Park Aerospace Corp Q3 FY2022 Earnings Call

Good morning. My name is Michelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Aerospace Corp Third Quarter Fiscal Year 2022 Earnings Release Conference Call and Investor Presentation. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. At this time, I will turn today's call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, operator. This is Brian. Welcome, everyone. Happy New Year and thank you for joining our Q3 investor conference call. I'm here with our CFO, Matt Farabaugh. We announced our earnings this morning in a news release, which includes instructions on how to access the presentation we're about to discuss. You can also find it on our website, and I recommend having the presentation on hand for this call. As always, we aim to provide useful and engaging information rather than just a dry analysis of numbers. Each quarter, we face the challenge of revisiting the same topics while also wanting to introduce new information. To manage our time effectively, we'll skip over a few sections covered in previous calls and focus on what’s new. Just a heads-up, the presentation may take around 50 minutes, and after that, Matt and I will be happy to answer any of your questions. Let’s start with Slide #2, which contains our forward-looking statement. If you have questions about that, please ask. Slide 3 shows our table of contents, and we'll move on to Slide 4. Now, let's dive into our Q3 results. Our sales were $13.864 million, with a gross profit of $3.863 million and an adjusted EBITDA of $2.670 million. Comparing quarter to quarter, we see that, at least in terms of bottom line, this quarter is lower than Q1 and Q2. Regarding our forecasts for Q3 made during the Q2 call, we estimated sales between $13 million and $13.5 million and adjusted EBITDA between $3 million and $3.4 million. Interestingly, we exceeded our sales forecast but fell short on EBITDA. This discrepancy requires clarification, which we will cover shortly. I’d like to reiterate our philosophy on forecasts: we aim to provide our best assessment of what the future holds, rather than offering a lower estimate that we could easily surpass. We find that approach to be somewhat disingenuous. On Slide 4, we note that $2.4 million of missile program sales originally anticipated for Q4 were realized in Q3. This is a product we now refer to as C2B, a specialized fabric essential for producing components for missile and rocket programs. This sale was facilitated by our relationship with Ariane, a French company, due to the OEMs’ need for a reliable supply of C2B. It is important to note that this transaction has lower margins, but it’s a good lead-in to our higher-margin ablative materials. Since this sale took place earlier than expected, it affected our revenue projections. If we remove that $2.4 million from our Q3 sales, it brings it down to $11.5 million, which is below our initial forecasts. Despite this, the EBITDA remains relatively strong given the circumstances. Furthermore, we currently have over $5 million worth of C2B product in our facility, owned by our customer, which indicates a solid future for ablative material sales. This arrangement provides us with stability, as our aim is to convert this product into higher-margin sales. Moving on to Slide 5, it’s important to address additional factors impacting our Q3 sales and margins beyond the C2B sales. We’re still battling significant supply chain challenges. These issues have worsened since our last update in Q2, contradicting reports suggesting improvements. We are facing difficulties in sourcing raw materials and experiencing delays in shipments, which collectively resulted in a loss of $600,000 in potential sales. Broadly, the aerospace industry also feels the effects of supply chain struggles, indicating that we are not alone in this situation. The situation has led to declines that hinder not only Park but others in the industry alike. Critical costs and efforts related to launching the new plant and equipment trials have also placed strain on our operations. As we navigate these challenges, the delay in defense budget approvals has exacerbated softness in our market. While the recent signing of the Defense Authorization Bill is a positive step, the Defense Appropriations Bill—key for authorizing actual spending—has yet to be passed, leaving many in the defense sector in limbo. On Slide 6, let’s discuss inflation. We are experiencing rising costs across the board, from raw materials to freight. We have been passing some of these costs onto our customers but wonder how long this will continue. It raises the question of how much longer we can expect to transfer increased costs to consumers without facing a limit. These are critical factors for your understanding of our current situation. I want to clarify that we are not making excuses for our quarterly results; our team has worked hard under tough conditions. We have limited influence over our top-line sales, as we cannot dictate production schedules or raw material availability. Let’s proceed to Slide 7, where we revisit our annual projections. Our forecast shows sales between $53.8 million and $54.3 million, and EBITDA estimates between $13 million and $13.5 million. On Slide 8, we summarize our balance sheet and cash dividend history. The figures reflect the impact of the C2B sales, straddling two fiscal periods. We’ve maintained a consistent dividend history since 2005, which is commendable for a company of our size. Slide 9 covers our top five customers, which largely remain consistent with past quarters. Slide 10 presents insights into our revenue sources: military sales constituted 41% of our revenue this quarter, totaling roughly $5.7 million, but the C2B impacts that figure significantly. As we look at program updates on Slide 18, we focus on GE Aviation’s jet engine initiatives, which remain a vital context for understanding our operations. We also examine Slide 19, showcasing the resilience of the A320 production rates maintained by Airbus throughout the pandemic, despite challenges faced by other competitors. Now, let's board the last slides, focusing on our commitment to pushing forward despite the many hurdles we encounter. Our recent partnership with ArianeGroup in France signifies our ambition and dedication to expanding our role in the market. The future looks promising as we continue to pursue major projects and initiatives that expand Park’s capabilities and reach. In conclusion, our focus remains on overcoming challenges and driving forward. We're committed to progress despite uncertainty, and we stand ready to seize opportunities as they arise. Thank you for your attention today, and now I invite any questions you may have.

Our first question comes from Brad Hathaway with Far View. Your line is open.

Hey Brian, thank you for the detailed presentation. Especially appreciate the commentary on what the MRAS programs would look like with the A320 in 2025. That was really incremental and helpful. So thank you for that. One quick question for you and then one longer one. The quick one is, can you give us any kind of thought on the materiality of the Ariane space, I guess, sales relationship that was announced yesterday?

So we can't quantify it. I guess I'll answer it this way. First of all, we already buy a lot of this product. So from our perspective, it's a big deal already. In terms of being a distributor and selling these products to others, we're just really getting started. We'll have to see. And it's really hard to predict. These are very critical components: this fabric, the C2 fabric that's used in a lot of missile programs. So other companies want to get involved with the missile programs; they're going to need this material, and they'd have to get it through us, at least in North America. But I can't really quantify it. It just – I mean, we just, yesterday, I think in the news release, I think we signed this agreement with them just about a month ago. So, maybe not even a month ago, sometime mid-December. So I have to get back on that; we'll have to update you as we go. I wouldn't expect though because of the nature of how aerospace works, especially defense, that next quarter we're going to tell you we've got $5 million of sales of this product. I think it's kind of more of a long-term effort to develop this business.

Got it. Understood. Any future detail you can give on the materiality over the long-term would be great; we appreciate it. So the second question is on capital, and we've discussed it many times. But in this presentation, you talked about, I guess, a project that could use $6 million to $9 million of capital. But you still have, even with a conservative calculation, you have basically close to $100 million of capital on the balance sheet. How do you think about, I guess, your alternatives to use that capital going forward? And what are you seeing in terms of things you're excited about or things you're most excited about compared to where we were six months ago?

So we certainly don't need that amount of money to run our business on a day-to-day basis. I mean, normally, we generate cash. We like to be conservative, so we want to have some working capital available. So that's our opportunity of money, really; and I know it's $6 million to $9 million. For some companies, that would be a lot. For us, it's probably not that much. I mean, it's important money because we had to earn that money; nobody gave it to us. That's kind of our mindset in our money and know that we don't spend it casually. But to your point, it doesn't make a huge dent in the cash position now. And this is probably a little bit of maybe good frustrating discussion for you and some other shareholders because all we can do is say we're working on things, a number of things, but we really can't identify or quantify what those things are, including acquisitions. I know we've been talking about it for a long time, so I wouldn't blame some shareholders for being a little skeptical of that, and we blame it all. Our standard is a little different; we're not looking to just buy something to buy something. We covered that probably a dozen times. But let me just go back to what I said. To us, this is our opportunity money for the future. And whether we do something or another – we've done a lot of dividends in the past; we continue to pay a regular dividend. That's something that, obviously, we always consider. But my hope would be that we still are able to use a good portion of cash to develop opportunities for Park for the future.

No, and to be clear, my preference is always that if you can find a high return use of that capital, whether it's an acquisition or whether it's a joint venture or whether it's an investment in another factory, it could be returns from the new nature because they're going to be incredible. That would be my preference. But just to push a little bit more, you got – as you say, the aerospace industry was dead a year ago and is now recovering. So, I guess, if you couldn't get – if you couldn't find a deal that worked for Park in the last 18 months, at what point do you say, you know what, it's going to be actually even harder trying to go your valuation criteria going forward and say that you're not going to be able to put cash to work?

Good question. So, you're right. We thought that when the market collapsed, that there would be a lot of great opportunities, maybe companies that were good talent companies, but had too much debt and that kind of thing; the valuation is to be really good. But that didn't happen. I'm not the expert in that topic, Brad, but I understand that there's just so much free money, so much Fed money around that people were able to hang on rather than selling at these kind of distressed levels or bargain basement levels; hang on and get through the difficult times, which I think a lot of people did. You're quite correct that the valuation never went down to as much as we would have liked, but they certainly are very high right now. Everything is high; any assets, cars, houses, boats, planes, and businesses. And that's obviously not our friend; that’s not good for us. Maybe with interest rates going up, maybe nobody wants interest rates to go up except us because we're the ones who have the cash; maybe that will help us a little bit. It seems like the tenure is up a little bit again, so that might actually be good news for us. But the more direct answer is that we have to keep adjusting our focus and looking at other ways and other things, which is what we've done and what we're doing because, you're right. I mean, what did Einstein say, keep doing the same thing and expecting a result; that's a definition of being insane. So just to keep adding and saying, oh, we're still doing the same thing; it does not bring logic to it when your point is correct. I mean, we have not had that success. So what we do is we keep adjusting our focus and refocusing and retuning, looking from other perspectives. And we're pretty actively doing that actually right now. The frustration with M&A stuff is, obviously, there's only so much I can say. We can't really give any specifics. I'm sure you understand that that's not something that's possible. So I don't want to say except I'm hoping that you'll see some interesting things in the future on the M&A side. But we're continuing to work at it. But a very good point – not just continuing to beat our head against the wall doing the same thing, adjusting our focus as we go so that we have a better chance of being successful.

Great, excellent. Thank you very much for your efforts and efforts for Park.

Happy New Year, Brad.

I'm not showing any additional questions. I'd like to turn the call back over to Brian Shore for any closing remarks.

This is Brian again, of course. So Happy New Year to all. Thank you very much for listening to our very long presentation. Every time I want to make it shorter, it gets longer. But Matt and I wish you a Happy New Year and all the best. And feel free to call us if you have any follow-up questions. Always happy to talk to you. Thanks and goodbye.

This concludes the program. You may now disconnect. Everyone, have a great day.