Triumph Group Inc (TGI) 2006 Q2 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 2006 second quarter earnings performance. You are currently in a listen in-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 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 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 that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed, or rebroadcast 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. Go ahead, Mr. Bartholdson.

Thank you and good morning, everyone. I will briefly review the numbers for the quarter and turn the call over to Rick. For the quarter, sales in the quarter ended September 30 were up 8% to 183.6 million versus 170 million last year. Operating income increased 34% to 13.2 million over 9.9 last year and income from continuing operations was up 44% at 7 million versus 4.9 million. EPS from continuing ops $0.44 a share versus $0.31 last year.

Year to date, sales were also up. In the 6 months period 8% at 361.3 million. Operating income increased 65% to 26.9 million versus last year’s 16.3. And income from continuing operations doubled to 14.2 million from 7 million in the earlier year resulting in $0.89 per share from continuing ops versus last year’s year to date $0.44. Looking at segment results, our aerospace systems group sales increased 15%, up to 140.4 million in the 3 month period and increased 14% in the 6 months to 274.5 million. Operating income in the quarter was 17.2 million, up from 14.6 in the prior year. For the 6 months, operating income totaled 33.4 million, up from 25.9 in the year before.

EBITDA in the quarter was 22.7 million resulting in a 16% EBITDA margin for the quarter. Year to date EBITDA was 44.5 million and again, 16% EBITDA margin on sales in the 6 months. Our aftermarket services segment sales in the quarter were up 4% to 44 million versus 42.4 in the quarter last year. Six months year to date sales were 88.2 million, up 7% from the prior year’s 82.2 million. Operating income in the quarter was a loss of 1.2 million versus 2.3 million in the prior year. Year to date operating income was $100,000 versus 3.6 million in the prior year. EBITDA in the quarter at 1.2 million or 3% EBITDA margin. Year to date 5 million or 6% EBITDA margin.

Same store sales were all organic. There was no period to period acquisition impact to the revenue, so all of the revenue increase was organic. Turning to our top 10 programs and, again, we rank order our top 10 programs by backlog. The backlog is product that is shippable in the next 24 months. It’s not life of the program estimates, it’s our horizon for the next 24 month period. And the top 10 programs, starting out with number one is the 737 followed by the 777, the A320 family, the CH47, the C17, next the V22, the 747, and for the first time appearing in the top 10 in the next position is the A380 program, then the F18 and the E2C.

Export year to date was approximately 24% of our revenue. Sales mix broken down by commercial at 45% of our revenue year to date compared to in ’03 41, in ’04 43, and in ’05 44. So continuing to reflect the ramp up in build rate. Military sales essentially flat at 33%. In ’03 they were 32, in ’04 33, and ’05 34. Regional jets at 6% of revenue. The prior 3 years were in ’03 5, ’04 6%, ’05 6%. Business jets were up to 9%. ’03 they were 9% dropping to 8 in ’04 and 8 in ’05. And other non aerospace sales were 7%. In ’03 they were 13%, ’04 10%, ’05 8%, reflecting the withdrawal from the IGT market.

As in prior periods, the only customer that’s generated more than 10% of revenue was Boeing. They were, in the first quarter, 22.7% of our sales, dropping to 19.7% in the second quarter for the reason I think we all know. The strike. And we estimate that the strike at Boeing in the quarter impacted our results by approximately $0.05 per share. Cash flow was 6 million in the quarter, cash flow from operations. We had 5.5 million of cap ex expense in the quarter and we spent 3.5 million on costs related to acquisitions.

Debt to capital at the end of the quarter was at 24%, again reflecting the strong balance sheet and net debt at the end of September was 166.8 million. That’s the review of the numbers. I'll turn it over to Rick now. Rick?

Thanks, John. As the press release says, and as John has indicated in going over the numbers, we are in fact very pleased with our results. I won’t go over the percentages again, but sales, earnings up over last year. Cash flow very good for the quarter. Backlog up to 756 million which is up 35% over the previous year as the press release indicates. John spoke about the Boeing strike and our estimate that that was a $0.05 impact on our earnings for the quarter. The Boeing strike ended on October 11th. It will have some impact for the year depending on how fast Boeing gets back. But I will underline that this is a postponement, it's not a loss of business and it shows a number of things within our business. We are, in fact, just in time to the assembly line on many of our operations. We had to layoff approximately 5% of our workforce when Boeing went out on strike and everything is starting to get back into a good flow as we speak. The frustrating part of the that for the quarter was the fact that the leverage on our increase at our plants in business because of the build rate going up was hitting stride at that time when the strike was seen. So it’s a very frustrating thing but, on the other hand, as I mentioned, it’s a postponement not in fact a loss of business and we’ll benefit from that as we go forward.

We continue to benefit from contracts that we have received. John mentioned the A380 going into our programs, our top 10 programs for the first time. And it's an indication of a number of the new contracts we had and the ramp up that we received in that. We are focusing on working capital. The other issue that hurt us to a certain extent, vis-à-vis the strike, was inventory. Our inventory built up during that period of time, but we are in fact very optimistic and then we feel that our cash flow will be excellent for the year, especially with our focus on the working capital.

The aftermarket services, a couple comments in there. We continue to expense relatively significant development costs there at our casting facility. Our normal R&O activities in the aftermarket services group continue to be excellent. The aftermarket services group we feel will in fact be a very good contributor to our company as we move forward. Coming full circle, again, mention that our backlog is up at record levels. And just to wrap up, based on that backlog, based on what we’ve told you about this quarter, we would in fact reiterate the same range that we have before of $1.75 to $2.00. And as we said last quarter, we would expect that that would be at the top of that range for the end of the year. As I mentioned, our cash flow will continue to increase. At that, I’d open it up to any questions.

[OPERATOR INSTRUCTIONS]. Jay Khetani, please state your affiliation followed by your question.

Good morning, it’s Jay Khetani with S G Cowen. So Rick, just to build on the comment regarding the leverage in systems, on the reported basis, it was a 16% incremental margin, but of course including the Spokane impact. So the performance there would appear to have been fairly robust in that segment had you not had the Boeing strike. So I mean, we should clearly be thinking about a better incremental margin as we roll forward as the OEM cycle progresses. Is that fair?

I think that’s fair, Jay. It’s not only fair with Spokane. Spokane, that would be very true there. But it’s also somewhat true in some of our other operations because as we’ve mentioned in the past, as we move, in the past we’ve talked about being at 35% capacity. And as that capacity has been utilized to a much greater extent, that would be true in a lot of our other plants. Spokane is a little more effected because of the high percentage of business that we have directly with Boeing.

Okay, so I mean, in terms of thinking about systems margins as we roll forward over the next several years, what is your outlook for where margin rate could go in systems as we, I guess, look towards close to the end of the decade?

Well, that’s a long term look. I think that we’ve said before that we go back a few years, 3 or 4 years, and we were at margins that were in the high teens, you know 18, 19%. And I think we’re fairly consistent in the fact that - - I’m not sure that we can get back to 19% type of thing, but I think that we can safely say that in a period of time in which we’re working right now, the margins in that group will be higher as we leverage that capacity, etc., etc. So I think that - - and we’ve also done a better job in some areas of integrating some of our costs, etc., and we’ll continue to do so. So although it’s hard for me to talk to the end of decade in margins, I think your point is well taken that our margins in places like Spokane and some of our other locations should in fact go up.

And the issue with not getting back to the 18 or 19 is the price that you’ve had to conceded through the downturn, is that right?

I think that the issue here is that we’re obligated and it’s no secret that there is a fair amount of pressure on margins from the aircraft manufacturers. On the other hand, we've also gotten more efficient and will continue to become more efficient. So I think the margins can go up, but I’m not sure they’ll go back to the high numbers of the 19s, etc.

Okay. Second question, you're holding this $1.75 to $2.00 range again saying towards the upper end of the range. Why not tighten it to the upper ends? Are there factors that are still in play that could lead you towards the $1.75?

No, Jay, I really don’t think there are and that’s why we’re trying to give the guidance toward the top end of the range. Frankly, it's just an issue of us saying to everybody we'll give you an absolute number. It’s the age old issue, should we give any guidance at all type of thing. And we're just trying to be relatively conservative, not tie it down. But I am confident that we’ll be at the top end of that range.

And does the range contemplate a recovery in the fourth quarter of any of the lost aircraft? Because we’ve heard Boeing say that Q4 will not really include those and they’re even hedging about whether or not they come into ’06. So how - - does that 1.75 to 2 assume that the 25 or so aircraft are fully pushed out?

It does not assume, because we’re concerned about the same thing. I spoke about the fact that it’ a postponement and not a loss of business. But at this point in time it's unclear to us what Boeing’s going to do and what quarter that will fall in. Whether it will fall in our fiscal year here, I think it will certainly fall in our fiscal '07, if you will, in the next year, but we haven't been told that everything is going to recover by that fourth quarter.

I think, Jay, that the nickel impact in the second quarter, if we don't completely remove that in the third quarter because of the 10 day period at the beginning of October and then a question of whether or not operations will run through the holidays, is an issue. But just normalizing the quarter and adding those 2 quarters onto the second half of the year is a pretty good indicator of where we're going to go. Plus the continuing build in the backlog is an indicator of continuing growth on the top line.

Okay. One last question and then I'll pass on. Can you quantify the size of the Northwest and Delta charges that you took in the quarter?

We could, but we haven’t.

Okay, fine. Thank you very much.

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

Ryan Beck. Good morning, Rick and John. Glad to see things are turning back around, too. In the Spokane plant, is everybody back to work now or is it still going to take a little while before you get things turned up there?

It will take a little while, and I’ll underline the word little there. As of 2 days ago, not everybody was back to work, but they will be in a very short period of time. So we’ll get to the point where we ramp up very well there. The issue is the one that I just spoke about in answer to Jay’s question on the fact that how fast does Boeing ramp things up for us.

Okay. Secondly, on the V22 now that it’s going to full rate production. I guess the schedule has been something like 11 planes, 16, 22, and then going up. Is that the sort of build rate you’re looking at for supplying the parts?

Yeah. We’re using obviously the same build rate. That won’t kick in right away here. But it’s going to be, it’s a very significant program for us in a number of our plants, specifically in our gear plants. But we’re looking at a good ramp up on that.

Have you heard anything about work beginning on a quad tilt rotor heavy lift? I don’t even know what to call it, it’s not a helicopter, it’s not a plane. But a quad tilt rotor aircraft?

I've got to say no. There’s a lot of development programs we’re working on, but I personally, I’m going to say no.

Last, on the 787 and the A350 now that they’re officially launched, I guess there haven’t been a whole lot of recent announcements from Boeing and I guess it’s a little early for Airbus. But where do you see some opportunities on those aircraft?

Well, we are working on a tremendous number of opportunities on both aircrafts, from a structural point of view and from an engineered, actuation point of view that we've quoted and we can't yet talk about because most of the things that we're working on are not direct. We're working in joint ventures with a number of companies on the 787 and the A350. But we're very confident that some of the things that we're working on will in fact be very good for us. Some of the things we’re working on are some of the last things that would in fact be awarded.

Sort of the floor panel and interior parts?

Well that’s certainly one of them. But that has not been, some of those have not been awarded, so I obviously can't say that we feel good about the fact that we’re going to get them because you don’t get them until you get them. But I think that in our case that we'll do, have a much better chance on some of the 787s and the A350's. We have a number of opportunities that we're working on with Airbus.

So are those planes you think somewhere out a little ways we’re going to see on your top 10 list?

I think it will follow the same pattern, Steve, as the A38 0. When you think about that, we’re approaching the ramp up to full production and it’s appeared in the top 10. And I wouldn't be surprised to have the same thing happen with the same kind of lag time with the 787 and the A350.

Okay, thanks very much.

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

Hi, J.B. Groh from D.A. Davidson. Question on your A380 work. Is that for the freighter version? I wasn’t aware that there was any passenger version work there.

It’s really for both. We have the stringer contracts on the passenger A380. We’re doing the engineering work and the floor panel work on the A380 freighter, so we really have - - and then we’re doing the cargo door actuation assembly work for the freighter and the passenger, so it’s really both.

Okay. Got to be pretty good content if it’s already showing up in the top 10.

Yeah, J.B., the freighter really hasn’t appeared yet in the backlog because of the 24 month time horizon.

Yeah, that's why I asked.

We’re still doing the engineering on that part.

And then coming at this Delta and Northwest question another way, have those items not occurred? I mean, would aftermarket would have been breakeven or better? [Laughter]. Hey, I’m trying here.

It’s a good try, J.B. it really is. I'll tell you very honestly, we're trying not to quantify that. To repeat what we’re going to say, from an operations point of view in the R&O area of our aftermarket services group, that business is in fact excellent, okay? We have many of our companies in there that are doing very well. There's no doubt about the fact that we took some hit to receivables there, but we’d rather not quantify it. The other issues are the continuing taking of the development costs in casting as we grow into the aerospace business from the IGT business. So what I was trying to do was indicate that as we go forward, the aftermarket services group will be in fact a good contributor to the company.

And can you give us kind of an update on the casting business, how you feel about the competition there?

Well the casting business we feel, frankly, very good about. We’ve gotten, we’ve made a lot of inroads on the development costs for aerospace castings. We are working on and very close with a couple of very nice contracts there. So as we go down the road, I think that the casting facility has made and will make excellent inroads as we go forward.

And then just to clarify on composite systems. It was like a 5% workforce reduction there, correct?

Right.

5% of the total workforce, not - -

No, I know, just of composite.

No.

No, of all our workforce.

Oh okay. Okay.

And approximately a 50% reduction of the workforce in composite systems.

So all the composite systems people have been rehired or will be rehired?

Yes.

Okay. Thank you very much.

Robert Jackapraro, please state your affiliation followed by your question.

Investment Counselors of Maryland. Good morning, gentlemen. As far as legal expenses related to the litigation, were they consistent with your prior outlook or were there any changes in the quarter on that?

They were relatively consistent as we’ve gone forward. As you go down through the months, that’s a little bit of ebb and flow in the legal costs. You know, the bad news is that to some degree you can’t control that. The good news is that it’s built into our forecasts as we’ve given them to you.

Just for sort of some background on that, on the litigation with Eaton, was there an injunction on the production of the parts, including the intellectual property in question, in that suit?

No.

Okay. And John, you mentioned in the quarter something on the order of, I think it was $3.5 million in costs related to acquisition. Was that due diligence on perspective acquisitions or costs related to integration of prior acquisitions?

It was cost related to prior acquisitions.

Okay. And just another sort of stab at the casting business. In some prior quarters you had given a range of sort of the costs or investment costs in the quarter. Are you willing to do so or are you seeing progress there?

We're seeing progress there. And again, as Rick mentioned, good progress in both development costs and attracting new business to the facility.

Terrific, thank you very much.

Robert Stallard, please state your affiliation followed by your question.

Morning, guys, Rob Stallard from B of A. How are things? Everything all right? Good, good. Just a couple of quick questions. First of all, just a follow on from Rob’s questions eluding to acquisition. You've been pretty quiet on the acquisition front for about 12 months or so here. Is there anything on the horizon that we can expect to see?

Let me comment on the quiet part. I think we’ve said before that we have been quiet a) on purpose, because we’ve focused on the issues that are now essentially behind us. Secondly, the acquisition funnel is, or the possibility funnel, is full. We’re working on a number of things as we speak. We have, in some cases, chosen not to bid on some things, and in other cases, we’ve finished second which is like finishing last. But on the other hand, we’ve still been somewhat disciplined. We realize that the multiples have moved north a little bit on that. But we’re working on a number of them and we have not gone out of the acquisition business, Rob. We intend to stay there and we intend to grow the business in that fashion.

Yeah, and then what sort of companies are you contemplating acquiring?

Well you know, it gives me an opportunity to say ones that are profitable. But we have been looking at as our strategy, and we’ve been very consistent in saying so, adds product lines to our business and it adds a lot of engineering expertise to our business. If it makes the entry from other people difficult, number one, and it enables us to integrate products that we already have and continue to move up the food chain at the aircraft manufacturers, which is simply stated the reason that our backlog is continuing to go up. So I think companies that - - I don’t think you’ll see - - we have the capacity, for example, in our machine shops. The only type of machining you would see is very specialty type machine that would add something to our product line. But specifically companies that in fact have a high engineering content or we can add a high engineering content to, to develop and sell through the lifecycle of the product.

Just to follow on to what you were talking about with the 787 and the A350, if you win a larger position on these aircraft, does that have a consequent impact on R&D as well?

It would have some impact. But very frankly, it’s already had some impact on our R&D costs that we have incurred. The only reason, Rob, that we’re not talking about anything in regards to that is that we’re working with other companies and joint ventures. They have not announced anything yet, so we’re not going to announce anything until they do.

Right.

Some of that R&D cost has in fact already been spent.

Okay. You don’t expect any material change in R&D going forward?

No. No, we’ve been fairly consistent on what we have been spending on that. That is not to say that if were weren’t working on some new products we wouldn’t spend the money on that.

Yeah, I think that’s correct, Rick. You point out that that has been a cost that’s been in our income statement for a couple years now as we’ve stepped up the food chain.

Just finally, some of these commented on in the past as being Sarbanes Oxley costs. Have those materially changed in the quarter?

That is part of the reason for the drop in corporate expenses, the reduction in cost year over year.

Right. And do you expect this kind of level to be consistent going forward on corporate expense?

Barring some unusual costs coming in, either legal, healthcare, the other nondirect operational costs, yes.

I think the larger costs that we really don’t have a feel for is what’s going to happen with the legal costs. But as I said, in our forecast that number’s built in there.

That’s great. Thanks very much, guys.

If there are any additional questions, please press the one key. We have a follow up question from Steve Levenson. Pleas state your affiliation followed by your question.

Ryan Beck, thanks. Just one more thing. You mentioned about the capacity utilization ramping up, but unless I missed it, I don’t think you mentioned it. Can you tell us what that was in the quarter please?

Steve, that’s a hard question to answer.

Yeah, the Boeing strike, right.

Well, a) because of the Boeing strike, number one. Number two, it’s very different in a number of our locations, okay? We’ve ramped up. We used to be at 35% in some of our plants. I’d say that in some of those areas we’re close to 70%. The real answer to that thing is there’s still room to get business. It’s not, you know, we’re not maxed out and we’ve made capital expenditures to increase that capacity, etc., etc. But it’s very difficult to answer all the way across. If I were going to venture a guess I’d probably say the number was probably close to 55, 60%.

Maybe I shouldn’t ask, and I know this is not necessarily part of your guidance, but if you were going to take a shot at where it would be for the current quarter, I know there’s still a little impact, or a normalized quarter right now.

Where the capacity utilization would be?

Um huh.

I think, Rick, it was fine saying we still have room to put more business in our facilities.

You know that’s a very hard - - I’d be guessing, Steve.

Okay. Thank you. It’ okay, thanks.

You also have a follow up question from Robert Jackapraro.

Hi again, sorry I didn’t catch this before, but on that 3.5 million of acquisition costs, you said they were from prior acquisitions. Were those costs related to the workforce actions that you took at Spokane or was it something completely unrelated?

Completely unrelated.

Okay, can you elaborate? Was it integration of facilities with existing or just even off that track?

It’s off that track. It’s if you look at the - - well, when you look at the cash flow statement, it is cost associated with acquisitions. Not operational expense.

Oh, so they’re payouts.

So they’re payouts associated with the acquisitions.

I’m sorry, my mistake. Thanks for clearing that up, gentlemen.

If there are no further questions, this concludes the Triumph Group fiscal 2006 second quarter earnings conference call. The replay for this call will be available for one week beginning today at 11:00 A.M. and ending November 4 at midnight. To access the replay, please dial 1-888-266-2081 or 703-925-2533. Access code 791424. Thank you all for participating in today’s conference and have a nice day. All parties may disconnect now.