Park Aerospace Corp.

Good morning. My name is Justin, and I'll be the conference operator today. At this time, I would like to welcome everyone to Park Aerospace Corp., fourth quarter fiscal year, 21 earnings release conference call and investor presentation. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during the session, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. 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 call.

Thank you very much, Operator. Welcome, everybody, to PARCC's fourth quarter conference call. With me, as usual, of course, Matt Farber, our CFO. We announced, published a earnings release earlier this morning, so if you haven't checked it out, you won't do that. In the earnings release, there are instructions as to how to access the presentation. We're about to go through a presentation you also can find on our website, but you really want to get that presentation in front of you in order to make this call more meaningful. Without the presentation from you, it might be a little confusing. Also, there's supplemental financial information that's attached as Appendix 1 to the presentation. Matt used to read that for us. These presentations are going on for so long that we don't do that anymore, but feel free to access it and ask any questions you like about it. You know, we mention this every now and then, probably almost every call actually, that we're not able to cover everything. These presentations are filling lengthy as is. We need to kind of select what we think would be of interest to you and helpful to you in understanding our company. We do the best we can with that and then, you know, next call maybe we'll cover something else. The call could go on for 45 minutes, so you see we really can't, it's not possible to cover everything. We'll try to keep it to 45 minutes. When I say the call, I mean the presentation, and we'll have as much time as you want for questions and answers. When we're done with the presentation, then we'll turn it back over to you, and you can ask any questions you want, either about the presentation or anything about PARCC generally that's not in the presentation. Okay, so why don't we just go ahead and get started. on when we turn to slide two. This is our forward-looking disclaimer language. Any questions about this, just let us know. Slide three, we'll take a little bit longer on slide three than slide two. Slide three has a lot of stuff going on here, very busy. So why don't we take a look, start by looking at the top line for the quarters of the 21 fiscal year, one, two, three, and four. You can obviously see what's going on. based upon the significant downturn in commercial aerospace. And also we talked about destocking at some point. Come back a little bit in Q4, but I want to remind you right now, right when we start, about something we discussed I think last quarter, maybe in a prior quarter, and that relates to this essential component for rockets, for missile systems. This is our ablative product line. So remember how it works. There's an essential component that's sourced overseas. We have the relationship with the supplier, so the OEMs are concerned about this. These are critical missile programs. They ask us to buy that component and then sell it to them just to have a safe stockpile of that component. It's an essential component. The product couldn't be made without it. So we do that. We buy this component. We sell it back to, I shouldn't say back, we sell the OEM to the customer. They never owned it to begin with. It's their product, and they can do with it what they want, I guess, but the expectation is that we will use that component to produce the blade of materials, the composite blade of materials for these rocket and missile programs. This is significant for a couple reasons. It affects our top line, also our bottom line, We sell it at a small markup, so the margins are quite small. The material content for these sales are quite high. So I just wanted to remind you of that for background. In Q2, sorry, in Q3, we had approximately $2 million of those sales of the component. And in Q4, we had $3.5 million of sales. And we predicted that, I think, when we did our Q3 call, so that shouldn't be a surprise to you. But I just want to remind you of that because it does kind of affect the numbers. So let's go through... 24, the current quarter, fiscal 21-24, $14,441,000 of sales. You can see the numbers moving up, but in that number, $3.5 million of sales of that critical component with very low margins, gross profit, $4,326,000. Gross margin, 30%, which is, we like that. We don't like it when it's below 30%. We're actually surprised about this because with that critical component, that central component. The margins are quite low, so we're surprised that the gross margins actually came in at exactly 30%, actually. That's not a forced number. We don't do that. That's just the math. It came in 30.0%, and the adjusted EBITDA at 3,257,000. So we're a little bit surprised about that. Let me remind you about our forecast philosophy before we go into more discussion about the numbers. So we give you a forecast. We're telling you what we think is going to happen based upon working very hard and everything we need to do to make it happen. But we're telling you what we think is going to happen. We don't give you a low number to beat it. We think that's kind of silly. We know lots of other companies do that, large and small alike. We think it's kind of, I don't know, wasting your time to do that. If we tell you something, We're telling you what we think is going to happen. We could be wrong, but we're telling you what we think is going to happen. So, all right, so with that in mind, let's talk about what did happen in Q4. What did we say about Q4 during our Q3 conference call? We said the sales estimate was 14 to 14.5. Well, we came in within that range, okay, maybe to the higher end, but still within that range, no problem. We also said the adjusted EBITDA estimate was 2.3 to 2.8 million, but we came in at 3.257 million. So quite a bit above the top of the range. That's not what we thought was going to happen. And what happened was that we did not properly capture in our estimate for Q4 the margins on ablative products. Now I'm not talking about the essential component. These are our sales of ablative materials for rockets and missile programs. Very good margins, and we just didn't fully capture those margins. That's on us. This is not something we did to, you know, give you a low number. We could be a hero. We don't, as I say, we just don't do that. Not our way of doing things. Let me see. Anything else to cover on the numbers? No, I don't think so. But there's another big item I kind of deal with on this page. This page is closed down. Special items. Okay. You see at the bottom it says before special items. Well, there was a big special item. and Q4, $1,570,000. And that related to something we used to call a pioneer plant, which is a plant in Singapore we opened in 2008. This is a composite material plant. This is just around the time we were going into aerospace. This plant was going to be our Asian aerospace for composite materials facility, but it was part of our Singapore company, our Singapore entity, our Singapore operation. In electronics, our Singapore facility was our largest facility, so it was part of that. It wasn't a separate entity, and the key thing was it was going to be operated and managed by our Singapore team, which is the electronics group at the time. I wouldn't say it was very successful in terms of marketing. We didn't get very much sales, but nevertheless, For whatever reason, I would not say it was a great success. But then, as you know, we sold our electronics business in its entirety, ACG, in December of 2018, and that included the Singapore operation, of course, the Singapore entity. Now, this Pioneer plant, as I said, wasn't a separate entity. It was part of the Singapore entity. But we separated it and dropped it into another entity owned by Park. Why is that? Because AGC did not want to buy the Pioneer plant. They didn't want it. So we said, okay, fine, we'll keep it. And we have kept it. We had a mothball almost right away, I think almost right away when we did the sale in 2018. because we didn't have, without AGC, we didn't have, or Singapore people, we didn't have the ability to operate this plant anymore, so we mothballed it. We didn't write it off right away because we had some, you know, hopes that we could be able, we might be able to use it at some point. Why is that? Remember we've been talking about working on an Asian JV for a while. I don't think we discussed it every quarter. We've been talking about it for a while. and actually we're still in discussions with an Asian, large Asian aerospace company about doing a JV in Asia and our thought is that well maybe this plant would be used in that JV. These discussions are high level at the executive level of this company. I would say they're serious but also they're still preliminary and COVID has not been our friend because we really need to get together. We've had a lot of phone discussions, correspondence back and forth, questions and answers But to me, in order for this to get to the next level, this discussion, we need to get together. And really, their team needs to come to Kansas, spend a couple days with us. And with COVID travel restrictions, that just has not been possible. They have not been able to do it. So, you know, it really sidetracked this whole thing. We're still in active discussions. I mean, I don't want to tell you that I'm not telling you it's dormant at all. We're still in active discussions. I mean, like probably on a weekly basis, you know, emails or phone calls, that kind of thing. But I feel like until we're able to get together, it's kind of not going to get to the next level. So why did we decide to write it off this time? Because this thing has been going on for a while. and even if we do a JV, it's not clear that we'd use this facility in a JV. So we decided to write down the assets at this time. I think that's the right decision. I think it was the right, you know, prudent and thoughtful decision. Just in case you're interested, not much of an impact of, you know, why is the pre-tax benefit now that we've written off the facilities by $200,000 per year positive and the EBITDA benefit is only about $80,000 because, you know, some of the costs of depreciation. So just wanted you to be aware of that because I think in the news release there's kind of a reference to this write down but I wanted you to know the background. It just kind of wasn't, I mean we didn't have the ability to continue to operate this plant after we sold electronics to AGC because we just didn't have, there was nobody to operate it for us. So maybe the decision was kind of inevitable but we made it and I think it was the right decision and the right timing. Why don't we go on to slide four. Just a little more history here with our 2021 results. You can see the top line, kind of nice growth, 17, 18, 19, 20, and oops, 21. But of course, no news flash here. That's the effects of the commercial aircraft industry downturn, and that's the stocking we talk about sometimes. Okay, why don't we move on to slide five, our top five customers. This is something we do, I think, every presentation actually.

It's kind of almost a fun thing sometimes. We have a little picture for each customer.