Triumph Group Inc (TGI) 2012 Q1 法說會逐字稿

Welcome to the Triumph Group conference call to discuss our fiscal year 2012 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 pop-up locker is enabled if you're having trouble viewing the slide presentation. You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by Management.

On behalf of the Company I would 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 statement.

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 the 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. On the heels of a very strong fourth quarter in our last fiscal year, we had significant growth in revenue, operating income, and operating margin expansion across all 3 segments of our business in the first quarter. We had organic sales growth of 13%, and we continued our strong cash flow generation, which Dave will cover in a minute.

The integration of Vought is progressing very well. We are on track to deliver annual synergies of $18 million within the first 18 months and $50 million per year after the 3 years. As we have said in the past, we would be disappointed if it weren't a little more than $50 million.

We have successfully completed the sale of some of the shares that Carlyle owned, and we went live on SAP on May 1 at our Triumph Aerostructures Vought Aircraft division. In addition, we won the wing design and build contract for the Bombardier Global 7000 and Global 8000 during the quarter. And then, we issued a 2-for-1 stock split in July and effectively doubled our dividend.

In addition to that, we completed the sale of our discontinued operations in early July. So, at this point in time you will no longer see discontinued operations on the P&L and/or balance sheet. I have some more comments later, but at this point I will turn it over to Dave.

Thank you, Rick, and good morning, everyone. I would like to start with a review of the financial results for our first quarter.

Turning first to the Income Statement, sales for the first quarter were $845.1 million, compared to $407.2 million for the prior-year period, an increase of 108%. Operating income increased 221% to $105.4 million with an operating margin of 12.5%.

Income from continuing operations increased to $50.9 million resulting in earnings per share from continuing operations of $0.99 per diluted share versus $0.31 per diluted share for the prior-year quarter. Included in these results was $500,000 pre-tax or $300,000 after-tax, or $0.01 per diluted share of integration expenses related to the Vought acquisition.

The prior year's operating results included $17.4 million or $13.2 million after-tax of such costs. Excluding these expenses from the current year's first quarter would result in income from continuing operations of $51.2 million or $1 per diluted share.

As we indicated in our press release on May 9, we successfully refinanced a portion of the Vought acquisition debt during the quarter, and we built $7.7 million of debt retirement costs into our guidance for the year. And those costs are reflected in our Q1 results.

For the quarter, earnings accretion from the Vought acquisition was approximately $0.40 per diluted share excluding integration expenses. The loss from discontinued operations was $700,000 or $0.01 per diluted share. The discontinued operations results reflect the sale of the castings facility, which was completed in July.

Net income was $50.2 million or $0.98 per diluted share. EBITDA for the quarter was $127.1 million. The number of shares used in computing diluted earnings per share for the quarter was 51.3 million shares, and reflects the 2-for-1 stock split that was issued in July.

For the first quarter, sales in the Aerostructures segment increased 178% to $643.3 million. Organic sales growth in the quarter was 10%. Operating income increased 144% from the prior year to $88 million. The segment's operating margin for the quarter improved sequentially to 14%, while the heritage business's operating margin was 18%.

In the Aerospace Systems segment sales for the quarter increased 13% to $133 million, all of which was organic. First-quarter operating income increased 22% from the prior-year quarter to $22.4 million with an operating margin of 17%. The segment's operating results included $600,000 of legal costs, associated with the previously disclosed trade secret litigation.

In our Aftermarket Services segment, sales for the first quarter increased 18% to $70.4 million, all of which was organic. First-quarter operating income increased 69% to $7 million with an operating margin of 10%.

The next slide summarizes some key financial data related to the Vought acquisition. Purchase accounting was finalized during the quarter, and there were no changes to this slide from the last quarter. We have included the schedule as a point of reference.

Turning now to our backlog. Our backlog takes into consideration only those firm orders that we are going to deliver over the next 24 months, and primarily reflects future sales within our Aerostructures and Aerospace System groups. The Aftermarket Services group does not have a substantial backlog.

Our order backlog as of June 30 was $3.76 billion. Heritage backlog increased 16% year-over-year and 3% sequentially. Military represents approximately 30% of our total backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. In first place was the Boeing 747 program, followed by the Boeing 777 program in second place. Third where the Gulfstream G450 and G550 programs followed by the Osprey combat helicopter in fourth place.

In fifth place was the 737 next generation, with the Blackhawk helicopter in sixth place. Seventh was the 787 and in eighth place with the C-130 program. The C-17 freighter was ninth and in tenth place was the 767 program.

Looking at overall sales, Boeing remained our only customer which exceeded 10% of our revenue. Net sales to Boeing commercial, military and space totaled 47.5% of our revenue and was broken down 70% commercial and 30% military.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal 2011, commercial aerospace increased to 53%, military decreased to 31%. Business jets increased to 13% while regional jets remained unchanged at 1%; non-aviation decreased to 2%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter increased 13% from the prior year. Breaking that down by segment, first quarter same-store sales from Aerostructures was $165 million, an increase of 10%. All of the Aerospace Systems segment and Aftermarket Services segment sales for the quarter were organic. Export sales for the first quarter were $113.1 million or an increase of 60% from the prior year.

Turning to the balance sheet on the next slide, we generated $116.3 million of cash flow from operations before we made $25 million of pension contribution to the Aerostructures' defined benefit plans in the quarter. After these contributions, cash flow from operations was $91.3 million.

CapEx in the quarter was $15.7 million. We expect CapEx and investment in major programs for the year to be approximately $130 million to $145 million. Net debt at the end of the first quarter was $1.2 billion, representing 41.6% of total capital. The global effect of tax rate for the quarter was 35.5% and reflects only 9 months of estimated R&D tax credit due to its expiration at the end of the calendar year.

Now that we have made substantial progress on Vought's pre- and post-acquisition tax returns, we have a slightly more favorable view of our estimated cash taxes for the next few years. For fiscal year '11 and '12, we expect to pay virtually no cash tax. We expect minimal cash tax to be paid in fiscal '13 and possibly in '14, depending upon whether certain tax losses are carried back.

We are currently considering the option of carrying back some of our post-acquisition tax losses to obtain cash refunds from prior years. Please remember this guidance is with respect to our cash taxes, and would have no impact on the tax rate reflected in our earnings.

If we proceed with the refund claim, EPS would be adversely affected by approximately $0.04 per share due to the recapture of the domestic production deductions taken in those years. With that I will turn it back over to Rick.

Just a few words on our future outlook. Dave mentioned that our backlog remains strong at $3.76 billion, reminding you that's a backlog on firm orders that we have, which we will deliver over the next 24 months.

We remain focused very much on improving our execution, driving the integration and controlling our costs. In addition to that, we still have our goal of de-levering our business and getting below 40% debt to capitalization where Dave indicated it is just a little above of 41% at this point in time.

We have, as you all know, raised our earnings guidance, EPS, from continuing operations of approximately $4.35 excluding integration costs. Based on the favorable market conditions we see happening right now, current production rates, as told to us by our customer base, and the weighted average shares of 51.6 million, which includes an estimate of additional shares from a convertible debt.

It is interesting to note, as Dave and I have both mentioned, we had a very good quarter from a margin perspective. In our perspective, going forward by segment is that our Aerostructures margins were up, and they are in fact sustainable at the levels that we are currently.

The Aerospace Systems long-term margins, I think, will be up, but there is pressure in the short-term defined as the next quarter or so. But over the year I think that our margins there will be strong, as they will be in the Aftermarket business. And they will be sustainable at the 9% to 11% range.

In our case, there is not any concern that those margins will drop down to where they were when that segment had some problems. So the 9% to 11% range is very much sustainable as we go forward.

Based on the fact that we have raised our guidance, we remain optimistic for the balance of the year. We show no reason why we won't achieve that particular earnings per share. With that, I will turn it over to anybody for questions.

At this time the Officers of the Company would like to open the floor to any questions that you may have. (Operator Instructions) Your question will be taken in the order it is received. We stand by for your first question. Peter Arment, please state your affiliation followed by your question.

Yes, Gleacher & Company, good morning, Rick and Dave. Another nice quarter, congratulations. Rick, can you talk about, this is the first time we saw that you went live on SAP at Triumph Aerostructures, you know the Vought division. How should we expect that rolls out? Can you just remind us what the plan is there?

Well, the plan, you might remember, really to go to SAP was in place when we made the announcement of the acquisition. This is just actually an execution of what they had already planned when we acquired the Company.

And, if it was late being instituted, it was only late by a month or so. We closed the quarter using SAP; it went well. Like anybody else who puts in SAP, are there hiccups? Are there problems? Yes, there were.

But, we feel confident that they're being beat. As it goes forward, we are going to look at, when we get a lot of time under our belt, we are going to look at the fact, do we institute SAP throughout our whole Company?

At this point in time, we are remaining with the systems that we have in place for the heritage Triumph Companies, but I think it behooves us to look at the possibility of making a transition in the future. I don't know if that is what you are referring to or not. (multiple speakers)

We did go live throughout Vought. It was all 6 factories on May 1, so there is no rollout. We went with a, quote, Big Bang theory, so that it is in, It's in everywhere. And now, whereas Rick said, looking to stabilize and then start to get the benefits that we had planned on.

Right, okay. We should assume that that is in part of the synergies that you've built in, correct?

Well, as we have said when we talked about the $18 million and the $50 million, we have said we have not included any integration savings with SAP. And the main reason we did not include that, was the fact that it was already underway to go ahead and do that under Vought, prior to the acquisition.

Now, at the end of the day, will we take credit for some of the savings? Yes, we probably will. But, we haven't announced any numbers that relate to that.

Okay.

It should be on top of the other numbers, Peter.

It should be on top, okay, great. And Rick, we have seen the production rates continuing to go up. Can you just give us a little reminder on the 737NG? Is it an important program for you guys? Are you able to handle the announced production rates to 42 or is it going to require additional CapEx? How are we thinking about that?

We have had numerous conversations with Boeing on the ability to handle that. The general answer to your question is, yes, we will be able to handle it. But, you are also correct in the fact that it will require some relatively small amount of CapEx to get up to speed to handle the 42.

That sort of depends on which location you are talking about, and what product that we are delivering to Boeing. But, generally speaking we feel confident we are going to be able to handle that, because that doesn't ramp up for a little bit of time anyway, so.

And then, just last. We saw an announcement by, well now, a competitor being acquired on Primus. Clearly, it looks like Precision Cast Parts wants to make a bigger effort in acquiring tier 2 companies.

What is your view out there in terms of your ability to continue to grow the Triumph Group franchise in terms of bringing in your niche companies, how are you thinking about that?

Well, we are addressing the issue. We have talked about the issue and if you have noticed, we have been actually relatively silent vis-a-vis the acquisition route because we have been focusing on our execution and the integration of Vought. But, we are not out of the acquisition business.

We, in fact, will look and continue to look for companies that fit our model, which is the expansion of product and services that we can provide to our customer base. And we will probably not finish in first place in some of the frothy multiples that are being paid at the present time, but that does not put us out of the acquisition business.

Yes. No, I don't think anyone wants you to win the race there. Thanks again, nice quarter.

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

Deutsche Bank, thanks; and good morning, Rick and Dave and Sheila. What is your sales outlook at this point? Obviously a really strong sales in the first quarter and the implication for the rest of the year. I think you were previously talking about 3 to 2, 3/5, and clearly the low end I think you'd be blowing out. I am just curious what your outlook is for that range.

That range is still there, Myles. Maybe it is creeping up into the middle, something like that.

Okay, and the seasonal pattern, 2Q flat sequentially. I think I have the pro forma numbers right for Vought; they also have that similar trend?

Yes, they do because there is pluses and minuses going forward. In our projections, we have looked at the fact that we are going to lose 1 747-8 during the rest of the year, some of the 787 has been pushed to the right a little bit. That is the headwind issue.

On the other hand, as has already been discussed, we have the 737 and some of the going-forward issues there. There are positives along those lines, so that is mainly the reason that Dave is maintaining -- we are maintaining the 3/2 to 3/5 area sales wise.

That's fair. Okay, Dave, the cash in the quarter obviously really strong. And you have warned us in the past about the lumpiness of advances in Vought; and I'm just curious where your -- and you mentioned the cash taxes, so that is obviously a good thing. Where is the current line in the sand for fiscal '12 free cash flow at this point?

Yes, I think it might be a little bit better than what we had indicated a couple of months ago, Myles, with regard to $100 million. But keep in mind, we indicated $130 million, $145 million. We only spent about $16 million, $17 million this quarter between the CapEx and the very small investment initial investment in Bombardier. We obviously weren't pro rata there.

$118 million in pension, we paid $25 million, not quite pro rata there. Advances were actually favorable in the quarter, yet we still expect them to be negative for the year. So, those are really the headwinds that will make the cash flow, moderate a little.

We are very proud of the fact that even without the advances, our inventory was down; and I think we will continue to do well in the working capital that we can control.

It was, I would say, a very strong quarter. On the guidance, what is assumed on the convert side? Can you give us some color there? Is it more beneficial at this point to do a redemption, refinance or how are you looking at that?

I think, Myles, at this point I don't think what we decided to do in early October would really influence that, because our guidance reflects our shares at about the price it was a week ago. That is when we ran the numbers.

And frankly if we had to refinance the principal, re-borrowing under our revolver would be about the same interest costs that we'd have on the convert, so I think we are still leaning toward leaving the convert in place. A number of people put it to us this quarter because they had the right to put them, so we did redeem quite a bit. So, some of that is not totally in our control.

But I think right now we would lean towards leaving the debt in place in October and just having that $150 million of 2.875%, 2.75% fixed rate debt for 15 years.

Okay, and then the last 1, just at a high level, simple math. The underlying earnings in the quarter are $1.10. You're essentially forecasting that as the run rate for the rest of the year. Should we just think of that as conservatism?

You are talking about sustainability in Aerostructures, obviously some potential margin pull back in Aerospace Systems where volumes are going to be increasing. So I'm just kind of curious if there is any other put and take we should interpret.

I think Rick referred to losing some sales that were in our plan and I guess you are getting to your number by adding back the debt retirement costs.

Yes.

Keep in mind, that allowed us to lower rates on the term loans, so there is a benefit there. So, we think it is a balanced view of where we are at after 90 days.

Okay, thanks again. Good quarter.

Myles, going back a little bit to your question on the cash, just to make things perhaps a little clearer. We had our inventory go down in the first quarter. It is our plan to continue to control our working capital on that. That is a wild card within our Company on a quarter-to-quarter basis; we hope to continue to do so, but that might be an issue.

As Dave, I think, indicated, we have not started to really spend in the first quarter. We only spent about $2 million on the Bombardier new program that we got, and that will start to ramp up a little bit. So, that is a long way of saying that I don't think we can multiply the free cash flow by 4, and figure out what it is going to be for the year, but we are focusing on that on a very strong fashion.

That is great, thanks again.

Next question comes from Stephen Levenson. Please state your affiliation followed by your question.

Stifel Nicolaus. Thanks, good morning, Rick and Dave. 777 moved up on your top 10 list; is that a function of orders for the lead time on the build rate increase, or did the work on Gulfstream decline at all?

No, it is a matter -- we have been saying for a long period of time that we'll have a ramp-up in this 777, over the course of this year. So, that is obviously within the next 20 -- the 777 is at an all-time high right now on a production rate. And in our backlog. So, that is a function of the 777, not necessarily anything going away at Gulfstream.

Okay, thanks. And it looks like business jets moved just a little bit higher. Is that also all Gulfstream, or is there some other business coming in now?

I would say there is a little bit of business coming in. There is a little bit of stirring in Wichita that we are encouraged by, but we are not singing Hosannas, but there are things happening in the business jet, despite what our government is trying to do.

Got it, thanks. On the A320 Neo and potentially 737, do you see an expansion of content possible from the changes that will be required to put new engines on the planes?

The expansion of our content is always possible. We want to do some new design work for our customer base. There is a lot of things that we have a potential of doing. I think that if you look at the 737, I think that American sort of forced Boeing's hand in regards to the re-engining issue. I'm not sure that was really the decision that Boeing wanted to make at this point in time.

We are not exactly sure at this point in time what the issue will be going forward on the 737, and what opportunities we will have, but there certainly is an opportunity for that, yes.

Okay, thanks. And last, on the tanker, I know you were named to the tanker team. I know that is also going to take a little while to ramp, but can you give us an idea of how things are expected to go on the tanker?

Maybe I will just comment on the 767, as well as -- there are companies looking at using the 767 as a freighter in addition to the tanker itself. How it is expected to go is, they have got to do some -- let us know and let others know what the redesign work is on the tanker to reconfigure it as a tanker.

It also, in our opinion, helps us maintain the commercial aspect of the 767, which was an item that if they did not get the tanker, at least in our opinion, it was possible that the 767 commercial would go away. So, that is a positive. And, you are right, some of the things going forward, we really don't know yet, because that does not roll out for a little while.

Okay, thanks very much. Talk to you soon.

Our next question comes from Ken Herbert.

Wedbush. Good morning. Just wanted to first -- I know you've seen better margin both from heritage, or legacy, Vought as well as Triumph. Specifically within the Aerostructures segment, can you provide some more detail on some of the actions you are taking, and specifically then as it relates to the synergies and some of the incremental detail on the bridge that gets us from sort of the 18 by the 18 months up to the $50 million, and current thinking along those lines, and where you stand with some of the core initiatives?

I think that the major thing to take away from that is that, and we have said this before, the low hanging fruit has been really addressed in regard to the $18 million. And, a lot of that is in place so that really reflects in our operating margins at that Structures division, the great majority of which are the Vought sites.

So it is the execution of that $18 million, A. B., there will be more volume going through the plants, which relates to those margins. As we go forward, in items we have already talked about like the 747-8, and the things we are doing in the structures, and that will continue to stabilize and increase that volume.

The long-term synergies are somewhat -- I was about to say wild-card. It is not a wild-card, but it just takes a longer period of time over that 3-year period of time as we make a decision on where we manufacture parts, how do we institute our Mexico strategy when we produce things in Mexico and bring that product back to our plants in the United States, and how much that affects our margins going forward.

And, we think that a great majority of that $50 million will be in that area as we execute, have more volume, and we get the synergies going in there, which will definitely affect our margins going forward.

That is helpful. When you look at the quarter, is it possible to get any more -- how much of the increase in the quarter on the margin was driven by synergies in the cost savings relative to volume, even if it is just in terms of magnitude or rough areas there?

I will tell you, Ken, I would be really -- that would be a wild guess. We really don't know the answer to that question. As I said of the $18 million that we expect within the first 18 months of operation, a lot of that is in place already. So, it is helping our operating margins in the Structures and therefore the whole Company. But, I would be guessing as to what percentage of our margins that really reflects.

We know we are getting better execution, overall the synergies and a little bit of the start of the volume, Ken. I don't think we want to get into quarterly breakdown of those 3 items, I think they are all favorable and should push margins up over time.

Okay. That is helpful. If I could, just to look at the business from a different angle, on the defense side, I know clearly you still have a number of programs in the top 10. Specifically on the Rotorcraft side and the tanker, the fundamentals still remain very strong. But, when you look at this business out through 2012 and into 2013, how would you characterize the growth opportunities in specifically the defense business?

I think it would be silly of us or anybody else to have no concern at all about the defense budget and what is happening within the budget going forward. So, I think that we do have some concern about the defense budget.

Specifically in a lot of our programs, we have consistently said that we don't see the C-17 certainly going away. Your timeframe you just mentioned was 2013. We think the C-17 will be good through C-17 in the orders that are already placed, the foreign orders that are placed. And some of the other projects with the helicopters that we have, we have not seen any slowdown in that area.

We still have the issue of the CH-53K, which is not in the top 10 programs, which we have done a lot of work on in the development area. So, I think that we are getting somewhat across the board; it gives me an opportunity to talk about some of the others.

The V22, for example, in some of our other program, we're already getting some price pressure from the military programs. Things being handed down from DOD. They want to keep some of the programs going, but they don't want to pay as much, et cetera. And we and our competition are facing those issues. Not that we are not facing them in the commercial area, frankly. But, that is somewhat of a normal thing.

We have not been told anything is going away from us so we are assuming that -- all we can do is assume that our customers want what they have already ordered. And that goes out through the next 24 months.

I will say, Ken, it's part of our standard IR pitch, this is why we like our balance so much. I think we feel very fortunate that, as obviously, there's concerns about military spending either in units or in price. We feel fortunate that we have a commercial business that is going to be growing at a significant rate.

That is why when we look at acquisitions, we always talk about how important diversification is in the mix, and it is playing out right now.

Yes. No, I can appreciate that. Finally, on the business jet side, Rick, you mentioned that you are starting to hear some rumblings out of Wichita.

When you look at your business jet exposure, is this a market where you could perhaps see 20%-plus growth in volumes over the next 1 year to 2 years as that cycle potentially comes back, assuming some of the noise out of Washington and some more rational decisions are starting to be made around this sector? How do you think about business jets in terms of the broader opportunity here moving forward?

I think that certainly it can help us, but to talk about a number that is 20%, that would be a high number. Certainly based upon the market share and the business, the percentage of our business that is made up by the business jet. Some of our individual companies will show much more than 20% increase potentially when the business jet market comes back.

And, certainly long-term, when we get into deliveries of the Bombardier program we have, we will see increases there. 20% is probably a high number because of our percentage of our business which is business jets. Now, it'll help the margins in some of the segments in a big way, but not 20%. Because we are not that big in the business to begin with, other than the fact, the wings, the things that we are making for Gulfstream.

There is no way that Cessna returning to -- starting to grow again could drive that kind of improvement given the huge amount we do with Gulfstream, so.

Okay, and finally is business jets an area where over the next few years you see market share or new capture opportunities similar to what you have recently done with Bombardier. Is that maybe an area within the portfolio we could see outsize growth?

Yes, I think we possibly can. That is a hard thing to say right now because there is nothing -- I said we saw rumblings; there's no volcanos going on, but, yes, I think we can grow that. In the structures area, for example, and some of the other companies that we deal with, the business jet area we'll be able to help out and gain market share, but I think that is a little further out on the horizon.

Okay, nice quarter, thank you very much.

Next question comes from Ron Epstein.

Sure, Ron Epstein, Bank of America Merrill Lynch. What do you guys see in your supply chain? Like, I mean in raw materials, bearings, so on and so forth. Is it that everything's tightening up or leads times going out, that kind of thing?

We believe very strongly in the do unto others as they do unto you. And we're putting pressure on them to reduce prices just like our customers are doing to us. If you are referring to any problems that we see, we are working very hard on our supply chain management. It is part of the issue that we see going forward on the $50 million.

Our supply chain has been very cooperative with us, as far as proper deliveries, and if you are looking for any problems going forward, we don't see any problems on the horizon. We have proper things in place for deliveries, quality. We don't see any shortages. We're addressing the same issues with us as for example Boeing does with us. Are you guys going to be able to deliver up to 42?

We are addressing the same thing with our supplier base and frankly we have not had anything surface that we see any major problems going down the road. I sense that is what you are referring to.

Yes, just if you are seeing any tightness around raw materials, titanium, bearings, C class parts, or whatever. When you think about the business going forward, it seems like everything is good right now, right? Strong demand, airplane build rates are going up. What do you worried about? What keeps you up at night?

I think that the biggest thing that we still have to be concerned with is taking advantage of the synergies that we have identified and becoming more efficient at all of our Companies going forward. Because we are assured of 1 thing -- and we tell our Companies this on a very regular basis.

We have mentioned and passed over the fact that there are pressures on prices in the military and commercial areas. Well, it behooves us to become more efficient, take advantage of the integration numbers that we're identifying over the next couple of years; and that is the major issue that we spend a lot of time. And, it even goes over to the issue on the IT.

We mentioned that we have successfully gone live with SAP. And over the period of time the way we have grown our Company from an acquisition point of view, we have to continue to address the IT area, and how we take cost out of the system by using our IT systems.

It is issues like that, that if we don't take costs out of our system and become more efficient, shame on us, because our customer base is going to be on top of us to do so.

Okay, great. Thank you.

J.B. Groh.

D.A. Davidson. Good morning, guys. I just had a couple. On this 42 rate, I think you have addressed that, but Boeing talked conceptually about going to 60 eventually. I am curious as to what sort of planning that is going to take on your part in terms of CapEx globally for the company.

Well, they have not spoken to us about going to 60 yet. I understand that was on their call. From a personal perspective, the airlines make money 1 year in a row and all of a sudden they offer -- they order about 9 million aircraft; it does not make any sense to me, but that's all right.

I think that we will have to address that issue when our customer comes to us and says, okay, as a planning basis what are you going to do? And you are right, it would cost us more money if we chose to spend it, because we are very diverse on the 737, and we supply them product out of a lot of our plants.

So, it is an issue we would have to address, and we are not quite finished addressing the 42 yet, let alone the 60. So, we are working on that.

Obviously, it is key that it is sustainable, J.B.

Right.

The last thing we want to do is capacitize for 1 year of 60. That really would play into a big part of our planning as to how we would accomplish that.

Right, I am sure that is a fun negotiation. On the military side, you've mentioned obviously some programs that you have had some wins on, and you talked a little bit about CH-53. Is the content you are getting on the new wins -- I presume C-17 is fairly large from a dollar content standpoint, and if that eventually comes down over the next few years. Is the stuff that you are winning big enough to kind of offset that so that you could -- is there a potential the military could stay flat or even grow in the face of a shrinking budget, just through winning higher content on some of the newer programs that you have mentioned?

I think that what we have said in the past, and I would repeat, is the fact that the increased volume that we have gotten on all our programs, the 747-8, the 777, the 737, et cetera, and then the rest of the military programs are more than going to offset if we lost the C-17.

That obviously includes the 787, when that gets to a ramp-up, because the 787 is a program that what we have supplied so far is positive to our margins, but will not be equal to our margins that we are now experiencing until it gets to full production levels, which will be along the period of time that the C-17, if it phases out, will be phasing out. With the inclusion of all those programs, whether they be military or commercial, will more than offset the C-17 loss if there is a loss.

Got you. From a housekeeping standpoint, does tanker get its own line item in your top programs or is it just going to fall under Boeing 767?

I don't know. We have not even addressed that issue.

Got you.

We will probably keep it as a line item, is my guess, but there probably will come a time when all the 767 is tanker and maybe freighter, and not a lot of commercial planes, but I think for now we will probably plan to keep it as 1 line item.

So, there is nothing in there now for tanker obviously, okay. Thank you very much. Congratulations on the quarter.

Next question comes from Eric Hugel.

Stephens. Good morning, guys and good quarter. Could you talk about -- I know in the past we have talked about your plan to generate something like $900 million of free cash flow over the 5-year period after you acquired Vought.

We are about a year into that period now and the business outlook seems better, but you also maybe have some more CapEx spending than you maybe anticipated with the Global 7000, 8000 win and all that stuff. So things are sort of positive and negative.

Can you address, where are you, are you on track to meet, maybe exceed that number? Can you give us an update?

I think from a specific basis what we have said, the $900 million is the addition of a few things, but the major part of that is that, we have said, that it is our plan to execute paying down $750 million of debt while at the same time we reduce our under funded liability at pension and continue to spend CapEx at approximately the $100 million a year level. I think that approximately adds up to your $900 million.

That has not really changed, and we feel good about that. It does put us under pressure to determine strategically what we do from an acquisition point of view, and that is definitely a subject that internally we discuss on a very regular basis.

We don't want to go out of the acquisition business, but on the other hand, we won't be acquiring too many more Voughts.

Dave, can you address where do you stand right now in terms of the size of your net operating loss carryforwards and what's the timeframe over which you would expect them to be utilized, was it 4 or 5 years?

Yes, I think in my comments earlier, that was the point that we are going to use them. We used some of them in '11; we will use them in '12, '13 and some may extend into '14. Some of these are losses we acquired from Vought and others are just the differences between book and tax income.

I think the value of the NOL was around $200 million at the end of the fiscal year in our deferred tax footnote in the 10K. I think that is the NOL portion. There's other deductions that are well in excess of that. I have to check that exact number, but the point is, we are not going to be paying much federal income tax for a while.

Great. With regards to the synergies, in Q1, were you at that $18 million, were you at that $1.5 million per month run rate or is that still building up to that?

I think there are some things, as I mentioned, of the $18 million. I have not put it on a $1.5 million dollars per month basis, but of the $18 million, essentially a lot of that has been included. There is still some to go within the last 6 months, if you will, because we have been one year essentially through that first quarter. A lot of it is in there.

There is some that we are going to accrue during the rest of our fiscal year. But, it is essentially done, and hopefully we will start eating into the $50 million as soon as we possibly can do it.

And again, we talked about a good portion of it is SG&A, so when we save it, it goes to the bottom line. There is also a portion that goes to inventory, so it needs -- when we save the cash, when it shows up in the P&L, is only a little bit of a lag.

Sure.

Of flow.

Lastly, the $7.5 million costs in terms of the debt repayment, is that an interest expense, where is that exactly?

Yes. It is an interest expense. Like any fee amortization.

On a go-forward basis, sort of X that, and obviously I guess there is some shift in interest expense from higher margin to higher rate, to lower rate. What is a good run rate that we should be looking at in terms of interest expenses as we look forward?

I think we are still at the 85 level for the year. We had obviously a disproportionate amount of that this quarter. I think you are looking at around 20 million on average. But, again the second quarter is going to be high, not as high as first quarter, because we are still having the special accounting for the convert for 1 more quarter. And then, everything drops down.

So, we will have 1 more quarter that phases down, and then the last 2 quarters should be substantially less than where they are at right now. I think the 85 is still the number. You might be in the 20 million range in the second quarter, and then drifting down 1 million or 2 million in the third and fourth quarter.

Great, thanks a lot, guys.

Michael Ciermoli.

KeyBanc Capital Markets. Thanks guys, real nice quarter. Most of mine have been answered. I guess we have been hearing some whispers out there regarding some potential new business with Airbus. Is there an opportunity for you guys to score some business if they maybe outsource some of that wing production or if they go through with some of their winglet programs they have been talking about?

I think that we have, especially since we acquired Vought, there is been more opportunities with Airbus. And I think there remains a number of opportunities. Our frustration on that level is that we keep being told that they are going to dollarize a lot of their product and maybe we can get some business and increase our market share there, which is lower than we would like to see it.

But, every time that becomes close, somebody reminds somebody in Europe that costs European jobs, and it does not get done. But it is not through lack of trying on our part. And my simple answer to your question, yes, there is opportunities and hopefully will get a lot of them.

Okay, fair enough. On 787, I want to make sure I understand this. You guys talked about margins being sustainable for the remainder of this year. So, as that program ramps with the first lot, you don't think there will be any sort of margin drag here and then as we get towards full rate, that should provide some further upside towards the overall margin structure you're at now?

Yes, to be clear, with a product that we have been supplying on 787, is a minor amount positive. But, it does not get to the point that is equal to the margins that we are selling in our segments, until it gets too full production rate.

I think what Rick is saying is, it will be a headwind to margin percentage, but I don't think we expect to tell you why --that our margins are going to be down because of it. It's 1 headwind to margins, positive to dollars, but it is not the kind of thing that we expect to drag margins down.

Okay, and then maybe on the Aftermarket. 18% growth in the quarter, are you guys thinking that rate of growth can continue based on the current trends you are seeing, and some of the activity out there?

No, we are not really looking that that will grow to that extent. Don't forget, the business in our Aftermarket segment grew 20% year-over-year in our year-end announcement and it is up again.

I think we feel optimistic that our business there will be maintained as we go forward. And that our margins will be approximately maintained, but I don't think there is a whole bunch of growth left in that thing. Obviously, it is trying, in some of our business, they come in in large chunks, whether it be APU engines, or thrust reversers that come in for repair and overhaul. But I think that we feel good about the margins there, and we feel good about our growth in revenue there. I think it will be maintained over a period of time.

And then, the last 1 on the synergies. You talked about getting all that low hanging fruit and that will get you to $50 million, it is going to be more of a challenge. What specifically are the areas you are targeting; is it supply chain? Is it further insourcing of product, facility optimization, and are there some revenue synergies that you have built into that $50 million or could that be added?

We have not built any revenue synergies in. The 3 that you mentioned, the answer is yes, yes, and yes. We have built all of that in, the efficiencies that we have, the supply chain, et cetera. But, we have not built any revenue synergies into that $50 million. And, most of the companies we acquire, if not all, has always been a revenue synergy as we go forward.

I think, Mike, we have already made progress on -- we have always talked about that $200 million of stuff that Vought could buy from Triumph. We've made decisions and there is production moving, and each month that goes by, we are adding to that. It is not like it is impossible to do. It is a little more difficult than getting a better insurance cost, or a lower auditor fee.

We have already made a lot of progress and decisions have been made on others that have not yet been implemented. So that, we are well on our way to identifying them and now we have to implement them on time, on budget, without impacting customer deliveries. So, that is the challenge.

Great, thanks, guys, and nice quarter.

Our next question comes from Bruce Bruckman.

It's Bruce Bruckman from BRS. Great quarter, keep it up. I have a couple of questions for you. They are related questions, and 1 is really a David question, the other is really a Rick question. They are different from the other questions you have been asked, so just bear with me a minute here.

You are making me nervous, Bruckman.

We know you are both members of Merion, that fine championship golf course in Philadelphia area, where you have had the most USGA Championships of any course in America. You are having the 13 US Open, and 3, that is where Bobby Jones won the last major, and his grand slam, in '50, that's when Hogan hit that 1 iron on 18 to win the '50 Open.

So, that first hole, that little baby faced par 4 you got. There's those lawn chairs where people sit out and eat their breakfast and lunch right by that first tee right off to the left.

So, here is the first question, we have heard that there is now an informal policy at the club that when Kornblatt gets on the tee, all people have been asked to leave the tables lining the left side of the tee box on the lawn, because David has hit some errant shots.

Incorrect.

We are just not sure what that means, since CFOs are supposed to be the epitome of reliability, dependability and accuracy. So, we have been scratching our heads about that 1. With respect to Rick, you know that little tizzy face par 3, was it the 13th, the 1 where you blow the ball onto the green 100 yards or something. Some people have thought about turning that 1 into a miniature golf hole.

We have heard that Rick is taking out his chipping iron and chipping up to that big cavernous monster bunker in the front and then trying to pitch it over to take 6, 7, and 8 out of play and just hope to gag a 4 or 5. That is not a real good indication about the courage and the fearlessness and the leadership skills of your CEO. What do you 2 think about that?

We have always been accused of being conservative. (laughter)

David, are you going to turn around that first tee? Are you going to start swinging from the other side, or what are you going to do? Or maybe you could go to the red tees. I think they are beyond where the people sit out on the lawn and eat.

If that would be allowed, I'd do it. Is there anybody else in the queue with some questions? (laughter)

I am showing no additional questions at this time.

I would not follow that either.

Since there are no further questions, this concludes the Triumph Group fiscal 2012 first quarter earnings conference call. This call will be available for replay after 11.30 AM today through August 5, 2011 at 11.59 PM. You may access the replay system by dialing 888-266-2081, and entering access code 1541083. International participants may dial 703-925-2533. Thank you all for participating and have a nice day. All parties may disconnect now.