Triumph Group Inc (TGI) 2005 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Triumph Group conference call to discuss our fiscal year 2005 fourth quarter earnings performance. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the Webcast. 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 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 call Triumph's actual results, performance or achievements to be materially different from any expected future results performance or achievements [indiscernible] in the 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 that this call is the property of Triumph Group Inc. And may not be recorded, transcribed or rebroadcasted without explicit written approval. At this time I would like to introduce Richard Ill the Company's President and Chief Executive Officer, and John Bartholdson, Chief Financial Officer and Senior Vice President of Triumph Group Inc. Please go ahead, Mr. Ill.

Thank you and good morning, everybody. For those of you following on the slide presentation, I am going to start on the fiscal 2005 in review. As we mentioned in our conference call of April 14th, fiscal 2005 was truly a year of transition and challenge within the Company. The core businesses that we had, the results were, in fact, very solid and John in a moment will cover the numbers and the Press Release that we put in there, John will cover those numbers. But our core businesses were, in fact, very solid. Our sales went up 13% to 600 -- almost 689 million and more importantly, for where we sit today, our year-end backlog was up 17% up to almost $600 million. This is somewhat significant based on the fact that our Aftermarket Services Group essentially doesn't have a backlog. They're on a build and bill basis, so they get to the point where they get their business and turn time is very fast.

As we mentioned on our call at April 14th, we have exited the IGT business. That is 100% behind us. We have no operations now in Wisconsin. We've covered this rather extensively in our April 14th call. We have completed our divestiture as we mentioned in the past of any noncore assets our metals group, and we generated 26.8 million in cash flow from the proceeds of these businesses. Very briefly, and John will go into this in more detail, our fiscal 2005 results our sales as I mentioned went up to almost 689 million. Our operating income was 33 million. Income from our continuing ops was almost 16 million, and our earnings per share that -- and again, John will go over this in more detail, for the year was $0.99. Our net working capital reduced to $214 million and we spent just short of $19 million in our CapEx.

Our Aerospace Systems Group, the segment sales increased by 18% over 2004, and 6% over the fourth quarter of 2004. The three -- we have three major contracts that we have, in fact, announced during the course of the year and in reiteration we were awarded a four-year contract with Lockheed Martin estimated at $42 million to supply structural components on the Sniper and Arrowhead Advanced Targeting Program. We have been awarded a contract by Airbus for the design and manufacturer of the Floor Panel System for the A380 Freighter, a value at about $35 million. And we were awarded a contract by General Electric to provide the inlet gearbox, as well as related spare parts for the CFM-56 Engine Program, for the life of the program which is estimated value of about $300 million based upon current market forecasts. This is coupled as you'll see in a moment, with an upturn in the build rates for commercial and business jets.

The Aftermarket Services Group has increased their sales by 17% over 2004 and 7% over the fourth quarter of 2004. As previously mentioned we were awarded a five-year contract with the U.S. Army, TACOM, to provide first stage rotor blades for the AGT 1500 gas turbine propulsion engine used in the Abrams tank, and that's valued at approximately 32.9 to $33 million. I mentioned before, this is in addition to the business that has been increasing there as I mentioned before by 7% in the fourth quarter. It's in addition to the non-backlog we have in that group, so we're very enthusiastic about their business going forward.

2006 we've talked a lot about that in our April 14th call. We feel that we're very positioned, very well-positioned to take advantage of a strengthening aviation market. I mentioned before that the OEMs have ramped up their build rates and that will be a very positive impact for our Aerospace Systems. You'll see a little bit of this when John goes over some of our -- the top-ten programs that we normally present to you all on our conference calls. The available Seat Miles growth remains robust and it's a very positive impact for the Aftermarket Services Group. I will emphasize, once again, that the overhang from the exit of the IGT business is, in fact, resolved and it is 100% behind us. And I would like to reaffirm the 2006 guidance that we gave on the April 14th call. We feel our sales will be in the range of somewhere between 700 and $750 million, and an earnings per share range of $1.75 to $2 and as in the past our earnings -- our quarterly results will be improving sequentially.

Finally, it is clear or should be clear that 2005 was disappointing to us and our shareholders. And was a very difficult year for reasons that we've previously mentioned. But -- and it's a very large but, 2005 is behind us and we are encouraged. We're enthusiastic and we're very optimistic that 2006 will be a year in which we will deliver well in-line with the guidance that I've just given. At that I'd like to turn it over to John to go over some of these numbers.

Thanks, Rick. Good morning, everyone. Turning to financial performance and looking on a quarterly comparison basis and all the numbers that I'll talk about will be on continuing ops ex the discontinued ops. Our sales in the quarter at 181.9 million were up 3%. Operating income at 8.3 million up 179% from last year. Income from continuing ops at 4.9 million aftertax compared to 1.2 million in the prior year. Earnings from continuing operations per share, $0.30 a share versus $0.08 in the prior year. And I'll have some more comments about the $0.30 per share and what was included in costs in the quarter to get to that number. EBITDA in the quarter at 16.2 million up 48% from the prior year.

Turning to the annual comparison of financial performance, 688.5 million in net sales, that's up 13% over the prior year. Operating income for the year at 33.4 million, down 9%. Income from continuing ops aftertax, 15.9 million, down 19%. And for the full year earnings per share from continuing ops of $0.99 a share, down 19%. And EBITDA for the year at 64 million was essentially flat with the prior year. Looking at overall recent performance, while sales are up 13% on an annual basis and up 3% on a quarterly basis, continuing the upward trend, operating income has been suppressed by the nonrecurring costs associated with exiting the IGT business, litigation expenses, and our experience in the first year of Sarbanes-Oxley 404 Compliance activities.

And looking at fiscal year 2005, and enumerating the significant charges and costs in the quarter and the year-to-date, our other segment which was the segment that primarily related to the IGT activity and as Rick said has been exited, will disappear as a reporting segment in fiscal '06. In the quarter we incurred 571,000 of restructuring and impairment costs. For the year, 3,069,000 in restructuring and impairment costs. In the quarter we had inventory adjustments which were reported in cost of goods sold of 1,751,000. For the year, 2,035,000, and the remaining operating losses in -- reported in the segment less these other charges of 1.9 million and 9.9 million year-to-date, providing losses for the segment in the fourth quarter of 4.2 million and 15 million for the year. In addition to absorbing those losses, we had trade secret litigation expenses funded in the quarter of a million, 2 and for the full year, that cost us $2.8 million.

In addition, the Sarbanes-Oxley 404 expenses, which we estimate to be the first year nonrecurring startup expenses totaled 700,000 in the fourth quarter, a million 8 for the year, resulting in total significant charges and costs in the quarter of 6.1 million pretax and 19.6 million for the year. The majority of these we deemed to be nonrecurring. The trade secret litigation expenses will be ongoing and have been estimated in the earnings guidance we provided earlier for fiscal year 2006. But other than those two items, the remaining items we deemed to be costs incurred in '05 that we would not expect to be repeated in '06. When we tax effect those and quantify them on a per share basis in the quarter, that cost us $0.25 and for the year, that cost us $0.80.

Turning to segment performance, looking at the Aerospace Systems Group, the sales, again, 132.7 million in the quarter, that's up 6% for the year, 495.4 million, up 18%. Operating income in the quarter, 14.6 million was down 16% year-over-year. For the year, 54.1 million is up 3% over the prior year. And EBITDA 20.1 million in the quarter, down 11%. 73.7 million for the year up 7% and EBITDA margin in both the quarter and the year was at 15%. And again, this segment is where the 2.8 million of litigation charges were incurred. Not direct operating costs, but absorbed in the operating income and EBITDA numbers for the years.

Aftermarket Services segment performance, 45.9 million in sales, up 7% in the quarter. 173 million in net sales for the year. That's up 17%. Operating income in the quarter up 1.5% -- or I had 1.5 million up 3% and for the year, 7.6 million, that's down 40%. EBITDA in the quarter, 3.6 million, up 13%. And for the year, 16.1 million down 20%. And the operating income and EBITDA, again, for the year, included costs associated with focusing our casting facility on to the aerospace market as opposed to the IGT market and those activities generated an operating loss of 3.9 million which was included in the results that I just covered. EBITDA margin in the quarter was 8% and for the year, 9%.

The "other" segment, which again will not be reported next year, it's been transitioned and liquidated through exiting the IGT business, had sales of 5 million in the quarter, 26.6 million for the year. That's down 43% year-over-year as we exited the IGT business. Operating income in the quarter was a loss of 4.2 million and we absorbed the loss of 15 million overall in that segment for the year.

Turning to the current backlog, our backlog as Rick mentioned was 598 million. At the end of March '05, and, again, our backlog reported numbers Rick went over a number of contracts which I know in total about 450 million in total. What we report in backlog are items that we have a purchase order for, a ship date and a ship date falling within a two-year outlook. So the $300 million on the GE contract is not included in these numbers except for what we expect to ship against purchase orders in the next two years.

Looking at our top-ten programs, top-ten programs with a slight shuffle from what we reported last quarter remain the same programs. Rank ordered, it's the Boeing 777 is the top in our backlog, and this is rank ordered by backlog. Boeing 737 New-Generation is number two; Airbus A320 narrow-body family, including the 319 and the 321 is number three; the V22 program is number four; 747 is number five; C-17, number six; the E2C is number seven; CH47 Helicopter number eight; F-18, nine; and F-15 number ten. Boeing is -- and looking at our top customers -- Boeing is our only customer with more than 10% of sales. Fiscal year '05 representing 21.2% of our net sales versus 20.5 in '04, so running at about the same level. Airbus is currently 4% of our net sales and we would expect that to be growing as the A320 production ramps up.

Sales trends, looking at same-store sales in the quarter, same-store sales were 163 million of the 182 million, up 3% year-over-year. Same store sales for the year at 620.7 million of the 688 million in net sales, up 6%. Export sales in the quarter were 42 million. And for the year, 157.8 million. Showing continuing growth year-over-year. Looking at our sales [indiscernible], sales are -- the 688 million in sales breaks down to commercial programs, 301 million. Military and space, 233. Nonaviation business, which is where the other segment resides, 53 million, business jets, 58 million, and regional jets, 40 million. That compares to the prior year where we had 262 million in commercial, 202 million in military, 36 million in regional jets, 49 million in business jets, and nonaviation business of 59 million. OEM revenues in the current year generated 59% of net sales. Aftermarket 33% of net sales and nonaviation was down to 8% of our net sales.

Looking at R&D trends, we continue to spend additional money pursuing additional proprietary products business. In the quarter we spent 2.7 million versus 2.2 million in the prior year quarter. For the full year 8.3 million versus 7.4 million in the prior year. Looking at cash flow, again, Rick mentioned cash flow is very strong for the year. Operating -- net operating cash flow deducting working capital -- or deducting CapEx from cash flow from operations was $53 million for the year, and resulted in capitalization at the end of March with net debt-to-capital down to 23%. And net debt down from 219 million to 153 million at year-end.

One other comment, the results in the Press Release had an effective tax rate for the year of 22% with minimal tax provisions in the current quarter. We had been running at a 30% effective tax rate for the year with the decline in income in the fourth quarter that was not projected prior in the year. The significant reduction in earnings with very high levels of both R&D and ETI deductions at fixed dollar levels wound up year-end with an effective rate of 22%, which we adjusted to in the fourth quarter. Looking out to next year, on the guidance that we provided, we have estimated the effective rate next year will run between 31 and 33%. That's enough with the numbers. We'll open it up to questions now.

[OPERATOR INSTRUCTIONS]. Ron Epstein, please state your affiliation followed by your question.

Sure. Hi, this is Ron Epstein with Merrill Lynch. Can you just give us some more color on what you're seeing with regard to the rates you're currently building to for OEM deliveries? Because I guess you guys are what about nine months, twelve months ahead of what the OEMs are doing? Can you give us some color of what kind of rates you're building to?

I can't give you, I guess the better answer is I shouldn't give you the build rates, but I can tell you that my statement before, that the build rates have increased significantly in the -- what we're currently either building to or will be building to over the course of 2000 -- our 2006 fiscal. In addition to that, the uptick in build rate is in the programs that John listed as our top -- within our top-ten programs. So we're not -- I mean, clearly, some of the aircraft have, you know, gone away and the uptick is not in leftover 757s or something like that. It's in the 777. It's in the 737 New-Generation and it's in the programs that we're, in fact, doing very well in.

In addition to that, John mentioned that the Airbus will, in fact, increase. And he mentioned as the A320 ramps up some more and that is true, but it's also very true as the A380 ramps up as we go forward into the new year, especially toward the end of our fiscal year 2006.

Okay. I'm just -- two more questions for you. This one regarding the Aftermarket. I mean, again, can you just give us some more color on what you're seeing in the Aftermarket with regard to growth rates? I mean, have you seen -- you know, one of the things we've been hearing is the yields have come down. Airplanes are full. I mean, are you seeing the growth in air traffic flow through to your business?

Absolutely. You have to remember one thing in our -- in the Aftermarket Services Group, John mentioned that we moved the casting facility over to that particular group. That is perhaps the only area where we have a backlog, if you will, because we're producing aerospace castings so we do have some visibility in there and especially toward the second half of 2006, we have an increased backlog there.

In regards to the component repair and overhaul business, we clearly see an upswing in the business we're getting in the components that we're repairing in overhaul which is due to the -- exactly what you said, the planes are being full and the components are coming in.

Okay. And then I just -- one thing --?

I think Ron in addition to that, the Bizjet business continues to be very strong. Operating at a very high level and continuing to move up.

Okay. Great. Just two last quick ones and I'll let someone else go. What are you guys seeing with regard to raw material pricing? I mean, are you seeing pressure in the raw materials market for aircraft aluminum or titanium or any of the other materials you guys are using?

We have seen pressure and we -- on both ends of the spectrum, I mean, from our suppliers of that, although we are, in fact, helped out in many cases in working under contracts that our customers have helped us with, that's number one. Number two, where we don't have that, we have signed long-term contracts with suppliers of primarily sheet aluminum and products of that nature where there's upward pressure on the pricing. So albeit, I think our biggest problem in that area is the lead times that we have, not necessarily the pricing. I'm not trying to belittle the pricing, because there is upward pressure on the pricing but our biggest problem is the lead time issue.

And as we've said in the past, the high value added that we put in our products minimizes the overall impact of raw material, and it's more an availability question rather than a margin impact question for us.

And one last question I guess more of a strategic question. Do you think there will be any opportunities for Triumph's Group if Onyx outsources any of their operations at Wichita?

Absolutely. I think that there will be -- number one, you have to remember, we do business today with Boeing Wichita. And in our opinion, we'll have more of an opportunity going forward as opposed to less of an opportunity. It's a long way of saying yes.

Great. Thank you guys.

Rob Stallard please state your affiliation followed by your question.

Good morning. It's Rob Stallard from Banc of America.

Hi, Rob.

Hi, guys. Just a couple of quick things. First of all with regard to the Aftermarket following on from what Ron was asking, what's your assumption with regard to ASM growth looking for FY '06?

Assumption to what growth?

ASM. Traffic growth.

The same that we have been, in fact, using for -- in the last year --- that's 4 to 5%.

I think Rob we've been using Banc of America's forecast.

Well, it must be accurate. Okay. Second thing, I was wondering if you could update us on what the capacity on your plants is at the moment?

The capacity, we've always talked about our capacity in the last -- I think we addressed that either one quarter ago or two quarters ago. And we said in a lot of our plants we were running at about -- especially in the build to print plants -- about 35%. It has gone up to somewhere in the 40% range and I think that as we get to the middle of fiscal 2006 it will ramp up a little bit on that as well.

We're obligated to become more and more efficient. So the percentage of capacity may change from two directions, number one, we have more business, and number two, we're becoming more efficient at the business that we do. So that will affect the capacity issue but clearly we have capacity. We don't have capacity constraints in the great majority of our plants.

And as you see production increasing assuming you'll get some operating leverage coming through, where do you see margins moving up to as the volume starts to increase?

I don't know if we've -- I can say that if we see our margins moving up, we have -- for two reasons, number one, we are rid of all the extraneous issues that we have talked about for the last quarter or the last six months and that will move our margins up in and of itself. And as we move from the 35 to 40 and get more business in there, we'll continue to -- our margins could be -- will continue to go north. I think that in the past, we have been up as high as the 11.5 to 12% operating margins. I'm not sure that it will get quite that high in the near-term future. We still have some of the issues that we talked about and then the litigation and some other, which is included in that. However, I am very optimistic about our margins moving north from where they have been.

Great. Thanks very much.

J.B. Groh, please state your affiliation followed by your question.

J.B. Groh from D.A. Davidson.

Good morning, J.B.

How are you doing? A question on the litigation expense. It looked like you said it was 1.2 in the quarter and about 1.5 for the first three quarters. Is there anything going on there? I mean, could you give us a kind of status update on the litigation and kind of why it bumped up in the final quarter?

Well, I think the number one, the status is really no change from what we have said in the past. It's an ongoing issue. It's a very good situation for the attorneys. And that continues to go on. I think that one of the reasons that the cost has been a little higher in the fourth quarter and in the year was this is a lot of preparation work being done from the legal perspective. In the guidance that we gave you as John mentioned, we have the legal expense that we anticipate for fiscal year 2006 included in that number. So I think that the fourth quarter, for example, what we're seeing in that regard is a little higher than we anticipate as we go through fiscal year 2006.

But would it be safe to say that it's above 2.8 million for '06?

We -- I really -- you know, that's a very hard question to answer. I don't -- mainly because I really don't know. I mean, I know what we have in the budget and you know, the budget is somewhat around the same, you know.

And we'll track that to provide the information with respect to what the underlying operating margins are in the systems segment.

Okay. Great. And then kind of moving on to 787, have you guys -- what are you working on there and when do you expect to hear? I know Boeing usually makes the announcement but just give us an update there.

I don't think there's really any update other than from what we had told you in the past. We are -- we have a lot of content, not directly with Boeing other than some of the development issues upfront that we have already started to work on. But we have a lot of content on there with -- as subcontractors, if you will, of other companies, such as Saab and others that we're doing some business with.

Okay. And can you tell us sort of the order of magnitude relative to say, a 777 work?

Well, you -- we would estimate J.B. that when that plane goes into production, we'll have a significant presence on that aircraft in multiple areas.

So it definitely has the potential at some point to be the number one?

It will move into that -- it will be in our top-ten.

Especially if the orders keep coming the way they've been coming.

That's right.

Okay. Hey, thanks a lot.

Okay.

Are there any additional questions? Larry Baker, please state your affiliation followed by your question.

I'm with Legg Mason. Good morning. Just a couple of questions. One is a request. It would help me if you put in the gross margin SG&A, et cetera in your Press Release rather than waiting for the 10-K going forward. Just if that could be done I would really appreciate it. And then would you repeat the percentage sales for military and commercial?

Sure.

And Larry, if you go to the website -- [multiple speakers].

I can't read it off your slide. It's too small for me to see.

I'll be glad to.

I need a bigger computer.

In '05, commercial 301.44%. Military 233, 34%. Regional 43, 6%. Business jets 58, 8%. Nonaviation 53, 8%. And hopefully that totals up to 688.

Great. And then just in looking at your guidance, and the bottom end of the range of your guidance is very similar to what you would get for adding the actual results this year to the $0.80 of nonrecurring and then making some adjustment for the ongoing litigation expense. What sort of circumstances from -- are you looking at that would bring you in at the bottom end of this range?

Well, one of the impacts could be as business ramps up, the level of R&D spending that we incur. As we pursue additional work. We're also looking at a number of expansion situations on the CapEx side which would have expense associated with them.

One of those is the expansion into Thailand that we had mentioned in the past, which is a cost factor, if you will.

Okay, just -- I'm sorry.

I just finished up on the Thailand.

Okay. So basically, what would bring you at the bottom end would be funding growth opportunities?

Yes.

Okay.

Yes.

All right. Thank you.

Ladies and gentlemen, are there any additional questions at this time? Since there are no further questions, this concludes the Triumph Group's fiscal year 2005 fourth quarter earnings conference call. This conference call will be available for replay today May 6, 2005 at 1:00 p.m. ET through May 13, 2005 at 11.59 p.m. Eastern. You may access the replay system by dialing 888-266-2081, or 703-925-2533. Entering the replay code 692774. Again, those numbers are 888-266-2081 or 703-925-2533, replay code 692774. Thank you all for participating and have a nice day. All parties may now disconnect.