Triumph Group Inc (TGI) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2013 second quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please be sure that your pop-up blocker is disabled if you are having trouble viewing this live 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 that 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 the website at www.triumphgroup.com.

In addition, please note 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 Jeffry Frisby, the Company's President and Chief Executive Officer, and David Kornblatt, Chief Financial Officer and Executive Vice President of Triumph Group, Inc. Go ahead, Mr. Frisby.

Thank you, and good morning. I want to welcome you to the call this morning, and tot hank you particularly due to logistical issues presented over the past couple of days by Hurricane Sandy for dialing in.

Before we go any further, I just want to give you a brief update on Hurricane Sandy, and how it has affected the Triumph Group. First and foremost, as far as we know everyone is safe, and that is certainly the most important issue. We have several facilities that are based in Connecticut and New York that have, in fact, lost power, and we expect to have power restored shortly, but have in fact incurred no damage in those facilities. We have one facility on the south shore of Long Island that has in fact, suffered some flooding, and we are currently assessing the ramifications of that damage. We had a prestorm check list that we had gone through, because we certainly are as prepared as we can be for situations such as this, and we are currently implementing our plan and will do so as soon as we are allowed back into the facility. So all-in-all, the storm was certainly devastating to the region, and we were affected somewhat, but not in a significant manner, and have had no injuries, which is good news.

Before I get into the prepared slides, I am going to take the opportunity to provide a few introductory remarks. I want to start out by saying something that a lot of you already know, that Triumph is a special company. Our 2012 Annual Report declares that we are designed to be different and built to perform. That statement is certainly true, and has proven to be true over the course of time. You have also heard us repeatedly describe ourselves as a Tier 1 capable company. As a reminder, the term Tier 1 capable means that we have the full capability to operate within Tier 1, and to offer Tier 1 integrated solutions, but we are not limited to only that model. Our costs are low, including a relatively thin corporate costs. And as a result, our companies can compete in, and in fact, thrive within whatever Tier is most advantageous for them.

Our product offering, again as a reminder to many of you, is among the industry's broadest. Prior to our acquisition of Vought Aircraft Industries, Triumph was known for its broad product offering often being compared to Goodrich in that regard. When we acquired Vought in 2010, we only added to those broad capabilities. While it is true that the Vought acquisition shifted the balance among our three operating segments, it did not change who we are, and only added to the range of solutions we can provide to our diverse customer base, spread across our enviable mix of commercial, military both fixed wing and rotocraft, and business jet markets. Over time, we expect to reestablish the balance that was once so evident.

Between now and then, we will continue to look for opportunities to take advantage of our many strengths, including participating in a limited number of large Tier 1 Aerostructures projects, when they fit within our core capabilities and meet the economic and risk objectives we set forth. And just a further bit of discussion on that subject, with regard to large program risk, we do play in the large integrated program world. Currently, we have one major development program in our backlog, that being the Bombardier Global 7000 and 8000 Wing. We are managing that process very carefully, and we selected it as a program to pursue, as it had the right risk profile. It was a program that was clearly within our customer's capability, we like to describe it as being right down the middle of their fairway. It was right down the middle of our own fairway as well capability-wise, and did not involve a revolutionary design or technology leap. We will pursue other opportunities that have the right risk profile, however, we are certainly mindful that we can't have too many large scale development programs all at once and that we need to choose our spots prudently.

Okay. Now I am going to start with slide number three. I want to remind you about the slide presentation that should be available, along with the audio. I understand that we may have had some technical difficulties, so I am hoping that I am suggesting the right thing.

But I am on slide number three now. And that is the FY 2013 Q2 in review, and as Dave will certainly provide a lot more detail, we had a very strong quarter. The quarter was marked by increased revenue, record operating income and year-over-year operating margin expansion, particularly in Aerostructures and Aftermarket Services segment, and also by record EBITDA. I also want to note here and we will talk about this a bit later, also note that in the face of uncertainty in the military market, we actually maintained our military sales for the quarter, actually increased it a tiny bit. But it certainly was something that we had hoped to be able to do, and at least in the this quarter we were able to do it.

The integration of Vought continues to progress well. We are still on track to deliver $50 million a year at that run rate by June of 2013. Last quarter, we described that we were about at the $3 million run rate. All I can tell you now is that we are north of that and headed for that $50 million a year run rate mark by June of next year. Dave will also provide some detail on different activities that we have made in managing our pension obligations, which I think we are continuing to do well.

Our balance sheet is very solid our net debt to total cap was down to 35.2% at 9/30, which is a good number, good progress for us. And it is also marked by a robust backlog. Our backlog has now eclipsed the $4 billion mark.

And additionally, I will just point out that we have also won some new and important contracts. These are not large individually, and we have not, at this point have not taken to announce the specifics publicly. But they do represent inroads into new and important programs, including the A320 Neo. Also of note in our aftermarket segment is an additional contract that we have won from FedEx for APU support, that supplements our previously announced wins, so that was good news as well.

So at this point, I will turn the presentation over to Dave, and then I will return for some closing comments. Dave?

Thank you Jeff, and good morning everyone. I would like to start with a review of the financial results for our second quarter. Turning first to the income statement, sales for the second quarter were $938.2 million, compared to $790.5 million for the prior year period, a 19% increase, almost all of which was organic. Operating income increased 32% to a record $142.9 million. Included in operating income was approximately $1.4 million of integration costs related to the Vought acquisition, and a $2 million charge for early retirement incentives offered to certain Triumph Aerostructures employees.

Income from continuing operations improved 37% to $80.2 million, resulting in earnings per share from continuing operations of $1.53 per diluted share, versus $1.13 per diluted share for the prior year quarter. Excluding the integration costs and the early retirement incentives, income from continuing operations was $82.3 million, or $1.57 per diluted share.

EBITDA excluding the early retirement incentives for the quarter increased 29% to a record $170.3 million, resulting in an EBITDA margin of 18.2%. The number of shares used in computing diluted earnings per share for the quarter was 52.3 million shares. Looking now at our segment performance, sales in the Aerostructures segment increased 21% to $714 million, all of which was organic. Second quarter operating income increased 31% from the prior year quarter to $121.4 million, and included a net unfavorable cumulative catch-up adjustment of $200,000. As we have previously pointed out, not all the synergies will contribute to favorable cumulative catch-up adjustments.

A sizeable portion will favorably impact the margins of our Heritage companies, which are indeed higher year-over-year. We remain on track to deliver or exceed our synergy target of $50 million annual run rate by June of 2013. The segment's operating margin for the quarter increased 130 basis points over the prior year to 17%. EBITDA for the quarter was $138.9 million, and an EBITDA margin of 19.5%. With respect to SAP, we continue to make progress, but are not yet in a position to see net savings being added to our operating results.

In our Aerospace Systems segment, sales for the second quarter increased 12% to $150.1 million, all of which was organic. Second quarter operating income increased 14% from the prior year to $25.7 million, with an operating margin of 17%. EBITDA for the quarter was $30.2 million, and an EBITDAmargin of 20.1%. The segment's operating results included $1 million versus $0.5 million last year of legal costs associated with the previously disclosed trade secret litigation, as well as $1.2 million of expenses associated with the Sky Aircraft bankruptcy.

We also thought we should offer a brief note on the status of the previously disclosed trade secret litigation with Eaton Corporation. As we previously reported, Eaton's claims against us were dismissed in December 2010. In May of this year the US Attorney's Office in the Southern District of Mississippi, voluntarily dismissed all related charges against the five engineers at our Triumph Actuation Systems Clemens subsidiary, who had been formerly employed by Eaton. Eaton has appealed the dismissal of its civil claims to the Mississippi Supreme Court and the parties are currently engaged in the briefing of that appeal.

In the meantime, we continue to prosecute our counterclaims against Eaton before the state court of Mississippi. While there have been press accounts of some of the more recent proceedings and decisions related to this matter, none of these more recent decisions represents a final disposition of our counterclaims, and we decline to comment on them at this time. To anyone who wants to know more, we commend you to the public record, which now contains many of the pleadings of the parties, and the opinions and orders of the Court. We prefer to let those documents speak for themselves.

Our Aftermarket Services segment reported sales for the second quarter of $76.1 million, an increase of 8%. Organic sales growth for the quarter was 4%. Second quarter operating income increased 54% over the prior year to $10.8 million, with an operating margin of 14.2%. EBITDA for the quarter was $13.1 million, and an EBITDA margin of 17.2%.

The next slide is a pension OPEB analysis for Triumph Aerostructures for your reference. As you can see, the table summarizes the pension and OPEB P&L impact, as well as the required cash contributions for fiscal 2013 and 2014. The fiscal 2014 amounts assumes that all of the fiscal 2013 actuarial assumptions are met. With regard to pension at 9/30/12, we estimate that our net underfunding would have increased by approximately $22 million since March 31st. This is almost entirely due to a drop in interest rates.

As discussed last quarter, we had initiated a few programs with respect to our defined benefit plans. Specifically, we mentioned an early retirement incentive we offered to certain members of our salaried work force. This program was concluded in the second quarter, and resulted in a $2 million charge in the quarter. This charge is reflected on the face of the income statement, for segment reporting you will see that we have included it in corporate.

We initiated a similar program with our bargaining unit in Dallas late in Q2, which will be finalized and accounted for in the third quarter. We expect the charge for that program to be approximately $2 million. However, there are certain variables that are not yet known, so this number is only an estimate. While these actions create expense in the year, mostly noncash, over the long term they reduce our obligations, reduce risk and volatility in future years. Lastly, one of our major action related to the synergies will result in the closure of a portion of our Dallas facility. If approved, this will likely create a pension curtailment in a future quarter, which we currently estimate to be between $10 and $20 million.

Turning now to 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 September 30th was $4.04 billion, an increase of 8% over the prior year. Heritage Triumph backlog increased 5.1% year-over-year. Military represented approximately 25% of our total backlog.

Our Top Ten programs listed on the next slide are ranked according to backlog, first place was the 747 program, followed by the Gulfstream G450 and G550 programs. Third place was the Boeing 777, followed by the Boeing 787 program in fourth place. In fifth place was Airbus A330, with the 737 next generation in sixth. Seventh was the Osprey combat helicopter, and eighth place was the C17 cargo plane. The 767 is ninth, and in tenth place was the C130.

Looking at overall sales, Boeing remained our only customer which exceeded 10% of revenue. Net sales of Boeing Commercial Military and Space totaled 50.4% of our revenue, and was broken down 74% commercial and 26% military.

Looking at our sales mix among end markets, the next slide shows comparative Q2 in fiscal 2012. Commercial Aerospace sales increased 34% to $526 million, representing 56% of our total sales, while military sales of $263 million were flat year-over-year, and represented 28% of total sales. The military decline as a percentage is entirely attributable to commercial growth. Business jet sales increased 15% to $120 million, and represented 13% of sales, regional jets remain unchanged 1%, and nonaviation accounted for 2%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter increased 18% from the prior year. Breaking that down by segment, all of the Aerostructures and Aerospace System sales for the second quarter were organic, the Aftermarket Services segment same store sales for the quarter grew 4% to $73.3 million. Export sales for the quarter increased 2% to $113.5 million.

Turning to the balance sheet on the next slide for the six months ended September 30th, we generated $188.9 million of cash flow from operations before we made $56 million of pension contributionsto the Aerostructures defined benefit plan. After these contributions cash flow from operations was $132.9 million.

The calendar was not our friend this quarter as a significant amount of cash payments that were processed on the last Friday of September were not received until Monday, October 1st, adversely impacting the quarter's cash flow. There was modest inventory growth in the quarter. The material portion was attributable to investment in the Bombardier Wing, a reduction in advances and inventory primarily to support new programs.

For the full fiscal year we expect cash flow available for debt reduction to be between $150 million and $200 million. CapEx in the quarter was $24.1 million, and $61.2 million year-to-date. We expect CapEx and investment in major programs for the year to be approximately $140 million to $160 million. Net debt at the end of the quarter was $1.1 billion, representing 35.2% of total capital.

The global effective tax rate for the quarter was 36.5% and reflected the fact that the R&D tax credit expired back in December of 2011 and has not yet been extended. We continue to expect minimal cash tax to be paid in fiscal 2013, and to be increasing to a low to mid-teens tax rate in fiscal 2014.

One matter that may be worth addressing here is it the status of our negotiations with the new landlord at the Jefferson Street facility occupied by Triumph Aerostructures Vought aircraft division. As of today we are still attempting to negotiate an acceptable new lease with the new landlord. At the same time we are developing a back up plan to relocate our operations out of Jefferson Street. In doing so, we are modeling a number of scenarios that do not compromise customer commitments, and balance our need and desire to retain the right skills and work force, and the moving risks and costs, both in terms of the move itself and future ongoing operating costs.

We have not yet made any final decisions in this regard. All of the various scenarios would involve a significant investment in capital and expense, but would produce significant long term savings for the Company. While the timing of a near term move may not be optimal in terms of the programs currently being produced at Jefferson Street, after the move, we will be a far more efficient and streamlined business. We expect to make a decision in our third quarter.

As you saw in the press release, we reaffirmed our revenue guidance for the fiscal year to be between $3.5 billionto $3.7 billion. However, we do expect revenues in Q3 will be up year-over-year but down sequentially. This is primarily due to some significant deferral requests by some customers from our Q3 to Q4, and to a lesser extent some customer driven acceleration of sales into Q2. Please note that our EPS guidance of approximately $5.95 does not include the cost for the pension actions we have taken to date, nor does it include the pension actions that may occur in Q3 and Q4.

With, that I will turn it back over to Jeff.

Thanks, Dave. On slide 15 in the fiscal 2013 outlook, as we look toward the balance of the fiscal year and beyond, we are encouraged that our backlog remains strong. As is always the case, we certainly need to remain focused on improving execution, continue to drive the integration benefits, and also continue to control our costs. We certainly believe that we are well-positioned to benefit from t he increasing OEM build rates, and we are in good position to capitalize on whatever new opportunities arise.

At this time, we are reaffirming our fiscal year 2013 revenue guidance of $3.5 billionto $3.7 billion, taking into consideration the slope that Dave just referred to. Additionally, we are raising our earnings guidance, our EPS from continuing operations to approximately $5.95, excluding integration costs and early retirement incentives. And this is based on our year-to-date performance which has certainly been strong, current market conditions. Now when I speak about the current market conditions, you all are certainly aware of thepublished commercial build rates and their increases.

In terms of military, I want to talk about our assumptions there for a minute. For the balance of the year, we have projected sales to generally continue as they have during the first six months of our year. We have seen and expect to continue to see a certain level of inefficiency in the order and shipment cycle as our customers are clearly managing their spend much more carefully. We may see an uptick in deferral requests from quarter to quarter, but we do not expect that to have a material impact on our business for the balance of fiscal year 2013.

With all of that said, this portion of our business is certainly being impacted by budget cuts and potential cuts. Where all of this whole sequestration discussion ends up, we still think that there is going to be some downward pressure on the military budget. And it is different program by program. However, there is clearly less overall certainty in this portion of our business. And also, the current production rates, as I mentioned before, is something that have been well published and understood, and it is also based on weighted average shares of 52.5 million.

That concludes my remarks. And I would like to open up the line for questions at this time.

Thank you at this time officers of the Company would like to open the forum to any questions that you may have. (Operator Instructions). Our first question comes in Julie Yates. Please state your affiliation followed by your question.

Credit Suisse. Good morning, guys.

Good morning.

Can you offer some more granularity on the drivers of the revenue strength in both structures and systems? I know you had the easy comp from the slippage of the 747s in the year ago quarter, and then you mentioned some customer-driven acceleration into the quarter, but was there anything else abnormal in the numbers?

No. I mean there were a few, we got the benefit of a few extra wings in the business jet area, and a couple other small requests out of Q3 into Q2, but nothing abnormal. Certainly, you make the valid point, Julie, last year was when we had the pause. Certainly some of the year-over-year growth is attributable to that. But nothing highly unusual, no big, nonrecurring revenue was relatively flat. There is nothing unusual like that.

Okay. Are you seeing an increase in the 787 shipments, and maybe you could let us know where you are on a run rate, a monthly run rate?

We are starting to inch towards five, we are not there yet but we have seen an uptick generally in the quarter. Some of our companies are still at three as we have talked about before. It is not one-size-fits-all for us, given that we sell parts to not only to Boeing, but to a number of other suppliers.

And I think it is kind of good news is the more that you hear coming out of Seattle is that the actual number of deliveries that are coming out of there has in fact been increasing. So we have been talking about a ramp for a long time. It looks like we are finally getting one. We will see how successful Boeing is. We certainly are hopeful that they will meet all the projections that they have made, but we are seeing the increase. It is a question, as Dave talks about, as to we have already talked about how we are going to lag the build rate in this case, because of Boeing having to remove some of the slack in the supply chain with some of the stuff that they have prebought, and things of that nature. But just the fact that they are delivering the additional aircraft and making good progress is good news for us.

Okay. Great and then last one, are the customer deferral requests from FQ3 to FQ4 from your military customers, and then how do you get comfortable these won't slip into FY 2014, or what is the risk that they might.

They are all military, and there is that risk, so when we look at our revenue guidance, I mean some of it is purely their own calendar year-end, and we have had those requests even when times were good. They might be accelerating a little, and there is no guarantee. But that just makes Q4 even better. It usually does, but I think we are always entertaining deferral requests these days in the military side.

Thanks, guys.

Yes.

Our next question comes from Rama Bondada. Please state your affiliation followed by your question.

Royal Bank of Canada. Glad to hear everybody is safe at Triumph from the storm. First question is around margins, the last two quarters were basically at these record level margins once you take out one-time items. As we look forward particularly after we pass hitting that $50 million synergy goal next June, how should we think about margins in terms of incremental margins, or what are the potential peak margins that we can see Triumph both as a company, and then also the segments too?

Rama, we have continually said that we are not going to give a peak margin goal. We have also repeatedly said we believe that we have multiple hundred basis points of upside from where we are, certainly in Aerostructures. The synergies will be part of that tailwind to get there. But now that the aftermarket group has gotten well past our long-term target of high single, low double, I don't think we are prepared to give a peak margin. We have a lot of room to still improve at many of our companies.

That hundred bips of improvement that you are talking about, are you talking about one year, three years, ten years, I would just like an idea how quickly that could come through?Is that based upon the current production rates that Boeing and Airbus have already announced?

Yes. I think it is current business. When we look out we think within a two to three year time horizon, we can continue to have multiple hundred basis points

Perfect, great. Also on the 777, that is stepping up on the first quarter calendar year of 2013. Has that begun to flow through to your numbers already, that new production rate?

Very little but we will get a little tailwind from that in Q3.

Great. Thanks a lot.

Thank you.

Our next question comes from Yair Reiner, please state your affiliation followed by your question.

Yes. Oppenheimer & Company. First just a quick follow-up on the margins question. It looks like your guidance implies that margins will decrease a bit in the second half of the year compared to where they were in the first half. Can you talk about the drivers potentially driving that?

Well, I guess just fundamentally, to anticipate that question, I am glad you brought it up early. I think we have got to remember that first off, we have already delivered two great quarters and we expect to continue to perform well in the future. There's nothing fundamental to our business that suggests a change in course. The deferral request that Dave talked about on the military side, we have seen for Q3 should provide a tailwind for Q4. But as you know, there is some uncertainty regarding this as we just discussed. So it included some level of conservatism there. In the Aerospace Systems segment we have already had two strong quarters of aftermarket activity within that particular segment. And so given historical patterns we are projecting some leveling off of that in the second half. And in the aftermarket segment, we have also provided some conservatism, as some of the new wins ramp up. So we do expect the second half to be down from the first half. But at this time, we just want to be slightly conservative on certain issues.

That is what I was anticipating. Now just another question aftermarket. Can you give us some color to help us try to think about the sequential kinds of revenue trajectory from here? You were down, I think quarter-on-quarter. In the second quarter obviously lots of puts and takes with Delta, with FedEx, and I guess with the general weakness in air transport. If you can help us think through the next couple of quarters, and maybe about 2014, that would be helpful?

Well, we are not giving 2014 guidance today so I am not going to address that. I would think you would see given even with Delta winding down, I think FedEx ramping up, assuming the market stays where it is at, you will see growth sequentially, not monster growth, but in the aftermarket, in quarters 3 and 4.

Thank you.

Yes.

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

Stifel Nicolaus. Thanks. Good morning Jeff and Dave.

Good morning.

I am glad nobody is hurt down there. On your balance sheet, you cleaned up things quite a bit since the Vought acquisition. You are sort of down near the range where you have been doing things before. We hear Boeing talking about shrinking the supply chain. So I haven't seen any deals in a while. I am wondering if you are looking for something specific, if it is valuations, I know there are some other guys in the market who have been paying up recently, but can you give us a comment on that please?

Well we are trying to maintain our strategic objective which is to acquire aggressively, with another objective which is to remain disciplined. That is kind of a hard place to be right now, but there certainly are a number of acquisitions that we have a great deal of interest in. And we have been, I would say we have been fairly competitive in some recent deals that have been consummated. So I think that we will be successful at some point in the acquisition game, where we are in fact, still actively involved in it, and we are trying to make sure that we are targeting those areas that meet our strategic objectives to continue to increase our product portfolio, and to fill some technology gaps that we think that we have. I talked about the fact that we are going to our restore balance over time. We have got to look at that in terms of making acquisitions. So we are still playing, we are still active, and we hope to have some success.

Okay. Thanks. And on the Jefferson Street facility, just as a reminder, could you tell us which programs are in the building you may sign a new lease on or otherwise change?

Yes. The programs there are C17, some V22, G5, a little bit of Blackhawk, and Global Hawk Wing.

Okay. So it is not the same as moving all of that big 747-related stuff around the corner.

Correct. That is Marshall Street, so that is not impacted.

Great. Thank you very much.

Our next question comes from Michael Ciarmoli, please state your affiliation followed by your question.

Keybanc Capital Market. Thanks, guys. Great quarter.

Thank you.

Thank you.

Dave, you didn't want to comment on fiscal 2014. What about your thoughts on fiscal 2015 given the margins, you have got that long-term $6.50 target out there. I mean I can appreciate the conservatism for the second half of the year, but if all things go well you could be in a position to do north of $6.00. Any comments or thoughts around updating that longer term target you guys have up there?

I will repeat what Jeff has said repeatedly the last quarter. That is if we were holding Investor Day today, it is likely that the fiscal 2015 guidance that we gave would be higher.

Okay.

Okay. So does that indeed look fairly conservative now, but we are also not prepared to give fiscal 2015 guidance.

Got you. Maybe just to probe into some of the new opportunities, Jeff, could you elaborate? You mentioned the A320 Neo opportunity. Could you elaborate on that a little bit?

I can elaborate a bit. We still haven't, I am unclear as to how much, I guess how much we can talk about, in terms of our customers' concurrence with public releases and such. And in fact, I would anticipate we would have a public release as soon as we nail down those things, and get that concurrence. But the reason I bring up those A320 Neo wins, is that they were wins within our Aerospace Systems segment, and they are proprietary wins, so that they are going to help us not only today but in the future.

I bring that up specifically because we are talking, I was talking about attempting to rebalance. And for those out there who think of us solely as a structures company, it is another indication that in fact we are not one, and that we do have a very, very broad base of product offering as we always have. Additionally, we have also noted that in our Top Ten backlog, that one of the programs or probably the biggest absent program on that list was the Airbus A320 program. So we have in fact launched an initiative to attempt to regain some market share, and to make further inroads into that program. And this is a furthering of that particular strategic initiative. So it is for those reasons I mention them. And so I guess I can go as far as that at this point. But I would have to say we would love to make the announcements official with far more detail as soon as we can.

Okay. Fair enough. And then last one, and I will jump off here. How about opportunities with Airbus producing that platform in Alabama? How are you guys kind of planning or posturing to pick up some opportunities related to that new facility?

We always have an ongoing dialogue with Airbus relative to that plan. It has been their initial position that there is not going to be a tremendous amount of supply chain opportunity, specifically because that facility is in Alabama. They are looking at building, they say somewhere around four to five aircraft a month, which in and of itself does not create a real need for having additional supply chain locally. They will be quick to point out that they already buy a substantial percentage of their aircraft from American suppliers. So I think if they were going to start building a greater number of aircraft in Alabama, the opportunities would be greater. That being said, there will be some opportunity there, and we are staying as close as possible to take advantage of whatever may come up.

Great. Thanks a lot, guys.

Thank you.

Our next question comes from Ken Herbert. please state your affiliation followed by your question.

Imperial Capital. Good morning, everybody.

Good morning, Ken.

Just wanted to do follow up. Aerospace Systems, really nice margin this quarter. Did you see anything unique in terms of aftermarket part sales there versus original equipment sales, or was there anything different sequentially from the second quarter that may have benefited the margin there on the aftermarket side?

Aftermarket was about flat with Q1, which was very strong. So that was one of Jeff's comments, about we usually have two really good quarters with the way our customers order in that segment. So we had a very good quarter in Q2 or deliveries, I should say. And other than that, I think it is a matter of our really good companies continuing to be really good, and a number of our companies that are moving up the chain and performing better. So that always has the biggest impact on margins is when the lower producing companies improve. So we saw that. Certainly there were more companies improving than going the other way. So I think it is good old-fashioned execution and the aftermarket stayed strong.

You typically talked about from the part sales within Aerospace Systems, it is the fiscal fourth and first quarter when you see the strongest quarters, correct?

That is what it has typically been. That is right. Some was military driven, some spares. Certainly it is one of our initiatives to grow the aftermarket part of our own products, and certainly over time we would hope to see that increase. But I think at this point, I think it is just more we haven't seen tremendous evidence of that yet, but the is certainly something that we hope for.

Okay. That is helpful. And if I could, the Global 7000s and 8000s, you talked last quarter about some inventory build. Could you just give an update as to with your stand with those programs? And did you see are inventory levels sort of tracking sequentially where they were in the last quarter, and any change in timing on that program for you?

Yes. I mean the inventory was up a little bit overall in the quarter, and I think the Bombardier Wing was the biggest portion of the increase, I think it was up $17 million or $18 million year-to-date, and about $10 million in the quarter. So that is the biggest portion of our inventory growth. And then certainly some for new programs. But it is probably the spending is a little less than we had thought at this point. That is mostly engineering, by the way. It is not hardware atthis point. It is deferred engineering into mostly what is going into inventory, the capital goes into capital, and we are working our way through the development program with Bombardier, and I think at this point there are the normal things that come up in a development program, but nothing that is changing our spend dramatically at this point.

Okay. It sounds like that program is pretty much on track relative to your expectations?

Yes. I mean it is a little behind, but probably we had planned that.

Okay. Excellent. Great quarter. Thank you very much.

Thank you.

Our next question comes from JB Groh, please state your affiliation followed by your question.

D.A. Davidson. Good morning guys. Just playing off the Neo question, could you maybe talk about potential incremental opportunities on the max, and that is obviously, the 737 is obviously a great program for you, but is there anything additional you think you could get with the newer generation?

Yes. I think that there is. I think there are opportunities for us there. I think that there actually when they have changed the engine, they are changing some I guess some purchase points on some of the equipment that we had sold to Boeing directly, that now there will be opportunities to sell to Tier 1 integrators, whether they be the cell makers, or that type of thing. There also are changes that will invariably occur on the structural side. I call them probably some small changes that would be really perfect opportunities for us, and we are staying close to Boeing to make sure that we participate in that. So we have a number of different avenues in which we can participate with things. So I think we will be successful in adding market share as we go from the next generation to the max.

So more opportunity than risk?

I think so, yes.

Okay. And then, on this Johnson Street, you mentioned that potentially having to make a move. And could you said this, I might have missed it. Potential sort of CapEx investment that would require, I know you said that there would be some significant savings if you were forced to do that, but what sort ofCapEx would be related to that?

I don't think we want to give those details at this point. We are looking at what do we have to move, where do we have to move it, the potential range is wide. But it is substantial. I mean it is eight figures, mid-eight figures probably

Okay.

So I mean it is substantial. Now fortunately, the savings there are also a lot of moving costs, and the savings are also rather significant. And there will be some noncash write-offs. But I think it would, other than it might not be the optimal time to do it, this was something we have known would be done since we acquired Vought. It was really just the timing.

But all-in-all, it looks like a pretty positive MPV sort of project, if you had to put it in those terms?

Absolutely.

Definitely.

Yes. Okay. Okay. Good. Thank you for your help. Great quarter.

Thank you.

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

Deutsche Bank. Thanks. Good morning. Good quarter. Maybe to pick up where JB left off, so you had the synergy target for $50 million. I am just curious what kind of other things like Jefferson Street, which sounds obviously like an investment but a pretty substantial return. Dave you have done a healthy amount of work on the pension side, and if you could comment on how much the curtailment might lower ongoing expense, that would be helpful, if you do take that $10 million to $20 million charge? But broadly, maybe Jeff, could you talk about the $50 million of synergy target in context to some of the other synergy opportunities, I guess the best way to put it that are out there that might require a little more investment, a little more horizon? But can you scale or at least put in relative terms of kind of opportunities for success?

Well, I think that we have talked about any number of times, I know I remember Rick repeatedly describing the fact that we would be disappointed if we only got $50 million. We thought that we were going to be able to deliver far more than that. And I think that is true. But there comes a time in this whole synergy discussion, when we really just have to start taking a look at what we are doing to continue to drive competitiveness. And we have talked about the fact that we have a couple hundred basis points of margin potential. In all of the things that we are talking about doing, whether they be investments in capital to drive down costs, and maybe they are within Aerostructures, maybe they are not. Maybe we could describe or discuss whether they would be a synergy or not.

But I think in discussing specifically synergies, we are going to stop doing that, and we are going to start talking about the fact that we are going to make investments to enhance our competitiveness, that will be able to grow our business because we will be, if we are not world-class competitive, we will be far closer than we were before, because we will have made a lot of these investments. So I guess the best answer to your question is, that rest assured that the synergies we are going to deliver are going to be far in excess of the $50 million, and they are going to help to ensure our overall competitiveness as we go forward in the years to come.

Is there that $10 million to $20 million potential curtailment, is there a material impact on the ongoing and pension expense that you presented in the charts?

I wouldn't think so, Myles, but if there is ever a time to give precautionary language it is when you talk about pension accounting. So we are focused on the long term here in reducing the risks. There are so many of these factors that every time I think I understand it, I figure out that I don't. And you got the corridors, the non-corridors, when do you recognize the amortization, all I can tell you is if we are successful in these actions, we are bringing forward some expense. We are reducing the people that have a pension, and that is all about goodness long term, and eventually derisking the whole obligation. So I don't think it has a monster effect in terms of what fiscal 2014 would be. But I don't want to venture a guess at this point.

Okay. Then the last one is on cash, and I am probably answering it with my own questions. But I think the cash available for debt reduction last quarter was $200 million. It sounded like you are more looking at $150 million to $200 million. The CapEx deferred production target didn't move, so I am just trying to think what else moves within the working capital accounts, or where you are kind of thinking it is going to more hedge to the $150 million to $200 million, versus the $200 million previously, Dave?

Yes. We are hoping it is closer to the higher number, Myles. But what we have seen with the deferrals, become big deferrals of advances in the military world, and I could tell you our customers are very focused on the quarter ends. And it is just very easy for very large payments to slip. So we are starting to account for that and giving a range. But if everything goes as planned and the sales, we don't have any huge deferrals out of the year, and it is mostly Q3, I would hope we would be at the upper end of that range.

Is the military deferrals, is this more a customer specific issue, or maybe the customer doesn't want to commit without an order either domestically or internationally. It seems like your shipments on your aircraft side of the house, would have a better schedule they kind of want to stick to unless they were taking a more conservative approach. Is that kind of what it is, or is it very customer specific?

My take on this is that it is really customer specific, and it is not fundamentally that although they may not actually sell that helicopter or that aircraft, these things are under contract. It is more of a timing issue in terms of what they want to do vis-a-vis their year-end.

Yes. There is no discussion of deferral leading to cancellation. It is purely as Jeff said. And I think people want to, even the largest companies look to their year-end balance sheet and quarter end balance sheets these days more carefully than ever.

Thanks.

Are there any additional questions? We have a question from Peter Arment. Please state your affiliation, followed by your question.

Yes. Sterne Agee. Good morning, guys. Nice quarter.

Good morning.

Thank you. good morning, Peter.

Jeff, could you walk us through a little bit. You guys continue to differentiate yourself with your solid performance, and I am particularly talking in Aerostructures. A peer of yours is stumbling quite badly on a lot of development programs, and you are embarking on what looks like is going to be a successful program for Bombardier. How are you approaching kind of the risk retirement, and how do we think about the milestones going forward?

If we were talking specifically about the Global 7000 and 8000 program now?

Yes.

Now in terms of risk retirement because we have obviously got, we were just talking about pension which is a whole another risk retirement. But as I mentioned before, this program is one that is not a high-risk program from the standpoint, talked about it being right down the middle of Bombardier's fairway, it is a metal aircraft. It is not anything that is brand new that has a huge risk of great delays, other than normal development delays. It is in the middle of our fairway in that we have done this type of product before. We have designed and developed wings in the past, and there is nothing specifically new to this, other than some of the, maybe it is an improved design certainly, but there is no technology leap. So we are really into managing a specific program here. And what we have done is taken a great deal of time in laying out the two main issues that you always look at in these things, and not to oversimplify it, but it is your nonrecurring costs and your recurring costs. So you have to have the proper estimates up front, and certainly an estimate of a price that enables you to win that still enables you to make money.

And we have had constant communication that has measured our effectiveness against those internal goals that we have set for ourselves, so that we can determine whether or not we are performing according to our cost targets, and we continue to discuss that. When there are changes that come about in the design that come from Bombardier, we have immediate discussions on ramifications to nonrecurring and recurring price along those lines, so we are doing the standard, I guess we will call it standard, program management activities that you would expect us to do. I think the important thing to remember in this is that it is a program that we are very comfortable with, and it is in a product that we are very comfortable with. we're staying within our core competency and we are able to manage it, because it is really our only large development program.

We do resist the temptation of embarking on five or six of these at once, because it is not easy to develop a new product, but to do it five or six times at the same time would be, I think a very high risk, certainly a high risk idea as we have seen evidenced. And I don't want to get into what Spirit's issues are, but obviously they have had some, and they are addressing them, and we are counting on their continuing to be viable player in this industry. They are a very important company for our industry.

Thank you for that. And just, Dave, could you just remind us of kind of the CapEx profile for what we could expect on this program? When do we peak out related to that?

We should, the last year of large sort of just only spending should be fiscal 2014, and it should wrap up in early 2015, and then we start selling wings, and I think 2015 should be a positive net year, but there would still be cumulatively we would be negative from an investor perspective. But we have one more year of heavy spending in fiscal 2014.

Okay. Great. Thanks, guys. Nice quarter.

Thank you.

Our next question is a follow-up from Michael Ciarmoli, please state your affiliation followed by your question.

Keybanc. Thanks, guys. Dave, this 787 program ramping, is that currently dilutive to your current corporate margins, and how should we think about those revenues and those margins as the program continues to mature?

Currently profitable, currently dilutive, and I believe we have consistently said and continue to believe that if after two or three quarters of being in the 5 to 7 per month category, we would hope we could bring those margins up to corporate average, and then possibly beyond. So maybe you are looking out a year from now, where perhaps we would expect the margins to be no longer dilutive. But it is profitable today, and is adding to earnings.

Okay. Does that factor into the couple hundred basis points of margin expansion?

Yes. But I mean you are talking about a very small amount of sales today that are being dilutive.

Got you.

That is not what is preventing us from being another hundred basis points higher today. Believe me.

Okay. Last one can you give us a total, you had a new FedEx contract, what sort of annual run rate for those FedEx revenues?

I think that we are going to stay away from that Mike. These are nice contracts, and they will in and of themselves be impactful, and some nice tailwind, but FedEx is constantly moving their fleet around. We have already seen some movements. Some of the planes in the first one may be retired earlier, but they will be replaced by planes in this next win. So I don't want to get into that projection. But these are multi-million dollars per year wins.

Got you, perfect. Thanks for taking the follow-ups, guys.

Since there are no further questions, this concludes the Triumph Group fiscal 2013 second quarter earnings conference call. This call will be available for replay after 11.30 AM today through November 7, 2012, at 11.59 PM. You may access the replay by dialing (888)266-2081, and entering access code 1593689. Thank you all for participating, and have a nice day. All parties may disconnect now.