Triumph Group Inc (TGI) 2002 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fourth quarter and full fiscal year 2002 earnings performance. You are currently in listen only mode. There will be a question and answer session following the introductory comments by Mr. John Bartholdson and Mr. Rick Ill. On behalf of the company, I would now like to read the following statement. Certain statements on this call constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph’s actual results, performance or achievements to those of the industry in which the company operates to be materially different from any expected future results, performance or achievements expressed or implied in these forward looking statements. At this time, I would like to introduce Mr. John Bartholdson, Senior V.P. and C.F.O. of Triumph Group Incorporation. Please go ahead Mr. Bartholdson.

I’ll make some introductory comments on a quantitative nature and then turn it over to Rick for his comments. Real quickly for the year ended 3/31, fiscal year ’02, sales for the year were up 52 million to 612.8 million, an increase of the year for nine percent. The fourth quarter was down 8.4 million to 148.5 million, off five percent off the prior year’s quarter. Net income for the year wound up at 49.4 million, up 10.2 million from the prior year, an increase of 26 percent in the quarter. Net income was 14.5 million, up 2.8 million, an increase of 24 percent. EPS for the year was 91 cents -- or for the quarter was 91 cents verses 90. For the full year $3.11 versus $3.11 in the prior year. Shares last year for the year were an average of 13.2 million versus this year’s 15.9 million. Segment sales in the aviation segment, sales in the quarter were down 5.2 million to 137.3 million, while for the full year they were up 65 million to 565.3 million, a decrease of 4 percent in the quarter and an increase of 13 percent for the year. Operating income in the quarter was 23.3 million, down 1.4 million from the prior year, while for the full year we wound up with 96.6 million of operating income, an increase of 11.9 million. Margin for the year was 17.1 percent in the aviation segment versus the prior year’s 16.9. Indiscernible) for the quarter was 28.7 million and for the year 117.1 million. The metal segment, continuing the difficult pattern of last couple years, sales in the quarter were down 3.2 million to 11.2 million, down 13 million for the full year to 47.4. Operating income in the quarter was essentially a break even at 180,000, and essentially a break even again approximately 400,000 for the full year. Turning to some other numbers, backlog at the end of the year stood at 378 million compared to the prior year’s 369 million, down from a peak at September 30 of 421 million. Looking at markets in product distribution, our top five programs as measured by firm backlog has shifted somewhat and the 737 new generation aircraft continues to be our top position in backlog. The C17 program has moved into second place. The CRJ program stays in third. It’s interesting, the F18 program has moved into fourth. And the A320 family of aircraft is the fifth position. Distribution by end market of sales, fiscal year ’02 would up with 56 percent of our aviation segment revenue going to the OEM markets, 20 percent to the maintenance, repair and overhaul markets, and 15 percent of the revenue was classified as other. A slight shift from the prior year distribution of 56 percent OEM, 32 percent MRO and 12 percent other. And I though it would be, because of the volatility of market, I’m going to give you some numbers by end market fourth quarter ’01 to fourth quarter ’02, which shows the way the revenue mix is shifting in our diversified customer base. Our commercial business, and this is both OEM and after market, in the fourth quarter of last year was 66.6 million. It declined to 51.7 million in the fourth quarter of ’02. Our military and space business in the prior year was 34.9 million and increased to 42 million in the fourth quarter of this year. Business jets were 36.6 million a year ago in the fourth quarter, increasing to 15 million in this year’s fourth quarter. Regional jets a year ago was 10.0 million in revenue, decreased to eight million in the current quarter. And the other was 17 million going to 20.6 million, so a significant shift with a decline in commercial and an increase in military. Turning to the balance sheet, the net debt was down to 151.5 million at year end. We had only 114 million outstanding on our committed 350 million senior bank credit facility. And debt to capital dropped to 25 percent at year end. Ten percent customers continues, only one Boeing Corporation, represented 14.7 percent of our aviation segment revenue. IGT revenue for the year wound up at 45 million compared to the $30 million level of the prior year. And same store sales for the year by quarter, first quarter same store sales were up 24.5 percent, second quarter 23.8 percent, third quarter 1.2 percent, and in the fourth quarter a decline of eight percent. For the full year same store sales were up 9.1 percent. And I think that’s enough numbers for you. I’ll turn it over now to Rick for his comments.

I’m going to repeat some of the things that John said, not necessarily numerically, but number one we are pleased with our year end results. And I’ll get into that a little bit. The year that we just ended can be characterized frankly as the challenge of the unknown, especially after 9/11. John just referred to a number of issues. We were in fact plagued in our after market services group by Parked (phonetic) aircraft, we were plagued at Boeing airbus and Bombardia (phonetic) with shifted or stopped shipments. We hade a significant slow down in the acquisition area, while many people including ourselves took a wait and see attitude on the acquisition track. And we had a slow down in the industrial gas turban business due to what we refer to as the Enron/Calpine (phonetic) type effect that took place toward the end of our year. And I’m going to come back to a little bit about our industrial gas turban business. However, as John mentioned, we are enthusiastic. Our backlog is up to 378 million from 369 million a year ago. We did have a September high of backlog of 421 million, but that does not blunt our enthusiasm at the 378 million going forward. We’re proud of the job our people done. John gave you some numbers in regards to our balance sheet with our debt to equity being down to 25 percent. We’re very proud of that, in the end of this, especially the last six months where we created a great deal of cash. John also referred to our top five programs. You’ll not that two of those programs, specifically the C17 and the F18, are in the top five programs and that gets our military business up to about 31 percent of our aviation segment sales. So we have participated very strongly in the military market at this point in time. I mentioned I’d come back to the industrial gas turban business, we did have a shortfall as to what we hoped we would do. About a year and a half ago, we said that when we had our -- built our casting facility, went into the industrial gas turban business that we said we’d end up this year at about 100 million worth of sales. We started if you remember two years ago at 3 million. Last year we did 30 million. This year we did 45 million. We did have, as I referred to the so-called Enron effect within our company, however, we are currently just short of a run rate of 60 million with new orders we’ve received. And we anticipate that we will be in 2003 in the neighborhood of 90 million in sales versus the 130 million we said we’d be about two, two and a half years ago. So we are not discouraged about the industrial gas turban market. Our casting facility was slower coming on than we had hoped and some of the orders as all the companies slowed down a little bit, but recently there’s still a demand out there, so we are enthusiastic and very optimistic about that market. Specifically when you turn to our next fiscal year, there are still many unknown factors. The unknown still lurks. However, in some of the areas such as, talking about areas where the build rate at Boeing airbus is down. But if you look at the statistics, the build rate is going to be down, but still at a higher level in all the years except the most recent ones. So we’re not discouraged about the build rate issues. Clearly we’d like to see it a little higher, but in fact I think it’s going to be high enough and you’ll find that rates are, as I say, higher than all but the most recent years. We are concerned about the Bombardia strike. We are projecting up sales at Bombardia. And in the RJ program, as John mentioned, it’s in our top five programs, so we are concerned about that. The backlog, however, as we mentioned is up to 378, and I’m assuming that that strike is not prolonged we’ll be in good shape there. We have just released, or will release today, another press release indicating that we have been selected to provide airbus on the airbus A380 program, the cargo door actuation system. That’s a big program for us that is a proprietary design capability and enhances our presence with airbus, along with some of ht structural products that we do with them. The business we do in the business jet area, the build rate is double the last down cycle that we’ve had, so we do have backlog in that business jet area. We see some signs of the MRO business being on the mend. That was, in fact, significantly hit after September 11th and specifically in our fourth quarter. Looking at everything, our watch words for the year, our costs will in fact be down. We are going to increase our market share and simply be better at what we do. So albeit an unknown year, we expect to have some organic growth. Our first quarter will in fact be down, especially in relationship to our recent fourth quarter. This is not unusual. This has happened in the last X number of years. Our fourth quarter is normally a good one. So our first quarter will not be as high as our fourth quarter. Translated, you all can’t divide, take our earnings for the next year and divide by four. We do, as I said, anticipate organic growth within our company. We do anticipate acquisition growth to some extent. I would not be surprised if very shortly we would not see an acquisition. In getting to the bottom line and giving some guidance, we feel that our earnings next year will be somewhere in the neighborhood of between $3.00 and $3.40 for the year ended. With that I’d like to open up to any questions you all may have.

CALLER INSTRUCTIONS) Steven Livenson (phonetic). Please state your affiliation followed by your question.

It’s Steve Livenson from Gerard, Clare and Madison (phonetic). I had two questions. The first one being, could you give us any information on gross margins, and the second one, are you sharing any of the risk on development of the parts for the A380?

The second question, at this point we’re not. We have programs on the A380, specifically some stringers and some structural products on the A380, and then the additional and the actuation system that I mentioned. I assume you are talking about the risk sharing partners where people are putting cash up front. We are not doing that. We are getting paid before the first plane gets delivered, et cetera, et cetera. So we have not, as I think you’re referring to, we’re not per se a risk sharing partner.

That’s what I was hoping to hear.

Would we like our margins to be a little higher on the A380 originally, yes we would. But we are not a risk sharing partner in the light that I think you’re referring. Secondly, our gross margins based on the last six months of the year, it would be untrue to tell anybody that we haven’t had pressure on our margins, pressure by Boeing. But this is not --and other customers -- but that is not anything unusual that we haven’t had in the past. We have and we intend to continue to gain market share. And we have gained some market share to offset some of that margin pressure. So albeit to there, I don’t expect that pressure to go away. I think I would have answered the question the same way a year and two years ago.

In the fourth quarter, gross margins declined .9 percent to 33.

One thing that I should mention that I didn’t mention in the end, I meant to give the sales range, and that sales range will be between at a low of 600 million to a high of 650 going forward for 2003, and that’s without any acquisitions.

Steve, that number I just gave you, that’s for the aviation segment.

Steve Wordman (phonetic).

Soldoney (phonetic) company. In terms of that overall guidance you provided, can you maybe give us your thoughts on the tax rate?

Tax rate next year will be 35.5 percent, would be a good number to use.

Your assumptions regarding recovering the metal segment in that sales number?

Well I think that we do see some up tick, if you will, in the metal segment. Not a particularly large one, frankly. But we are enthusiastic, about we have a new electro galvanizing line that we have online that is now operating. Prices in the metals market have increased somewhat significantly, albeit it’s because of the tariff’s that have been and it’s a supply price increase, which may in fact be somewhat artificial because the demand hasn’t come back to the levels that we’d like to see it. So there is a minor increase there and I’m scrambling to look for the number. It’s somewhere in the neighborhood of eight to $12 million increase in sales in that area.

Just in terms of the tap x (phonetic) guidance, for next year as well?

I think that the same number that we have been spending in the past will be about the same. We should be spending somewhere in the neighborhood of a little excess of $30 million.

Yeah, that’s a good number Steve, in the low 30’s.

And just some specific questions about the industrial gas turban market, what has changed within the last say two, three months that the order rate -- I mean you’re running at a run rate of 15 or 60 that you think you can get up to 90. Given the downturn of the OEM side, are you getting significant orders from the repair facility?

Well we have significant orders from two different areas. Number one, we had a definite hiatus, if you will, in the OEM area in the latter part of our third quarter and the first two months of our fourth quarter. We just recently received a very significant order OEM wise, which is why I’m confident to talk about the run rate in the OEM area of running around $60 million or just short of -- it’s $58 million, but the $58 to $60 million in the OEM area, and we in turn are anticipating significantly greater sales at the RNO area because the casting facility is now operating. As a matter of fact we shipped some of our first major orders out of there toward the latter part of the fourth quarter.

How long has the casting facility been totally up and running from right now?

It was essentially commissioned April 1.

It depends on who you talk to, but essentially April 1 we did. We have been operating for about two months to a month and a half, but not on a fully operational basis.

And I guess just going over the military side for a second, you did indicate that 42 in the quarter, what’s the spares versus OEM breakout there roughly?

That’s a hard question to answer because a lot of the spares business goes through the OEM and not direct to the military. So if we’re shipping components, we don’t know it that’s going in to an assembly line or going into the aftermarket. But I will say that both sides of the market are improving.

I guess as a whole it looks like the C17 and F18 programs are two pretty good programs to be on right now. If you took those two programs together on the OEM side, what type of increase would you expect on a revenue dollar basis next year?

In one respect the revenue dollar is not all that’s about. For example, on the C17 program, we’re building some -- part of our capital expenditures will be, in fact, in some long tanks where we do processing of parts that not only we will produce, that other people will produce, that will give us increased margins as opposed to increased revenue dollars. It’s hard. I don’t know if I can answer that question to be honest with you. I’d have to do some research.

They’ll both be up year over year. Quantifying how much it would be difficult on live time here.

CALLER INSTRUCTIONS) Suzanne Gegmer (phonetic).

I have two questions for Rick and two questions for John. Rick, the C17 program’s been getting rave reviews in Afghanistan and I was just wondering if you could comment at all on the efficiency that you see? I don’t know, maybe you’re not too familiar with this program, but the efficiencies that you see versus possibly the C130.

Could you ask that again, Suzanne?

The C17 program’s been getting rave reviews. Some people have been saying it’s a better method for airlift requirements than the C130. I was wondering if you could comment at all on some efficiencies that you’re seeing on that program?

I can’t. The only way I can comment on the efficiency of the aircraft is that the military has placed orders for more C17 and Boeing has come to us, as I just related, and asked us to increase some capacity on some processing for the parts for the C17. So on a long term basis, it’s very clear that the C17 is the future of the troop and equipment transport. So efficiency wise and how it’s working, I hear the same things you hear.

And on the acquisitions scene, can you comment a little bit on environment in terms of pricing and the quality of properties that are out there?

Well I think that there are a number of quality companies that we have talked to. I’m not really sure that the environment has changed too much recently. By that I mean the last couple of months there were clearly a hiatus after September 11th where we did have one company that we were talking to around the area of September 11th, which we put on hold on a joint agreement, if you will. We are currently back talking to those people. I mean we didn’t cut it off, we just jointly agreed to not do anything. So I think the atmosphere from the willingness to talk has loosened up a little bit. We are looking at any number of acquisitions. From a price perspective I’m not 100 percent sure that’s really changed. I think it’s not going to change for us. I think that we still in many, many cases remain the preferred buyer without the preferred price. We’re not going to go forward as we’ve consistently said and pay too much. I think there are people that might be willing to pay a little bit more and might do so while interest rates are relatively low. But I don’t see a big change in the prices that people want. I think where some of the issues become a little bit different is the projection of earnings and the multiple of trailing or forward looking (indiscernible) that we’re willing to pay.

Maybe a quick addition to that Sue, one of the difficulties in the acquisition side is the changing revenue mix. And you can’t look back to get a lot of information going forward. Just like the revenue mix that I went over, the shift from commercial to military, that provides a lot of volatility and analyzing what the assets of the particular company can do going forward for the long haul.

And on the outlook for next year, can you guys tighten up your guidance just a little bit when you say you anticipate organic growth, is that single digit, mid single digit, low teens, what are we talking about there?

Definitely single digit.

On operating margins, how should we be thinking about drivers of that and what are the ranges potentially there?

Our objective continues to be to run the business with a target of 16 to 18 percent operating margins in the aviation segment. And as Rick mentioned, it’s a difficult market out there and we are going to be aggressive in going after market share. But with incremental volume we get efficiencies in our operations. But everything we do is focused around attempting to maintain those superior operating margins in that 16 to 18 percent range.

Last question is, can you comment of how your (indiscernible) Agreement is going with American Airlines and do you see any kind of agreements such as that with other airlines or expanding the American Airlines (indiscernible) Agreement potentially this year?

I think the American Airlines Agreement is going very well. It depends, it has been hampered by the fact that some of the work that we do with American Airlines they haven’t because of the mile -- revenue miles flown, et cetera, et cetera, they have had some things in the development of the repairs has been a little bit slower over the last quarter to quarter and a half. But where it’s working very well with American Airlines in that regard, I think that as far as any other airlines and/or cargo carriers, I’m not exactly sure we’ll have agreements that are exactly the same as American Airlines in some of the APU parts. But we clearly have expanded our agreements with some other airlines and cargo carriers and we’ve gained more market share. I wouldn’t call them the same type of agreements that we’ve had with American, but very similar. Agreements that relate to all of the components that we repair and overhaul for them, and they’re not quite as specific as the American one is. And I think you’ll see that we’re expanding some of our business with American as well.

Our next question is a follow up from Steve Wordman.

Just quickly on the acquisition side, in terms of size that you’re looking at, are we talking about larger companies or more in the $25 to $50 million range.

Steve I think that that has remained somewhat consistent if you will. If you looked at the list that we have, we have a couple of companies that are relatively small that I look upon as the product line add-ons, if you will. I think I said a little while back that some of the companies we would look at would get a little larger than the 25 to 50 that we’ve heretofore acquired. So I think that that might move up the numbers up to the $90 to $110 million, maybe a little more than that, range as we go forward here.

CALLER INSTRUCTIONS) At this time there seems to be no further questions. Since there are no further questions, this concludes the Triumph Group’s fourth quarter and full fiscal year 2002 earnings call. If anyone should chose to dial in to the replay of this conference, you may dial in at 703-925-2533 or 1-888-266-2081. Thank you all for participating and have a nice day. All parties may disconnect now. Thank you.