Triumph Group Inc (TGI) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2010 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. Please ensure that your pop-up blocker is disabled if you're 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 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 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.

Good morning and good morning from Philadelphia, home of the steroid-free world champions who are poised and ready to repeat. Despite the current market conditions that we are in in the aerospace and defense business and the uncertainty in the marketplace, we are very pleased with our results. We had a positive quarter despite headwinds such as the 777 rate drop and the 787 delay in sales for this fiscal year.

Our quarter produced a strong cash flow, which Dave will get into in more detail, $40.8 million. And our Aerospace Systems operating margins remain very strong despite other headwinds such as continued deterioration in the business jet and regional jet markets. As I mentioned, the delay in the 787 and 747-8 production reduced spares revenue. We had some increased costs in severance for the quarter in our efforts to control costs and we had legal expenses in the quarter of approximately $1.2 million, which is a little more than last year. We expect to have approximately $6 million to $7 million in legal expenses for this year.

As we said on our last conference call, we expected the Phoenix APU operations to be profitable for the quarter, which in fact it was. We continue to emphasize a strong balance sheet and we have amended our revolving credit facility to increase its size and extend the maturity to 2013. At that, I will turn it over to Dave.

Thank you, Rick and good morning, everyone. I would like to start off with a review of the financial results for the second quarter. First, turning to the income statement, sales for the second quarter were $313.1 million compared to $323.4 million for the prior year period, a decrease of 3%. Operating income was $37.1 million with an operating margin of 11.9%. Income from continuing operations was $20.7 million resulting in earnings per share from continuing operations of $1.25 per diluted share versus $1.51 per diluted share for the prior year quarter. The loss from discontinued operations was $1.2 million, or $0.08 per diluted share. Net income was $19.5 million, or $1.17 per diluted share.

The second-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 second quarter were essentially flat at $256.4 million. Growth in military and commercial was completely offset by large decreases in business jets, regional jets, program delays and aftermarket sales. Operating income decreased 16% from the prior year quarter to $39.1 million with an operating margin of 15.2%. The segment's second-quarter results included $1.2 million of legal expenses, net of insurance reimbursement, associated with the previously disclosed trade secret litigation.

In our Aftermarket Services segment, sales for the second quarter decreased 14% to $57.3 million, reflecting lower passenger freight traffic and the continuing effects of inventory destocking. Second-quarter operating income increased 20% to $3.5 million at an operating margin of 6.1%, which was a year-on-year improvement of 170 basis points and a sequential improvement of 190. As we stated in the press release and as Rick mentioned, our Phoenix APU business generated a small profit for the quarter.

Our order backlog decreased 2% over the prior year to $1.23 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 within our Aerospace Systems group. The Aftermarket Services group does not have a substantial backlog. The decrease in our 24-month backlog was 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 46% of our total backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. In first place is the Boeing 737 followed by the 777 in second place. Moving into third is the Osprey combat helicopter followed by the CH-47 Chinook helicopter in fourth place. In fifth place is the 787 with the Black Hawk helicopter remaining in sixth. Seventh is the C-17 freighter and moving up to eighth place is the F-15. The Boeing 747 program is ninth and in tenth place is the Airbus A320.

Looking at overall sales, Boeing remains are only customer which exceeded 10% of our revenue. Billings to Boeing commercial, military and space totaled 30.3% of revenue and is broken down 60% commercial and 40% military.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal '09, commercial aerospace increased to 48% and military grew to 38%. Regional jets decreased to 4% and business jets dropped to 5%. Non-aviation was 5%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter decreased 11% from the prior year to $288.8 million. Breaking that down by segment, second-quarter same-store sales for Aerospace Systems was $231.5 million, a decrease of 10%. This decrease was due to the reduction in demand for business jets, the program delays we have talked about and the softening of the regional jet market. All of the Aftermarket Service segment sales for the quarter were organic. Export sales for the second quarter were $61 million, a decrease of 10% from the prior year.

Turning to the balance sheet on the next slide, we generated $40.8 million of cash flow from operations in the quarter, an increase of 25% for the prior year. CapEx in the quarter was $7 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 $395.6 million versus $460.8 million at the end of March, representing 32% of total capital. The global tax rate in the quarter was 34.1% and reflects the fact that the R&D tax credit is due to expire on December 31, 2009. For the remainder of fiscal year '09, we expect the tax rate to be approximately 34%. With that, I will turn it back over to Rick.

Thank you, Dave. Future outlook, our backlog, as Dave mentioned, particularly the military end remains strong, but maybe even more importantly, we announced recently the order that we got on the CH-53 Sikorsky -- CH-53K Sikorsky aircraft, which just points out we continue to get significant opportunities from our customer base to develop new products and beyond new products for our customer base and we are very pleased with that.

We remain and will remain focused on improving execution and controlling our costs. Dave mentioned our CapEx expectation for the year. We are currently at a lower rate than we had publicly forecasted, the $40 million to $50 million. We do have some CapEx that is coming up toward the end of the year, but I am not sure it will reach the $40 million to $50 million in total. We are being very careful in that regard.

Overall, we are pleased with the quarter and based on the information we have given you, we are affirming our earnings guidance of $5 per share, earnings per share from continuing operations based on production schedules and existing share counts. At that, I will turn it over for any questions anybody may have.

(OPERATOR INSTRUCTIONS). Myles Walton. Please state your affiliation followed by your question.

Thanks, good morning, Oppenheimer. Just a few questions for you, Dave and Rick. On the Boeing side of the house, it looks like you are penetrating more and more there as a supplier. Looking at the sales exposure, you are now 30% exposed there. I guess can you talk about a little bit of the dynamics that are underlying that, both in the commercial and defense side and if that is a source of growth purely out of the defense pickup or if it is additional workshare being allocated to you that Boeing is essentially outsourcing?

I think it has, Myles, a little bit to do with both, as we have said. Some of the programs we are on with Boeing have been delayed. So actually we would expect a higher content when the 787 gets going and the 777 comes back. As you know, it has been announced that that is going to reduce.

I think basically it has a lot to do with the military content that we have had -- we have gotten in the last couple of years. That is going up. We have always said -- and you will notice that, for the first time, we are really dividing the military and commercial within Boeing when Dave brought that up.

We have been very frustrated in past years, the fact that so goes Boeing, so goes Triumph Group in regards to the backlog. That really is not that true from the perspective of we are virtually with Boeing on every program and almost every plant. In addition to all of that, we acquired Insulation Systems. The company used to be called Mexmil and that is a fairly good-sized company that has a lot of content on insulation thermal and acoustical insulation with Boeing. So that pushed our percentage of sales with Boeing upward. So the combination of all that really gets us in better shape with Boeing and a larger marketshare. We have gained some marketshare in many of our companies.

Myles, the softest part of our business is almost completely non-Boeing. Boeing growing and the other piece shrinking a little, so it has a powerful effect.

Sure. No, I see that on a percentage basis, but you still had what looks to be 20% plus growth year-on-year in Boeing alone.

Okay, the other question, on the CH-53K, I think the production ramp is in kind of the middle part of the next decade. So 2013 kind of it ramps up pretty materially. When does it start to be more material for you guys? Is it right around that same timeframe or is it a little bit before that?

Well, perhaps a little bit before that, but not significantly so. That is the period of time that -- I mean we are no different than anybody else in that regard. We just feel good about the fact that the development work we have done with Sikorsky and the work we have done with them and the credibility we have with them has, in fact, developed into a fairly good order on development issues here.

And on the destocking side of the house with respect to your customers, are you finding that they are continuing to essentially adjust your production rates potentially below what are their production rates? Have you seen an end to that destocking yet and where are you seeing it most?

We really haven't seen an end to it. I would say that we see it certainly most in the Aftermarket Services end of our business where the uncertainty of air miles flown, the uncertainty of the cargo miles flown, etc. still remains. So I think that they are very hesitant to stock up on any number of things so the destocking is still very much of a factor, especially in the aftermarket.

In the OEM end of our business, I think what we are finding when Boeing and our other customers are ordering to a min/max, they have a tendency of emphasizing the min as opposed to the higher end of the order frame. So that uncertainty still exists going forward in the short term.

Okay. And just a couple more. One on sales guidance. You didn't mention it. Is it still in the same range that you are looking at?

Yes, it would be the same that we had projected at the beginning of the year.

Okay. And the last one for me, on the legal side, I think there has been some movement in the case from a standpoint of potentially putting the criminal case on hold and allowing the civil case to proceed. Is that the case and does that have any implication on your kind of outlook for how this all progresses?

It doesn't really change our outlook. I mean we remain optimistic. I am sitting at a table in our conference room looking at our General Counsel.

He wasn't there last time, so I figured I'd -- (multiple speakers).

-- get a baseball bat out now. So I really can't comment on that, but we do remain optimistic.

Okay. And the $6 million to $7 million versus prior $9 million of the anticipated legal expense, is that a result of lower gross run rate or higher reimbursement?

Not higher reimbursement. It is really a lower run rate because everything has been pushed out a little bit to the right, so we are not spending as much money. We are not forecasting spending as much money in this fiscal year.

Okay, great. Thanks again.

Eric Hugel.

Stephens. Good morning, guys. Hey, just a follow-up on Myles' question with regards to the guidance looking at the $5 of EPS. It looks like everything sort of stayed the same except for the share count. You tweaked that down from -- I think your prior expectation was [17.2] down to -- I guess now you are saying [16.7]. And that has about a $0.15 impact. I guess plus you are lowering your legal expenses by a couple of million. I am just trying to sort of see where -- if you are keeping your EPS -- maybe the way to think about it is, in terms of your let's say a net income number rather than talking about an EPS number, would there be -- should we think about -- is there any real change between let's say the guidance that you gave last quarter versus the guidance that you are giving today?

I think -- Eric, I think the larger moving pieces -- you have identified some of them. I think the other larger moving pieces is we see clearly less 787 sales than we saw 90 days ago when we were speaking. We see the 777 cut hitting us faster than what we had originally projected. Frankly, I think the business jet and regional jet market, that deterioration is accelerating; it is not slowing. So I think that there is some positives on the expense side and there is some negatives on the revenue side and a lot of moving pieces, including performance all nets to us still being at approximately $5.

Okay. Fair enough there. Can you comment on the M&A pipelined?

I would say that the M&A pipeline is strong. It may not be as strong as it was say six months ago. We do have a number of decent opportunities that we are looking at. It is not quite as robust as I say as it was six months or so and go. Because of the period of uncertainty we are in, a lot of people are backing off selling and the ones that are are still -- they are living in the past a little bit in regards to some of the multiples that they want versus what we are willing to pay. We remain pretty disciplined in that regard. But there are companies out there that we are looking at and proceeding with as we speak.

Great. Can you talk about the Mexican startup costs? You said a little bit of it was in the Aerospace segment. Can you talk about how much and how are you tracking versus -- I think you have put out, what, a $7.5 million target or something like that. So how are you tracking to that and sort of how does that ramp?

Well, we are tracking well to that if, in fact, spending money is tracking well.

Well, making sure you are not going over or under.

No, we are on schedule. Right now, we are underspending on that type of thing, but I think that by year-end, we will be right about on target as we go forward. We are not rushing into it. We are not really having any problems. There is some delays on the construction, but we don't see those being serious and I think we will be right on schedule as we get toward the end of the fiscal year.

About 85% to 90% is in corporate, Eric. The comment really is that we have people in all our businesses that are helping out traveling, incurring expenses of that like and we are not going to go through a massive intercompany cost allocation to get all those costs in corporate. But the large incremental expenses are all being paid at the corporate level.

Okay. And you would still expect Q3, Q4 to be the peak spend?

Yes.

Great. Thanks a lot, guys.

Steve Levenson.

Stifel Nicolaus. Good morning, Rick and Dave. As a Yankee fan, I guess I hope the Phillies don't do as well as you guys are doing. Could you comment on the two helicopter programs where you have won business in the most recent period, the CH-53 and the Bell 429? Are those likely to get bigger? Are those programs potentially top 10 list programs going forward?

I think as we get into the production level on both of them, yes, they are both very, very good programs and we sort of discussed a little earlier in the call, that -- that won't come to the -- the CH-53K is a program that we really won't get to the peak of sales for a couple of years yet. But we released that release just to point out that we have opportunities on a regular basis to step up to different programs and the Bell 429, as we indicated in the last conference call, is a program that is the first time that Bell has ever outsourced anything of that nature to somebody else outside the company and we are working very closely with them. So they will both be very good programs in a couple of years as we get up to production levels.

I think you will see Bell hit the top 10 before the CH-53K, but they are probably still -- even that is probably a year away before we get it to the top 10.

Okay, thanks. Can you comment at all on activity related to 787, 737 and V-22 and on V-22 particularly for spare parts, what sort of things are you seeing there?

I think all three programs we continue to look at as being good programs. But I think going down the road, the spare part business and the V-22 will be good because of the usage they are having overseas now. I think the 787, the next two months will tell everything. It is supposed to fly by the end of the year. Boeing reiterated on their call that it will in fact fly and that directly relates to it not being pushed out to the right anymore. And when we add 787 sales, we will be -- that will help us tremendously.

Thanks and 737, sorry, are you hearing anything one way or the other on that one?

No, we -- as a matter of fact, the only thing we have heard is what we have talked about before, our reiteration by Boeing that those rates will not go down certainly in this year or in 2010. I think they leave some room to say that 2011 will drop down a little bit, but no confirmation of that at all.

Okay, thanks. And -- sorry.

I mean they adamant on their call that that rate is not going anywhere for a while.

The last item is on the destocking. Do you think some of your customers, if there is such a word as overdestocked, do you expect to see anything spike up with the service that is normally done during the cooler months?

Well, if they are overdestocking, they are not admitting it to us.

Steve, I think there is -- I mean we have talked about that. I think in the OEM world, we are finding that even our largest customers are paying very close attention to their inventory levels. And we do believe that some of them probably are going too far and we are expecting to see sales drop, spike, drop, spike and things will be a little uneven in certain programs. So we haven't seen that for sure, but we are not going to be shocked if it happens.

Okay, thank you very much.

J.B. Groh.

D.A. Davidson. Good morning, guys. A question on Aftermarket Services, you mentioned Phoenix slightly profitable. Have we kind of turned the corner there in that business in terms of what the margin expectations are going forward? Are we going north from here or is it -- is there still pending issues there?

I think that there may be pending issues, but they are more market-related today than they are the internal structure and the cost aspects that we have dealt with. With passenger miles down, planes being parked, it becomes an issue of the market as opposed to the inefficiencies that we have admitted that we had. I don't really know how to project that, but anybody else who is projecting it is not -- the miles flown issue is still significant. And if they parked it and they don't fly it that much, we are not going to do as much work, so we are at the mercy of the market from that perspective.

As you know, that is an area where we have no backlog basically. We get the APU in and we repair it. We don't even know when they are coming basically. So that is the issue at this point in time. Of course, that issue has been with us for six, eight, nine months, so we are still fighting that issue. But I think the margins themselves, assuming the business is there, I think we can assume that the increase in the margin will remain and then go north from there.

The good news is that we have significantly lowered the breakeven point in terms of number of engines we need to get per month to be profitable. And as Rick said, we think the internal issues in terms of quality efficiency have been rectified.

Are you in the camp that believes that there is a lot of pent-up demand for some of these maintenance-type activities just due to the fact that the airlines have been in cash preservation mode and maybe not sort of managing for the short term and not doing some maintenance on things, maybe leasing some APUs instead of having ones that they own repaired and that kind of thing? Are you seeing any of that?

I think so, yes.

I think there is some of that. I don't know how significant it becomes. I think we are more at the mercy of what the market is and the miles flown, etc.

Right. Okay. And then Dave, I didn't see a D&A number. Is that in the presentation or could you give it to me?

It is in the press release, but the D&A was about $14,000 I believe.

$14,000, okay.

It is on the third page of the (multiple speakers).

Okay, okay.

$14,297.

Okay, thanks for your time, guys.

[John Healy].

Hi, John Healy, Forest Investment Management. Good morning. In your presentation on the capitalization, you list the convertible debt. I am assuming that $166 million is the liability component.

Yes, that is below the face of what is outstanding under the new rules. That is correct.

Now did you buy any of the converts back in the quarter?

A little bit. I think we bought about 4 million (inaudible) back. It was a small gain.

Got you. Thank you very much.

Eric Hugel.

Stephens. Hey, guys, this is Omear Khalid sitting in for Eric. Just a quick follow-up. Based on the revised 78 schedule, the 787 schedule, when would you guys expect to see a ramp in sales from that program?

Certainly not in this fiscal year because it will take longer than that to get it up to production. We have always said that once we get up to production mode, which I don't think will be until the end of the third quarter to fourth quarter of next calendar year in that area. So once we get up to that production mode, I think we will be -- we feel good about our margins in that group.

Our margins, just to reiterate what we have said in the past, our margins are positive now in the development phase; although dilutive to margins than we have in the Aerospace Systems group, they are still positive in the development phase. But I think it will take about a year to get up to approach the production level.

Okay, fair enough. Thank you.

(OPERATOR INSTRUCTIONS). J.B. Groh.

I will throw one more in there, guys. On the sort of rate change on 777, when is that fully into the backlog, when do you -- when is that fully in there?

I think it will be -- I think it would be probably for sure by March 31. We might see most of it come in, more come in in the next quarter, but I think you will see that drop two more quarters.

So two more quarters of sort of flat to slightly down backlog and then would the 787 portion of the backlog start to pick up maybe in the middle of fiscal 2011 prior to you actually ramping up those productions?

I think it will continue to go up I think a little bit and then -- I mean 777 will be going down and down the next two. I would think 787, because of the two-year visibility, would go up and up in the next two quarters, but on balance, I am not sure where that will be.

Okay. So it shouldn't be huge drops in the backlog in any case?

I think the net of those two would not be dramatic.

Okay, good. Thank you.

(OPERATOR INSTRUCTIONS). Since there are no further questions, this concludes the Triumph Group fiscal year 2010 second-quarter earnings conference call. Ladies and gentlemen, this conference call will be available for replay today, October 27, 2009 through November 3, 2009. You may access the replay system at any time by dialing 1-888-266-2081. International participants call 703-925-2533. Enter the replay code 1404070. Once again, those numbers are 1-888-266-2081 and 703-925-2533, replay code 1404070. Thank you all for participating and have a nice day. All parties may disconnect now.