Park Aerospace Corp.
Q1 2021 Earnings Call Transcript

Published: 9 Jul 2020

[Operator:]

Good morning. My name is Shannon 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 2021 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. [Operator Instructions]. 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.

[Brian Shore:]

Thank you very much, operator. Welcome, everybody. This is Brian. Welcome everybody to our first quarter conference call. I have with me, as usual, Matt Farabaugh, our CFO. So, just want to mention that we announced our earnings of course this morning. And if you don't have the presentation up in front of you, you want to go get that, there's instructions in the earnings release itself as to how to access the presentation. Also it's on our website, I think under Shareholders and maybe presentations or something like that. I'm sure you'll find it, if you look. So, you want to get that because that'll make the call a lot more meaningful. Also, there is supplemental information, which is attached, and there’s financial information, which is attached as Appendix 1 to the presentation itself. So, for those of you who attended or participated or listened to our fourth quarter conference call, which was on May 14, we went into pretty great detail about the virus and the economic crisis and the impact on the aerospace industry and Park. We're not going to go over all that again. I think that would be not that productive. Unfortunately, to have the best context for this call is you probably need to have some reference to the prior call. But for us to go back over everything again, and we’d have a 2-hour call and I don't think anybody is up for that, probably me -- not -- even me included not being up for that. So, we're not going to rehash all of it. We'll do a little review of some of the -- and go over some updates. And then of course we'll answer questions. So, why don't we just get right into it? And I'll going to be referring to presentation and going through it for you when referring to a slide number. So, why don't we move over to Slide 2? Those are -- that’s our forward-looking disclaimer information and you're familiar with it, I would think. But if you have any questions, give us a call and we'll go through that with you. Slide 3, our quarterly results, we're getting right into it. So, we have the history of the quarters for the last two fiscal years, plus Q1 is in yellow at the right hand column. So you can see our revenues, you can see our EBITDA, you can see our gross profit and our gross margin a little bit up above 30%. Unless they’re referenced a little bit downloading the page, what we said about Q1 during our fourth quarter conference call on May 14th. We said our sales estimate was going to be $12 million to $12.5 million. So, we're at $12.213 million. We came in kind of middle of that range. Our EBITDA estimate was $2 million-ish and we did that ish stuff because as we discussed in great length during our fourth quarter call, a lot of uncertainty in our business right now, and in the aerospace industry, so we put that ish on the end of the $2 million. And we came in at $2.364 million. So, I guess that's kind of in the $2 million-ish range. Remember our forecast philosophy is we get forecast. We don't play what we consider to be a game of giving you a low number, so we’ll get to be a hero. We tell you what we think is going to happen, assuming we're going to work very hard the way we can to make it happen. We're not going to make it easy for ourselves. Okay. Let's keep moving here. When we go to Slide 4, our top 5 customers. This is for Q1. And if you remember, these actually are the same customers that were the top 5 customers for last fiscal year. This is alphabetical order. So, we're not commenting on the order, except I think you all know that, MRAS is going to be the top customer for Park. AAE Aerospace, So that's for ablatives, PAC-3 missile. You see that, the picture, nice pictures at top right. And that's the latest generation, what you speak of all the Patriot missile, which is designed to shoot down hostile incoming missiles. Remember, during our Q4 call, I mentioned that we received 25 letters from Department of Defense, from military contractors, saying we're expected to stay open. Well, this might be an example as to why we are expected to stay open. I doubt that the military wants to run out of Patriot or PAC-3 missiles anytime soon. AAR Corp., multiple programs, maybe interiors and things like that, floorboards for aircraft, Gulfstream program is one of them. Kratos, that’s an important customer as well. And we are the main supplier, maybe the sole source supplier, not sure, but main supplier anyway for all the drone programs. Those are tactical drones and target drones including the Valkyrie, which is depicted in the bottom right picture here. Then there's Middle River Aerostructure System, MRAS, which was a subsidiary of GE Aviation, but that was sold last year to MRAS -- sorry, MRAS was sold last year to ST Engineering Aerospace, which is a large Singaporean-based aerospace company. And we have a picture of the COMAC 919, which is one of the -- on to the bottom left, which is one of the MRAS programs. Nordam Group, multiple programs, actually one of the items is GE Aviation for their engines. Another is WeatherMASTER Radoms, which would be for -- I think, for Boeing aircraft, maybe others as well. Let's move on to Slide 5 if we could please. So a little comparison here, kind of interesting I think to look at our pie chart. Remember, last quarter, we kind of took our pie chart, which had kind of more breakdowns and simplified into three key areas, which we thought it would be meaningful in terms of understanding our business. So the top of pie chart is just the pie chart you saw from our last -- fourth quarter presentation, this is for last fiscal year. And we’ve put the revenues on the side just we still want you to have a perspective here. Then we go to our Q1 pie chart, it is very interesting. Remember, Q4, we said we're going to focus on military, that’s one of our objectives. So obviously military percentage went way up, partly because commercial and business aircraft went down, so military obviously went up, but do the math here for a second. Just look at the dollars, forget about the percentages. So last year 35% of the $60 million, that's about $21 million, I think that's the number, in the first quarter 53% of the $12.2 million, that's $6.5 million, that’s the annualized $26 million. So in a very tough market, we actually grew the military segment dollar-wise, not just percentage-wise, but quite nicely. Some of it’s locked, because some of it’s just timing terms of when the programs are produced, because it's lumpy, the quarter when we're producing one program, next quarter maybe not. But nevertheless, nice job by our salespeople, all three or four of them, we have pretty small sales group, because we had -- for sales group, though, you saw the announcement I think a couple of days ago, new sales guy, so that's good. So, let me see if there’s anything else, no. Let's keep moving here. Let's go to Slide 6. So, slides 6 and 7 are really pretty much slides that were in our Q4 presentation. And you see topics as revisited, because we thought, well, let's take a look and see how we're doing. We were talking about in terms of factors that could affect, what will -- the recovery of the different industry segments, aerospace industry segments we supply into. Military, we hear of the supply chain disruption that hasn't affected us really very much. We've heard about some -- for instance, with respect to the F-35, a program we’re not on. Park program seemed fairly strong and stayed so far. And as we already said, it's actually better now. We grew our military business, not just percentage-wise in terms of the pie chart but actually dollar-wise in Q1 as compared to the quarterly rate from last year. Commercial aircraft, so this is the Big Kahuna for Park. Jet fuel prices, when we spoke about that last time, well that's actually done better. I haven’t checked this morning but yesterday it was low at $40 -- not the jet fuel, the crude was $40 per barrel. But obviously that's will drive the jet fuel prices, meaning the lower prices are a disincentive for airlines buying new airplanes. Reopening economy, economic recovery. So we've come a little bit of-- what is it? Two months, it’s almost two months, maybe 7, 8 weeks since our last call, and things have developed, so the economy is being reopened. One concern I want to highlight though, is that these core teams that are being put forth by these different governors of different states, I am quite concerned about it, and quite concerned that it's actually been -- it’s actually shut down the economy again, I'm sure you could open up a beauty shop. But most business relies on interstate commerce. And it's become difficult actually with all these orders, all these quarantines that are being ordered by different governors. So I hope that the governors do the right thing for the country and the economy, because if we destroy the economy, then we'll really know -- the world will really know what darkness is. We don't want to do that. So I hope everybody will think about what's best for the country and the world and not just the -- maybe myopic or small-minded about it. It is concerning though. Because the things were getting better in the commercial aviation area, actually a little bit -- more clumpy than people expected. People are getting on planes. I’d say May was better than April, June was better than May, and July was expected to be better than June. But with all these quarantine orders we’re concerned about what's the impact, because you can't travel from one state to another without locking down -- lock yourself down in quarantine for two weeks. It’s kind of pretty big disincentive from doing that -- for doing that. So we'll have to see what happens with that. But I just want to flag, that's kind of a new thing and it's concerning. So I don't know, but I just want to flag that. Down to the bottom of page, we're not going to cover everything here, just like to say this is really slide from last quarter, we just wanted to update you on it. So generally, the news is actually pretty good. The commercial aviation industry was improving a little bit more quickly I think than most people expected, not to where it was before the crisis but people getting back on planes. Let's see what happens with these quarantine orders. Single-aisle at the bottom versus wide-body, we covered this a lot. And I think it's pretty well -- pretty clear that single-aisle is going to recover more quickly and more strongly. Let's go to Slide 7. This relates to business aircraft. Again, a slide from last quarter. Just to update here. Jet fuel prices are probably not much of an issue, reopening economy, economic recovery, yes, what's interesting that -- it’s same kind of pattern. So in terms of business aviation, usage, May was better than April, June was better than May and we’re expecting July to be even better but now there's serious concern about these quarantine orders, so let's see what happens. I spoke to a couple of executives from four different business aviation fields yesterday, different companies, and they both confirm the same thing, which I was surprised about, interesting. They said actually smaller jets have recovery in terms of sales more quickly than the larger jets, larger jet like the Global 7500 which is an important program for Park. This is probably the largest business jet we can buy. So interesting. That said, well, the individual owner operators, they could write a check for a small airplane. These are not cheap airplanes or like $5 million to maybe $12 million, but the corporations who buy the real big airplanes that cost more than $50 million, they're kind of sitting tight, you're not ready to make a commitment yet, so we'll see what happens. And that was before we had this issue I raised regarding the quarantines. And both the guys said, yes, this quarantine, they're already seeing impact on our business from the quarantines already and it's just -- this is a two to three week event. So this is a real concern. And like I said, hopefully these governors will do the right thing to think about what's best for the country and the world, but we'll see. Let's see. Okay, so with social distancing, if you factor concerns for commercial aircraft benefits, business aircraft, of course, I mean, obviously, if somebody is in a position to buy an operated business aircraft that's going to be a preference we might have considering the issues of flying on airlines these days. Well business aircraft recover before commercial aircraft, I do not know that. People have different opinions, that’s interesting topic to discuss. Let's see. Slide 8, let me go to Slide 8. Let's talk about GE Aviation. We always have to do that, it’s such an important portion of our business. So why we go through the individual programs? Because I think it would be helpful to put GE Aviation in perspective. Obviously, we’ll start with A320neo family and you can read on top the different variants of A320neo family. All of these are LEAP-1A engine and all these are top programs. So last quarter, we mentioned that Airbus had announced reducing production by one-third. Now, I think the production rate for A320 was maybe 60 a month. I think that's why it's reducing it by one-third. Then there’s something confusing happening, I think last week they said well, maybe 40%. But I read that the difference between one-third and 40% relates to order of how they measure the output on a weighted basis rather than any kind of new cut. So, I think that got some attention, I'm not sure what it means, a little bit vague. Well, one thing I can tell you is, for us, we had been in touch recently, just a couple days ago, I think with my counterpart at MRAS and they received a forecast recently from Airbus and Safran, which actually moves the numbers up. And taking the numbers on, that's not what would be appropriate. I'm not allowed to do that. Move the number up -- moves the numbers up in 2021 actually significantly. And in 2020 as well the caveat of 2020 is that remember the whole inventory thing we talked about last time the burn down. So it's kind of muddy water, it’s not clear how it’s going to impact us in 2020 yet. But those are facts I'm reporting to you. There's a lot of different information out there. Some of it’s consistent, some is not completely consistent. But now you know pretty much most of what I know. The news on this aircraft is actually positive from what we hear. Bombardier Global 7500, we just were talking about that with respect to business aircraft with the Passport 20 engines. This one is the biggest unknown for us. I'm not sure what's going to happen with this program. We know Bombardier is pushing the program hard because this is really their big new aircraft. The company has -- it has a lot of investments in this aircraft. Their future is very dependent on the success of this aircraft. And also, even though it's a smaller engine, Park has a lot of content for engine, dollar content for engine on the Passport 20 engines for the Global 7500. This is a question not for us in terms of where things are going in the short-term. 747-8, no change to program rates, not sure how long the Queen of the Skies will be produced, but they're not going to produce at the rate in my opinion. They will produce at the rate which is six airplanes per year. We have 4 engines per airplanes, that’s 24 engines per year. They are going to produce at that rate until such time as they cancel a program. Hopefully they never will. But there's some talk and maybe even it’s trade dots a little bit that Boeing maybe pulling the plug in two years. But Boeing has refused as far as I know, to confirm that, they've not confirmed that news. My feeling is two years is a long time even if it is true. So hopefully somebody else will come in and order some -- these airplanes for cargo. They are not really being sold for passengers anymore. They are just really a cargo sale. So, I believe UPS has a number of them in order, and hopefully somebody else will decide to order some more. To me, I'm emotionally involved with the 747, it’s my favourite airplane, but also just you know our first shipment on the GE Aviation program, so first program we got qualified on was the 747-8, our first shipment was on, let me think, February 28, 2014 11

[Operator:]

[Operator Instructions]. We have a question from Nick [indiscernible] with NR Management. Your line is open.

[Unidentified Analyst:]

Just had a question on the dividend policy. Is your intention to keep paying the $0.10 quarterly dividend? And I know this is hard to forecast, but at what level would you think you would actually have to be in a situation, where you would burn cash rather than generate cash?

[Brian Shore:]

So at this point, we're not thinking of changing our regular dividend. We discussed that last quarter. So it’s something we continue to evaluate, but our position at this point is continue the regular dividend. That's based upon, we're looking after this year, our internal forecast. So this year, we probably will cover the dividend. We probably have some limited positive cash flow, but it won't cover dividend. But I think we're okay with that. It's important to us to continue the dividend. Now that's not a guarantee, I mean something could change. But that's our perspective at this point. So does that answer your question Nick or is there anything else I can help you with on that point -- on that question?

[Unidentified Analyst:]

No, that’s very clear. One other thing -- and again, I'm looking at -- I am not saying this could happen. But at one point an investor had requested or asked due to considered share repurchase. Now I do believe all that cash is a good asset to have especially in these troubled times. Are you seeing any more opportunities coming up for acquisitions? Is there anything out there that’s looking more appealing in these troubled times? And just to address share repurchase. If the stock were at 6 or 5 or something like that, is that something you might consider? Thank you.

[Brian Shore:]

Okay. So let's take those questions in reverse. So that's hypothetical, but yes, I mean, or how about one, sure. As the stock goes lower, obviously the share repurchase becomes more interesting. As far as the acquisition mark is concerned, so what we’re advised by the bankers we work is that you probably need to wait another couple of months, maybe the fall, maybe like September, October timeframe for some of these opportunities that kind of come out of the wood work. But we just -- we covered this on our last call, that's why I didn't go into detail in this call. But it's something very important I mentioned just kind of briefly using our cash and our balance sheet to our advantage. But we've been frustrated with acquisitions for a long time, had cash for a while. But valuations just not look right to us. And I think with a bit of hindsight, we were right and the world was wrong. So the inmates maybe running the asylum because we're told, well, if you want to get in the game, you got to pay these multiples and everything. I think I mentioned last time, we looked at companies that were actually where the asking price was maybe 5 times revenue. And there was also 5 times revenue. Not worse, of course, but in many cases we saw the announcement, were quite stunned. We just don't -- and these are not cure for cancer companies. I mean, maybe they thought they were but we didn't. So what we're looking for is something more central to our business. Something that would be not a direct competitor, would be added to our business, different capabilities, different product lines, but still center to our business, not very tangential. And we've been looking and looking and looking, but we've been frustrated because their evaluations have not been right. And maybe some things we're looking for weren't available as well. We're hoping that maybe opportunities will develop in the next couple months. We're told by the bankers and the investment bankers we work with, they think it’s probably the fall. Because the way they explained it to me is that the sellers have to go through some kind of a process of adjusting their realities and expectations to realize that whatever they thought they're worth before, that's kind of irrelevant. And also some of these companies maybe in financial distress. Because the other factors -- there's a lot of debt in corporate America everybody knows that. And maybe some big high profile companies will get bailed out. But we're not buying those companies. We're buying smaller companies, I mean Park size, something like that. So they're probably not going to have the opportunity to get a lot of help from the government, which is fine. So we're hoping to be optimistic. We're hoping to be able to buy something important had good values, maybe even distressed values. So we're sitting tight. We have seen a couple of things in the last couple of months, but we felt it was early, felt maybe the valuation is still high. And also they're a little more peripheral, not so central in aerospace obviously, well, I shouldn’t say obviously, an aerospace. We wouldn’t look outside of aerospace but that’s central to what we do now. So we look -- I think we decided maybe not for us. So Nick does that help with your question?

[Operator:]

Thank you. Our next question comes from Chris Hillary with Roubaix Capital. Your line is open.

[Chris Hillary:]

Just wanted to ask, with all the disruption that's out there in the industry, do you see that’s creating opportunity for your -- to bid on new business or is it more a situation where everyone is more disrupted and just trying to deal and manage their own business commitments or whatever the pipelines are as they recover?

[Brian Shore:]

I think it's a little bit of a mix, but unfortunately, there's a lot of companies in the aerospace industry right now. They're just I think feeling very defensive and in a survival mode. So that could be a little frustrating. We're doing everything we can. We reach out to customers all the time. We're not going away, looking for opportunities, looking for opportunities. But, it's not just black and white. There definitely are opportunities. I think, especially in the military area where it seems that the funding is still pretty good. So, we have to keep at it. I mean, it can be frustrating sometimes for the sales guys, they’ll call and say, look, you know what -- call a customer, we're not doing anything now, we got no money, we're no funding. We're just trying to survive through tomorrow. Okay, we'll call you back next week. We're not going to go away and we'll make a pest of ourselves. But there are opportunities and I don't want to be overly generalized, Chris, but I think they're probably more in the military or defense area than the commercial civilian, all the industries are affected by the economic crisis and/or pandemic, but military seems to be doing better. The funding is there. New programs are being initiated, qualifying new suppliers. So, I don't know. Well I guess the answer to your question is not so black and white, as far as I am concerned. It’s kind of a mixed thing. But from our perspective of like I said, we're going forward, we're not going to relent, we're not going to let up and yes, we'll be a pest. I mean, we'll keep on, what can we do, how can we help? Can we help? Sometimes -- I will just say one of the things, sometimes the first answer is well, that’s what we could do, but you need a follow-up question. Well, what do you mean by that? What are your issues, what are you struggling with? Don't accept no for an answer. So I mean, obviously you've got to be polite and respectful, not belligerent. But don't accept no for an answer. In other words, they may not even think there's an opportunity to start a discussion. Wait a minute, what about that over there? Oh, yes, maybe you can help with that. We're looking for little things, looking for big things. I mentioned last quarter there's a couple of initiatives that we're taking on. In other words, we are doing more ourselves rather than forming these things out. And we don't want to be specific because it's kind of sensitive thing. So we're looking at those kind of opportunities at all. Those are not huge ones, but they're nevertheless opportunities. As I just said, small, big, either way it's okay with us.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back over to Brian Shore for any closing remarks.

[Brian Shore:]

Thank you, operator, and thank you everybody for listening during the summer, when you probably have other things you might prefer to be doing. So, even though the world continues to be a kind of a challenging place, I want to wish you a really good summer. Hopefully you'll all get away a little bit, get some R&R. And we'll talk to you again, at least in terms of a quarterly call in a couple of few months. But in the meantime, you call us anytime if you have any questions. So you take care and have a great day. Good bye.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.