Triumph Group Inc (TGI) 2007 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 2007 second-quarter earnings performance. You're currently in a listen-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 their website at www.triumphgroup.com.

In addition, please note that this call is 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. We'd as usual go over the financial statements first. The quarter ended September 30 had another significant increase in revenue over the prior year. Sales up 23% to $226.1 million versus $183.6 million the year before. Operating income increased 76% to $23.3 million versus $13.2 million in the prior year.

Net income was up 79% to $12.6 million, resulting in diluted earnings per share of $0.77, compared to $0.44 in the prior period. Net income year-to-date came up to $22 million versus $14.2 million in the six months ended September last year, resulting in earnings per share year-to-date of $1.35.

In the quarter, the EBITDA margin increased to 14.2%. EBITDA was $32.1 million in the quarter and $59.2 million year-to-date.

Looking at the segment results. The Aerospace Systems segment sales increased in the quarter 24% to $179.7 million. They were up 25% year-to-date to $353.9 million. Operating income was $25.3 million versus $15.5 million the year before, up 64% in the quarter. Year-to-date, operating income was $45.6 million, up 48% over the prior year.

In the quarter, EBITDA for the Aerospace Systems segment was $31.7 million, with an EBITDA margin of 17.6%. Year-to-date, EBITDA margin was 16.5%, with $58.4 million of EBITDA for the Aerospace Systems segment.

Aftermarket Services segment sales were up 19% to $47 million from $39.4 million in the prior year's second quarter. Operating income was $1.9 million versus $0.5 million in the prior year. The $1.9 million this year includes $800,000 of startup costs in the quarter for our Thailand facility. Year-to-date, sales were $96.5 million; operating income $4 million; and EBITDA in the quarter for the Aftermarket Services segment was $4.3 million, a 9.1% margin.

Looking at the sales analysis, export sales remained steady at about 22% of our revenue. Again, we only have one customer over 10% of our revenue. That is Boeing. Both Boeing commercial, military, and space consolidated represent 23% of our revenue.

There were some interesting shifts over the prior year in our mix. Sales for fiscal year '06 broken down by market compared to year-to-date '07. Commercial sales last year were 45% of sales, dropping to 43% this year. Military sales increased from 33 to 34%. Regional jets declined from 6 to 5%. Business jets increased from 9 to 11% of our first six months' revenue. The remaining other category remained at 7% in both periods.

Backlog at the end of the September quarter crossed the $1 billion mark for the first time, increasing to $1,000,052,000. Again, our backlog is backlog that is shippable within the next two-year period of time with an order and a ship date to be delivered in a two-year period. That $1.052 billion compared to $888 million at the end of March.

Top 10 programs remain the same. There were some shifts in position. Again, we rank these by their precision in backlog. Number-one program remains the 777, followed by the 737, the A320, the CH-47, followed by the V-22, 747, UH-60, A380, C-17, and in 10th place the 767 program.

Turning to the balance sheet, the capital structure at the end of September had total debt temporarily up to $336.8 million. The balance sheet reflected $106.6 million in cash, resulting in a net debt position of $230 million, 28% of capital.

Just briefly, the cash on the balance sheet resulted from cash left over after paying off debt that was immediately redeemable upon the issuance of the convertible offering that we issued in September, raising just over $200 million in cash. Subsequent to the end of the quarter, on October 4, we used that cash to pay off the outstanding private notes that had been on the balance sheet for a number of years.

The net impact of those transactions was to significantly increase the available capital for growth opportunities, an easing of the covenants, in utilizing that capital gaining, more flexibility. A result would be that we would, going forward, on that $200 million that we raised on the convertible offering, gain approximately a reduction of 3% per year on that $200 million, net of the amortization cost in raising that deal. Plus the coupon.

Cash flow from operations in the quarter was $4.6 million; and we spent $13 million on capital.

Finally, tax rate. The effective tax rate for the quarter remained at 35.3%. We are still waiting for the people in Washington to enact the replacement for the R&D credit. If that occurs -- and people are still talking that it would be retroactive to the beginning of the year -- that would reduce the effective tax rate for the full year by approximately 2%. So if that happens in the second half of the year, that would be a retroactive adjustment back to the beginning of the year and effectively reduce that tax rate by up to 4% in the last six months, if it happens this quarter.

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

Thank you, John, and good morning, everybody. Obviously, we feel very good about our successful quarter, with the growth in revenue, operating income, and earnings per share. In addition to the strong execution in the quarter, the new unsecured facility, along with the sale of the convertible notes that John mentioned, provides us with the financial flexibility to support our strategic vision of continued, long-term growth while maintaining a strong and healthy balance sheet.

John has given you a number of the numbers that we achieved. I am going to repeat a few of them, because I think they are important, based on history. Backlog is at record levels, as John mentioned, at just over $1 billion. Our sales were up 23%. Our net income was up 79%. Our increase in our operating income was 76%. The EBITDA margin for the Group, for Triumph Group in total, was up to 14.2%.

Very importantly, however, the Aerospace Systems group, the EBITDA margins were up to 17.6%; and the Aftermarket Services were up to 9.1%, which includes, as John mentioned, the $800,000 charge -- not charge, but cost of our startup in Thailand.

Our cash, as John mentioned, was $4.6 million of cash generation. To us, that is a little bit disappointing. However, it is predominantly due to the high backlog in which our plants are extremely busy and our WIP has risen during the quarter. We expect that we will recover on our cash toward the end of the year.

Due to the backlog, however, we do expect that the balance of the year will continue to be very strong, based on these results.

In an attempt here to address certain issues that we think about, the backlog is high, as mentioned; and that does present some throughput problems, which we are overcoming. But if you remember a year ago or thereabouts, we were operating some of our plants at somewhere near 35, 40% capacity. That is significantly higher right now.

We have addressed the ramp-up problems. We have overcome most of the problems in the throughput as we go forward and work off this backlog over a long period of time.

Some of our concerns in other areas -- healthcare costs; it is no secret that it is a national problem. Our costs have gone up this year over last year approximately $2 million. About $800,000 of those costs are headcount oriented. Our litigation costs are up $1.8 million over last year.

I am trying to anticipate one question in regards to the A380. We have received to date no cancellations on the A380. We anticipate that we might get some of those cancellations or movement to the right. But with our backlog, I don't think this is going to affect us. In fact, in the short term, in talking about the throughput problems, I think that would in fact help us in some areas.

Finally, in regards to guidance, a quote in our press release, and I will repeat it here. We now expect our full-year earnings per share to be in the range of $2.65 to $2.70. Very importantly, this includes the after-tax impact of the debt prepayment and the unamortized debt issuance cost of approximately $0.20 per share. At that, I would open it up to any questions.

(OPERATOR INSTRUCTIONS) J.B. Groh of D.A. Davidson.

Congratulations on the quarter. I think I have got a little bit of a bad connection, so I hope you can hear me. Of your top 10 programs, what does that represent in terms of the total backlog as a percentage? Is that something you would be comfortable letting us know?

We don't quantify other than rank-ordering those programs. If we started doing that, then we would be breaking down what the actual revenue contribution is.

Fair enough. Fair enough. But it's probably safe to say it is a pretty good portion?

It is a pretty portion. There is a pretty good to slope to the rank ordering.

You have got to understand something, though. That is two years of confirmed orders, number one. And it is only on approximately two-thirds of our business. The Aftermarket Services Group essentially doesn't have a backlog.

That just is current quarter business, no backlog for that?

Right. Primarily, right.

Just conceptually, how would a cancellation of an A380 part work? Would you just be on the hook for that? Or mechanically how would that work if something were to be canceled?

That is hard to say. I don't think you're going to look at -- just an opinion -- I don't think you're going to look at cancellations. I think they're going to be looked at as being pushed out to the right, and we wouldn't be left on the hook for that. There are cancellation charges and this, that, and the other thing.

A lot of the inventory, in some cases we don't even own it. So I don't think it is going to hurt us from the viewpoint of being left holding the bag. I think that you might find that our receivables might get hurt a little bit, and then days outstanding. But I don't anticipate us being hurt in that regard.

So for some of that stuff it doesn't even show up on your balance sheet if you don't own the actual pieces; correct?

In some of it, yes.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS) Steve Levenson of Ryan Beck.

I saw yesterday that you expanded the credit line. Are there any current plans for that? Or is that just again for additional flexibility?

It is the latter, more flexibility. And you know better than that, anyway, Steve.

What position might the 787 be on the backlog list, if you went past number 10?

Well, the 787, you remember our backlog is -- that backlog is going to be delivered in the next two years. We are very pleased. A long story made short; we are very pleased at our content on the 787. We publicly announced issues such as the door actuator, cargo door actuator, and our partnership with Saab.

In some of these programs, we have recently announced the flooring program that we received at our Triumph Composite Systems. I think we issued a press release on that a little while back. Our content on the 787 is now significant, but it is not in the top 10 program because it is longer than two years out.

Steve, we stated in that release that the content on the 787 was higher than any other commercial aircraft program on a per-plane basis.

Now, in addition to being higher, you're acting -- it looks like here -- as a Tier 2 contractor rather than Tier 1. Does that mean you are not on the hook for development costs? Are the margins on these potentially going to be higher than some of your other products?

One could draw that conclusion.

We did not have a lot of requirements for front-end development cost contribution into the program because of the position we are in.

Okay, sounds good. Thanks very much.

(OPERATOR INSTRUCTIONS) At this time, I'm showing no further questions from the audience.

Great.

Since we have no further questions, this concludes the Triumph Group's fiscal 2007 second-quarter earnings conference call. A replay of today's conference will be available today at 11 AM Eastern Time through November 2, 2006. To access, you may dial 1-888-266-2081 or 703-925-2533, then enter replay code 975243. (OPERATOR INSTRUCTIONS) Thank you for all participating in today's conference. Have a nice day. All parties may disconnect now.