Park Aerospace Corp.

Good afternoon. My name is Camilla and I'll be your conference operator today. At this time, I would like to welcome everyone to the Park Aerospace Corp third quarter fiscal year 2024 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 this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. 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. And I want to introduce Matt, of course. He's with us, our CFO, as usual, Matt Farabaugh. And also we'd like to take this opportunity to wish you and your families a very happy new year. All the best to you in 2024 it is, right? Yep. We just announced our Q3 earnings, I guess maybe about 45 minutes ago. So you want to pick that up. And also in the earnings announcement, there's instructions as to how you would access the presentation that we're about to go through. You want to do that as well. The presentation is pretty long. Sorry about that. I really was thinking I was going to, this one, I'm going to make it shorter and end up being longer. It's hard for us, or at least for me, because it just seems like sometimes there are important things to cover. We don't do the sound bites, you know, we don't hire IR firms to do a little clever, you know, kind of slick things, and I don't know why you'd want that anyway, because I would think you'd want to hear from management, so we're not as polished, it takes a little bit longer. It'd probably take about 45 minutes or so to go through the presentation, so just a be advised. We might skim through some of the items that we've gone through previously. There are some items in this presentation which were in the Q2 presentation as well, so that might help us a little bit. Before we get started, I just really want to give a shout out to Donna because Q3 is a bear for us because our holidays are kind of a mess. Not just the presentation, we're closing our financials, so Matt as well. But Donna, you know, helps me do all the PowerPoint stuff. I'm not even dangerous in PowerPoint. I can't do it at all. So every third quarter, you know, she's working through holidays. Before we get started, note again, it's our 70th year in business. It'll be our 70th anniversary is March 31. So I guess, what is that, a couple months off? It'll be 70 years if we make it that far. Why don't we get going? Slide two is our forward-looking disclaimer. Language, so we're not going to go through it. Please call us if you have any questions or let us know if you have any questions. Slide three, table of contents. First thing is the investor presentation. Appendix one, supplementary financial info, which we're not going to go through either, but if you have any questions about it, please let us know. Let's go on to slide four, take a little bit longer. So Q3, let's go through it. Sales, $11 million. Why don't we compare things to Q2, $11 million, $639 million. So that's a fairly low number in terms of sales, even lower than Q2, which was off. And I think you probably have a good understanding of Q2, and we'll go through the explanation of Q3 as well. And look at the margins I highlighted. We highlighted the margins, both the gross margins and EBITDA margins. So you can see the comparisons to Q2, which are not really favorable, but As I think we tell you a lot, we don't like it when we see our gross margins below 30%, so they're certainly below 30% this quarter, and our EBITDA margins are not really that desirable for us anyway either. Our observations and thoughts about our Q3, so what's going on here? Well, the MRAS inventory burned down, which we talked about at great length in our Q2 call, that continued through Q3, and we predicted when we did our Q2 call, we told you, we predicted that. Is that MRAS inventory burndown expected to continue into Q4? No, it's not. It's over, and we'll get into that in the presentation. But there's no more burndown. We will discuss the MRAS inventory burndown in greater detail throughout the presentation. Let's go to slide five. Let's talk about the non-G aviation sales we have. We talk a lot about G aviation. Non-G aviation sales were only 7.5 million in Q3. And that compared to $9.4 million in both Q1 and Q2, so that was off as well. So although there almost always will be some degree of quarter-to-quarter variability in our business, the trend is actually quite good for non-GA evasion sales, so we're feeling pretty encouraged about that. But what is the reason for or are the reasons for the quarter-to-quarter variability? There are numerous reasons, but for numerous reasons, the programs we're on who will be active in one quarter and may be inactive in another quarter, and we really have no control over that. There's very little we can do to control the timing of when programs that we are on will be active or inactive, and it would really be a waste of our time to even try to do that. It would exercise in futility, as we say here. But at PARCC, the key thing is we focus our energy and efforts on getting on new programs, which we believe will be supportive of our long-term objectives, rather than attempting to try to control the timing of programs already on. So let's keep going. Slide six. But nevertheless, this quarter-to-quarter variability does come with less than optimal visibility often. And it does require us, in part, to be very agile and fast on our feet with our supply chain, with our inventory, and our production management activities. So were there any new obstacles to completing sales in Q3? Yeah, there were, actually, and we'll get to that in a minute. But let's not talk about the bottom line. We'll talk about the top line. Why were the margins in Q3 lower than Q2? And we already showed you the comparisons. Well, there's a few reasons. There's a less favorable sales mix in Q3 compared to Q2. Q2, the sales mix actually was quite good. Q3, not quite as good. But as explained above, we have little to no control over which programs are active and which programs are inactive on a quarter-to-quarter basis. That's kind of rolling the dice a little bit if you look at it short-term. Will the higher margin programs be active in a quarter or less active? That we have almost no control over. Again, our objective is to get on more programs. The ones that we think are good programs, the better margin programs, and the timing is up to the customer or God or something outside of our control. The second item was lower sales. We talked about it in Q2. That affects our bottom line in Q2. Lower sales in Q3 compared to Q2. That affects our bottom line, of course. And here's a big one. Even though we fully anticipated that Q3 sales were going to be light compared to Q2, we intentionally ramped up our costs in Q3 to meet the reduction requirements of expected key program ramp-ups. So that was something we decided that was intentional, and we'll talk about that number again throughout the presentation. So why don't we go on to slide seven. Yeah, we saw that freight train coming. That's an analogy we use in our Q2 presentation. The freight train coming, meaning the program ramp-ups, we wanted to make sure we were ready. Although ramping up our costs took some conviction and maybe some guts, a little bit anyway. You know, it's hard when you see, you know, it's not going to be a good quarter sales-wise to ramp up your costs. But it turns out, we didn't know for sure, no guarantee, but we clearly were right with the benefit of hindsight to do what we did in ramping up our costs in Q3, and we'll explain that as we go through the presentation. So... It was a good move on our part, I would say, to do what we did. Other considerations related to Q3, how things are going with supply chain staffing, freight disruption. We talk about this a lot. You might be tired of hearing about it, but we're sometimes tired of dealing with it. Supply chain staffing challenges continue, but they seem to be improving to some extent. Or maybe there's more... that we have become more effective with dealing with them. Now, I just want to point out, we're not talking about supply chain issues for the whole industry. We're talking about our supply chain. The whole industry we'll talk about later on. That's probably more of a factor for us anyway in terms of the opportunity industry and how they're affected by supply chain constraints. International freight, well, that's a little bit of a different story. There's that war in the Middle East. which occurred after the end of Q2, I guess during the first part of Q3, which we didn't see coming. But it's causing serious disruption and challenges for international freight, disrupting, sorry, slide eight, disrupting shipments to customers in the Mideast and Asia. Yeah, we've got customers in Turkey and Israel, important customers. So you can only imagine what kind of chaos that is. And then we also have customers in Asia where, There's not a war in Asia, not yet anyway. Hopefully it'll stay that way. But nevertheless, the sea freight goes through the Middle East. I guess now it's going through the hornets of Africa. It's way out of the way. So that's not a lot of fun. Total misshipments in Q3, about 560,000. I don't have it in front of me, but I think it was only about 220 in Q2. So in other words, Q2, we're really getting much better, but we have a big setback in Q3, and that's almost all related to international freight disruptions. So there you go. Also, our margins continue to be affected by inflation. I know inflation is supposed to be all gone, but I don't buy that. And cost-related operating are recently commissioned, new plant in Newton, Kansas. This is all planned and expected, but obviously planned, You don't turn a plant on and you're at full capacity. It's not how it works. Let's go on to slide nine. Okay, this is our historical fiscal year results. And for perspective mostly, let's talk about it a minute. Normally we don't spend much time on this one. Look at the sales in 17, 18, 19, 20. It kept going up like $10 million, $31, $40, $51, $60, really not.

And then what happened was this little thing called a pandemic.