Park Aerospace Corp Q1 FY2025 Earnings Call

Hello. Good afternoon. My name is Alicia and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Aerospace First Quarter Fiscal Year 2025 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 the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin.

Thank you, Alicia. This is Brian. Welcome to Park's fiscal 2025 first quarter investor conference call. It's great to have you with us. Joining me are Matt Farabaugh, our CFO, and Mark Esquivel, our President and COO. We released our earnings statement for the first quarter after the market close, and I encourage you to take a look at that. The earnings release includes instructions on how to access the presentation we'll be discussing today, which is also available on our website. Our last investor call, regarding the fourth quarter, was only six weeks ago, so we'll mainly focus on new and updated information today and avoid reiterating too much from that previous call. We will also take any questions you may have at the end of our presentation. Let's move to Slide 2, where we have our forward-looking disclaimer. If you have any inquiries regarding this disclaimer, feel free to ask. Slide 3 contains a table of contents for our first quarter investor presentation, followed by supplementary financial information, which we typically provide but won't elaborate on today. If you have questions about it, please let us know. We are showcasing the James Webb Space Telescope on this slide. As you may know, the James Webb was built using Park's proprietary SigmaStrut technology, which is truly remarkable. Recently, it made a groundbreaking discovery of the most distant, oldest galaxy observed so far, dating back 290 million years after the Big Bang, which is quite early in the universe's development. Notably, this contradicts previous understanding, as galaxies were not expected to exist so soon after the Big Bang. The findings from the James Webb Telescope are significantly reshaping our views on the universe, which is fascinating. Now, let's move on to Slide 4, where we present our quarterly results for fiscal 2023, 2024, and 2025. As indicated in the earnings release, our sales for the first quarter were $13,970,000, with a gross profit exceeding $4 million. Our gross margin stood at 29.3%, and our adjusted EBITDA was $2.6 million. I would like to remind you that in the last quarter, we discussed various factors impacting our long-term earnings related to our business ramp-up and setting up our new facility. I won't go over all those details again, but I want to highlight that the depreciation from our new factory amounts to about $1.3 million per year, accounting for roughly 2.3% of the gross margin. Depreciation does affect gross margin since it falls under cost of goods sold, although it does not impact EBITDA by definition. Moving to Slide 5, let's look at what we discussed about Q1 during our Q4 call, which took place on May 30, just six weeks ago. Our initial sales estimate for Q1 was between $15.75 million and $16.25 million. However, we reported $14 million in sales, which may seem unexpected. Our adjusted EBITDA estimate ranged from $3.25 million to $3.75 million, yet we ended up with an EBITDA of $2.6 million. So, what happened? As a reminder, our Q1 sales estimate provided during the Q4 call was based on fully booked sales for Q1, and the EBITDA estimate was similarly based on that booking. The forward-looking disclaimer language included from our Q4 call might seem a bit odd. We noted that Q1 sales and EBITDA would be affected by known figures related to storm damage to our facilities, which we reported in a news release on May 22, 2024. Additionally, while we initially expected sales to slip from Q1 into Q2 due to storm damage, we did not anticipate losing any sales or business because of it, and we still hold that belief. Now, let's discuss Slide 6 in more detail regarding the storm and the resulting damage. We have more information. On Sunday, May 19, at around 8 PM local time, our facilities in Newton, Kansas, experienced damage from strong straight-line winds reportedly reaching 100 miles per hour. Thankfully, none of our employees were on-site, and there were no injuries, which is a fortunate outcome considering the timing of the storm. Production was significantly disrupted during the last two weeks of the quarter, impacting our sales and leading to the discrepancy between our sales estimate and actual figures for Q1. However, our team did an impressive job recovering from the storm damage. By June 3, 2024, just two weeks later, our facilities were fully operational again thanks to the efforts of our staff. Moving forward to Slide 7, I've received numerous inquiries about the specific damages caused by the storm, so I’ll briefly outline that. The roofs of all three buildings at our campus were damaged and will likely require replacement. Temporary repairs have been made to secure the roofs. Many specialty HVAC units were either damaged or destroyed and are being repaired or replaced. We've implemented temporary temperature and humidity controls, as these units are crucial for maintaining proper conditions in various areas of our facility. There was also damage to our company vehicles. Fortunately, the main structures of the three buildings sustained no significant damage apart from the roofs. No production equipment was damaged either, which is positive news, as all necessary production and lab equipment remains intact. Now, let's move on to Slide 8 to discuss the timeline for completing the repairs. It could take up to six months, though our production lab facilities have been fully operational since June 3. Regarding insurance, our property insurance policy includes a wind damage deductible of approximately $2.5 million. This higher deductible was a deliberate decision to minimize our annual premiums, as we anticipate potential catastrophic losses. We've submitted a claim related to this storm damage, and any recovery will be accounted for at that time. Moving on to Slide 9, we recorded a one-time charge of approximately $1.1 million in our Q1 report, mainly to reflect the write-down of the book value of the damaged buildings and equipment. We also incurred about $80,000 in personnel costs during those recovery weeks, as many of our employees were focused on recovery efforts instead of their normal production roles. Our hourly workers remained fully compensated during that period. New replacement equipment will be accounted for as capitalized once purchased and installed. Now, let's discuss Slide 10. In Q1, we experienced total missed shipments totaling $2.5 million. The primary cause was storm-related missed shipments amounting to $1.8 million. Additionally, supply chain and other issues contributed approximately $300,000 to this total. Although we aim to manage our supply chain better through inventory and longer lead times, one of our major suppliers struggled with customer specifications. International shipments were also impacted by various global events, totaling about $400,000. It's uncertain how much supply chain and international shipping issues could have been alleviated if our focus had not been on storm recovery, but it was a significant concern. The good news is that no employees were harmed during the storm, although the timing did not favor us for Q1. Moving to Slide 11, let’s address our balance sheet and cash dividend history, which we cover every quarter. We have zero long-term debt and reported $74.4 million in cash and marketable securities at the end of Q1. It's important to note that we still owe $9.3 million in remaining tax transition installment payments due by June 2025. We made a payment of $4.2 million in June 2024, which will not appear in the Q1 figures. As for our cash dividend, we have paid uninterrupted cash dividends for 39 consecutive years. Since the beginning of fiscal 2025, Park has disbursed $594 million in cash dividends, totaling $28.975 per share, which is a notable amount for a company of our size. Moving on to Slide 12, here are the top five customers for fiscal year 2025, a regular highlight of ours. Avio is involved with the Vega Launcher, while Kratos relates to the Kratos fire jet and unmanned aircraft. Lifeport supplies materials for Sikorsky interiors, MRAS provides materials for various aircraft, and Nordam works on materials for the Bombardier Global 7500 business jet. Slide 13 shows our commercial performance, which dipped slightly; we attribute this to losing more business in commercial sectors due to the storm compared to non-commercial sectors. Moving to Slide 14, let’s briefly touch on niche military aerospace programs. We have several key projects, including materials for Boeing Osprey and the Harrier II. We're also involved in the SkyKnight multi-target short-range air defense missile, with our first shipment taking place this month. Slide 15 addresses the ongoing supply chain challenges we've discussed previously. Unfortunately, these issues remain persistent, as unexpectedly indicated by aerospace industry leaders, and we observe a similar trend from Safran, which is expanding its capability to meet turbine blade production demands. Supply chain challenges stem from both workforce availability and experience, complicating the issue further. Many experienced workers in aerospace were laid off during the pandemic and have not returned, creating a challenging environment for production. Slide 16 outlines the workforce landscape, indicating that while unemployment isn't severe, many capable individuals have left the workforce permanently. The aerospace industry, having laid off millions of skilled employees, now faces difficulties in retraining new hires, especially those with minimal experience. Slide 17 highlights challenges stemming from gaps in knowledge and experience among new employees, leading to issues in basic testing procedures and quality assurance. Such challenges pose risks for ongoing program ramp-ups, as seen with the recent announcements by Airbus and government reallocations for military resources. Supply chain constraints have interrupted production timelines and will continue to impact our ability to meet demand. Slide 18 shifts the focus to GE Aerospace’s programs, which are pivotal for our business. We have a long-term agreement in place with Middle River Aerostructure Systems, and our pricing will adjust starting January 1, 2025. We’re currently the sole source for composite materials for these programs, emphasizing our value in these relationships. Slide 19 updates us on the GE Aerospace Jet Engine programs, including the A320 aircraft family, which has a hefty backlog of 7,137 aircraft. Airbus is committed to achieving a delivery rate of 75 neo family aircraft per month in 2026. Slide 20 revisits delivery rate history, reiterating Airbus's current challenges with supply chain limitations hindering progress. Slide 21 brings us the latest news: Airbus has now postponed its target delivery rate from 2026 to 2027 due to ongoing supply chain issues, specifically citing engine availability as a significant factor. Slide 22 expresses the urgency for engine production, illustrating that many aircraft may remain incomplete due to lacking engines. Slide 23 reaffirms our position with the CFM LEAP-1A engine related to the A320neo family, where we hold a substantial market share. We see a total of 8,156 firm LEAP-1A engine orders, indicating robust demand for our products. Slide 24 addresses the A321XLR variant, which is expected to enter service by the end of 2024, and highlights the promising potential of the Comac C919 program. Slide 25 provides further news on Boeing's 777X, with the FAA granting the TIA for certification, which is an encouraging development as it faces some challenges. This is critical as it's an important opportunity for Park. Lastly, on Slide 26, we're forecasting our sales for Q2 to fall between $15.9 million and $16.4 million, with EBITDA expectations at $3 million to $3.3 million, although this forecast includes some low-margin sales. Mark and I have worked hard to create these forecasts and have made estimations about future revenue, guided by both the current uncertainties and market realities. These figures help illustrate where we believe Park is headed in the upcoming periods. Thank you for your attention, and if there are any questions, we would be pleased to address them.

All right. Thank you. Now we'll be conducting a question-and-answer session. All right. I'm not seeing any questions. I'd like to turn the floor back over to Brian Shore for closing comments.

Okay. Thank you, operator, and thank all of you for listening to our Q1 investor call and going through the presentation with us. You all have a great day. If you have any follow-up questions, please give us a call. Thank you. Take care.

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