Triumph Group Inc (TGI) 2005 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 2005 third quarter earnings performance. You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by management.

On behalf of the company, I would now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Legislation 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, performances or achievements expressed or implied in these forward-looking statements. Please note that the company’s reconciliation of non-GAAP financial measurements and comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is property of Triumph Group, Incorporated and may not be recorded, transcribed or re-broadcasted 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.

Go ahead, Mr. Bartholdson.

Thank you.

And good morning, everyone. We are hosting the third quarter, December 31, 2004, earnings conference call. The results - - and hopefully you’ve all gotten a copy of the press release - - will be reviewed briefly. I’ll make some other comments on the sales analysis and trends and turn it over to Rick for comments.

Beginning with the income statement, sales in the quarter were 171 million, versus 147 million in the prior year’s quarter; year to date, 506.6 million, versus 432.6.

Income from continuing operations, 3.9 million and a quarter, versus 2.6 in the prior year; year to date, 10.9, versus 18.2.

Earnings per share from continuing ops, 25 cents, versus 17 cents a year ago; year to date, 69 cents, versus $1.14.

And in the current quarter in that EPS number and continuing ops number, we had 2.7 million, or 11 cents a share, of the restructuring charges associated with the realignment of our IGT business. And in addition, we incurred a million dollars, or 4 cents per share, on litigation expenses associated with the litigation we have ongoing with the Eaton Corporation.

Also in the quarter, we finally closed out the discontinued ops line. We incurred a loss in the quarter of 6.1 million. That loss was triggered by a loss on the sale of the assets at 6.5 million. The sale generated cash proceeds of 13.6 million and a balance due on that sale in the fourth quarter of an additional 2.6 million in proceeds.

Turning to the segments, the Aerospace Systems segment had sales of 121.2 million, up 21 percent in the quarter; 362.7 million, up 24 percent year to date. Operating income increased 13 percent to 13.5 million in the quarter; 39.4 million, up 12 percent year to date. EBITDA margin in the quarter was 18.4 million, 15 percent margin and the same, 15 percent margin year to date at 53.7 million of EBITDA.

The Aftermarket Services segment, sales in that segment were 44.9 million, up 20 percent in the quarter; 127.1 million, up 21 percent year to date. Operating income was 2.6 million in the quarter, 6.1 million year to date, a decline in the quarter of 42 percent. Included in that operating income number was a restructuring charge of 400,000 of the 2.7 million that I spoke about on a consolidated basis.

The other segment had sales of 6.4 million, down 38 percent as we wind down the other segment. Operating income in that segment was 3.9 million loss, which included the balance of 2.3 million of restructuring charges.

Focusing on the top line and looking at where we generated sales, same-store sales in the quarter were up eight percent, same as in the prior quarter. The mix in the quarter was 43 percent commercial. That compared to the prior year’s 43 percent and fiscal year ‘03’s 41 percent. Military sales grew to 34 percent of revenue, up from 33 percent last year, and 32 percent two years ago.

Regional jets at six percent were the same as last year. Business jets at nine percent were up one percent over the prior year. And other category declined eight percent, down from ten percent in the prior year and down from 13 percent fiscal year ’03, which is where the IGT business was classified and reflected a decline in that revenue stream.

The IGT business, by the way, in fiscal year ’03 represented 50 million of revenue. It was 24 million of revenue in fiscal year ’04 and year to date for the nine months had declined to 11.3 million this year.

In our total sales, export sales were up to 23 percent, an increase reflecting increasing deliveries to the Airbus programs in Europe and the UK.

Our top ten programs - - when we look at our top ten programs, ranking programs by backlog, the top ten were Triple Seven is in number one position; 737 New Generation, second; 747 third; A-320, fourth; C-17, fifth; the E-2C is number six; the B-22 program, number seven; and a new addition, the CH-47 program, the Chinook helicopter, has moved into the top ten; F-18, number nine; and F-15, number ten. The addition of the CH-47 reflects the removal of the Lombardy ACRJ program as one of the top ten in backlog.

The only customer generating more than ten percent of sales was Boeing, at 21 percent. And our backbook [ph] grew again, it was at 578 million at the end of the third quarter, up from 520 million at the beginning of the year.

Turning to capital and the capital position on the balance sheet, net debt at the end of the quarter was down to 164 million, versus 204 million at the end of September, a decline of 40 million in the quarter. Our net debt to capital declined to 24 percent at the end of the quarter. And the strong cash flow that was in the press release, in the quarter we had cash flow from operations of 27 million in the quarter, 53 million year to date. The quarter had 3.9 million of CapEx, 13.7 million year to date. And we still feel that by the end of the year we will be looking at in commitments to spend CapEx dollars will fall somewhere between the 20 to 25 million range for the year.

Asset sales other than discontinued operations, but asset sales associated with the restructuring of the IGT business generated 3.7 million. We expect another 5.5 million from asset sales in the fourth quarter. And again, the discontinued ops generated 13.6 million in cash on proceeds with another 2.6 million expected in the fourth quarter.

Finally, tax rate in the quarter on continuing ops was 31 percent and it should be in that range or slightly lower in the fourth quarter.

With that, I’ll turn it over to Rick.

Rick?

Thank you, John.

I’d like to reference to start the quote which is on page two of the press release and talk about half of it now and half of it later. And I quote, “We are pleased to again report strong revenue growth across all our core businesses, accompanied by outstanding cash generation, which has allowed us to reduce borrowing over our revolver credit facility by $38 billion in the third quarter. In addition, as we previously announced, we were able to execute our plan to divest our metals operation in order to focus on our core aviation businesses, as well as complete the majority of our restructuring steps to exit the IGT business.”

And I’ll speak a little bit about this as we go through. Some of the things here I’ll reiterate what John had said. We are proud of our revenue growth. Our same-store sales, as John mentioned, were up eight percent. We generated cash through nine months of almost $54 million. And most importantly, as the quote indicates, we accomplished we said we were going to accomplish by the end of the third quarter. We sold TriWestern, the metals group. We substantially exited the IGT and its associated costs. We do have some residue left over in that business we have to operate for approximately two months to clean up and close out some contracts that we had. So there will be some residue, as we said there might be, in the fourth quarter. But we’re essentially exited that business.

When you look at the results, especially in the segment results, I think it’s very important to note that the Aftermarket Services Group, when you look at it now includes the castings plant, which was in the other group last year. So you’re not looking, really, at apples-to-apples numbers. The casting has been converted to Aerospace Products and continues to have, although significantly less, some operating loss.

The results in the Aftermarket Services Group also includes, as John mentioned, some relatively small restructuring charges.

As we mentioned in the first two quarters of the year and updating you, the year-over-year legal, regulatory and health costs are up some $2 million. John mentioned one million of it is in regards to the Eaton litigation in which we are involved.

Finally, just in going back to the quote in the press release, and I’ll continue, “With this activity substantially behind us,” referring to IGT and metals, “we are confident that our focused business model, along with our strong balance sheet will provide the potential for sustainable long-term growth.”

If that needs any translation, the translation, frankly, is that I feel that the tough times are behind us. And with the good backlog that John mentioned being up from 520 at the beginning of the year to 578 million at the end of the third quarter, our optimism is up and the ability to provide sustainable long-term growth has significantly - - is significantly enhanced.

At that, we’ll open it up to any questions.

[Operator instructions]. Our first question comes from Robert.

Hello. Robert Jacapraro, Merrill Lynch Investment Managers. Good morning, fellows.

I missed some of the preface of the call. Did you give the - - Rick, you had alluded to some restructuring charges taken in Aftermarket Services. Did you disclose that amount?

We - - right at the beginning, we said that income from continuing ops in the quarter was 3.9 million; EPS at 25 cents a share, which included 2.7 million or 11 cents per share in restructuring charges and 1 million or 4 cents a share in litigation costs associated with the Eaton litigation.

The 2.7 million in restructuring, are those the costs that had been anticipated to exit the IGT business?

Yes. That comes on - - that’s the IGT business. That comes on follow-on of the 1.1 million that was year to date, totaling 3.8 million within the $4 million that we had estimated at the beginning of the year.

And we do feel that there potentially might be something there in the fourth quarter, but still will remain within the $4 million we - - feeling that we had previously announced.

But those are included in the Aftermarket Services line?

Well, there’s - - one, because we had - - we shifted some of the companies between the other - - as I mentioned, the castings group, et cetera, moved over to Aftermarket Services because they’re now producing aerospace parts, et cetera.

Maybe another way to look at it, the sales in the other segment that totaled 6.4 million in the quarter included 3.5 million of IGT sales. So there were sales of aerospace product that by the end of the quarter the assets had been disbursed primarily into the Aftermarket Services Group to continue to provide those products to our customers.

Okay. But as far as the year-over-year decline in profitability in the Aftermarket Services Group, could you break that down as to sort of what the components of that were?

Well, one would be the casting facility which, in the prior year’s quarter, was in the other segment, has been moved, as Rick mentioned, into the Aftermarket Services to provide aerospace cast parts to a new and growing group of aerospace customers.

And in order of magnitude, I know the quarter before I think you might have mentioned that there was about a $1 million operating loss associated with that. Are you able to at least give sort of a rough estimate of what those - -?

It’s been reduced from that, Rob. And we’re making progress - -

Okay.

- - and moving towards - - with a plan to move that facility into the black.

Okay. Okay. Thank you.

Our next question comes from Rob.

Hi. It’s Rob Stallard from Banc of America. I didn’t know which Rob it was this time.

Good morning.

Good morning. Just a couple of questions, first of all, on the tax rate, John, you mentioned what you expect it to be for the full year. Do you expect this sort of tax rate to carry on into your next fiscal year?

I think the tax rate may marginally increase next year, as revenue and earnings increase and the permanent differences remain the same.

Right.

But it will still be maybe a couple points higher.

Okay. On to the castings area that Rob was talking about before, you said you have a plan to bring this back to profitability. What sort of timeline are you expecting for this to take? Is it going to take, say, six months or 12 months?

Less than that.

So we expect to be back in the black next quarter?

In the first half of next year.

First half of next year, okay. Amherst [ph] and Boeing are also increasing production. Have you started to see these volumes come through? And how has that been dropping down to your profitability in terms of your margin?

Positively. We’ve seen the top ten programs that John mentioned - - if you look at some of the Boeing programs that have been successful, such as the Triple Seven, that has - - that will drop directly to increased profitability for us, because we’re participating in that as we speak. And we will in the next quarter and the next year. So those items that Boeing is getting is very significant to us. So it’s going to be positive, which leads to some of the optimism about which I spoke.

But I think, Rob, the key word there is “going to be.” As we mentioned, export sales were up in the quarter, reflecting increased deliveries to AirBus. And the impact has yet to be seen on deliveries to Boeing.

I think in the past, Rick, you’ve mentioned what your, sort of, capacity level is. It’s still relatively low. Where would you put yourself as of today?

Rob, I, frankly, didn’t - - haven’t focused on that in this quarter, but I would say that with the increased - - for example, some of the increased structural deliveries to AirBus and some of the AirBus deliveries, I think that our plant specifically, in some of the structural areas, will go from - - and I’ve - - we’ve been using the number 35 percent in the past. I think that’s going to go up fairly significantly, maybe another five, ten percent in the very near future. And it’s already gone up and will do so in the fourth quarter.

Okay. Thanks so much, guys.

Our next question comes from Steven [ph].

In relation to the export sales, can you give us how much you might attribute to the A-380? Or is it mostly from the A-320 family, still?

Steven, it’s both. We’re beginning to see the front end of production deliveries on the A-380, as the A-320 picks up. So it’s really both of them.

It’s also an increase, Steven, and a continuing strong presence in Asia in the Aftermarket Services Group.

Okay. Yesterday, and I guess this morning, as well, there have been some announcements about China ordering 60 7E7s. And I guess there are still some contracts to be awarded. Can you give us any update on where you are in relation to the 7E7 and if that’s going to do anything for the Spokane plant?

There is so much left to be done to the - - the simple answer to your question is no, I can’t. But expanding on that, there’s a lot that has to be done there. In the Spokane plant specifically, one of the areas that is the very last area to be concerned with on - - by Boeing is the flooring assembly and some of the duct work. We’re working on that. We’re also working on a number of projects with people who have received larger contracts. And we’ll be successful with some of the products on the 7E7. You have to realize, though, in those - - in the content on the 7E7, what we’re doing is we’re developing product at the present time. And we don’t ship any product for awhile, like anybody else is on the 7E7.

Okay. Will you be involved in kitting things up for Boeing, as well out there? Or is that something you don’t know about yet?

You mean specifically at Spokane?

Well, any of the plants.

We don’t know, but the answer is that's what we’re trying to accomplish with Boeing. And we already do kit on some of the older programs that we’re on, 737, 777, this type of thing. We already do that. And I think that our presence in Boeing is very good and I think we’ll continue to grow.

Okay. The two last items are on the E2C. Is that actually parts revenue? Or is that development revenue still?

It’s both, actually. As you know, we’re a very significant provider of product on the E2C and we have some other products and aircraft that we’re working on.

Okay. And the last one is on the B-22. I think we saw that the Bell-Boeing joint venture got $850 million of funding for long lead-time items. And I know you have - - obviously, from being in your top ten list, you have some significant content there. There have also been some questions about what’s going to happen to that program, so just looking for your opinion and when we’ll start to see some big activity there.

I think as we’ve commented before, Steven, that with that program at today’s very low production rates, as in the top ten, that would imply that we’ve got some real significant value in that program. And when that program ramps up, that will become more significant.

And we have been given no indication that that program will not go. We remain optimistic. I think you can trust me on the fact that our companies that have the content on that are continually asking that question. It’s our opinion that there really isn’t any other choice as we go ahead. And I think the risk factor on that thing is if they had, which they haven’t for a long time, if they had a major catastrophe again, that would hurt the program. But we don’t see that happening.

Okay. Thanks very much. We’ll talk to you soon.

Our next question comes from Byron.

Byron Callan at Merrill Lynch. Just kind of more on a conceptual level, since you are putting some of this stuff behind you now, the ITT issues and metals, it’s got to free more time up in your day-to-day schedules. I’m just kind of curious, conceptually, where are you allocating that time? Is it just kind of on nuts-and-bolts operations? Are there other business development initiatives you’re looking at? Can you talk about that a bit?

No, we can’t. I mean, obviously, there’s some specifics I can’t give you. But one of the things that we set out to do at the beginning of this year, as I mentioned before, was to accomplish the goals by the end of the certain quarter and we feel we’ve substantially done that.

Right.

You will also note that during that period of time there have been no acquisitions announced. And that was at least partially to a great extent on purpose, because we feel that we had to develop time to - - devote time, rather, to accomplishing what we said we were going to do.

So I think part of the time issue is, number one, making sure that we deliver on our optimism for the fourth quarter and the next fiscal year, number one; number two, talking about the business development area and how we expand and what specific areas we’re going to expand from an acquisition point of view.

Obviously, at this particular point in time, we’re also spending a great amount of time through a number of our people, because we have a 3/31 [ph] year, on issues such as 404 testing and things like that. So we’re - - there’s a lot of time being spent on that.

Now, that’s a very soft answer, but if it says that we’re still interested in and we’re still very inquisitive, that’s what it’s meant to say. But our philosophy of acquisitions hasn’t changed. As far as being very disciplined and doing it - - and very frankly, some of the acquisitions that have happened recently have come at what I will refer to as European costs.

Yes. Okay. The other thing is just I think one of the broader things that you guys have been working on is trying to get some of these different groups to work together to provide a sub-system or a sub-lease for some of these new aircraft development programs, the A-380, for example, 7E7. What do you see in terms of new aircraft development pipeline? And should we at all be concerned about higher development costs if you elect to participate in any of these? I’m thinking of the C series and [inaudible] J or possibly some developments in the business jet area, AirBus A-350. Go ahead.

Well, yes, you should be concerned about that because that’s our business in working with the people in regards to developing new programs. Okay? And that becomes part of our costs going forward. There’s a lot of those costs that, over time - - that we have already expensed. Okay? For example, our participation on the A-380, where we have significant development costs across our corporation. We’ve already expensed that. That’s why John and I have made the comment before, when we get to the point of shipment on the A-380, that will significantly enhance our position.

Where we develop new programs, which we’re in the process of doing, in some cases, we get some reimbursement and in other cases we have to bear some of the development costs. But I don’t think you should be concerned about it any more than - -

Maybe another way to answer is if you see any - - if developments costs - - if the development effort remains at a fairly steady level, in other words, there’s not some kind of surge of proposals coming in the coming fiscal year that - -

Oh, no. And the trailing income statement has incurred costs of - - at a reasonably high level, so the trend - - there’s no big trend shifts in this area.

Great.

From that perspective, no, you don’t have to worry about it.

Great. Okay. Thanks.

Our next question comes from Roger.

Roger Trofal [ph] from Dreyfus Corporation. I’m just trying to understand the operating profit contribution lines a little bit better. If you can give me an idea of the incremental margin that you got from those - - from the 20 plus percent sales growth in the quarter, what was the incremental margin that fell to the operating line?

I could, but we don’t provide a contribution margin breakdown on incremental revenue. You’ll see in the 10Q they’ll be a detailed breakout of the income statement on a comparative basis. So you can look at gross margins there and also what’s happened on the SG&A line not associated with restructuring charges.

If I just look at the - - take the Aerospace Services line, and take out the - - or you adjust for the casting - -

Aerospace Systems or the Aftermarket Services?

Aftermarket Services, I’m sorry. Aftermarket Services line, so if I adjust for the castings and I adjust for the restructuring, I still get a margin that’s below last year. And I guess what I’m just trying to come to terms with is what’s in there that would have caused that line to actually fall?

I would say a mix situation, where you have increase in revenue on lower-margin product.

Okay. And as we look forward, is that going to be reduced back or reduced out? Or how - -

We will work diligently at raising that EBITDA margin above the ten percent level. And also, as we mentioned, the volumes, as we build volume, which we think is occurring as revenues rise, we will be getting a benefit on absorption there.

Okay. So the volumes you’re bringing in now are not inherently at lower price or lower margin that what you historically have. Is that correct?

I don’t think there’s been any big shift on new blocks of business coming in, as opposed to continuing increases in levels of business with various customers, which have different margin levels by customer.

Okay. Thank you.

Our next question comes from JB.

JB Groh from DA Davidson. Could you maybe address the trends you’ve seen and sort of what impact raw materials pricing has had on that casting operation?

I think in general in the raw material areas, although we have some longer term contracts in regards to our raw materials pretty much across our operation, but the casting facility has those long-term agreements. There’s clearly pressure on raw materials across our system, casting facility included, with the exception of the fact that we’re pretty much locked in on raw material pricing. So there’s inflation potential there over time, but it’s not going to affect us in the short run.

I mean, do they typically protect you, what, six, nine, 12 months out? How does that normally work?

Well, you know, I can’t answer the question without going back and looking up in the casting facility, frankly. But typically, we try to get a minimum of a year protection. And that - - all our locations are different in that regard, as far as when they fall, when they expire and we have to do it. And the casting facility, I really can’t answer the question at this point in time.

One of the big trends that has changed there, JB, is the dropping volume on large-block IGT customers and moving towards smaller-scale precision castings for the aerospace industry. So the whole sales mix has changed in that facility also.

Another thing, I’ve seen some articles recently about how our airlines save money and maybe decreasing use of APUs. Is that - - do you see any impact on the servicing side there or not?

We really haven’t seen anything. If you remember, in the past we’ve made presentations in regards to our APU customer base. It’s one of the reasons I just mentioned before, the significant business we have in Asia. And we haven’t seen that downswing there. Our customer base in North America has been the airlines such as the Southwests and et cetera. We’ve been very careful managing our credit with some of the larger airlines, so we haven’t really seen any downturn in regards to that. In the past, we’ve seen it sometime in the summer, but not recently, certainly.

I think the trends there - - the trend on it, particularly on the APU product line, is that the growing market share air carriers, the low-cost budget carriers in the U.S., the air freight, UPS and FedEx, who are major customers of ours, and the Asian airlines are all people who outsource that kind of component maintenance. And they’re gaining market share in an overall market that is growing. So our available market for our services is growing.

Okay. Good. Thank you.

Are there any additional questions? Our next question comes from Larry Baker.

Larry Baker with Legg Mason. John, I have a question that goes back to the other category, can you give me what accounts for the difference between the 3.9 million loss and the 2.3 million restructuring? Is that - - is the rest of that operating losses?

Correct.

In IGT?

Well, as we’re completing the restructuring, Larry, the process we’re going through is taking the facilities that were devoted primarily to producing IGT product, but also aerospace product going through, for instance, we had a major facility in Phoenix that formed and fabricated high-temperature alloy combustion components for turbine engines, both power generation engines and aerospace applications. As we wound that down and completed divesting either through shutting down or selling and we announced the sale of the IGT business facilities in Wisconsin and assets in Phoenix and the - - another facility in Phoenix, which was a high-temperature printing facility to a company [inaudible], we have taken the tooling and equipment that was associated with the aerospace production and by the end of December have relocated that equipment into other facilities to continue to supply those customers. So in that wind-down mode and in the transition period, we took - - identified in that operating loss the 2.4 million which was associated with restructuring costs and booked that. And the other amount was an operating loss, a cost associated with running the facilities during that wind-down period, versus the revenue generated on sale of the products.

But it’s a good point to point out that with the vast majority, substantially all of that wind-down completed, the other line will be de minimus or eliminated as we go through the quarters coming up.

Okay. So in the fourth quarter, something under 500,000 in terms of a loss in there, I would assume. Is that - -?

The loss would be significantly reduced, if not eliminated in the fourth quarter on other.

Okay. And then next year, are you going to eliminate that segment altogether?

I think we need to carry it for the prior-year purposes, but we have no expectation of generating revenue in a segment called “other” going forward.

Okay. And now, just a clarification from last year’s fourth quarter, there was a - - before you reported on the segment basis, there was a comment in your fourth quarter that the IGT business cost around 12.5 million. Is that - - when we see the fourth quarter on a segment basis, is that sort of the number that’ll show up in the IGT?

We will - - the IGT revenue and operating performance will be disclosed in the fourth quarter on that other line. So they’ll - - the historic breakout will be there in the prior year’s quarter. And the absolute amount will be in that neighborhood.

Okay. I’m just looking for some comparisons on the other lines.

And to go back to the one question about the margin pressure, are there other factors that would cause the third quarter in Aerospace Systems, for example, on basically flat revenues with the second quarter to show a little bit of, you know, 90 basis points of margin deterioration? Are there other factors in there, other than mix, that you could address?

One of the things that we did mention specifically was the Eaton litigation.

Okay.

And that million dollars is in that Aerospace Systems segment.

Okay. All right. Thank you very much.

Since there are no further questions, this concludes the Triumph Group’s financial 2005 third quarter earnings conference call. A replay is available of this conference call starting at 1 p.m. Eastern time today, through February 4, 2005. The dial-in number is 888-266-2081, as well as 703-925-2533. The replay pass code is 633401.

Thank you for participating and have a nice day. All parties may disconnect now.