Triumph Group Inc (TGI) 2011 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 2011 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 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 web site 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. As you know, I believe, the acquisition of the Vought Aircraft Industries was completed in the first quarter, and the acquisition was accretive to earnings in the quarter for both Triumph and all the bankers involved.

The quarter itself was very strong. The earnings per share from continuing operations was $1.33, excluding transaction and integration costs. There was organic growth in revenue and operating income despite reductions in regional debts, 777 and the A380. And we continue to have good cash flow from operations.

The integration of Vought is progressing very well, with a number of people involved in all business disciplines, and very good cooperation between all locations and managers within the Company. And we remain very parsimonious in reviewing all our expenses.

We continue to have a strong backlog of approximately $3.35 billion, and the momentum in our markets, especially commercial and military, continue to be strong.

Dave will discuss some of the issues, but our balance sheet remains strong as we speak. And I'll get into the future in a little while.

With that, Dave?

Thank you, Rick, and good morning, everyone. Before diving into the numbers, you will notice that we have called out a number of rather large items on the press release and its attachments, and I will reference some of them in my comments.

While it is generally not our style to report or disclose lots of adjusted numbers, the impact of some of the Vought acquisition costs were rather impactful, and without calling them out, our true operating performance in Q1 would be less transparent. All of these items were discrete, incremental, third-party costs.

With that said, turning to the income statement, sales for the first quarter were $406.4 million compared to $316.1 million for the prior-year period, an increase of 29%. Operating income was $32.9 million, with an operating margin of 8.1%. Income from continuing operations was $11.6 million, resulting in earnings per share from continuing operations of $0.62 versus $1.30 per diluted share for the prior-year quarter.

Included in these operating results was $17.4 million pretax, which equates to $13.2 million after tax or $0.71 per diluted share of transaction and integration expenses related to the Vought acquisition.

Excluding these costs, income from continuing operations was $24.8 million or $1.33 per diluted share.

For the quarter, earnings accretion from the Vought acquisition was slightly more than $0.10 per diluted share, excluding transaction and integration expenses.

The loss of discontinued operations was $200,000 or $0.01 per diluted share. Net income was $11.4 million or $0.61 per diluted share.

EBITDA for the quarter was $47.6 million. Excluding the acquisition-related costs, EBITDA was a record $65 million in the quarter. The number of shares used in computing diluted earnings per share was 18.7 million shares.

For the quarter, Vought's operating results, since their acquisition on June 16, were included in the aerospace system segment.

Starting in the second quarter, we expect to be reporting in three reporting segments. Triumph aerostructures, which will include Vought as well as legacy Triumph structure and structure-related companies, Triumph aerospace systems, which will include our control systems companies current in the aerospace system segment, and Triumph aftermarket services, which will remain unchanged.

For the first quarter, sales in the aerospace system segment increased 33% to $346.9 million. Organic sales growth for the quarter was 1%.

Operating income increased 30% from the prior year to $54.4 million, with an operating margin of 15.7%. Organic operating income increased 9% over the prior year with an operating margin of 17.4%.

The segment's first quarter results included a net recovery of $800,000 of legal costs associated with the previously disclosed trade secret litigation, which was offset by costs related to the signing of a collective bargaining agreement at a favorable settlement of a retroactive pricing agreement.

In our aftermarket services segment, sales for the first quarter increased 4% to $59.8 million. First quarter operating income was $4.1 million with an operating margin of 6.9%, which represents a 64% year-over-year improvement.

The next slide summarizes some key financial assumptions resulting from the Vought acquisition. Please note that these estimates are preliminary and are subject to change based on the finalization of purchase price accounting.

Starting with pension and OPEB expense, the fiscal 2011 pension expense for the post-acquisition period, June 16 through March 31, is estimated to be $16 million. Annualized for 12 months, the estimated pension expense would be $20 million.

As a point of reference, the calendar year 2009 pension expense for Vought was $70 million. Cash pension contributions for fiscal 2011 will be approximately $136 million and includes a voluntary contribution already made in July of $50 million.

The fiscal year 2011 estimate for OPEB expense is projected to be $20 million. The annualized estimate would be $26 million. The 2009 OPEB expense was $7 million. The OPEB cash contribution for fiscal year is estimated to be $29 million.

During the first quarter, the impact of depreciation and amortization of Vought's fixed assets, intangibles and contract liabilities did not have a significant impact on our results. We expect to finalize these amounts during the second quarter, at which point we will provide that detail to you.

To clarify, the impact of Q1 transaction and integration costs was $0.71 per diluted share based on 18.7 million shares outstanding. Our overall fiscal year 2011 guidance is computed on a share count of 25.2 million shares for Q2, Q3 and Q4, resulting in a weighted average share count of 23.9 million shares at the end of the year. This amount reflects the shares issued in the Vought transaction, as well as our estimate of additional shares associated with the convertible debt.

Based on these facts and estimates, the EPS impact of the Q1 transaction and integration costs will be diluted by yearend to $0.56 per diluted share.

With respect to the tax rate for the quarter under (inaudible), we reflected the tax impact of not being able to deduct certain of the transaction costs incurred as a discrete item all in the first quarter, resulting in a tax rate for the quarter of 45.2%. For the remainder of the year, the tax rate will reflect a more normalized rate of approximately 36% and does not include the tax impact of these transaction costs.

The increase in the normalized tax rate is primarily due to the absence of the R&D tax credit as well as a higher state tax rate resulting from the inclusion of Vought.

Turning now to backlog, I will remind you that our backlog takes into consideration only those firm orders that are we are going to deliver over the next 24 hours, and primarily reflects future sales within our aerospace systems group. The aftermarket services group does not have a substantial backlog.

Our order backlog as of June 30 is $3.35 billion, which includes an acquired backlog from Vought of $2.04 billion. Same-store backlog increased 4% over-- year over year and 1% sequentially. Military now represents approximately 38% of our total backlog.

Our top ten programs listed on the next slide are ranked according to backlog. In first place is the Boeing 747 program, followed by the Gulfstream G450 and 550 programs in second place. Third is the Boeing 777, followed by the Osprey Combat Helicopter in fourth place. In fifth place is the C17 Freighter with the Blackhawk Helicopter in sixth place. Seventh is the 737 Next Generation, and in eighth place is a 787 program. The Airbus A330 is ninth, and in tenth is a C130 program.

Looking at overall sales, Boeing remains our only customer which exceed 10% of our revenue. Billings to Boeing, commercial, military and space, totaled 36.8% and is broken down 63% commercial and 37% military.

Looking at our sales mix among in-markets, the next slide shows that compared to fiscal 2010, commercial aerospace increased 49% and military decreased to 36%. Regional jets decreased to 2%, while business jets increased 8%. Non-aviation decreased to 5%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter increased 2% from the prior year to $323 million. Breaking that down by segment, first quarter same-store sales for aerospace systems segment was $263.2 million, an increase of 1%.

In addition to Rick's comments, our organic sales were reduced by sales from Triumph to Vought that were still in inventory at the end of the quarter. All the aftermarket services segment sales for the quarter were organic.

Export sales for the first quarter were $70.5 million or an increase of 9% from the prior year.

Turning to the balance sheet and the next slide, we generated $22.7 million of cash flow from operations in the quarter. In accordance with GAAP, cash flow from operations was reduced by approximately $12.4 million of interest paid at closing on Vought debt and approximately $12.8 million of transaction and integration costs. If these two special items were excluded, our cash flow from operations would be a strong $47.9 million, an improvement of close to 50% over the prior year.

CapEx in the quarter was $16.9 million. We expect CapEx for the year to be approximately $80 million to $90 million. In addition, we have conformed Triumph's treatment of customer advances to Vought and are trading them as reduction to inventory. The reduction is shown on the face of the balance sheet, so that the gross inventory cost is clearly stated and to provide a clearer picture of our inventory reduction initiatives.

Net debt at the end of the first quarter was $1.3 billion, representing 48.6% of total capital.

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

Thank you, Dave. As you've seen from some of the numbers that Dave has gone over and I mentioned in the beginning, we have a lot of reason to be optimistic about our future. Our backlog, as I've mentioned, remains strong. And at the time, we continue to remain focused on improving our execution, driving the integration over the next 12 to 18 months, and continuing to control our costs.

In light of those above comments, we are raising our earnings guidance, and we think that our EPS from continuing operations will be in excess of $6 per share based upon current production schedules. And this includes-- excludes transaction and integration costs, and it does include a weighted average share, as Dave discussed, of 23.9 million shares.

At that, I open it up to any questions anybody may have.

Thank you. At this time the officers of the Company would like to open the forum for any questions that you may have. (OPERATOR INSTRUCTIONS) Ken Herbert, please state your affiliation followed by your question. Mr. Herbert, please check your mute button. Your line is open.

Yes. Hi. Good morning. Ken Herbert, Wedbush Securities. My first question--

Morning, Ken.

Yes, my first question re-- involves the guidance. Just so I understand, as I look for 2011, you essentially from $4.65 up to $6.00, just to be straightforward, and I know there was $1.10 in accretion from the announcement at the time of the closing. If you look at that sort of incremental $0.25 from the $5.75 to the $6.00, how much of that-- is that-- is it safe to assume that that is all synergies, or is there any fundamental change in the business outlook that, you know, between the time of the initial guidance and obviously the revised guidance now?

Ken, I don't believe it's all synergies. As I mentioned, we see some of our markets are very strong, and we see some increases in our current markets. Not withstanding some issues in regards to the programs I mentioned, like the 777 and/or regional jets. What we do see are organic sales doing very well at this point in time. Certainly some of that is synergies, but it's not all synergies in that regard.

I mean, Ken, keep in mind we-- in my comments, we did indicate that the legacy Triumph-- and we don't want to talk Vought versus Triumph too much, but in this quarter legacy Triumph margins were at 17.4%, which is a very strong performance in our Q1. And also, I hope you realize that we've upped the share cap for more shares in the convert as well as the slightly higher tax rate. So the $0.25 you refer to is with some headwinds.

Yes. Okay. No, I can appreciate that. I mean, is it possible to just give anymore specific breakout as to what the synergies versus, you know, fundamentals and other issues might be of that incremental $0.25?

Not really. We wouldn't-- we'd prefer not to do that.

It's mostly performance at this point.

Okay. And then just to follow up, on the synergies, it seemed like then obviously having said that with the performance driving a lot of that increase, you know, for the second time you upped your estimate of the synergies that you could achieve this time, you know, up to $15 million from the $12 million to $15 million range.

Can you just give any more color or the specifics on the steps you're taking and what you're seeing and what's enabling you to continue to obviously see these improvements and the process as you go through the acquisition now with the integration, to-- that's obviously putting you in this position to realize the improvements here?

I think that in the past we might have referred to this on various calls. But what we've done in regards to the integration process, other than the general comments I made in the beginning, we have formed some-- currently seven or eight discipline teams such as operations, finance, HR, IT, et cetera that we're reviewing that has people from Vought and people from legacy Triumph looking at this. And they're headed up by senior managers of the Company.

And we are identifying savings in each one of those areas. And we're very carefully reviewing the department sizes and the corporate costs and the synergies that we can come up with on an operating basis. Issues such as what can be in-sourced that Vought buys. Thy can buy from legacy Triumph companies and/or vice versa within the legacy companies.

And we've identified certain savings along those lines, some of which are somewhat immediate, and some of which will take a 12-- as we've said in the past, 12 to 18 months period of time to realize those savings or synergies.

So that's the process we're going through. And as we continue to go through those process-- that process, we continually are identifying efficiencies and synergies that we can come up with. That's basically the process we're going through and meeting on a very regular basis on that.

Great. Well, thank you very much. And obviously a very nice quarter.

Thank you.

Thank you.

Thank you. Our next question is from David Strauss. Please state your affiliation followed by your question.

David Strauss, UBS. Good morning.

Good morning.

Good morning.

Could you talk about specifically within your guidance what you assume for the C17 program for this year?

We've assumed that the number of aircraft being built in the C17 are consistent with the projects that Boeing has come up, and that's ten aircraft.

Okay. So lower than what Vought had in its numbers last year.

If you say so. I don't remember the number that Vought had in their numbers last year, but we're assuming ten.

I mean, I think they're finishing one of the lots, which was a 15, and then would be starting the next lot, which I believe is a 10. But we're in that transition mode, and the strike has-- you know, has pushed things back slightly. But I think we're closer to a 10 mood today than we would be the old 15.

Okay. And Dave, on pension, what are your underlying assumptions for pension in terms of discount rate and assumed rate of return? And any sort of sensitivities as we start to think about-- you know, I know it's early still, but start to think about next year and the potential for, you know, a lower discount rate.

Yes, we're-- we use [6.03] as a discount rate. You know, we refreshed all of the actuarial assumptions on June 16 and an 8.5% rate of return on the assets, which the rate of return is consistent with prior periods for Vought and a discount rate is more mechanical based on certain bond yields.

I'm not prepared to comment on fiscal '12 at this point.

Okay. So no-- but nothing on the sensitivities around what a 25 basis point move in discount rate would do to pension expense?

No. No. Not at this point.

Okay. And I don't know, last question I might have missed it, corporate expense going forward, is it kind of-- is it unchanged from where you've been?

Yes, I think so. I think if you subtract out the $17 billion, which was all at corporate, that should give you a run rate in the $7 million, $7.5 million range for the rest of the year, per quarter.

Okay. And your assumption for legal expenses now for the year, I think it was $5 million, but you obviously had a benefit this quarter.

Yes, I still think the last three quarters would still reflect the $5 million per quarter or total. So, like, $3.750 million for the last three quarters.

Okay. All right. Thanks.

Thank you.

Thank you. Our next question comes from Bill Hoffmann.

Yes, Bill Hoffmann, RBC. Rick, I wonder if you guys could provide a little bit of help on the business and maybe how it did in this-- in the June quarter, just to give us some context, you know, even just sort of general parameters.

Well, as I mentioned, the earnings were-- it was accretive to our earnings. Having said that, you realize that that was only two weeks of earnings from after the acquisition consummated. But I think that as a general rule I can say that we're very pleased as to the contributions made by Vought. And we're very pleased with the contributions made by the Vought people in making this acquisition successful.

They have made some good improvement on some of the program management. They've-- the cost and/or the profitability on some of the programs that they've had have improved over the last two to three months and certainly since the time we've owned the Company. A little too early to answer a whole bunch of specific issues in that area, but other than to say that we're pleased with the direction things are going.

Is there any way to help us sort of quantify, you know, if you just looked at their quarterly numbers over the last, you know, couple of quarters, you know, revenue EBITDA wise, you know, just generically whether they were contract?

I think I'd rather reserve that. We're in the process of reviewing what the best way is to report our numbers publicly that would give you a little better idea on that. We still have the-- we've maintained the public reporting in regards to the two segments. And I think that we're going to-- in the relatively near future, we're certainly considering it, reporting things a little differently that would give you a little better idea in that regard.

But it's very hard to do so at this point in time, other than to say that it's positive. It's very positive, and they're performing to the point that they said they would in the model that we reviewed and reviewing the acquisition.

Okay. Good. Thanks. And then just a quick question for Dave. Just from a working capital standpoint as you go towards the second quarter, is the expectation here of working capital cash use, I would assume, as receivables start to build off this number in the first quarter?

I think there would be a small usage on that front, and hopefully, you know, inventory is-- we'd always like it to be down, but hopefully flat to down.

Okay. Good. Thanks very much.

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

Stifel Nicolaus. Good morning, Rich and Dave.

Morning.

Good morning.

And congratulations on getting a deal done when things were pretty difficult out there.

Boeing said the other day that they may bump 737 production rates if suppliers can get up beyond 35 a month. So do you think you guys can get beyond 35 a month?

Yes.

That was easy. With Vought as part of the family now and having content on A330 as well as 767, there's an upcoming tanker competition. Hopefully something will get awarded. I don't know if you want to try to handicap it, but I'm curious, either way, does the business you think you can get on a tanker in the next few years offset the decline in C17?

First of all, I'm not going to jump into the fray in handicapping it. I've said before-- I've said in the past that it's beyond me that we would give a consortium of foreign countries a bid-- so-- an order so important to the tanker program in our country. Having said that, we clearly have more content on the 767 than we do on the A330. Although Vought plans do have more content on the A330 than we do, the legacy Triumph Companies do. So we would, in fact, participate in significant fashion, regardless of which direction it goes.

Overall, I think we'd prefer the 767. Frankly, I think that if it's not offered or ordered from Boeing and the 767, that might put that the-- in jeopardy, the actual production of 767 commercially as well as obviously militarily. So I would prefer the 767 winning the bid and Boeing winning the bid. But at this point in time, that's, you know, as far as I'd like to go on that.

Okay. Thanks. And last, I know there's nothing in the charts right here. Do you plan, at some point, giving us a sort of debt reduction schedule over the next few years?

Yes, we'll update that from time to time, Steve. You know, we have publicly said that, you know, we expect to have about $900 million in debt reduction, cash over the next five years, and nothing's changed with regard to that. The only really major debt repayment we have is the convert next October for $179 million. At this point we would intend to use shares to pay off the-- to the extent the convert is in the money. But that's still the thinking.

Okay. And last one. Sorry about that. It seems that this time there are a little bit more active retirements of older planes. Do you think it'll take longer and/or when do you think aftermarket may catch up to prior levels?

I don't really have any idea. I mean, that's--

I see positive momentum there but--

I don't-- I think the backlog at Boeing and the backlog at Airbus indicate that, you know, the new aircraft are going to be strong in the foreseeable future, defined as the next year to two.

Okay, great.

But--

Thanks.

Thank you very much.

Yes.

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

Stephens. How you doing, guys?

Good.

Good.

Couple questions. I guess, first, when you initially-- I guess when you initially closed the Vought transaction, you talked about the $1.00 run rate for '11 and $1.50 run rate-- or $1.50 for fiscal '12. You've obviously adjusted your '11 number, but you haven't really talked about that $1.50 number. You know, so given the increases in your expectations for '11, should we expect that at $1.50 to be a higher number, or is it more just sort of getting to a point quicker?

Tell me what the by-- the $1.50 was over a period of what time because I don't remember that number.

Well, I think you said in terms of your guidance, your accretion for Vought, you said $1.00 run rate at the closing and then-- and for fiscal '11 and $1.50 for fiscal '12.

You might have converted that. Are we looking at calendar or fiscal year, which I think might be part of the difference?

Not sure. I mean, it was in your pitch book. You said, you know, $1.00 and $1.50.

I don't think we're prepared to talk about '12 yet. Obviously if we hit our synergy targets, a lot of that would be realized in fiscal '12; whereas, less might actually be realized this year. But--

Maybe another way to ask the question is are you finding more synergies or are you just getting to a point that you thought you were going to get to quicker?

I think that what have said right from the beginning, that the synergies that we will realize will be realized over a 12 to 18-month period of time. So it's an issue that a lot of those synergies will be realized in this fiscal year. And some of those won't be realized, you know, until fiscal 2012. So we're optimistic that that will carry over into 2012, but I don't have that good of crystal ball to tell you a lot of things that are going to be happening in 2012. So certainly we'll have some positive issues then. But to quantify it at this point in time is very difficult.

To your point, Eric, I mean, when we put the total potential synergies down, I mean, we've stated that it's a hell of a lot larger than what we've talked about publicly.

I think what we're finding is that we're doing better on some and doing worse on others. And what you've seen us say is that when we sort of lock in these synergies or get close to it, we're starting to-- we're trying to give you that feedback that we're more confident. So we would hope that the number would continue to grow. Maybe not every quarter, but I don't think we're shocked at what we're finding. It's just, you know, our style is to be conservative, and we're-- as we sort of lock them in or semi-lock them in, we're upping the commitment.

Fair enough. Can you talk about I guess your sales target on the heritage, I guess, Triumph Group was, what, $1.3 billion to $1.4 billion. You know, and I guess, Dave, we had talked about you said don't sort of look at Vought, sort of what they do in this quarter as that-- sort of a necessarily a good run rate. Can you sort of give us what sort of a run rate or a good-- a full year sort of updated revenue target for the Company?

I think as Dave indicated in some of his comments, I think that we're very pleased at the growth of the revenue of the legacy Triumph. We're going to get to a point, if we're not there now, that I'd really not rather talk about breaking conversations between legacy Triumph and Vought because our goal right now is operate as one company, and that's the way we're going to talk about it going forward.

Having said that, as Dave indicated, we're very pleased at the margins that were generated by the legacy Triumph companies and the revenue growth that we had organically.

Oh, okay. So let's talk about it then. For the full company, can you update your sales guidance?

I think it'll be slightly under [3] for the year.

Okay. In terms of the aftermarket business, and you saw 4% year-over-year organic growth, you know, starting to sort of pick up, can you be maybe a little more specific with regards to where are you seeing the pickup coming from? Is it more commercial? Is it more military? You know, sort of a little bit more visibility there?

It's mostly in the commercial area because the business we have in that group is predominantly commercially related.

Okay. And I guess, finally, you know, guys, can you sort of talk about the amount of time that you guys are spending, given the size of the Vought acquisition, obviously the amount of time that you guys are spending sort of focused on Vought versus sort of the rest of the business?

It's no more than 14 hours a day.

It's a very, very high percentage.

It's a high percentage of our time that we're spending in that because that's a very important issue. And we look at it as being, you know, critical to the success of our Company.

And have a structure in place that, you know, has some controls and reviews of our existing companies. And, fortunately, the-- in the aggregate, our existing companies are performing very well.

Great. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from JB Groh. Please state your affiliation followed by your question.

DA Davidson. Morning, guys.

Morning.

Congratulations on the good numbers. I just want to clarify a couple things about these synergies. You know, you're saying $15 million over 12 to 18 months, but that's not included in the fiscal '11 guidance, right? There isn't-- I know, Rick, you said you expect to get some of that over the course of this fiscal year, but is that included in the-- is some of that included in that $6 number?

A very small amount at this point in time.

Okay.

Even if we, right now, realize a synergy, for example, one of them being defined as in-sourcing and some of the Vought plants buying from a Triumph Company, it's not going to be fully realized even until, you know, before the end of the fiscal year. It takes time to institute that synergy. So, therefore, in this fiscal year, it's a relatively small amount.

Okay. And then on-- you know, the re-ramp of 777, when do you expect that to start to impact the backlog and the top line?

Next fiscal year.

Maybe some in our fourth quarter.

Some in Q4 but early next fiscal year, okay. And then Boeing had some-- I think some cautious comments on kind of the military helicopter (inaudible). Can you give us your thoughts on that?

Our helicopter business, with any number of the helicopter producers, are-- is currently very strong. Clearly there is some-- and there is going to be some uncertainty in regards to the military budget as we go forward, which I don't really have any view towards.

That business seems strong to us, so we think we're gaining some share there. And, you know, Boeing generally talks about build rates on those. I listened to their call yesterday, and, you know, certainly with regard to, like, Chinook, we have a nice spare. There are some spares being sold, so that-- you know, that generally helps but it might not be within the scope of what Boeing talks about.

We're not seeing any real slowdown in our major helicopter programs with Boeing or the other guys.

We remain optimistic there. I mean, we haven't really had-- we talked in the past about the Bell 429. We really don't have any input from a revenue and profit point of view yet, but that'll come up, you know, again, in the relatively near future but not this particular fiscal year. So we remain very optimistic in regards both commercial and military helicopters.

Okay. And then one of the things I think-- I don't know if you addressed this when you talked about Boeing and 737 production rates, but they said, you know, regarding your capacity and your ability, would you have significant CapEx if they were to push that number above whatever they were talking about, 35 a month?

No, no. What CapEx we've made in that program, we've essentially made. Not that we wouldn't have repair items on equipment and things like that, but we don't anticipate any significant CapEx at all to raise that to adhere to a raised capacity need.

So it's just standard maintenance CapEx. Nothing incremental in terms of capacity increase?

No.

Great. Okay. Thanks for your input. Good job.

Thank you.

Thank you.

Thank you. Our next question comes from [Byron] (inaudible). Please state your affiliation followed by your question.

Sure. [Alliance Path] Capital. Good morning, gentlemen.

Good morning, Byron. How are you?

Good. Good, Rick. A couple of things. First, the ranking of the programs that you list on the slides, do you think that'll change much over the next couple of quarters, specifically related to the 777?

I think yes. Once the 777 starts kicking in, it will change. There's a couple-- the order is always relatively dynamic. You'll notice things like currently the C130 is in tenth place. It's always lingered down around 11 and 12, but there's a ramp-up in the C130 currently.

Another example would be the 787, when we get-- when 787 gets to production, that will significantly increase, and the dollars will increase there; 777 you mentioned. So yes, I think there are areas that the top ten will shift around from time to time.

As Dave mentioned before, the C17 has gone from 15 to 10 over a period of time here, so that will change as well. So, you know, this is-- we've done this for a long period of time trying to give everybody an idea of where our programs are. And they have, in fact, changed over time.

Right. Okay. And then the other question, I know this may be a little too early to assess, but when you look at the Vought operations, is there anything that stands out in terms of their processes or practices in terms of, you know, best practices that you think could be ported over to Triumph or vice versa? Really thinking from a manufacturing or supply chain standpoint.

I think that you've stated it very well. There's a lot of best practices that we think that legacy Triumph can offer Vought. And conversely, there's a lot of best practices and things that Vought does that, in fact, can help us in transferring. It's-- we're not going into this purporting that the Triumph answer is the best one. The synergies that we're talking about are a two-way street, and they will continue to be so.

Okay, great. Thanks a lot.

Okay.

Thank you. Our next question comes from [Tony Reiner]. Please state your affiliation, followed by your question.

Hi. Cantor Fitzgerald. How are you?

Good.

Good.

Good. And then congrats on the numbers. I just have a more esoteric question. In general, and I know we've been involved in some M&A and congratulations on that, what are your thoughts on the Board receiving any sort of hostile, any sort of bear-hug kind of bid? What are the obligations of the Company to examine such a scenario if one should arise in the future?

I think the Board has a-- in all cases, has a fiduciary responsibility to review anything that comes across. Do you have anything mind?

No. It's just kind of as a general statement. You know, would the Board put together a special committee? Would there be-- you know, it'd have to be taken a serious process, hire bankers, all the, you know, standard stuff, or, you know, just would there be, right away, you know, put up some defenses or put yourselves up for sale? Or as a more, you know, kind of general rule.

It's hard to answer at this point in time anything that we do because it would depend on the specifics of what was happening at the time. And as I said, I think the Board would do the right thing in their eyes to protect our shareholders over that period of time. So it's possible that any or some or all of those issues you've mentioned, as an example, could be instituted.

And there could be instituted, and there could be other ways it would be looked at. It depends on-- and clearly, we'd rather, if there was any interest, we'd-- clearly, we'd rather have it be non-hostile. But, you know, we-- I think that our Board would look at this-- as something like that in a very responsible fashion.

What-- and you just refreshed, I'm sorry. Is there-- can you just go over the makeup of the Board? Is there a standard Board, and is there any poison pills in place, just out of curiosity?

There is no poison pill in place. We don't have a staggered Board. The makeup of the Board is, I think, very well divided between various disciplines that we need on the Board, speaking to operational expertise, financial expertise and the like. So I think it's a-- you know, it's all-- that's all delineated in the merger proxy that we put out.

Sure. Okay. Yes, I appreciate it. I just wanted to, you know, touch base on that. Thanks so much. Congrats, you guys.

Fair enough.

Our next question comes from Ed Keller. Please state your affiliation followed by your question.

Oppenheimer. Hi, Rick and Dave. Congratulations on closing the deal and on the strong quarter.

Thank you.

You mentioned earlier the combinations that you'll be making for reporting purposes at the 2Q, and I was just wondering if you could highlight any physical business movement that you'll be making in terms of facilities or production equipment or personnel over the course of the next year or so. Thanks.

Between operating physical facilities you're talking about?

Yes.

We-- at this point in time, we don't anticipate any transfer of equipment or closing down of facilities or anything of that nature. That's not-- it doesn't dovetail with the philosophy of our business. That is not to say that it won't happen in the future because clearly we have a number of locations now, and we've really got to look at that possibility from a strategic point of view. But at this point in time, we have no plans to do so.

In fact, one of our committees, you know, one of the operations committee that is looking at capital avoidance, you know, where we have existing capacity that Vought brings us so that, you know, it could very well be that where one company would have needed extra machining, they might get that from Vought or a Vought factor. So there will be-- those are the exact things we're looking at in the operations team that Rick referred to.

Okay. Thank you.

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

Stephens. Yes, just quickly, in terms of Mexico, the startup costs, can you give us how much they were in the quarter?

About $1 million.

And how is that process coming?

You know, a little slower than we would like, but we've got two factories there that should be starting up pretty soon in the next quarter. We need some customer inspections, but some really strange, devastating weather closed the borders. We've had some real delays with weather and mostly on the US side that's caused some delays. But, you know, we've got two factories, and the third one is-- the third building is under construction now. So I think we're getting close.

Now, Dave, did you say that heritage Triumph Group operating margins this quarter were 17.4%? Did I hear that right?

In the aerospace systems group.

Aerospace. Okay, good.

Right. Which was, I think, up year on year and off a pretty high watermark. Not peak. Not peak but very good.

Pretty phenomenal, yes. And lastly, just in terms of maybe just, you know, a general ballpark just to give us sort of some kind of basis in terms of sort of thinking about-- you know, I know going out more in the quarter is probably not going to happen. But maybe just for second quarter and maybe a run rate. You know, what order of magnitude are you thinking in terms of these AIT costs?

What costs?

AIT costs, the integration costs?

Oh, I think that's going to slowdown dramatically. I mean, most of the $17.4 million was transaction costs, not integration.

Right. Right.

So I think you're--

But, I mean, are we talking $3 million to $4 million? Are we talking $7 million to $8 million? I mean, just on the order of magnitude.

Well, some of those decisions-- the reason it's hard to answer is some of the decisions that we have to make in regards to, you know, personnel costs, benefit costs, things of that nature, cost to move one product in to be produced at either a Vought plant or a Triumph plant, you know, we haven't made those decisions, so it's very hard to paste a number on it.

I would say that-- and reiterate what Dave said, you know, it's going to be significantly less in the quarters going forward. But it's very hard for us to give an estimate on that.

I mean, I'll give you an example, Eric. There may be a fantastic work statement for an existing Triumph factory that bought (inaudible). But they might-- that might be under a two or three-year contract. You know, we may have to-- we may consider buying that out because the benefits are so great. Well, we haven't projected any of those, but that could happen in a quarter, and then the number could spike.

Now, we would only do that if-- obviously if there was a positive return to doing that. And so we're-- you know, those are the things we're evaluating. We're looking at going on one network. We're on two different networks. Both of us are in the middle of a contract. Are we-- I think we're going to be pleasantly surprised at how much money we save there. We may have to buyout one of the contracts.

Yes, Dave, can you sort of maybe talk a little bit more about sort of the SAP system integration that Vought is going under and sort of how that's going and what degree of confidence that there won't be a meltdown?

You know, that's the SAP implementation. It was ongoing prior to us having discussions with [Carlisle] for Vought. And I've been sitting in on those weekly, biweekly updates. And I think the guys are-- the guys, both the external consultants and particularly our Vought team, are doing a great job in terms of knowing what they have to do with static conversion, running parallel tests, making sure all the bills of material transfer over.

And, you know, we have a high degree of confidence that our target near calendar yearend that they'll be more than ready. But that's something we're going to-- we're pressing hard on. But right now we have a very high degree of confidence they're going to do very well.

And la--

It's very impactful to unleashing some savings.

What's sort of the timeframe when we might start to see those savings as this system gets implemented?

I think the savings would probably show up in the part of fiscal '12.

Okay. Fair enough. And lastly, legal, is there any update there?

No, other than the--

No, not really.

Other than, you know, what we said. I think one of your colleagues asked the question, so I think we're still expecting, you know, to be on a run rate of $5 million in the last three quarters. And obviously we got the recovery this quarter, which was nice.

Okay. Can you-- is that the reflection of, I guess, what Eaton was made to pay for not providing evidence or something like that? Is that what that number-- that boost was, or is that just recovery?

By asking that question, I'm sitting across the table from our General Counsel, and my shin is getting bruised.

Sorry about that. Maybe can you just update us in terms of timing of the trial?

We have no idea.

No trial. Okay.

Things are caught up in flux right now.

Thanks a lot, guys.

All right.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2011 first quarter conference call. This conference will be available for replay today, June 29, 2010 through August 5, 2010. 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 1470279. Once again, those numbers are 1-888-266-2081 and 703-925-2533, replay code 1470279.

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