Triumph Group Inc (TGI) 2014 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 2014 second quarter results. This call to being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast.

(Operator Instructions)

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 now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Security Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results performance or achievements expressed or implied in the forward-looking statements.

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition please note that this call is the property of Triumph Group Inc and may not 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 everyone. I'd like to welcome you all to this conference call to review our fiscal year 2014 second-quarter results. As has been mentioned, there is a slide presentation to accompany the audio portion of this call, so I invite you to follow along.

Six weeks ago we announced the recording of a charge to earnings related primarily to the 747-8 program. If memory serves, Boeing announced the impending cessation of C-17 production later that afternoon. Subsequently the production rate of the 747 was further reduced to 1.5 per month.

I mention these things not to focus on the challenges faced by everyone in this industry, but to illustrate that our marketplace is and always has been a dynamic one. Setting aside the charge we took on the 747 program, we will be reviewing a quarter that was strong in many ways.

In terms of the rate reduction on the 747 and the fiscal year 2016 cessation of C-17 production, I do not believe anyone who has been involved with this industry for very long could call either event a surprise. The dynamic nature of our marketplace is one reason that companies that are committed to long-term growth have strategies that are longer and broader than an individual program or two. Triumph Group is such a Company.

We have continued to aggressively pursue our strategies to gain market share, to broaden our customer and program base, to be on the right programs, to continually enhance our competitiveness through cost reduction, and to innovate in terms of product, as well as process. We do these things both internally when we win new business, and externally when we make acquisitions.

I make these comments to explain why I sit here today, fully understanding the challenges that we face yet still having the same level of confidence in our future that I had a quarter ago, or even a year ago. We have a solid Company, a strong Management team with an equally strong track record, and in my opinion a superior operating model for this environment. Some might call me a bit biased, but that is how I see it.

With that said, let's look at slide 3. Slide is titled Q2 in Review. In summary we had solid second-quarter performance, with the exception of the 747-8 program. In the Aerostructures segment, excluding the 747, our businesses performed well. As Dave will delineate, the balance of the second margins were very strong.

Within Aerospace Systems it was a solid quarter in light of military sales decline. Overall sales were higher, but this was due to our newly acquired companies. And we were able to report continued margin improvement at Triumph Engine Control Systems, which is going to be very important part of our future in this segment.

In our Aftermarket Services segment, we showed continued strength in operating margin performance despite military after-market weaknesses. And we had overall organic growth despite continued, we will call it military sluggishness, that is still -- we are still experiencing, although we still believe that we are going to see an uptick in that area.

In terms of the status of the 747-8 program, performance is in line with our expectations with some improvement being made. We are carefully monitoring our new assumptions and our continued focus is intended to give us enhanced visibility. With visibility comes an ability to properly manage.

Our market conditions continue to be conducive to increased opportunity on the commercial side and I will talk about some of those opportunities a bit later. The pressure on pricing from our customers continues, but is basically unchanged from prior periods.

In the military business it is still uncertain with the total impact of sequestration still up in the air. We have experienced the aftermarket and discretionary type of spending effects and we believe that is kind of -- felt the full impact of that. But in terms of the production, effects of sequestration and the longer-term effects, we are just not sure yet and we will wait and see. However, that being said, we continue to win substantial contracts in the military arena, so it is not as if this business has ceased to perform.

And we have successfully -- we successfully completed the acquisition of General Donlee, which is now operating at Triumph Gear Systems-Toronto, which happen at the beginning October. That is a very good acquisition for us. We are looking forward to this new product line that should continue helping us implement our strategies.

The construction of the Red Oak facility continues to be on budget and on time. Dave will also cover this, but we should actually deliver our first Sikorsky helicopter cabin later this week, on schedule.

The construction of this facility is again a further illustration of our desire to enhance our competitiveness, reduce our costs, and build a very strong future for potential growth. This shifting from Jefferson Street to Red Oak is meant to drive our costs down, and the assumptions that we made going into the project are still sound.

At this point I will turn it over to Dave. Dave?

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

Turning first to the income statement, sales for the second quarter were $967.3 million compared to $938.2 million for the prior-year period, a 3% increase. Organic sales for the quarter decreased 4%, primarily due to production rate cuts on the 767 and the 747-8 programs, a decrease in military sales, and a decline in non-recurring revenue. Operating income decreased 35% to $93 million.

Included in our results were approximately $5.8 million in pre-tax costs related to the Jefferson Street facility move. Also included in the quarter results were $43.7 million pre-tax of previously announced additional program costs associated with the 747-8 program. The prior fiscal-year's quarter included $1.4 million of integration costs related to the Vought acquisition and a charge of $2 million for early-retirement incentives.

Net income was $49.5 million, resulting in earnings per share of $0.94 per diluted share versus $1.53 per diluted share for the prior-year quarter. Excluding the Jefferson Street move cost and the non-recurring costs in the prior-year period, net income was $53.2 million or $1.01 per diluted share, versus $82.3 million or $1.57 per diluted share.

EBITDA for the quarter was $122.3 million, resulting in an EBITDA margin of 12.6%. The number of shares used in computing diluted earnings per share for the quarter was 52.8 million shares.

Looking now at our segment performance, sales in the Aerostructures segment for the second quarter declined 3% to $690.7 million. Organic sales for the quarter declined 5%, primarily due to production rate cuts on the 767 and 747-8 programs and decline in military sales and a decline in nonrecurring revenue.

Second-quarter operating income was $64.4 million compared to $121.4 million for the prior-year period. And included $5.6 million of charges related to the Jefferson Street facility move, as well as the $43.7 million of pre-tax charges resulting from the reductions for the profitability estimates on the 747-8 program.

Operating results for the quarter included a net unfavorable accumulative catch-up adjustment of $25.4 million, of which $2.8 million was related to the Jefferson Street move and $26.2 million was related to the 747-8. Excluding these two items, the remaining long-term contracts had a net favorable acum-cash adjustment of $3.6 million. The segments operating margin for the quarter was 9%.

During the quarter the majority of our Aerostructures segment businesses performed well. Excluding the 747-8 program impact, these businesses had an operating margin of approximately 17%.

This is not meant to downplay the impact costs and our concern around 747-8, but to give you some insight, the majority of our Aerostructures segment operations and programs continue to perform well. EBITDA for the quarter was $85.3 million and an EBITDA margin of 12.3%.

As Jeff mentioned, with regard to Jefferson Street Red Oak move we remain on budget and on time and our team is doing a great job orchestrating and planning a complex move. While the heavy lifting on the move remains in front of us, we made excellent progress during the quarter.

Examples as Jeff alluded to would include that our Blackhawk cabin assembly has already moved and we expect to deliver the first cabin on time in the week to come. The B22 move has been substantially completed and assembly will commence next week. We have completed the closure of over 1.4 million square feet at the Jefferson Street facility.

To date, and admittedly with a relatively small sample size of approximately 60 people, mostly on the Blackhawk program, we have seen an excellent rate of our experience personnel from the Jefferson Street facility accept a new position in Red Oak.

In our Aerospace Systems segment, sales for the second quarter increased 37% to $205.5 million of which $60 million were attributable to MB and Triumph Engine Control Systems. Organic sales for the quarter declined 3% driven primarily by decreased military sales, and to a lesser extent, a decline in non-recurring revenue.

Second quarter operating income increased 23% from the prior-year quarter to $31.7 million, with an operating margin of 15%. Both of our acquisitions for fiscal 2013 continue to perform well.

EBITDA for the quarter was $36.9 million and EBITDA margin of 18%. We continue to deal operationally with the effects of hurricane Sandy at our Freeport operation. However from a P&L perspective the impact was essentially flat in the quarter net of insurance reimbursements.

The segment's operating results included $1.9 million versus $1 million last year of legal costs associated with the ongoing trade secret litigation. And we expect legal expenses for the fiscal year to be approximately $6 million.

As for the status of the Eaton litigation, we are now awaiting a ruling from the Mississippi Supreme Court on Eaton's appeal which has been briefed and argued. Meanwhile, Eaton has also appealed a ruling by the trial court in connection with our counterclaim against Eaton that would have required Eaton to produce several documents. Eaton claims to be protected by attorney-client privilege.

The Mississippi Supreme Court has stayed all proceedings in the trial court pending its decisions whether to order those documents produced. Accordingly the trial will not begin November 4 as we have long expected. We will have to wait for a ruling from the Mississippi Supreme Court that lifts this day.

In the antitrust case we filed in North Carolina however, the US District Court in North Carolina has granted trans motion to dismiss Eaton's counter claims, and a scheduling conference has now been set for November 21. If anyone wants to know more, we refer you to the documents available in the public record and prefer to let those documents speak for themselves.

Continuing with our segment review, sales in the Aftermarket Services segment in the second quarter were $73 million, compared to $76.1 million in the prior-year period. The year-over-year decrease reflected the impact of the divestiture of the instrument companies.

Organic sales growth for the quarter was 5%, second-quarter operating income was $10.1 million with an operating margin of 13.8%. EBITDA for the quarter was $12 million and an EBITDA margin of 16.4%.

We recently secured a nice piece of business with KLM Royal Dutch Airlines in Amsterdam, who awarded Triumph Airborne Structures a five-year component maintenance and availability agreement for the Diesel components on their fleet of MD-11 PW 4000-powered aircraft.

The next slide is a pension/OPEB analysis for Triumph Aerostructures for your reference. As you can see the table summarizes the pension/OPEB P&L impact as well as the planned cash contributions for fiscal 2014 and 2015. The fiscal 2015 amounts assume that all fiscal 2014 actuarial assumptions are met.

During the second quarter we launched an offer to the deferred-vested participants in the aerostructure defined benefit plan. This should have the effect of reducing both our liability and assets and is consistent with our goal to de-risk the pension plan. The exact acceptance rate and impact are not yet known, however we do expect this to contribute to a triggering a so-called settlement accounting.

Settlement accounting requires us to re-measure our assets and liabilities and reset the pension income or expense for the balance of the year. It is triggered when a certain amount of our pension liability is settled. Driving this for Triumph is the large number of people, who pursuant to the various initiatives taken last year, opted for a lump sum and this years action for deferred-vested participants.

Our current projections based on today's discount rates and year-to-date asset returns, is that the settlement will result in a small net-positive impact in fiscal 2014, reflecting both the settlement loss and a slight increase in pension income for the balance of the year. Of course, this estimate is dependent on a number of factors which cannot yet be quantified with any certainty, and as such is not included in our guidance.

With regard to our pension liability at September 30, we estimate that our net under funding shrunk approximately 50% to $175 million since the beginning of our fiscal year, primarily due to an increase in discount rates and good asset returns. Looking at the components, our gross liability decreased $251 million, offset by a decrease in assets of $76 million, which was driven by large lump sum distributions partially offset by positive asset returns.

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 Systems groups. The Aftermarket Services group does not have a substantial backlog.

Our order backlog as of September 30 was $4.85 billion, an increase of 8% over the prior year. Backlog increased 4% sequentially, and same-store backlog increased 4% from the prior year. Military represented approximately 29% of our total backlog.

Our Top 10 programs listed on the next slide are ranked according to backlog. In first place is the 747 program, followed by the 777 program. Third place is the Gulf Stream 450 and 550 programs, followed by the C-17 freighter in fourth place.

In fifth place was the Airbus A330, followed by the 737 next generation in sixth place. Seventh was the Boeing 787 program, and eighth place was the Osprey combat helicopter. UH60 Blackhawk helicopter is ninth and tenth place is the Boeing 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% of our revenue and was broken down 74% commercial, 26% military.

Looking at our sales mix among end markets, the next slide shows that compared to Q2 of fiscal 2013, commercial aerospace sales increased by 6% to $558 million, representing 58% of total sales. Military sales of 266 increased 1% year-over-year, and represented 28% of total sales.

With respect to military sales on the OEM side, build rates our customers are generally in line with our prior guidance. However, in situations where we use a min/max system, many of our customers have slid closer to minimum and that is impacting our sales. We do expect this to be a short-term issue.

On the military aftermarket side we saw a large decrease in Q2. However, early trends in October indicate that a good portion of that business is returning.

Business jet sales decreased 10% to $108 million, and represented 11% of sales. Regional Jets increased 100% to $14 million representing 1% of total sales, and non-aviation accounted for 2%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic sales for the quarter decreased 4% from the prior year. Breaking that down by segment, the aerostructures segment same-store sales for the second quarter declined 5% to $674.9 million primarily due to 767 and 747-8 production rate cuts, military sales decrease of non-recurring revenue decline as mentioned earlier. Aerospace Systems segment same-store sales declined 3% to $145.6 million. The Aftermarket Service segment same-store sales for the quarter grew 5% to $73 million, and export sales for the second quarter increased 33% to $151.1 million.

Turning to the balance sheet in the next slide, for the six months ended September 30, we generated $89.4 million of cash flow from operations, before we made $45.8 million of pension contributions to the aerostructure defined benefit plans. After these contributions cash flow from operations was $43.6 million.

Inventory for the year increased $108 million. The components of this increase were $33 million in the Bombardier Wing, $19 million from the Primus acquisition, $19 million from the Jefferson Street build ahead, $12 million in tanker non-recurring development activity, and $7 million in non-recurring development activity in the Embry air program. Based on the current forecast, pension contributions of $115 million, the completion of the Jefferson Street Red Oak move, and excluding acquisitions, we do not expect any fiscal year 2014 cash flow to be available for debt reduction.

During quarter two we had agreed with a major customer to defer receipts of certain receivables until our Q4. This will have no impact on the fiscal year, but will create a large difference between Q3 and Q4, in that approximately $90 million of Q3 receipts will be deferred until January. With respect to pension contributions of $115 million, $70 million of which remains to be made, all of the contributions are voluntary. And given the cash deferral expected in customer receipts in Q3, we may adjust the Q3/Q4 cash outflow to provide a better balance.

CapEx in the quarter was $63 million, of which $1.6 million was for Bombardier and $32.2 million was attributable to the Jefferson Street relocation. Year-to-date, CapEx was $119.3 million. We expect CapEx and investment in major programs for the fiscal year to be approximately $340 million to $360 million. Net debt at the end of the quarter was $1.4 billion, representing 39.5% of total capital.

During the quarter we had minimal activity around our convertible debentures. In early Q3 we had puts of approximately $17 million, which will bring the balance of our converts to $15 million. Earlier this month we notified the holders of our 2017 bonds of our intention to call their bonds in November at the contractual 4% premium. That premium and the write-off of the unadvertised fees and discount associated with these bonds will create a charge of approximately $11 million in Q3, which is now included in our guidance.

It is our intent to refinance these bonds and the acquisition of Triumph Gear Systems-Toronto with a term loan. The exact details of that plan will be announced at the time it is completed, which we expect to be in mid November.

The global effective tax rate for the quarter was 35.4% and reflected the fact that the R&D tax credit will expire in December. In addition, the income-tax expense for the quarter was favorably impacted by increase to our R&D tax credit carry forwards that resulted from a recent change in the law. We continue to expect minimal cash tax to be paid in fiscal 2014 and 2015.

One matter that might be worth addressing here is the status of our negotiations with the UAW. As of today the union continues to work under the prior contract. High-level discussions are continuing and we remain hopeful that a satisfactory resolution will be reached.

With respect to our financial guidance, excluding Jefferson move-related expense, but including the refinancing cost, we expect EPS in Q3 to be slightly above Q2. We do expect that Q3 will see the highest-level expenses associate with the move.

Our fiscal 2014 projected EPS of approximately $5.25 per diluted share reflects the impact of the 747-8 as discussed in September. It also includes the high yield redemption costs, and the impact of Boeing's decision to reduce the rate to 1.5, both of which are recent developments. It further include the impact of military uncertainty and the trend we have seen in min/max, and the tax benefits reflected in Q2.

With regard to Boeing's September decision to cease production of the C-17 in 2015, we believe there is a chance that the impact of fiscal 2016 will be less limited. While we expect to cease production of the major portion of the work statement in Q1 of fiscal 2016, we have received inquiries for substantial spares activity as we believe the Air Force will want to make sure it is adequately supported for the long term, given the likely scenario that the supply based on C-17 could disappear soon after production ceases. We will continue to update you on this as it plays out.

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

Thank you Dave. Turning to our fiscal 2014 outlook slide.

As Dave pointed out, our backlog remains strong and that our balance sheet remains solid. We continue, and remain focused on improving execution, continuing to drive integration and reducing costs, both internally and externally. We feel that we are well positioned to capitalize on new opportunities as I mentioned in the earlier slide. We have very recently been awarded a design-and-build contract for thermal acoustic insulation systems on the Embry Air EJets E2 program.

We view this win as approximately $150 million program win. While this individual win will not move our needle, this is clearly a part of our strategy that I mentioned in my earlier remarks of continuing to broaden our customer and broaden our program base, and being on the right programs. And this contract is just part of the significant contract potential that exist in a very active pipeline of opportunities.

At this point we are reaffirming our fiscal year 2014 revenue guidance of $3.8 billion to $4 billion. And as Dave mentioned, our current earnings guidance is for EPS of approximate $5.25, excluding Jefferson Street move related costs, based on current market conditions and current production rates. The previously announced 747-8 additional program costs of $0.83 per diluted share, recently announced 747-8 production rate of 1.5 per month, refinancing cost of partially $11 million pretax, and a weighted average shares of 52.9 million.

With that I would like to open up the line for our questions.

(Operator Instructions)

Robert Stallard, please state your affiliation followed by your question.

World Bank in Canada.

Good morning.

Dave, I was wondering if we could first start off on the 747? You said you stayed in line with your plan and there were some signs of improvement. I was wondering if you give us some concrete examples of how you are comfortable on the plan, for example how much your parts and air freight in?

Yes. We've instituted a pretty detailed review weekly with the teams in our two factories that support 747-8. We're looking at the key metrics of getting back to schedule, number of quality tags, level of overtime, labor efficiency, things like that. And we are looking at those comparing them weekly, as well as to the calculations we've made in coming up with the Q2 results.

And what we're seeing is, most but not all, most of those items are either trending slightly favorably or on schedule. And we do believe that we are a couple weeks away from getting out of the premium-freight business. So, which is consistent with what we had built into the forecast.

And maybe one for Jeff, on the FY 16 target you did not specifically talk about it this quarter. I was wondering if you still feel comfortable with that long-term EPS target giving the known negatives like the C-17 coming to an end?

I guess I would like to address that, I thank you for bringing that up. There really has been no material change to our view of our long-term guidance since we last spoke. We talked about 825 or 775 as adjusted for the C-17, and that remains our goal. Boeing's decision to reduce the production rate on 747-8 is certainly going to add some additional challenge, both in the form of loss margin on the loss sales, as well as pressure on overhead recovery.

We are in a process now are just beginning to the process of our annual budget and midterm budget analysis at our individual companies. There have been a lots of positives and negatives since the guidance in our last Investor Day that -- some of them are obviously negative and we have been talking about those, but there have been a lot of positive changes as well. And so we are going to gain some clarity over the next quarter, in terms of really -- I guess -- give some granularity to what it is that we put out there as a goal. And this process is going to give us additional information to help us to refine those calculations, which we will provide to you as soon as we properly vet them.

With that caveat said, the major movers of our earnings do remain in place. Specifically I'm talking about the Red Oak savings, margin improvement that we feel we will achieve, lower interest, improved pension, and new wins and acquisitions. So with that said, at the macro level and taking into account the major items listed, that I have delineated, we now see the fiscal-year guidance to be 825 less approximately the $0.50 for the C-17, less some impact from the rate reduction on the 747 to 1.5 a month.

The status of the military market in two years could either be a positive or a negative. I talked about the dynamics of the marketplace, and you think about the $0.50 cost or reduction that we put in place for C-17, we do not have a purely static view of C-17. By fiscal year 2016,a large number of our companies will have replaced the work that they lost on C-17 with other products. So I do believe there is some room for some upside there.

I guess the way I am answering this, we still hold the 775 as a goal, although over the course of the next quarter we will gain some additional insights and will be able to provide some more specifics on it.

Great, thank you Jeff.

Sam Pearlstein, please state your affiliation followed by your question.

Good morning, I am with Wells Fargo.

Good morning.

Dave, can you just tell me if I just look at your old $6.30 to $6.40 and take out the 747 and call it $0.13 for the refinancing, that still seems like there is about $0.10 from other changes in the outlook. What other things have been adjusted since then?

Well, we have baked in something for the rate drop of 1.5 on Boeing, that was not known at the time. And probably, while we see some recovery in the military, I would say a slightly bearish view than we would have had 90 days ago. So those are the two negatives that bridge that gap, a little improvement in tax, but those are sort of the larger items.

Okay. And then improvement you talk about just in terms of some of the military aftermarket, or early in this month. Was that the C-17 comment as well or has there been another change or improve in the aftermarket?

I think it is a different C-17, that is one of our larger--in our Aftermarket Services segment one of our larger contracts. And we decent some inputs in early October and sort of a plan for the rest of the year from our customer. Whereas we had seen no inputs for two months. So, it's that, it is some refueling work, and just across the board a lot of our companies you know -- saw military declines.

In the aftermarket segment it was down 55%, in Q2 year-on-year. Were it not for Engine Controls, that was down double digits in the aerospace systems group as well.

So we are starting to see some pickup. Whether we get back to prior years I think it is too early to tell, we put a little bit of cushion in for that. Not fully recovering.

One last question on Red Oak, how are you thinking about the C-17 coming to an end? And whether you will move C-17, whether you're going to move C-17, how is that going to play out?

We will move C-17. I think it is in the best interest of Triumph, our customer, the ability to exit Red Oak, exit Jefferson Street, that is clearly in our -- everyone's best interests.

Okay, thank you.

Our next question comes from David Strauss. Please state your affiliation followed by your question.

Good morning, UBS.

Good morning.

Back on Red Oaks, you talked about Black Hawk being moved, I think you are now in the process of moving, I guess, C-17 the Gulfstream program is that right? Is this kind of the peak period of risks overall for the move as we sit here today?

Well anytime you move something there is some inherent risk, but there have been plans been put in place that should mitigate those risks. This next quarter is when there are going to be a awful lot of moving parts.

That said, things like the G5 wing move we are not, for example taking an example tool and moving it from Jefferson Street to Red Oak. We are creating an additional tool. So that we in fact never really stop the production of that product.

The C-17 is already in the process of moving, in terms of some of the smaller components. So it is all very carefully laid out, and to the best of our abilities we have mitigated the risks that are in place.

David, my comment about the expenses, there will be some disruption that is planned, but when I said the expenses will be the highest in Q3 I was mostly referring to the moving cost themselves. The rigging, trucking them, putting them back together, testing them, all of that has to be expensed. So that is the comment, we are not expecting a huge spike in disruption or certainly anymore that what we -- was built into the business case.

Okay, on C-17 you've highlighted the hit as being around $0.50, is that -- can you talk, Dave -- how it plays out? Can it potentially be worse than that as you come down in terms of overhead absorption issues? Or anything that could play out that the hit could actually be larger than that, or maybe more accelerated than the hit coming in 2016 or beyond?

It has always been approximately $0.50 David, that gives us some cushion. Hopefully that also reflects a little bit of opportunity. It's not an ultra-precise number but that accounts -- we built in some loss of overhead absorption as Jeff referred to.

We recently hope that is not the case and that we will replace the business. I can guarantee you in the situation with Red Oak, we're not going to allow arguably our most state-of-the-art new facility to have a big hole sitting in it. That will drive other decisions that will make us more competitive.

There will be a lot of moving pieces, but I do not see that number, you know, at this point growing to like $1. Could it be $0.60, sure. It is a calculation that will be refined over time, so that is where that stands.

I think it is also important to remember, there are very few kind of capital items, really large items that are strictly related to C-17 that once we cease production to C-17 there's going to need to be any type of write off. We are depreciating our assets in sync with the cessation of the program, we are not really looking at anything significant in terms of -- you know, future write offs, if that is a concern.

As I said, there are going to be -- there are going to be opportunities when the C-17 disappears from our plants over time to replace it with other work. It is not just kind of a uniform overhead issue. It will be kind of spotty.

Okay. Last one I had Dave, you are addressing the 2017 debt, I think you've also been thinking about 2018, what is the plan there the high rate dates in 2018?

Our plan would clearly be, assuming interest rates continue to cooperate which you know is a good assumption, that shortly before those bonds are due next summer, we would do the same thing. You know generally, it is not economic to do that prematurely. But is something we will look at.

But, I think you would see the same thing. Obviously those are choice, so we will certainly have a cost in fiscal 2015 to redeem those bonds. But those are like 8.6% so there be some very significant savings there.

Okay. Thanks.

Thank you.

Yair Reiner. Please state your affiliation followed by your question.

Oppenheimer & Co. I just wanted to ask a question about the systems business. It sounds like the military part of it was what was putting on the most pressure.

Can you give us a sense of how the commercial OE part is doing? And how the commercial aftermarket is trending these days?

The commercial OE was up in the aerospace systems, the fares were about flat. It was all a military story. And I will say, you made the comment about pressure and a few of your colleagues in your early reports, we were really pleased with the margins there.

At the end of Q1, we had indicated that that rate short-term was not sustainable, because of the blowouts first quarter of aftermarket parts, particular in Engine Controls. This is above where we saw fiscal 2014 being and that really reflects good performance by most of our companies, and the fact that our original prediction at Engine Controls would drive their margin higher is coming to fruition. So, I realize no body likes a sequential decline but this is exactly as we projected. It could have been better had it not been for the military aftermarket decline.

Fair enough should we think about the mid teens level as kind of the right baseline going forward?

Yes in fact I would hope -- on average a little better for the balance of the year.

Great, then in just another question about some of the main programs for you. I guess the two where some of us see some incremental risks are the V-22 and the G450 and G550. Can you help us think about how you view those programs? And when you think about those targets for FY 2016 what are you baking in terms of run rate on those?

I will let Dave comment on what was in FY 2016. But we really are not seeing much of a degradation in G4 and G5, the order bookings have been pretty solid with those. And I think we will find that those have continued lives that are certainly respectable.

The V-22 is one that already been reduced in terms of sequestration. I guess it was really reduced in terms of the initial round of defense cuts that were prior to sequestration. So there has been a multi-year that has been entered into that is a set number of aircraft for the next several years.

There is discussion on a further multi-year that is being discussed. There is actually a fairly significant international demand for this aircraft.

So we feel fairly positive about the V-22. Not in terms of its growing greatly to some past level but we think it will be very stable. As we also believe the G4 and G5 sales to be.

Yes, I hear the number that was out there from the DOD, we are sliding right now from 36 to 30 to 24. We certainly have not gotten indication that will be further reduced. And I think there was relatively bullish news out of Gulfstream I believe. I believe 70% of their owners in their calendar year company in their Q3 were 450, 550 orders. So we certainly are not getting any sort of get-ready-to-slowdown signals from Gulf Stream on those two programs.

Thank you very much.

Cai von Rumohr. Please state your affiliation followed by your question.

Cowen and Company. Could you give us the -- the tax rate looked lower. Could you give us some sense of what you're now looking for the tax rate? And maybe some color on the margin for the year by the three sectors?

Yes, the tax rate for the balance of the year, absent any new assessments or any positive developments is 35.4%. That lowers the rate slightly from where we started the year. And then the difference between 35.4% and where we ended the quarter, was all driven by some additional R&D credits that our tax department identified in regard to some new rules about certain costs qualifying for the R&D credit.

I think as to segment performance, I think if you look at the easiest one first, aftermarket, we see it staying essentially in the range it is at today. Maybe picking up a little bit from here. But not too much higher.

In Aerospace Systems, I think you will see it be on balance slightly better than Q2 but obviously below Q1. And I think in aerostructure, that is a tough one. It depends -- you know I think we see them going north from here because we are not going to have the same level of charge on 747. If you take out the impacts of 747 we will continue to perform very well. But GAAP margins should go up from here nicely if that is the metric you are using.

Terrific. So the follow-up on the change and the estimate, you mentioned 747-8, but doing the math it looks like I'm going from 1.75 to 1.5 is about $35 million. And with the reduced run rate in the profits it looks like maybe that is $1 million to $2 million. It does not look like that is a big factor, you consider Donlee and I assume, maybe incorrectly, that was not in your guidance before and that should be slightly accretive.

And the military numbers in this quarter looked okay and you seemed to be saying that hopefully they will get a little bit better from what you have seen? I'm still a little confused in terms of why the estimate excluding the debt retirement came down?

I think -- I will not comment on your shift set value on 747 but when we factor in the lost margins and some overhead impacts, I think your number is very light there. Donlee was in our number, because you remember -- even though we had not closed on it, we had already signed an announced by the time we spoke last. So that small accretion for the six months was already in the numbers.

Obviously there were some legal costs there and due diligence cost which sort of hurt that. You cannot capitalize those anymore. So I think those are -- that might be why you are a little off, I mean -- Cai, I think Engine Controls because of their strong military you know -- profile, may have skewed your view of military. In Aerospace Systems, military was down 19% year-on-year, organic.

Okay.

Triumph Engine Control Systems may have made up for a lot about, but that's pretty dramatic.

Got it.

Now again, we are hopeful that that comes back, I'm not trying to be doom and gloom, but it was not a robust quarter on that front.

Terrific. Good answer, thanks so much.

Phil Hoffman. Please state your affiliation followed by your question.

RBC Capital Markets. Two questions, one, you talked about the working capital and the increase in inventory and also receivables, can you go through that again?

My second question has to do with the export sales. They are up strongly, I just wanted you to give us some guidance and thoughts on the sustainability at that level of exports?

Yes. The inventory -- I listed the major -- you know -- sort of what I would say intentional increases in inventory. We do not like any increases, but we knew at the beginning of the year that there would be these items.

So, you are looking at $33 million on bombardier wing, $19 million came with the Primus acquisitions, $19 million on the Jefferson Street build ahead, there is always a build ahead in that business case to avoid disruption and missing customer deliveries. $12 million in the conversion of the 767 commercial to a tanker, at least our portion of it. And $7 million in Embry Air, the big win we had on Embry Air.

So, you add those up that, I think that takes care of $99 million of the $108 million of inventory. I think receivables are following their normal pattern. I think year-to-date it's pretty flat in terms of usage. It was negative in the second quarter, positive in the first.

And I would think that export sales, which you know we consider really non-US sales. A lot of it is exported but some of it is just the sales by our non-US companies. That is going to increase certainly with the Primus acquisition, Triumph Structures International, and certainly when we are successful with gaining more Airbus and Embry Air business, that will move that number north.

So with regards to the inventory. It looks like the Jefferson Street buffer is the one that comes back out again. Eventually?

Well the tanker nonrecurring we should be paid for in a relative short period let's say this year.

Okay.

The Jefferson Street build ahead would probably peak in Q3, a little more and then start to wane down. But you probably do not get through all of that until early next fiscal year.

Perfect. Thank you.

Ken Herbert. Please state your affiliation followed by your question. Ken, If your line is on mute please un mute it.

Canaccord. Dave, I just want to -- further -- you used to speak a lot about significant margin improve within the aerostructure business. I know there is significant amount of moving parts over the next few years with military, Red Oak and every thing else going on. How, Dave, has your outlook for margin improvement in that business changed at all with what is happened so in the last few quarters when you think about out two years to three years?

If I remember well you always talked about 200 basis point type improvement from where we were running in fiscal 2013. Can you provide any updated thinking on that please?

Yes. I think if you exclude 747, I think that story is very much intact.

Red Oak is essentially a very significant cost reduction that will drive margins higher. And I think there is continues to be integration opportunities, both with aerostructure, and with Triumph Structures International given the facility they have in Thailand where there is plenty of capacity. As well as our own supply chain efforts.

You know -- I think this year we are taking a backward step obviously because of the impact of 747, if you read baseline from there, I do not -- we are not coming off of that story and the Red Oak will be very impactful to that. I do not think we have a different view other than -- what 747 has been to the margins in the near-term.

It sounds like on Red Oak you are starting to see benefit now on the Black Hawk. How does benefit on other programs -- when will you really see the benefit from Red Oak over the next couple of years? Is it right away? There is still a lot of issues with the move I can imagine.

There is no benefit now, Ken. There would never be a benefit this year given all the move expenses. And the cost of maintaining two facilities or running two facilities.

The projections always were that next year we'd sort of be break even-ish. If you start with fiscal 2013 we go down dramatically, in 2014 we sort of get act to fiscal 2013 numbers in 2015. And then 2016 we look at the $40 million or so of improvement that should be a constant run rate from there. And hopefully prove to be conservative.

There were not be any -- will the cost to build it in Red Oak be technically lower than it was in Jefferson Street? Maybe. But there's too many other activities going on that there is no way that helps margins on a GAAP basis this year.

Yes. I'm not expecting that this year, just it sounds like there's a fairly immediate impact as you're able to move programs over.

I think that real time that margins will be felt in Red Oak is when we give the keys back on Jefferson Street.

Okay. Okay. And just finally Jeff, can you comment on the M&A pipeline? And some of your thinking they're either by segment or anything that has changed since we last spoke on that front?

In terms of M&A we certainly have -- I guess to call everything a pipeline -- now -- the deal flow has continued to be very robust. We continue to participate in those areas that match our strategies.

And so we are just continuing to look for those opportunities that help us be the Company that we need to be. You know those things they give us broader program exposure, the right programs, the right customers, and the right segments. So that we can continue our strategy of diversification and kind of re-balancing, striking the optimal balance that we are going for.

Great, thank you very much.

Stephen Levenson. Please state your affiliation followed by your question.

Stifle. Good morning, Jeff and Dave. Looking forward to transactions to new models like the Max Neo -- Max and Neo, and soon hopefully will hear more on 777X. What is the likelihood to increase your content there?

Are you feeling you will have to fight to maintain content, particularly as it relates to, whether you want to call it partnering for success or anything else like that? Jeff, on the last call you mentioned Triumph's own version of partner for success. Is there anything else to talk about that today?

Good question Steve. On the first part of the question, in terms of 777X, in terms of Max and Neo, we are already gaining market share on those programs. Each of those wins we made over recent months, have not been sufficient to individually cause us to issue press releases and such.

But that's mostly the nature of how we continue to gain market share. But we are already establishing a stronger position in the newer version aircraft then we have been in the more classic ones. And I think that you will see that will be the case going forward. We are actively discussing with Boeing opportunities on 777X as well, even though a lot of these systems have not been defined yet.

In terms -- we are not calling our initiative partnering for success, we have not come up with a catchy term, but we will. What we are actually doing -- I believe it is actually today, our supply chain team is meeting in Dallas to formally kick off this program. Which is one that should in fact -- we are going to be looking for suppliers that will in fact participate with us in the same matter that our customers are asking us to participate with them.

That is a joint partnership, an agreement to strategically align to drive costs out of the system. And with driving costs out of the system obviously reduced prices are part of that. What we will be asking our suppliers is much the same, better customers are asking of us, and we do believe we will have substantial success in that arena. And I will add that we have yet to quantify the level of success that we are expecting and as a result we have not specifically plugged that into any guidance that we have issued.

Okay thanks. And are there likely to be cases where you will have a desire to make those parts yourself? Or really just working with suppliers to get low costs?

Well -- I know I think we will have to have lower costs. And to the extent that we could just keep the came supply base and just have lower cost that were clearly be the least risk, most immediate opportunity to improve. And so that would be our desired effect.

But Triumph does have a tremendous amount of manufacturing capability and capacity. So we certainly have the ability to bring things in house if we fill that is our best long-term solution.

Thank you very much.

The next question comes from Mitt Miracha. Please state your affiliation followed by your question.

Deutsche Bank. This is Mitt Miracha in for Myles Walton, good morning.

Good morning

Dave, can you give us some indication on cash flow for fiscal 2015? I know it's a bit early but it's looking like a pretty significant uptick on step down in CapEx, and restructuring savings, and little to no cash tax. But can you give us color how you and how you think about the puts and takes into free cash flow next year?

I think you have it right, I would say -- the big movers is probably a couple hundred million better on CapEx and new programs. You know -- assuming -- I hope it is less than that because I hope we win some new programs but it should be $150 million or higher improvement there.

We are already indicated that pension steps down I think $75 million. And then you have some of the relief from the Jefferson Street move inventory build ahead.

So you know -- we agree with you, we are looking at a very substantial cash inflow next year on the back of those sort of major items. As well as increase in profitability. So -- should be rather significant.

That is helpful and just Jeff on the news business outlook. Clearly the E2 win is a positive one and you talked about new business potential, can you help us put maybe a little bit of a finer point on that? Give us a little color on how much new business opportunity Triumph currently sees? And how much the Company realistically win or actually realize?

This is always kind of a moving target. Again I am going on somewhat questionable memory, but in Investor Day Jim stood before folks and talked about a pipeline that I believe was something in the $1.7 billion range.

So you think about the percentage of the business that we might win of that. We won a $1.7 billion contract since then, clearly we are not winning 100% of things in our pipeline so that there are wins that come from beyond that as well. So I think the size of the pipeline is something that is useful for us to indicate kind of how the level the activity is going.

I actually asked Jim to put together kind of a quick shot of what the pipeline looks like today. It came out really almost the same, slightly over $1.6 billion.

We do in fact feel very good about the fact that we will be announcing additional contracts soon. This is unfortunately a record that we play over and over again, but we have won the insulation contract which is great. We do have contracts that our customers will not allow us to announce, but the fact is there are many other opportunities that we are winning and some of them will be substantial enough that we will announce. We are very optimistic about our ability to participate in the market and to be on the right programs, and so we continue to be bullish on that.

Okay. If I can sneak one more in, on the FY 2016 target of 775 plus or minus, I want to confirm that does not have any assumption of M&A in that number, is that correct?

No, it does. It is always had an assumption of new wins/acquisitions. So we have done -- we feel good about how much of that pipeline, so to speak, or how much of that amount we already filled with Primus, with General Donlee, and some other wins that will take place by fiscal 2016. We have not filled the bucket yet we have made good progress.

But there is always a growth target that was in there between the buildup of our individual plans of existing ship sets times the number of planes, there is always that wedge so to speak. I think we are making good progress billing it.

In terms of underlying organic-growth assumptions, is that low- to mid-single digits? Is that the right way to think about that?

Yes.

Thanks.

Peter Arment. Please state your affiliation followed by your question.

Good morning Jeff and Dave. Just a quick question given most of my questions have been answered, but on the 787 Jeff, the step up to 12 a month and eventually 14 -- does that have any material impact on your kind of -- you know -- CapEx spending heading into 2016? How do we think about that?

I do not think we will be talking about substantial CapEx requirements to get to 12. I'm not really seeing the map of how we will get to 14, we will have to look at that.

And again, when we talk about the difference between 10, 12, or 14 there may be additional machine tools we may need to acquire. There may need to be -- I already think we already own most of the world's autoclaves but we may need another one.

These are investments but they are not of such a large level of significance that they are overly concerning. I think it would be great if Boeing can get to the rates. I think it is fair to point out, that rates of 12 to 14 787 is not in the guidance we provided, they would provide a bit of a tailwind.

Are you currently synced up today with -- on their path to 10 per month? There's some competitors talking about a overhang still on the fasteners side of things. Where are you relatively in sync with the rates?

Well, we supply to different parts of the supply chain as you know. It is almost like any question you ask about Triumph we always have to start out with the two words--it depends. (laughter) But, I would say we are largely in sync with their rate. Not all of our factories are delivering at 10, but I think we're getting close -- at least at 7 now or heading towards 10?

Yes.

Thanks.

Thank you.

Michael Ciarmoli. Please state your affiliation followed by your question.

KeyBanc. Good morning, thank you for taking the question.

Most of mine have been answered, maybe one point of clarity here Dave, on the 747 program as it relates to the accounting and just general cost. You noted a couple of weeks back, moving that program to full rate there were price de-escalaters. Now obviously, we've seen the program get cut by 25%.

Does the pricing at all change? As you kind of scale back down? Do you get any kind of relief from Boeing on the pricing given the volumes?

I don't believe we do at 1.5.

Okay, where would you get relief?

If it goes lower there is an adjustment at that point.

The last one I had and thank you for staying on here. We've seen from some of the other OEMs out there Black Hawk volumes could be down next year. What are you guys planning for?

Have you seen any signs that Black Hawk will be trending lower performing below your expectations? Maybe some color there?

You know they Black Hawk is still a solid program. And there are -- we have not only production opportunities there but support opportunities for the many, many Black Hawks that are out there. We, as you know with our cabin business we are no longer supplying the M version, we're just applying the S version of that helicopter. That becomes a less significant concern for us.

Okay.

The tier 2 aerostructure companies that have significant Black Hawk have not sent up any flares that their business is weakening, and in fact some of them are gaining share. That is not something we have heard yet at as a big concern.

I think there is a lot of movements going around in the short term, as I think our customer is -- you know -- doing their best to deal with some potential labor issues. I think that is more short-term noise than anything.

Okay. Perfect thanks a lot guys.

Julie Yates Stewart. Please state your affiliation followed by your question.

Credit Suisse. Good morning, thank you for taking my question.

Back to the M&A question, are you guys still looking at some of the programs or even all of Tulsa?

Well, as I mentioned before, we have a number of items that we are looking at now. And we have said all along, that we would have some interest in at least part of Tulsa. So, I guess beyond that we are still at some level of discussion, I cannot comment on that to much more.

But nothing has changed in terms of level of interest, in particular programs or all of Tulsa?

No, nothing has changed.

Any update on the timing of the program wins you guys have talked about since May?

No. I see them as just around the corner, they have been just around the quarter since May. Things tend to take a little longer than I think they will.

But I do believe we will see some contract wins -- I would hope I will see them this calendar year. Again I will hold off on that until we actually announce them. Again the pipeline is robust, we are very optimistic that we will have some significant wins and we will be very happy to finally announce some of these things.

Great. One last one, Dave on military you mentioned it was down 19% organically in Aerospace Systems. Can you parce out what the organic decline was in markets or military OE and for military aftermarket?

So in Aerospace Systems, it was down 19% in total and organically the military aftermarket was 20%. So just about the same. And in aftermarket it was down 55%, and in aerostructures which is almost exclusively OE it was down 10%.

Great, thank you very much.

Eric Hugel. Please state your affiliation followed by your question.

S&P Capital. With regards to the 747-8, is there any opportunity to see any moderation in your expectations of additional program costs given the slower drum beat on the program now?

So -- let me try to understand your question-- does slowing it down --.

Slowing it down hope you catch up quicker and maybe more efficiently.

Yes. When we came out what the hit was for have 1.5 we built in small amount of mitigation for some cost, but obviously did not cover the impact.

Okay.

That should make it easier for us to catch up.

With regards to the $11 million you have factored into the guidance for the debt refinancing, what assumptions have you made in terms of lower interest expense going forward for that? Or is that from a net number?

That the cost we incurred to get out. We believe we'll drop multiple hundreds of basis of points on the 175. Unfortunately what has happened this year in terms of our original interest forecast is that debt is much higher.

So all net in we are probably on budget for interests plus these costs. But that is in the forecast for the half year. (multiple voices) For 4.5 months, we cannot do this until November 15.

So you have a lower interest expense factored into there?

That is right.

Lastly, you mentioned the KLM deal in the aftermarket business, can you put any size, annual run rate on that? Is it meaningful?

It is meaningful because it is our first long-term contract with a substantial airline in Europe. Normally we are on a one at a time basis. The impact on revenue is not dramatic, it is less than $5 million a year, but it does give us the ability to demonstrate our capabilities there.

And any time you win a five-year deal with a good airline it feels good. It is not going to move the needle but is a nice win for that business.

Thanks guys.

J.B. Groh. Please state your affiliation followed by your question.

DA Davidson, and thank you for sticking around. I had a question on the movement and backlog of a couple of programs A330 and 787, is that the timing of receipts of orders and that kind of thing? Is there anything else we should be aware of?

Mostly timing, A330 is at a all-time high.

That is all that I have Dave, thank you.

Yilma Abebe. Please state your affiliation followed by your question.

JPMorgan. Two quick ones. Firstly, perhaps if you can comment on the thought process in terms of financing the existing bonds in your acquisition and the term-loan market versus the high-yield market?

Secondly broadly, what you expect incremental cash flows? Any comments around expectations for further debt reduction?

Yes I mean we did a careful analysis of the high-yield markets, term loan, the relative savings, the tenor, the ability to repay a term learn given our potential nice cash flow in the next couple of years. You know -- it was not an overwhelmingly -- it was a slam dunk to get term loan. But when we look at all of the factors, the fact that banks are awfully anxious to lend money and like-funded assets. We are getting a very attractive rate, we will swap it--assuming we go ahead with the plan, we will swap it's fully into fixed so we are not playing the variable rate curve.

You know -- 5.5 year money we are looking at versus 7 that is substantially better rates and that is with rules today. I think we'll go through a similar exercise depending upon new program wins, acquisitions, things like that, pension levels when we fast forward five or six months and we have an opportunity to do with next year's bonds. I think that will be the thought pattern.

And on -- I guess -- debt reduction in 2015 with higher cash flow?

I think the intention would be to continue to deal with the pension, and to deleverage a little bit. I think that would be our intention. We're at the high end of the comfort zone right now.

Thank you.

Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group fiscal 2014 second quarter earnings call.

This call will be available for replay today after 11.30 AM through November 6, 2013 at 11.59 PM. You may access replay system by dialing 88 88266 882662081 and entering access code 162-4471.

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