Triumph Group Inc (TGI) 2008 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 2008 first quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. You are 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 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 David Kornblatt, Chief Financial Officer and Senior Vice President of Triumph Group, Inc. Please go ahead Mr. Ill.

Thank you and good morning, everybody. As mentioned, we do have a slide presentation on our website that you can follow. Needless to say, based on the numbers that we see, which Dave will go over in a second, you know, we're very pleased with our first quarter results, especially on the heels of what we consider to be a strong fiscal '07 and a very good start to our fiscal '08 year.

The first quarter showed very strong revenue growth, year-over-year a 26% growth in revenue. More importantly perhaps, because we've talked about it for the last two or three quarters, we've had some significant improvement in operating margins. We're up to 11% overall, 14% in our Aerospace Group and 10% in our Aftermarket Services Group. It's an issue that we've been addressing and have talked about in previous quarters.

Our backlog continues to grow. It's up to $1.2 billion. Dave will address our programs and where we are. However, one thing to note in the programs that we're on is the 787. We have secured more business on the 787. Our backlog in the 787 has in fact doubled in the last six months. So when that program starts to ramp up, I think we're going to see that that program will be one of our top programs in the company.

The significant part of our press release was our portfolio change in non-core operations. We have listed in the discontinued operations, two of our companies. One, those of you who have been on the calls have been very familiar with, because we've talked about it in the past. And that is our Triumph Precision Castings. And as the press release says, we have in fact made progress in transitioning the casting facility to a profitable operation, but we have made the decision to sell the operations to allow us to focus on our Aftermarket Services business, which are much more of a core to our ongoing future.

So that has been listed in discontinued, as well as a company, Triumph Precision. A lot of you may or may not be familiar with that company. It's a relatively small company, which is in the beryllium and AlBeMet machining business. The divestiture of that company will not have any significant effect at all on our ongoing operations and it didn't have any significant effect on our past operations. So, we're very pleased with the fact that we're able to do this.

And at that, I'd like to turn it over to Dave, and we can talk about some of the numbers. Dave?

Thank you, Rick, and good morning, everyone. I'd like to start off with a review of the financial results for the first quarter ended June 30, 2007. First, turning to the income statement, net sales from continuing operations for the quarter increased 26% to $275 million compared to $218 million for the prior year period. Operating income from continuing operations for the quarter increased 57% over the prior year to $30.3 million.

Operating margin was 11%, a substantial improvement over last year's performance. Income from continuing operations was up 70% from $10.5 million to $17.8 million, resulting in earnings per share from continuing operations of $1.04 per diluted share versus $0.64 per diluted share for the prior year quarter.

The loss from discontinued operations was $3.9 million or $0.23 per diluted share. This included an impairment charge of $2.6 million or $0.15 per diluted share. Net income for the quarter was $13.9 million or $0.81 per diluted share, an increase of 48% over the prior year's first quarter net income of $9.4 million or $0.58 per diluted share.

EBITDA grew 48% to $40.8 million in the quarter, resulting in a 15% EBITDA margin. Turning to our segment performance in the Aerospace Systems segment sales increased 26% to $217.3 million versus $172.6 million in the prior year. Operating income increased 49% from $20.3 million to $30.3 million. Operating margin was 14%, an improvement of over 200 basis points. EBITDA for the segment rose to $37.6 million at an EBITDA margin of 17%.

In our Aftermarket Services segment, sales increased 26% to $58.3 million versus the prior year's $46.4 million. Operating income rose 92% from $3 million to $5.7 million. Operating margin improved significantly to 10% as compared to 6% a year ago. EBITDA in the quarter was $8.9 million, a 78% increase over the prior year period with an EBITDA margin of 15%.

Our order backlog continues to grow, increasing 27% over the prior year to $1.2 billion. I will remind you that our backlog takes into consideration only those firm orders that we are going to deliver over the next 24-months and primarily reflects future sales in our Aerospace Systems Group. The Aftermarket Services Group does not have a substantial backlog.

Our top ten programs listed on the next slide are ranked according to backlog. The 737 program remained in first place, followed by the Boeing 777. Third was the A320 family, followed by the CH47 Chinook helicopter. The Boeing 787 is in fifth place, followed by the Blackhawk helicopter in sixth place. Seventh is the C17 freighter. Eighth is the Osprey combat helicopter. Ninth is the Boeing 747. And in tenth place is the A380 program, which has reentered the top ten after being off the list for the last two quarters.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue. Billings to Boeing commercial, military and space totaled 22% of our revenue. Looking at our sales mix among end markets, the next slide shows that compared to fiscal 2007, in the first quarter of this year, commercial aerospace remained at 45% and military decreased slightly to 32%. Regional jets remained at 5%. Business jets remained unchanged at 9% and non-aviation increased to 9% versus 8% last year.

Finishing our sales analysis, the next slide shows our sales trends with total organic growth for the company increasing 20% over the prior year, from $219 million to $262 million. Breaking that down by segment, same-store sales for the Aerospace Systems segment was $211 million compared to $172.6 million in the prior year period, an increase of 23%.

Aftermarket Services segment had same-store sales of $50.4 million, an increase of 9% over the prior year period sales of $46.4 million. Export sales were $56.2 million or 20% of our total revenue.

Turning to the balance sheet on the next slide, we used $10.8 million of cash flow from operations in the quarter. CapEx in the quarter was $9.8 million, down from the prior year's first quarter. Net debt at the end of the quarter was $328 million versus $309 million at the end of March, representing 34% of total capital.

The tax rate in the quarter was 33.9% versus last year's tax rate of 35.3%. For the remainder of fiscal 2008, we expect the tax rate to be approximately 34%. With that, I'll now turn it back over to Rick.

Thank you, Dave. The numbers in some cases somewhat speak for themselves. I just refer to the press release on one of my quotes, where I say based on robust backlog, the strength of our markets and our ability to execute, we are confident that we will be able to continue to generate significant revenue growth and enhanced operating earnings and profitability for the balance of the fiscal year. I think that somewhat says it all.

We are buoyed by very strong market conditions, especially in the commercial area. We think that our performance will continue to improve as we point out, the margins have improved in both of our operating groups. There will be, later in the year, some ramp-up in some of our key programs, such as the 737. That ramps-up some in November, to 3 more planes a month. I've mentioned the 787. The programs that enter our top ten that Dave mentioned, they're not only our top ten programs, they are, in fact, the programs to be on within the industry. So we're very pleased with that.

And on the basis of all that we have said -- and this may shock some of you out there, because we haven't done this before, but we are raising our earnings guidance from $3.60 to $3.80, to $3.85 to $4.00 for the fiscal year. At that, I'd like to open it up to any questions.

[OPERATOR INSTRUCTIONS] Ron Epstein with Merrill Lynch.

Just a couple of questions. In the aftermarket business the margins in the quarter really were pretty spectacular. What changed?

Well, the issue that we hadn't talked about for a long period of time is that we have a couple of things going on in that. Number one, we've always talked about the Aftermarket Services Group being a third-party repair and overhaul. And that doesn't necessary compare to the internal aftermarket business that we have and the margins that are in our Aerospace Systems Group. But what has changed basically is that number one, Thailand has started to put engines through and product through over there, so the margins there, although they are not where we expect them to be towards the end of the year, they have affected the overall margins within our group.

We made an acquisition there last year of Triumph Accessories Grand Prairie, which has been at this point in time a very successful acquisition, and as we said, immediately accretive to our earnings and they have increased our earnings for the whole group. And thirdly, as we have said, we expected our margins to increase somewhat within all our companies within that group.

Is it okay for us to think about the new margin level there as kind of a run rate or do you expect improvement off of the current levels?

Internally I would certainly tell all our fellows in the Aftermarket Services Group that I would expect the margins to be higher, but I think that the numbers where we are, which is actually 9.8% for the quarter, I would expect to maintain that or be slightly up on that number.

Okay, maybe just two more and then I'll let someone else ask a question. The operating cash flow in the quarter was negative. Is that just the working capital required for the ramp-up?

If you look at our working capital requirements, it's been somewhat consistent with the sales as they've gone up over the last five or six quarters. That doesn't mean that we're particularly satisfied with our working capital requirements and we're addressing the cash issue. You'll notice that our CapEx is a little less than the first quarter of last year, and we're attempting to manage those issues. And I think that our cash flow will, in fact, get better as we go through the year.

Okay. And then just one final question. From your material supply chain in terms of metal and the other material you guys use, how's it look? How tight is it? How are the lead times? How's that going?

Well, in some products, the lead time is in fact significant. But as we've said before, in most of the cases, we really don't have a problem for a couple of reasons. Some of our plants are receiving material that is bought through our customer programs, you know, the titanium, some aluminum type of thing, where we, in fact, have planned for that over the last year to year and a half. So I'm not going to say that there's not an isolated case where we have some material problems, but generally speaking it's not a problem for us.

Miles Walton with CIBC World Markets.

Good quarter. Just for comparative sake, if you hadn't decided to sell the business and essentially kept it within operations, is it safe to say you would have reported EPS of about $0.96 and wouldn't have had to take the impairment charge or would you have had to take the impairment charge based on a review of the properties?

I think, number one, it's somewhat of a moot point, because we meet all the requirements of FASB and all those other guys that say that we have to put it in the discontinued. But if you go that way, yes, I think the press release speaks to the issue as to of the $0.23 charge there is an impairment charge of approximately $0.15.

Right, but if we had elected not to sell that operation, we would not have been required to take an impairment charge.

All right, that's great. And then, to push you a little bit on the guidance, you did raise it. I'm just curious, the strong performance here in the first quarter and kind of your response to it Ron is that there's not an anomalous behavior here, you expect it actually to be almost as good, if not better, through the remainder of the year. So, you did $1.04 here in the first quarter. I guess sales will grow a little bit through the course of the year and you'll maintain margins. Is there something we should think about or is this just conservatism early in the year?

You probably know the answer to that question.

I like to ask it anyway.

I know. I know. Well, you're consistent, Miles.

I try. Then to ask, on unallocated corporate expense, that appears to be one area where maybe over time you could capture some value. Is there opportunity there to trim back and how much of that growth is driven by legal expenses?

Well, first of all, I wasn't trying to avoid your first question. I think that our tendency over time, as you well know, is to be relatively conservative as to our guidance. We don't give the quarterly guidance. We're very pleased with this quarter, because if you remember over history, our first quarter is not normally a very strong quarter because it follows a very strong fourth quarter in our business. So, we are being perhaps somewhat conservative. But on the other hand, as I've said many, many times, I want to make sure we deliver what we say we're going to deliver. And I think that's a very important issue.

I think that the other issues -- I'm forgetting your second question.

Corporate expense.

The corporate expense, number one, we have added some people on the corporate level, as we get larger in areas that need it, to assist that growth in our individual companies.

Secondly, there are numbers in the legal area going on that are in the corporate numbers that have been there for a while. We're trying not to focus on that as far as our earnings issue, but those are there. We've also had -- from time to time we have some unusual costs. But I think you'll see the corporate costs probably rising a small amount for the year, based on two things; some more people that we have here and issues that we're addressing and we're in a period of time where our legal costs might escalate to some degree going forward.

But I can assure you -- and there's a couple of people sitting around in this room, that the corporate expenses won't rise precipitously without an absolute necessity.

Miles, I would also say that I don't think we would continue at the first quarter run rate. It may be higher than last year, but we don't see it at that rate. We did have some one-time items that we absorbed in the first quarter.

J.B. Groh from D.A. Davidson.

Maybe you could give us a little more detail on Thailand. I think last quarter there was some startup cost, excluding those you said I think it would have broken even, roughly. Is that profitable now and is there anything in there that's one-time in nature? Are we at a good run rate now for Thailand?

No. As we said last call, we don't expect Thailand to be profitable in the first six months of our year. The possibility is that toward the end of the second quarter we could have a third month of the quarter that is profitable, but that's up in the air. What we said last time is that the year for Thailand will, in fact, be profitable and that that profitability would be skewed toward the last six months of the year.

So in that sense the aftermarket side may be a little backend loaded on margins?

Well, by definition it's going to be that way, because if Thailand is profitable versus not profitable, yes, the operating margins will be higher at the end of the year, everything else being equal.

Give us some tailwind.

Okay. And you mentioned that your content has really increased on 787. I think you said that it had doubled over the last six months, is that correct?

Backlog, yes.

The backlog or the per-ship set content? I'm trying to get a feel for -- I know that it's the first 24-months. Is what's represented in the backlog those first 112 aircraft or is there stuff beyond that?

Well, there might be stuff beyond that, depending on whether it fits in within the 24-month period of time, because we're measuring our backlog, as Dave said, only in the 24-month period of time. So, depending on when the ramp-up of the 787 is, that's when we get that content. So it's by backlog, but if the backlog goes up, by definition the ship-set value will go up as well.

To say it another way, I think Rick indicated on last quarter's call that the 787 would be our largest ship-set value and that continues to be the case today.

But it continues to get better.

Yes. And we're also hopefully making progress on the other programs. So, I'm not saying that delta is widening, but it remains in first place.

Can you give us some specifics of additional things that you've won recently in terms of different product?

Well, it's not necessarily something that we've won. I referred to a little while ago about the -- for example, the 737 and the other Boeing products. 737, for example, ramps up 3 planes per month in November. It goes from 18 planes to 21 planes. That's our number one on our list, if you will. And the same thing is true with the 777.

The helicopter programs we're on, we continue to win more products there. We've won some gear products from Sikorsky. Across the board we have increasing business. On the Airbus A380, as Dave mentioned, went into the top ten when it went out. They're projecting more usage on the A380 and we've gotten some business on the A320 family of aircraft on some structural parts, etc.

There are a number of other small products, but I don't have them at my fingertips right now, small wins that we've had throughout our customer base.

And then lastly, with getting rid of the casting business, you've got a pretty good balance sheet. What are you seeing in terms of other acquisition opportunities? What's your appetite there and what's your outlook?

There are a number of opportunities that we're looking at at the present time. Our appetite is high, but our eyes aren't going to get bigger than our stomach in regards to our discipline. It's clear that the multiples are higher as we go through and we look at companies for acquisition. We're trying to remain disciplined and follow our strategic issues that we followed since day one. But I think that there are a number of possibilities that we have out there to fill our product lines and to expand our business. So we're working on it very hard.

Thanks for your time and congratulations for the start to the year.

Steve Levenson with Stifel Nicolaus.

A lot of good questions asked and answered already. Can you give us a little more detail on the helicopter business? I guess the Pentagon has given approval for full rate production on CH47 and H60. How might that impact you going forward?

As you see, they're in our top ten programs and they have been for -- I really don't know how long. I don't remember. I'd have to go back in history. But they've been in there. We have been supplying more and more product. I mentioned some gear systems that we've done. We are now -- we've been supplying a lot of the monolithic bulkhead for those aircraft. There's been a lot of military release on those aircraft and we continue to increase the numbers on those aircraft. So certainly the immediate future, defined as the next couple of years, is very good.

Okay. Osprey moved down a little bit. Is that just a function of the other ones being bigger or is there some sort of pushback from the Pentagon on V-22?

I know of no pushback on the fact that those aircraft are going to be delivered. I really can't answer that question definitively, but to my knowledge there's no negative aspect of the V-22 going on at the present time.

It's holding steady over the last few quarters. It's more that the others have gotten bigger.

Okay, great. And on A380, now that it's reappeared, is that a function of just greater orders or are they now giving you dates that are a little bit closer for delivery? And if you can say if they're at the beginning of the two-year period from which you measure or towards the end, that would be great, too.

Well, a lot of them are toward the end. They disappeared, because you know, I don't have to reiterate for anybody on the call the problems with the A380, because when they had the wiring problem, everything came to a screeching halt. And this is a matter of the fact that Airbus feels confident that the aircraft is going to go onward and therefore, they are re-placing the orders that they put on hold and giving us dates which they didn't give us before, but those dates are a little bit out, not toward the end of the two years, but it's within the first year or 15 months of the program.

Karl Oehlschlaeger with Banc of America.

Congratulations on the quarter. You had really a pretty strong top line and I just wanted to get an idea if it could be discontinued ops? Am I thinking right that those are about $10 million to $50 million business that got stripped out?

Well, the two businesses, one of them, Precision, is about a --.

It was much, much less of that. I mean, those businesses are not nearly of that size. They're much smaller than that.

On a combined basis?

That's right. It's under $20 million for the year.

And you might have touched on it briefly with one of the questions, but can you say what your prior EPS guidance was sort of baked in for these operations?

On the discontinued operations?

Right.

Not without doing a lot of -- not really, no. Because two things, number one, it's hard to do right now, but number two, we've never given any -- I mean, you can figure it out with the difference in the impairment charge and the other, but for the quarter anyway. One of the businesses was not major league profit, nor was it a loss.

So, the casting facility, we've said all along we've had some problems coming up to. We had made progress going forward, but the decision we made is the decision we made from a strategy point of view and I think it's a good one. So I think that -- and that number has been different as time has gone by, so answering it as of any one given point in time would not really be useful. But it was not making money.

Okay. And then just secondly, you talk about the Thailand facility there. I just want to get an idea, if we look, it's ramping up, but if we look into next year, how big of a percentage of the Aftermarket Services business will Thailand be, you think?

Taking all the companies, it's going to be a relatively small part of our sales, but we expect it to ramp-up over the course of the years. I think we have to remember, you know, we keep focusing on Thailand and when it will be profitable, okay? I'd prefer to look at Thailand as a strategic issue and focus on the point of why we went to Thailand in the first place.

We had a good 15% of our business was from Asian airlines and Asian customers. We were convinced, and I think that we are still correct, that if in fact we didn't do something to service those customers in Asia, we were going to lose that business anyway. What has happened is even better than that. We have in fact serviced our Asian customers and will continue to do so and we have gained new customers in Asia, because we've put the Thailand plant in there.

So albeit we all have a tendency of focusing on which quarter that's going to become profitable, we're saying that at the end of the year, in the last six months of the year, we will in fact be profitable, but more importantly and strategically, in the future it's going to be a contributor and a very good contributor to the Triumph Group.

Miles Walton with CIBC World Markets.

Two softball follow-ups for you. The share count in the quarter, is that just the convertible dilution hitting the numbers and is that about the right run rate for the full year?

That's correct. Most of that increase was in fact the dilution effect and I think if the stock were to stay at today's level, there would be even a little more dilution in Q2, because it's based on an average.

And the other softball, what if any proceeds do you anticipate from the sale in the second quarter?

Tough question to answer, because it depends on how long the due diligence takes. It is our expectation, and I underline expectation, assuming nothing goes wrong, that everything will be done by the end of the second quarter.

And proceeds?

I would say about $20 million combined.

Combined $20 million, yes.

Chris McDonald with Kennedy Capital.

Just a question on 787. With the additional content that you've won recently, can you talk about if that changes the margin profile initially? I know you've said that it shouldn't be terribly dilutive to margins as you ramp-up on that program. But just curious if that's changed at all based on any new content that you've won?

Chris, that's a tough question to answer, because it's got to be analyzed. Because we have the increase in volume and the backlog there is across any number of our companies. And in some cases, the margins will be positively affected immediately and in some cases the margins ramp-up as we go through the learning curve of the products that we're supplying to Boeing or to the intermediaries that then supply to Boeing.

So the best I really can do is it's certainly not going to be dilutive to the margins, but I think that in some cases we have ramp-up charges and efficiency levels that we have to achieve before the margins are in fact as high as we think they will be. That's a little bit of a roundabout answer, but it's the best I can do.

I understand. Just following up on last quarter, you took a charge for a change in accounting related to power-by-the-hour type program and I was just curious if now having to account for those programs based on when the work is performed, as I understand it, does that change seasonality at all when you look at your Aftermarket Services business? I know there's certain times of the year where the airlines tend to not want to do additional maintenance. I'm just curious if that has any sort of impact on when you see volumes going up and down?

It has a potential. I wouldn't use the word seasonality necessarily, but it has a potential of changing it a little bit because of exactly what you said. We recognize it as we do it and we can't control when an APU, for example, comes into our shop. So if in fact there is a period of time where the airlines are not taking the APU off the wing and sending it to us, it might affect it to a certain degree, but I don't think in the long-run -- certainly over the case of a 12-month period of time, it's going to be a big issue.

Right. And I would also say, in the quarter it could have that impact on revenue. I don't think it would be distortive to margins in any given quarter. But it could have an impact on revenue.

There are no further questions at this time. Since there are no further questions, this concludes the Triumph Group fiscal 2008 first quarter earnings release conference call. This conference will be available for replay today, July 26th, 2007 at 11.30 a.m. through August 2nd, 2007 at 11.59 p.m. You may access the replay system at any time by dialing 1-888-266-2081. International participants please dial 703-925-2533, replay code 1113153.

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