Triumph Group Inc (TGI) 2007 Q3 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2007 third quarter earnings performance. [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 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 expressed written approval. At this time I would like to introduce Richard Ill, the Company's President and Chief Executive Officer; and John Bartholdson, Chief Financial Officer and Senior Vice President of Triumph Group, Inc. Go ahead, Mr Bartholdson.

Thank you and good morning, everyone. I will start the call with reviewing the results for the quarter, third quarter ended December 31. In the quarter consolidated net sales rose 29% to 242.3 million, up from the prior year's 187.2 million. Operating income in the quarter increased 80% over the prior year, to 23.8 million, and net income was up 16% to 10.8 million versus 9.3 million in the prior year. Earnings per share in the quarter, fully diluted, were $0.66 versus the prior year's $0.58, but it's important to note that in the quarter is $0.66 of earnings included a $0.20 charge for early retirement of debt that was not in the prior quarter, and also $0.03 per share for stock-related compensation expense, also not recorded in the prior year's quarter. EBITDA margin in the quarter rose to 13.6% versus 11.4% in the prior year. Year to date net income was 32.8 million, $2.01 a share versus the prior year's 23.6 million at $1.47 a share.

Turning to our segments, the Aerospace Systems segment, sales in the quarter rose 29% to 190.1 million, versus the prior year's 147.2 million. Operating income was up 64% to 25.8 million, and EBITDA rose to 32.3 million at a margin -- EBITDA margin of 17%. Year to date, revenue was 544 million versus the prior year's 431.1. Operating income rose to 71.5 million, and year to date EBITDA was 90.8 million at a margin of 16.7%.

Aftermarket Services had sales increase in the quarter that also was 29%, up to 52.7 million, versus the prior year's 40.8 million. Operating income rose 70% to 2.7 million, and EBITDA in the quarter was 5.4 million, and EBITDA margin of 10.2% for the Aftermarket Services group.

Looking at overall sales, export sales were 22% in the quarter, and again, our only customer which exceeded 10% of revenue was Boeing, and billings to Boeing commercial, military, and space totaled 22% of our revenue.

Looking at our mix between end markets, year to date in '07 commercial aircraft generated revenue of 43% versus full year fiscal '06 the prior year was 45%. Military in both periods year to date this year and full year last year remained at 33%. Regional jets year to date this year declined to 5% from the prior year's 6%, and business jets were up 2% to 11% year to date versus the prior year's 9%. Our backlog reached a milestone and crossed $1 billion for the first time, arriving at 1.96 billion at the end of December, versus 851 million a year ago and 888 million at the beginning of the year. Again, our backlog we define as orders that will ship within the next 24 months that we have both a purchase order and a delivery date on that volume.

Our top ten, which we review every quarter, top ten programs rank-ordered by backlog, the 737 program remained in first place, followed by the 777, third was the A320 family, the CH47 helicopter, followed by the V22 program, another helicopter, the UH60, but importantly the seventh position, which was the A380, the A380 has dropped out of the top ten with the delay in the program and the delay in shipment dates, and it's been replaced by the 787 coming into the top ten in the seventh place, eighth is the 747, ninth is the C17, and in tenth, the 767 program.

Turning to the balance sheet, we ended the quarter with total debt of 279.7 million. Net debt was 270 million. In the quarter, cash flow from operations totaled 15.5 million. We had capital expenditures of 14 million, and expended 46.5 million on acquisition related costs. The net of that activity, the quarter ended with debt to capital -- net debt to capital at 30.7%. Finally, the tax rate in the quarter was impacted by finally passing -- Congress passing and the President signing the extension of the R&D tax credit. That had a catch-up effect which we booked in the quarter of $0.06 a share. The tax rate in the quarter was 30.1%. Going forward, we expect the tax rate to run at about 33.5%. With that, I will turn it over to Rick. Rick.

Thank you, John, and good morning, everybody. As John mentioned, we're very pleased with the results that he reviewed, which are very much in line with the expectations that we've had and have communicated to everybody. We're pleased with the increase in sales, operating income, cash flow, and backlog, which has now, as John mentioned, reached $1.1 billion.

To take a moment just to describe again and remind you all of what the backlog is made up of, first of all, it is made up of only approximately two-thirds of our business, because our aftermarket services group does not have a backlog. That's basically components that come in the door and are repaired in overhaul, and we don't know when they're coming, so there's no backlog there. So it comprises about two-thirds of our business and it comprises two years of confirmed orders going forward. That's one of the reasons that the 787 has gone into our top ten in our backlog, because product for that aircraft will be delivered in the next two years.

In addition to the operating results that John went over, we have two exciting things that happened in the quarter. During the quarter we acquired Allied Aerospace, which is now Triumph Aerospace Systems Newport News, which is a company that offers fully integrated range of capabilities, systems engineering, conceptual engineering, mechanical design and analysis, and limited rate production and testing services for our customer base. On January 1, we announced that we acquired Grand Prairie Accessory Services, now named Triumph Accessory Services Grand Prairie, and that's a company that adds, consistent with our strategic missions that we've expanded. We have extended everybody over the course of a number of years. It greatly expands repair and overhaul capabilities to provide comprehensive maintenance solutions for engine accessory, main engine accessories related to engines such as the CF34, CFM56, CF6, CT7, and the like. The capabilities there include fuel, oil, pneumatic, hydraulic, and mechanical engine accessories for gas turbine engines. So we're very excited about those acquisitions, and we expect that they will add a lot to the Triumph, and they will be great additions to our company.

Specifically, on some of the things that John mentioned in our two groups, we have shown improvement in our operating margins in both groups. The aftermarket services group over last year has increased the operating margins by 1.2%. Despite $1 million of costs that we incurred for the start-up in Thailand, we will have some costs in Thailand for the fourth quarter, but we are pleased as to the progress with Thailand. We are now starting to have production there on a ramp-up basis, and we look forward to the opening of that plant and its success.

As John mentioned, our margins have gone up. The Aerospace Systems operating margins are up to 13.6%. We have had a sales increase in both of our groups, which bodes well for our future. Another issue that I think that has to be addressed, or that we should address, some analysts are concerned about the order intake at Boeing, Airbus, and the fact that the order intake may not be as high going forward in 2007 as it was in 2005 and 2006. I remind everybody that our business runs on the build rate, not on the order, and that's why we have consistently said we see a two to three-year strong build rate. Therefore, I reiterate that our cycle, we do not see that our cycle is over, as some analysts have tried to point out.

In addition, if you look at the Boeing forecast -- and I realize over time Boeing forecasts have a tendency of being very optimistic, they say there will be 27,000 planes produced over the next 20 years. If you believe only part of this -- by the way, that's about 1350 aircraft a year. If you believe only part of this number, you should be optimistic as to the future of Triumph Group over time.

And finally, to talk about where we think we'll be at the end of the year, I think it's apropos just to reiterate the press release where I had said as a result of our strong performance we expect our fiscal year 2007 sales will be in the range of 950 to $975 million, and earnings per share for the fiscal year will meet or exceed the upper end of the previously announced range of $2.65 to $2.70, which I will remind you again, includes the $0.20 per share charge for the early retirement of debt. At that, I will open it up to any questions.

At this time the officers of the company would like to open the forum to any questions that you may have. [OPERATOR INSTRUCTIONS] John Evans, please state your affiliation followed by your question.

Wells Capital. Can you just talk a little bit about Thailand? Is the quarter that you just reported the biggest quarter relative to the expenses and help us understand roughly what they will be in the fourth quarter, and then did they dissipate completely, or how should we think about that into the next fiscal year?

The costs -- I'm going to answer your first question first. I believe that this quarter is the largest expense. I don't have the numbers in front of me, but, yes, I think that this quarter was the largest expense, not necessarily the largest expenditure, because we actually capitalized the plant. We built the building.

Right.

Type of thing. I think it will be somewhat less in the fourth quarter, and then next year, we will not be talking about charges that we will take to Thailand, because at that point in time, it will be ramping up to what we consider to be fairly significant profitability. I'm not prepared to really talk about how it will go quarter to quarter next year, but we are in the middle of our business planning cycle right now, and Thailand will, in fact, be profitable next year, so that will, in fact, the charges we have been talking about will disappear.

And I guess, since's it's been a long project, can you help us or maybe remind us of why this was such a good project and maybe why you think the -- it can really help expand MRO margins once it gets done?

The reason that we built this plant is that -- the aerospace expansion that has taken place over the last couple of years and the new planes that have gone into operation and will go into operation to a great extent have been in the Asian market, and over a period of time, the airlines that we deal with, Thai Airways, the airlines in China, the various Japanese airlines, et cetera, we felt that over time they're not going to want to send their accessories and their APUs, et cetera, to Phoenix, Arizona, or our other plants that we have repairing and overhauling their components, and that if we didn't build a plant in Asia to take care of that customer base, somebody else would, and that market share that we enjoy would be in jeopardy. So that's the major reason that we did that. In addition to that, our business in the accessory business, whether it be APU or other accessories, in the U.S. has grown to the point that it's an advantage to us by doing the Asian airlines in Asia, it shifts those products to Asia and gives us capacity here to do two things. Take on more business, and, very importantly, increase our turn times and our serviceability to the airlines in the U.S.

Okay. One last follow-up to that. Have you been successful at getting any Asian business now that you have that facility? I mean, I know you haven't done it yet, but have you been successful in potentially getting some already?

Yes, we have commitments from the airlines, our biggest problem in that area is that we have capabilities for a number of APUs over there. As I mentioned when I was talking about backlog, it's hard to predict which engine is going to come into the plant first, so we need some history to be developed over the next few quarters or half a year to smoothly run the plant. But we expect that, but we've been very successful. One of the reasons that we have -- we chose Thailand was that we have some airlines in that area that have agreed to give us business and be our start-up helper, if you will, our start-up partner in growing the plant in Thailand. We have also, by the way, we have taken people, our workers in Thailand, some of them are still in the United States being trained. We have been very active in taking the people from Thailand to our plants in the U.S., training them. They have lived with us, and then they have gone back to run that plant in Thailand. So that's one of the things that we feel very optimistic about, as far as the training and the quality of the workforce that we have.

Thanks so much.

Thank you. J.B. Groh, please state your affiliation followed by your question.

D.A. Davidson. Can you guys hear me okay?

Yes. Good morning.

Congratulations on the results. I was hoping maybe you could give us a little more detail on the Grand Prairie deal. Are margin expectations there similar to what's been going on at your typical Aftermarket Services businesses, or is there a difference there, and maybe you could speak to valuation.

Well, speaking to valuation, no.

Okay. Fair enough. I thought I'd ask.

I think what I was trying to indicate when we talked about the Company, it it's very much in line with our strategic bent that we've had since day one within the Company. What it has done is that it's added components on the main engine accessories that we really didn't have the capability to perform. The margin expectations, you know, within that company are consistent with the margin expectations in our accessory repair and overhaul companies. We have announced that it's going to be immediately accretive, and it was a plant, by the way, that used to be owned many years ago by General Electric. So it's an excellent plant. We have excellent management down there, and we're very optimistic that that's going to contribute significantly to the Aftermarket Services group.

And that was financed with cash and--?

Yes. It was all cash.

All-cash deal.

Maybe you could talk about kind of the acquisition pipeline. I know you've done a couple of deals here, but what you're seeing out there in terms of multiples and just general activity, competition with private equity, that sort of thing.

First of all, the volume of companies that are out there is -- continues to be robust. Maybe not as robust as the multiples that people think their companies are worth. The Smiths deal with GE has further probably ratcheted up people's expectations. There's a number of companies that are, in fact, available. There are more and more companies on the -- coming up that are on the auction block, so there's -- we have enough to do in looking at some of the companies that we have to look at. We continue to be circumspect and very conservative in regards to -- or disciplined, is the better way to put it, as to what we pay for a company. On the other hand, we realize that in this particular environment, the multiples have gone north, and if we want to participate, we know that we have to be, in fact, competitive. And what that is is becomes a decision that we have got to make as we look at each acquisition.

And lastly, on Grand Prairie, you gave some guidance as to what impact, revenue impact there would be in the fourth quarter. Is it kind of safe to annualize that, or is there some seasonality there? How should we be thinking of the--?

J.B., we said the revenue for the fourth quarter, and we also said it was increasing, so we anticipated that that run rate would be up, I believe, 15%, prospectively for fiscal year '08.

So I could annualize the ten weeks and then?

At 115% for next year.

Right, got you. Thanks a lot.

Okay.

Thank you. [Chris McCrary], please state your affiliation followed by your question.

Black Rock. Very nice results. I was hoping you guys might just flesh out a little bit more on what we're seeing in the tax rate. I believe in the past the fourth quarter has often been a kind of a catch-up quarter where it's come in significantly below an annual run rate guidance, and given the benefits seen in this quarter, is that going to take away at all from the fourth quarter, and specifically to the fourth, are you being highly conservative in a 33.5 outlook there?

I think we will be in that 33.5% rate for the quarter and prospectively at the beginning of next year. That's a global rate. The effective rate domestically is about 32%, Chris, and since the losses we're incurring in Thailand are not deductible, they're offshore, that bumps the rate up, but that 33.5% rate, as we make progress in Thailand next year, could trend down towards the domestic rate of 32%.

Okay. And there's no impact of the R&D credit on the current quarter?

It's $0.06 catch-up, and that's roughly $0.02 a quarter. So $0.02 was included in the current quarter, $0.04 of it was for the prior two quarters.

I got you. Right. Thanks very much.

You're welcome.

Thank you. Ron Epstein, please state your affiliation followed by your question.

Merrill Lynch.

Good morning, Ron.

Can you remind us year to date what was the charges related to the Thailand investment?

I think it was about 800 the last quarter, and maybe slightly less than that. So maybe 2.5 million, in that range, Ron.

Ballpark year to date?

Yes.

And you expect that to go away next year? Rick, what have you been seeing with regard to raw material pricing? How has that been?

Ron, well, raw material pricing has clearly gone up. Not necessarily in this quarter, okay, but over the course of this fiscal year, compared to last fiscal year, raw material prices are -- have gone up relatively significantly. In addition to that, in some of our plant areas, we have experienced some slowness of delivery from our supplier base, which has not helped our production rates. We're overcoming that. But that's been a problem. We don't necessarily foresee any further increase in raw material rates from now into next fiscal year with the exception of some spotty issues that we may have in some of our companies, but they have clearly gone up during the course of a year.

How has the access to titanium been? Has it been super tight?

Well, there's been difficulties, but as we've said in the past, some of our companies are obtaining titanium, and other metals, under the contract that either is provided by our customer base, the material is provided, or under a contract that, for example, Boeing has that they give us access to their particular raw material, or contracts that we have forged with various suppliers to come up with titanium. It's probably obviously the most difficult and the most -- from a lead-time basis, our most difficult material.

Yes. And then I think maybe just two more just quick ones. From your vantage point, how does the 787 program appear to be going?

We -- from our vantage point it's going very well. We're, with the exception of a few cases, we're not direct. We're working with a lot of partners on this issue. It's going very well. I can only tell you what you probably heard yourself on a -- what the rumor mill says is that it may be a little late, there's potential weight problems in the 787. I have no way of really confirming that, but I think that the 787 has the potential of being a little bit late, but I think I would underline the fact that I don't think it has -- it's nowhere near the scale of the A380. The 787 is a going project, and I think Boeing has a handle on it, and certainly the work we're doing with them, we have a handle on. Is there work to be done, is there weight to be taken out, et cetera, I think, so yes, but I don't think -- it's not going to be the magnitude of the A380 that I see right now.

I think, Ron, when we talked about the top ten backlog and the 787 orders coming in with firm delivery dates, we're seeing the production requirements being placed with us with the releases to begin production with firm delivery dates. So the program is progressing and moving forward on a real production basis.

Okay. That's great. That's real helpful. Then in the aftermarket, I think you touched on this in your prepared comments, what are you guys seeing there in terms of aftermarket growth and what trend are you expecting as we look out maybe for the industry in the next couple of quarters?

We're looking within our Aftermarket Services group to continue to get better and better in our margins and our sales will continue to increase. You have to remember, in our Aftermarket Services group, by and large, they repair and overhaul third-party components. So when you're talking about some of our competition that repair and overhaul their own products, we do that, too, but we do it in the Aerospace Systems group. We're talking about third-party components here.

So it relates very directly to the air miles flown. As long as the air miles flown continue to increase, we're going to have the ability to get our customers to come to us and repair and overhaul their components. And so we look very positively on that. The one component of the Aftermarket Services group, which I haven't commented on this call yet, is the castings facility. That castings facility has been doing better, and we expect it to continue to do better, and those numbers, which aren't anywhere near what we want them to be, are in those numbers. So despite that, I think that we will see a uptick in our Aftermarket Services.

Okay. That's great. Thank you, guys.

Thank you. Steve Levenson, please state your affiliation followed by your question.

Ryan Beck. Good morning, Rick and John.

Hi, Steve.

John, is this going to be your last call?

That's the rumor.

Well, we'll miss you. Thanks a lot.

You're welcome.

Now, as far as questions go, on 787, do you see opportunities for you to get additional business with some of the composite floor panels and things as they have weight problems that they need to address?

I think there's opportunities there. Don't forget, the aircraft is not going to fly for awhile, so I think there's a lot going on within the aircraft, especially in the area that you just mentioned with some of the floor panels and the duct work and issues of that nature. So I think there's opportunities there. We're very pleased where we are on that program.

And again, Steve, repeating that, based upon where we are today, this airplane has the highest ship set value of any commercial airplane program in our history. So each one of the 787s is worth more to us than any other delivery. With still more potential to capture more value per plane.

Okay. Thanks. Do you have your carbon fiber suppliers lined up for those parts right now, or are you feeling a squeeze there?

I really can't answer that question, Steve. Where we're doing that, it's one of our better companies I really can't answer that question, but I'm going to make -- since we have been working on this for a relatively long period of time, I would be very surprised if we're going to have a problem there.

Okay. The news is beginning to come out about the tanker program, that the Northrop team may drop out. How might that affect Triumph?

Obviously it affects it in a very big way, depending on what they do. If they go to the 767, they use the 777, they use the -- whatever they may use, you heard, and you know the issues on our top ten. If they start building those aircraft and using any one of the Boeing aircraft that we have, we have content on all of them. So it would positively impact Triumph if they went to any one of those aircraft.

Okay, thanks. And last, on the aftermarket margins, I know you mentioned what's going on at the casting facility, but do you have a sort of -- I know you don't like to give out numbers, but do you have a time line on when you think you'll get up to your target operating margins and aftermarket?

We have just -- we're in the process of going through our business planning review right now. This is the wrong way to answer the question. Our target, we probably won't reach until sometime late next year, because our targets are high. Our targets are in the double-digit range. And I think that we will increase toward that number as time goes by toward the end of next year. Or up to between now and the end of next year.

Okay. Thank you very much.

Are there any additional questions? Richard Tortoriello, please state your affiliation followed by your question.

Standard & Poor's Equity Research. My question is, I'm sorry, I had a conflicting call. I missed the beginning. I wondered if you gave any guidance with regard to FY '08 sales run rates.

No, we didn't. We typically do that at the call that goes to the earnings at the end of the fiscal year.

Sure.

And at the same time we'll give perhaps give guidance to the next year.

Okay. I wonder if I could kind of put that in a broader perspective with a more general question, which is, you say that you see strength in the deliveries for the next two to three years. I would actually put it in terms of maybe the next four to five years, and with organic growth now coming in at 18% in aerosystems this quarter, I wonder what you see as maybe the longer term sustainable kind of run rate for that business?

Well, sustainable run rate in regards to, what, revenues?

In regards to revenue growth, yes, from an organic basis.

Well, clearly -- first of all, I like your version. The four to five years. I have a hard time going out four to five years, because it's -- that's a hard look out that far.

Sure.

I think that if you look at two things, number one, if your version is correct, and my -- the numbers that I used on the call of approximately 1350 aircraft, and cut that back by 400 or 500 aircraft. If, in fact, that happens, number one, you're going to have more aircraft in the air, more components that have to be repaired and overhauled, so that will speak very highly for our Aftermarket Services group, it will clearly speak highly for our Aerospace Systems group because those planes have to be built, and so I think the sustainable rate is going to increase over the period of time. We're investing CapEx right now for a higher rate than clearly we were, in fact, producing a few years ago.

Our biggest challenge right now is to not to over invest, and invest for the peak of the market, and then have the cyclical -- even if it's five years, there's going to be a cycle at some point in time. And our challenge is not to build to the peak. But having said that, we are investing, and therefore I think the sustainability of revenue is, in fact, there in both sectors where we have it.

I also think on the organic side that the consolidation of the supplier base continues. It's a strategic direction that the main customers are driving, so that the opportunity above the build rate is incremental as we are one of the consolidators in the industry.

Yes. Okay. That speaks to my second question, which was, if you look at your acquisition pipeline, and you determine that maybe prices are a little bit high right now, would you see some of the cash flow that you're generating to continue to go to reducing debt or do you just see the general outlook as good -- the return on investment as so good that that money will go into CapEx and into acquisitions?

That's a broad question. Obviously we have always been a relatively conservative company. Our debt to capital right now is about 30%.

31.

31%. We're very comfortable with that. It's a little bit higher than it has been in the last couple of years. We have -- we are investing at a higher rate in our CapEx. Historically you go back, and we were investing at the tune about 25 to $30 million a year. We're now up in the $60 million range on an annual basis, 55, $60 million, in specific -- a lot of which is for specific programs where customers are coming to us to invest, and we've done so. So I think that we will pick and choose in regards to CapEx, but we would like to produce more cash, which would be going to reduce debt.

Right.

But at the same time, not stop acquiring.

Right. Okay. Great. Thank you very much.

Thank you. Chris McDonald, please state your affiliation followed by your question.

Good morning, guys. Chris McDonald with Kennedy Capital.

Good morning.

Hi, Chris.

Just one more follow-up on Thailand. Just wanted to get your handle, maybe just a clarification, will -- do you see that facility really opening up your services to new customers, and maybe you could talk about with your launch customers. Are those actually new customers or currently customers you're servicing out of facilities here in the U.S.?

Generally speaking, -- well, there's some of both. The beginning customers, the larger beginning customers are customers that we're doing business with already in the U.S. The interesting part of Thailand and the plant in Thailand is that originally we built this plant to repair and overhaul and service auxiliary power units for the Asian airlines, and what's happened is that there are -- and this is a very positive thing, from our perspective. What has happened is that there are other products within our companies, within Triumph Group, that are going to go into the Asian plant in initially in very small volume, [Inaudible], and we are going to be stocking things in Asia for the airlines over there. So we have expanded to some degree what we were originally going to do in Asia, and that has led to new customers in Asia or selling new products to old customers. If that makes sense to you.

I also think that the smaller airlines in Asia, typically the volume that we have been doing with Asian customers were the ones that were international carriers. The intra-Asian smaller carriers are the ones that are more comfortable doing business locally. So it has expanded our available market by being in the market with a facility.

Okay, that makes sense. Then just a question on the 22% of sales being international. Is the majority of that in the aftermarket services group? I know you have A320s in your top ten programs. Just I'm curious to know the split there.

I don't have that at hand right now. That's the first time that question has been asked. But one of the ways that we have responded to that is that in our top ten customers in MRO, in maintenance, repair, and overhaul, the international package carriers, FedEx, UPS are big customers. Typically we've only had one domestic main line carrier in our top ten. So there's been a -- historically a significant group of customers in Asia. The freight carriers are big customers, and a very low exposure to the main line carriers in the U.S.

I would generally say -- and I don't have the numbers, either, in front of me -- in the Aerospace Systems group, in the OEM group, the dollar sales have tendency of being larger on the build of the new aircraft. You mentioned the A320. There are other products that go out of the country. So I would say that the majority is not in the Aftermarket Services group, but the number of customers in the Aftermarket Services group is probably greater.

Okay. That answers my question. Then lastly, just looking at the fourth quarter and with the guidance it looks like you're certainly on a trajectory to probably exceed that guidance. Just want to make sure, you don't anticipate anything unusual from -- other than maybe some additional Thailand expense in the fourth quarter, but nothing other unusual that you can see right now that should happen in the fourth quarter?

No.

Great. Thanks, guys. Appreciate it.

Thank you. [Carl Auschlager], please state your affiliation followed by your question.

Banc of America. You had some really great organic growth in both your segments, but I wanted to talk a little bit about the Aerospace Systems segment, and not just the organic growth but the margin improvement. You had, I think, 17% incremental margin there, 21% in the second quarter. Is that kind of a target that you think makes sense going forward for that Aerospace Systems segment?

Organic growth of 17%?

No, the incremental margins. So you had some profit expansion, profit margin expansion in the third quarter, as well as the second quarter. I just kind of wanted to get an idea, given that the strong -- you had strong organic growth, how should we be thinking about margin expansion?

I think that the existing programs that we're on, in thinking about that, as the build rate goes up and incrementally we're making more of the things we have already made, the operating leverage comes into play there and is reflected in the results. As a new program comes in, for instance, the 787, that initial margin is one that is going to be lower and ramp up as we develop efficiencies in production. So the current delivery rate going up on existing programs is, again, very attractive on that marginal return, but as we develop new programs, it's -- the average today is achievable over time on those new programs.

Okay. Thank you.

Are there any additional questions? Since there are no further questions this concludes the Triumph Group's fiscal 2007 third quarter earnings conference call. This conference will be be available for replay January 26, 2007, at 11:30 a.m. Eastern time through February 2, 2007 at 11:59 p.m. Eastern time. You may access the replay system at any time by dialing 888-266-2081. International participants, please dial 703-925-2533, access code 1026032. Those numbers again, are 888-266-2081, and 703-925-2533, access code 1026032. Thank you all for participating and have a nice day. All parties may now disconnect.