Triumph Group Inc (TGI) 2005 Q2 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2005 second quarter earnings performance. (OPERATOR INSTRUCTIONS). On behalf of the Company I would now like to read the following statements. 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 our Website at www.triumphgroup.com. In addition, please note this call is a property of Triumph Group, Inc. and may not be recorded, transcribed or re-broadcasted without explicit written approval. At this time, I'd 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. Bartholdson.

Thank you and good morning everyone. As we usually do, I'll go over some of the quantitative results in the quarter and year to date, and then turn it over to Rick. First turning to the income statement, sales in the quarter were $170 million versus $145.1 million in the prior year. Sales year to date, $335.3 million versus $285.7 million. Income from continuing operations $4.9 million versus $7.9 million in the prior year. Income from continuing ops year to date, $7.0 million versus 15.6 million. Discontinued operations in the quarter, earned $800,000 versus a loss of $600,000 in the prior year, year to date earned $1.5 million versus a prior loss of $1.2 million.

Net income for the quarter $5.7 million, versus $7.3 million in the prior year, year to date $8.5 million versus 14.4 million. EPS was 31 cents from continuing ops. Discontinued ops added 5 cents for net EPS of 36 cents in the quarter, year to date 44 cents from continuing ops, 10 cents from discontinued ops, net 54 cents per share.

Continuing on the income statement, I am looking at the schedule on segment reporting. We have as a result of the realignment of operations and the change to a group structure in the management of the business, we have adopted segment reporting this quarter as shown in the earnings press release. And I will quickly review the results by segment. The Aerospace Systems segment, which includes the operations, which manufacture proprietary and build-to-print products for the global OEM aerospace market, had a significant increase in sales in the quarter, $122.1 million, up 23 percent over the prior year, year to date $241.5 million, up 25 percent year to date.

Operating income of 14.6 million, up 26 percent, year-to-date operating income 25.9, up 12 percent. EBITDA in the Systems Group was 19.2, a 16 percent EBITDA margin. Year to date 35.2 million at a 15 percent EBITDA margin.

The Services segment, which provides services consisting of the maintenance repair and overhaul services provided globally to both commercial and military markets, on components and accessories manufactured by third parties had sales of 42.4 million, up 21 percent, year to date sales of 82.2 million, up 22 percent. Operating income in the quarter was 2.3 million, down 41 percent from the prior year, year to date 3.6 million, down 48 percent from the prior year.

EBITDA was 4.4 million, a 10 percent margin in the quarter, 7.7 million year to date at a 9 percent margin. Other segment, which is the segment that is comprised of the facilities that are primarily related to our historical activities in the industrial gas turbine market, had sales in the quarter of 7.5 million, down 39 percent from the prior year, 15.2 million sales year to date, down 44 percent. Operating income in the quarter was a loss of 3.8 million, and that 3.8 million loss included impairment charges associated with our realignment activity of 1.1 million. Year-to-date operating loss was 6.9 million.

Turning from the income statement to sales analysis, as we usually do. Same-store sales in the quarter were up 8 percent over the prior year. That follows the June quarter increase of 6 percent and the March quarter increase of 3 percent, which was the first positive year-over-year same-store quarter in 7 quarters at that point in time.

Our business mix, as we break it down usually between commercial, military, regional jet, business jet, and other, in the quarter was 43 percent commercial, same as last fiscal year. Military was 35 percent year to date -- the 43 percent was year to date, 35 percent Military year to date this year versus 33 percent last year. Regional jets were 7 percent up from 6 percent last year. Business jets at 8 percent actually the same as last year's 8 percent. And other declined to 7 percent of sales from 10 percent in the prior year. Other is where we classify the sales for the IGT market, which year to date was 6.4 million compared to last year's 24 million for the full year, in the prior year 50 million for the full year and fiscal year '03.

Top 10 had the similar first 4 positions, and again the Top 10 is ranked by backlog, by program. Top 10 are 777, 737 New Generation, V-22, 747, and then replacing the C-17, which moves to sixth place is the E2C, again C-17 is sixth. F-18 is seventh followed by 767, A320, and the CRJ program at Bombardier. Greater than 10 percent customers, again the Boeing remains the only customer, and Boeing -- Billings made up 22 percent of revenue, combination of Billings with Boeing commercial, military, and space operations.

Backlog at the end of the September quarter rose to $559 million from $520 million at the beginning of the year. Net debt at the end of the quarter was $204 million, net debt to capital was at 28 percent at the end of the quarter. Cash flow from operations in the quarter was $9.4 million, which brings the year-to-date number to 26.6. One final comment on the income statement. The tax rate in the quarter was down caused by a true up to reflect filing of tax return and off of the base rate of 32 percent, that base rate of 32 percent will be effective going forward to be modified as we roll in the effect of the extension of the R&D credit. With that, I will turn it over to Rick. Rick?

Thanks John. I might go over a couple things that John has already covered to make sure they are perfectly clear to everybody. In the press release, I talked about the -- us nearing completion of the reorganization. This is a reorganization that we in fact initiated at the beginning of the fiscal year and we have finalized the realignment of the operations and the organizational structure, which led to the reporting our results by segment. We had previously announced that Aerospace Systems Group is being headed up by Jeff Frisby and the Aftermarket Services Group is headed up by John Brasch. And it has changed our operating. We made the operating alignments, we made the announcement at the beginning of the year and we further reviewed our strategy in regards to our alternatives and have decided to exit the IGT business, as John mentioned. In fact, and as John mentioned, these are the operations that are currently listed in the press release as the 'Other' segment. In fact, we made the decision to close our Phoenix plant, we did previously announce that earlier in the year. We have made the decision to divest, phase out, or consolidate the remaining operations by calendar year end. In fact, we have sold assets in the repair and overhaul business within Triumph Turbine Services, and the plan includes the rationalization in to our integration of equipment throughout other Triumph Group Companies.

The costs associated with this exit from the industrial gas turbine business, we feel, will in fact fall within the previously announced range of up to $4 million. As John mentioned, it was $1.1 million in this quarter just announced. Last quarter, I referred to significant increased costs for our business, many of those costs remain predominantly in the healthcare, legal, and regulatory area. We have experienced increases of in excess of approximately $4 million year over year through the 6-month period of time. In a lot of the very positive areas that we have going, John mentioned that our sales were up. Our sales were up in virtually every area, major area that we do business. Those being the commercial area, military, business jet, regional jet, and our aftermarket sales to the aviation sector. Our cash generations through 6 months period of time were just short of $27 million, cash from generation from operations. John mentioned our backlog was up to $559 million, which is up from $520 million at the beginning of the year. John also mentioned, and as a brief aside, he mentioned that the E2C New Generation has taken a spot in our Top 10. That's very important to us because we have been stressing and we have mentioned in the past.

Our emphasis on proprietary products as opposed to build-to-print and the proprietary product is involved. There is a very high engineering content at our Frisby Aerospace Company, and it does show that we are pushing this and the engineering content and the engineering success that we've had in many of our products. In general, the revenue growth across all our core Aerospace businesses is very, very positive, as is the backlog. And when we complete the re-organization by the end of the calendar year, we will, in fact, capitalize on the recovery taking place in the Aerospace industry. With that, I'll open it up to any questions that anybody may have.

At this time the Officers of the Company would like to open the forum for any questions that you may have. (OPERATOR INSTRUCTIONS). Ron Epstein, please state your affiliation followed by your question.

Yes, it's Ron Epstein from Merrill Lynch, New York. Can you walk us through your commercial aerospace margins? I am having difficulty understanding why you guys aren't seeing the pickup in margin that many of your competitors are?

Yes, in reference to which segment?

Well, to talk about all of it in OEM and aftermarket.

Well, the margin in the Aerospace Systems Group, which again is the sales to our OEM customers, is made up of proprietary and build-to-print products. As we've said before, the impact in our build-to-print area, based upon both the decline and build rate and combined with the continuing pressure on pricing brought the margin and the activities related to the build-to-print activities down into the single digit range. So, we are beginning the recovery, operating those facilities as we've said in the past in the 35 to 40 percent of capacity level. But looking forward to improvement in the combined margins for those activities. The margin in the services area, includes as part of the re-alignment, the transfer, Rick referred to the transfer of assets, we've transferred into the services area the activities related to our casting facility, which now is focused on producing product for both internal consumption and for a number of aerospace customers. And the results that I referred to in the quarter in that segment with an operating income level 2.3 million included about a million dollars of operating loss, as we started up the aerospace activity in the casting facility. And I think the other margin is self-explanatory, what the activity in the IGT business. Hopefully that provides a little background.

Ron, I think there are some other issues in regards to that too. Number one, I think that we will see -- you will see going forward some increase in margins in both those areas, but there are two areas that are significant. Number one, we've already said that we operate. We have been operating at approximately 35 percent capacity within, mostly, our build-to-print operations. And that has yielded a relatively low operating margin. I think that, as John said, the business was coming back in that area as the build rate begins to accelerate and will especially starting in 2005 calendar. So I think we'll see some higher margins there. In addition to that some of the origins in the cost that I mentioned on legal and healthcare especially are in the operating companies because we charge the -- we allocate the actual cost that is being incurred whether it be legal or healthcare to our individual companies. So, that hasn't affected those margins. But I think that you will see those rising as the capacity utilization gets a little heavier at all those companies.

Okay, now do you guys seen a bump in the business jet market, I guess, after this year's NBAA and I think across the street most delivery forecasts for business jets have been going up.

Yes. We have seen that, number one. And number two, in a couple of the companies we have seen an increase in the market share that we have gotten from a couple of companies, predominantly because of investments we have made to specifically help them in expansion of some of our plans -- some of our CapEx has been used to take advantage of what we saw as an upcoming market or an increasing market.

No, how would you characterize that market? Is that outsourcing or what, how would characterize that market?

Well, the capital expenditures that we made were exactly that.

Okay.

It was a product that was being produced internally at some of the business jet companies that were now producing for them and providing them with more -- higher assemblies if you will.

Do you expect that to continue or is that already played out?

That is a hard call, but I would say that I think it would be, it would continue because once again just like the commercial companies, they are looking for -- they want to be giant erector sets. They want to take that assembly and not the individual components. So, I think that in fact will continue.

And well, I think it is a combination of both, both the outsourcing and rates sort of picking up.

JB Groh, please state your affiliation followed by your question.

JB Groh from DA Davidson. Wanted to get some more clarity on the -- specifically the Aftermarket margins. I mean, you had a nice pickup in sales there, but on an operating income and EBITDA basis the margin kind of dropped off there. Was that acquisition related or how -- what's the --?

JB, it's simply related to -- John started to discuss the casting facility. But we have made a conversion at that casting facility from predominantly being an IGT-oriented business to an aerospace-oriented business. If you go back a year and a half, almost 100 percent of our business there was IGT. Today, it is 50:50 and in ensuing quarters, the next 2 or 3 quarters, you will find that will be almost all aerospace oriented. And that will change the margins, number one, and it will, as we exit the IGT market -- as I say, our goals are to get that out of the system by the end of the calendar year. I think in the casting facility, because we have backlog, some of the backlog in the IGT will slip over into our fourth fiscal quarter. But generally speaking, the margins will be better there.

So, you expect that to improve sequentially over the next couple of quarters?

Yes, the margin in the Aftermarket Services Group improved where it pertains to the third party components such as the APUs, CSDs, especially in the Asian market etcetera have been in fact very good.

And just to clarify on the -- you said 1.1 million of the 4 million charge was taken in this quarter, is that correct?

Correct.

So, you have got 2.9 left. Can you give us a breakdown of what is cash and what's noncash?

In the 1.1, they were all impairment charges and noncash.

Okay, and the remainder?

We believe in total that it will fall within up to that $4 million number and as we incur them, we will provide a split.

Then lastly, could you just update on the sale of Metals?

We are hopeful, as we have been in all previous quarters. As you well know, the Metals market has changed a little bit, John, gave you the breakdown of the earnings there, that a year ago were not earnings. The market has increased to a great extent. We continue to negotiate and it is our hope that we can in fact effect the sale of that again by the end of the December quarter. But we are still looking at various alternatives there.

And discontinued ops was made up of 2 activities, the TriWestern activities and we had a steel erection business in that which was a very small piece. We have completed the divestiture of those assets at essentially book value. The diminimus amount of the assets and revenue in there, but that process has already been completed.

The erection business?

Yes.

But lastly I saw some couple of carriers mentioned, increased outsourcing of MRO activity. What is your thoughts there and the ability to capture some of that business?

There is no doubt about the fact that it will continue to happen. We have talked about it before and regard to the business model of the airlines changing and we already have garnered some of that business and we will expect that we would continue to do so. The other people that we hope to garner more business from -- are the people that do the C&D checks for the airline, we don't do that, but those people who do that do outsource some of the business on the third party components that we do the work of. So, we are optimistic we will get some of that business.

And the other thing that is driving that is the shift from the integrated carriers to the `low cost` carriers through the successful business model are the carriers that do outsource, but don't try to do everything in-house. So, as market share grows on the nonintegrated carriers that provides more market share or more available market for us.

Great. Thanks. I will let someone else step on.

Robert Stallard, Banc of America

Just a couple of quick questions. First of all, looking at the commercial aerospace aftermarket. What do you think the organic growth was this quarter, looking year-on-year?

The organic growth, Rob, since there was no acquisition activity in that area was the reported percentage increase of 21 percent.

And if you look at the defense aftermarket, how does that progress looking on a year-over-year basis?

We don't break it out by aftermarket there, but the -- due to the direct sale on or a new build, the spares activity and the aftermarket activity associated with spares. But there is continuing growth both in new build and aftermarket activity reflected in that growth and that military percentage up to 35 percent of sales.

Firstly, on the some project programs like C-17, for example with the increasing input from the contract we got a little bit almost a year ago.

In the aftermarket.

In the aftermarket area, not the OEM area.

Looking at your balance sheet and cash flow, what do you see as your priorities for cash deployment at this stage, your leverage is getting reasonably low at this point?

Well, the cash flow, it was in operations and we will note that the -- our CapEx has been down for the year-over-year, I expect it in fact to remain lower than we have made in the last 2 years. I think that we have always said that we can generate cash from operations. We like the fact that almost $27 million of cash generation. We have in fact laid a little bit low in making some acquisitions, very frankly because we thought it was apropos to focus on the realignment and the operating issues that we've clearly executed on and will continue to execute on between now and the end of the calendar year. That however, does not mean that there aren't acquisitions out there that we are looking at to employ, at this point in time, primarily cash, because of the balance sheet issue to spend on, and we are all working on a couple as we speak.

And then just finally, you mentioned a percentage of proprietary, what do you do? Could you clarify just exactly what the split is between your proprietary work and your build-to-print work?

Rob, I know, we've had this discussion before. We really don't -- with the advent of some of the issues that I spoke about the E2C, when we put the engineering center in, our proprietary work -- it has increased significantly and our proprietary work is significantly more than our build-to-print, although at this point in time, ironically the build-to-print business is in fact increasing with as the A380 comes up and as the build rate comes up within our other things. But we've never broken out the percentages and we'd rather not do so. But I will tell you that the build-to-print is less than our proprietary products. I am including in proprietary products, the products that are engineered by our own engineering staff.

Is that split sustained in the aftermarket business or did you involve third-party at the moment?

That's the one that I really can't answer in regard -- we don't even teach that, but we have at each one of our locations where we do this different third party product. We have our own engineers that work on the repair and overhaul of those. So, we really don't -- that's not even a build-to-print type of business. It's a repair using the catalog of the OEMs that have the product.

But if you look at the amount of work that you're doing say, Honeywell APUs versus your own products, if there is sort of a rough metric you have, which direction that's moving?

In that group, I think that was just a point of the -- the aftermarket services does repair overhaul services that are on products that are manufactured by third parties.

Essentially that's all third party?

So, it's essentially all third party.

Essentially somebody else's proprietary product.

Larry Baker.

Legg Mason. Good morning. Just a couple of questions. I want to clarify the IGT business. I haven't heard you say OEM or is that still the only part that you're exiting or are you giving out the entire business -- the aftermarket small piece that you had as well?

No, let me make perfectly clear. We have made, as it says in the press release, after reviewing our strategic alternatives, have decided to exit the IGT business in total. And as I mentioned in my comments, we are in fact -- we've already sold the repair and overhaul and assets with regards to our repair and overhaul business within Triumph's Turbine services. So, we're in the process of exiting the entire IGT business.

So, that line -- the other line in your segment reporting by the first quarter of next year will be basically 0.

That's right.

And then would you expect the -- the losses there, the operating losses to continue -- there was early a conversation that that would decline by the fourth quarter to maybe breakeven, is that -- is it going to be small after breakeven then or are you still looking at this $3 million loss?

In other?

Yes. You didn’t break it upbefore?

It is our intention and it is our detailed plan to exit all of that business by the end of our calendar year, which means that our plan is to have that segment, if you will, disappear. Now to the extent that it is still there, it will be still there to a very small degree in the ability to -- if we don't sell a couple of minor pieces of equipment or something of that nature, it'll be there into a very small extent, but that's our goal right now.

And Larry, the activity in that quarter, as Rick mentioned before, we incurred in that quarter $1.1 million of impairment charges. There are more charges to come, but up to that $4 million amount, which will be incurred as we execute the plan in the next quarter.

And then the tax rate, 32 percent in the second half of this year is the current projection?

32 percent adjusted as we roll in the effect of the R&D tax credit. So, it should fall somewhere between 30 and 32 percent.

And then how about next year, John? Can you go out a year?

The extent of the R&D to credit through calendar year '05. So, it should be comparable through that period.

Okay. Is that 32 or less going forward?

Yes.

And then finally, in the after-market services segment where margins were impacted by this casting facility startup, does -- do you have a goal there? I mean that was, you know, a double-digit operation last year. Is that sort of a --?

Yes, the goals are to make that a profitable piece of that operation. And it depends on how fast we can ramp up the aerospace revenue going through that facility; we are optimistic about that. We have a number of customers, where we are supplying initial parts to, out of that facility, that are aircraft quality castings, and our plan is to make that a contributor.

Great. Just a comment, if I may. Great job on going to this segment reporting. I think this clarifies a lot of things, particularly the --sort of the drag of the IGT business on your operations. One request, is it possible to get the third quarter and fourth quarter of last year in your 10-Q or in an 8-K or some document before you actually report the third quarter and fourth quarter this year?

I think that will sequentially come out as we report, Larry.

Steve Levinson.

This is actually Liz DeFreitas filling in for Steve. I would like to know what's ahead in your acquisition pipeline. I know you said that you are looking at acquisitions and that's still in your strategy, but can you be more specific about that? Is there anything lay out on the table at this point?

Clearly I can't speak about any individual companies that we are talking to, but we have somewhat consistently said that the companies that are on our radar screen are companies that have proprietary products and that they have a high content of engineered products. In addition to that, there are companies in the after-market services, the repair and overhaul of third party products that we would like to acquire, but those are the two areas that we'd like to expand, especially the ones that have high engineering contents.

I know that you said that there are a few more charges left with regard to the IGT business, are there anymore IGT sales or contract agreements to be fulfilled in the December quarter? Richard Ill, Triumph Group Inc. - President & CEO

Yes, we have backlog, that we have committed to the customer base that we will continue and that's why I hedged a little bit on that question in regards -- will it be finished by the December quarter and it is our intention to be out of that by the end of December. To the extent that we have very minor charges or some sales left in our fourth quarter or the first calendar quarter of next year, I don't look at it as being significant.

And in regards to tiltrotor aircraft, can you disclose dollar contents per V-22?

We have never done that; I guess I am politely saying no.

Are there opportunities with other tiltrotors like the Eagle Eye, UAV or commercial versions of the V-22?

Absolutely.

Can you quantify that at all?

No, not really.

And the other question has to do with operating margins, can you -- do you have an idea of where do you think they’ll recover to -- to what level?

It's a difficult question. I think that it's no secret that our customers, Airbus, Boeing, all of the helicopter manufacturers and our major customers are in fact have had for a long period of time some pressure on the margins and the pressure to reduce prices to them. So they in fact can reduce their prices and be competitive in the market. Having said that, I don't think we are in a position where we will see the operating margins recover to what they were 2 or 3 years ago when we were up at the operating margin level and our groups at 16, 17 percent price. I certainly think that we have the ability to have them recover into the -- well under the double-digits where we can feel comfortable going forward with that number.

Robert Jacapraro please state your affiliation followed by your question.

Good morning. Merrill Lynch. Just a quick follow up on the V-22, what kind of visibility, if any, do you have as far as production volumes as we get out of 2005 and into calendar 2006?

We don't really have a lot of visibility as to the number of aircraft that are being built. It's still being evaluated. We have orders now that are significant in all the V-22s that have in fact been ordered and nothing else has been released. And I think we've had the conversation before. I don't -- we don't see any other alternative in this type of aircraft and we know of no problems in the subsequent testing of the V-22s that would hold that up. So I think it would become in fact a budgetary issue in Congress. But I don't have any -- we don't have any -- I am not sure anybody does have any visibility as to the actual number of aircraft that will be ordered over the next 3 or 4 or 5 years, other than what's already on the book.

Okay and do you have any exposure to any of the recent bankruptcy filings of the carriers in the US?

The exposure through APA, US Air combined is less than a quarter of a million dollars.

Very good and I would assume or at least hope in your case that since AirTran is a customer of yours but they are buying some of those operations could only be something positive for you possibly in expanded business?

Should expand activity with airfare.

Thank you very much, and appreciate the new release and conference call calendar.

Are there any additional questions at this time? Mr. Ill, I am showing no further questions, would you like to conclude?

We have nothing more and we thank everybody.

Since there are no further questions, this concludes the Triumph Group's fiscal 2005 second quarter earnings conference call. This conference will be available for replay after October 29, 2004 after 1 PM today through November 5, 2004 at 11:59 PM Eastern Time. You may access the replay system by dialing 888-266-2081 or 703-925-2533 and entering the access code 579537. Again, those numbers are 1-888-266-2081 and 703-925-2533. Access code 579537. Thank you all for participating, and have a nice day. All parties may disconnect now.