pains, no doubt about it, especially with new technology, but the reported Pratt engine durability issues seem to be far worse than durability issues reported on the LEAP engine option for the A320neo aircraft family. Let's go on to Slide 22. According to GE Aviation, they've already made improvements to the LEAP engine regarding durability and test results have yielded very good results.

Speaker 1

Let's sorry, next item. Now here's an important question. Will the PAT 1100 gs durability issues lead to an increase in CFM's A320neo family aircraft program market share to even greater than 60%. It's something interesting to think about, but these are serious issues, they're widely reported. So Let me just ask a question.

Speaker 1

Let's say, you're a big airline and you're ordering A320neo aircraft, you need to select an engine pretty soon. What engine are you going to select? Maybe even like Pratt, but are you going to take a chance that by The time your aircraft is delivered, these durability issues will be resolved. I mean, you're not going to be emotional, I think, if running an airline, you want to make the best decision. So it's a question as to whether these durability issues, which again are widely reported, will move the market share more in CFM, the leaf engines favor.

Speaker 1

These are, like I said, serious issues. There is, I think, one airline that here's the thing about airlines, they don't make that much money, their margins So it's really a problem when the airplanes are on the ground, they're not flying. And this is that's what happens with durability issues. The airplanes are on the ground a lot more. There's one airline who claims that it cleared had a clear bankruptcy because there's so many airplanes around it.

Speaker 1

It's not a minor issue. So we'll see what happens, but I just think You might want to be aware of. Going to next item, assuming that 60% market share and assuming 75 aircraft deliveries per month, That basically translates to that number, 10 80 fleet 1A engines per year. Next item, Interesting. Remember, we talked about the A321 XLR in prior presentations.

Speaker 1

So that's a pretty exciting airplane that Airbus is working on. And they so that okay, so what happened is that the aircraft made its debut at the Paris Air Show, but with a LEAP engine and Airbus plans to achieve certification of the aircraft with a LEAP engine. So they're going to first sure find the aircraft with a LEAP engine. And as you know, Boeing doesn't have a response for that aircraft. Slide 23.

Speaker 1

So just a couple of other programs we'll touch on, the 919 The CFM LEAP-1C engine. COMAC plans to achieve reduction rate of 150 C919 aircraft a year within 5 years. That's what Comeback says. Comeback currently has over 1200 orders. The China Eastern Airlines just conducted recently conducted its 1st passenger flight with the 9/19.

Speaker 1

Here's the issue or here's the dynamic. Basically, Comeback will be able to sell all the airplanes They control the market in China. If they can produce it, those airplanes will be sold in the Chinese market. Whether they'll be sold outside of Chinese market, That's another question. I'm not even sure that's the objective of Comec and the Chinese government at this time.

Speaker 1

The Global 8,000 variant, Let's see. Prototype first flew in May of 2023 and expect to enter service in 2025. Let's go into 2024. So just a little bit of a nostalgia thing here. We're not only nostalgia, we've got the old and the new.

Speaker 1

We've got the Boeing 747 going by, bye bye. But the new airplane is 777X that's supposed to enter service in 2025. We talked about the cash wrap. We talked about The potential redesign, but it's a program we feel really excited and happy to be on. And hopefully, it will work out our way.

Speaker 1

I think it will, my opinion. I could be wrong, but we'll see what happens. I think we'll know in the next year how this is going to break or maybe even sooner than that. Let's go on to Slide 25. GE Aviation's Jet Engine Program sales history.

Speaker 1

So Q1, we have $6,200,000 which is Kind of in the range of more or less of the last couple of years, some ups and downs, not the 2021 year, that was the pandemic year. But what you probably noticed is we're not providing a forecast for Q2 for either GA aviation programs or for Park. So why are we not doing that? So just a little bit of background here. Airbus has been a pretty aggressive company in the last 3, 4, 5 years.

Speaker 1

During the pandemic, Airbus was known to be pretty aggressive with their customers, customers who wanted to push out or cancel orders. Airbus was not allowing to do that. Airbus also has been quite publicly aggressive with the supply chain for a couple of years now. Almost uncomfortable with these kind of public battles with supply Where Airbus has been very aggressive, very vocal about pushing the supply chain, pushing the supply chain, pushing the supply chain to ramp up, ramp up, ramp So that they can get to the rates that Airbus can get to the rates they want. And it's been interesting battle now.

Speaker 1

Some companies have Done a pretty good job with meeting Airbus' expectations, some companies in the supply chain, maybe companies like Safran, maybe companies like Airbus Sorry, companies like MRAS, Safran. But I mean, how many components does it take to make H320neo. I don't know the answer to that question, but it's a lot, lot, lot. How many suppliers supply to that program? I don't really answer it, but it's a lot, lot, lot.

Speaker 1

And a lot of the key suppliers can be meeting Airbus' expectations. But there's even a few and a lot more than a few, they're not. What happens? Airbus is not able to produce the aircraft. So what are they going to do?

Speaker 1

They're going to say, well, we have to slow down our rates. So the suppliers, the good suppliers that really try to keep up with the expectations, What are they caught with? They're caught with a lot of inventory. And that's what's happened here. We don't know the details yet.

Speaker 1

We're going to be meeting with MRAS in the next couple of weeks to figure out what the plan is, but We have what's called a burn down because it's not really Park inventory, we don't think. It's finished goods inventory, finished structures inventory. Well, they just got ahead. They tried to meet Airbus' expectations, but Airbus is not able to produce the airplanes they want to produce, not because of MRAS or Safran, but because of The dozens and dozens and dozens of other suppliers, it's just not meeting expectations. I just gave you the information, only 40 airplanes per month For the 1st 5 months of this year.

Speaker 1

That's a very low number. That's not what they want. Not many expectations. So what happens to all the good suppliers They really try to support Airbus and they get stuck with inventory. And that's what's happened here.

Speaker 1

So that inventory needs to be burned down. I don't think it's our inventory. We'll get we need to get the details and facts. We just sit down with MRAS and figure out, okay, how much inventory we're talking about And here's the key thing, what's the burn down plan? Over what period of time is this inventory, how much is it is going to be burned down?

Speaker 1

Until we had that information, we don't really know what we're going to be looking at in terms of our GE program sales for the short term. It could be a fairly week, fairly light for next couple of quarters, but we don't know. And I think we don't want to guess. I I mean, there's really no point in doing that. So the better thing would be to explain to you the situation rather than guess at something that would not be meaningful because it would just be a guess.

Speaker 1

I would expect the GE Aviation program number to be down. I just don't know how much it will be down. We don't And we don't know how long it will be down. The good thing is that inventories are finite. There's a finite amount of inventory.

Speaker 1

It can be quantified. So if we're effective at this, we meaning us, MRAS and maybe their customer, we should be able to come up with a fairly incredible burn down plan. When we get to our next quarter, we'll have that information and we'll Be able to tell you, okay, this is what happened in Q2, but also what's the expectation, let's say, for Q3 and when the burn down will be done. So just for reference, if you look at the current rates for Day 3 2020, the Global 7,500, the Comeback Airplanes. Let's say the inventory gets normalized.

Speaker 1

It should be kind of more or less at the rate of last year, $23,000,000 $22,000,000 So that's when things are normalized. Once the inventory is normalized, once the inventory is burned down, then our rates We'll align with the end market rates. In other words, the production rates of these airplanes, okay? So I just wanted you to have that perspective that what we have here As an event that's going to distort our numbers temporarily, we don't have the detailed information yet to be able to share with you. But the key thing is, once the inventory, which is finite, is normalized, our sales will be aligned with the end market's production rates.

Speaker 1

At this point, based upon today's end market production rates, that is kind of like that $23,000,000 number for last $22,000,000 $23,000,000 for last fiscal year. So let's see, I think that kind of covers this issue and I think we should just go on to the next group of slides. So what are we doing here? We're going over What we went over in our Q4 presentation is outlook we call it. And I'll explain why we're doing that if we get through go through the outlook again.

Speaker 1

But the reason is that we I'll give you a little bit A teaser, I guess, I'll quote that. The reason is that we didn't really know if People, our ROEs, our investors, got it, in quotes again. So we won't go through all This preliminary information in great detail, the first item on 26, we're saying we're really not in a position, not even talking about the burnout we just spoke about, to kind of give you a year over year forecast because it's so uncertain as to when things will ramp up because of what supply chain issues. Like I said, Airbus says they're going to be at 75% within 26%, are they? We don't know.

Speaker 1

And that will drive a lot of the year over year predictions for us and forecast for us. So we'd rather talk about, okay, we know or we believe anyway that at some point these issues will normalize, supply chain issues, staffing issues, inflation issues, Freight issues, all the things we're talking about. At that point, then we'll be dealing with more, let's call it, a normalized market. So for that reason, we're providing an outlook on the theory that these things will resolve over the next few years and then we'll have better visibility into where we're going. So let's go on to Slide 27.

Speaker 1

Slide 27 just says, these are the assumptions we're making and just going to cover them already, so we'll go through those again, Slide 28. Let's slow down here and take a couple of minutes because this is something important. So how do we do this? We just looked at the programs. We assume certain rates for the A320neo, that's the 10.80 number.

Speaker 1

That's the 75 at a 60% LEAP market share and the revenue per engine that comes from our customer. So this is just math, you can just multiply across. And the same thing with Passport 20. So I think that Bombardier is producing about 40 airplanes a year for the last few years. So we thought maybe move it up to 45 OE-ninety engines, 2 engines per airplane.

Speaker 1

919, Remember, I told you they're predicting 150 airplanes in per year in 5 years. Well, we're assuming 100, because there's again 2 engines. Why do we assume 100? Well, the A320neo, which is another single aisle, you're talking about being 900 a year, the Triple sorry, this 737 MAX, you're talking about being at 600 a year. So 100 a year, we thought And really like we said, it's a function of how they're able to ramp up, not really the market.

Speaker 1

The limitation Or the issue for C-nine nineteen is not the market, it's how quickly Comeback is able to ramp up. Air J-twenty one, last year they produced They shipped 26 of these airplanes, so that would be times 2, so 50, we think it's really conservative. The GD9X, we're not giving you the details, because to protect the confidentiality of the program, but we think the assumptions we're making are quite conservative in terms of units. We do have the revenue per engine number. It's just the units that we don't want to disclose at this point.

Speaker 1

Now, we're wondering about why this didn't have Warren impact as well as the next slide, which is the outlook for Park. So we thought about this and we receive a lot of books Investment Bankers with these offering memoranda with forecasts that are basically hockey stick forecasts. Somebody is doing $30,000,000 of sales, but 2 years from now they're going to be $60,000,000 or EBITDA is in kind of steep ramp up hockey stick. A lot of that's really kind of fantasy stuff. It's not real.

Speaker 1

But this is a little different here. What are the chances we're going to lose the A320neo program? I mean, I guess you never say 0, but I would say less than 1%. So this is not prediction, hopes and dreams. These are programs we're on.

Speaker 1

The only question is how many Airplanes, Airbus produces with the LEAP engine. That's the only question that's meaningful. This is not a hockey stick prediction. This is not hopes and dreams. These are reality things that we're talking about.

Speaker 1

Programs are on qualified on sole source. So I just wanted to explain the basis of this And that's how we get to the $50,625,000 per year number. Let's go on to Slide 29. Let's stop here for a second as well. Something we shared with you last quarter.

Speaker 1

We just take the baseline this is a Park outlook. This is outlook, not a forecast. We take the baseline year last year $54,100,000 of sales, dollars 11,500,000 of EBITDA. When we look at the GE programs incremental sales, In that $50,000,000 $650,625,000 number from the prior slide and subtracting the 23 revenues, that's the incremental Revenue $28,000,000 $20,000,000 from these other 3 programs, which we think is a pretty conservative number. There was a comment that maybe this number is aggressive and I would say we completely disagree with that.

Speaker 1

We believe this number is actually pretty conservative. 9 gs program incremental sales $8,000,000 We just took the baseline from $23,000,000 which is about $32,000,000 Assuming about 5% year growth or 25% over the period through the outlook year to the outlook year $20,000,000 we think that's sorry $8,000,000 I think that's pretty conservative $110,000,000 in total. And then EBITDA Estimated EBITDA contribution from the incremental revenues. We assumed 37% contribution percentage. And when Matt and I did the math pretty carefully, Probably good number, not an aggressive number, that's for sure.

Speaker 1

Money will be a little conservative. Adjusted into base year EBITDA $2,500,000 This is assuming that the Things we talked about at the beginning of the presentation, which affected our margins in Q1 and prior quarters that those things normalize. $2,500,000 we think is a good number, but also a conservative number. That's how we get to $38,000,000 $35,000,000 of EBITDA. Going to Slide 30, we're not going to go over these footnotes.

Speaker 1

We kind of just went through them. These are just explanations as to how we did the math. Let's go on to Slide 31. We'll stop here for a second because this is important stuff. Park financial outlook presented, okay, we're just principally based upon growth estimates of programs on which Park is sole source qualified.

Speaker 1

Okay. What does that mean? The above outlook is not a forecast, it's just an outlook. It does not consider growth on these programs and we have a whole list of these program opportunities here. These are examples.

Speaker 1

This analysis does not consider any other revenue opportunities including for example revenue opportunities related to. We're not going to cover each one of them. 2nd one film adhesive Except for the A320neo, we're not considering any film adhesive. Going down to the middle of the page, Structures, Assemblies, Integrations project, which Park is in serious discussions with existing customer, significant potentially very large significant, I mean, Revenue wise. Next one, technology license agreement under discussion with large OEM related hypersonic missile systems, potentially very large, Talking about lots and lots of dollars here.

Speaker 1

Last one, our 3 missiles defense system, again, essentially very large. We actually covered that in the slide relating to some of the niche, aerospace military programs that we're working on. Let's go on to Slide 32. So why are we doing this? Why are we reviewing our financial outlook?

Speaker 1

Let's go through some history. February 9 this year, we announced that the Board of Directors had approved an increase in our regular dividend. And the stock price Reacted, we thought, appropriately. Market response to the announcement made sense to us. I think the stock went up to about $16.90 and that would be equivalent to $15.90 because there is a $1 special dividend that in between the announcement and the current market price, so $15.90.

Speaker 1

Then March 2003, S and P announced that we're deleting our common stock from the S and P Small Cap Index and that pretty much wiped out the entire gain. We didn't feel so good about that. We also mentioned to you last time, well, those other companies in the S and P Small Cap Index, How many paid dividends and how many paid over $28 a share since 2,005, probably maybe none. And obviously that has an impact on our stock price and our market cap. But continuing on May 11, 2023, that's when we announced Q4 and that's when we provided you with this outlook that we just reviewed and went through it again because we thought maybe it wasn't we didn't make it clear.

Speaker 1

We explained at the time, this is Keith, that the financial outlook formed the basis of the Board's decision to increase the regular dividend. That's why it's on the forecast. We did this outlook and we review with the Board, we decided to increase our regular dividend because we were looking at holding You're saying, look, this is an outlook. This is kind of like what we consider to be pretty good thing. You wouldn't say sure thing, you won't ever say sure thing, But a pretty reliable thing to count on.

Speaker 1

So yes, we're very comfortable increasing the regular dividend net basis. Let's go on to Slide 33. What was the market response to the provision of our financial outlook? Not much, which surprised us a lot. We didn't understand that.

Speaker 1

Why was it such a muted reaction? We're not sure. Is Market efficient. The theory that the market's efficient is kind of like this big computer that takes into account all the data, all the information that comes out with the right company value. Is the market broken?

Speaker 1

Maybe. What I consider to be a very smart institutional investor recently mentioned to me that he thought The mark was broken. Maybe the investing public just doesn't believe us, maybe don't believe that our outlook is real. Even though we've explained it again that It's not a forecast. We're talking about for the most part, programs are already sole source qualified on.

Speaker 1

And we're not talking about any of those old programs. Listed a couple of slides ago that are significant programs, some of which my guess will have a big impact on Park's future. But we believe us, maybe the market doesn't. So shortly after we announced Q4, we implemented Rule 10b5 1 company stock purchase plan with Needham. On that plan, through the end of our Q1, We purchased about 129,654 shares of common stock at a price of an average price of $12.87 total cost of 1,668,000 The key thing here is that through the end of the Q1 that it was only 2 weeks from when we implemented the plant when the Q1 ended, Really talking about what happened in the Q1 and that amount was the maximum we were allowed to purchase under the plan under the SEC rules and regulations.

Speaker 1

Let's go on to Slide 34. So purchases that occur, if any, Our Q2 will be slowed as we report that quarter. We're not talking about that. Now we told you in the past, some even like this, we prefer that the investing public We prefer the investing public to buy our company stock, but since that did not seem to happen in any meaningful way in response to the provision of our financial outlook To the investing public during our Q4 investor call, we did. We went and did that.

Speaker 1

We prefer the investor investment community, the investor responded, But they didn't, so we did. Let's go on to Slide 35. So this is a change of gears here. We just kind of did give you an update. We now have As at the end of the quarter, Q1, we had $81,000,000 in cash.

Speaker 1

We still owe that $12,500,000 transition tax installment payment, payments have to be made and they're to be made within 2 years. The last payments made in June of 25, so that money won't be around for long. The solution treater for the ADL project $6,000,000 Joint development project capital investment $5,000,000 This is kind of a derivative of what we used to call the FV project. The difference here is that this would be working directly with a customer, a joint development project. Additional buybacks?

Speaker 1

Well, we'll see what happens with that. But it looks like cash remaining after all the stuff is about 50 $75,000,000 We just wanted you to see that number for perspective. Let's go on to 36,000,000 balance sheet, Cash and capital allocation. We have a zero long term debt. You know the story about our cash dividends.

Speaker 1

I won't go through it except to mention again, It's been $583,000,000 that we paid in cash dividends since fiscal 2,005. Our thoughts about our cash and capital allocation. So I'd like to change gears for a second here. I know it's late and we've been in we're 55 minutes since the call. But something came up, I guess, after we announced, I think, after we announced Q4, 2 different institutional investors called me and they're good people.

Speaker 1

So I'm glad they mentioned this to me. Moe said to me, Ryan, you're underpaid and you should pay yourself more. And I think their point was then maybe we Park would be inclined to do more buybacks less dividends. I think that's what they're getting at. So nobody's ever said that to me before and I'm glad they did because When 2 people say something like that within 3 days of each other and I don't think they were talking to each other, maybe other people are taking the same thing.

Speaker 1

I don't remember ever talking about My situation. Let's just backtrack for a second. I want to tell you something else. I've been in the Board since 'eighty three and I can tell you with 100% confidence that whenever the Board is talking about dividends, buybacks, what do with our cash, never once, Never once have I come up, my personal situation come up or my family situation. It's never been considered, it's never been discussed.

Speaker 1

It's just not on the table. I want you to know that. Let's go back to me, all right. So I think my pay is $2.20 I think that's what it is. You can look check the proxy statement.

Speaker 1

I'm not 100% sure about that. So, in many years, I reduced the pay in orders for the company to be able to afford to pay for maybe holiday gifts or additional bonuses for the workforce to some extent anyway. Every year without exception, the Board offers me more money and bonuses. Every year, I turn the Board down. I never accepted.

Speaker 1

What's going on here? The Board wants to pay me more. These 2 shareholders said maybe I should be paid more. Well, This may sound like a strange thing to say, but I'll say it since it's been brought up. You couldn't pay me enough to do this job.

Speaker 1

It's just not something that could happen. The sacrifices I've made, the things that I want to do that I won't get to do, the people I would have liked to spend time with, so that I will not get to spend time with. Just kind of a fact of life for me. I'm not complaining. I'm just telling you the reality.

Speaker 1

But I don't do this job for the money. See, that's the I do would be so I care about Park. I want Park to have a future. That's a key thing for me. And I care about our people.

Speaker 1

I care about our people a lot. I love our people. And I also care about the long term investors. So I just want to understand the motivation here. I appreciated the comment.

Speaker 1

I appreciated that somebody had the kind of guts, whatever, 2 people to Actually tell me this, so it led to my thinking, well, maybe I should kind of air this out a little bit and not keep it, Let's say quiet. Let's go on to 37. So we're almost done here. Park family, the secret To our success, the following is an extra from recent message to the Park family. I'm not going to read it, if you'd like at your convenience.

Speaker 1

But the key thing here is that the Park family culture is really everything for us. Without our Park family culture, we would be really nothing would be lost. Let's go on to Slide 38. In the Park family, we go for Greatness and the path to greatness is arduous and difficult and hard. Others may settle for mediocrity, but a park We're not like the others.

Speaker 1

At Park, we play for keeps and we are now in our 70th year of playing for keeps. So our tradition every quarter we share a photo of one of our teams. This is the special we call Park Special R and D Group. I'm not going to provide you the names because I know it will make it easier for the people to our South to steal our people. But outstanding job by our R and D group, developing 2 film adhesive formulations.

Speaker 1

Polymer chemistry formulation R and D is Very challenging. We've been doing this for a long, long, long, long time, even electronics. And the large majority of projects that are started never get to the finish line. So the fact that we developed 2 formulations, one of which we commercialize Arrowhead here and one of the other is being the process. So we're starting the qualification with MRAS like I said, very, very, very good.

Speaker 1

And we're working other projects as well, not just these 2, but these 2 are outstanding. And then something else, what about doing the So many trials, the qualification runs, the internal qualification runs. We haven't had the work for us to do that. So who did it? The R and D group.

Speaker 1

They staffed the qualification runs and the full needs of qualification and trial runs. And what about the new plant? We have a new plant qualified. We had to do trials and qualification runs from new plant. We didn't have the staffing to do it.

Speaker 1

The R and D people stepped up and they did it. So remember at the beginning of the presentation, I said we do more with less. Well, in our R and D group, You can see it, there's one person didn't wasn't able to make the photo op. I think he was out for the day. So this is our whole R and D group.

Speaker 1

We do more or less outstanding and great accomplishments by a Driven by a pretty small group of people, I would say. I'm saying that on a basis of experience actually. So, okay. Well, thank you very much for listening, operator. If there are any questions at this time, we'll be happy to answer them.

Operator

Thank you. There are no questions at this time. Do you have any closing comments?

Speaker 1

Okay. Well, thank you everybody for listening. Have a great summer. And if you have any follow-up questions that you want to ask Matt or me, feel free to give us a call. Have a good day.

Speaker 1

Thank you.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
Park Aerospace Q1 2024
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