Triumph Group Inc (TGI) 2004 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 2004, third-quarter earnings performance.

[OPERATOR INSTRUCTIONS].

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 Web site at www.triumphgroup.com.

In addition, please note this call is the property of Triumph Group, Incorporated and may not 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, Incorporated. Go ahead, Mr. Bartholdson.

Thank you and good morning, everyone. As we usually do, I'd like to start out and cover a statistical review of the results for the quarter before Rick will pick up and add his comments. Looking at the income statement on a continuing operations basis, sales for the third quarter were 146.8 million, an increase of 11% over the prior year's quarter.

Year-to-date sales were 432.6 million, up 5% from the prior year's nine months ending December. Operating income in the quarter was 6.9 million versus 16.2 million in the prior year. Year-to-date operating income was 33.6 million versus 53 million in the prior year. EBITDA in the quarter was 14 million, with a 10% margin.

Net income in the quarter was 2.7 million versus 8.5 million in the prior year, generating 17 cents per share. EBITDA year-to-date was 53.9 million, with a 12% margin. Net income year-to-date, 18.2 million versus 28 million in the prior year, yielding $1.15 EPS on a continuing ops (ph) basis.

Looking at the sales and providing some information, breaking out the sales, same-store sales in the quarter were down 3% from the prior year's quarter and it's interesting to note that, that compares to the last two quarters where same-store sales were off 10%.

Acquisitions in the quarter added 14%, coming down to the net increase of 11% revenue. The acquisitions affecting the quarter were the acquisition of First Aircraft Instruments, our Triumph composite systems acquisition of the Spokane fabrication operations from Boeing and Triumph Thermal Systems, the acquisitions of Parker Hannifin's heat exchanger business.

Looking at our sales mix year-to-date, breaking it down by commercial generated 44% of sales. That compares to 41% in fiscal year '03. Military sales were 32% year-to-date, equal to fiscal year '03 is 32% share. Regional jets at 6% were up 1% over '03. Business jet revenue declined year-to-date to 7% of sales, down from 9% in the prior year.

And other declined 2 points to 11% versus 13% in the prior year. And, in that other, 11%, the ITT market generated for the 9 months 21 million in revenue compared to the 50 million for the full year '03. Our backlog at the end of December was 495 million versus 486 at the beginning of the year versus 378 at the beginning of the prior year. The 495 was down $2 million from the end of September.

Looking at that backlog by program, the top 10 programs represented in that backlog, the 737 new generation continues to be the number one program, followed by the "777". The C-17 program moved into third place from 7th place in backlog, a significant move in the quarter, followed by the 747, the A-320 program, F-18, 767, F-15 and the Bombardier CRJ program was in 10th place.

Taking another cut at revenue by program on OEM sales, this is where we track sales both direct and indirect, where we can have visibility to what program they wind up on. Boeing commercial aircraft continued to lead, generating 19% of our revenue, followed by Boeing military and space programs, which generated 11% of the demand and Airbus programs were 5%.

The only customer that was over 10% to miss this direct billings, the combination of Boeing commercial, military and space accounted for 23% of our revenue and the final cut on revenue, foreign sales remained at approximately the 20% level. Turning to capital structure, net debt at the end of the quarter was 205 million. Net debt to capital remained low at 28.5%.

Cash flow from operating activities in the quarter was 7.5 million and in the quarter Capex was 6 million and it looks like now that for the full year, Capex will be in the neighborhood of $25 million for the year. With that overview, I'll turn it over to Rick now. Rick?

Thanks, John. Good morning, everybody. I want to start out and talk a little bit about the ITT-OEM business. The quote that we had in the press release, maybe explained a little bit of it and then go back in some history as to what we've said in the past.

Clearly, we are disappointed by the impact we had in the changed ITT market conditions and we're referring to there, the OEM conditions. Some of you who have followed us might remember that our largest OEM customer was Siemens Westinghouse, although we sold other people and you might also remember that we talked in the past about our strategy of taking part in the OEM market, at the same time building up our repair and overhaul capacity and capabilities at the same time. So, when the OEM market subsided, we'd have the ability to take advantage of the repair and overhaul market.

We have had some concerns on this, as you know, in the last couple of quarters in regards to the overall market and lack of business, but what we, in fact, were surprised with was the rapidity at which the OEM market disappeared. And frankly, that is the reason, as indicated in the press release, that, for example, the ITT cost exceeded revenue by approximately $5 million in the quarter, as indicated in the press release.

We are clearly still committed to the after market business in the industrial gas turbine business and will, in fact, continue to grow that business as we have over the last three or four quarters. We are evaluating what steps we are going to take in the OEM business. As I mentioned in the quote on the second part of the press release, in giving some expectations on earnings for the fourth quarter, we talk about prior to any costs associated with reevaluating the ITT market.

We don't know at this point in time, what any of those numbers would be, but it would be evaluated and completed by year-end that we would, in fact, make an evaluation and exit essentially the OEM market and that might involve a one-time charge. We really don't know at this point in time. I do want to stress for a lot of people that we, in fact, are committed to the after market in the ITT. It's a good business.

We've invested in that. It was in our long-term strategy over the last year to do so and the problems that we've had in the OEM market are related to, as I said, the rapidity of the decline in that business. And consistent with what we've done in the past, we've faced up to it in the quarter and gotten that behind us with the exception of what I just spoke about.

On a much more positive note, there are a lot of very good things happening in the company. The press release, and John mentioned issues, our aerospace OEM business is stable. Our after market actually exceeded our goals, so we're very optimistic about the future of our aerospace business, both in the OEM area and in the after market area.

As I mentioned, our after market business actually grew. Our same-store sales, which were down in the previous two quarters, were still down but a very minor 3%. Our backlog has remained essentially the same. We have a robust backlog and we feel very good about that. Our mix, as John mentioned, has not changed much and we expect that certain programs will continue to grow. He mentioned the C-17 going to third on our programs.

We're contributing to the C-17 through many of our companies and that's not just one of our companies as we go through our, the number of companies that sell the C-17 program. I would be remiss if I didn't spend a little bit of time on our recent acquisition.

The recently-announced acquisition of Rolls-Royce Gear Systems, which is now Triumph Gear Systems was somewhat buried in the fact that we issued a warnings, an earnings warning at the same time as we announced the acquisition. The acquisition itself is a very important acquisition to us. It adds, as the press release said, about $55 million of revenue in fiscal 2005 and will be immediately accretive to earnings.

The importance of the acquisition, for those of you who did read the press release, is the fact that we already own a company, ACR industries right outside of Detroit and it provides our company with a very significant position in the gear-driven actuation business for the aerospace industry. And we have significant positions in gear-driven systems, high-lift actuation and it really expands value-added products for our aerospace systems group. So, we're very enthusiastic about that acquisition. We've been out there, we've met a lot of people there and we're in the process of integrating the company into the Triumph Group and we're very pleased to have that company aboard.

Before anybody might ask a question about acquisitions, we are working on a few acquisitions. We don't have any that are particularly imminent, but we are looking, working on some and we will maintain the disciplined acquisition pace that we have had in the past. At that, I'll open it up to any questions you may have.

[OPERATOR INSTRUCTIONS].

Chris MeCray, please state your affiliation, followed by your question.

Yes, from Deutsche Bank. Hi, guys.

Hi, Chris.

Yes. I just looking at the results in the quarter, I guess just to confirm, because the wording was just, it could have gone either way. You would have suggested that the add-back from ITT would be around 7 million, not the 5, right? The 2 year warranty is not included in that 5 million loss?

That's correct.

OK. So, if we do that and we get a margin implying about 11%, it's sort of between the first and the second quarter of the year, obviously within the range of what you've been producing. You did note, last quarter that there were unusual expenses that dragged down the margin there a little bit. So, you know, given that you're a little below the run rate of the first quarter and last year, were there also acquisition-related costs that, or anything else that you might point to that might account for the gap between 11 and say the 12 to 14 that you'd been doing?

No, I think, in the implication, in the estimate for the fourth quarter, in EPS in the release would indicate that other than the two items that we specified in the release, that really is the operating margin at the current state.

OK. So, you know, are there any particular mix effects or anything you would point to, to maybe account for that relatively, you know, small but nonetheless that drop in margin?

Chris, I think that it, nothing in particular, other than perhaps two things. General pressure on, on some, you know, of the OEMs' issue and then some costs that were really not, I wouldn't call them extraordinary but we've been very aggressive in a number of programs that are future-type programs that we've expensed as we've gone along. If you want to read into that the 77 type of quotes, then you can do so. So there are some expenses there, but, you know, we look at that as the normal course of business that we have to proceed in that and is consistent with the strategy of moving up the food chain, if you will.

Right. OK. The one other thing, that 2 million in R&D at ITT, you know, should we really be calling that out, given that I mean, I presume you're going to spend that kind of money going forward?

I think that, and again, the 40 to 45-cent outlook includes that spending in the fourth quarter. I mean, we, we've counted that in estimating what we're going to do in the fourth quarter. And that's going to be an ongoing thing, where we see opportunities to expand the product offerings in the after market. We'll make that front-end investment.

OK, great. And the Rolls-Royce deal closing is estimated at when?

It's closed.

It's done?

It's closed. It's done. It, I was out there, when was it? Last week. That will be in the full fourth quarter, Chris.

I gotcha. Oh, yes, OK. So the announcement came right after the end of the quarter, so it's going to be in there most of the fourth, OK?

That's what we were concerned about when it was sort of mixed in with the other news, the other release that we had.

Well, it looks like a neat business. Good. I'll pass it on.

Robert Jack Prayer (ph). Please state your affiliation, followed by your question.

Good morning. Merrill Lynch. Good morning, John and Rick.

Good morning.

Two questions. One, if you can, to what extent can you kind of color out the time line in the quarter? Because, it sounds as if this was something that really developed late on you in the quarter in the ITT business. And secondly, if you can bring us up-to-date with the progress for the disposition of the metals business?

Two things. I'm not, I'm not sure it was late in the quarter. You know, late in the quarter perhaps only because we focus on, you know, the numbers in early to mid-December, you know, on the quarter. But, I don't think it was necessarily, you know, late in the quarter. The costs that we talked about that exceeded revenue were, were throughout the quarter.

OK.

In the metals group, we, as you know, it's discontinued. As you know, we have it up for sale. We would expect and anticipate, although it is not done yet, there are very strong possibilities that that will, in fact, will have something under contract by the end of the fiscal year. We don't have anything signed at this point in time, but we, we're optimistic.

Given the, I don't want to get you in too bad a position here, but the carrying value of those assets, would you anticipate that there would be a charge necessary in connection with that sale?

It's really hard to say at this point in time because we're still in negotiation with the buyer. If there is a charge, it will be a relatively small charge.

OK, and final question. What, what would be the approximate value of your invested capital in the OEM ITT business, as it sits on your books today?

That's, the OEM ITT business and the after market business are combined. And the facilities support both sides of the market.

The -- the real question is, how rapidly we can ramp up market share in the after market and fully utilize the assets that we have supporting that business. So, there isn't a discrete breakdown of the capital committed just for the OEM market.

Basically what we're trying to look at during this last quarter here, it's hard to break out, though. It's an impossible to give you a number at this point in time because, as John says, there, we used the same assets in both businesses.

And as Rick mentioned before, the plan all along has been to make the investment for the long term, to focus on the after market. The strategy was to utilize demand on the OEM side to support that front-end investment and we've had significant disappointment based upon what's happened in the overall IGT market, compared to where it was two years ago when we began the investment.

How would you describe your progress over the past couple of quarters of at least marketing that service to potential customers on the after market side?

Positive.

OK. All right. Well, thank you very much.

Steve Levenson. Please state your affiliation, followed by your question.

Well, good morning. Advest. How are you, Rick and John?

Good morning, Steve.

Hi, Steve.

Hi. In relation to the casting facility for IGTs, is there, presumably there will be some excess capacity. Can you use that for any of the aircraft products you build now? Is there any opportunity to consolidate or to add aerospace cast parts?

Steve, we've already, approximately 20% of the capacity of that plant and it's risen significantly over the last, I'm going to say, four to five months. About 20% of the capacity is now being utilized for aerospace casting. Not only castings that other people buy but castings that we buy within our own company. So the answer is clearly yes.

OK. And excuse me. I may have counted wrong. But in your top 10 programs, I only came up with 9. I'm wondering which one I missed. If you don't mind reading down the list again.

Let me, let me go down that list again. 737 new generation, 777, C-17, 747, A-320, F-18, 767, F-15, CRJ, CH-53.

OK. It was CH-53. OK. Thanks very much.

Thanks, Steve.

Ron Epstein. Please state your affiliation followed by your question.

Yes. Merrill Lynch. Good morning.

Good morning, Ron.

Got a couple of questions for you. When you, in the commercial after market, you mentioned that you're seeing some pickup? What are you seeing? Where is it coming from and kind of in a broad sense, what's, can you just give us some color on that?

Well, I think, we do business, there's three major areas of business that we do in the after market services. One of the reasons that the C-17 has moved up the, up the list is in the after market business we do on the C-17.

OK.

Because that's clearly growing.

Secondly, we have been very successful at some of the cargo carrier companies, such as, you know, FedEx, UPS, in regards to garnering more businesses because, business from them because we've expanded our product lines to them.

And thirdly, we've done a tremendous amount of business in Asia, where we have garnered a, with our capabilities, we've garnered a lot of business throughout Asia, we've established a sales office in Thailand at, really at the behest of our customers over there because they needed the contact and wanted the contact over there. So that's been a, I think, John mentioned that our foreign business is about 20%. If he didn't, it is about 20%.

OK.

And a lot of that is coming from Asia.

OK.

So it's been a very good growth for us over there.

So the company hasn't seen kind of a broad pickup in the commercial after market yet? Is that true or not?

Ron, I think it's been steady.

Steady?

There's been steady improvement quarter over quarter, but there's, there hasn't been a quarter with a significant snap-back or anything like that. It's just gradually

OK.

well over time.

OK. In other words, you know, there's been speculation in the press and Boeing kind of dodged the question yesterday about Wichita. Now, does that, with regard to, you know, strategic acquisitions in the future, I mean does that present opportunities for you guys?

Only if Merrill Lynch will give us a lot of money.

Well, pieces of it. I'm not talking about the whole thing but, you know, just pieces of it.

We really haven't addressed that. I mean, Wichita, it does some of the same things that we do and clearly if there were pieces of that available, we'd be very interested in looking at that because I think it would fit what we'd be able to do and as a matter of fact, enhance what we'd be able to do, because then we'd go more up the food chain vis-a-vis assembly products and this type of thing.

So, I think that we'd be foolish not to look at pieces of that if, in fact, it came up. We have talked to a number of people at following since that, speculation came out. I noticed the same thing you did. Harry Stone Cipher dodged that issue. And they've clearly dodged the issue with us when we've inquiries as well.

OK. Thanks.

John Rogers. Please state your affiliation, followed by your question.

D.A. Davidson and good morning.

good morning, John.

Just one more question on the IGT business. Who is your biggest customer on the OEM side?

Siemens Westinghouse.

Any, that's what I figured. And is it, is it a question of just their product not working?

No, no, no, no, no, no, no. I didn't mean to, if I intimated that, I didn't mean to. It is very simply a disappearance of the market, OK? The OEM industrial gas turbine business, whether you're talking about Siemens Westinghouse, whether you're talking about GE, whether you're talking about Alstrum (ph) and the others that I'm not thinking of at this point in time, has, in fact, deteriorated significantly. OK? The business is just not there, OK?

OK.

And that's, it's not a matter of their product not working. It's a matter of the fact that they don't have, I don't think we've had, we didn't have any falling out with Siemens Westinghouse. The business is just not there. They don't have the business to give us.

And business that had been given to us was canceled.

OK.

And there was a contraction in their business, which caused the fall-off in volume with us.

OK. So it's not a question of just redirecting it to another OEM or trying to get other OEM business?

Not as we see it. I think this is a --

No.

market-wide issue. That's why I was so, tried to explain, from a strategic point of view, I think we had it right strategically in that doing the OEM and then preparing to take advantage of the after market, but what has happened to us over the last quarter and even longer than that is the market deteriorated faster than we thought it would.

OK. OK. And then, just a couple of other quick things. Your aerospace OEM business is about $90 million in the quarter? If I back out everything else that you gave us, is that pretty close?

No. The split is, I'll give it to you exactly.

OK.

The OEM piece off the 146.8 million. OE revenue was 84.4, after market, 46.4 and the 11% other was 16.0.

OK. OK.

And that, that OE is commercial, military, regional jet, business jet.

Right. OK. And then, with the Rolls-Royce business, is roughly similar type splits?

No. The Rolls-Royce business is, has a heavier content in the military end.

OK. So as we look out over the next 12 months, then, but the, the split with commercial should decline a little bit? Just as the after market picks up and the military picks up a little bit?

That's a hard question to answer. We say in the press release and I think, we'll hold to this, as that we do really see some of the OE business that we have stabilizing.

OK.

And there's a couple of projects that, you know, I wouldn't put any numbers to at this point in time, but we're optimistic about that, in fact, the OE business could be at least stable, if not up a little bit.

And, John, when you layer in the Rolls-Royce business, you're going to get a bigger percentage of that as military than commercial.

OK.

So you may just see a couple points shift there.

OK. I was just trying to look at the sensitivity looking out over the next year.

Right. OK. Thank you very much.

Chris MeCray. Please state your affiliation, followed by your question.

Still Deutsche Bank.

You haven't changed, had you.

Haven't moved. OK. Just the tax rate, maybe for the fourth quarter and for the year expectation.

Fourth quarter, 35.5.

OK. And presumably, that would be a good bet for next year for now still?

Yes. Yes.

Good. Your capital spending, I guess down a little bit but still obviously at levels implying significant investments in areas. Can you review sort of where, where this year's spending plan has covered, or what, what you've been doing?

Chris, it's been a relatively smooth across. I think, that what you'll see in the fourth quarter, less spending in the fourth quarter as we go forward.

Next year, we haven't finalized our plan for next year, but plan-wise it will probably be somewhat in the same area.

And that basically, is pretty much across all of our business. We don't have any, at this point in time, any major plans such as our engineering investment we made at, in North Carolina.

We do have some pieces of equipment that are in the business plan for next year that are expensive pieces of equipment, but that would be with business that comes in.

We don't really have anything of big amounts. So, I think that the, the capital expenditure issue might be somewhat lower, which is consistent with a flattening out of the OE business. I mean, I don't know if that answers your question, but I just don't have any specific numbers that are, that stick out that are going to be any less or any more across the board.

I was just trig in terms of the characterization of the areas you're spending in, whether it's, you know, upgrades in the machinery in one area of the business or another, or new plant infrastructure or what?

I think as we've said in the past, the maintenance level of spending, Chris, is, the requirements are very low, so that the spending we're doing is really on specific projects where expansion of existing facilities.

We, you know, completed this year the engineering center down in North Carolina. We completed the major program on the long processing tanks in California, where we can take parts up to 110 feet long. That was a major investment. And going forward, they are, are really specific project-related investments to garner additional market share with new capabilities. As opposed to a maintenance level of spending.

Great. One other thing. In the past, you've talked about cross-selling initiatives across the company and made some, some changes in management to facilitate that. Can you update us on progress there?

Yes, I think that there's nothing but, you know, basic success in that area. We've been very successful in that area. The challenge still remains, because we still have some customers who, such as Boeing, Seattle, for example, is very anxious and we've accomplished the fact that we have a single supplier code within Seattle, but we don't within the other Boeing plants because the other Boeing plants aren't up to speed as is Seattle.

So we, and we do have an office in Seattle. We have a Triumph Wichita support center, which handles all the customers in the Wichita area for all Triumph capabilities and products. I wouldn't be surprised that we'll have a few more of those support centers in other geographic areas. So, from a customer base, we have been, in fact, very successful. I referred during your first question to the Boeing-7E7 program.

We're excited about things of that nature because as you well know, one, two, three, four, certainly longer than that years ago, Triumph Group would not have even been considered for such programs of this nature. So, I look at it as being very successful.

Do we have challenges in regards to the senior people in some of these companies wanting to do business with Triumph and the local, you know, buyers being concerned about getting better prices on components? Yes, we do. But we're overcoming that and I think it's been a very successful program.

Sounds good. Thanks very much.

Are there any additional questions?

Since there are no further questions, this concludes the Triumph Group fiscal 2004 third quarter earnings conference call. To attend the reply of the conference please take note of the following phone numbers and replay those. The toll free dial-in number will be 1-888-266-2081, the toll dial-in number 703-925-2533. The replay code 370150. Thank you all for participating and have a nice day. All parties may now disconnect.