Park Aerospace Corp.

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 first quarter fiscal year 22 earnings release conference call and investor presentation. Our 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 pound. 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, everybody. Welcome all to our Q1 Investor Conference Call. I have with me, of course, as usual, Matt Farbrower, CFO. So, Park, we announced our earnings early this morning. You want to go check that earnings release because in that earnings release, their instructions as to how to access the presentation that we're going to go through now. In order to make this call more meaningful, you really want to have the presentation in front of you. The presentation is also available on our website if you want to do it that way. So what's interesting about this call is that it was actually less than two months ago than it was before, so there's not a lot of new stuff. There are some new things. We'll give you some updates. and we'll try to make it interesting by not having everything the same. Some of the slides are actually almost identical to the Q4 slides, but we felt we kind of had to include them for perspective. Some of you may be totally on top and remember every line of our Q4 presentation, but I suspect most of us aren't on top of it, so some of the slides will at least quickly go through just for the perspective. And, you know, like I said, maybe we'll skim through those, but they're there for perspective. The presentation, you know, could take about 45 minutes for Matt and I to go through, so I just want to warn you, partly because we're including a number of slides from Q4 just for that perspective and context. Then, of course, after Matt and I go through the presentation, we'll answer questions for you. Okay, so why don't we get moving. Slide two is our forward-looking disclaimer. If you have any questions about it, just let us know. Slide three, we assess a new year table of contents. So the first thing, slide one, is the presentation. Appendix one is supplemental financial information, which is something we've included in our presentations for several quarters now. Appendix two and appendix three are new, environmental and community considerations, diversity in the workforce. These statements, PARCC statements, are actually posted on our website. I think maybe early June we put them up there. because we suspect that a lot of people aren't aware of, you know, every last thing when it goes on our website, you know, and probably don't check it every day. We just wanted to attach these two statements as appendices to this presentation just so, you know, we bring it to your attention so you're aware of it. We don't, you're aware of them. We don't intend to go over them during this call, but we wanted to, you know, put it out there so you can see them. And like, you know, anything else, if you have any questions or comments, please let us know. Okay, let's go to slide four. This is gonna take a little bit more time to go through. So why don't we start with Q1. The numbers, sales, 13,594,000. And let's just compare that to Q4 for a second, because this is an important perspective. Q4 was 14,441,000. But remember, we covered this. Q4 included $3.5 million of that, That essential component, we keep talking about that for missile programs. So basically that's a pastoral. We have the relationship with the supplier overseas. We buy this product and we sell it to some of the customers and we charge a markup, but there's no production involved and very low margins involved. So really if you want to get apples to apples, you might want to subtract about $3.5 million from the $14.4 million, so that's approximately $11 million compared to the, for Q4, compared to the $13,594,000. Depends on how you want to look at it, but I'm just offering that for perspective. Gross profit, $5 million for Q1, $5,472,000. And gross margin, 40.3%, which to us is something, I don't remember seeing that maybe ever, over 40% gross margin. That's quite good. You know, we normally don't like it when our margins, gross margins go below 30, so above 40 is... It's quite good. The adjusted EBITDA, 4.1 million. I don't, 4,104,000. I don't remember how long ago it was that we had EBITDA above 4 million and a quarter. It's been a while anyway. You can look at the, you know, historical quarters. You don't see anything getting close to it. And 30%, 30.2% adjusted EBITDA margin, also quite good. And look at the history. You're not going to see anything like that. So let's see. What did we say about Q1 during our... May 13, 2021 Q4 investor call. You know, when we say about it, we said our sales estimate was 13.3 to 13.8. So our sales came in right in the range, which is good. That's what we want. And I'll explain that, I mean, by what we want in a second. Adjusted EBITDA estimate was 3.6 to 4.1 million. So we came into the top in the range, but let's say we're still within a range of, by, well, yeah, we're just at the top of the range. Now, remember a forecast philosophy, I remind you of this just about every quarter, is we don't play this what we consider to be a game where we give you numbers that we know we can beat so we can be heroes. We think that's kind of silly, it's insulting to you, and plus it violates one of our principles, which is we always tell the truth. And as we know, we could be wrong, we could make mistakes, but if we believe something, we're going to tell you. We're not going to tell you We believe X, we're going to tell you X minus, you know, 3% or something like that so we can be heroes. We know a lot of companies do that, and probably almost all of them do it, but that's not for us. So we just want you to understand that. So we give you an estimate, a prediction. This is what we think is going to happen. We could be wrong, but that's what we think is going to happen. We're not shading it to look like heroes. Certain factors which affected 2.4 and 2.1, sales and margins in 2.4, sorry, Lord mentioned that there was a $3.5 million in sales of the essential component for missile programs, very low margin, just a markup. And Q1, actually, was the other side of the coin, the other side of the equation, about approximately $1 million of sales of materials for those missile programs. Those are very high margins, so you see the flip there. Eventually, all those essential components will be used and produced and pre-preg and sold at Q1. at good margins, which that's the expectation. Q1, other factors, favorable product mix in some respects, and also cost factors, which were favorable for Q1. But that's only part of the story. First of all, there were no real unusual items or nothing special or unusual that pushed up the bottom line for Q1. Like we said, good mix. We had those those sales of the, we call it a blade of materials or materials for missile programs. And just want you to highlight, we'll get back to this later, that there was a very steep G ramp with no extra people. So it's easy to say, oh, it's a good mix and stuff like that. But somebody had to make it happen. And that's our people making it happen. Also with relatively low waste, you know, you increase your production by significant amounts. Actually, compared to Q3, Q3 compared to Q1, four times GE program sales, four times, 4X. That's a very, very steep ramp, and our people handled it and handled it really well. So Q1, we won't see those kind of gross margins and EBITDA margins for at least the next couple of quarters, but it does give us some perspective on what's possible. Now, cost side, we need to hire people. As you'll see from the presentation, we haven't been successful with that, but we're still planning to hire people. T&A will increase as one example of cost increasing because, you know, with the pandemic, we were willing to travel and nobody was willing to see us. And, you know, we'd go to call a customer. Well, we're not there. We're all home. So, you know, hard to visit a customer when they're not there. But we're hoping, you know, that will recover. So there's going to be some increase in costs there. as you go forward, which is what we want, a good thing. Let's go on to slide five. This is just historical perspective. Look at those gross margins, nothing close to 40%, and EBITDA margins, nothing close to 30%, even during those so-called good years like fiscal 2020. So enough on that one. Let's keep moving. Slide six. Slide six. Okay, Matt's going to take over on slide six, so go ahead, Matt, please help us out with slide six.

Sure. On the cash investment yields, I'll just let you know at the end of the quarter, cash and marketable securities were approximately $117 million, very similar to the fiscal 2021 year-end cash and marketable securities. PARC invests in highly liquid, high-rated U.S. treasuries, agencies, and corporate bonds. For Q1, our portfolio yielded 0.35%, so rates very low. This is reflecting the decreasing rates on investments in our longer-term investments maturing and as they get reinvested. So far this calendar year, until just recently, Treasuries, as long as three years, have been yielding less than that 0.35%. For comparisons, at January 1, 2020, Treasury yields for one year all the way through the three-year Treasuries were all between 1.5% and 1.6%. Highly-rated corporate bonds earn a little bit better, but not much. Just to give you some perspective, last calendar year, our investments earned on average 1.76%. For the trailing 12 months that just ended, they earned 0.91% steep drop-off. And for the first quarter, this first fiscal quarter, our investments earned 0.35%, as I mentioned before. That's how fast rates have dropped off. A one-year treasury right now will yield less than a tenth of a percent. Net investment income, will remain very low until we see a recovery in short-term interest rates. So moving on to the tax rate, our effective tax rate for the first quarter was 30%, 30.0%. This was higher than normal as we wrote down some deferred tax assets in Singapore that we feel are not going to be realized. Assuming nothing unusual comes up during the year, the rate going forward, the effective tax rate going forward through the fiscal year should be closer to 27% for each quarter. Of course, the change in the federal corporate tax rates could change all of that, and there's been a lot of talk about potentially bumping up the federal tax rate. Moving to depreciation, depreciation will climb through the remaining quarters of the year as we bring online our expansion. For the full fiscal year, 2022 year, depreciation will be similar to last year's. Last year's depreciation was roughly $1.2 million. But it will start low and grow throughout the year, throughout the quarters of the year. Next year's depreciation, all of our expansion assets are all online and up and running. The depreciation will increase somewhat significantly as we have a full year of depreciation on all of those expansion assets. That's it for me, Brian, unless there's anything else. Okay.