Park Aerospace Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 30, 2024

There are 4 speakers on the call.

Operator

Good afternoon. My name is Paul, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Aerospace Corp. 4th Quarter Fiscal Year 'twenty four 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 At this time, I would like to turn today's call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Speaker 1

Thank you, operator. Welcome all to our fiscal 'twenty four Q4 investor conference call. I have with me Matt Farabaugh, our Senior Vice President and CFO. You probably noticed in the news release that we announced Matt is retiring. Original plan was the end of this month, but Matt has agreed to stay with us through, I guess, it'd be sometime like mid July through our Q1 10 Q filing.

Speaker 1

So thank you for doing that, Matt. We I think the earnings release across the wires maybe about $415,000,000 You want to take a look at that because in the release itself, it gives you instructions as to how to access the presentation that we're just about to go through. After the presentation, Matt and I will be happy to answer any questions you have. If you look at the bottom of the cover page of the presentation, notes that we're celebrating our 70th anniversary. Park was founded on March 31, 1954, and that was 4 years ago.

Speaker 1

Interesting, somebody recently asked me if I found the company and I'm thinking, boy, I must look really old. No, I didn't actually found the company. I was 2 years old at the time. So let's go on to Slide 2. If you have any questions, we're already in forward looking disclaimer language.

Speaker 1

I should tell you, I forgot to mention this to you. It may be obvious during the presentation. I say the flu, so the show must go on, we'll get through it. I think a couple of years ago, I actually had COVID during one of these investor presentations. I don't get sick very much, but it seems like when I get sick, it's always during investor presentation.

Speaker 1

So I was just thinking, I hope there's no psychologist who are sitting in that might want to make a connection pertaining to. Anyway, on forward looking disclaimer, you have any questions about the forward looking disclaimer, let us know. Slide 3, so table of contents, we have our presentation and we have the supplementary financial information. We're not going to go through it, but the supplementary financial information. But if you have any questions about it, just let us know.

Speaker 1

So the original fact well, it wasn't a factory, it's actually a garage, was in Woodside, Queens. And I mean, I'm not using a poetic license. It was a garage, really a garage. And actually, it's still a garage. We did a Google map search and that building is still there.

Speaker 1

It's still a garage. I mean, like for fixing cars and that kind of thing, maybe 2,000 square feet. A couple of years later, I think, I don't know exactly when the company moved to a real factory in Flushing, New York, Flushing, Queens, New York, which I think was maybe 8,000 or 10000 square feet. This picture is in that factory. The guy leaning forward, kind of the left, that's Jerry Shore, my father.

Speaker 1

The guy on the right is Stonjaza. He's my father's partner, starting Park. And as I said, sometimes he was like a second father to me. These are power presses and the original business was nameplates and deckers trim. So these presses would stamp out the sheets of nameplates.

Speaker 1

And my father and Tony, they used to work the line, they worked the machines, they would repair the machines, they maintain the machines, they did entering, enhance which are machines. So I think when looking at the dictionary hands on, you see pictures of these guys. Anyway, we've had a long history, as you know. We changed our name to Park Electrochemical in 1960. And a lot of people thought that related to being electronics business, that's not true.

Speaker 1

We didn't go electronics until 'sixty one. Electrochemical refers to the anodizing process that we just still use, I guess, to make nameplates and decorative trim. We ended up selling that business, the original business in A-four to General Manager at the time they built hand. But this goes way back, probably this picture way back to the mid-50s, I guess, we call this our founders photo. I guess, we did a nice little meeting with our employees.

Speaker 1

We went through a presentation and went through a lot of aspects of our history. We don't have time to go through that now, but I thought I'd just touch on a couple of things. Just for the sake of time, we'll keep moving. Let's go on to Slide 4, talk about our Q4 numbers. So sales $16,333,000,000 not bad.

Speaker 1

But then you look at gross margin 27.3%, you think, well, that doesn't make a lot of sense. That number is low, especially considering that the sales were reasonable. And then the EBITDA margin also is low. We don't like gross margins they're generally under $30,000,000 and EBITDA margins under $20,000,000 What do we say about our Q4 about Q4 during our Q3 conference call? We gave you a sales estimate of $15,000,000 to $16,000,000 So we actually exceeded that number a little bit in our sales, but EBITDA estimate was $3,200,000 to $4,000,000 and we just came at the bottom of the range.

Speaker 1

So you know obvious questions, why does the EBITDA look better considering that the sales were actually above the top of the range? You think that the EBITDA would be better. So let's talk about that. First of all, we always talk about missed shipments, dollars 565,000 always the main cause of missed shipments. Without turning over the next slide, can you guess, you probably can.

Speaker 1

But let's go to the next slide, so we don't leave anything to doubt. International freight disruptions caused by the wars in the Middle East and Europe. That number is not a good number, but it's a struggle with these international freight right now. We don't like those numbers, but they are what they are, let's put it that way. I didn't think considerations related to our Q4.

Speaker 1

So we're going to go through a few things here. I just want to explain, these are not excuses. We don't like that. We don't make excuses. Fewer explanations as to what happened, you can choose to be interested in them or not, but some of you might be interested.

Speaker 1

So this first one is important. We never talk about production because normally our production levels match our sales pretty closely. But Q4 sales, they were $16,300,000 but our production, we call it sales value production, the sales value of our production was only $15,200,000 like $1,000,000 under our sales. And that's actually a big deal for P and L. So this and not surprisingly where that sales came from, came from selling on inventory by $1,000,000 That had a negative impact of $275,000 in our gross profit and about $250,000 in EBITDA.

Speaker 1

Why is that? Because look at it this way, if we actually produce that product rather than selling it from inventory, we get the additional absorption of labor and overhead that would go into creating the inventory. So it's significant when this is not our plan. We didn't plan to do this. We just came up short in terms of our production numbers.

Speaker 1

We plan to produce at the level of our sales, but we didn't get there. And there are a lot of reasons for it, not excuses again, but we have less experienced people, they're gaining experience, leads. I'll just give you one little example of what we're talking about. The experienced lead will know what's acceptable, let's say, in a treated line or film line or tape line, which is basically our business. It's a continuous operation.

Speaker 1

So really important to keep those things running. That's how it works. That experienced lead will know what's acceptable and what's not. So they'll make the decision, no, we need to stop, we need to get going. A less experienced lead won't know, will stop the line when they go find somebody, maybe in Cory, come take a look at this and to get a ruling as to whether we run or stop.

Speaker 1

Certainly, when I run it, the product is not good, we should just running scrap and that's a bad idea. But that's an example as to why we're struggling in our 4th quarter to get to production where we wanted to be. The good news is that in Q1, the production levels were quite good until the storm hit, which we'll also talk about later on. Then moving on, dollars 474,000 C2P fabric sales. We talked about that many times, but that's a product where we just we buy it, we sell it to our customer at a small mark up.

Speaker 1

So the margins and sales are there, but the margins are going to be very light. Unplanned property tax $212,000 The property tax goes to the cost of goods sold. I don't know if you know where that, that's not like a concession in the tax line, that's the cost of goods sold that affects our gross profit or EBITDA, of course. And we weren't planning on that. We had a little bit of a, I don't know, let's call it disagreement with the State of Kansas and we ended up deciding to approve for the amount and ultimately pay for it as well.

Speaker 1

Q4 was a 14 week quarter, which means that there's an extra week of fixed cost. The sales mix in Q4 was a little less favorable. Let's go on to Slide 6. Let's talk about the year over year results, the annual results comparison, which probably is more meaningful than the quarter on quarter comparisons. Fiscal year $24,000,000 $56,000,000 of sales, 29.5 percent EBITDA sorry, gross margin, that's not really very wonderful, and 19.6 percent EBITDA margin.

Speaker 1

This though is a very different discussion than Q4, where there are certain incidents, which we just reviewed, which had impact on our Q4 margins. The longer term picture, 24,000,000 is more about what we're doing intentionally to ramp up our business for what we call the juggernaut. So let's talk about that. Let's go on to Slide 7. What is the story behind our year over year margins?

Speaker 1

I said probably more meaningful question than the same question related to quarter over quarter. Quarter over quarter is always going to be items in each quarter that affect the numbers, which make the quarter over quarter comparisons less meaningful. Year over year, those things uneven out, so the year over year comparisons become more meaningful. So ramping up with the juggernaut on Slide 32, we talked about the juggernaut, we talked about that almost every quarter. Going for the long term, at Park, we don't run a business for the quarter, although you may be shocked by how dedicated Park's people to delivering outstanding results for you every quarter.

Speaker 1

I just want you to be aware of that. But let's face it, if we're in a business for the quarter, you never would have gone into aerospace to begin with. That was a long that was a decision based on very long term thinking, not 1 year, not 5 years, not even 10 years. So that's just an example of how Park goes for the long term. And if we ran our business for the quarter, we wouldn't have gone ahead with our $20,000,000 factory expansion either.

Speaker 1

Let's talk about a little bit further on top of Slide 8, I think. Yes, if you consider the annual sales history, it's obvious we don't need the expansions for our current business levels. Let's go back to the Slide 6. Look at the sales in 24, dollars 56,000,000 look at the sales in $20,000,000 $60,000,000 We certainly didn't have the expansion in 2020. So we certainly didn't need the expansion to get the $56,000,000 of sales.

Speaker 1

We did $60,000,000 sales in 2020. You see what I'm saying with all sector costs, this is needed to support the business levels in 2026. The extra cost is because we see what's coming and we don't want to get caught behind the power curve. Going back to Slide 8, we clearly needed the Juggernaut, the plant, the new plant. Also we're staffing up our new factory expansion to prepare for what is coming, running a lot less efficiently efficiently, sorry, while we staff up and ramp up our new factory.

Speaker 1

Now the good news is the new factory lines are ultimately expected to run more productively, meaning faster and efficiently than the lines in our existing factory. Makes sense, the original lines were designed back to whatever it is, 2,007. These lines are more we use all learning over the last 15 years to design these new lines much more efficient, much more productive. And that will have a really nice impact in the bottom line as we ramp up in the factory. We're also carrying additional $1,300,000 per year depreciation costs related to the expansion.

Speaker 1

Obviously, those costs don't affect EBITDA, but guess what? They expect growth they sorry, they don't impact EBITDA, but they do impact gross margins. And because the gross margins do include depreciation. That's approximately 2.3% to the gross margins based upon the fiscal 2024 sales, 2.3%. So let's see, how do we work that?

Speaker 1

If we go back to Slide 8 Slide 6 again, 29.5% was the gross margin. We were saying we could just basically add 2.3 percent of that if we didn't have the new factory, just the depreciation alone. And then we're carrying other additional overhead costs related to the expansion, which is obvious. So utilities, insurance, you name it. And those things are both affect EBITDA and gross margins, all related to the expansion.

Speaker 1

Let's go on to Slide 9. Ramping up our people cost for the Juggernaut as well. We just it's not just about equipment and factories. We've got people. We need people.

Speaker 1

Our current people count as 126. Our hourly people count, cost rather already up by approximately $800,000 per year compared to last time this year. That's not going away. That's temporary thing. That includes the additional people and some wage inflation as well.

Speaker 1

And we just approved another 5 people to staff the manufacturing lines in the new factory. And that's just for now, that's not the end game. We need to hire a lot of people for the juggernaut. We increased our authorized people count for now from 133 to 138. As you ramp up our people costs and staff to bear for the juggernaut, our productivity, we measure that.

Speaker 1

Sales value production, that's production divided by hours, hourly hours worked, that means all hourlies, So indirect, indirect. That will temporarily slip. That's just the way it is, but ultimately will reverse very much the positive as we ramp up production. The bottom line though is we want to be ready for the coming juggernaut, which we do. All these things are necessary.

Speaker 1

So this is like I said different than the analysis regarding Q4, where there's certain special items that affected Q4. When you look at the fiscal year numbers, it's more part of our plan, We plan to do it, we intended to do. Let's go on to Slide 10, parts balance sheet, cash and cash dividend history. We have 0 long term debt. We reported $77,200,000 in cash and marketable securities at the end of the fiscal year Q4 this year 2024 Q4.

Speaker 1

But don't forget, there's 9,300,000 dollars remaining transition tax installment payments payable through June 25. And Matt just told me that $4,200,000 of that is paid next month. So when we get to our Q1 balance sheet, you'll see that impact on the cash. So there's 2 more payments, 1 June this year and 1 in the remaining payment is June of 25. So I think you'd want to consider that.

Speaker 1

Our cash dividends, Park has paid 39 consecutive years uninterrupted regular quarterly cash dividends, without ever skipping a dividend or reducing the dividend amount going for 4 years here. Parkus paid $594,000,000 or $28.975 per share in cash dividends since the beginning of fiscal year 2,005. So $594,000,000 for a little company I park, that's a hell of a lot of money. I don't know, it's probably a lot of money for Microsoft. I don't know about Microsoft, but that's a hell of a lot of money for a small company like Park, I would say.

Speaker 1

Slide 11, we always give you or tell you about top 5 customers in alphabetical order. A, aerospace that relates to the Lockheed Martin Patriot, the tie to names of the photos, Patriot PAC-three missile, which we talk about often. AeroSpheres that relates to the Gulfstream G-eighty. So Aerospace Airspheres is a rep distributor for Israeli aircraft, a big Israeli company. And they produce these some of the Gulfstream airplanes under contract for Gulfstream like the 280.

Speaker 1

Kratos will get back to them, I think on the next page. Middle River, so we could have done lots of examples that we chose the COMAC 9 19 and the Nordeon Group, that's the Boeing 737, 700. What we're talking about here is the WeatherMaster radome, which no one produces with our materials. And we go on to Slide 12, this is a big thank you for Kratos, they're one of the top 5. But Kratos gave us this gift, and I never received a gift like this.

Speaker 1

I mean, that's an aircraft. That's an aircraft that saw operations. They gave this to us to put in our display in our factory. It's a beautiful, beautiful aircraft, unmanned aircraft. I mean, I'm just overwhelmed.

Speaker 1

I don't know what to say. Even now, I don't know what to say. So we took a little picture and we just to thank Kratos, but now we're doing it publicly. So, let's go on to slide. This is an airplane aircraft used by the Air Force.

Speaker 1

So let's go on to Slide 13, our pie charts. Interesting, 24 2021 was the pandemic year, so you could see commercial aircraft was slammed and that's why it's so low. The rest is about rest of the year is really consistent. I'm actually surprised that commercial aircraft held up in 24. In the second and third quarter, we had those big burn downs for MRAS, which you talked about.

Speaker 1

But I guess with other commercial aircraft sales, which allowed us to hold our own there. Let's go on to Slide 14. This is Elena's project every quarter just to come up with some interesting ParkClip's niche military program and military aerospace programs, some interesting military programs. Our estimated 24 military revenues by market segment, We consider radomes, rocket nozzles and drones to be niche markets for us. Although even aircraft structure for us is a niche market, it might not be for others, but for us in each market.

Speaker 1

So what do we got here? Adreno's next generation short range interceptor, just a replacement for the Stinger missile. You probably heard Stinger missile, the Boeing EA-eighteen Growler. We supply radome materials into that program. North Aquaman LGM 35 Sentinel, they call it GBSD, ground based, restricted deterrent.

Speaker 1

It's interesting term, used to be called ICBM. This is a replacement for the Minuteman III. So we supply materials into this materials and parts into this program. So this is what you know it's for, it's for nuclear warheads. McDonnell Douglas F-fifteen Eagle and we supply rhodo materials into that program.

Speaker 1

And the Boeing PA Poseidon aircraft, that's a replacement of the Orion structural materials into that program. Let's keep going. Let's talk a little bit about Slide 15, sorry. Let's talk a little bit about supply chain challenges. Well, in the past, I keep hearing that.

Speaker 1

I've heard so many times, oh, yes, supply chain issues are behind us or about to be behind us. Whenever we hear that they're behind us, we find out they are not. I can't tell you how many times I read reports from other public companies' reports using highlighting supply chain issues as the main reason why they're not making their numbers. What is supply chain issues really all about anyway? What is causing them?

Speaker 1

Why won't they go away? Our supply chain issues fundamentally workforce issues, Have workforce issues been resolved? I mean, isn't that what it's about? If you know the workforce, you can have all the machines, all the equipment, you're just not going to be able to produce to the requirements you need to produce to, the people to do it. We hear unemployment is not that bad.

Speaker 1

So what's going on here? Well, one of the things to consider, it's widely reported 7,200,000 able-bodied men, just men between the ages of 25 54 have permanently left the workforce and are not even looking for work. I guess a lot of them left during the pandemic. Even though there are help wanted signs everywhere, why is this happening? I don't know if you have an opinion about that.

Speaker 1

I heard this guy Charles Payne, he's a what do you call financial news guy. He he knows a guy 60 years old, never worked, a lot of people apparently never worked their whole life. So obviously, the government is enabling that. I wonder why that's happening. But these lives, I mean, this is not funny.

Speaker 1

These lives are being destroyed. After a couple of years, People sitting on the couch were eating potato chips, watching Oprah, whatever they do for 2 years. They try to come back to work. They can't. They've lost their edge.

Speaker 1

It's a real tragedy and that's not probably what you want to hear about our investor presentation, but every now and then I'll give you my thoughts about something like that. Let's go on to Slide 16. What does this mean to park the supply chain issues? So we found ways to manage supply chain challenges, so better planning, strategically carrying more inventory, providing suppliers with longer lead times. But the issues continue to be a major challenge for us They're very consuming of our time and energy.

Speaker 1

So yes, we're managing it, but it's with a lot of effort. But what did the ongoing supply chain challenges need for the aerospace industry generally, maybe parks able to manage it with a lot of effort. But the aerospace industry continues to struggle with supply chain issues. These challenges are impacting program ramp ups and new program introductions. Demand is there, but the industry is just falling short, meaning the demand.

Speaker 1

Where is this going? Is there a solution in sight? I don't know. You know it is? If so, what is it?

Speaker 1

I don't know. Maybe you have some ideas. I'm serious. I don't know. I don't know what the solution is.

Speaker 1

Going to Slide 17. We won't cover this in great detail. This is a slide we show you every quarter. Firm pricing GE Aviation Jet Engine Programs, firm pricing LTA requirements contract from 2019 to 29 with Middle River Air Structure Systems, MRAS, which is a sub of STNG Engineering Aerospace. So we always have to explain this and we'll get it because we have all these GE matter of fact, the title of the slide, GE Aviation's Engine Programs, all these programs listed below are GE Aviation programs.

Speaker 1

So what's the connection? Well, the connection is that when we got on these programs, Middle River was a sub of GE Aviation, GE sold GE Aerospace now, sorry. GE sold MRAS to SG Engineering, which is a large Singapore aerospace company about 5 years ago. But Amerenas and Parr continue to support those programs just as when it was a whole bunch of aviation. I won't go into these programs.

Speaker 1

We talk about all the time. So I'll just point out the nice picture here. 747 program was canceled. We sold some spares. I really love this picture because you could see how big these nacelles are compared to the sky standing back here.

Speaker 1

And those nacelles are all park material. Let's go on to Slide 18. Yes, we don't have to cover the first check item. We cover that every quarter. 2nd check item, fan case containment wrap or the GE9X, which produced to our AFP composite materials.

Speaker 1

We talked about that as we go into the Q3 now as well. But here's some new relative new stuff, MRES qualification of 3 Park proprietary film adhesive formulation product forms in progress. And then the next item, MRES PARK LTA, that's the LTA we referred to in the prior slide, through 29, was recently amended to include 3 part film adhesive product forms for composite bond and metal bond. That's a really great deal because we developed this film adhesive product line under a joint development agreement with GE and MRAS. But it's really wonderful because when we developed a product, then immediately it goes into qualification on really important programs.

Speaker 1

The dilemma is you develop a new product in your R and D level, it's a great product. So what? I mean, it's like 3 folds in the forest, nobody hears it. You got to get into programs. That could take 20 years, like not 20 years, 20 seconds is between the time that our product is finished and it goes into qualification.

Speaker 1

That's a very special thing that we have with that customer. Life of program agreement required by MRS and SDE, agreement is being actively worked on. We talked about this before. What does it work to park? I don't know what's a whole lot to.

Speaker 1

Let's go to Slide 19. Let's talk about some of the GE Aviation Jet Engine programs. We'll start with the big Kahuna A320neo. Airbus has its huge backlog of A320 aircraft, 7,170. I don't know if you know that, that's such a huge number.

Speaker 1

And here's the problem for Airbus. Let's say they're currently producing at a rate of maybe 50 a month, now that's 6 year, right? Well, how many years of backlog is that? Like 12 years. So if you want to wonder a new one, you got to wait 12 years to get it.

Speaker 1

That doesn't help. They want to sell a lot more of these, so they really need to bring the lead times down. That's why they're pushing hard to get to $75 per month, which is what $900 per year, right. So we do the math, divide $718 by $900,000 that's better. It's not like tomorrow, but it's a lot better.

Speaker 1

That's their motivation. And my opinion, you can listen to other people, they have different opinions. I think Airbus is very determined to get to that $75 per month. And during their annual shareholder meeting on April 25 sorry, their April 10 in the Q1 investor call on April 25, they again reaffirmed their plan to achieve a rate of 75 H320 family aircraft deliveries per month in 'twenty six, maybe the end of 'twenty six, I don't know, but in 'twenty six. How are they doing so far with that ramp up?

Speaker 1

This is notwithstanding and over and above all the restrictions and limitations of what supply chain. Let's go on to Slide 20. They're doing pretty well actually, I think, pretty well. Airbus delivered the following number of H320 new field new aircraft each year in the following calendar year. So you can see the numbers ramping up.

Speaker 1

We get to 2019, the peak at 5.61 and boom, hit by the pandemic and you slip back. Look at 2023, so 571 compared to 561. So 2023 actually exceeded the first time pre pandemic production levels. So in 2023 for the first time since the beginning of the pandemic, Airbus was able to return to A320 production delivery rates to pre return to pre pandemic rates. That's a key milestone and a very good accomplishment for Airbus.

Speaker 1

Congratulations to them because it's over and above all the supply chain issues just here at all time, or notwithstanding them. April 24 year to date, Airbus delivered 167 airplanes in those 4 months, but they also delivered 51 airplanes in both March April 24. So don't get too don't get confused by the beginning of the year, always slow and kind of ramp up at the end of the year. This does come from Airbus, if you want my opinion. It's just my opinion.

Speaker 1

I can't prove it, just my opinion. My guess is they'll probably get, but probably at 55 this year average for the year. That's just my guess. And Airbus is not saying what they're going to do this year. What they're saying is the end of or 2025, they're saying by the end of 2026, they'll be at a rate of 75.

Speaker 1

Let's go to 21, in Slide 21. Yes, we already covered this. Based upon this huge backlog, Airbus would already be producing A320neo aircraft at the rate of 75 per month if not for supply chain constraints and limitations. Again, what was the story about supply chain problems are behind us? I don't think so.

Speaker 1

What about Boeing? How Boeing struggles and challenges with the MAX impact A320neo family aircraft prospects and also the single aisle market share? I think my opinion is it depends on whether Airbus is willing to try to move that number up from 75 to higher. There's been a lot of reporting about it, they're thinking about it, but they've not made any announcement. So what about the engines though for the A320 aircraft?

Speaker 1

That's an important question for Park. By way of review, H320neo offers 2 approved engine options, namely the CFM LEAP-1A engine, which is the program Park is on and the Pratt and PW1100 gs engine, which is Park is on in that program. So we just covered the 2nd bullet item. The 3rd item, according to the May 24 edition of your engine news, that's our buy monthly edition. CFM LEAP-1A's market share for new engine orders for the 20 Neo family of aircraft is 63.1% as of March 24.

Speaker 1

At delivery sorry, Slide 22, a delivery rate of 75 A320neos per month, 63.1 percent LEAP market share translates into 1136 LEAP engines per year. What's that worth to park? We'll cover that when we get to Slide 32. There are currently 8,132 firm LEAP-1A engine orders. That's a lot of engines.

Speaker 1

Were those firm orders worth the part? I don't know. You might refer to Slide 32, but probably about $250,000,000 I would think. That's not precise because this is Slide 32, assuming the pricing were $25 to $29 so note that pricing doesn't go into effect for 9 months. Also assumes film adhesives on the screening program not on yet we're qualifying.

Speaker 1

But what the other thing is that our pricing after 'twenty nine is clearly going to be higher. That's expected by MRAS and Park. So we haven't taken them into account. And some of these engines will be delivered after '29. And we don't have a contract after 'twenty nine, so I guess you'd say, well, maybe it's nothing after 'twenty nine.

Speaker 1

My opinion is that highly, highly, highly, highly likely that we supply in this program for a long time after 'twenty nine and all the other MRAS programs. One of those are firm orders worth the park, we just talked about that, sorry. There are widely reported serious durability issues with the Pratt PW1100 gs engine. We talked about this before. So will these issues affect market share between the Pratt and LEAP engine?

Speaker 1

Interesting question, we don't know. And maybe the answer is similar to the Boeing question regarding Airbus A320. Generally, can is LEAP willing to produce or CFM rather willing to try to produce more LEAP engines and I know the answer to that question. So meanwhile CFM is already delivering new LEAP-1A engines with its new reverse bleed air system design to further improve durability. So you see that the dichotomy thing here, it's like Pratt's having pretty serious durability issues and CFM is moving forward improving durability.

Speaker 1

Let's go on to Slide 23. We got the H320 XLR variant of the the A320 family. We covered this we covered every quarter and expected to enter service at the end of 24. Boeing is not planning response. Airbus has 550 orders for the airplane, potentially important program for Park.

Speaker 1

Let's focus on the 919 a little bit more though, 919, this is Slide 23, with CFM, LEAP-1C engines. 919, that's the only engine for the 919, it's not like the A320 where there's 2 engines that are approved. COMAC plans to achieve a production rate of 159-1.9 aircraft within 5 years. If you look at our juggernaut slide, we're assuming less than that. Comac has reported to have 15 under orders.

Speaker 1

It's really hard to nail that down, but it's one of the reports I saw. China Southern just ordered another 100 airplanes. Going to Slide 24, Comecak just delivered its 6 unit. Comec is reportedly expanding its 9/19 production lines. This is important stuff.

Speaker 1

Now look at this, recently reported that China CAAC, that's like the China FA, is aiming for 2025 EASA, that's European Certification Agency for the 9/19 aircraft. That's a really, really big deal because the thought was this was going to be China only airplane. It's clear that China and COMAC, that's not what they're thinking about at all. They want to take on Boeing Airbus for single aisle. This could be a big program, important program, important program for Park.

Speaker 1

And like I said, they're expanding production lines. So these things to me mean something. The last item is the ARJ, COMAC ARJ21 Regional Jet. We don't spend a lot of time on that. We'll accept 35 aircraft reported delivered in 2022 and 2023.

Speaker 1

We'll get back to that later. And the rest of the program is going well, a good program for Park. And continuing on Slide 25, 777X aircraft, the GE9X engines, we've covered this for many quarters now, expecting certification in 2025. Some people are skeptical about that, but we'll see. I'm talking about the airplane.

Speaker 1

We expect about $1,700,000 from this program in this calendar year 2024. And we'll see there might be a little bit of a gap after we're done with the current production just as there may be some almost a little bit of waiting for the program to start to really ramp up. This next check item, we've carved that many times. And the next check item, Boeing has 481 open orders for this airplane. Next check item and the 777X orders continue to come in nicely even though Boeing notwithstanding Boeing's ongoing challenges.

Speaker 1

This is also potentially very significant program for Park. So we're hoping for the best for this program. Slide 26. Okay. What do we talk about here?

Speaker 1

This is GE Aviation Jet Engine Program sales history and forecast estimates. When they go through the whole history, Q4 of 'twenty four in the recent quarter, dollars 7,600,000 I think we had estimated $7,500,000 so just about that number. The total for $24,000,000 even though we had a good Q4 is only $21,100,000 dollars That's because we had those burn down quarters in Q2 and Q3. I'm talking about it for fiscal 2024. So, dollars 21,000,000 that's a pretty low number, not a good number compared to last year, the prior year, dollars 23,000,000 to $22,300,000 So we had forecasted $6,300,000 for Q1.

Speaker 1

That's not even a great number. You look at $7,600,000 in Q4, but I guess it's an okay number. But it's really important that we now read this footnote here carefully. The amount is fully that amount is fully booked for Q1. This is the forecast, but Q1 GE Aviation programs will be impacted by an unknown amount of storm damage to the company's facilities reported on May 22 and the company will be released.

Speaker 1

We'll get back to this when we talk about the forecast for Park generally. So let's keep going for now. Slide 27, burn downs, aerospace industry management, inevitable day of reckoning. So we've been through inventory burn downs. You're probably tired of hearing about them.

Speaker 1

We're tired and certainly tired of talking about them. We have discussed at some length a very strange inventory management practices of the aerospace industry. I think at a different term, not strange, but I decided to be a little nicer about it In my one of my early drafts, I mean, you're probably tired of hearing about those things too and we certainly are. And we at the lithromine, These burn downs and strange inventory practices certainly can cause serious and even extreme distortions and disruptions to business planning and expectations. But ultimately, the distortions and disruptions are as a matter of inevitability, temporary and transitory nature.

Speaker 1

Why is that? Because the end program demand have to take over at some point. I mean, it's inevitable. It's just true math. Let's go on to Slide 28.

Speaker 1

Sooner or later, the inevitable day of reckoning, we call, will come. Sooner or later, the demands of the aircraft and programs will take over and drive our business levels and activities. That has to happen. It's inevitable. And here's the thing, from what we're hearing now, I mean, really recently, that day of reckoning is coming rather soon, sooner rather than later.

Speaker 1

We heard just recently in 2025, we're talking calendar years, pretty big jump for the A320 program, pretty big jump. We've been kind of languishing with burn downs and inventory adjustments and we hear, oh, yes, now there's our inventory has been burned down. We don't have any more we don't our inventory I mean, the customers, the inventory they hold of our product is fairly low. They can't really burn it down anymore. But now we hear, oh, they have some finished structures inventory or they do what the customer does.

Speaker 1

So it's a little bit exasperating. But our customers have been told to get ready for a pretty big jump in 2025. And they've also been told that at 2026 the end of 2026 Airbus will be at that 75 airplanes per month range. So I have a feeling that this day of reckoning is not far off. We'll see.

Speaker 1

But the good thing is that although we did not know when the day of reckoning would come, we knew it was coming. It's inevitable as far as we are concerned, cannot be stopped, like the locomotive that can't be stopped, freight train. Good thing that at Park, we did not wait. Good thing that we are already ramping up for the day of reckoning ramping up for the coming juggernaut. Let's go on to Slide 29.

Speaker 1

Okay, here we go. Park Financial history and our estimates. We won't go through the history, at least we already kind of covered it fiscal year 2024 Q4 in total. So we already talked about those numbers. But let's talk about the forecast for Q1.

Speaker 1

This forecast was before the storm. It's really a shame because Q1 was looking at a real nice quarter. Why is that mostly because all those kind of things that affected Q4, none of them were affecting Q1. The production level is planned to be at least at the sales level. And actually, I was thinking we'd be at the top end of the range for both sales and EBITDA in Q1.

Speaker 1

So the timing of this storm was very unfortunate. This Q1 was looking like a nice quarter, but we better go ahead and the Slide 30 and read that big footnote. The 25 Q1 sales estimate is based upon fully booked sales for Q1. The 25 Q1 EBITDA estimate is based upon those fully booked sales. However, the Q1 sales and EBITDA will be impacted by unknown amounts for the storm damage the company's facility reported on May 22, 24, in the company news release.

Speaker 1

Although as reported, unknown amount of fiscal Q1 sales will slip into Q2 as a result of storm damage, The company is not expected to lose any sales or business as a result of storm damage. Let's talk about this a little bit more. So it was a pretty big event for us, but our people done a really fantastic job of getting the factory up and running. All the hot melt lines in both the old and new factory are fully running, the tape lines, the film lines. We're about to restart the solution treaters.

Speaker 1

I'd say pretty incredible job on their part, pretty incredible job. But that we're the number I'll just guess at this point a little bit, but my guess is the top line is going to be in the 13s, not 16s. So major, major impact on the quarter. We typically produce a lot at the end of the quarter, ship a lot at the end of the quarter. And we don't have any inventory, so we only could sell what we produce and we're not able to produce, which one of the factory could produce.

Speaker 1

Last week, P and L looked pretty ugly because we hardly produced anything, but we had full staff. Everybody had full pay last week. We had everybody come and help clean up and stuff like that. But the recovery is going really well, except it's going to be a mess for Q1. Too bad these things happen.

Speaker 1

People did a great job in my opinion. The key thing for me is nobody was hurt. That was a key thing for me. So let's go on to Slide 31. Park Financial Outlook sorry, Financial Outlook for Park Energy Program is an update.

Speaker 1

We don't have to go through this in detail. Obviously, we've gone through this pretty much every quarter. Just one thing, what's the timing for the outlooks? We kind of already covered this. Not sure, but the juggernaut is coming, can't be stopped, we better be ready.

Speaker 1

I think maybe pretty soon, maybe not this year, calendar year, but I would think next year. So meaning calendar 2025, we'll see. So let's go on to Slide 32. This is the juggernaut slide and we won't go into detail because we cover this 3, 4 times already. Couple of points I want to make.

Speaker 1

A320neo, we're assuming 10 80 units and that assumes 75 airplanes per month, but also assumes a 60% market share for the LEAF engine. Remember we said it's about 63.2%, I forgot what the number was exactly. So we're doing is we're bringing out a 60%. And the reason we're doing that is we don't have to change this every quarter, because every quarter the market share is going to change. This way we'll just use 60%, which is a little bit lower number, 60%, but that way you don't have to change the presentation every quarter.

Speaker 1

So I don't know if that was a good decision or not, but that's what we've done. And you can see this highlighted in footnote 4. One other change that was made as we upped ARJ-two thousand one hundred and seventy two, remember I said that they delivered 35 airplanes last year The prior year, that's equivalent obviously to 2 engines sorry, to 70 engines, 2 engines per airplane. All these programs are 2 engine airplanes. And well, we think we need a couple more spares.

Speaker 1

That's probably still pretty conservative in there. They're still trying to ramp up to some extent. 919, remember, Comex said they're going to be at 150 units per year, 4 or 5 years. Well, that's going to 300 inches not 200 inches So generally speaking, we think this is relatively conservative. The GE9X assumption, we're not going to provide how many units we're talking about, but I think it's pretty conservative actually in my opinion.

Speaker 1

So that's that, the juggernaut slide. Let's go on to Slide 33. We'll go through this pretty quickly. We just updated the slide financial outlook based upon the growth estimates of programs, which were sole source qualified. You can read the footnotes to kind of explain the math, but we start with our base case of fiscal 2024 and then we the incremental program sales, I mean, we only had about $21,000,000 in fiscal 2024, so a lot of incremental GE program sales, dollars 15,000,000 We decided to remove the reference to specific programs because we felt uncomfortable.

Speaker 1

We felt we do disclosure for customers and maybe they don't want that. So we just lump in all one number, dollars 15,000,000 incremental sales of $7,000,000 last year, it's for non g programs last year, dollars 35,000,000 approximately. So we're assuming that a 20% increase over course of whatever 3 or 4 years. We think that's a pretty conservative assumption. And the rest is math, except the $4,000,000 I'll bring point out that I think last time we did this maybe $2,500,000 but this is based on $11,000,000 EBITDA, which is such a depressed number based upon the ramp up of our costs as we ramp up our factory and ramp up our cost to prepare for the juggernaut.

Speaker 1

So it gives us an approximate EBITDA estimate outlook $35,000,000 And Slide 34 is all the footnotes, and I won't go through this. It's just math. But really, if you have any questions, let us know. Slide 3536, these slides were in our Q3 presentation. I think exactly like this new major new manufacturing crotch initiative.

Speaker 1

The only new item is the last item of 36 manufacturing project initiatives under active review and discussion with the customer. The point we're making is that this is a pretty active project and the customer is highly motivated. So we think there's a pretty good likelihood this will actually happen. This is a major project for Park, as we outlined in these two slides. Let's go on to Slide 37.

Speaker 1

As I said, we had a nice little event to celebrate our 70th anniversary in the factory, top left, do a little presentation, the history about Park for employees, discussions about how Park is a special company and how we've done some really incredible things over the years. And my point to them is that even if they've only been with us a week or a month, part of the Park family and they share in all those accomplishments, all those incredible things just like anybody else does, top right. After the presentation was I was done with the presentation, a number of employees came up to me and said some very nice things. One guy told me, I remember exactly how he said it, but parks meant so much for him and his family. Thank me for that.

Speaker 1

And I'll tell you, running any business, parked on unusual, a lot of stuff, crap you got to deal with, but those kind of things make it all worthwhile for me. This top right, this young man came up to me and introduced himself and said, my name is Jovaris and he said, I work as a treater operator. I've been here for 1 week. I said, oh, so he said, the newest employee. So I said, all right, Shavarz, then you and I will cut the cake.

Speaker 1

We had a nice cake we had for the event and we cut it together. So and then the bottom picture is obvious. That's just a company photo of our employees, at least the ones that are based in Kansas. Unfortunately, Mark wasn't able to be there, but everybody else who you normally see in Kansas was there. I'm actually in the back row because the tolls people were like Corey organized the photo sessions.

Speaker 1

That the tolls people need to be in the back row. So if you could find me, let me know in the back left. And operator, that concludes our presentation. So if there are any questions, we'd be happy to answer them.

Operator

Thank you. We'll now be conducting a question and answer session. Our first question is from Nick Repostella with Enanta Management. Please proceed with your question.

Speaker 2

Good evening. And Brian, I'm glad that as you said, no one got hurt from the storm. And thank God, it wasn't any worse. I just have kind of a big picture question. Given the programs you're on and the future and the potential new opportunities, I'm just wondering, do you think Park will continue to be a debt free company?

Speaker 2

Or at some point, would you consider borrowing money? And the reason I ask this is if the stock weren't reflecting the potential, possibly you could be more aggressive in repurchasing shares. And I'm not saying today, but if the stock does not reflect the bright future, stays where it is or goes lower, would you consider being more aggressive and then maybe levering up? Thank you.

Speaker 1

Thanks, Nick, for the question. So interesting question. Yes, the stock price, I mean, I follow when we follow it. I mean, it's hard to figure out why it might be going up or down. I agree with your implications that it's certainly a little echo there.

Speaker 1

Hello? Okay. It went away. Operator, there's an echo on the line at this point. I don't know why.

Speaker 1

I'll continue talking, it was very distracting. So the stock price, I don't know why it goes up or down a little bit, but I certainly agree with the implication that doesn't reflect the value of the company. And I guess my way of thinking about that is that ultimately you'll have to. And I think ultimately as the numbers pan out, the numbers we're talking about that the world, the market will recognize the value of the company. Until then, I guess, we'll just do the best we can to explain what we're doing and some people will understand it, maybe some people won't agree, I don't know.

Speaker 1

As far as going to debt, Nick, right now, we don't see a need to do that. We completed our expansion. As you know, we paid for it, and that itself will lead to that very significant uptick in revenues as we call the as we call to juggernaut. This other project we're talking about, so that could lead I think we talked about maybe $6,000,000 to $10,000,000 of capital, but what we didn't talk about is working capital. We talk about capital, we're talking about capital equipment and the plant and that kind of thing.

Speaker 1

But the working capital could be a lot, could be like $15,000,000 or something like that. So that gives you a little additional perspective. Would we go into debt? I'm sure we felt that it was a legitimate reason to do it. And there's some opportunity that was important enough that requires us to go into debt.

Speaker 1

So generally speaking, we've not been a company that's had debt. It's not been our philosophy is to have cash. We've always had cash and we feel good about that. And you certainly feel good about it when you go into these, what do you call, black swan things like a pandemic. But we're not so philosophically opposed to that that we wouldn't consider it if the circumstances we felt were compelling.

Speaker 1

Okay. I'm not sure. Yes. Okay. Thank you.

Operator

Our next question is from Chip Ruwe with Ruwe Investments. Please proceed with your question.

Speaker 3

Hi. Thanks for taking the question. Can you talk a little bit more about the potential storm recovery aspect? You say you have extra staffing. How much of that can really be recovered potentially in your second quarter and third quarter and both from a revenue and a profit point?

Speaker 3

I imagine some of the profits are just burned because you have to hang on to your staff,

Speaker 1

which is understandable.

Speaker 3

And then secondly, on that extra opportunity that you talked about, potential opportunities, is there any timeframe for when you expect that to be a bid or potentially awarded? Thank you.

Speaker 1

Okay. Thanks for the question. We don't expect to lose any business in all the business that we're supposed to be, all the sales, let's put it that way, that we lost in Q1, will be in Q2, it won't go into Q3. The profit story is a little different. Let's say, just hypothetical, let's say we end up at $13,500,000 in Q1 when we're thinking to be over $16,000,000 The bottom line will be a lot different than if we planned $13,500,000 It was kind of even across the quarter, then we're running for towards $16,000,000 And then the last 2 weeks, everything goes down to 0.

Speaker 1

So there's some amount of profit, which will not be recovered even though all sales won't we won't lose any sales. All the sales that were lost in Q1 will be in Q2. I don't know if that answers your question, but and I don't I can't quantify that. I try to quantify the well, maybe I did not if I did not intend to, so let me do that now. We're thinking that sales wise wise that we're probably going to be in the 13s when we were planning on 16.

Speaker 1

So we're thinking of losing over $2,000,000 of sales in Q1. All that will be translated into Q2. The profit stuff is much more difficult for us to estimate at this point. Even though we're at the end of the quarter, it's still a very dynamic situation. As far as that new project is concerned, It's not a matter of award.

Speaker 1

It's not like we're competing for it. I just want you to understand that. But the customers' needs are for that project to be up and running by 2026. So that's kind of a timeframe that you might consider not it's from their end, not from our end. That's not a lot of time actually, because a lot to be done to get there.

Speaker 3

Okay. And just following up on that, if you're not competing for it, is it business that you think you can get or that you hope to be awarded? And if they want deliveries in 'twenty six, like when would you need to start out getting capital, later this year or early next year? And on the storm insurance, was there on the storm, was there any insurance of any kind, either for capital or business interruption?

Speaker 1

Yes, we have insurance. The wind damage insurance, which is it comes under wind damage, across. Don't want to bet against the banks. We said our deductible is pretty high in the theory that if we set them lower, obviously, the premium will be much higher and ultimately insurance companies are going to win because they always win. So there's a pretty high deductible, but we still expect to have some insurance recovery and there is business interruption insurance that's included.

Speaker 1

But we don't have amounts at this point, because it's very difficult for us to quantify the loss, not only in terms of business interruption, but the repair in the facility. The roof itself is intact right now and it's secure, but it still eventually need to be replaced. So on that question about that project, it's a customer that we're very close to and I'm not at liberty to describe which one. They're talking to us exclusively a great length about how this would be done. Their timing is 26.

Speaker 1

That's what from their perspective, that's what they need. I got to be careful, it's a very confidential project. So I don't want to say too much about it, if you still want to give it away. But yes, I mean, it's good question. I would think that next year we would need to start ramping up the capital in order to meet that requirement by maybe the beginning of next year.

Operator

Great. Thank you.

Speaker 1

It still may not sorry, I just want to say, it still may not happen, but I think there's a high likely it'll happen because the customer is very motivated and they're not talking to anybody else about this.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Mr. Brian Schorr.

Speaker 1

Thank you. This is Brianneken, of course. Thank you very much for listening in. Have a good afternoon. And if you have any follow-up questions, please feel free to call us.

Speaker 1

We'd be happy to try to help you with them. Have a good afternoon, and we'll talk to you soon. Thank you.

Operator

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

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Earnings Conference Call
Park Aerospace Q4 2024
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