Triumph Group Inc (TGI) 2007 Q1 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 2007 first quarter earnings performance.

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 the 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, Incorporated 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, Incorporated.

Go ahead, Mr. Bartholdson.

Good morning, everyone. I'll start off as usual with a quick review of the financial results for the first quarter, ended June 30th. First, turning to the income statement, we had revenue for the quarter up 25% over the prior year at 222.8 million, up from 177.7 million. Operating income was up 33%, up to 18.3 million and net income was up 32%, up to 9.4 million.

That resulted in earnings per share in this year's first quarter of $0.58 fully diluted, versus the prior year's $0.45. EBITDA grew to 27.1 million in the quarter, a 12.1% EBITDA margin. Turning to segment reporting, the Aerospace Systems segment, sales in that segment were up 26% to 174.2 million, versus prior year 138.6. Operating income increased 32% to 20.3 million and EBITDA for the segment was 26.7 million, a 15.3% EBITDA margin.

Aftermarket services segment, returned to profitability on a sales increase of 24%, 49.5 million. Operating income came in at 2.1 million, versus the prior year's 2.2 million. EBITDA in the quarter was 4.4 million at 8.9% margin. And I'd like to point out that the comparisons to the prior-year first quarter, ended June 2005, we have restated results and reclassified revenue of 4.4 million from the Aftermarket Services Group last year to the Aerospace Systems group and reclassified an operating loss of 800,000 out of the Aftermarket Services into last year's Aerospace Systems.

That's as a result of the transition that we've been going through, transitioning activities in the Aftermarket Services Group, and we wound up with Triumph Fabrications Phoenix and Triumph Fabrications Fort Worth essentially providing products to OEM customers as opposed to Aftermarket Service customers and as of April 1st had those operations operationally report in the Aerospace Systems Group.

Turning to a sales analysis, export sales in the quarter were 22% of revenue. Again, our only customer above 10% of sales was Boeing, at 23% of our revenue. Our sales mix compared to fiscal year '06 in the first quarter this year, commercial aerospace dropped to 43% from 45% in the prior year. Military was 33% last year, dropped to 32% this year.

Regional jets for the year last year were six, stayed at six in the first quarter. The big change was in business jets, which represented 9% of our revenue last year, is up to 11% this year, a 2% increase, and other remained at 7% in both periods.

Backlog, which a year ago was 682 million, at the need of March was 888 million, increased to 943 million at the end of June, with a large portion of that increase being attributed to the two acquisitions we made in the quarter. Our top 10 programs by backlog, and again, our backlog is backlog that is shippable with an order and a ship date within the next two-year period. And ranking - and in that backlog - our top 10 programs, we have continuing in the number one position the 777 program, followed by the 737, CH-47 Chinook is in third, the A320 Airbus program in fourth and a new entrant into the top 10 is the UH-60 Black Hawk helicopter, which now is in fifth place, V-22 Osprey next, then followed by the C-17, 747, A380 and finally the 767 program.

Quickly looking at the balance sheet, net debt at the end of the quarter was 211 million, versus 156 million at the end of March, representing 26.7% of capital. Cash flow from operations in the quarter was 1.1 million, the same as the prior year. CapEx in the quarter was 13.1 million, up significantly from the prior year's first quarter, and acquisition expenditures on those two acquisitions that we did in the quarter represented 42.1 million of new debt. One other final item is to look at the tax rate. Last year's tax rate in the quarter was 32%. This year, it's 35.3%. The change being caused number one, primarily, 2% of the change, the increase, coming from so far this year the elimination of the R&D tax credit in the tax bill. And we will continue to use 34% as a basic domestic rate until when and if the R&D tax credit is passed.

Additionally, bumping it up to 35.3 are the startup costs which we incurred in Thailand, which under GAAP were not tax benefited. With that, I'll turn it over to Rick Ill. Rick?

Thank you, John. Good morning, everybody. I think the best way for me to start is to reiterate the quote in the press release, because I think it says it all. We are very pleased with the first quarter results and the strong operational and financial performance across all our businesses.

The acquisitions we made have made a positive contribution, but the big driver behind our strong performance was organic revenue growth and enhanced operating leverage. Based on the strength of our markets and the robust backlog, which went up to 943 million, as John mentioned, we expect that we will continue to generate sales growth and improve profitability for the balance of the year.

In our groups, the Aerospace Systems Group had same-store sales which were up 19%. As mentioned, the acquisition made in that group, Triumph Structures Wichita, has immediately contributed to our profitability. In the Aftermarket Services Group, our organic sales growth was 18%, and the acquisition made in that group has immediately contributed to our profitability. We have had significant improvement in operations.

The transition that John referred to has been very positive and the outlook is very good, especially in the castings facility, where we're continuing to make the transition to aerospace castings. John mentioned a couple of times Thailand. Thailand is on schedule.

It will in fact continue to generate expense for the balance of the year. You'll note in the press release that the expense that we incurred, some $600,000 this year, was not in the first quarter of last year for that group. But we'll continue to generate expense while we stay on schedule to produce in Thailand later this year and early next.

Overall, with our operating groups, our operating margins are up 0.5% year over year and we like at this point in time expect that to continue. John briefly mentioned some of our capital expenditures. In past years, our capital expenditures have run in the neighborhood of $30 million. This year, I expect that our capital expenditures will be up to somewhere in the neighborhood of 40 to $45 million for the year. Some of those capital expenditures were in the acquisitions that had been spent before we made the acquisition and the equipment is coming in.

So it's good capital expenditure, it's increasing some of our capacity and taking care of the backlog that we have. Then, finally, I would just like to reiterate the guidance that we have in the press release. I see no reason why our earnings per share for the fiscal year won't be toward the upper end of the previously announced range of 240 to 270.

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

[OPERATOR INSTRUCTIONS].

Our first question comes from Steve Levenson. Please state your affiliation, followed by your question.

Ryan, Beck. Good morning, Rick and John.

Good morning, Steve.

Obviously there's been a lot of talk lately about the A380, and I see the A380 moving up on the top 10 list. What have you heard from Airbus about delivering A380 parts, specific A380 parts?

At this point in time, Steve, we have not been pushed back, but you've got to remember that the backlog, even though it moved into the top 10, it's not in the first year of the top 10. In other words, as John mentioned, our backlog is the two-year period of time, and it's not in the first year. We have not seen that much of a pushback on anything on the A380. Some of our backlog is on the A380 freighter, which is a little longer out and it's not in those numbers, but it's a little longer out than the A380 passenger.

Clearly, there are problems that we've all read about in regards to the wring problems, the weight problems, et cetera, and I would expect that some of our deliveries will be pushed out to the right, but so far we haven't seen a lot of that. I expect that we will. It doesn't bother us to a great extent because it's sort of a good news-bad news scenario. We don't have a great, heavy amount of content, business with Airbus. And of course some of the business we have, on the A320, et cetera, we're enjoying, and that's certainly ramping up and there's no slow-back in that one.

Yes, Steve, the revenue from Airbus has remained in the first quarter in the 5 to 6% range of our overall sales, so there hasn't been a material change there.

Okay, thank you. Second item is on the aftermarket business, obviously, the revenue is up there and were you able to squeeze some cost savings out of that too that got it turned around?

We obviously have been working both ends of the spectrum in that regard. Yes, we have some increased revenue, we have some programs that we feel very good about in the future, and we're constantly working on the expense side to take some expense out of the factor, and, as John mentioned, we made the switch and we put some businesses over into the Aerospace Systems Group which were primarily OEM business.

So it's in the business where it currently belongs and that's all part of the transition factor. So some of that expense came out and it's been integrated into Aerospace Systems but at a lower number.

Real good. Thanks a lot.

Next question, [Chris McCrea]. Please state your affiliation, followed by your question.

Yes, Merrill Lynch. Nice quarter, guys.

Hey, Chris.

Hi. I was wondering if you had ongoing legal costs, as you had in the last couple quarters, and if you could break that out associated with the lawsuit that you've been facing.

I don't know if I want to break it out 100%, but the answer to that is yes, and it's in those earnings and we're continuing to aggressively defend what we think is a charge by Eaton that is unfounded and we're continuing to do that and continuing to do that means we're expending legal dollars. And they're relatively significant in this quarter, and I assume that they'll keep going forward until it comes to fruition, which I have no idea when that will be.

[Find] us whether those costs were in the comparable quarter last year, or whether they'd arisen since then? I think they were not in last year's quarter, right?

There were costs in last year's first quarter, Chris. They're higher in this year's first quarter, but they were significant in last year's first quarter, also.

Okay, and an update on the castings facility conversion. Is that on plan, and where are we there?

I think we're - at this point in time, as I tried to indicate, we feel very good about the transition planning on the castings facility. We continue to change our forecast on a quarter to quarter basis internally in the casting facility and we're changing that forecast on an upwards basis. The throughput there is in fact much greater at this point in time, the business that we have clearly in the long-range in the next one or two years is getting larger as we speak. So we've made a lot of the transition there and we feel very positive about the outlook there.

Great, and lastly, I guess, there are several helicopter programs now coming to the forefront for the company. Can you perhaps just review some of the primary contributions that you make the helicopter programs, the Huey, the V-22, CH-47.

The V-22 has been on our top 10 list for, oh...

Maybe the last year.

A year, year and a quarter type of thing, and the high-lift actuation system we supply, the V-22, it's the actuation that tilts the rotors, if you will. We have a number of our companies on the Black Hawk. We have a lot of machine parts on the Black Hawk. When John mentioned the top 10 programs, it moved into the top 10, although it was very close to the top 10 before that, but it moved into the to p10 based upon the acquisition of Triumph Structures Wichita that had a significant backlog on the Black Hawk.

Trying to think of other programs, but clearly at Sikorsky and others we have a great amount of backlog in our business.

And, Chris, the Chinook is reflecting not only the maintenance activity, which has been ongoing, but also the new activity for both the retrofit and the new build of another 100 CH-47s with orders coming out of Boeing here in Philadelphia.

And what companies are you serving them with within Triumph.

Triumph Fabrications Wichita that Rick mentioned, Triumph Actuation Systems Connecticut that is a big supplier and Triumph Fabrication Systems Kansas City.

Got you. Just trying to get a feel for where the product's coming from there. I appreciate it. Thanks.

Our next question comes from Steve Song. Please state your affiliation, followed by your question.

Hi, Banc of America. Hey, guys, good quarter. What types of impact do you expect to feel when C-17 production eventually winds down?

I think that we'll certainly have some impact, because we have, if you've noticed, on the top 10 we do have content on that, but we also service the C-17 from an Aftermarket Services perspective, and you sort of give me the opportunity to transition to some of the things. The OEM aspect of the C-17 will be more than replaced by the content we have on the 787. But going back to the C-17, we do have a lot of Aftermarket Services repair and overhaul on the C-17 as well, which is why it goes into the top 10 within our programs.

Okay. And I guess on the raw material front, what are you guys seeing as far as costs go these days?

They're not going down. I think that the raw material costs clearly have gone up, number one, and in many cases, depending on the product and the alloys and some of the things that we need, the delivery process - titanium, the lead times have significantly increased. And we are in many cases working under supply agreements that have been in fact forged by Boeing, and therefore we're able to get the material. And we have in Airbus's case, we've utilized some of their material, et cetera.

So it has been a problem with lead times and the costs. In some of our contracts, we have escalators in regards to the cost of raw material, some of our contracts in the LPAs we don't. And in most cases, we've tried to anticipate a cost increase over the last couple of years.

Okay, all right. Thanks a lot, guys.

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.

Hi, J.B.

Very good morning to you from the west coast.

The sun's up here.

Well, it's not here. A question on the A380, that A380 in the backlog, that's all passenger version, right? I think you said there's no freighter there.

I don't believe the freighter is in there. I'd have to double check that, because I don't think the freighter is in the two-year window.

If it is, it's not material.

If it is, it's not a big number.

Just because of the small number of them that have been sold, or the content's a little bit higher.

No, the freighter is scheduled after the passenger.

Right, right. But are your contents a little bit higher on the freighter than the passenger, is it not?

I don't really know the answer to that question. I guess it might be when you talk about we have a lot of high engineering content on the freighter, and it will be higher because we have more of our companies producing product for the freighter than we do the passenger, so just because of that we'll have more content on it.

Okay, and then on 747, I'm assuming that's all the 400 version. Have you got any work - it's probably too early, on the Dash-8 and what's kind of the outlook there?

I can't really add to that question. I think it's a little bit early to answer that question.

Too early?

If in fact - I can tell you this. We will get content, when it's time to make those orders, we'll get the orders from them.

J.B., in some cases, we're guaranteed content on follow-on models of the same Boeing aircraft.

Yes, that was what I was kind of driving at. And then maybe you guys could talk about - you made a couple of nice-looking acquisitions in the quarter. Maybe you could talk about what you're seeing out there in terms of opportunities, multiples, competition from private equity and such.

I have to take a deep breath and be polite. The multiples have significantly risen. There's a lot of - the number of a couple of companies that sold at multiples that were significantly higher than they've been over the last couple of years. The buyers have essentially been venture capitalists, et cetera. There's a lot of money out there, waiting to be invested. The multiples being paid in my opinion are too high and what's happened in the last couple of years, some of the venture capitalists are selling those companies after they buy them, but they're selling them to other venture capitalists.

At some point in time, the circle has got to end and our stance on that will be that we will remain disciplined. I am not saying that at some point in time we might not pay a higher multiple, but if in fact we do it will be a significantly strategic move for us, one that would add a product line that we think our customer base wants us to have and will do us good in leveraging our other operations and the products we offer to our customers. But suffice it to say that those multiples have risen significantly and there are people offering companies because they perceive it being at the beginning of the cycle.

Got you. Okay, hey, thanks for your time.

You're welcome.

[OPERATOR INSTRUCTIONS].

If there are no further questions, this concludes the Triumph Group fiscal year 2007 first quarter earnings conference call. This conference will be available for replay after 10:30 AM today through August 3rd, 2006, at 11:59 PM. You may access the replay system by dealing 888-266-2081 and entering the access code of 935724. Again, the number is 888-266-2081 and the access code of 935724.

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