Triumph Group Inc (TGI) 2004 Q1 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2004 first-quarter earnings release -- 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 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.

Please note that the company's reconciliation of non GAAP financial measures to comparable GAAP measures is included in the press release which can be found on their website at www.TriumphGroup.com. In addition, please note this call 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. Please go ahead Mr. Bartholdson.

Good morning everyone. What I would like to do is briefly cover the statistics for the first-quarter before turning it over to Rick. Commenting on the first-quarter, sales in the quarter totaled 140.6 million compared to 139.8 million in last year's first-quarter. Operating income totaled 14.7 million, down from 18.3 million in the prior year. EBITDA came in at 21.2 million versus 24.2 in the prior year with an EBITDA margin of 15 percent in this year's quarter, down 2.3 percent from last year's 17.3 percent. Income from continuing ops totaled 7.6 million, down 20.9 percent from last year's 9.7. Discontinued ops had a loss of 0.6 million versus income of 0.4 million in the prior year resulting in net income of 7.1 million versus 10.0 million in the prior year's first-quarter. On a fully diluted basis, EPS from continuing ops was 48 cents a share versus 60 cents in the prior year. Net EPS was 45 cents versus 63 cents.

Turning to some other statistics, our backlog at the end of the June quarter was 490 million, up slightly from fiscal year end March of '03 of 486 million and compared to end of fiscal year '02 of 378 million. So essentially flat. Our program as measured by backlog really didn't change, the 737 new generation is still the main position in the backlog followed in the top five by the 777, 747, F-18 and the A320. We again only had one customer with over 10 percent of sales, that's the Boeing Co. et al, Boeing Commercial, Boeing Military and Space which in the quarter totaled 20 percent of our revenue. Reflecting the significant contribution of the acquisition of the operations of the Boeing Spokane plant which we now call Triumph Composite Systems.

Breaking down the revenue and trying to give you a feel for what's happened in sales mix by market, looking at the first-quarter and comparing it to all of last year and all of fiscal year '02, sales in all three of those periods are essentially flat. If you annualize this year's first-quarter, sales are about 563 million, last year they were 565, and the year before they were 565. Same-store sales in the first-quarter were off 14.5 million or down 10.4 percent, acquisitions contributed 15.3 million, so essentially getting us back to that flat run rate level. Breaking down the sales in the fiscal year '02, fiscal year '03 and the first quarter '04 the sales mix, and again on essentially the same sales number, sales driven by commercial large transport business in '02 was 46 percent of sales, in '03 declined to 41 percent, and in the first-quarter of fiscal year '04 it was 42 percent.

Military and space in '02 was 26 percent, increased last year to 32 percent, and in the first-quarter continued to grow to 33 percent. Regional jet in '02 was 6 percent, in '03 it declined to 5 percent, and in '04 went back up to 6 percent, so essentially flat. Our business jet business was 11 percent of revenue in '02, declined to 9 percent in '03, and had a further decline in the first-quarter of '04 to 7 percent. Netting out other uncategorized business, it was 11 percent in '02, 13 percent in '03, and 11 percent in '04. And of that other, in the first-quarter of this year the IGT business was 8 million in revenue, a run rate of 32 million which is down from last year's 50 million in revenue generated out of the IGT market.

Turning to the balance sheet, net debt to capital was 30 percent, total debt was 226 million, and we had 60 million outstanding at the end of the quarter on our senior bank credit facility of 265 million so that we have over 200 million of available credit to draw on. With our statistics, I'll turn it over to Rick for his comments.

Thank you, John. Good morning everybody. I'll make some of the same comments and reiterate some of the things that John had said, but I'd like to reiterate some of the things in the press release, which really hasn't changed a great deal from our last conference call. The commercial build rate is significantly down, as you all know. Business jet, and our business in the business jet, as John just indicated, has dropped significantly. We have maintained a relatively flat percentage of business in our regional, as John pointed out, and our military remains relatively high at 33 percent, as John mentioned, at a high-level and that business, in fact, is very good. Our aftermarket services business has, after a brief slump as I mentioned in the press release, in the commercial area has recently been very positive, and the military aftermarket services business has been very good.

John referred to the IGT business. Clearly our OEM business is down, our aftermarket business is up. If you remember when we discussed this at one point in time, this was our plan albeit the OEM business we had hoped at one time it would be good through this fiscal year. John mentioned the run rate at the end of the first-quarter. At the present time, if you look at our business where we're approximately, give or take, $10 million behind last year's sales in IGT if you look at what we have booked and what we've already sold. We do feel there's a chance, however, to equal last year's sales in the IGT market bolstered by the aftermarket services. As you can well imagine, the aftermarket services end of the IGT is not as busy right now because the powerplants are working and they're not shutting down for some of the maintenance that they have to do.

In addition to the press release there are some other major issues. Last quarter we mentioned a significant decline in our structures business. We're currently operating at less than 50 percent capacity. We're still profitable in that end of our business. Over 90 percent of our margin decline, and I think we mentioned this last quarter, 90 percent of our margin decline has been in the structures OEM end of our business. Our recent acquisitions, John referred to a couple of them, one of them had been very, very positive, Triumph Thermal Systems which we acquired from Parker Hannifin, and Triumph Composit Service Systems which is the plant we acquired from Boeing have been very accretive and very positive to the Triumph Group and have added a lot to other companies within the group.

Margin pressures continue to be there. I'm sure you've heard that with other aerospace companies. John mentioned our EBITDA percentage at about 15 percent, we do track some of our competition. And although we're not enamored with the fact that we've dropped from 17 percent in that area, we are holding our own in the marketplace. And we are very competitive in the area of the sales and margins that we've seen other aerospace companies have. In the last quarter we said that the market will be challenged for 12 to 15 months, and that we're running our business to combat this challenge. That hasn't changed. I said in the press release the first-quarter earnings were in line with our expectations. We have in fact reduced costs, we've eliminated redundancies and continue to do so, and we don't see the market recovering until late 2004.

I've already commented on the margin pressure. Sales, I think, will be up for the full year. John mentioned, if you annualize our first-quarter sales it's 563 million. It would be my thought that we would exceed that number; and our sales will be up primarily for two reasons, market share gains and our acquisitions. John mentioned our backlog is at 490 million, as in the past that does not include our aftermarket services. That's why it's a little bit difficult, for example in the IGT business, to say that we'll maintain those sales because we don't know -- we have no backlog in that particular area. We have lost sales due to pricing. Some of that lost sales has been on purpose when we decide not to take an order. And I'm sure you've heard that from other people in the industry.

Our cash flow. Cash flow, we have consistently said that we can generate cash. We're not backing off that because of this quarter. Our cash flow was negative for the first-quarter of $26 million, 4.5 of that was from operating. As the press release said, 7.2 million was a completion of capital projects, 15 million was an acquisition. It's interesting that some of our inventory gains in excess of $2 million, for example, at one company was in light of a major producer of aircraft asking us to carry their inventory; and I use the word asking relatively loosely, to carry their inventory. So that's the type of thing that is happening in the market as we go forward. As we combat the fact that we're going to reduce our working capital, this happens all the time. That does not have us back off, however, the fact that we will be reducing our working capital.

In the area of acquisitions, we continue to see a very robust number of acquisitions available. I would say that the pricing is -- well, put it this way, we still remain the preferred buyer without the preferred price in many instances; but that's our history and that's the way we'll maintain it. But the acquisitions stream is, in fact, very robust; and we're working on a number of them as we speak. At that I'd like to open it up to any questions anyone might have.

At this time, the officers of the company would like to open the forum to any questions that you might have. (CALLER INSTRUCTIONS) Bill Fogel, please state your affiliation followed by your question.

This is Bill Fogel from the Galleon Group. I was just wondering if you're going to give any earnings expectations for the year or whether you're comfortable with consensus estimates or not?

At the end of last year we made the decision not to give guidance because of the uncertainty in the marketplace. There clearly remains a great uncertainty in the marketplace. It's a little bit of a, very honestly, a frustration from our perspective because very frankly we're damned if we do and damned if we don't. If in fact we give guidance and miss, then if we don't give guidance and all of the analysts come up with a number and we miss, we feel like we're penalized anyway. Having said that, last quarter we said that we would not be surprised if in fact we could manage to make the analyst estimates at that point in time which were in the neighborhood of -- and I don't have it in front of me -- I think $2.34 or something like that. $2.33 -- I think we're, at this point in time, would not want to back off that. It's clear because of our first-quarter and this and that - I think that's going to be a difficult thing to do based upon the marketplace. But certainly we have a goal on the wall, and that's what we expect to make.

Just one last question. In terms of what you're seeing over the last month or so since the end of the quarter in your markets, are you seeing somewhat of a recovery, are you seeing flattish, or are you seeing them down? If you could talk about that a bit?

I think that the -- what I was attempting to do, we do see some good uptick in the aftermarket services area both in the IGT end and we expect that to be toward the end of the year. In the aircraft, in the aviation aftermarket services, both military -- military we expect to continue to have an uptick toward the end of the year. The commercial we expect the same thing. I do not expect any uptick between now and the end of the year in the commercial OEM area in the build rates. Nor do I expect any uptick in the business jet area from now to the end of the year. We're hopeful that the regional jet business will remain relatively flat, as I mentioned before.

I also think that on the business jet side there have been significant hiatuses at Gulfstream, Learjet, Cessna where production has been shut down for periods anywhere from four to eights weeks at certain facilities which has caused complete cessation of shipments to those customers for those periods of time. That pattern hopefully will recover as we get through the end of the summer. But that has been a significant disruption again in the build to print structural parts area.

Thank you very much.

Ron Epstein, please state your company name followed by your question.

Ron Epstein from Merrill Lynch. Just a quick question regarding -- kind of circling back to the business jet market. So far through this reporting season we started off with General Dynamics and Gulfstream being a little more optimistic, than Textron came out and said well, we don't know if we're all that optimistic, it is what it is, it's too early to call if anything is really changing in this market. Then yesterday Raytheon kind of slipped in on their call that 50 of their horizons got cut out of backlog by Net Jets. What are you guys seeing? What sense do you have on what's going on in the business jet market?

I'm not a business jet manufacturer, so hopefully there's not too many of them on the call. Business in the business jet business is lousy. There are not orders there. I'll tell you what is happening in the area, however, is that a number of the companies are utilizing this period of time to look at the fact as whether they can in fact outsource more of what they do in their own plants. And as a result we're having the opportunity to look at larger assemblies and parts or components that they do in their own plants that they're looking at outsourcing to reduce their costs. That doesn't necessarily mean that all these packages that we're looking at are going to be awarded right away. But I think they're utilizing the lull in the business jet business to look at how they're running their business and what they're accomplishing. I think that the other thing is, if you'll note, that some of the orders from Net Jet and companies of that nature are significantly down because of -- up until six months ago or so that was a saturated market, and Net Jet, etc., really didn't need any more aircraft.

I think the gross market continues to trend down, but the opportunity for us is just growing market share, and it's through absorbing some of the working capital out of the OEMs on this outsourcing basis.

Do you have a sense on what -- how much -- do you have a sense on the opportunities that are presented to you now? How much bigger are these subsystems that you guys do?

You're looking at instead of a section of a leading wing, you're looking at putting together the wing assembly.

So, significant?

(indiscernible) wing and a cell. Those kind of programs.

Okay. Very good, thank you.

Chris Mecray, please state your company name followed by your question.

Deutsche Bank. I was hoping you all could just give us -- I think you touched on it, but I didn't quite pick up on it all. But you said that 90 percent of the margin decline was structural and that kind of goes part way. But can you just sort of go through the three main groups and discuss the year-to-year position? I mean is aftermarket pretty stable in sales in the quarter relative to last quarter, for example, on a sequential basis and so on?

Sure. In talking about aerospace, of which -- part of which is the structures, it's interesting to note that the control, the X control systems, Chris, when we merged, if you remember, we merged the structures products and the control systems into the one group.

Yes.

The control systems in that area, it remains albeit a slight bit down, it is essentially flat. Which is what we were trying to indicate when we said over 90 percent of the margin loss is in the structural products end of that business, and you're talking -- when I'm talking about structural products I'm talking about large machining and sheet metal parts for aircraft or sheet metal components and/or assemblies for aircraft, and that's the big loss in that particular group. In the aftermarket services group, what I was trying to indicate there is that we have seen an uptick in the commercial aftermarket services business, the repair and overhaul of components; and we've seen a relatively large, for us, uptick in the military end. If you remember, we got the C-17 APU contract recently and that has not really ramped up yet; so that's why we remain optimistic toward the end of the year with that particular end of our business.

In the components end of the business, they have been hurt by, as I mentioned, the downswing in the IGT OEM area, but at the same time there's an uptick in the repair and overhaul business. If you translate that, in the past, Chris, we've talked about the casting facility, and in the past we've said that it was behind schedule ramping up. It's ramped up and the business there has increased significantly. And we're very positive about that, and we think we're going to make plan which was significantly greater than last year's numbers at the casting facility.

That's specifically the IGT facility in Arizona?

That's right.

But you're still down in that market broadly in IGT?

Well, in that market; but, don't forget, that doesn't make up the whole components group. What I'm saying is that the ramp up between now and the end of the year will come in the aftermarket end of that business. And from a strategic point of view, albeit the OEM has gone away or essentially gone away, it hasn't 100 percent gone away, we will recover that through the aftermarket and the IGT business.

And that's the statistic I touched on, Chris, where last year we generated 50 million in the IGT market.

Right, the run rate is down there. So does that mean that components as a whole is a little bit flat if you say there's been an uptick in some areas?

Probably net negative.

You're thinking year-to-year or sequentially?

I think some of that business also relates to the OEM build rate where, for example, combusters and things of that nature where we're just not manufacturing as many of them because of the build rate issue.

Okay. On cash flow, I mean, if you -- is there any way to quantify kind of what you would consider unusual movement in inventory? I mean you're down 4 or 5 million in operating cash, it's not a big number, but presumably you'd be positive without that affect.

Yes, in looking at the balance sheet the inventories included 3.4 million of acquired inventory in the quarter from the UAP acquisition in Triumph Thermal Systems. So the net change in inventory from operations was 5.9 million. And typically in the first quarter, Chris, the end of the fiscal year rolling into the first quarter we have significant accrued expenses for incentive compensation. If you look back at last year's first quarter it was the same pattern. And really those items netted out to the change in 15 million in working capital. We think during the year that will swing back, and by the end of the year we'll have given no further acquisition activity on a steady-state basis a reduction in working capital.

Okay, great. I'll pass it on.

John Rogers, please state your company name followed by your question.

D.A. Davidson. I was just wondering, Boeing, in their release, talked about possibly having to shut down their 757 program. There are some other programs out their, Airbus, Boeing, that could be closed down over the next couple of years. Are you concerned about any of these in particular in terms of your relative exposure?

We're concerned about anything that Boeing is looking at not being -- running the thing. The 757, if I were going to pick a program that they are saying may not have much in it, the 757 would be, in fact, the one that we might pick. If somebody said the 737 new generation and the 777 were going to go down, that would be a major league problem for us because, as John mentioned, it's in our top programs. And I think in the announcement that Boeing made, they actually said although the 757 may be shut down, the build rates in those that I mentioned would be up. From that perspective it's a positive thing for us.

And it's also important to note that our position is one where we have contracts for both acquiring raw materials and production for the parts. No deferred cost in any of these programs on the balance sheet. In the event one of these programs is shut down, our contracts have termination provisions in it for us to recover our working capital investment.

Okay, great. In terms of the aftermarket repair business, can you give us a sense of what you're seeing regionally, either by airlines or --

Again, about two-thirds of our aftermarket business is in North America, one-third outside of North America. In North America people say you've got two of the major carriers gone through bankruptcy and the others are distressed. Out of that two-thirds of the North American business, less than 10 percent of it is with the major trunk carriers. Our major customers are UPS, FedEx, Southwest Airlines, AirTran, those kind of people who outsource the majority of their maintenance requirements. The offshore business has a lot of concentration in Asia which, because of what has happened over the last six months, that business has been -- has gone through a cycle and, as Rick mentioned, is recovering as capacity is put back on in Asia. So the outlook would be for that trend, that positive trend to continue in the commercial aftermarket as we go through the balance of the year barring some other kind of event.

John touched on the cargo carriers. Our market share on the component repair and overhaul and the cell repair and overhaul continues to increase both with people such as UPS and FedEx, etc. They're very good customers of ours.

And what about some of the traditional carriers that have done a lot of that work in-house, are you seeing more opportunities there?

We're seeing more opportunities in there. We've had to walk through the mine field, if you will, of making sure our exposure wasn't too great in that area. We are seeing opportunities but, as you well know, they have union problems in outsourcing some of the things that they would like to outsource. But we do do business with American, USAir, United, etc.

But that out there has not been a major step taking by those trunk carriers in outsourcing chunks of activity yet.

Okay, thank you.

Chris Mecray, please state your company name followed by your question.

Still here at Deutsche Bank. I wanted to see if you could just quickly review your capital spending plans? Is around $30 million a plan for the year like it has been in the last couple?

Yes. I think so, Chris, that's not going to change too much. We have a couple of large contracts, I mean we're optimistic about a couple of large contracts that we in fact can have -- can get, and if we get those contracts we'll make some capital expenditures on the machinery and equipment to take care of those contracts. But I don't think it will change too much from the $30 million.

The effective cash flow generally increasing in recent quarters I guess is partly the result of a bit of restraint in capacity expansion. So has that changed at all overall, and should we be thinking in similar terms to last year in effect when we think about your ability of generating operating cash and then net cash flow with that type of spending?

That pattern should continue, yes.

Okay. Remind us the cash flow last year in the first quarter, was that around neutral as well?

Slightly negative as this quarter was.

So the trend is very much in line with last year?

Very similar.

Great, thanks.

Are there any additional questions? Since there are no further questions this concludes the Triumph Group's fiscal 2004 first quarter earnings conference call. There will be a rebroadcast of today's call starting today, July 25th, at 11:15 a.m. Eastern Time and ending August 1st at midnight. The dial in numbers are 888-266-2081 and 703-925-2533. The pass code is 206-596. Thank you all for participating and have a nice day. All parties may now disconnect.