Good morning. My name is Doug, and I will be your conference operator today. I would like to welcome everyone to the Park Aerospace Corp. Third Quarter Fiscal Year '23 Earnings Release Conference Call and Investor Presentation. I will now 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 everybody to our third quarter conference call. Happy New Year. With me, as usual, is Matt Farabaugh, our CFO. We announced our earnings this morning. In the earnings announcement, there are also instructions on how to access the presentation, either through our webcast or through our website; you want to have that up in front of you to make the call more meaningful, of course. Just one note, I don't want you to get too concerned about the length of the presentation. It's about 55 slides. We incorporated several slides from the prior presentations, Q2 and even Q1 for context and perspective. So the third quarter presentation stands on its own. You need to go back and check the second quarter or first quarter presentation to get the full picture. But those items we carried over are pretty much intact, and we will probably skim over them. So it’s a lot of slides, but I think we'll be able to move through it relatively quickly. When I say that, it’s probably about 45 minutes, but we’re not going to go through every slide in detail. Of course, when we're done going through the presentation, Matt and I will be happy to answer your questions. So why don’t we get started? Let's move on to Slide 2, our forward-looking disclaimer language. If you have any questions about that language, please let us know. Slide 3 is our table of contents for the presentation that we're about to go through, along with the supplementary financial information, which is Appendix 1. We won't be discussing that during the presentation, but if you have questions about it, please let us know. Let’s move on to Slide 4. We will slow down a little bit here for Slide 4. This is the earnings results on a high level. If you look at the right-hand column, these are quarterly results, with Q3 sales of $13.867 million. Gross profit, easy number to remember, is $4.444 million. Gross margin is 32%, which we like to be higher. But as we always said, we get quite unhappy when it goes below 30%. In fact, during Q2, it did go below 30%, and we’ve had a couple of quarters where it’s fallen below that. Now if you look back to fiscal year '21, that was the beginning of the pandemic, so we know that several quarters have experienced lower margins. Adjusted EBITDA is $3.321 million, with an EBITDA percentage of 29.3%. What did we say about Q3 during our Q2 investor call? We said our sales estimate was $13.25 million to $13.75 million. So we came in just a little bit above the top of that range. The adjusted EBITDA estimate was $3 million to $3.5 million. As I said, the adjusted EBITDA is $3.321 million, so that is right in the middle of the range for EBITDA. I’d like to remind you briefly about our forecasting philosophy. We tend to remind you almost every quarter: when we give you a forecast, we’re saying this is what we think will happen. We don’t play what we consider to be a game of giving you a low number that we can beat and be heroes. That is not how we operate. Our employees have the same targets, so these are genuine objectives for us, and they are not easy objectives. We’re telling you what we think will happen, assuming that we do our usual hard work to make the numbers. I want to reiterate that. When we make our numbers, we’re not just presenting a low figure from our forecast in the prior quarter that we can exceed. That’s not how we function. I believe doing so is just a waste of your time and ours to play that game. When we’ve had others do that, I know most companies do, we believe they aren’t being honest. They make it sound like they expect one thing, although they don’t really believe it. That isn’t what we do. We’re not judging others; we’re just reminding you of our philosophy. Let’s go on to Slide 5. An outstanding job by Park’s employees to exceed our Q3 sales estimate just slightly and to meet our Q3 EBITDA estimate, particularly amid significant challenges with supply chain disruptions, freight delays, and staffing shortages. It was not easy to achieve those numbers. In total, we missed shipments in Q3 by approximately $650,000. We’re still grappling with those issues, and the three checked items are the reason for the missed shipments in Q3, which we hope will carry over into Q4. Let's discuss the factors that affected our margins in Q3. We’re going to talk about several factors, so far, we’ve concentrated on top-line impacts regarding the $650,000 we missed. Now let’s turn our attention to the bottom line—moving on to Slide 6. There’s significant inflation. It hasn’t eased or abated yet, at least not for us. Costs for raw materials, shipping supplies, utilities, labor—you name it—are all rising. Some of these increased costs were passed on to our customers in Q3 in the form of price hikes, but not all. Why is that? The first reason is a lag effect. We honor our commitments on our POs. Some companies, surprisingly, do not. Our suppliers have sometimes notified us after confirming prices that their costs are increasing, even though a PO has been issued. But we still fulfill our obligations. It’s straightforward; we make a commitment, and we stand by it. We face the lag effect, waiting until the next opportunity to quote a customer to incorporate these increased costs. Additionally, it’s not just our suppliers—other costs are rising more slowly. While some analysts talk about moderation in inflation, we haven't observed it. We anticipate some inflation in our quotes, but it sometimes surprises us, leading us to fall behind. This lag effect impacts our quoting and pricing strategy. And the other issue lies in long-term pricing agreements with customers like MRAS, which we often reference in these presentations. We have long-term, fixed pricing that may involve set adjustments but isn't always influenced by inflation factors. Simply put, inflation remains a burden for us. It’s substantial and ongoing rather than a minor issue. Our team has been doing an exceptional job finding solutions to overcome these challenges, and it is a persistent burden—we’re uncertain when this situation will cease. As I mentioned, while others report inflation to be moderating, we aren’t experiencing that in our sector. Moving on to Slide 7, let’s continue the discussion about margins. We noticed a somewhat lower margin product mix in Q3 than expected. This leads to the question: why didn’t we fully anticipate this in our planning during the Q2 announcement? Planning amid supply chain chaos is challenging. While we have a great plan, we often have to set it aside when unexpected disruptions occur. Even if we start with a solid plan, circumstances frequently change drastically, impacting our ability to adhere to those plans. The Herculean effort required under these conditions is necessary for achieving our quarterly goals because if we followed the plan rigidly, we’d miss our targets. We often joke that every fighter has a plan until they get hit. We have a plan, but once it’s placed aside, our environment changes significantly. It's atypical; yes, circumstances change, but our disruptions have been on a massive scale. We’re finding it difficult to anticipate exactly what we'll sell in any quarter, which is why predicting product mix remains challenging. What we plan may not align with what we physically sell during the quarter—frequently, it has exceeded our forecasts. Supply chain disruptions continue to introduce profound inefficiencies in our manufacturing operations. Individuals running manufacturing operations prefer predictability to build against forecasts. Scrambling leads to inefficiencies, which must be managed. Despite these obstacles, I believe our remarkable Park team rose to the occasion, and they deserve recognition for their contributions. Each Park employee received a quarterly bonus of $200—not $200,000, but $200—to acknowledge their outstanding work under challenging circumstances. Moving on to Slide 8, while we won’t dwell on this slide much, we've included it for historical context. If anyone has questions regarding historical annual results, please ask. Let’s shift to Slide 9, which discusses Park's balance sheet, cash, dividend history, and recent share buyback authorization. We’ll move through this material quickly. A key investor suggested this content, and we see merit in covering it consistently each quarter. Some of the information may not appear particularly newsworthy as it reiterates points already discussed. Our reported cash stood at $103.3 million in Q3. What’s our investment philosophy? We invest in highly secure liquid securities like treasuries, governments, and high-grade commercial paper. We do not take credit risk but do face interest rate risk. Given that our average maturity is 21 months, a spike in interest rates means the value of these investments could temporarily decline. Our practice is to hold these investments to maturity, but the reported value of them is mark-to-market, not investment value but market value, which places our cash at $103.3 million. This is pertinent so you can understand the implications of our cash position affected by interest rate fluctuations—we don’t take credit risk but do take on interest rate risks. Moving on to Slide 10, if there are further inquiries about this, feel free to reach out to Matt later for clarification as it's detailed info. Now looking at Slide 10, we note about $13 million in expenditures, particularly related to installment tax payments. We'd like to share this information with you to shed light on our cash position. This is a liability on our books. Cash dividends are another salient topic; we consistently cover this. In total, Park has distributed $558 million in cash dividends since 2005. That’s quite an impressive figure for a small company like Park. On to Slide 11, regarding share repurchase authorization, a notable topic recently. We announced in May 2022 the Board authorized purchases of 1.5 million shares of our common stock. Did we buy back any shares in Q3? No, we didn’t buy anything, but that was not for lack of trying. There were moments, as you might recall, when our stock traded down to around $10.11. During that period, we felt the market might be presenting an offer we couldn't refuse. Our philosophy remains: we think it's your job to consider stock purchases, whereas our role is to focus on enhancing the fundamental value of the company. We're not market traders, and we don't get overly excited about purchasing tiny numbers of shares daily. When the stock dipped, we felt we might be presented with an attractive opportunity at that price. We sought larger blocks and were informed institutions were predominantly buyers, not sellers, which is why we didn't find any options. Ultimately, when the stock price rose into the $11-$14 range, we backed off to avoid being pitted against actual external buyers. I want to clarify: If the price drops to $10.50, we won’t necessarily be back in the market; that’s something for us to determine privately moving forward. Now on Slide 12, our focus is still on military aerospace programs like the MK125 warhead with the SM2 missile. That’s an exciting program for us. We’re also pleased to be part of the Kratos Valkyrie program, which is gaining traction. That recent deal with the Navy for additional Valkyrie aircraft is exciting for us. Unfortunately, we can't disclose much about Lockheed Martin's secret program, but they were among the top 5 in Q3. Middle River and MRAS have been doing notable work with the COMAC 919 and LEAP-1C engines, while Nordam is involved in the Bombardier Global 8000 with the Passport 20 engines. We’re focused on Nordam this time for the Bombardier program. Moving to Slide 13, I’ll highlight, comparing fiscal '22 and '23 for the first nine months, there's barely any change, particularly within the commercial sector. It appears that the segmentation is stabilizing at these levels for now. In fiscal '21, during the pandemic, commercial aviation was significantly impacted. Moving to Slide 14, we consistently emphasize our commitment to niche military aerospace programs. Thank you, Donna and Elena, for your contributions to this slide. We focus on specialized markets, such as the ASTER 30 missile, Predator Radome materials, Growler Radome structures, and Poseidon structures. We prefer niche opportunities over commoditized markets in both commercial and military sectors. Let’s move on to Slide 15. Not every slide contains optimistic news, and that’s not our role. We seek to convey our perspective honestly. Not surprisingly, there’s much emphasis on expanding military budgets worldwide, including increased spending in the U.S. and abroad. This also extends to missile defense systems like the PAC-3 Patriot missile, which represents a key area of focus for defense funding. Slide 16 reiterates the emphasis on missile defense systems. Our coverage for the PAC-3 missile defense system relies on specially ablative composite materials. Park is the sole-source supplier for that program, which is attractive. Countries including Japan, South Korea, Taiwan, Germany, Switzerland, Poland, Netherlands, and Romania are acquiring or upgrading PAC-3 missile systems. Notably, during President Zelensky's visit to Washington, the U.S. committed to providing PAC-3 missile systems to Ukraine, which is a significant development as they have been requesting it for some time now. Slide 17 highlights our expectations, projecting Park's fiscal '23 sales of ablative materials and RAYCARB C2B products at around $7.5 million. Serious supply chain and inventory management challenges persist, which could potentially hinder the pace of global military build-ups. Moving along, Slide 19 captures the commercial aviation industry’s ongoing recovery. Let’s proceed directly to Slide 20 regarding watch items that we discussed previously. The commercial aircraft industry faces the same challenges as everyone highlighted at the slide's top. Observations show that international travel is rebounding more rapidly than anticipated, which is beneficial for wide-body aircraft. At the top of Slide 22, we note this includes the Boeing 777X, which we will discuss further in this presentation. A silver lining exists: as jet fuel prices rise, airlines may feel compelled to phase out older aircraft earlier than planned. This trend could foster opportunities for suppliers of newer, fuel-efficient models. Moving on to Slide 23, GE Aviation's jet engine programs are a topic we revisit consistently with minor modifications. Our firm pricing LTA originated in '19 and extends to '29 with the Middle River Aerostructure Systems (MRAS), a subsidiary of ST Engineering Aerospace. We’re reflecting on a variety of GE Aviation programs on this slide. At the bottom right corner, we touch upon the 777X, produced using our AFP composite materials. I hold special appreciation for a photo of the 747-8 engine nacelles, as the background offers a scale perspective. Let’s keep going; on Slide 24, we’ll focus on significant updates concerning GE Aviation programs. To expedite, we need to highlight the A320neo family among the informed audience. Airbus' ambitious efforts to increase rates have encountered hurdles but they are making strides. We've discussed previously the tension between Airbus and its supply chain, which has impeded their return to pre-pandemic levels. Moving to Slide 25, notable updates from Airbus include their intention to produce A320neo family aircraft at a rate of 65 per month by early 2024, a goal that has been revised since mid-2023. They now acknowledge more challenges than previously expected. Furthermore, the complete capacity of 75 aircraft per month is still in the agenda for the middle of the decade in 2025. However, they have not outlined a definitive timeline for reaching the 65-production mark. It's worth noting that the engine manufacturers are catching up, but significant supply chain constraints outside the engine sector remain challenges. Many companies reduced their workforce during the pandemic, and now there’s a robust push to ramp back up despite challenges of matching resource availability with demand. As of June 17, 2022, we committed to supporting Airbus during any ramp-up period. Recent trends indicate CFM holds a significant market share regarding A320neo, with substantial firm orders ensuring their prominence. On Slide 37, we estimate potential revenue per LEAP-1A unit based on past data. Airbus intends to take more orders, suggesting potential volatility in these revenue numbers depending on market conditions. Moving to Slide 28, we’ve discussed the promising A321XLR program connected to LEAP-1A engines. The first test flight occurred recently, marking its potential as a transformative program in the aviation sector. Importantly, Boeing has stated they won’t develop a new commercial aircraft during this decade, creating more opportunity for Airbus. Finally, on Slide 31, regarding the Bombardier Global 7500 and 8000. We note their impressive metrics and performance enhancements—indicative of the increasing competition in the business jet sector. Slide 32 discusses the GE9X engine, indicative of the ongoing advantages Park holds within these programs. We are also witnessing progress toward certification, expected by 2025, which could mark an exciting advance for Boeing. Unfortunately, few commercial aircraft share the range and passenger capacity metrics of the 777X. Moving on to Slide 35, we track GE Aviation program sales history and forecast estimates. It is noteworthy that while we encounter setbacks in quarters due to deviations from our program expectations, they are somewhat cyclical and higher-level trends remain consistent. Looking ahead, we do see revenue remaining strong, as noted in our forecasts—cautiously optimistic, but tempered by external market conditions and internal production velocity. Our backlog is robust, showing promise even if our projections have differed. Lastly, as we draw this extensive presentation to a close, we’d like to retain communication through all channels. We value open dialogue and insight throughout this process, and I appreciate your patience today.

Thank you. Our first question comes from Nick Rispatella with NR Management. Please proceed with your question.

Hi. Thank you. First of all, Happy New Year, and thank you for your comprehensive presentation. I listen to many conference calls and Park has the most comprehensive presentation. That’s wonderful. It’s the first time in all my years I’ve seen Vito Corleone mentioned. So my question is: regarding the China program, Comac, how can you quantify the significant upside potential a couple of years down the road? Do you see any risk politically for Park as a supplier in this program? Lastly, how do you characterize Park’s competitive position in the marketplace?

Thank you, Nick, and Happy New Year to you. I appreciate your input. As for the 919 program, the upside potential is presently almost zero. The question is how many 919s Comac produces. The good news is that Comac has a captive market in China, and the Chinese government will dictate, to some extent, what airlines buy. We’ve seen some figures from Comac but are hesitant to share those as we are unsure of their reliability in terms of forecasts and ramp-up rates. Starting from a zero base, let’s imagine they hit 100 airplanes per year. In comparison, 75 airplanes per month is what the A320neo program aspires to—substantial revenue for Park. We’ve provided you revenue estimates so you can do your math on this. Importantly, the LEAP-1C engine used in the 919 relies solely on CFM engines, which is beneficial as it eliminates competition from Pratt. Regarding risks, while any program can pose risks, the 919 is a high-profile, strong program for the Chinese government, which does not want hiccups. They want a smooth introduction since the world is watching. They likely want to avoid unnecessary variables. There’s been talk about establishing a Chinese engine alternative to the LEAP-1C by 2025. Personally, I doubt they’ll achieve that timeline. Ultimately China desires maximum technology and component involvement, so we’ll need to see how that unfolds. If risk exists, it may be more of a long-term consideration than an immediate concern through this decade. Yes, tensions are real, but GE also has significant operations in China, and there is an interdependent aspect to maintain their programs. In conclusion, the competitive landscape encompasses many factors; I suggest asking our customers for their perspectives. Our unique culture sharply prioritizes flexibility, responsiveness, and urgency, which distinguishes us within the aerospace industry where long lead times are common. That culture drives our operations and sets us apart significantly.

Okay, thank you. That’s helpful.

Thank you, Nick.

Our next question comes from the line of Brandon Dietz with Huffman Prairie. Please proceed with your question.

Hey, Brian, Happy New Year. Thanks for taking the question. I have a couple of inquiries. To start, regarding the AFP initiative, what do you mean by multi-front in the JV project?

By multi-front, I mean there are two different initiatives related to the joint venture discussions that I can’t elaborate on at this time. Both are significant initiatives raised by this company that are ongoing discussions. If we only proceed with one, it still holds substantial potential.

Okay, understood. My next question is about the RAYCARB C2B sales— I recall you previously expected minimal amounts in Q2 and Q3. Given your updated guidance, is the majority now expected in Q4, and could you quantify those amounts for modeling purposes?

Yes, we expect approximately half of that $7.5 million total in Q4. Your observation is correct.

Nice to see the increase in headcount, especially given past struggles. Has Park altered its hiring strategy, or was it merely a favorable labor market?

We haven't changed our strategy. We've adhered to our principles. However, a local company that was hiring aggressively closed unexpectedly. This created a pool of labor for us, which we took advantage of as we prefer local hires.

So you haven’t altered your approach, just been opportunistic in your hiring strategy. What would be an optimal headcount for Park to reach?

It's a good question and we’re discussing that. It depends on how we structure shifts, but an additional half-dozen employees would bring us to a recommended level of approximately 120. We aim to reach that target.

Regarding the ADL program, I know there are limitations, but the $2 million forecast is encouraging. Are you already producing this, or is it tentative?

Some of that is booked already—approximately 40%. We have orders ready to ship in our fourth quarter, which is promising.

That sounds promising; thanks for your time and Happy New Year.

Happy New Year to you as well. Thank you for your questions and interest.

Our next question comes from the line of Daniel Baldini with Oberon. Please proceed with your question.

Hi, good morning. Thanks for taking my question. I'm trying to gauge the impact of the pandemic on demand and whether it has been deferred or destroyed. Looking back three years, your forecasts suggested sales growing to $94 million to $100 million by fiscal year '24. If I calculate your numbers now, it appears the commercial and military sectors have rebounded. Are you suggesting we could see $94 million to $100 million in revenue by fiscal year '27?

Thank you, Daniel. That’s a good question. We refrain from providing new long-term forecasts due to substantial short-term uncertainty. I can confirm that many programs were deferred rather than completely destroyed. We are not quite back to pre-pandemic sales; fiscal year 2020 sales at $60 million were prior benchmarks. The A320 program provides a relevant gauge—it’s not back where it was, and while some projections suggest a recovery over a couple of years, specific circumstances still cloud our outlook. Moreover, our pathway to recent capabilities indicates we’re reliant on several aspects, including operational alignment and overall market conditions.

Ok, understood. With respect to LEAP forecasts, did you expect the market to be worth more than $32.5 million considering your prior estimations?

I don't recall our exact expectations concerning that long-term forecast. Any projection involving 75 plus units would be unexpected given how competitive the landscape has been. Airbus aims for a more substantial market presence in the single-aisle sector, intensifying as they see opportunity post-pandemic.

Lastly, how do you view the business jet segment's recovery?

The Global 7500/8000 is the primary program in our business jet business. It remains promising, and larger craft are positioned for resilience during potential recessions. Sales will vary based on the aircraft's price range, with larger jets like the Global requiring customer bases that may be less affected by economic downturns.

Great, thank you for your time.

Thank you for your questions and interest.

There are no further questions in the queue. I'd like to hand the call back to Mr. Shore for closing remarks.

Thank you, operator, and thank you all for listening. We appreciate your attendance today. Have a happy New Year, and all the best to you and your families in 2023. Feel free to reach out anytime if you have follow-up questions, and thank you again for your attention.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.