Triumph Group Inc (TGI) 2006 Q4 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2006 fourth quarter and year-end results. [OPERATOR INSTRUCTIONS] 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 the 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 rebroadcast 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. Good morning, everyone. I'll go over a quantitative view of the year first. For the full year, sales were up 10% to a total of 760.4 million. Operating income increased 68% to 56.1 million. EBITDA for the year was 88.1 million, up from 64 million in the prior year. And income after tax from continuing operations was 34.5 million, an increase of 118% over the prior year, resulting in diluted earnings per share of $2.15 versus $0.99 in the prior year. For the quarter, as the typical pattern is the fourth quarter was the highest quarter for the year. Sales came in at 211.9 million, up 16%. Operating income was 15.9 million versus 8.3 million in the prior year, up 92%. EBITDA came in at 23.9 million. Income from continuing ops 11 million. That's up 125% over the 4.9 million in the prior year, resulting in diluted earnings per share of $0.68 versus $0.30 in the prior year.

Looking at segment reporting, the Aerospace Systems group, sales for the year were up 17% to 578.3 million. Operating income increased 35% to 72.8 million. EBITDA for the group was 94.7 million. 16.4% EBITDA margin. For the quarter, the fourth quarter, sales increased 22% to 162.2 million. Operating income was up 49% to 21.8 million. And EBITDA in the quarter was 27.2 million at a margin of 16.8%. The other operating segment, the Aftermarket Services group had revenue up 7% for the year to 185 million. An operating loss for the year of 2.2 million versus operating income of 7.6 million in the prior year. EBITDA for the year came in at 7.7 million, at a margin of 4.2%.

For the quarter, sales were up 10% to 50.6 million. Operating loss in the quarter was the same as the year at 2.2 million, indicating that the nine-month results for that group were break even. EBITDA was 400,000, and a margin of 0.8%. All of the revenue numbers that I've mentioned are all organic. There were no acquisition impacts on revenues for the year. Another metric which was very encouraging was our backlog at year end had reached a level of 888 million, which is up 48% over the prior year-end backlog of 598.

Our top ten programs, which we usually provide you ranked by backlog, and again I'll mention our backlog number of 888 million is backlog that is firm and shippable within the next 24 months. And using that criteria, ranking our top ten programs, the number one backlog position is the 777 followed by the 737, the A320, the CH-47, the V-22, C-17, 767, 747, F-18, and in 10th place, the A380, making its second quarterly appearance. Of the revenue for the year, 22% of it was export revenue. Sales mix was stable compared to last quarter. Our commercial customers provided 45% of our revenue compared to 44% for last year. Military was 33%, down 1 point from the 34% in the prior year. Regional jets stayed stable at 6% in both years. Business jets increased by 1 point to 9% of revenue from 8% in the prior year, and the "other" category declined 1% to 7%. Again, the only single customer representing more than 10% of our revenue is Boeing, and Boeing commercial space and military combined year to date generated 22% of our billings.

Taking another look at revenue, if we look at the fourth quarter, and break down between Boeing commercial, Boeing military, and Airbus, the following revenue numbers were generated. Sales to Boeing commercial were 43.1 million representing 20% of the sales. Boeing military programs generated 21.7 million, 10% of our sales. And Airbus programs, 14 million or 7% of our revenue. And those are revenue numbers not only direct to Boeing and Airbus but also to other suppliers to those companies where we identify the programs generating revenue. Cash flow for the year came in at 40.4 million in the quarter, it was 14.1 million, cash flow from operations that is. Capital expenditures for the year were 28.8 million, and we spent 11.5 million in the quarter.

Looking at the balance sheet, net debt to capital wound up at 22%. And the numbers we've talked about, as we pointed out in the press release, the tax rate in the fourth quarter was 15%, and the reduction in the quarter was due to the fact that we closed on audit tax years '02, '03, and '04, and as a result of the position on audit we were able to reduce reserves by that amount. Year to date the effective tax rate came in at 21%, affected by the fourth quarter adjustment and also, as we reported in the third quarter, we had the impact of shutting down our operations in Illinois and Wisconsin and other apportionment factors reduced our tax rate in the third quarter. With that, I will turn it over to Rick. Rick.

Thank you, John. Good morning. As I mentioned in the press release, and on my quote, we are, in fact, very proud of our strong organic growths in revenue, operating earnings, net earnings, as well as our growths of a record backlog, as John mentioned, of 888 million. And this was true somewhat across our company. We're proud of our balance sheet, as John mentioned again, with a 22% debt-to-capital ratio, and our cash flow from operations for the year of over $40 million. We think that we're going to continue to grow our sales and earnings, and we're committed to expand our products and services and develop new systems and products and services.

In fact, our recently announced acquisitions, one that we announced yesterday, they add new products and services in line with our strategy to do so, which has been in place since our inception. The two acquisitions are Excel Manufacturing, now named Triumph Structures Wichita, in Wichita, and the one announced yesterday, Air Excellence, which is renamed Triumph Interiors. Both of these companies are very fine companies with excellent leadership and will be contributors to our growth in revenues and earnings.

We also for the year had our share of challenges. As the press release said, we had legal expense of $3.6 million due to a trade secret litigation that goes on. We had start-up costs in our Thailand operation which will continue into fiscal 2007. In fact, we are training many of our new Thai employees as we speak in our Phoenix plant. We continued to be challenged by the conversion of our castings facility to a fully aerospace facility, but we are confident that these conversion challenges are, in fact, behind us. Our bookings are significant at that plant, and our execution has improved greatly. In addition, the transition of a sheet metal product plant to aerospace products took longer than expected, and the execution of production was less than optimal. But we have addressed the issue and feel the problem is substantially behind us.

Our Aerospace Systems group performed excellently with the increase in backlog -- and with the increase in backlog we expect that this will continue in fiscal 2007. We see momentum, as I mentioned in the press release, across our operations in fiscal 2007, and as mentioned, we project our sales to be in the range of 875 million to 925 million, and earnings per share in the range of $2.40 to $2.70. As we have said in the past, many times, our quarterly earnings will increase sequentially throughout the year, and those of you who are doing the math, you cannot divide by four to get our quarterly earnings. We're confident that we're going to achieve the range that I mentioned, and our companies, with the very few exceptions that I have mentioned, are performing and executing very well which gives us confidence in our performance in the new year. At that I will open it up for any questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Robert Stallard, please state your affiliation followed by your question.

Morning, it's Rob Stallard from B of A. John, I was wondering if you could just talk about some of these nonoperating costs looking into FY '07 now. How do you expect some of these things to pan out like legal costs, any further restructuring? Do you see any lumpy events, or is it going to be relatively smooth?

Well, I think as Rick mentioned the legal costs will go on. We don't know how the process will resolve and what time period it will resolve, but I think that on the other side of the items that we mentioned, the Thailand costs, the start-up costs are going to increase through the commercial plagues of that facility in January. The other operating costs at the casting facility and the sheet metal facility we think will be mitigated dramatically as we go through the year. So on that we would see a reduction for the full year, a significant reduction year-over-year in those costs.

Looking at the operations, I was wondering if you could give us a feel for how you expect margins in the two divisions to pan out over the next 12 months.

The operating margins should improve in the Aftermarket Services as we mitigate the net number on those costs from where we wound up this year, the negative 2.2, and I think we're conservative in the outlook in margins in the Aerospace Systems group because of on the increased revenue we also had the increased material costs and continuing pressure on margin. Rick, you might want to--.

I think, Rob, you have to keep in mind, you've probably heard this from a number of the people you talk to but there is wind in the sails in the aerospace industry, and I really expect that to continue for a couple more years. But along with that wind in the sails comes pressure from our customer base on the margins that we're getting. We seem to be holding in there pretty well, and I think that as we get more utilization in our plants, many of our plants will have higher margins. But there is pressure on our margins and pressure on us to reduce our prices going forward. So far, it's been an issue has been not a particularly large issue, but it's coming up at a number of our customers.

Okay. And you've talked in the past about raw materials being something to watch. What's the current status there with regard to cost inflation?

I think that the -- I'm not as concerned, frankly, about some of the costs, although the cost is going up in certain areas, such as titanium. In some cases our bigger concern is the lead times that have stretched out to a certain extent. But I think there will be, as John mentioned, there'll be some increases in our raw material costs, and in our contracts with our customer base, it's really a mixed bag. Some of those cost increases we have the ability to pass on the our customer, and some of those we're restricted on what we can pass across, and in some of them we can't pass any of the increased costs along, depending on what the contract is and who it's with.

Then just finally on the acquisitions you've made recently, I was wondering if you could comment on the acquisition prices, how that market is looking, maybe what you paid for these couple of companies, and also if these are the kind of targets we can expect you to be acquiring going forward?

I think that we've always had the target, as I mentioned, to acquire companies that add products and services or capabilities that we don't have in our operations. The Excel, now Triumph Structures Wichita, added the capability with high-speed monolithic machining, which is a machine one-piece structural components. We didn't have that before, and that's an excellent company contributing across commercial business, regional jet type of thing. And military. In Triumph interiors' case, it's a -- we're getting into the business of quality interior refurbishments, and it expands greatly the services provided by the Aftermarket Services group, where we again have the ability to market a broad range of products to our customer base.

From a pricing perspective, we're obviously very pleased with the prices that we paid, because they're excellent companies. The projections for their earnings are significant. It's very clear in the industry that the multiples of trailing EBITDA have, in fact, increased significantly over the last approximately year, and I suspect will remain relatively high until we see the cycle, dissipating to a certain extent, which, by the way, I don't see dissipating very quickly, based on the fact that 2005 and 2006 are good order intake and all those planes have to be built, and I look at the two to three-year time frame. Four years, I'm not sure, because I'm just not smart enough to tell you, but I think two or three years we're going to have a good market.

That's fine. Thank you very much for that.

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

Ryan Beck. Good morning Rick and John.

Good morning, Steve.

When you were talking about some of the time delays, the longer lead times, do you mean on your supply chain, getting parts in, or do you mean longer stretched out lead times on the production?

No, I was talking about -- specifically, I was talking about raw materials. I was talking about the raw materials, getting them into our company for production purposes.

Thanks. Are Boeing and Airbus doing anything to help there?

Yes.

Or are they putting the screws to you a little bit?

We have gone to Boeing, we've gone to Airbus. Sometimes that's a mixed bag, because sometimes we go to them, they help us, but that means they also help us by having them -- by having us hold their inventory for them, which increases our investment in working capital. But it does get us where we have some problems, it does get us some of the raw material. And in other cases we also are instructed to buy product under their master contracts.

Okay. So that is a case where you're getting a little bit different margin because the raw material negotiation has been done by them.

That's right.

Okay. Thanks. You mentioned in the castings facility that's being converted that there's pretty good backlog. Can you give us an idea what those parts are for? And is it new stuff or aftermarket?

Well, it's aftermarket predominantly, but I can't tell you what they're for because we're working with a customer under a confidentiality agreement.

Okay. Thanks. And is Air Excellence mostly business jet, or is that big commercial stuff?

It's both. What we do is we work a lot with the large MRO facilities, people like Timco, the largest contract there, the largest business right there now is Delta. So I don't have a breakdown of the sales, vis-a-vis the commercial business, but it's really both. And more so -- heavy to the commercial as opposed to business.

Okay. On Excel, with the new capability that you have, will that help you on getting other business in other parts of Triumph, or is that sort of stand-alone?

No, I don't think it's going to be stand-alone. I think that -- we're in the infancy stages, if you will, in the integration process, but that company is essentially booked out, and as a result, we have the ability to integrate orders and inquiries that they get, and potentially produce them across our company. We're in the process -- the Company is in the process of increasing their capacity with some new equipment, which we'll announce sometime this year. But it gives us the ability to get business in at other Triumph companies as well as Excel.

Or Triumph structures Wichita, as we now call it.

Last item for John, were there any material write-offs in the fourth quarter, or anything that was a real hit through the year?

I don't think there were any material write-offs. There was -- it was sort of business as usual other than the excess costs that we incurred in transitioning.

No, I meant receivables write-offs.

No.

Okay. Thanks very much.

Thank you. Chris McCray, please state your affiliation followed by your question.

Merrill Lynch. Nice quarter. Can you just mention, the conversion facility from sheet metal to aerospace what is the location of that facility?

It's in Phoenix. John referred to, when he was talking, about the close-down of a company in Wisconsin, when he was referring to the state tax issues. We closed a plant up there. We were predominantly involved in the IGT business, and we announced awhile back that we were getting out of that business. We closed down the plant in Wisconsin, moved everything to Phoenix, and we had the remnants, during the course of our year, of getting out of that IGT business into aerospace alone, so it's predominantly those two plants that were the result of what -- our conversion.

So is this the one on the reservation that you converted to, or is it the other stuff?

It's out on the reservation.

Great.

For the rest of you, that's out on the Indian reservation in Chandler, right outside of Phoenix.

Good to hear you using that for something. It's a nice little facility there. The sales ramp for the year, is that -- just given your backlog and the nice backlog you have, should we be looking at -- can you give us any indication for how that's going to build throughout the year? Obviously there's seasonality, so adjusted for the seasonality should it be a relatively smooth buildout to your target, or can you give us any feel for that?

Well, I think the biggest feel I can give you -- and the reason I made the comment in regards to the -- can't take our guidance and divide by four, is the fact that, every year our first quarter is our slowest quarter. I think there's a little seasonality in that. The balance of the first quarter, March is always -- February and March are always our best months, because it's the -- call it the compensation phenomena. There's a lot shipped in the month of March. It's our end of the year, et cetera, et cetera. We put a lot of push on cash, on shipments, et cetera, et cetera. So the first quarter is affected by that. In addition to that you get into the beginning of the summer and it comes down. I think that the uptick, as we go through the course of the year, will again be third and fourth quarter-loaded, to a certain extent, because of the fact that we'll be taking on expense as we mentioned, in Thailand. If anything, the expense there will escalate, because we're supposed to open that plant in the July-August-September time frame, and ship products shortly thereafter. So I think you'll see it go up. I really -- I don't want to get close to giving quarterly guidance, because we just have made the decision not to do so, Chris, but it will ratchet itself up, as it has in the past.

Chris, I might add, there's no material event that is going to step function the revenue during the year. So it's -- normal ongoing business.

All right. So we'll just use prior year comparisons to build it up. And I guess you just touched on it, but when you look at the margin ramp, just given the -- I guess you call it volatility in earnings and aftermarket, it might help to just point to in effect, how that works through the year. I gather from your comments, July to September open in Thailand, we might see, is it fair to say we might see ongoing losses in aftermarket in the first quarter, maybe second quarter, then that flips to potential profit in the second half? Is that a fair comment?

Our projections, Chris, are to -- I'm not going to say we'll have continuing losses, because I don't think we will, but it will clearly get sequentially better as the year goes on. The Thailand issue notwithstanding, we'll probably spend more money there in the second and third quarter getting ready, but I see our business in the Aftermarket Services getting better. The casting facility is in that sector, and we look at that. We're optimistic that that's going to show better results. So I think it will show better results in the first and second quarters. Having said that, the certain fourth quarters will, in fact, be better in that segment.

Okay. And lastly, the materials pass-through issue, do you guys basically pass through materials to the large OEs, the Boeing's, and Airbus', on the military and commercial side, and where you reference the inability to do that, maybe is that with smaller sub suppliers that you work with? Is that accurate?

For instance, Airbus, Airbus is -- the material is acquired by us under Airbus purchase contracts. They negotiate the contracts with a supplier, and we execute our purchase orders through what in effect they've negotiated, and that price is built into the contract. On the large contracts with Boeing there's a similar situation where the material is either through Boeing's supply chain agreement or negotiated contracts on major contracts with material with the raw material supplier. So you're right, the large contracts are pretty much three-party contracts with the OEMs suppliers designated, and the smaller ones are where the issues -- where we either negotiate a long-term agreement concurrent with the commitment to supply the component, or in some cases we're exposed to market prices on raw material.

And when we have the ability, we've gotten a lot better and will continue to get a lot better on our supply-chain management issues in integrating our purchases and our supply-chain management. Both of our segments have supply-chain management directors, and we've gotten better at that and we'll continue to get better at that.

Okay. Thanks very much, guys.

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

J.B. Groh from D.A. Davidson. I had a couple questions. On your backlog, top three programs, obviously pretty high demand aircraft what sort of production rates does your guidance assume relative to those programs in line with what Boeing is saying now?

It's in line with Boeing's and Airbus' projections for deliveries.

So potentially if 777 ramps up a little faster there could be some up side there.

That could be.

That would be true.

In terms of the guidance that you've given, the tax rate moved around quite a bit this year, what sort of tax rate is implied in that guidance? Is it--?

The tax rate for next year implied in that guidance, J. B., is 32%, and that 32% assumes that there is an extension of the R&D credit, which is in Congress right now. Also, I might add that next year capital spending was 28.8 million this year. We're looking at an increase to the 45 to $0 million range for CapEx next year.

Any areas of focus there in terms of where that's going?

Thailand is one of the big pieces, building the facility and equipping the facility in Thailand. And there are some major machine tool installations to expand capacity on the structural parts side.

How about option expense?

Option expense next year will be in the range of 1.2 to 1.5 million and included in that guidance range.

Okay. And then on the Air Excellence deal, how much PMA business have you guys been doing in the past? Is that a departure, or -- I wasn't aware that PMA was a big part of it. Is this something new, or--?

Well, we've done, some PMA work, but not a great deal. I mean, we do have PMAs in the plant we bought from Boeing, Triumph composite systems in Spokane we transferred over from Boeing, but numerous PMAs, et cetera, et cetera, but it's not really something new. However, it's the nature of the refurbishment business that we use those PMAs, and we work with the MRO providers of the aircraft being refurbished. So it's not really a new thing for us, but it's the nature of that business.

The PMA isn't there. It's market position that's new with Triumph interiors.

And that seems like a good area. It sounds like there's some spending going on in interiors. So that's all aftermarket, Excel is all Aerospace Systems, in terms of the way they--?

Yes.

Fall into the segments? Lastly, on the composite systems, any -- what's the expectation for a announcement on flooring for 787? What kind of timing are you looking at there?

We've already announced -- well, flooring is about the I thing that's going to get awarded in that. The only thing I can tell you is that we're hopeful, okay. We've gotten -- we announced the order in conjunction with the ductwork that we're doing on section, I believe, it's 47 and 48, but we expect -- we're very optimistic on the flooring but no word at this point.

We're in a good competitive position for that.

Certainly location matters. Thanks a lot.

You're welcome.

Thank you. Garrett Leland, please state your affiliation followed by your question.

Deutsche Bank. Can you hear me, Rick?

Yes. Good morning.

Hi. My questions have been asked -- answered concerning CapEx and tax rate, so I will defer to the next, other than to also echo your welcoming of Chris back to the fold. So thanks, guys. Good quarter.

Thanks, Garrett.

Ron Epstein, please state your affiliation followed by your question.

Merrill Lynch. Hi this is actually Stephanie Huang. I just wanted to know if you guys expect Boeing's acquisition of Aviol to have any impact on your business or the aftermarket business in general?

No. I don't know how it would. I was a little bit surprised by it, because Boeing was getting out of the distribution business type of thing, but I don't -- I don't see that having any effect on our business. We know the Aviol people very well. It's a good company. And I don't think, if anything, it potentially could help us.

Then also, in terms of your two acquisitions, can we expect the margins on those acquisitions to sort of be in line with the normalized margins of your segments as well?

Yes, I mean, some of the -- it's a difficult thing to answer, because you're asking the question in this environment, that certainly at Triumph structures Wichita, and at Triumph interiors now, they're doing very well, so I think if you compare their margins today versus some historical margins, Triumph Group, like two years ago, those margins are going to be higher. Our margins within our company and individual companies obviously vary, but within the segments, I think that those -- that they have -- potentially to some degree help our two segments.

Okay. Thank you.

Ladies and gentlemen, are there any further questions? Since there are no further questions this concludes the Triumph Group's fiscal 2006 fourth quarter and year-end earnings conference call. This conference call will be available for a replay today May 5, at 11:30 a.m. Eastern time until May 12, at 11:59 p.m. Eastern time. You may access the teleconference replay system by dialing 703-925-2533, or 888-266-2081, and entering the replay code 889458. Again, you may access the teleconference replay system by dialing 703-925-2533 or 888-266-2081, replay code 889458. Thank you for participating. All parties may disconnect now.