Triumph Group Inc (TGI) 2010 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 2010 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. Please ensure that your popup blocker is disabled if you are having trouble viewing the slide presentation. 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 statements. 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 rebroadcast without explicit written approval.

At this time, I would like to introduce Richard Ill, the Company's Chairman and Chief Executive Officer, and David Kornblatt, Chief Financial Officer and Executive Vice President of Triumph Group Inc. Go ahead Mr. Ill.

Thank you and good morning everybody. I will refer from time to time to our press release, but as you see, if you are following it on the internet, we are in fact very proud of the positive quarter that we had despite headwinds that we list on the slide here.

There had been a significant reduction in demand for business jets. If you remember over a period of time our business jets were about 9% or 10% of our backlog. That's dropped to about 5% and the deliveries of course have been, in business jets, have been cancelled and not unlike the commercial jets, they haven't been pushed out to the right, they've been cancelled. So, it has significantly affected some of our businesses, specifically in the Wichita area, where we're very strong in business jets.

There has also been a softening in the regional jet market where you've seen a push out or cancellation there. In addition, we've had delays in the 747-8 and the much publicized production push out of the 787. In addition to that affecting our aftermarket business has been passenger miles and freight miles flown have significantly reduced worldwide and affected, as I mentioned, the aftermarket business.

On the positive side, the way we see things we are proud of the $32.5 million cash flow from operations that we had in the first quarter, which shows a continued emphasis on cash generation and working capital management, which we are doing a much better job at. Most of you will remember we've been stressing that for a long period of time, and in the last two or three quarters, we've gotten some results out of that.

Our backlog is maintained at our near record level of $1.3 billion, which is essentially about the same as it was at the end of the fourth quarter. Our Aerospace Systems group operating margins remained very strong, and we've had improvements at our APU operations. Just a quote from our press release, the operating performance at the Phoenix APU business was greatly improved during the quarter; however, their results continued to be dilutive to the segment's results. We have had some profitability there in the end of the quarter, and we feel confident we are solving that problem and we are further coming up with plans to get better and better with the operations.

We did mention just very briefly, the quarter included $300,000 expense incurred with the shutdown of a service facility in Texas. We shut that down and integrated it into one of our other companies during a quarter, so we had a minor hit there.

On the slide there we mentioned a very strong balance sheet, we still have that, and we feel good about the fact that we have that strong balance sheet to weather what we see will be economic headwinds going forward, especially in perhaps the second quarter. And I will get to some at the end here -- and I'll get to some the conversation about our guidance.

But I might remind everybody looking at last year's first quarter, when we were reviewing things for the conference call, we reviewed what we talked about in the first quarter last year, and I think at that time I used the terminology that the first quarter last year was in fact a perfect storm to the good, when we had a very good quarter the first quarter last year, so comparatively it doesn't look as good, but we are in fact very pleased with a lot of the issues that happened in the first quarter.

You also might have seen a press release that went out in regards to announcing our issues in regards to getting a Bell 429 contract. That's a very important contract for us and we are proud of it, it's -- it positions us on a very key new commercial program and it's a major outsourcing award on the gear transmission, et cetera, and allows us to cost effectively support Bell and it's the first time Bell has done something of this nature, so we are very proud of that particular award.

And in addition, finally in the beginning in the first quarter, you saw an announcement that we named Jeff Frisby President and Chief Operating Officer. And again I quote from that press release where I said he is a proven member of our leadership team and has played a key role in making Triumph what it is today.

And maybe we can talk about that more if you want a question -- ask any questions in that regard. But first I think I'll turn it over to Dave who can talk about some of the financials. Thank you.

Thank you, Rick, and good morning everyone. I'd like to start off with a review of the financial results of our first quarter. First, turning to the income statement, sales for the first quarter were $316.1 million compared to $320.6 million for the prior year period, which is a decrease of 1%. Operating income was $37.9 million with an operating margin of 12%.

Income from continuing operations was $21.5 million, resulting in earnings per share from continuing operations of $1.30 per diluted share versus $1.48 per diluted share for the prior year quarter. The loss from discontinued operations was $3.5 million or $0.21 per diluted and included an impairment charge of $2.5 million.

Net income was $18 million or $1.09 per diluted share. EBTIDA decreased 6% to $51.9 million. The first quarter results included $1.5 million of additional non-cash interest expense associated with the change in the accounting for convertible debt. The quarter also included approximately $1 million of startup costs related to the Mexican facility, which is primarily reflected in our corporate line.

Looking now at our segment performance. In the Aerospace Systems segment, sales for the first quarter increased 1% to $260 million. Growth in Military and Commercial was almost completely offset by large decreases in business jets, regional jets, and program delays. Operating income decreased 9% from the prior year quarter to $41.8 million with an operating margin of 16.1%. The segment's first quarter results included $1.1 million of legal expenses, net of insurance reimbursement associated with the previously disclosed trade secret litigation.

In our Aftermarket Services segment, sales for the first quarter decreased 8% to $57.8 million, reflecting deferred maintenance and inventory de-stocking. First quarter operating income was $2.4 million and an operating margin of 4.2%, which was a sequential improvement from the prior quarter.

As mentioned in our press release, the quarter included $300,000 of expenses incurred to shutdown a facility in Austin, Texas. In addition, the results in our Phoenix APU operations improved both year-over-year and sequentially. Our order backlog increased 3% over the prior year to $1.28 billion, but decreased 3.4% sequentially. I'll 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.

The sequential decrease in our 24-month backlog was entirely due to the cut in the 777 production schedule coming next June and the drastic drop in business jets. Without these impacts, our backlog would have grown. Military now represents approximately 45% of our total backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. Remaining at the first place is the Boeing 777, followed by the 737 next generation in second place. Moving into third is the CH-47 Chinook, followed by the Osprey Combat Helicopter in fourth place. And fifth place is the 787 with the Black Hawk Helicopter dropping to sixth. Seventh is the C-17 freighter, and moving up to eighth place is the Airbus A380. The F-15 is ninth and in tenth place is the 747.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue. Billings to Boeing commercial, military, and space totaled 28.2% of our revenue.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal 2009, commercial aerospace increased to 47% and military grew to 38%. Regional jets decreased to 4% and business jets dropped to 5%. Non-aviation remained unchanged at 6%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter decreased 9% from the prior year. Breaking that down by segment, first quarter same-store sales for Aerospace Systems segment was $234 million, a decrease of 9%. This decrease was due to the reduction in demand for business jets, the softening of the regional jet market, and the program delays on the 747-8 and the 787. All of the Aftermarket Service segment sales for the quarter were organic. Export sales for the first quarter were $64.5 million, a decrease of 9%.

Turning to the balance sheet on the next slide, we generated $32.5 million of cash flow from operations in the quarter, an increase of 118% from the prior year. CapEx in the quarter was $7.1 million. We expect CapEx for the year to be approximately $40 million to $50 million. Net debt at the end of the first quarter was $422.6 million versus $416.8 million at the end of March representing 34% of total capital. The global tax rate in the quarter was 33.6% and reflects the fact that the R&D tax credit is due to expire on December 31, 2009.

For the remainder of fiscal year 2009, we expect the tax rate to be approximately 34%. With regard to our EBIDTA and other disclosures, please refer to our press release which has been posted on our website.

With that, I will turn it back over to Rich. Rich?

Thank you Dave. Future outlook, Dave just mentioned that our backlog has been at $1.3 billion, we take heart in that, our military business has increased to 45% of our backlog as Dave mentioned, and we feel very good about that backlog and we remain very optimistic about the future.

We are going to remain focused on improving our execution and controlling cost and generating cash, and we're going to control those cost and our capital expenditures where it will be very prudent in spending money, as Dave mentioned, up to about $40 million or $50 million.

In the press release we affirmed our earnings guidance, which we had said would be approximately $5 per share based on the current production schedule.

We don't see the 737s dropping as many have speculated. We spoke with Boeing many times and we think that 737 schedule will stay the same and that will keep our sales in the approximately area that we talked about early in the year of about $1.3 billion.

We have always -- we've given annual guidance, I would like to remind everybody, we don't give quarterly guidance on purpose, so we're saying that our annual earnings will remain in about $5, but our quarterly earnings may fluctuate sometime and we don't think the second quarter will be quite a strong as the consensus there, but we do feel good about our $5 a share.

At that, I will open it up to any questions

At this time all officers of the Company would like to open the forum to any questions that you may have. (Operator Instructions). Please standby for the first question.

Tyler Hojo, please state your affiliation followed by your question.

Sidoti & Company. Good morning.

Good morning.

I guess my first question is just on the Aftermarket Services side, obviously some nice improvement in margin there sequentially. But, this is a second quarter where we've seen kind of a, I guess a minorish type shutdown. I'm just wondering what's kind of built into your expectations as we go through the year, are there any other potential integrations or shutdowns that we should kind of be keeping a track on?

You have to remember, we mentioned that it's a very small integration that we did out there. We had a small operation in Boston, Texas, with five or six people and we consolidated that into one of our instrument repair shops in Fort Lauderdale. I don't anticipate over the near term, next couple of quarters, any integration of that nature. If in fact there are, it would be a positive thing for the company going forward, but I don't anticipate any at this point in time.

Okay. That's fair enough. And then, just one more from me. Just on, I mean obviously you are holding the guidance, but does that mean that the $9 million in legal that you previously guided to and the $7.5 million in the Mexican startup remain unchanged?

Yes, it means that the other -- the Mexican I got a little more control over the legal costs that's what that means, but we don't have as much control over that.

No, certainly understood. What do you mean by you have more control over the Mexican startup?

Well, we are the ones that are building it.

Yeah, right.

I mean, we are -- when we venture into something like that Tyler, obviously we estimate some cost to the things we don't know about and I would say that if we execute well, we should beat the $7.5 million, but that is the number that's included and it's too early in the process at this point to come off that number.

Okay. And obviously with $1 million I got to spend in Q1, obviously the trajectory is going to be up, but do you see -- may be you could possibly tell us when you think kind of peak spending levels will be for that?

I think Q3 and 4.

3 and 4.

Yeah.

Fantastic. Thanks a lot.

Thank you.

Thank you. Peter Arment, please state your affiliation followed by your question.

Yeah, Broadpoint AmTech. Good morning. I hope you can hear me, I am on a cellphone. I guess just mainly for you just about the -- with the senior promotion. I just want to figure out how does it affect to you I guess in terms of how you are going to be spending your time and what you will be focussing on going forward?

This is Rick. You are talking to me, I assume.

Yes Rick, sorry.

Okay. I don't think I am going to be spending my time too much differently, obviously there is a lot of governance issues, there is a lot of things that I have to focus on. Jeff will have responsibility very directly for all the operations. We've always been a company that puts a lot of emphasis on each individual company in a very entrepreneurial fashion, and we are focusing on each individual company to better those companies increase their margins, control their working capital and the like. So while Jeff is focusing on that, I'll be working with him on that and other issues such as acquisitions and things that have to be dealt with. I hope it answers your question.

Okay. No, that does, that's very helpful. And just regarding acquisitions, and how are you thinking about just -- your business continues to generate a lot of cash, and you did have quite a few last year, may be you could just give us an update there?

There is a lot of acquisitions out there, some of them are coming through auction and some of them are getting larger, at least ones brought to us. We are going to continue to be prudent in regards to how much we pay for companies, but we don't have any lack of opportunities to look at via the acquisition route.

Okay. Thank you.

Thank you. Our next question is from Steve Levenson. Please state your affiliation followed by your question.

Stifel Nicolaus. Good morning Rick and Dave.

Good morning.

A lot of people are talking about this destocking and as you go for the supply chain, do you think there is an over reaction here, I mean are you guys building to meet the build rates, are you building at the same rate to meet the build rate that is currently in effect for a variety of aeroplanes that you provide parts for? Do you think there is going to be a spike in orders somewhere along the lines? Or do you think rates are--

I think eventually yes, there will be. I'd have a little harder time predicting when that's going to be, but we are producing to what our customers tell us to produce to. That's one of the reasons that our business is down and our sales are down in the business jet area, because they are telling us not to produce.

In other cases, such as Boeing business that we have, that's why I made the comment on regards to the 737. We are still producing parts for that, because they've told us that when they want those and where they -- when they want them and we are still producing. So I think that -- I will say that the -- the orders on the OEM side are sliding towards the min as opposed to the max in what they want shipped. But, we are still shipping a fair amount in that regard. Everyone's been watching inventory, our customers and the like.

But I think Steve, you are -- we have seen situations where it's not necessarily destocking so to speak, but companies are trying to match their inventory more closely and then you know they are not going to get it right and we are already seeing examples where there has been a spike in orders and I just think people are trying to run their business and really be tight on their cash. So, it makes a little more difficult. But as you can see from our inventory results, we are certainly not building ahead to keep our factories full anything like that. We are building to our demand. I think today our demand might be less than ultimate production in some parts of the business.

Okay.

And it's affected the Aftermarket business significantly, where you have passenger miles slowing it down, cargo miles slowing it down, and it's been significant in that area.

Great. Thank you very much. And second, we're starting it sounds like to get some movement on the tanker and I guess Congress has suggested using two suppliers and buying 36 points a month. What if anything, are you hearing on that, how might that help you going forward?

I actually hear the same thing that you'll hear in regards to the facts you just recited. We haven't -- we clearly haven't received any orders for anything, but we are expecting that to.

The next question -- supplementary question may be what do we care? Well, we've answered that before in regards to, yes, we care. We'd rather haven't be a Boeing Aircraft because we are stronger there. But we certainly have the ability to supply Airbus, depending on what else is used if they split it. So, it's -- I think overall it would be a positive thing for us, that particular order.

Great. Thanks very much.

Thank you.

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

Oppenheimer. Thanks, good morning.

Good morning.

Good morning.

Question for you first on the [49], congratulations on the win there. Is that going to be booked in to backlog in the coming quarter, and I guess of the $360 or so odd million on the multiyear agreement for 10 years, how much of that would go in and I guess it would be the next 24 months, but how much is that?

We would start to see some of that creep in to our backlog by fourth quarter Myles.

Okay.

As we said they were -- the first thing we are doing is we were engaged to help design a lot of it and build a lot of the test equipment, which we're being paid for, and that's what's in our backlog today. Production would start in a serious level a couple of years out. So probably starting in our fourth quarter you would start to see a nice trend of the backlog building.

Okay. And the Military side, looks like it keeps building in backlog, pretty darn good, and sales growth coming through. You have -- 45% of your backlog is military and 38% your sales military. Are we looking for that military growth to kind of remain at this double digit level through the course of 2010?

Well, at some point in time you can't grow that double-digit. I will say that our helicopter business is robust all the way across a lot of programs. The helicopter business will obviously be better with the Bell, but that's commercial. But our military business and the rotor craft has grown significantly over the last couple of years. I don't see it continuing to grow at double-digit because I think that there is a -- there is a limit and I don't know some of the issues in regard to the defense budget, et cetera. But it will remain very good.

We also have for the next year, the C-17 is in our backlog and that's a significant program for us as well as a lot of other people. I can't tell you what's going to happen to the C-17. In my opinion it will continue longer than the next year that they it in the budget for, but I certainly don't have a crystal ball on that, and that could hurt it going forward after about the next year, a year and a quarter, but we really don't know.

Okay.

The one program that's out there would be the CH-53K, which -- if that's get funded at the right levels, you could -- that would be another jewel to add to our military rotor craft. We are -- we've already secured some very good content on that doing a lot of prototyping. And so, if that program goes, that would be a nice add for us.

Okay. And then one other question on the top ten programs. The 320 used to be a bigger kind of top three program, then there was a little bit more of work brought into airbus in the -- I think the fiscal 2008 timeframe or maybe it was fiscal 2007 timeframe. Now it's fallen completely off of the top ten list for the first time. Is this indication of production rates or more enforcing or dynamics on the other programs?

Well, it reflects first a lot of issues that they brought a lot of their production in-house rather than outsourcing some of it, which does reflect a little bit of production issues as far as Airbus is concerned. Beyond that, that's the major issue I think that's going on there.

So from a standpoint of production rates this is not an indication that your 24 months outlook for production rates on the 320 has come down considerably?

No, not that anybody has indicated to us.

Okay. And then, last one, just a couple of clarifications. So the Mexican expense, that's going to continue to run through corporate or through aerospace systems?

For the remainder of this year I think we'll run it through corporate.

Okay. And then the only other one was the progress update on the disposable of the discontinued ops. Can you give us something there and was the impairment charge in any way related to a near term valuation of the assets may be preparing it for...?

The update on that is we still have people that are interested, and it's a matter of bringing the horse to drink the water. So we are still -- really no update on what we've told you in the past. We do have people that are interested and we're still talking to them.

Okay. All right, thanks guys.

Thank you.

Thank you. Our next question is from Eric Hugel. Please state your affiliation followed by your question.

Stephens. Good morning guys.

Good morning.

Hey, can you talk about, I mean if you look historically at your second quarter, it tends to be pretty much in line with their first quarter is and you're talking about consensus numbers being too high, again consensus is pretty much right around where you delivered first quarter results. Can you talk about sort of where the headwinds are in the business, is it more top-line, do you see sort of margin issues better going forward, can you sort of give us some more color there?

I think the biggest thing Eric is really the acceleration in the business jet. I mean I think that there has been some positive comments by the two parent companies of Cessna and Gulfstream that perhaps things have stabilized, but we're shipping well below. I think they are using their inventory well below what they are really producing. Our supply is less than their demand so to speak and there were shutdowns, but only last week we opened some factories. And so, I think we're going to continue to see some pain in that area, and I think that that's one thing and I think secondly the aftermarket, I think will -- I don't it's going to get any worse, but we don't see it picking up dramatically in the second quarter.

I think it's more on a revenue thing as Dave indicated...

Yeah.

It's not a -- and we're continuing to work on our efficiencies and our margins and the only thing that will hurt our margins is when the industry was on the way up to peak, we benefited because we had more throughput through our plants as we have lesser throughput especially in our plants that are very heavily business jet oriented. The margins will be hurt but it's predominantly a revenue issue.

So when we think about the magnitude we should think about it relative to your overall exposure to biz jets, which is a relatively small part of your portfolio?

Yes.

Yes. That is the biggest factor that's involved in the revenue headwinds, yeah.

Business and aftermarket. And as Rick said, even on some of our best programs there was a time where they were min-maxes, the customers were pushing us to stay at the max, now we are getting encouraged to be closer to the min. And so, those are subtle changes, you don't see a change in build rates but we might be shipping at less the production, that will come back. It just seems that everybody, even the companies that are doing well are watching the inventory, which is natural, we're doing the same thing.

Right, right, right. Hey, with regards to the 737 program, I mean everybody is talking about inventory de-stocking and feeling some significant impacts, and I am just trying to figure out why. I mean, I understand you are building to the rates and all that stuff that, but everybody is getting production schedules coming from wherever, which are significantly lower than what Boeing and Airbus are saying to build. I am just trying to figure out, are you supplying the majority of your content directly to Boeing, or is it you supply other guys who are feeding into Boeing?

A lot of ours is directly to Boeing.

Okay.

And we have spent time, we met with Boeing at the Paris Air Show, we've met with Boeing at other times and significantly questioned, because we're concerned about the "rumors" also. And they have told us that they were glad that we were talking the way we were because they've sealed the 2009 calendar, 2010 calendar for the 737, it was very strong, and that the only time they saw any significant chinks in the armor, if you will, was in 2011. And they've reaffirmed that more than once. So that's the reason that we are talking like that.

When we look at our 737 backlog other than some peaks and valleys and interruptions of the strike, it hasn't moved a lot.

Right. Worst case scenario, what kind of lead times on average? I mean you explained a lot of difference things, but what kind of lead times do you have with those parties?

That's a difficult question for us to answer in one sentence because we have -- all our companies have different times on that. For example, we supply the insulation blankets that go in the aircraft; that's a different lead time than are the composite flooring and the composite duct work that we supply. So there is no one answer to do that, but what we do keep track of on a very -- on a monthly basis -- is what the overall program deliveries are going to be and then we can filter that down to our companies.

Right. Last question, your cash flow was very impressive in the quarter, what are your plans usages for the -- for that money? I mean are you going to repay the debt? Are there sort of attractive opportunities to repurchase the converts or sort of what are you looking at?

Yeah, I think you got it.

That is to pay down the debt number one, and go up and repurchase or purchase back some of the converts. We've already done some of that on a very minor basis. We've purchased some of our converts back.

I think if the prices got reasonable again, I mean right now I checked the other day they were trading in the 97, 98. I think below 95, 94 starts to interest us. So I think if it got down to those levels I think we'd be more aggressive.

Great, thanks a lot guys.

Thank you.

Are there any additional questions? Our next question is a followup from Eric Hugel.

If no one is going to ask questions, I'll keep going. Can you give us some additional color on Phoenix? I mean this has been a while now, I've seen $1 billion companies sort of turned around in quicker time, can you give us some more color as to sort of, I mean what is going on, why -- I mean have you lost significant customers? Why is it taking so long to get this business back together again?

We've -- Eric, I think I've addressed this for the last two quarters. Number one, we've put a President in there who has significantly populated the company with overhead far and above what he in fact needed to do, and you can hire people and put costs into a company a lot faster than you can in fact take them out, number one.

Number two, we also said that we had a problem on -- let me start another way, the two major things you have to do in a company like the APU company is a) have very fast turn time for your customer base, and secondly, keep the engine on the wing as long as you can possibly keep it on. And in both cases, we were, from a delivery point of view and a call it for lack of a better work, a quality point of view in keeping that aircraft on, we had some difficulties with some of our customers, and that was the major issue. And you have to build that back up with your customer base which we're in a process of doing. And taking overhead out of the company is a difficult thing to do and you still got to run you got to get your deliveries better, you quality better, and you got to do with a lot less people and a lot less overhead.

Understood. Any update on the trial that you can provide?

I am under -- most of the conference calls I have our General Counsel sitting across from me. He is not here this time, but before he left the office, he says you are hereby instructed to saying nothing. So I am sorry, that's got to be my answer.

Understood. Thanks a lot guys.

Eric, on the APU I would also add that we were very candid last year that when people asked. We were very candid; we said the problem was mostly us and only a little bit on the market.

And I would say that's turned now. We were profitable in the month of June because we had decent volumes. Now we are confident that when we had decent volumes we can make a profit in that business and it wasn't a bad problem. I am not talking about $1,000; they made money.

And so, I think now when the market recovers and we can get significant number of engines and we have lowered our break-even point to the number of engines we need, I think we fixed ourselves, we need the market to give us a little bit of cooperation. I think we can make money there.

Good, good to hear. Thanks a lot guys.

Since there are no further questions, this concludes the Triumph Group Fiscal Year 2010 First Quarter Earnings Conference Call.

This conference will be available for replay starting today, July 30th at 2 P.M. Eastern Time through August 6, 2009. You may access the replay system at any time by dialing 1-888-266-2081. International participants dial 703-925-2533. Enter the replay code 1378637.

Once again, those numbers are 1-888-266-2081 and 703-925-2533, replay code 1378637.

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