Park Aerospace Corp Q3 FY2025 Earnings Call

Good afternoon. My name is Alicia, and I'll be your conference operator today. I would like to welcome everyone to the Park Aerospace Corp. Third Quarter Fiscal Year '25 Earnings Release Conference Call and Investor Presentation. All lines have been muted to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Now, I would like to turn the call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference.

Thank you, Alicia. This is Brian. Welcome all to Park's third quarter investor conference call. I have with me Mark Esquivel, our President and COO. Right after the close, we published our third quarter earnings press release. You want to get ahold of that because in that news release, there are instructions as to how to access the presentation that we're about to go through; without access to the presentation, the call will be less meaningful. The presentation is on our website and you can link to it via your webcast. And as the operator already said, after we're done going through the presentation, Mark and I would be happy to take questions. Just want to give you a warning, the presentation for Q3 will probably take 45 minutes or so to cover. So, having said that, why don't we just go ahead and get started? I want to go to Slide 2, our forward-looking disclaimer info. If you have any questions about it, please let us know. Slide 3. This is our table of contents. First item is our Q3 investor presentation. We also have supplementary financial information in Appendix 1 at the back. We don't usually go over that during our investor call, but if you have any questions about the supplementary financial info, please let us know. In the photo here, we have 'The Missing Link? Thank you, James Webb Space Telescope.' I'm not sure I understand very well, but I'll do the best I can. This little box on the left shows an enlargement of a little box kind of in the middle of the image here. That's, I guess, apparently a really, really old galaxy, only about 1 billion years after the universe began, which is about 13.8 billion years ago. The problem for all our scientists is that this is way too hot and too bright for a galaxy that old, and nobody understands it. Once again, James Webb is challenging all the wisdom and knowledge that we supposedly had and saying, 'No, sorry, you're wrong.' I mean, we don't care if James Webb is speaking. We don't care what your opinion is or what your beliefs are. These are the facts. So, it's quite exciting. As I think some of you know, our proprietary SigmaStrut is used in the structure of the James Webb and they are important parts of the James Webb Space Telescope structure. This is supposedly the missing link. I know that means between primordial galaxies and modern galaxies. I think you've got to put 'modern' in quotes because modern is not like 10 years old or something like that. But we'll see, interesting, and it's exciting for us to be part of it. I would say this is probably one of the top five things that Park has done since we started; not that we're as old as some of the even modern galaxies, but since 1954. Okay. We're going to get down to earth or come back down to earth and go to Slide 4 and talk about our quarterly results. If you look at the right-hand column here, sorry, sales of $14,408,000, gross margin, 26.6%. If you know us, you know that is kind of a miserable gross margin. We don't like gross margins below 30%. So obviously, we're not very thrilled with that one. Adjusted EBITDA $2,414,000. So, what do we say about our Q3 during our Q2 investor call on October 15, what would be our forecast? Sales estimate $13.5 million to $14.5 million for the quarter. It looks like we came in a little bit above the range for sales, but the adjusted EBITDA $3 million to $3.3 million, we're way below that number. So, something isn't right. Something doesn't make any sense. Let's talk about that. Let’s go on to Slide 5, on top of Slide 5, Q3 considerations. Why is Q3 EBITDA considerably below the forecast range when the Q3 sales exceeded the top of the range? In other words, normally you would say 'Yeah, Q3, the sales were top of the range, EBITDA should be top of the range as well.’ Let's get into that. First check item, fiscal '25 Q3 sales were $14.4 million, which exceeded our forecast range by about $150,000. But, it's a big, big, big but, our Q3 sales value of production, we call it SVP, was only $13.2 million or $1.2 million less than Q3 sales. And we won't talk about SVP unless it's significant, and I want you to understand, SVP is not inventory value. That's the value of the product we have sold. It’s good to think that way because when you try to compare production to sales, then you have apples to apples. So, that's why we use SVP rather than just the inventory value of the inventory produced when we do production. At Park, SVP has a significant positive impact on the bottom line. As a result, this production or SVP shortfall has a significant negative impact on Q3 EBITDA by about $300,000 actually. In terms of EBITDA production, it absorbs a significant amount of costs into their produced inventory. So, what happened? Why the production, SVP shortfall in Q3? There are several things to consider here. First, bringing up the new manufacturing lines in the new factory; we’re going through the anticipated challenging process of optimizing new lines as you operate them and ramp them up in a production environment. It is vastly different than running something in trials or qualifications where you can take your time. Production is a very different world. Going to Slide 6, ultimately, we expect the new lines, this is important, to run 25% to 50% or maybe even more faster than the existing lines. That depends on the product type, film or tape, but conceptually, it is a lot faster. However, we must go through the expected learning curves to achieve those results. But ultimately, that will deliver a lot of oomph to the bottom line, to be able to run our products so much faster. The new lines are designed with better controls, also, which is another factor. Better controls than the existing lines, capable of producing tighter tolerances, meaning better quality products. We actually do not need to run new lines to support current production levels. We're ramping up to prepare for the coming Juggernaut. We have talked about the Juggernaut a lot; that is coming toward the end of the presentation. On Slide 26, when we get to that, you'll see clearly why we don't need to be running the new lines to support production levels. That's not the point. Ramping up a little too early, however, will cost our P&L in the short term. And it's hard to precisely judge when to ramp, making little adjustments. But ramping too late and not being prepared for major programs, the Juggernaut, well, that’s not a pretty picture to contemplate. You get behind and you're kind of stalled. So, you want to err on the side of being early rather than late. You just make the necessary adjustments as you need to. But the bottom line includes the impact on the bottom line; we need to be ready for the coming Juggernaut, that's the most important thing for us. On Slide 7, ramping up the new lines is now part of our plan to get ready, but for the time being, the new lines run less efficiently until we get on the other side of the learning curves and the business ramps up. When business ramps up, we don't even need to use the new lines. So there are obviously a lot of extra costs doing that. The next item, although Park is very fortunate to have a dedicated workforce, many of our production people are relatively new to Park and still at the front end and steep ends of learning curves. This is another factor. As new people are trained to go through the learning process, our productivity, measured as production units or dollars per work hour, is temporarily reduced. This temporary reduction in productivity negatively impacts profitability since it increases our input cost per unit of production. It takes more time to produce a unit, affecting the bottom line. Additionally, this reduced productivity also negatively impacted our Q3 production levels, contributing to the shortfall we discussed, which had a significant impact on our bottom line. How much are we talking about in terms of productivity impact on profitability? We're not saying but it's meaningful. Our current headcount is 134 compared to 124 at the end of Q2. What's going on there? Let's go to Slide 8. Obviously, the increase in headcount, at least temporarily, places additional pressure on profitability, but we will need the extra people for the Juggernaut. Since employee turnover is down, we've ramped up our workforce more quickly than anticipated. That's a two-edged sword. Our people, Sadie, Nancy, others, are doing a fantastic job hiring the right candidates. That's a key point. While we've been able to hire, finding suitable employees is quite unusual for us; about nine out of ten candidates are simply not suitable for Park. It’s also significant; those ten new people probably cost our P&L $150,000 in just that quarter, approximately. That's another part of the equation. This was not something we expected because we have been trying to ramp up for some time and have been struggling with it. It feels frustrating as we make minimal progress and then lose it. That’s complex and tough to navigate. We’ve been hesitant to discuss it, as it’s a sensitive situation. But we feel it's important to be transparent with you because you are investing your hard-earned dollars or your clients' hard-earned dollars. And you have a right to know about these issues. So, let’s discuss a sensitive situation regarding ArianeGroup's RAYCARB C2B NG Fabric. Remember that Park entered into a partnership with ArianeGroup in January '22 under which ArianeGroup appointed Park as its exclusive North American distributor of its proprietary C2B fabric. This fabric is used by Park to produce ablative materials for missiles and rockets. One of Park's key customers, which produces the rockets and missiles with ablative materials, is going through a requalification of the fabric, not our material, of the fabric. We won't discuss why that is; this is sensitive. However, this customer and others continue to buy and stockpile significant amounts of C2B fabric from Park. Our C2B fabric non-material sales are expected to be approximately $6.9 million in fiscal '25 and $2.5 million next year or more. Actually, we expect $3.9 million just in our Q4. These OEMs are committed because it is their risk, meaning this is their inventory; they keep buying and buying and stockpiling this product. Meanwhile, one of the key OEMs is saying, 'We're requalifying the C2B fabric.' Until this requalification is complete, Park is unable to produce the ablative materials using C2B fabric for this customer. So, just to be clear, we’re saying we didn't sell any materials that were produced with the fabric. We are still selling the fabric; these are two very different things. We sell the C2B fabric to our customers for a small markup. Our margins on the fabric sales are low, but the margins when we produce and sell ablative materials made with C2B fabric are significant. In Q3, we expected to produce and sell $400,000 of materials made with C2B fabric. That's a significant amount, and it would have contributed over $300,000 to the bottom line. Until the requalification is complete, we'll have to manage this double whammy, selling the fabric with a small markup instead of a very high margin on ablative materials produced with the fabric. The requal is expected to be completed in March, and while that is stated with quotes, it is not something we can control. However, there is motivation because there’s pent-up demand for producing these rocket motors and missile systems that cannot be produced without our material. If the requal occurs in March, we expect sales to this customer of ablative materials alone to be about $2.5 million or more in '26. The contribution from those sales, as I explained would be significant. There’s pent-up demand, so as soon as the requal is complete, we’ll be ready. Let’s go on to Slide 10. We’ve been holding back discussing this, but we felt it’s important for you to know because you are investing your hard-earned dollars. Let me clarify why we didn’t expect these issues to happen in Q3—why didn’t we consider these in our Q3 EBITDA forecast? We expected to produce and ship $400,000 of ablative materials; that’s not on us. That just didn’t happen due to the requalification. As a result, we take this P&L double whammy. We ended up selling the fabric for $400,000 in Q3, which doesn’t help our bottom line significantly. Additionally, we ramped up our headcount more quickly than expected; that has been a historic challenge for us. We've made better hiring choices, but we didn't foresee the production shortfalls and reduced productivity. That's on us. We should have anticipated those factors when we provided the forecast and just missed the mark. Of course, we did our best; we missed the mark. We did not hit our production or productivity targets. That’s on us. As a result, the Park people will not receive a bonus for Q3. To clarify, this is not about punishing anyone, but Park decided to roll this together. If we're not making our numbers, bonuses are not applicable. However, there is optimism at Park about the coming year and the future, and our Park family members will receive goodwill bonuses for the New Year. This is not for the quarter; these will be issued. There were significant ongoing expenses in Q3 related to operating our new factory, including depreciation. The annual amount is about $1,260,000, which affects gross profit but not EBITDA. The rest includes facilities, maintenance, utilities, insurance, overhead, and people expenses. We considered these when providing our Q3 forecast. Missed shipments in Q3 were slightly better; the production shortfall was significant. In previous quarters, it has been around $500,000 to $600,000, which is an improvement. The usual suspects include international shipment issues, supply chain challenges, and customer hold issues, meaning customers aren’t paying their bills. We have a strong commitment to getting paid for what we do. Slide 12 shows you our usual quarterly information regarding our top customers. Just quickly, on the Comac 909, that is now the name of the ARJ21 retail jet. The Gulfstream G280, that's Aerospheres, a distributor for Israeli aerospace vehicles, making the G280 business jet under a contract with Gulfstream. The Patriot Missile and Kratos are also on this list, among others. Let’s keep going. On Slide 13, our pie charts show that '22, '23, '24, and '25 were similar in terms of breakdown, with '21 being different due to the pandemic. Slide 14 focuses on the current missile program. We have many missile programs, but we'll highlight a few. Slide 15 covers GE Aerospace jet engine programs, which is ongoing. Look at Slide 18 where Airbus has had an impressive finish, achieving 602 deliveries in '24, with a target of 75 airplanes per month by 2027. Will Airbus achieve this on time? Yes, I think so. The CEO has stated they are targeting that in '27. On Slide 19 I talk about CFM's market share. We supply into the CFM LEAP-1A portion of the A320 program. On Slide 20, I discuss the 777X, where the FAA grounded the 777X due to some engine attachment defects. Boeing's first delivery target for the 777X is now '26, with over 500 orders. Park is in a solid position regarding these programs and we are encouraged. We can move through the next couple of slides quickly since they cover more updates on jet engine programs, historical sales projections, and our revenue outlook for Q4. Overall, Q4 is expected to yield $15.5 million to $16.3 million in sales, with Q4 EBITDA projected at $3.3 million to $3.9 million. We are committed to ramping up production and growing our bottom line. We’ve encountered setbacks in Q3, particularly surrounding the C2B fabric production. We are focused on future revenue opportunities and maintaining the right level of production to support growth, while we adjust our forecasts according to the current realities of demand and supply situations.

Thank you. We'll now start the question-and-answer session. Our first question comes from Nick Ripostella with NR Management. Please go ahead with your question.

Good afternoon, Brian, and I just want to say thanks again for the transparency on the issues in the quarter. It's appreciated. And as always, I'm very happy with the way you treat share repurchase, and the language about buying it when it gets stupid is right on the mark. I think the shareholder base is sufficiently patient now and understands what the upside is. So, we may not get to those prices anytime soon. But just a quick question, and I may have asked you this before. There were slides in past conference calls where there was Park content on SpaceX product, and obviously, there's Blue Origin. Is that something that Park can still have content in? I'm just interested in that. And the second question is, I may have asked this before as well, do you think, in any way, Comac product and what you supply could be affected by hostilities between U.S. and China, et cetera? Or are they pretty much, they need your stuff? And so, that's it. Thank you so much.

Thank you, Nick. Happy New Year, by the way. In the slide, it discusses our affinity for niche military programs. I believe we referenced a SpaceX program, which I truly admire. Was Blue Origin the other one you were inquiring about? Apologies for any confusion.

Yeah. We've done some work with them, Brian. We do a little bit of structure for them in our parts operation. It's really niche. It's a lot of volume. We've built some minor structure for them. And we did a project many years ago. We're looking at strut technology with composites, but they went ahead and went with a metal strut instead.

Okay. Thanks. To me, I love SpaceX; I just love that company. They're very different than typical aerospace companies. I would also categorize Kratos in that positive way. The more we can do with those companies, particularly SpaceX, the happier I will be. Comac is an obvious question and a good one. We'll have to see what happens. I would be quite shocked if anything can happen quickly because the 919 is a real prestige program for the Chinese. I'm not an expert in their culture, but it's really important to them. For them to change gears with materials for the 919 program would be risky, which could put the program back years. I don't know, but I would be skeptical about anything happening soon. However, CFM needs to be cautious to provide enough engines to the Chinese because if they don’t, it'll just motivate the Chinese to develop their own engine more quickly. That’s just my opinion; I could be wrong, but it’s my perspective. We always have concerns, but I wouldn't classify losing the Comac business due to trade tensions as one of my top 10 worries right now.

No. Okay, thank you so much.

Thank you, Nick.

All right. I'm seeing no other questions. I'd like to turn the floor back over to Brian for any closing remarks.

Thank you very much, operator. And thank you all for listening and having the patience to hang in there for a whole hour. I would like to take this opportunity from everybody at Park, all of our Park people to wish you the very best in 2025, a very Happy New Year to you and your families. Thank you and goodbye.

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