Triumph Group Inc (TGI) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2003 third quarter earnings performance. You are currently in a listen-only mode. There will be a question and answer session following the introductory comments by management. 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 Security Litigation Reform Act of 1995. These involve known and unknown risks and uncertainties which may cause Triumph's actual results, performance and achievement to be materially different from any expected future results, performance, achievements expressed or implied in these forward-looking statements. This call the is the property of Triumph Group, Inc. and may not be recorded, transcribed, or rebroadcast without explicit written approval. At this time I would like to introduce Richard Ill, the company's President and Chief Executive Officer, and John Bartholdson, Chief Financial Officer and Senior Vice President of Triumph Group, Inc.. Go ahead, Mr. John Bartholdson.

Good morning, everyone. I would like to take a couple minutes just to review and expand on some of the numbers that we put out in the release before turning it over to Rick for his comments. And then we'll have our question and answer period. For the quarter sales were $143.3 million, down 4% from the prior year. Net income at $7.9 million was off 33% from the prior year. Same percentage decline in EPS at 50 cents for the quarter. EBITDA for the quarter was $22 million versus $26.4 million in the quarter in the prior year. Year to date sales came in at $446.9 million, again off 4%. et income down 20%, year to date at $28 million. Earnings per share of $1.76 off 20% from the prior year. And EBITDA at $72 million versus $79.3 in the prior year.

Looking at the segment results, aviation sales in the quarter are off 4%, down at $132.6 this year versus last year. Operating income at $18.3 million down 19%. Margins declined to 13.8% versus 16.2 in the prior year. And I'll comment on the margins when we talk about markets and split in sales in a minute. And EBITDA came in at $24.5 million versus $27.7 in the prior year. Our metal segment, sales in the quarter at $10.8 million, off 1% from the prior year. And we had an operating loss in the metals group of about $900,000. Our backlog trend since last December '02, when backlog stood at 387 million, March it was 378, end of June 394, ends of September 368, and wound up at the end of December at $360 million. And again, our backlog is measured by product where we have an order, a purchase order and a delivery date that falls within the next 24 months. So, any pushout or extension of deliveries that go beyond 24 months would negatively affect that number. But the build to book has been pretty good.

Our top five programs measured by revenues represented that backlog are the 737, number one. The Airbus' 320 family, number two, Canadair's CRJ regional jet program number 3, the F-18 number 4, and the C-17 program is our fifth biggest potential sale. Looking at our customer list, we only have one customer that represents more than 10% of sales. Sales to the combined Boeing companies, commercial aircraft, military and space, were 13.6% of consolidated sales in the quarter. Parsing out the results on revenue and looking at our aviation markets, looking at the revenue in the aviation sector, 53% of the revenue was generated by OEM sales, 34% through maintenance, repair and overhaul, and other, primarily IGT, was 13%. So, we've gone from two-thirds OEM, one-third MRO, back to about a 60-40 mix.

Comparing this December quarter to the quarter last year and looking at breaking out revenue by commercial, military, regional, business jet and other, you can see a significant shift has occurred over that 12-month period of time. In the quarter ended December '01, commercial, this is both OEM and MRO, sales were $65.5 million, representing 47% of the sales in the aviation segment. This quarter that dropped to $49 million, and a drop of 10 points down to 37% of sales. Military and space, on the other hand, a year ago was $38 million in sales, a 27% increase to $45 million or 34% of revenue. Regional jets went from 7 to 7.5%, 5% a slight increase to 5.6%. Business jets dropped from $14 million to $13 million. And other went from 13% of sales up to 18% of sales, representing that 13% of the segment.

Looking at other IGT sales for the full year last year, they were $45 million. And as opposed to some other results that have been reported, our IGT revenue continues to tick up and for the nine months was $36 million in revenue. Turning to the capital structure and balance sheet, net debt to capital at the end of quarter was 26%. During the quarter we completed the sale of $150 million worth of senior notes in a private placement, carrying a blended rate on an average maturity of just under 10 years of 5.83%. Total debt in the quarter declined from the end of September. It was at $192 million it declined to $179 million. End of quarter we generated 26.6 million in cash from operating activity. We had $11 million of Cap Ex and acquisition-related expenses of $4 million, which resulted in that decline in total debt. With that I'll turn it over to Rick for his comments. Rick?

Thank you, John. Good morning, everybody. For those of you who went right to the numbers in the third quarter results, I would like to read part of my first quote and then discuss the issues in the third quarter. The quote read, "We experienced significant reductions in shipments to our OEM customers and weak maintenance demands from the commercial airline industry. Our military business remains strong, but growth in this sector did not offset the results in the commercial side of our business." That quote actually, you know, sums up the quarter. But in a little bit more detail, in the third quarter we had significant continued cutbacks at Boeing and at Airbus in the number of aircraft that they are producing and shipping. We had cutbacks at Bombardier in the RJ program. Bombardier actually shut down their Challenger, Global Express and Lear Lines, and have announced, but we're not sure when they'll come back. In addition, at Raytheon and Cessna, they had shutdowns and announced layoffs of employees, and as a result significant announcements of lesser aircraft being delivered certainly in the quarter and in the future. On top of that we had significant airline issues, none the least of which were bankruptcies, weak demand in the quarter due to primarily the fact that they were flying many aircraft during the holidays, and that's when we do not repair and overhaul those components. Revenue miles are down. And they are still parking some of the older aircraft in the desert. You have might remember, and I will remind you that last quarter we stated that our third and fourth quarter were going to be flat with the fourth quarter being a somewhat stronger. And I will talk about that a little bit more in a moment.

One of the issues that has hit us and a number of other companies that is outside the market share issue, but our healthcare costs. When we start our year, we forecast our home care costs. They have in fact increased dramatically in our corporation year-over-year and will cost us this year an additional 10 to 12 cents per share by the time of the year ends up. John mentioned our industrial gas turbine business, it has been somewhat stalled over the last six to nine months. You've read, obviously, a lot about the industrial gas turbine business being down. We are actually very encouraged about the fact that we did last year about $45 million, as John mentioned, in the IGT business, and we're on track through the third quarter to do over $50 million this year. We have gained a significant amount of traction in the aftermarkets our casting plant and our repair and overhaul services in the Phoenix area have gained that traction and we do feel good about the strategy that we employed albeit somewhat lower than we originally projected, but we clearly have a strong foothold in that aftermarket business.

John mentioned a little bit about the margins. It's no secret that in addition to some sales drop in the OEM area, our markets have been under pressure. The good news is we have gained some market share in many programs as we go forward. John briefly mentioned the metals. Clearly the operations there are in fact dismal. The industry itself is dismal. And I will say that at this point in time we are exploring some opportunities in regards to the metals group. Having gone over the rather downside of things and the reasons for our quarter, we in fact remain very, very positive in some of the things that we have going.

We announced the acquisition of what is now called Triumph Composite Systems. It was Boeing Spokane, a plant that we bought from Boeing. It was a cost center for Boeing. And we have in fact made the switch. It is clearly going to be a profit center for us. We look for the plant to be immediately profitable. We are very enthusiastic about the plant. They were unionized, they are unionized. The IAM and SPIA, the two unions there, in fact were cooperative. We learned a lot and we expect this plant to be a conduit for further market share growth at Boeing and other aircraft producers, not only at the OEM level, but in the aftermarket area. It's a very, very lean manufacturing plant. We intend to use it as a training ground for our other operations and bring more assembly through that particular plant. So, it's a very significant purchase for the Triumph Group as we go forward.

John mentioned our backlog of $360 million. I also reminds you that about 40% of our business has no backlog. So, that backlog, we are in fact very enthusiastic about because we have gained some market share at our largest customers. I'd like to reiterate some of the things that John said because for a long period of time we have mentioned that in down periods of time we have the ability to generate cash. And as John mentioned, cash from operations in the fourth quarter was just short of $27 million. And we spent $11 million on Cap Ex during the quarter. So, we do have a lot of reason for optimism in the future. We also have said, however, going forward that we do expect the OEM build rates and the airline maintenance requirements to remain at approximately current levels. But we can't create a market for new aircraft, but we can get better at what we do within the market in which we participate. In that light, the guidance that we might put forward and we feel that we can achieve is approximately 60 to 65 cents for the next quarter, which would give us approximately $2.40 for the year. Going forward to 2004, although we haven't finalized our business plan, we're in a quarter right now where we visit all our companies and develop our business plan for fiscal year 2004. We currently see that we'd be somewhere in the neighborhood of 680, 690 million dollars worth of sales preacquisition, and we should generate earnings per share on those sales of somewhere in the neighborhood of between $2.50 and $2.70 based on the current market as we see it. At that I'll open it up to any questions you all may have.

At this time the officers of the company would like to open the forum to any questions that you may have. If you are using a speakerphone, please pick up the hand set before pressing any numbers. Should you have a question, please press 1 on your push button phone. Should you wish to withdraw your question, please press pound. Your question many be taken in the order it is received. Please stand by for your first question. Chris Macray, please state your affiliation followed by your question.

Yes, Deutsche Bank. Hi, there. On the Spokane plant, the outlook there is obviously somewhat dependent on Boeing projections and you don't have any guarantees in the sense of volume, though my understanding is they will give you all their business. Are you anticipating a flat revenue profile there from what they're currently doing and have you built in any distribution onto that given clear risk in the build plans going forward?

Chris, the simple answer to your question is yes. We're going to get the business that Boeing has through that plant. So, the business that we get from Boeing is definitely contingent upon and affected by the build rate. So, we get every piece of business that goes through that plant for current Boeing aircraft and any had derivative of that aircraft. So, the mult plier there becomes the build rate on all the different aircraft. It is our intention and we have already talked to a number of other people, whether they be producers or airlines in the aftermarkets, that we will have the ability to put a lot more revenue through that plant in time. I don't expect that revenue will rise significantly, certainly in this next quarter and perhaps for a six-month periods of time, because that's going to take time to develop that business. Having said that, the other plan that we have is to put some of our other products through there and potentially use that plant as an assembly plant for some of our other products on its way to Seattle or wherever. Is that what you were driving at?

Yeah, Rick. And the other part of that question, I guess, is, you know, you say you want to be immediately profitable. In your plan would you expect overall margins to remain consistent with no other changes in effect? I mean, if we go to the fourth quarter and the first quarter next year and if margins are any different, would we be hearing that mix is the reason, or would we be hearing that it would be fundamental issues?

No, I think the margins for the foreseeable future, and I'll call that the next six to nine months, will be very consistent, because when we've made the transition from a cost center, I think you're very aware that one of the reasons that we now have margins is that when we negotiated the union contracts, we got significant givebacks in wages and in benefits, which immediately gives us, you know, a margin, if you will, notwithstanding if the build rate gets cut in half then we have some other problems to address. I don't foresee that, but I think for six to nine months our margins many in fact be flat. The newer business that comes in there, at least by our plan, would be incremental business and it would be on top of what we already have and should increase our margins, not drop them.

Chris, the deliveries out of that plant today are at a build rate below 300. And the pro forma is set up at a full absorption basis for that plant to be profitable at today's build rate.

Okay. That's helpful. And just in terms of those prospects for new business and market share gain, any clear timing there, or is it really, you know, something for down the road discussions?

Well, I think that we, you know, -- internally our plan is to have more business in there within the next six months. So, I don't think that you'll see it in this quarter. We have to get approvals on some of the aftermarket products that we're going to put into the market place. We have to get approvals and win the business from other, you know, producers, whether it be Airbus or the aftermarket or other people we're talking to. So, it's very hard to give a timing on the thing. It certainly won't happen in this quarter, and it's hopefully going to happen within the next six months.

And one of the other real strong positive attributes about the acquisition is that this facility is set up to deliver products directly on a just in time basis to the final assembly line. And as Rick mentioned, the other products we can stage there and utilize that supply chain position gives us a definite competitive advantage to go after more of this outsourced work.

Great. I'll pass it on.

Susan Kessmer, please state your affiliation, followed by your question.

Good morning. Merrill Lynch. If we could dig down further into your guidance and start with the fourth quarter of fiscal 2002, you mentioned that EPS could be in the range of 60 to 65 cents. Could you give some more clarity on what your operating revenue and expectations are?

The fourth quarter will have two and a half months of Spokane in it, which we've said is generating about 55 million a year in revenue. And as Rick just mentioned, that's our pro forma that's pretty flat. So, we've got 10 weeks of a $55 million annual run rate in there. The other thing is the lack of that two-week [INAUDIBLE] at the end of December, we in essence pick up two additional weeks of shipments in the fourth quarter. And we're getting back to the pattern that we had in the first two quarters. We would expect revenue up around the $150 million level, recovering to that. And the earnings level that Rick indicated.

So, flattish? Margins would be flattish?

To the extent we pick up a little bit of recovery in the OEM side from not having the shutdowns, not having the outages, that incremental volume will help margins recover somewhat in the fourth quarter.

Okay. And can you run through this exact same scenario for '04, the 680 to 690 million dollars in sales, what is your operating income assumption there? Are margins again flattish?

Well, right away there's that 55 million of revenue from Spokane.

Right.

So, if we net that back out, we're expecting some incremental growth internally in our other businesses. And as Rick mentioned, the demand situation from the fourth quarter would be pretty flat margin wise going forward.

Okay. On the margins for metals, when do you expect that business to return to profitability, or is your internal plan -- are you forecasting that to be an operating loss in '04, as well?

We haven't finished our plan yet on that. We're looking for it probably to be in a break even mode or a minor loss probably for the next quarter. Certainly the 2004p as I mentioned, we're exploring some opportunities right now. That's a nice way of saying maybe we won't have to forecast 2004.

Okay. And last question, can you guys just discuss the pricing environment for aftermarket parts?

Competitive. When you say "After market parts," are you talking about the repair and overall of those parts?

Yes, for commercial airplanes.

You know, it is in fact very competitive with the airlines. We don't -- the reason I ask that question is that we're not really -- we're in a very small way in the distribution end. So, I can't really comment on the marketplace for the pricing of that. But in the repair and overhaul of the aftermarket parts that we have, you know, the airlines are struggling. That's no secret. And they're looking for their suppliers to help them out. And therefore, there's margin pressure in that regard. Now, having said that, our margins have remained, you know, relatively static and stable over time. And we're getting the dollar that we want to get on -- you know, on the components that we're repairing and overhauling. Interestingly enough, the most pressure we're getting is from some of the larger U.S. airlines who are struggling more in Asia and parts of Europe, I won't say there's less pressure, but it's not as prevalent as it is here.

Okay. Thank a lot.

Steve Levinson, please state your company affiliation followed by your question.

[INAUDIBLE] good morning, Rick and John. Could you give us some more details on the purchase price of this Spokane facility, please?

It will come out in the quarter, but since this is a full disclosure conference call, we paid about $42 million for the facility, for the facility, for the fixed assets in the facility and the data sets for all of the parts that have been produced by that facility.

Okay. Thank you. When you mentioned before about the build rate that Boeing, I guess, is talking about 275 planes plus or minus, and you said the build rate was less than 300. Is it in the 275 range, or do you believe it's below that?

We're using the same numbers that Boeing and/or other sources, the airline monitor, you know, Deutsche Bank, et cetera. So, we're down at the level of about 285, somewhere around there we're using.

Okay. The MRO business that you felt you didn't get in the fourth quarter because of the planes were flying over the holidays, normally you figure that's something you can't recover. But do you think you'll see any recovery of that in the fourth fiscal quarter?

All I was reaching referring to there, Steve, is the fact that when they're flying the planes, they're not taking off the component. For instance, the APU. They keep the planes in the air, so the APU stays on the wing, if you will, or stays on the plane, and then they send it to us in January. And that's not a -- that's nothing unusual, okay? And we in fact will get our fair share of those components that come off the aircraft in this particular quarter.

Steve, that's just a fact that over the holidays there's very little equipment in the maintenance shops. They're flying everything they can because of the demand level.

Okay. And last, even though there hasn't been, I guess, a formal announcement about the tanker lease, there have been some news releases from some of the Boeing's other suppliers about parts for the tankers. What are you hearing about the tankers?

Well, we're hearing the same thing you're hearing, but we have not been notified of anything official. We have a number of our companies who are, you know, involved in various parts of, you know, the tanker. And I think that we will in fact participate if and when that is officially let. We're not prepared to announce anything at this point in time because I'm not going to say it's not significant. The business we're getting and will get will be significant, but we're just not prepared to say anything because we don't have any orders in hand.

Okay. So, should we assume that that's not built into your guidance?

That is not built into the guidance, you're correct.

Okay. Thank you very much.

Steve Warmin, please state your company name followed by your question.

Sedoit and Company. Good morning. Just a couple things. Regarding the guidance of revenue next year, 680 to 690, if you take the 4Q left of 150 and you annualize that you get to about 600. Can you talk about what are the growth prospects from your internal business in F '04 to get up to that number aside from IGT?

Again, you've got the 55 million from the Spokane facility.

Mm-hmm. Right. But you're talking 150 in the fourth quarter. And that already has two and a half months of Spokane in that.

And that two and a half months again is in a start-up mode where we're not fully recognizing that run rate potential in that projection, just giving ourselves some room to, you know, work out the issues that may arise in transitioning over to an independent company from what had been an internal company. So, a big portion of it is Spokane going forward. And then there are incremental pieces of market slayer that even in this environment that's flat we're looking for continuing growth on the military side, both OEM and after market, and growing market share on the low level of OEM production in commercial and business jets and an increase, significant increase in the build rate at Canada Air on the RJ program, which is a significant program for us.

Steve, if you take the numbers, I think what you'll find is that they're somewhere in the neighborhood of a 25 million to 40 million dollar growth in that area, in the incremental market share of which John speaks. I think that a lot of that will come from some of the issues that I referred to in the purchase of Boeing Spokane that will be a conduit for some more market share at Boeing, number one. We have some reason to believe that our aftermarket services group will increase in sales to some degree.

Absent an improvement in air traffic?

Well, your using a relatively flat passenger mile scheme going forward. If you look at the rates in 2004, 2003 and 2004, they're really, you know, somewhat flat, maybe rising toward the ends of 2004. But yes, I think put absent that -- we look at some programs that we're on, a few months back we acquired some of the assets of Aerocell, which we have some input there. That hasn't really reached as high of sales as we thought it would by now, but we any it will be by the middle of next year. And that may be another -- that in itself may only be 5 or 10 million dollars, but as I say, in the aggregate, the increase is going to be between 25 and 40 million dollars growth internally.

Just a couple other things. How much did acquisitions in terms of revenue provide in the quarter?

In the quarter the acquisition impact was minimal. Same store sales were off 4% as the top line was off 4%, Steve.

Okay. And the last thing, the inventory level was up a little bit sequentially. Can we expect that to decline going forward.

Year to date, it's interesting. When you look at the inventory, year to date the inventory increased 21 million. Of that, $13 million was acquired inventory. $8 million was internal growth. And as Rick mentioned, some of the things we're doing in the aftermarkets, in going after incremental business on thrust reversers and flight control services, we picked up some parts in that area, which was about half of that $8 million internal growth. So, net, the net sticky inventory was really year to date only about $4 million.

Okay. Thanks a lot.

Okay.

Are there any additional questions? Our next question comes from Chris Macray of Deutsche Bank.

Hi. Just on the metals side, can you just sort of parse out a little bit what the sequential situation was there? Was it all pricing? Were there triggers where you couldn't adjust cost quickly? Maybe just give us some more detail there.

I think we have a couple of issues there, Chris. Number 1 is internal. We over the last year and a half have been putting into place a new electroline which is significantly less cost-producing should we say? And the transition is ending up? That quarter and a little bit going into this first quarter. So, our costs were a little bit higher there than we had expected. But there's two things that are happening externally. In the steel erection business where we build the office products, et cetera, the demand based on the economy is down a little bit. In the metals distribution and electromechanical control business, if you remember, they had the imports where duties were put on the imports. As a result, the mills raised their prices about six months ago. I may be off a month or so, but about six months ago. And that was raised significantly. So, the mills tried to get more money. So, our inventory cost rose to a certain extent, and now the mills, because of the demand factor being significantly down, have sickly reduced their prices in the marketplace, and the demand just still isn't there, okay, in the areas in which we sell. So, it became a little higher cost factor, and the demand in the metals business just hasn't picked up. And we don't expect it to pick up in the next couple of months. So, I think we were hit by the double whammy of increased costs and lack of demand. Forever you've heard us say, Chris, that we would -- the metals group, even though we've had some tough situations over the last year, has had positive cash flow. Their cash flow at this point in time for the quarter was not positive, which is the robe that I made the statement the reason that I made the statement that we're exploring other opportunities.

If you took out those internal costs for the quarter, just if we have to project something going forward for our models, can we strip out half of that loss or something?

Yeah, you could do at least half of that loss on increased costs because the plan, when we're building this, when we're restructuring that particular group, was to save at least that amount of money. And if we have any demand at all increase, you'd eliminate that whole loss.

Okay. Great. Thanks.

Next question comes from Don Rogers, please state your company name followed by your question.

D.A. Davidson. Good morning. I was curious. For next year in the projections that you gave us and including Spokane, should capital spending stay about the same level, just incrementally up for Spokane?

At the $30 million level.

Okay. And then secondly, it looks like next year with the Spokane operation, Boeing will be something over 20% of sales and maybe 25% if you divest or eliminate the metals business. Is that an issue for you at all?

It really is not an issue.

Okay.

You know, for a lot of period of time we have fought the issue that if Boeing hick-ups, you know, Triumph falls off a cliff. That's not the case. When John mentioned the 13%, what he's referring to is the fact that we sell virtually every Boeing plant. We sell the military, we sell the space, we sell Wichita, Winnipeg, Long Beach, Seattle, et cetera, et cetera, et cetera. So, in any given location we don't have an overwhelming percentage that in fact will bother us. And as a matter of fact, I'm go even further than that. We are in the process of exploring opportunities with Boeing to increase the amount of business we do with them because Boeing is clearly trying to eliminate numbers of suppliers.

Right.

And I think we have a tremendous opportunity to go to Boeing, and in some of our groups now we have single supplier codes and we have the ability to increase our business. And it being a very win-win situation with Boeing and the Triumph Group. So, I don't look at that as being a problem at all.

Okay. Great. Thank you.

Since there are no further questions, this concludes the Triumph Group's fiscal 2003 third quarter earnings conference call. There will be a replay of today's conversation. The pass code is 6389810. The start date of today's replay is 1/28/03, and the start time is 12:00 p.m.. The replay will end on February 4th, 2003, at 11:59 p.m. The dial in numbers for the replay are 703-925-2533 and 1-888-266-2081. Thank you all for participating and have a nice day. All parties may disconnect now.

Thank you.