Triumph Group Inc (TGI) 2006 Q3 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2006 third-quarter earnings performance. You are currently in a listen-only mode. (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 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 now 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 would like to review the quarter quantitatively before Rick provides his discussion. Real briefly, sales in the quarter as on the cover of the press release, were up 9%. Operating income in the quarter was up 50% to 13.2 million. Income from continuing operations was up 137% to 9.3 million after tax, which resulted in the $0.58 per share versus $0.25 per share in the prior year's quarter, an increase of 136% and that's on a fully diluted basis.

Year to date for the 9 months ended December 31, sales of 548.6 million were up 8%; operating income at 40.2 million was up 60%; income after tax from continuing operations at 23.6 million, up 115%; and diluted earnings per share year to date of $1.47 versus last year's $0.69.

Looking at segment performance, sales in the quarter for the systems group were up 17% to 141.6 million. Operating income came in at 17.5 million, up 29% over the prior year at 13.5 million. And that operating income in the systems group again contained continuing litigation expense, which for the quarter was about $1.1 million. EBITDA in the quarter at 23.1 million resulted in an EBITDA margin for the systems group of 16%, an increase of 1% over the prior year. Year to date, the systems group sales of 416.1 million of a 15% increase. Operating income of 50.9 million, a 29% increase and EBITDA again at a 16% margin, up 1 point from last year, came in at 67.6 million.

Our Aftermarket Services group result for the quarter -- sales rose 3% a quarter to 46.1 million; we had an operating loss of $100,000 compared to the prior year's 2.6 million of operating income; EBITDA was 2.4 million, a 5% EBITDA margin in the quarter. Sales for the year to date came in at 134.3 million, an increase of 6%. The operating income line year to date was a breakeven. EBITDA year to date in the aftermarket group was 7.3 million.

Since there were no acquisitions in either of the periods, the increase of 9% in the quarter and 8% year to date was all organic growth. Backlog increased dramatically over the prior year up 48%, winding up at 838.8 million. In the quarter from the end of the prior quarter, backlog rose 21%.

As we have done in the past, we have ranked our programs by backlog. And the Top 10 by order of backlog were the 777, which moved into first place based on that increase in orders in the backlog; 737 is in second place; third is the A320 family, CH-47; four, V-22; fifth, followed by the second five, the C-17, 747, 767, 380 and F-18.

Export sales came in at 23% of, sales. Looking at the sales mix, the sales mix remained unchanged from what we reported last quarter. Commercial for the full year last year was 44%, remained at 45% year to date. Military, which was 34% last year, continued at 33% this year. Regional jets last year were 6, remained at 6 year to date. Business jets, which were 8% last year, rose to 9. And the other non-aerospace declined from 8 to 7% year to date.

Boeing remains our only customer, generating more than 10% of sales. It was 22% in the third quarter. And that 22% again was depressed in the quarter by the ramping up of production at Boeing, which on our deliveries didn't resume to the pre-strike level until the month of December.

Cash flow from operations in the quarter was a strong 19.2 million. We expended $6.8 million in the quarter on capital expenditures. Year to date, we expensed 17.3 million. Debt in December -- net debt at the end of December was 157.8 million, a decline from 166.8 million at the end of September, resulting in a reduction of the leveraged net debt to capital down to 22%.

The quarter was impacted on our federal tax provision by $2 million due to a permanent change in our state tax rate provision, declining approximately 1% from 3 to 2%, which is a permanent reduction. That will result in a 1% reduction in our provision going forward. That 1% impact impacted the current period's pretax income and was a factor in the $2 million being applied to deferred taxes on the balance sheet.

Corporate expense rose in the quarter over the prior, primarily due to three reasons -- healthcare costs; also costs expended on acquisitions that were pursued but not completed; and with the improved performance this year, increase in incentive accrual.

With that, I will turn it over to Rick. Rick?

Thank you, John. Good morning, everybody. Just to reiterate some of the things that John has said, we are very pleased with our results for the quarter -- increase in sales, earnings, cash flow as John has pointed out. Just to reiterate so we can focus on some of these things, continuing operations earnings were up 136% and our cash flow from operations for the 9 months was $26.3 million. Our operating income was up 60%. John quickly covered our balance sheet items. We are very proud of our balance sheet and the condition we are in at this point in time with the balance sheet.

Over the last couple of months, I've talked to a number of people and had conversations with people who are concerned that the aerospace cycle will in fact decline because the large aircraft manufacturers cannot possibly duplicate 2005 orders. We don't look at it that way. We look at -- number one, a strong 2 to 3 years in this cycle for continuing orders, especially in some of the aircrafts that were in our Top 10 less that John mentioned but in especially for production. We are in fact very optimistic over the next 2 to 3 years. As John mentioned, we are spending for the future and our capital expenditures. We are watching our capacities. We're dealing with our capacities, and we expect our operating leverage to in fact increase over this period of time.

John talked about our backlog increasing to 838.8 million, up 48% from the prior year. I want to take just a second to define that backlog as we have in the past. Our backlog is defined as those orders that we have in-hand that will be produced over the next 2 years. It does not include anything in the aftermarket and the repair and overhaul area that is specifically in the aftermarket business because we don't have a backlog in that business. So, what we're talking about in the $838 million is approximately a backlog that relates to approximately 60% of our business. So we are enthused about that, and I think it will hold us in excellence stead as we go forward over the next couple of years.

We are not problem free. We do have some issues in our Company. Reading part of the quote that came out with the press release, I said, "The results in our Aftermarket Services segment continued to be negatively impacted as we focus on strategically altering the product mix of the castings and manufacturing operations in this segment." That refers to the fact that as we have talked about before, we are converting and have been converting our castings operation from an industrial gas turbine to an aerospace casting. For those of you who are even somewhat familiar with that business know that that takes a lot of development time and effort to make that happen. We are well on our way to doing that.

In this quarter, the Aftermarket Services group lost $100,000. Last quarter, they lost 1.2 million. The costs taken in this quarter in non-recurring transactional costs there were about 800 million for the quarter and 2.1 million to date for that particular group. We also have in there continuing costs as we are expensing as we go along for our new plant in Thailand that we expect will be in operation in approximately 10 months from now or that area. We are expensing a number of the costs there over and above obviously the equipment, which we would capitalize. We do have some problems specifically in the Aftermarket Services group at our Airborne Structures Company. That's being addressed and will in fact -- our efforts will show results within the next quarter and the next year.

Throughout our total Company, the only problem that has come up and tends to offset some of our operating leverage increase is material costs. Material costs do continue to rise with the demand, but we are very cognizant of that and we are addressing that.

One of the programs that John did not mention because it's clearly not being produced yet is the 787. Some of you might have read the press release we put out on January 19th, talking about our multiyear supply agreement with Vought for the Boeing 787 program, which is in conjunction with our Triumph Composite Systems Company in Spokane, Washington. That's the first of what we hope and believe will be a number of contracts going forward with the 787, and we will keep you all advised on that as it goes forward. But it is very gratifying that we are starting to participate in that, and we have a number of things in the wings on that.

We are in fact very much participating in the aerospace industry success and expect this to continue as I have said a couple of times over the next few years at least. As the press release said, we can reiterate our expectation of $1.75 to $2.00 per share for the year. We haven't changed that number. But as we mentioned in the last quarter, the earnings should be at the very top end of this range.

At that, I would open it up to any questions that anybody may have.

(Operator Instructions). Steve Levenson.

Ryan Beck. When you gave the backlog number, did that include the 787 contract or is that something that came -- since it came subsequent to the end, it's not in there yet?

No, it's not in there yet because that will in all probability start at the very end of that 2-year period of time or after that. So we don't have the exact number that will go in the latter part of that second year yet. So it does not include that number.

It was only orders that were on the books at 12/31.

Can you give us an idea of what the capacity utilization overall was? What it was in Spokane in particular? Where you think that's headed with this order?

Well, let me answer the two questions. The question on the capacity, which comes up every quarter, is becoming a more difficult question to answer because it cannot be answered generically for the whole corporation. I mentioned that we are spending money, capital expenditures going forward. We as a matter-of-fact even today will be analyzing some of those capital expenditures to address the capacity issues at individual companies.

We in the past have used a number of 35% generically. There are some of our companies now whose capacity utilization of their plants is significant -- significant to the extent that we are concerned about that capacity -- and that's why we are investing the capital expenditure issues. In other plants, we're not concerned about it and they may have a little bit lower capacity. But clearly, all of our plants are operating of a higher capacity. And that's why I referred to taking advantage of the operating leverage going forward. And that's certainly our goal. But it's a very hard question to answer generically, Steve.

In regards to Spokane and Triumph Composite Systems, we do not have a capacity problem there. That plant is a very lean operating plant. You have to remember that that plant was set up by Boeing originally to adjust to the Boeing build rate. And Boeing is still our largest customer there; although, we're very proud of the fact that we have added any number of other customers, including Vought as I just mentioned. But it was built to adjust their production to the Boeing build rate.

So I can't answer the question specifically where we stand on capacity there. But I'm not worried about it because of their particular environment and how they adjust to the build rate.

Steve, as we said before at the bottom of the cycle, we were down around 35% on the OEM side of the business. Sales year over year in the Aerospace Systems group were up 17%, but the backlog is up 48%. So the leverage opportunity going forward is still there.

We haven't seen the full increase yet in demand, and the ability to produce those orders is still in the hand. But with more orders to come like the 787, we're looking at additional efficiencies in the plants. But there is still capacity to utilize in meeting that increase in the backlog.

Thanks for all the details. I think that certainly answers the question. Last one is, do you have any pass-through arrangements on increased material costs?

In some cases, we can pass along increased material costs. And in some cases, we can't. It depends on the individual contracts or the individual LTA.

In some of the major contracts, we use the OEM's supplier on a pass-through basis where in effect, they negotiate the material price and we buy the material under their negotiated price. Others have formula adjustments, and others were exposed to the market price.

That's not meant to indicate that we're not concerned about that. It is a concerning issue. In some of our plants where we don't have that pass-through ability, we are concerned. It does offset the operating leverage increase that we referred to before. But we're very aware of it, and we are addressing the issues.

JB Groh.

DA Davidson. A couple questions on the Vought deal, that doesn't include any flooring, correct? That's all other types of stuff?

What it includes it's the ductwork and the attachments; I won't get overly technical. But in fact, Vought needs to put that aircraft together. What it represents, it represents the ability of Triumph Composite Systems, some of our other companies within the Triumph Group and in fact some outside suppliers where we in fact are integrating the product for Vought and worked with Vought very closely to deliver them an assembly that goes into the 787 part of the fuselage -- does not include the flooring.

You kind of implied fourth-quarter guidance, the range there is pretty wide and you said that you would be at the top end of that range. Why didn't you narrow the range? Or what sort of factors could cause it to swing within that range?

I thought I had narrowed the range.

Okay. Fair enough. Congratulations on the nice order flow.

Robert Stallard.

Banc of America. Firstly John. First of all, if we could look at the Aerospace Systems division, you saw some nice sequential margin improvement there. What is your feeling -- you talked about raw material pressure. Do you think this level of growth is sustainable going forward, given the adverse Boeing build rate increases.

As we've talked about this morning a little bit, we do expect that the operating leverage that we have in the Boeing and Airbus by the way and Cessna and all the other people that we do business with who is increasing their orders with us, that operating leverage will help us increase our margins in that segment. And what I was trying to indicate was the fact that there are issues that we have to address as we go along, and our capacity is highly utilized. And one of those issues we have to address is the some higher material costs. All I'm saying is that that is a operating leverage issue, which drives the margins up, will be somewhat impacted at some of our plants vis-à-vis the material issue. That's all we're trying to point out. I think that the margins themselves going forward are sustainable. There's pressures there, etc., but I think they are sustainable.

What's your feeling on looking further out into time? Do you have the capacity within your system if Airbus and Boeing decide to raise production rates in say 2007 by 15%?

Again, that somewhat depends on each individual plant. Clearly in some of our larger plants -- I spoke about Composite Systems -- yes, we will be able to handle that. We are already working on a business at that plant for Airbus and the engineering thereon. We are addressing that issue. There are some of our plants, who are now operating at a very high capacity rate. The answer to the question today if they raise it another 17% in some or very few of our plants would be -- no, we couldn't handle that. But that's exactly why we are addressing the issue of how we increase that capacity, becoming perhaps somewhat more selective as to our orders that we're taking and what we can perform and secondly, where we're going to properly make our capital expenditure to increase the capacity across the system.

You feel you still have time in hand if you need to deal with this production rate increase?

Yes, absolutely.

Moving over to the Aftermarket Services division, I was wondering if you could give us an idea of what the underlying margin was in that division if you strip out the non-recurring costs?

I would have to do some work on that, Rob. I mentioned the fact that you have the castings issue. It would be somewhat of a meaningless number because if I took out some of the costs that we are incurring to build -- and the expenses to build the Thailand plant and then we would have to normalize and assume that the full conversion of the castings facility was made to aerospace. It would be a guess. We would have to really do some work on that thing.

Rob, the trend is in a positive direction there. As mentioned in the press release, the core operations are continuing to perform well. It's the incremental costs and the transition and the startup in Thailand.

What's a sort of timeline we can expect to see the Thai plant, the forgings for this work to be completed?

Well, we're going to incur -- if you take the two subjects, you take one subject is Thailand. Thailand will have an impact on the earnings of that group through next year. Okay? We will in fact not go into production there and ship orders until probably -- don't hold me to the exact month -- but October and November of next year. We're going to have ongoing expenses in building the Thailand plant.

In regards to the castings facility, we will also go into -- that will continue to go into next year with the conversion to this. I mean we're working with some very large companies and some very good customers. But as I say, the development time on aerospace castings is not a short lead-time issue. But we do remain very, very optimistic, and that's going to be a good operation for us going forward.

Then just finally looking at this tax issue, is it right to say that this quarter you had essentially a catch-up. In going forward, your tax rate should normalize at say a more steady rate -- what is that like 31%?

It's at 1% lower and normalized around the 31% level.

Jay Khetani.

SG Cowen. If I could just focus in on the tax rate for a minute. Back on the first-quarter call, you had talked about a 32 rate for the full year and we've got now this kind of 7.5 in the third quarter and 31 in if we say Q4. And the guidance as of last quarter had been 1.75 to 2.00 indicated at the higher end of the range, and that's where we remain despite what looks like kind of $0.15 or so of help from the tax rate. So is there something that has deteriorated elsewhere in the business with regards to the outlook for the full year that would keep you in that same top end of the 1.75 to $2.00 range despite the tax help?

Jay, there's nothing lurking in the corners. I guess I am addressing the glass as half empty theory here. I think all we're doing is sticking with the top end of the range as we have all during the year. There's nothing there that speaks to the fact that we're going to have a bad fourth quarter. Going forward, our tax rate will reduce by 1%, okay, on a permanent basis.

That's that 32 to 31%, Jay. It's not 15% -- or $0.15, it's more like $0.12. And if you think about applying that 1% reduction to the first 3 quarters of this year, that's probably $0.01 or $0.02 of the $0.12.

But I guess my point is you were at this upper end of the 1.75 to $2.00 range. You've been there all along, and I would presume that as of last quarter, that did not contemplate this tax adjustment. So it would seem that you should be able to creep over $2 -- easily over $2 for the full year unless I'm thinking about something incorrectly.

We've consistently decided not to give any quarterly guidance, okay? I think that's got to be your presumption going forward as to what we in fact can do. You know we are operating the Company and we have our goals, and our goals may be higher than the guidance I've given. But, I'm going to make darn sure that we meet the goals that we publicly state, and I think we're doing the proper thing in the way we are presenting it.

On Aftermarket Services, this idea that it is a challenging transition from IGT to aerospace makes a lot of sense. And it just -- I wonder about your view on what this segment can do with regards to the operating profit in 2007. I know that you haven't given us any guidance there, but is there -- and your comments to Rob would seem to support that this could continue to be a challenging performance in the type of results that we've seen for the past several quarters into '07. Is there any reason to think that the performance given the Thai and the castings conversion substantially improves in '07? It sounds like those two items really continue for more rather than less of 2007.

You know off the top of my head -- and that's exactly what it is right now -- we're right in the middle -- not in the middle, I take that back. We are right in the beginning of reviewing with our group presidents, and we leave next Tuesday on an extended trip to all of our locations to review the business plans for every one of our companies in our group. We are -- the only thing I can tell you right now, we are optimistic that the results of that group -- of that segment rather will in fact be much improved next year. But it's too early to go to that and give you any guidance on that. We will in fact do that at the end of our year end and on our next call as we go through the point of developing our business plan for next year.

I have tried to indicate in the comments today that we are in fact very optimistic about next year, and we're very optimistic about participating in the aerospace production uptick. And I think that also notwithstanding the two issues, the conversion of castings and Thailand -- don't forget, Thailand is a -- the investment made there, we're making for the future and the future growth within Asia for APUs and other products that we're planning to put in that particular plant. I know that doesn't specifically answer your question, but it's very difficult for me to do so now because it's too premature.

That's fair. Last question. The comments that you made with regards to challenges in the Airborne Structures segment, is that the Airborne Nacelle business in services?

Yes, it's Triumph Airborne Structures, which was at one time Triumph Airborne Nacelle.

Can you give us some more color on what the challenges are there? That's one of the larger businesses in services, yes?

Well, no. It's not one of -- that's the challenge. It was projected to be a larger part of our business, and we've spent a lot of money on tooling. We've spent a lot of money on tooling up for repairing and overhauling a lot of the nacelles, etc. And those orders, although they are coming in, have not come in as fast as we expected to have them come in. We spent the money in expectation of those orders. On the other side of that coin is we're optimistic that we're going to grow that business, and that business will show its growth over the next quarter and year.

(Operator Instructions). Steve Levenson.

While we were on the call, there was a story that just crossed saying that the Air Force has released its study and feels it needs a medium-to-large aircraft for a new tanker program, and that could include 747, 777, 787 or the A330 or A340. Any thoughts on that? Obviously, we know where you are on the Boeing planes. I don't know where you are in terms of the A330 or A340 in terms of content.

Well, if you look at the Top 10 programs that we have by backlog, it would give you our druthers in regards to which aircraft the Air Force would choose for the new tanker. We are however on all the programs. We are clearly more on the Boeing programs than we are on the A330 and A340 at Airbus so that would -- if they chose the A330 and the A340, that would not be as big a program for us as it would if they chose the 7777 for example, which is sort of an obvious answer based upon our backlog and our experience in those particular aircraft.

Have you heard anything aside from this ahead of this news?

Nothing other than the same thing you have heard all the time, the rumor mills. You know the rumor mills, you never know which of the rumor mills to believe. We haven't gotten any orders.

But we believe, Steve, that one of these days they are going to have to address the tanker fleet issue.

At least it sounds a little closer now than it did a week ago.

Ron Epstein.

Merrill Lynch. Just kind of a broader question here and be it that you guys probably have a pretty good view on this given all the sub-suppliers within the Triumph Group. How stretched is the supply chain now? What worries me sometimes is we've got Boeing increasing rates and Airbus increasing rates, the helicopter industry increasing rates, the business jet industry. Pretty much rates are going up in everything that flies except 50-seat RJs --

Ron, if you look back in history at the last peak in the cycle, we're not at that delivery level yet. The backlog has increased dramatically, but the production is not at that increased backlog rate. And that's really going to be the issue when you cross the prior peak -- has capacity expanded to meet that incremental demand?

But have the suppliers -- what is different this time? Have the OEMs -- are they communicating better with you or the supply chain in terms of their needs so that there's no surprises in terms of lead-times and materials? Has there been any change with regard this upturn and (multiple speakers) --

I think that it was -- I think we had the ability to do some anticipation in this particular cycle. I don't remember being asked 9, 10 months ago -- why aren't you doing better because the cycle is doing really well? Well, the fact of the matter is the orders at Boeing and Airbus, etc. had not been converted to orders to us. All right?

But at the same time, we had the opportunities to react. The only area that in some of our plants where we have some concern that we're dealing with is the material issue in certain areas of material. You know 15.5 bar, in some cases, titanium and things like that. There are spotted areas, where material is a problem from the perspective of lead-time and costs as I mentioned before.

What kind -- if you guys can say -- what kind of lead-time are you guys seeing for titanium?

I would have to really ask. I don't know. I do know, but I don't have the answer sitting right here.

I'm showing no further questions at this time.

Thank you, everyone.

Since there are no further questions, this concludes the Triumph Group fiscal 2006 third-quarter earnings conference call. This conference will be available for replay from January 27th today at 11:30 AM Eastern Time through February 3rd at 11:59 PM Eastern Time. You may access the replay system at any time by dialing 703-925-2533 or 888-266-2081 and entering the replay code 839492. (Repeat).

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