November 1, 2012

Agile Acquisition and Expansion

Triumph Group's Rick Ill explains his aggressive global strategy and why aerospace should stay strong.

 Rick Ill, chairman of Triumph Group, an aerospace components and systems manufacturer.

Rick Ill, chairman of the Berwyn, Pennsylvania-based manufacturer of aerospace components and systems Triumph Group, is convinced that demand for aluminum and other metals crucial to aerospace and defense will remain strong into 2013. Regardless of what happens in Washington, he says, commercial air flight will remain a booming business.

Ill’s performance at Triumph and savvy instincts make him a man worth listening to. After starting out in Alco Standard Corporation’s mailroom in 1968, the office supply and paper distributor offered the 25-year-old Lafayette College graduate a position as a corporate representative for purchasing. By the mid-70s, Ill was president of Alco’s steel distribution group, and in the mid-80s, he was president of SSCI, the predecessor to MSCI.

In the early ‘90s, Ill was put in charge of selling Alco Diversified Services, comprised of a paper company and aerospace metals companies. Instead of selling it all, he and other investors and members of management bought it for $125 million in a leveraged buyout in 1993, naming the organization “Triumph Group.” Under his leadership, Triumph has focused exclusively on the aerospace and defense sectors, designing, engineering, manufacturing, repairing and overhauling a broad portfolio of aircraft components, accessories, subassemblies and systems.

In less than two decades, Triumph has grown from $60 million to $3.5 billion in annual sales. Today, it is 44 companies in 63 locations, driven by a perceptive and aggressive acquisitions strategy. Triumph expanded into the U.K., Germany and France in the early 2000s. In 2007, it built a new operation in Thailand and acquired a company in Mexico, as well as a greenfield operation in Mexico. Since 2009, Triumph has established joint ventures in China to take advantage of the relatively low cost labor there.

The Guessing Game

Where do you expect to see growth in aerospace in the coming year? Are there certain materials or products you expect to take off?

The commercial side at Boeing and Airbus on certain aircraft is excellent. The backlog is terrific. They’re going to build a lot of new planes. The unknown factor is: How will the military business grow? With the uncertainty and the likely budget cuts, the military end of the business will probably not grow, but the commercial end will be very strong. I don’t think there’s anything [in the defense business] that’s a sure bet. But we’re going to need helicopters. We’re going to need planes to fly troops and equipment.

I think that the repair and overhaul business will remain strong, too, based upon the fact that regardless of the economy, the passenger miles and the freight miles flown are continuing to increase at the rate of 3% to 5% a year. So, there will be need for new aircraft for two reasons: No. 1, people are flying, and No. 2, the new aircraft that they are building, the 787, the 737, the 747-400 and A320, are about 20% to 25% more efficient than the older aircraft.

The problem with the industry, in general, is that a number of suppliers are being pressured to lower their prices. For example, Boeing has asked German supplier ESW to reduce prices 3%, while also demanding higher quality and productivity. It’s an interesting situation where people are building aircraft that cost an awful lot more money and the cost is increasing. They are selling aircraft to a customer base, the airlines, with customers who don’t want to pay more than $400 or $500 for a ticket. So, the elasticity of pricing is not there, which is why there is extreme pressure on cost and pricing.

What is the outlook for defense?

The defense budget, and the programs that are in the defense budget, have activity in every state of the union. For example, there has been an effort to reduce

the usage of the $218-million C-17, the Globemaster, the workhorse of military transports. But, the C-17 has products that are produced in every state. There is movement toward a smaller, more mobile military force, so the C-17, despite its broad constituency, is clearly on the forefront of being cut out if we’re going to reduce the military budget. Even now, budget uncertainty has had a very large effect on the U.S. economy. Because of the unknown, those in the defense business—and about 30% of [Triumph Group’s] business is defense—can’t hire. We can’t plan on the expansion of programs because of the unknown factor.

Is the backlog in commercial aircraft enough to prop up the aerospace industry in the midst of all this budget uncertainty?

[At press time, there were more than 9,000 aircraft on firm backorder, according to Aerospace Market News.] It will prop up a number of companies because the commercial backlog is very significant right now. Those who have defense content in their revenue, like us for example, where we’re 30% military and 70% commercial, will maintain their revenue. Others, whose businesses are higher percentage military, will be hurt more.

Has the budget gridlock affected your thinking about acquiring new businesses, capital investment and all those strategic decisions?

Absolutely. Like anybody, we have to consider return on our capital, and we’re not going to invest in products if we don’t know what’s going to take place going forward. As a general rule, we’ve got to be very careful on companies that we acquire, because we have to make sure that we get a proper return on our investment. We’re not going to acquire somebody who is highly tied to the defense business when we don’t know what that future is going to be.

Acquired Knowledge

Triumph has completed more than 40 acquisitions since 1996. What has been the strategy behind this?

What we’ve tried to do throughout our international expansions is acquire small companies and participate in a worldwide market in the aviation business. One example is a company now called Triumph Thermal Systems, which manufactures and repairs and overhauls heat exchangers for aircraft. We acquired the company when it had about $15 million in sales and we’ve expanded it worldwide so now it has about $50 million in sales. It has a product line we didn’t have in the past.

Aviation businesses by nature are very international in scope. In addition to that, one of our other philosophies was to broaden the product lines that we offer our customer base, Boeing, Airbus, the airlines, the cargo carriers and the like. Philosophically, we felt that the more products we can offer that customer base, the more successful we would be. That has, in fact, proven to be correct in that our customer base buys many, many products from us. We’re not the largest company in the industry, but we’re very broad in the products that we offer, both on a manufacturing basis and on a service or repair and overhaul basis.

We’re going to continue to expand our product lines and to acquire smaller companies that are close to manufacturers, such as Airbus and Embraer, [the Brazilian aircraft manufacturer]. In addition, we are going to continue to start companies, especially in low-cost areas. We have two locations in Mexico, where we do rough machining and then ship it back to our companies for finish machining or assembly of product. In this fashion, we take advantage of low-cost labor, while at the same time we’re not eliminating jobs in the United States. As a matter of fact, we’ve expanded some jobs in the United States as we go forward and supply our customer base with final assembly in the States.

How is it possible that doesn’t eliminate jobs in the United States?

We can continue to expand the products that we supply our customer base. We’re still assembling and building the product in the United States, and they are products that have technical expertise associated with them. We’re not attempting to export jobs to Mexico or any other place. We have the ability to expand the products we provide by utilizing the expertise we have here. You’ll find that we have expanded our labor base here in the United States as opposed to eliminating it by going overseas for some products.

Making Mexico Work

You have two locations in Mexico, one in Zacatecas and one in Monterrey, and together they account for about 2% of sales. Have you experienced any problems operating out of Mexico, given the drug wars in the last few years?

We really haven’t. Are we concerned? Sure, we’re concerned just like anybody else is, but we haven’t seen any particular problems. We obviously work very hard on our security and hope that we’re very conscious of the [Mexican] people who work at our plants. We’re very conscious of their safety and it’s an issue we work on constantly, but I don’t think that we’ve had any problems, even at the border.

How are you developing and protecting your workers and how are you making sure you have the right people working for you?

Well, we do the obvious things in regard to screening and checking the backgrounds of the people that come to work for us. [The Mexican and local government agreed to] establish a training school. The people in the area had to be trained in the things that we needed, such as the fabrication of composites and machining capabilities. The state of Zacatecas built the building, and we provided the machinery and collaborated to train the people in the area. Once they were trained, our company hired them. People are screened as they go into that school. We have some very good [Mexican] supervisory help down there and they do a very good job. In addition to that, we do have a security force and our security is very tight.

Change Ahead

How will the expected expansion of natural gas production in the U.S. affect the industry?

I think it will affect aerospace because it will affect every industry within our country. It’s going to be a major-league issue as we go forward, because clearly there are people in the government and others who don’t want to exploit the fact that we have a large supply of natural gas, just like the government has suppressed the usage of oil and the drilling of oil. A lot of people are opposing fracking, for example, in the state of Pennsylvania, but I think that will be overcome because we’re going to have to have affordable energy going forward. That’s one way to get it: with the natural gas.

 Under Ill's leadership, Triumph has focused on the aerospace and defense sectors, designing, engineering, repairing and overhauling aircraft components, accessories, subassemblies and systems.

What is the biggest change that you’ve seen at Triumph since the Great Recession, assuming the recession is, in fact, over?

[The recession] might have been over and started again. I think we have had an administration that is anti-business. The regulation in government has become oppressive and I think that is the biggest change I’ve seen in the last three or four years. When the president said, in essence, that you founded a company and you really haven’t done anything, the government has done it for you, I would wholeheartedly disagree with that.

He is saying that somebody helped you along the way. A lot of people have helped us along the way. Our employees helped us along the way. In starting our business in 1993, I can’t remember when government was a big help in getting things done. When we started our company at Triumph, we had 450 employees total. We now have 12,500 and we feel pretty proud of the fact that we’re providing jobs, good-paying jobs, for all those people. I think government has grown bigger and bigger and more expensive, and that’s a real problem.

Have you seen aerospace move into more exotic alloys, and will there continue to be a place for aluminum in the future?

In the foreseeable future, there will definitely be a place for aluminum. I don’t think that’s going away. We have a couple of companies that are involved in the composites for aircraft, and some of our competition makes fuselages for aircraft out of composites. This has been a trend for a lot of years. It has never really taken off until recently, but I don’t think in the foreseeable future that metals are going to go away as a part of the aircraft being produced.

Triumph announced your retirement in April. As of July, you were no longer CEO of Triumph. What brought that on?

Age. It was my decision. I’m just short of 70; I have enough to do. At some point, people have to hand things off to younger people. I’m still going to stay involved as chairman. In addition to that, right now we [are planning for] the 2013 U.S. Open Golf Championship [June 10–16, 2013] at Merion Golf Club, where I’m a member, and I’m general chairman of the U.S. Open. I think that I’ll do a little more traveling and relax a little bit. I will miss the people with whom I interacted. Finally, I think that we feel fairly proud of what we’ve accomplished at Triumph.

Ashley DeVecht is the director of communications for MSCI and former managing editor of Forward.