Park shows resilience and adaptability in a dynamic market environment | Park Aerospace Corp. (PKE) Q2 2024 Earnings Call Transcript

1. Brian discussed the company's second quarter dynamics and longer-term outlook. He highlighted the outstanding gross margin of 32.7% despite a $3.1 million drop in revenue from Q1. The decrease in sales was entirely due to a $3.1 million reduction in GE Aviation Jet Engine Program sales. During their Q1 call, they had warned of a burn down but didn't have any quantification of it until spending time with customer MRAS.

2. Brian and Matt discussed the steep drop in GE Engine Program sales in Q2, which was due to the MRAS inventory burn-down. They also mentioned the ongoing challenges related to supply chain, freight disruption, and staffing, but noted that things were improving. The total missed shipments in Q2 were down to approximately 220,000, primarily due to international freight issues. Park's margins continued to be affected by inflation and costs related to a newly commissioned plant in Kansas. Despite these challenges, the company's outstanding job in delivering the margins they achieved in Q2 was acknowledged, and it was considered one of their best quarters.

3. They presented pie charts comparing the commercial aerospace market in 2021,2022, and 2023, with a slight dip in the first six months of 2024 due to the burn down being all commercial in Q2. The company's niche military aerospace programs were highlighted, including the MK125 Warhead on the SM2 and SM3 standard missiles, Alenia C-27J Spartan radome materials, and the MK-41 Vertical Launching System. Brian noted that aircraft structures are considered a niche market for Park, as they prefer not to go for big programs with a lot of margin pressure.

4. Park is sole source for composite materials used in engine nacelles and thrust reversers, and for the Passport 20 Engine on the Global 7500 and 8000, but not for the fan case containment wrap for the GE9X engine. MRAS is currently qualifying two proprietary Film Adhesive formulations, and the MRSA/Park LTA has been amended to include three Park Film Adhesive product forms. A Life of Program agreement was also requested by MRAS, which could be worth approximately $55 million per year and continue beyond 2029 with increased pricing.

5. Brian discussed Park's Q3 bookings of $4 million and the consistency of non-GE Aviation Programs. However, GE Aviation sales were impacted by MRAS' inventory burn-down, which explained the shortfall in Q2 sales. The MRAS build plan for 2023 translates to approximately $23 million of Park Aviation GE Program sales, but Q2 sales totaled only $3.1 million due to the inventory burn-down.

6. Brian praised MRAS as a wonderful customer and highlighted their special partnership with Park. However, he also noted that the aerospace industry tends to be risk-averse and resistant to change, which can lead to overshooting and increasing oscillations. This may have contributed to MRAS carrying excess inventory of Park materials, despite their enlightened sourcing people. To mitigate this, Park needs to be agile, flexible, and urgent in managing its business. Brian emphasized that this is not specific to MRAS and that they are likely better than other companies in the aerospace industry.