Triumph Group Inc (TGI) 2006 Q1 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2006 first 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 be materially different from any expected future results, performance, or achievements, expressed or implied in the forward-looking statements. Please note that the Company's reconciliation of non-GAAP 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 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. Please go ahead, Mr. Bartholdson.

Thank you and good morning, everyone. We will review the quarter quantitatively before Rick provides an overview of performance for the Company. Real briefly, the income statement sales in the quarter of 177.7 million were up 7% from last year's 165.3 million. Operating income rose 111% to 13.7 million versus 6.4 million. Net income was up 151% at 7.2 million versus a year ago 2.1 million. And earnings per share from continuing operations were $0.45 per share versus a year ago's $0.13 per share.

Turning to the segments our aerospace systems group sales increased 12% to 134.1 million versus 119.4 a year ago. Operating income for this group was up 43% to 16.2 million versus 11.3 a year ago. And EBITDA for the group was 21.7 million at a margin of 16.2%. After market services group sales in the quarter were 44.1 million versus 39.7 million a year ago, an increase of 11%. Operating income rose 7% at 1.4 million versus 1.3 million a year ago. EBITDA for the group was 3.7 million at a margin of 8.4%.

A year ago we had a third group, the "other" group that we reported on a year ago which was primarily related to our IGT business. That group a year ago on the quarter generated 7.7 million in revenue and generated an operating loss of 3.2 million. Since we have ceased operations in the IGT business, there are no revenue numbers for the "other" group in the current year's quarter. Analyzing sales for the quarter, export sales rose to 25% of our revenue . Driven by increased shipments primarily to the Airbus programs. Boeing remains our only customer with revenue -- with sales over 10%. Sales to the Boeing Company commercial, military, and space made up 23% of revenue in the quarter. And the Airbus that I mentioned rose from an average of 4% of revenue last year to 6% in the quarter.

Our sales mix reflects the growth in commercial aircraft. Commercial aircraft represented 46% of revenue compared to 44% a year ago. Military sales in the quarter were 32% compared to last year's 34%. Regional jets remained at 6% in the quarter versus last year's 6%. business jet revenue though rose 1% to 9% versus 8% for last year. And the "other" category where the IGT business was a part of other revenue, nonaviation revenue declined to 7% in the quarter from an average of 8% last year.

Another positive indicator in the quarter was our backlog. Our backlog at the end of last year was $598 million. It rose to -- in a quarter to 682 million. And again the backlog numbers that we report are backlog where we have a contract and/or a purchase order with delivery dates, stated delivery dates within the next 2-year period. Our top 10 programs ranked by backlog in priority were the 737 new generation as the number one backlog position followed by the 777. The A320 and then the CH47, V22, 747, C17, F18, E2C and finally the 767 program.

Briefly turning to our capital structure, net debt at the end of the quarter was 163 million versus 153 million at the end of last year, an increase of $10 million in the quarter. Debt to capital remained at 23%. Cash flow from operations in the quarter was 1.1 million and we had 5 million of capital expenditures in the quarter. Looking forward we anticipate CapEx for the year to come in at 25 to 30 million. And the tax rate in the quarter was 32% which is what we anticipate the tax rate to run for fiscal year 06. Those are the numbers. I'll turn it over to Rick now. Rick?

Thanks, John. Good morning, everybody. We are in fact very pleased with our results of the first quarter for a number of reasons. Some of which were mentioned in the press release, but we'll reiterate them and go into some others. Number one, our operational and our financial results are in fact very positive as indicated. As John indicated, our backlog has increased significantly up to $682 million. In addition to the fact that John mentioned that it's next two years, the shipments, keep in mind we also don't include in our backlog the great majority of our after market services group which is on a day-to-day, week to week type of input from our customer base. Third, our operating leverage has been greatly enhanced with the increased throughput that we have experienced in the first quarter. And expect to experience throughout the rest of the year. And as we have mentioned many times and John mentioned a little earlier, the IGT business is in fact behind us. The other segment which was essentially the IGT is no longer a drag on our earnings as it has been for the last few years. This is something we've been talking about for awhile, and it is in fact as we indicated last quarter behind us.

Our sales increase was in fact all organic as we've made no acquisitions in over a year. It is, however, extremely possible that this could change because our hiatus in acquiring companies was in fact self-imposed while we dealt with the problems that we have reiterated a number of times. The Company remains acquisitive and it is our desire to remain in that mode. We do remain with challenges as we go forward. Challenges such as continuing to transfer our best practices through integration of our companies. To continue to take cost out of our system by a very strong commitment to lean practices. To successfully manage the upturn and build rate and to continue the transition of our casting facility to aerospace castings which we're presently doing.

In general, we feel very good about our future and we do reiterate our guidance of earlier this year. However, due to all the factors that we mentioned already and John spoke to it. John spoke and I have spoken. We would expect that the year's earnings would be closer to the top end of our previously mentioned range of $1.75 to $2 per share. We also reiterate that our earnings should sequentially improve throughout the remaining three quarters. At that I will open it up to any questions anybody may have.

[OPERATOR INSTRUCTIONS] Robert Stallard please state your affiliation followed by your question.

Morning. It is Rob Stallard from Bank of America. First of all, guys, congratulations and secondly on the after market services division, revenues are up year on year, but the margin didn't quite keep pace. I was wondering if you could comment on what might have happened there.

Rob, nothing happened there. As we have continually said and I referred to in our challenges, we moved the casting facility from the other group last year into the after market services group because we have -- we are transitioning and have transitioned to a great extent and still have some work to do in that area as I mentioned, transferring the business from an IGT industrial gas turbine castings to aerospace castings. And that remains a challenge which is affecting the segment margins. In the margins and in the sales of the rest of the after market services group, we feel very positive about the growth and the sales in that area.

Do you care to quantify how much the casting cost was this quarter, and do you expect that to increase or decrease the rest of the year?

We expect over time that the cost there will get much better. We've made a commitment to that in the aerospace castings. I don't think it is fair within the segment and we have consistently said that we're not going to quantify individual companies. But in fact, if we didn't feel that it was going to get better, we wouldn't have made the move that we've made. So I think it will as we go through the course of the year.

By the end of this year, this process should probably be finished?

That's our intent.

Yes. Okay. Moving over to the other division, you sort of quite healthy margin there. Do you see sequential improvement in aerospace systems as it moves through the rest of this year and into 2007?

I think that the throughput that we have based on the build rate going up and the backlog that we have as we have discussed in the past and as we said last quarter, our margins will in fact increase because of the throughput. We've gone from approximately and we have used the number 35% in the past. Now I would say our capacity level in the area of the OEM is probably 50% or a little bit in excess of 50%. It varies by individual company. And those margins will in fact, I think, continue to rise. I don't think that they'll go back to margins of two or three years ago where we have operating margins of 17, 18%. But they will in fact increase and we're very optimistic about that particular group.

Rob, a lot of the increase is coming, as we said on the commercial side of the business. On programs where we have positions on the programs with stable pricing. So that as the incremental throughput comes through on parts that we're already making, it is naturally going to have a positive impact on margins.

Yes, I see. And just finally a couple of sort of accounting style things, I was wondering if you could comment on your pension situation and also if you have got any exposure on the foreign exchange side?

Pensions are de minimus. Really not material for us. We have very few defined benefit plans that are covered by the limited group of unionized workers that we have. So it is not an issue for us. Our FX exposure is extremely limited with respect to a very low percentage of our assets being offshore.

Great, thank you very much.

[OPERATOR INSTRUCTIONS] Steve Levenson, please state your affiliation, followed by your question.

From Ryan Beck, good morning, Rick and John.

Good morning.

While we are on the call right now, there is just an item crossing the tape that China is going to buy 50, 787's. And you didn't mention that. Can you give us an idea what you think your exposure might be or what your content might be on the 787 as I guess some of the tier1 subcontracts have not been announced yet and furthermore what your opinion is on the A350 and how you might be involved there.

The first question is that, yes, we will have, in fact, some content on the 787 we do not have any direct large contract with Boeing on that. It can be a long conversation on whether that is a good thing or a bad thing. But we do and we are working with a number of other people who have those contracts. So we will have content on the aircraft. It is awful hard to know what I really want to at this time quantify what that would be. Secondly, there is a number of -- there is a great amount of content on that aircraft that hasn't even been quoted yet which we feel we have a very good chance at such as some of the composite ductwork, some as the flooring assemblies, and this, that and the other thing that has not been discussed by Boeing or any of the tier one's in that regard. So going forward I think we'll have that. In regards to the A350, we have already had conversations with Airbus on a number of products that we'd sell as extensions to our business on the A380 and other Airbus products. So I feel strongly that we'll -- if that aircraft goes we'll have content on that.

Okay. Thanks. Did you have any bad debts or additions to reserves during the quarter? Anything meaningful?

No, nothing meaningful.

And are you still in the position where you've got the mechanics lien on parts in the after market side that you don't think you'll have any problems there?

We still have our position on work that we have in house and the value of the assets that we hold so that on turning those assets around we've had in the past and would expect to have in the future a very good cash flow relationship with our after market customers.

Thanks very much.

Thanks, Steve.

See you, Steve.

Our next question is from Jay Khetani.. Please state your affiliation followed by your question.

Good morning, Rick, good morning, John. This is Jay Khetani, with SG Cowen. Just a question with regards to operations, Rick. Can you comment on your assessment of kind of the operational status that some of the larger systems business, composites, Chem Fab, Frisbie, with regards to how they are performing today and how well prepared you think they are to deal with the build rate increases that are on us and as we look going forward.

Well, I commented a little bit about the -- coping with the build rate increase. So we're very aware of the fact. And have in fact been aware of this for a relatively long period of time, 4, 5, 6 months. Because we anticipate it coming. In some of the larger operations, you have to remember, for example, Triumph Composite Systems which we bought from Boeing when we bought it -- just before we bought the Company, they were in fact operating at a significantly higher build rate than they were right after we bought it. And we've converted that from a cost center to a profit center. So as John indicated in his explanation, the throughput there will in fact -- a great percentage of the throughput will drop directly to the bottom line and that company is used to a higher throughput anyway. So we're coping very, very well at that particular location.

In the Frisbie location, you may remember that we added engineering there. We've added capacity there. We've made some significant inroads down there in some of the Lean manufacturing practices. So they are more than prepared to go forward. The other one that you mentioned, Chem Fab has made significant inroads as to the programs they are on, the throughput of the Company and the contracts that they've received. So they're more than ready for any increase without virtually any slow down. I think then that's basically true throughout our operations where we're looking at where we put some business. You have got to remember also that we have some overlap, for example, EFS and Frisbie, although they work on different size parts and components, we can switch back and forth to a certain extent where we produce a product. So I think that we're very prepared for the increase in build rate, that doesn't go up overnight. It slides up gradually and has slid up gradually. So I think we're very well prepared to address those issues.

Thanks. Second question is R&D spending. Could you give us a number for the quarter, if you have it? And then how does that look as we roll forward? I guess 787 would be the primary driver, but if there is anything else that you would highlight in terms of the balance of the year?

I think in the Q we will have a number for you which should be out very shortly. And I think the spending this year should be comparable to the last two years. Running in the 7 to $8 million range. No significant shift from that.

Okay. And last question -- on the last call you had talked about some potential capacity expansion overseas. I think Thailand in particular. Where does your thinking stand on that? Should we be thinking that there is some capital expense -- additional capital expense coming from that as we roll forward?

Well, you should be thinking, yes, there is capital expense, but not necessarily additional capital expense. John mentioned a number of 25 to $30 million. That number -- the number end of our expansion in Thailand will -- it will be included in that number of 25 to 30 approximately. We are working on that still as we speak. We haven't changed our direction in that regard and we are very excited about that possibility and about the expansion over there. But it is included in those numbers, Jay.

And is that driving towards cost reductions? So is it a shift of manufacturing from a domestic facility? Or what is -- what is the particular value there or was it just simply to support growth?

It's a -- it's somewhat two aspects. Number one, a great percentage of our business in the after market service business, 15% plus has come from Asia. It is very clear that a lot of the growth in new aircraft and the older aircraft are also going to be in Asia. We feel very strongly that if we're not there we're going to miss a number of growth opportunities. Number one. Number two we will clearly shift some of our business from our U.S. operations to give our customers in Asia much better service. Closer proximity. Also we would intend to have that plant in Thailand be multi product for our customer base and add products as our customers in Asia want us to do. So it is really a combination of a number of things. We do expect that it will be lower cost operation in Thailand but in addition to that we would expect that it would be a growth vehicle going forward.

And I think, Jay, the important point it is to support our Asian customers and provides capacity to grow the domestic business back here. Frees up capacity to grow the domestic business back here. It is not meant to carry out services over there for reshipment back into this market.

Okay. Thank you.

Our next question comes from J.B. Groh. Please state your affiliation followed by your question.

Hi, guys. J.B. Groh from D.A. Davidson. I apologize. I'm on a cell phone. Is there any -- given the kind of new disclosure on the segments, is there any seasonality to that after market services business?

There is a minor seasonality based upon the aircraft utilization. For instance in the summer months, there is high utilization of aircraft. There is high utilization of APU's and there's some seasonality that the maintenance is deferred as much as it can be until you get through that period of time. But it's fundamentally driven by available seat miles. So the long-term trend continues to be on that midsingle digit growth of global air traffic.

But so in theory your margins should be a little stronger in the, say the lower utilization months?

Yes. Marginally increased volume.

Not a significant issue, J.

Okay. Okay. And have you guys had any -- do you have any feel for the -- I read a few articles on the decreasing use of AP use because of the high cost of fuel and more use of kind of ground power. Any trends there that you can speak to?

No. Not really. We do some of the ground power units also.

Okay.

So it not really to my knowledge has affected us to any great extent.

We haven't seen any negative impact on the level of demand for APU overhaul services.

Okay. And then lastly, could you give us an update kind of on the legal front? How significant were legal expenses this quarter versus last year, and just kind of an update on the litigation.

Well, I'll take the second part first. I really don't have any update on any litigation. On the litigation, it really has -- nothing's really happened in the quarter that is any different than we have described in the past. It is an ongoing issue . Our legal expenses are in fact factored into our business plan and therefore factored into the guidance that we're giving you. So it's not -- there really has been no change in that regard.

Okay. Great, thanks a lot.

Are there any additional questions? There are no further questions at this time, gentlemen. Since there are no further questions this concludes Triumph Group's fiscal year, 2006 first quarter earnings conference call. This conference call will be available for replay July 29, at 1:00 p.m. eastern time today through August 5, 2005 at 11: 59 p.m. eastern. You may access the teleconference replay system at any time by dialing 888-266-2081 or 703-925-2533. And entering the replay code 737351. Those numbers again are 888-266-2081 and 703-925-2533. Replay code is 737351. Thank you all for participating and have a nice day. All parties may disconnect now.