Triumph Group Inc (TGI) 2004 Q2 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2004 second-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 Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risk, 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 be recorded, transcribed, or rebroadcast without explicit written approval.

At this time I would now 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. Go ahead, Mr. Bartholdson.

Good morning, everyone. We would like to start out and review with you the results of the second quarter ended September of our fiscal year '04, before turning it over to Rick for some additional comments.

For the quarter sales were 145.1 million, versus 141.3 million in '02. Operating income was 12.1 million, versus 18.6 million in the prior year's quarter. EBITDA came in at 18.7 million, versus 24.4 million in '02. EBITDA margin was 12.9 percent, down from 17.3 percent in the prior year's quarter. Rick will have some comments with respect to the margin position in the September quarter in a little while.

Income from continuing operations was 7.9 million, versus 9.8 million in the prior year. Year-to-date sales were 285.7 million, up marginally from 281.1 in '02. And income from continuing operations was 15.6 million year-to-date, versus 19.5 in the prior year.

Discontinued operations incurred a loss of 600,000 in the quarter, and year-to-date a loss of 1.2 million. EPS from continuing ops was 50 cents a share in the quarter, helped by about approximately 2 million of adjustment in the tax rate provision in the quarter, based upon closing out three years of audit with the IRS, and recovery of some provisions that we had made in a very active acquisition period of time. That 50 cents compared to 62 cents in the prior year's quarter. Year to date, earnings were 98 cents a share, versus $1.23.

Turning to the backlog position, backlog at the end of September was 497 million; that compares to 490 million at the end of June; 486 million at the beginning of the year on April 1; and the year earlier level was 378 million, at the end of fiscal year '02.

Our top ten programs based on backlog position shuffled a little bit but continued to be the same names, with the top program being the 737 New Generation; second place was the 777; third place 747; fourth place the F-18; fifth, 767; followed by the A-320 family; C-17 was next; Bombardier's regional jet programs in eighth; the CH-53 in ninth; and the F-15 program in tenth place.

Looking at our sales mix in the quarter, and comparing it to the prior two years, year-to-date the mix, the sales were 44 percent derived from commercial; this is both OEM and aftermarket. And that compared to 41 percent in fiscal year '03, and 46 percent in fiscal year '02. Our military business year-to-date was 33 percent of revenue, up from 32 percent last year, which was up from 26 percent in fiscal year '02.

Regional jet business was 6 percent of revenue in the six months, compared to 5 percent last year, and 6 percent in the prior year. Our business jet business was down to 7 percent of year-to-date sales this year, down from 9 percent in fiscal year '03, and down from 11 percent in fiscal year '02; so a significant decline there.

Other sales were 11 percent versus 13 percent in '03, and 11 percent in '02. Of those sales, our IGT revenue year-to-date was 16 million, or a run rate of 32 million, compared to 50 million in '03 and 45 million in '02. So again a significant negative decline in our IGT markets.

The OEM mix, another cut at sales which we have talked about in the past is, when we have broken out what drives revenue between the build rate at Boeing on large commercial transport versus airbus. Boeing commercial aircraft production, both direct sales to Boeing and to Boeing prime suppliers, grew 19 percent of the revenue. Airbus is 4 percent airbus commercial build programs. And Boeing military has increased to driving 10 percent from OEM production on the military side.

Looking at cash flow, cash flow from operating activities was a positive 16.4 million in the quarter before CAPEX spending of 7 million. We are still looking at the year for CAPEX to be in the range of $30 million this year.

Total debt at the end of the quarter was 214.7 million. Less cash on the balance sheet, net debt was 207.4 million; and net debt to capital was approximately 29 percent below our long-term target of 35 to 40 percent.

Same-store sales in the six-month period compared to the prior year were down 10 percent, off 29.1 million; more than offset by acquired revenue from the three acquisition of first Aircraft Instruments, the operations of Boeing Commercial Aircraft in Spokane, Washington, and the UAP division of Parker Aerospace, which added 33.7 million, resulting in the marginal increase in revenue for the year-to-date period.

The only customer which is greater than 10 percent continues to be the Boeing Company, where the combined commercial, military, and space sales make up 22.1 percent of our revenue.

Finally, foreign sales continued to run in the range of 20 percent of sales. With those financial points as an overview, I will now turn it over to Rick for his comments.

Thank you, John. Good morning, everybody. There is no doubt that we have had a difficult quarter, especially on the margin front. If I may, I will quote from the press release in part, where we say that we continue to be impacted by weak demand and pricing pressures in the aerospace and power generation markets. That has been true for the beginning of this year, the first six months of the year; and we experienced that in the second quarter.

John commented briefly on the percentage of business and the issues involved in those businesses. Our military business has remained steady and as a matter of fact has grown some. We have some very significant contracts that we have announced, such as the C-17 APU contract, and that is growing. Our aftermarket services group business has in fact increased; and in fact in that particular group our margins are up from year-over-year.

John commented on the business jet. It is down to 7 percent of our business. We don't see that picking up quickly. The regional jet business has been relatively steady for us, but has not come back year-to-date. Clearly the commercial, which includes our aftermarket, at 44 percent of the build rate, is down. We feel that it is somewhat at the bottom; so we do have some positive thoughts in that regard. We have maintained a significant amount of market share there.

In the IGT, industrial gas turbine, business, clearly the OEM business as we have discussed in the last two or three quarters has been down. The build rate at virtually any manufacturer of industrial gas turbines has been significantly down. However, we do see some positive things happening in that area. We do have a significant order pending, which we can't announce; but we are very optimistic that we're going to receive a significant order.

The repair and overhaul business in that arena is in fact significant and currently growing. Our shop is full with growing IGT parts et cetera. All of which points to the fact that we feel that the balance of the year will be stronger. I will comment on that a little more in a second.

Our cash flow will continue to be positive. Our bookings as John mentioned are up, and a significant number. Having said all of that, we have a number of future thrusts that we in fact intend to take. Number one, John had mentioned our CAPEX remaining at approximately 30 million, which is about the same number we have spent over the last few years.

We are being very circumspect on how we spend our money; but it is an important issue because we have been investing and will invest for the future. One great example of that is our engineering center we are putting in North Carolina; it is relatively finished, and that will bode us well going forward in the actuation products et cetera that we are designing down there.

We also have embarked, a little while back, and have put a major commitment to lean manufacturing. This we feel will significantly reduce some of our costs and take a significant amount of dollars out of our working capital invested. We are in the process of reviewing low-cost sourcing alternatives, in response to the margin pressure that we have gotten from our customers. We are working with numerous customers to cut our costs and increase our margins.

John mentioned that I would talk about the margin area. I have referred to it. I will point out that in this quarter we did have a positive tax impact. And if you net the positive tax impact, and negative nonrecurring costs, which we have chosen historically and we still continue to put into our operating income, as opposed to coming up with a separate line item; but if you net the positive tax impact and the negative non-recurring cost of an unsuccessful acquisition which we spent a lot of money on, which was requested by a large European commercial aircraft manufacturer, and a write-off of cost associated with a multi-year customer requirement in the IGT group, you would approximate our first-quarter earnings.

As I mentioned before, we do see a modest increase in the third quarter, and a decent and (technical difficulty) to good fourth quarter, to achieve the guidance that we put forth in our press release; which was for the year $2.00 to $2.25 from continuing operations. At that I would like to open up to any questions anybody may have.

(OPERATOR INSTRUCTIONS) John Rogers.

DA Davidson. Just a little bit more questions on the margins if I could. I guess what I'm trying to understand a little bit is how much of it is direct reductions in product pricing, versus just mix issues? I don't know if you will give us anything specific. But I think, John, you mentioned same-store sales down 10 percent. Is that where the margins came out of? Or is it eliminating the -- or fewer IGT sales? Are you seeing same-product pricing going down?

I think it is a combination of all three, John. That there is the lower volumes going through, affects absorption on the same-store sales. In addition to that, Rick mentioned that there was a significant item with respect to one contract in the IGT business, where we are developing a family of parts for a large global-installed baseload fleet of a particular type of power unit; and the front-end development cost on that program was incurred in the quarter; along with writing off a significant amount of expense we incurred in pursuing a potential acquisition in the UK. If we back those out and back out the tax rate adjustment, the margins in the quarter were approximately equal to the margins in the last quarter.

Okay.

So there is no fundamental change, it is a continuation. And it was approximately the same number down in same-store sales last quarter. So the underlying business is really running at a steady-state, at what we consider and hope is the bottom of the cycle.

Okay. So if we do see a pickup in sales, you should be able to get back at least that whatever it is, almost 11 percent margin?

That gets us to the $2.25 for the year, if we get that recovery as we go into the fourth quarter.

Some of the new programs, the A-380, the 7E7; any comments there in terms of content?

We did make a press release a while back. We do have content on the A-380. We have the door actuation system, the cargo door actuation system on the A-380. We also have a number of stringers and flooring assembly on the A-380 when that goes forward. We, by the way, were not cash up front suppliers on that particular product on that (inaudible) plane. So it is excellent for us.

The 7E7, we are in fact being asked to quote, and have quoted on some of the larger programs on the 7E7. Not a lot of that of course has been awarded yet. It is in the beginning stages. We are currently working on that. I think the positive sign on that is that we are thought well enough of at Boeing at Airbus to be able to move up the food chain; and in fact being asked to quote on that issue.

I might also point out on, for instance 380 program, we are developing that program. As Rick said we don't use special charges. We also don't use program accounting, so we don't have any cost hung up on the balance sheet. We are incurring that cost as we go forward in working on all of our programs.

Thank you. By the way I am glad you don't take the special charges.

Ron Epstein.

Merrill Lynch. In a broad sense, what are you guys seeing out the business jet market? I think among some investors there has been a little more increasing positive sentiment with regard to what is going on with the business jet cycle. But are you seeing that? Is that just not what is happening?

We don't see it. I do not look at the business jet market getting any worse in regards to our percentage of business. I don't see yet the net jets and the fractional owner issue increasing significantly; certainly in the balance of our fiscal year.

I think that is very directly economy related. Obviously you saw the numbers yesterday or the day before in regards to the GDP. I think that will help it in time; but it is a lagging issue. So I don't see that happening very quickly in the next six months. I think that perhaps in the end of 2004, 2005, you might see an uptick. But we just don't see it.

In the real short-term, the only impact is the cycle we have just gone through of extended shutdowns. With the lines opening back up there is a near-term marginal recovery; but the business is still not showing positive signs, other than that. If you have a six-week outage or an eight-week outage, and that outage ends, that is going to have a marginal positive impact. But no long-term positive trend that we see yet.

With regard to the regional jet market, there has been a lot of talk about larger regional jets, the 70-seaters from both Embraer and Bombardier. Embraer has got some even larger plans. Do you guys have a view on where that area of the market is going? And how that will impact your top line going forward?

I think that that market is in fact again a little longer term; but it is an excellent market. I think it will certainly help our top line as we go forward; and our repair and overhaul market as we go forward. Because you have to remember, when we are on a Bombardier RJ, for example, we participate in the life cycle of that just like anybody else does who has their proprietary product on the aircraft.

I think our only disappointment perhaps, and we are working on that disappointment in the RJ area, is that although we have content on Embraer, we are not as heavy as we would like to be on that aircraft. Because Embraer is doing very well; and we are trying to increase our market share on that as we speak. But I look at the RJ, I look at the Bombardier, etc. as doing very well going forward.

Those were my two questions. Thank you.

Chris Mecray.

Deutsche Bank Securities. On the two things that you mentioned within margin in the quarter, my understanding of prior acquisitions is that the costs generally run in the couple of hundred thousand maybe type of range usually reflected, back when you broke out SG&A. Is that the ballpark of where you were there, on that?

No, it was higher than that. This was an extended -- with a lot of iterations, a lot of legal activity that was significantly higher than that.

Is there any potential of recouping that at all? Any intent to go after that at all?

No. The only thing we have is goodwill generated with that large commercial aircraft manufacturer in Europe that invited us into the process.

Right. On the IGT side, front-end development costs; is this something that surged in the quarter and declines? Or I guess typical of a lot of things like that, they usually run over a stretch, over a period. Has it been a facet of several prior quarters, and it is just beginning to go away now? How would you characterize that?

The amount incurred in the quarter is both learning curve process in the plant and the specific product that we are developing. It is a proprietary product. It is a customer's proprietary product, which is an improvement over the OEM design, with a lot of technical intricacies in producing the part. We are through the majority of that on this particular family.

That being said, we are going to commercialize this complete set of parts. But we would anticipate down the road that -- and hopefully looking forward to down the road, doing this on other models, and going through the same kind of process. With again the development cost being one that we expense rather than hanging up in the balance sheet. But in this particular case, the majority of it is behind us.

In a big picture sense, and I am not sure how to phrase the question other than to start with a comment; that I guess these types of cost are unusual and worth culling out, but probably don't qualify as extraordinary because they're ongoing operating type issues. Is there a way for us, on this side of the equation, to kind of understand where these types of costs might come up in the future? And to what degree we plan for those? Since you regularly engineer new products and refer to the North Carolina facility coming in and regularly investigate acquisitions.

Chris, I don't know. We would have to work on that. But the problem we have with that -- for instance, we talked about, when the question was asked about the 7E7, that is a very significant potential development cost. And that somewhat depends on two things. Number one, it depends on what we are allowed to bid on. And obviously we are working on a number of projects there, so we have some thought process as to where we can be on the 7E7.

On the other hand there are projects that -- well, I will give you an example. We have like five or six major projects we are working on for the 7E7 currently. We don't even know at this point in time whether we are going to get one of those, which ones we might get. Some of them are larger than others. So it is very hard for us to project exactly what costs are involved there.

We might have more input on that over the next, say, nine months to a year type of thing. We will probably be addressing that on a quarterly basis as we go forward. But having said that, I don't know how to project that on an even keel quarterly basis, because sometimes we don't even know what we're going to have the opportunity to quote upon.

I think as we move up the ladder, and move into these higher-level longer-term development programs, we need to look at how we -- you are right, how we communicate that. And what the longer-term impact is, when and if we win one or more of these major programs.

The 77 is coming up, I guess, and some of the opportunities are gradually coming up for bid. Can you just kind of frame how you are approaching that program? Of the products that you're contemplating bidding on, are they basically existing core products that you have on other programs; and hence would be added to the capacity, and you can afford to bid aggressively? Or how many of them might be, in effect, new products or product extensions that need to be treated more finitely?

Generally speaking, the programs that we are bidding on, we already have all or a majority of the capability to go ahead and produce, depending on the design accepted by Boeing in this case on the projects that we are bidding on. If that makes any sense to you. But basically that might mean that we have to invest more capital in some of these things.

But generally speaking we have the capability to do that, which is why we are being asked. I doubt we would be asked if in fact we didn't have that capability already. Because it would be a big bet on Boeing's part to ask somebody who is not in the business or never had been associated with it.

I think a big portion of the cost that we see is putting our pieces together, but it is the qualification process.

Right, okay. I may redial in, but I will try not to hog. So I will pass it on.

John Rogers.

I was wondering if you can give us a little bit of comment on, regionally from the airlines, where you are seeing activity? I know you do a lot of business with airlines on some of the AP units out of the Far East as well as domestically. Any thoughts you can share there?

A, we do a lot of business in regards to what are now the large cap airlines. Southwest is a very large customer of ours. Asia, you're absolutely right; we do a significant amount of business in Asia, and we think that is going to continue to increase as we go forward. John will have some comments here in a second, but I think the other issue here is how do the ex-large cap airlines, the Americans, United, USAir, etc., react and outsource some of their maintenance. And some of that is happening as we speak.

The MRO split for us is about 60 percent North America; 40 percent outside North America, with the majority of that being in Asia. We do an awful lot of business in Asia. Of the 60 percent in North America, people think, oh my goodness, you have got the major trunk carriers that are all in trouble. Of that 60 percent, less than 10 percent of that is with the major trunk carriers. The biggest piece of business in North America is a combination of UPS and FedEx. As Rick mentioned, Southwest is a big customer.

So typically in North America we do business with the people who outsource maintenance, not the integrated major trunk carriers. And 40 percent of the business concentrated in Asia is outside of North America. That Asian business has been coming back significantly; and the North American business is healthy and sequentially growing as we speak.

Okay.

Hopefully that gives you a feel for the geographic split.

No, that helps. In your Q you typically breakout cost of goods sold and the SG&A. Can you give us those numbers?

The Q will be out shortly.

Okay, thank you.

Chris Mecray.

I was just wondering to what degree, given Goodrich's comments at an investor conference yesterday, which of course you wouldn't have been at, but their comments were basically that they are interested in outsourcing more of their product and reducing the number of suppliers. Any direct comment on opportunities with that company to materially step up business in areas where you already work with them? Or don't yet?

We have a meeting set up with them, but there is nothing really that I could comment on specifically; in that we do do business with them. They are not alone in our customer base that says they want to reduce the number of suppliers they do business with. I think we have generally speaking been a beneficiary of that with our customer base; especially Boeing. (technical difficulty) of the airlines that John just referred to. But I don't have anything more that I can really specifically say too; other than the fact that I do have a meeting set up to discuss that issue.

Regarding capital spending plans, is a 30 million type of number, which I guess incorporates some non-maintenance type CAPEX with some facility expansion, is that a generally ballpark number that is good to work with, going forward?

I think it is a good number to work with going forward. We have become a little more difficult with some of our operating who want to spend some money significantly, because we are committed to producing cash flow in the year. And we want to make sure that the capital expenditures that we're making get the proper return, etc. But generally speaking, yes, you can use that number.

The maintenance CAPEX on that 30 million is less than $5 million. So we really are spending money on specific future programs, not on maintenance CAPEX. The maintenance CAPEX budget is low very low in this company. In the $30 million, more than or approximately about a third of that is the engineering center down in North Carolina, which again is a discrete, onetime project.

I wonder if you could just -- it would be sort of instructive to refer to new products engineered each year; or somehow quantify the extensions that you are doing as you go through the year. Since I think it would be an interesting tale going back over your history as a public company.

Good point.

Just a thought.

That is a good thought.

I will leave it there. Thank you.

Ron Epstein.

Just a follow-on to Chris's comment. There was discussion of this I think on last quarter's conference call, and I think there has been some discussion of it with the business jet manufacturers, that they -- one in particular comes to mind, that is particularly vertically integrated.

Have you seen a movement among some of the business jet primes to move more value-added stuff to the supplier? Out of their own shops into supplier shops?

We have sort of seen it on two different fronts. We have had, number one, requests on quotes to outsource some of that business on a long-term basis. In some cases it has gone beyond that. I obviously can't be specific in some things. But they have also talked about divestiture of different parts of their business.

So I see that as a possibility; not necessarily for us, although being acquisitive we would probably look at something like that. But I see that as a possibility for some of those manufacturers.

I would also characterize it, though, as a lot more discussion than actual action being taken. It is an issue that they talk about; but specific execution has been few and far between.

Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2004 second-quarter earnings conference call. The reply for the conference will be available today at 11:15 AM and will last through November 7, 2003, 11:59 PM. Thank you for participating, and have a nice day. All parties may now disconnect.

Thank you, everyone.