Triumph Group Inc (TGI) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss the fiscal year 2008 second 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. (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 the 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. Go ahead, Mr. Ill.

Thank you and good morning, everybody. To reiterate, we do have a slide presentation and it's on our website at www.triumphgroup.com for those of you who want to use that.

As the press release says, we-- I am very proud of what our record was for the second quarter. We had very strong revenue growth within the industry and within our company.

We have continued improvement in our operating margins and just a couple of comments about those operating margins. Aftermarket Services, which we've been talking about for a couple quarters now, has made progress and continues to make progress toward the high-single and low-double-digit margins by year end. The Aftermarket-- the Aerospace Systems Group I'll talk about in a second, perhaps after Dave's presentation.

We've had a strong growth in backlog. Our backlog is $1.2 billion. You'll soon note, when Dave goes on, that we-- that the 787 has gone up to number three in our backlog and to anticipate some questions in that regard on the 787 -- we've gotten a number of calls on that -- we really don't expect very much impact at all on the delay of six months that Boeing has, in fact, announced. And we do expect that Boeing will, in fact, meet that-- those delivery dates with the six months delay.

As you saw, we have record earnings per share from our continuing operations, despite two issues. Number one -- a significantly higher share count and substantially higher legal costs. To give you an idea on the year-over-year legal cost, that's approximately equal to about $0.10 a share, in that area.

So, in general -- and I'll wrap up with a few comments -- but, in general, we're very pleased with our record. Our companies are doing very well. The industry is doing very well. And at that, I'll turn it over to Dave to cover some of the financials.

Thank you, Rick, and good morning, everyone. I'd like to start off with a review of the financial results for the second quarter, ended September 30, 2007.

First, turning to the income statement, net sales from continuing operations increased 26% to $279.8 million compared to $221.8 million for the prior year period. Operating income from continuing operations increased 35% over the prior year to $31.8 million, with an operating margin of 11.4%, an improvement of 80 basis points.

Income from continuing operations was up 41% from $13.3 million to $18.7 million, resulting in earnings per share from continuing operations of $1.05 per diluted share versus $0.81 per diluted share for the prior year quarter.

It is important to note that the number of shares used in computing diluted earnings per share for the quarter increased to 17.8 million shares. The increase is primarily due to the dilution associated with the convertible debt as a result of the increase in our stock price.

The loss from discontinued operations was $1.5 million or $0.08 per diluted share. This includes costs of $200,000 related to the Triumph Precision sale.

Net income increased 37% to $17.2 million or $0.97 per diluted share versus $12.6 million or $0.77 per diluted share for the second quarter of the prior year.

EBITDA great 32% to $42.3 million, resulting in a 15.1% EBITDA margin.

Turning to our segment performance, in the Aerospace Systems segment, sales increased 24% to $220.5 million versus $178.5 million in the prior year. Operating income increased 23% from $25.3 million to $31.1 million at an operating margin of 14.1%, despite significantly higher legal costs. EBITDA for this segment rose to $38.5 million at an EBITDA margin of 17.5%.

In our Aftermarket Services segment, sales increased 36% to $60.1 million versus the prior year's $44 million. Operating income rose 118% from $2.2 million to $4.8 million at an operating margin of 8%, as compared to 5% a year ago.

EBITDA in the quarter was $7.9 million, an 81% increase over the prior year, with an EBITDA margin of 13.1%.

Our order backlog continues to grow, increasing 14% over the prior year, to $1.2 billion. I will remind you that our backlog takes into consideration only those firm orders that we're going to deliver over the next 24 months and primarily reflects future sales within our Aerospace Systems Group. The Aftermarket Services Group does not have a substantial backlog.

Our top 10 programs, listed on the next slide, are ranked according to backlog. The 737 program remained in first placed, followed by the Boeing 777. Third, as Rick said, was the Boeing 787, up from fifth place last quarter.

Fourth is the CH-47 Chinook helicopter, followed by the A320 family. The Blackhawk helicopter is in sixth place. Seventh is the C-17 freighter, followed by the Boeing 747 in eighth place. The Osprey combat helicopter is ninth and in tenth place is the A380 program.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue. Billings to Boeing commercial, military and space totaled 23% of our revenue.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal year 2007, commercial aerospace remained at 45% and military decreased slightly to 32%. Regional jets remained at 5%. Business jets remain 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 19% over the prior year. Breaking that down by segment, same store sales for the Aerospace Systems segment was $213.7 million compared to $178.5 million in the prior year period, an increase of 20%. The Aftermarket Services segment had same-store sales of $51.3 million, an increase of 17% over the prior year of $44 million. Export sales were $58.2 million or an increase of 15% over the prior year.

Turning to the balance sheet on the next slide, we generated $15.2 million of cash flow from operations in the quarter. CapEx in the quarter was $11.7 million, down from the prior year's second quarter. Net debt at the end of the quarter was $318 million versus $309 million at the end of March, representing 32% of total capital.

The year-to-date tax rate was 33.8% versus last year's tax rate of 35.3%. For the remainder of fiscal 2008, we expect the tax rate to be approximately 34%, which reflects the fact that the R&D credit is due to expire on December 31st, 2007.

With that, I'll turn it back over to Rick. Rick?

Thank you, Dave. In our future outlook for the balance of the year, we continue to see strong market conditions. We have talked about the market conditions and I see at this point in time at least a two-year strong market. I may note that we talked about-- a year ago, we talked about a two-year strong market. We continue to do so. Don't really want to go too far beyond that. I'm not sure we're clairvoyant enough to do so, but we do see strong market conditions for the next couple of years.

Our performance will, in fact, continue to improve. As I said before, we'll have minimal impact on the 787 delay. The 787 program is a very strong one, a strong program for us and across many of our companies, so-- but we don't think the delay will have much of a problem whatsoever.

The guidance -- we are raising our guidance. Earnings per share from continuing operations to a range of $3.95 to $4.10 and that is based upon 17.9 million shares, fully diluted shares, as indicated by Dave a little while ago.

At that, I'd open up to any questions you may have.

At this time, the officers of the Company would like to open the forum to any questions that you may have. (OPERATOR INSTRUCTIONS). Steve Levenson, please state your affiliation, followed by your question.

Stifel Nicolaus. Good morning, Rick and Dave.

Good morning.

Good morning, Steve.

Could you tell us a little bit about what's going on in Thailand and how the business is picking up or not picking up over there -- hopefully picking up?

Yes. The business-- I'm not sure that really a whole bunch changed since the last quarter we talked about that, Steve. We are-- things are getting better there. We have order input. Like any other startup, as I've mentioned before -- there's not any change in these comments -- it's-- a greenfield operation is difficult, but we still expect in the second half of the year that we will be favorable to certainly last year and favorable to the first half of the year.

Okay.

And so-- but we're very-- we're encouraged about Thailand and it's going to be a good operation for us.

Okay, thank you. Can you give us a comment on what you think about British Airways' order of the A380 and what it means for Triumph going forward?

Steve, it means that what we supply Airbus, the long stringers, wing stringers, that type of thing, it means that we will participate that and in the other products. It'll be definitely a positive for Triumph. It's clearly not as big a positive as aircraft like the 787 and the ramp-up of the 737 and things like that, but it's a positive issue.

Okay. Thank you very much.

Thank you. Our next question comes from Myles Walton. Please state your affiliation, followed by your question.

CIBC World Markets. Good morning, guys.

Hi, Myles. How you doing?

Good morning.

Good. Good. A couple of questions for you. When-- Rick, when talk about strong market conditions for the next couple of years, I know you haven't given guidance, but, I mean, is it safe to assume that that implies double-digit sales growth or, I guess, how would I contextualize that?

When I'm talking about strong market conditions, I'm talking about the general conditions within the marketplace as to-- as it relates to the build rate at Boeing, especially, because our biggest customer, as Dave said, is Boeing. So I'm talking about the-- the fact that the strong market conditions will, in fact, rise all boats, if you will.

So we're not selling into a market that is going to be declining for the next two years. The same thing would be true with the military market.

So those rates would seem to support double-digit top-line growth, though. Is that fair?

Myles, Myles. You know me. You're always trying--

I'm always trying.

--to get me to say those things, but that's fine. We're-- we would certainly think that we could get there, okay? It's very difficult to promise double-digit growth for two years in a row. I am making the projection the market will be strong and our business plan, which we're developing right now, will probably say that. But I'm not prepared to--

Fair enough. Fair enough. And then the period expense at Thailand in the quarter. I think it was $1 million last year. Was it-- was it down this year and do you expect it to actually become kind of a zero or a breakeven?

Are you talking about in the first quarter?

I think it was $1 million in the third quarter of last year and I'm just wondering what it was here-- excuse me, in the second quarter of last year.

It's a small amount down.

Small amount down? Okay. And then corporate expense was nicely down in the quarter. I guess is that a trend line that's going to continue or were there some favorable items in there?

Myles, we had said last quarter that they would trend down. We had had a few sort of one-time expenses in the first quarter. We had indicated that it would come down. So I think the rate you see in the second quarter is generally sustainable.

Okay. That's good. And then finally, if I could, on the legal side, you have elevated expense here in the second quarter and I know this is a-- you're preparing for trial this year. Is this a kind of a run rate we should expect for the full year?

I think, first of all, let me go back to one comment I made earlier on the $0.10 per share. That's a year-to-year date. That's a year-to-year number, not-- I might have given the impression it was the second quarter.

Yes.

It's not. It's a year-to-year date. But having said that, you're correct; we're preparing to go to trial. I would say that our legal expense for the next quarter to two would be ramping up from those date that we are now, just because of that issue going to trial.

Okay. But do you think you could sustain these types of margins in spite of that?

That's our plan.

Okay, thank you.

Thank you.

Thank you. Our next question comes from J.B. Groh. Please state your affiliation, followed by your question.

D.A. Davidson. Good morning, guys.

Good morning.

Good morning.

A question on the backlog. I think you said 24 months. So it safe to assume that that 787 numbers, those-- that first chunk of production, the 109, roughly, that are going to get built in those first two years?

Yes. I mean, we-- we have-- we will have strong backlog continuing with the 787 past the two years, but in terms of what we disclose, it is 24 months from September 30th is what we're measuring.

So that goes for basically the whole list?

Yes. Yes.

And maybe, Rick, could you-- could you talk maybe about your appetite for acquisitions? I know you're shedding a couple businesses here, but you've got a balance sheet that's in great shape and, obviously, the stock's done well. Size, different areas you're looking at?

J.B., I don't think that's really changed over a period of time. We have an appetite for acquisitions. We have been looking. The multiples paid for acquisitions these days have been significantly risen from even a year ago. And there are some companies getting into the aerospace business because they perceive it as being very strong at this time and they want to get into the business.

We have continued to be -- although some of the things we've tried to buy, we've raised the multiple we're willing to pay -- but we remain disciplined in what we want to do acquisition-wise. We do have a pipeline of a number of companies that we're working on now and we'll continue to do so, but that's no change from the past. We're always doing that.

We haven't made one for a while, not necessarily because we haven't wanted to make an acquisition. It's simply because the-- a lot of the companies have gone on a bid process and either we haven't been successful or we've chosen not to participate from a strategic point of view.

So we do have an appetite and we'll continue to do that.

So you haven't seen multiples come down significantly with the kind of turmoil in private equity and that sort of thing?

No, not really.

Okay. And I think-- I think in the past, you guys have mentioned on Aftermarket Services the goal is to eventually get that to double-digit. Is that still the case? I don't want to put words in your mouth.

No, you're not putting words in my mouth, because I've mentioned before that our progress is very good in regarding to get Aftermarket Services to high-single to low-double-digit by year end and we're continuing to do so. The only hedge in that regard is that we're saying high-single to low-double.

I think that, in fact, we can-- we can do that. Obviously, the importance of Thailand is there in accomplishing what we said we're going to accomplish.

The other side of the coin is -- and this isn't an answer to your question, but it's an issue that we've been dealing with for a long period of time. I think there's a general misunderstanding of the type of business we're in, in the Aftermarket Services.

Aftermarket Services becomes a catch-all for participating in the aftermarket. We participate predominantly in third-party overhaul and in that business, the people that we're competing against are the larger OEMs and that's a very tough competition for us. So it's a little bit different type of business than the aftermarket business that we experience in our own OEM where we repair and overhaul our own products.

I think it carries a little bit lower margins. That's not backing off the low-double-digit margins, but it's a little different business.

And then, is there a little bit of seasonality in that business? I mean, it looks like last year you had second quarter the margin was down a little bit. Same kind of impact this year. Is that like a regular seasonal impact that we're seeing there?

There are some seasonal aspects of our aftermarket business. For example, when travel is very heavy in the summertime, the airlines have a tendency of flying their aircraft more and not taking, for example, the APU off the aircraft to be repaired or overhauled. So there is some in some of our areas. And that holds true with some other accessories that we do. So there is some seasonality there.

Great. And one final one, with the 787, obviously, the success is pretty obvious. How has-- how has the way you work with Boeing changed and do you think that presents more margin opportunity than prior programs? And do you think that that will translate into similar opportunities on new Airbus programs?

Well, the answer to the second question is yes. I think it will translate in, because we've developed a lot of expertise in working on the 787 program.

The relationship with Boeing has changed only to the degree that our customer base becomes some of the people with whom Boeing is dealing. For example, we supply the ductwork for the 787. That's actually shipped to another customer and they ship the whole fuselage, or part of the fuselage, to Boeing.

So we've been involved in some design work and we've been involved in large suppliers to Boeing, which is exactly the way Boeing designed the whole program. That's what they wanted to have happen.

So our relationship has changed from-- to some degree with the 787 and, generally speaking, it's positive. In the short run, we are making significant investments in the 787, which includes new opportunities that will serve us very well in the future.

So the relationship has changed, but I think it's a very strong opportunity, especially considering the shipset content we have on the aircraft.

Now in the example you gave, that wouldn't be booked as Boeing, right? It would be booked as Customer XYZ. So, in some sense, your 23% of sales to Boeing is a little bit understated, correct?

Yes, you could look at it that way. Yes.

That's positive, I think.

I think it's-- the 787 -- I mean, I hesitate at this time to over-emphasize how important that is to the Triumph Group, because we are experiencing setup cost, investments in the program, et cetera, but I think the very important point is, is that we're very strong on a number of programs that the build rate is increasing as we speak, such as the 737. And by the time the 787 ramps up, we'll be very strong on all those programs.

Great. Hey, thanks for your time.

Thank you.

Our next question comes from Christine Min. Please state your affiliation, followed by your question.

Hi. Calyon Securities. Good morning, gentlemen.

Good morning.

Good morning.

With regards to the 787 shipset content, can you share with us what the value is of that? And then also, you talked about the relationship and how it's pretty diverse in terms of design work and also supplying to other suppliers to Boeing. Do you get paid on the delivery of your content to those suppliers or to Boeing or on the delivery of the aircraft to the airline?

We get paid on the delivery of the product that we deliver to Boeing or the other customer.

Okay.

The first question, we have been fairly consistent on not releasing information as to the shipset value on any aircraft throughout and we really would like to stick to that particular philosophy.

Okay, thank you.

Thank you.

Our next question comes from Karl Oehlschlaeger. Please state your affiliation, followed by your question.

Yes, Banc of America. Good morning, guys.

Good morning.

Good morning.

Hey, on-- more 787 questions, I guess. You spoke about the setup costs and the investments that you're making into the program and how should we think about the impact of those costs now and how should those should roll off and kind of the timing of that?

The timing of the investment?

Yes, like your margins, I guess, are being impacted as you're making investments now, right? It's not just a CapEx thing?

Well, we're clearly looking at the 787 as being a very long-term project for us. Some of the investments are capital in nature. In other words, a product that we have to buy new equipment to produce the product. And that's going to impact us from the extent of depreciation and the normal type things.

In the aspect of the delivery, as I just mentioned, we get paid when we deliver something, but there are concessions that we've made to various people, which are very standard in the industry in the upfront investment in the program. And that is a short-term effect on our earnings, but that effect is all in the projections that we're giving you and will be in the projections going forward.

But no-- you don't want to give us an indication of how much that is now?

How much affect on earnings it is?

Yes.

Well, part of the fact is, it's very difficult for us to do that. We have 787 programs-- I don't have that number right-- It's hard to come up with that number, because we have 787 programs in probably 10 to 11 of our companies and I could-- I'd have to go get the number, but we could give you some ideas on the CapEx that we're spending on the thing, on the program. But that'd take me a while to do that, unless Dave has the number at his fingertips. But I can't really give you that number.

Okay. And just on the opportunities that you're pursuing on the 787 further, like how should we think about the size of those versus what your content is now? I know you're not saying how big the content is, but is it 50% more opportunity or a doubling of the opportunity? What's the best way to think about that?

I wouldn't-- at this point in time, I wouldn't say it's double and the main reason I wouldn't say it's double is the 787 is already the largest program, by shipset value, that we have within the Company, which is significant to us, because it's so early in the program. So the best thing I can do, Karl, is tell you that that number, I think, will increase significantly over the next five years or so.

Some of the opportunities we're seeing are to be a potential second source and so ultimately the-- it'd be difficult at this point for us to quantify what that opportunity is. But we are seeing decent-sized new opportunities being proposed.

Okay. Thanks a lot.

Our next question comes from Eric Hugel. Please state your affiliation, followed by your question.

Stephens. Good morning, guys.

Good morning.

Good morning.

Just to follow up on Karl's question with regards to the impact of the 787 investment costs, I mean, obviously you're not-- you can't identify them, quantify them, but if you can think about them in terms of how they're impacting margins currently and how you would expect them to impact margins, let's say, over the next couple of quarters. Are we at a steady state? Are we ramping up? Sort of how do we think about that?

We're in, generally speaking, at a steady state. The-- as I mentioned before, the depreciation number that we'll have, going forward, for the next couple of quarters or, more than that, obviously, and the equipment investment we've made. I don't think in the-- over the next-- beyond the next couple of quarters, I don't think that the impact will be anywhere near as great as it is in the next two quarters.

Okay, so we're not-- we're not going to see sort of margins sort of trend down significantly, because you're going to sort of impacting-- hitting a huge tranche of well, we had to spend all this money to get the 787 set up?

No.

No.

Okay, great.

I think, Eric, there would be a shift, a subtle shift, perhaps, from less engineering and-- today we're not shipping a tremendous amount, but that's going to ramp up pretty quickly. So the engineering effort, the cost reduction efforts, will continue, but perhaps it'll start to be more in the product sales at those early concession rates. But, again, as Rick said, we don't expect that to bring down our overall margins.

Great. Because I would expect that as you start delivering, the overhead absorption probably offsets almost all of that.

We would hope so.

With regards to your guidance, your $3.95 to $4.10, I guess it would imply somewhere in the range of $0.93 to $1.01 in the third quarter and the fourth quarter on a per quarter basis. Can you talk about, as you look through the quarters, I mean, obviously, you have legal expenses, but can you talk about sort of what are some of the risks that you are looking at? And, obviously, if you look at sort of where we are in the first and second quarter, you're implying that earnings are going to be down kind of-- somewhat nicely in the back half of the year, despite your comments that things look very nice going forward. Can you just sort of talk about sort of what are-- what those risks are and sort of how we can judge them and monitor them?

Well, first, Eric, if you had been covering us for a long time, my comment to you could be, well, you know me in regards to the issues of what we-- the guidance we give. You haven't, so I can't say that, but the fact of the matter is, we are conservative, okay? We do want to promise what we promise and we want to achieve what we promise.

Having said that, we are concerned about some things going forward and it's not the strong business climate that we're in. It's not the build rate, because that is very, very strong. As a matter of fact, our build rate on some aircraft, like the 737, is ramping up three more aircraft, starting in the month of November. So we feel very good about that.

We are concerned about our legal issue, okay, in regards, because there's a trial, allegedly, that's going to happen this year. I say "allegedly" because it's been a while, okay? And so we're concerned about the costs there. I mentioned the $0.10 per share year to date and we think it'll ramp up from there.

We do have, not concern, but we do know that we're making significant investments in the 787, which will moderate, not kill our margins, but moderate our margins.

Thirdly, as we've talked about in the past, we do have some operations who have had the issues of getting their past due backlog out and that's had some extra costs in terms of efficiency, et cetera, et cetera. So those are basically some of the headwinds that we see, going forward. But I don't think that they're significantly going to impact what I've said to you in regards to the guidance. And I don't really think that there's going to be a bunch of problems in the second-- I mean, in the third and fourth quarters that will impede our operations.

And, as I mentioned before, we are being conservative. I'd rather promise something and over-deliver.

I understand. Can you update us? What's going on with the casting business sale? That was supposed to be, I guess, completed last quarter. There seems to be some kind of delay. Can you sort of give us an overview of where things stand?

Well, they-- it-- we're still actively engaged in discussions with a number of parties going forward as to selling that. The party that was interested chose not to make the investment in the plant, but we are talking to a number of other parties and we still-- we're keeping it in discontinued and we expect that to be the case.

Hard to give a timing on the thing, because it'll happen in its due time. But basically, we're still pushing that very hard and we're confident that we're going to sell it.

Great. Thanks a lot, guys.

Our next question comes from [Garrett Rieland]. Please state your affiliation, followed by your question.

Sorry. Hello?

Hello, good morning.

Good morning, David. I wanted to ask quickly about the first quarter-- excuse me, the quarter's cash flow was quite positive. What are the right expectations going forward in the next two quarters?

I think the cash flow should continue to be, I think, similar to what you saw in Q3. It's not quite at a one-to-one conversion rate there, but it should be-- it should continue to improve as I think we're making some strides on our working capital -- not where we need to be, but I think we are making some improvements there and certainly much improved from the first quarter. So--

It's terrific improvement. Would you care to share with us kind of benchmarks that you think are appropriate goals going forward, inventory-wise?

We're starting to look at putting in different metrics and I think it's just a little premature for us to put those out there. We want to make sure that they're aligned with what we would communicate to you. So, we are developing tighter inventory metrics going forward.

Our receivables are in pretty good shape, but could use some improvement, as well. But as we've spoken about before, the main culprit there is inventory and that's where we're focused. So I think there's more to come on that, which we will share with you.

Thank you. Well done.

Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2008 second quarter earnings conference call.

This conference call will be available for replay today, October 25th, 2007, at 11:30 a.m. through November 1st, 2007, at 11:59 p.m. You may access the replay system at any time by dialing 1-888-266-2081. International participants dial 703-925-2533. Enter replay code 1151410. Those numbers, again, are 1-888-266-2081 and 703-925-2533, replay code 1151410.

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