Triumph Group Inc (TGI) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2015 first quarter results. This call is being carried live on the internet. There is also slide presentation included the audio portion of the webcast.

(Operator Instructions)

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

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release which can be found on their website at www.TriumphGroup.com. In addition, please note that this call is the property of Triumph Group, Inc., and may not be recorded, transcribed, or rebroadcast without explicit written approval. At this time, I would like to introduce Jeffry Frisby, the Company's President and Chief Executive Officer, and Jeffrey McRae, Chief Financial Officer and Senior Vice President of Triumph Group, Inc. Go ahead, Mr. Frisby.

Thank you, Stephanie. Good morning, everyone. I want to add my welcome to the Triumph Group first quarter fiscal year 2015 conference call. I'll take this opportunity to remind you that there is a slide presentation available for your viewing in addition to the audio portion.

Before I get into the slide deck, I want to make a few remarks. Many of you attended either in person or by telephone our Investor Day that we held in New York City on June 11. The theme of that day was that Triumph was designed to be different, built to perform, and positioned for growth. For the first time, we shared not only short-term guidance but our long-term vision as well, long-term strategic plan that we have been executing for the past two years. We shared how, through the rest of this decade, we're going to mold our Company into a more balanced enterprise in terms of segments, customers, and programs characterized by a focus on execution at all levels leading to predictable 8% to 10% year-over-year revenue growth and 15% year-over-year growth in earnings per share.

In the seven weeks since we last spoke, we have made good progress on several fronts and have been benefited by a key customer decision. Shortly after Investor Day, we settled all pending litigation with Eaton ending a 10-year legal battle and freeing us from the distractions associated with this type of activity. Just prior to the close of the quarter we completed the acquisition of the GE hydraulic system businesses located in Yakima, Washington, Cheltenham in UK, Isle of Man, and [Suzhou], China.

We completed the first quarter with results slightly better than our June 11 guidance, and then we're gratified to learn that the recent airshow in Farnborough that Airbus had decided to launch the A330neo, effectively lengthening the production life of this important airframe well into the next decade. Each of these accomplishments and milestones is important individually, but together they provide us with solid momentum heading into the balance of our fiscal year and beyond. We'll get into more detail on some of these issues shortly.

There is one last item I'd like to cover before I get into the slides. There have been many questions asked, and there has been much speculation around Triumph Group's interest in and intentions towards certain assets owned by Spirit AeroSystems in Tulsa. I want to make a statement that will serve as the sum total of what we will say on this subject at this time. We have long stated that we would have an interest in certain pieces of Spirit's Tulsa business, specifically the Gulfstream wings should they become available. We have also long stated since win-win agreements are hard to reach that win-win/win-win agreements are far more complex and more difficult to achieve. That being said, we still have interest in reaching such an agreement if possible, and we will let you all know if and when we have something to report.

All right then, at that let's turn to page 3 titled, Q1 in Review. As I mentioned, our first quarter results came in as expected. We had a solid start to our fiscal year, and we're slightly above the upper end of our Investor Day guidance. In our aerostructures segment, we had a solid quarter in spite of our lower 747-8 and 767 program revenue and the shifting of several C-17 shipments to quarter 2 which was also mentioned at Investor Day. Importantly, the 747-8 program is on track.

In terms of aerospace systems, organic sales were impacted by the production rate cuts on V-22 program and decrease in military sales, but we had continued good performance at Triumph Engine Control Systems as well as other companies in the Group. Our aftermarket services business was down revenue-wise, but we had continued strength in operating margin performance despite military aftermarket weakness. I should add that we remain confident that this segment will recover well as the year progresses.

We successfully completed the acquisition of the hydraulic actuation businesses of GE as I mentioned earlier, and we are excited about and we have high hopes for this acquisition. As we speak, efforts are underway to make the kind of improvements necessary to achieve the margin potential this business has. GE operated this business in four locations, and as part of the agreement we will be moving out of some shared facilities and will be able to achieve some benefit from consolidating footprint. This business is also virtually entirely proprietary in nature, and as such should have a more vibrant aftermarket presence than they do. We're currently executing plans to take greater advantage of this position.

Thirdly, as in the case of Engine Control Systems, this Company was, and I'll use the term saddled, with contracts that provided parent Company benefit, but were in varying degrees detrimental to the individual site. We're in the process of shifting course relative to these contracts. These efforts among others plus the natural lift you get from a large dose of autonomy and support will add up to a very successful addition to our aerospace systems segment.

As I mentioned earlier, we settled all pending litigation with Eaton, and we received $135.3 million in cash. There's not much more to say about this. It's over. We received their payment, and now we can focus on winning more business. As you know, we successfully completed the refinancing of the high-yield debt due 2018 providing us some important interest reductions. We executed a 750,000 share buyback for approximately $51 million, and effectively repurchased an additional 284,000 shares when we redeemed our convertible notes. I'll be back to address our outlook shortly, but will now hand it over to Jeff McRae. Jeff?

Thank you, Jeff. Good morning, everyone. I'd like to start with a review of the financial results for the first quarter. Turning first to the income statement, sales for the first quarter were $896.9 million compared to $943.7 million for the prior-year period, a decrease of 5%.

Operating income for the quarter increased 70% to $240.5 million and included $8.7 million of costs related to The Jefferson Street, Red Oak facility transition and $134.7 million of settlement gain net of legal fees related to Eaton litigation. Excluding this nonrecurring items operating margin was 12.8% for the quarter. The prior-year's first quarter included approximately $3.5 million of nonrecurring costs related to the Jefferson Street move. Excluding these costs, operating margin was 15.4% for the prior-year's first quarter.

Net income was $128.2 million resulting in earnings per share of $2.46 per diluted share versus $1.50 per diluted share for the prior-year quarter. Excluding the nonrecurring items for both periods, net income was $62.1 million or $1.19 per diluted share versus $81.4 million or $1.54 per diluted share for the prior-year's quarter. Adjusted EBITDA excluding the net settlement gain was $134.4 million resulting in adjusted EBITDA margin of 15.1%. The number of shares used in computing diluted earnings per share for the quarter was 52.1 million shares.

Now, looking at our segment performance, sales in the aerostructures segment for the first quarter declined 6% to $611.9 million, primarily due to the production rate cuts in the 747-8 program whereas we were still at two [shift sets] per month in Q12014, lower revenues in the 767 program and the shifting of several C-17 shipments into the second quarter. First quarter operating income was $70.9 million compared to $100.4 million for the prior-year period, and included $8.7 million of pretax charges related to the Red Oak facility transition.

Most of this is costs that was incurred in fiscal year 2014 that is embedded in block accounting, although we did incur some additional costs in the quarter related to the cleanup and disposal efforts at the Jefferson Street Facility. We also saw a net unfavorable accumulative catch-up adjustment of $700,000. The segment's operating margin for the quarter was 11.6%. Excluding the Red Oak facility transaction cost, the segment's operating margin was 13%. EBITDA for the quarter was $90.7 million with an EBITDA margin of 15%.

We continue to make good progress in ramping up production at Red Oak and anticipate being fully back on schedule and recovered to pre-production performance levels on all programs by the middle of the fiscal year. The overall Red Oak business case continues to hold in line with previous guidance. As we move through the year, we will see segment margin enhancement driven by Red Oak, as we get into account blocks that are being fully executed in Red Oak in FY2015 and beyond.

As Jeff mentioned, we also saw continued stabilization in our 747-8 program, in line with our expectations which has allowed us to maintain a low single-digit margin on the current accounting block. Our margin calculation is based on the assumption that we maintain a production rate of 1.5 shift sets per month. We also continue to make progress with development of the wing for the Bombardier Global 7000 and 8000 and are on track to deliver the initial wings in support of the development effort this fiscal year. The rudder, elevator, and fuselage sections of the Embraer E-Jet are also on track, and we anticipate making initial deliveries on those during the first half of fiscal year 2016. We incurred $34.5 million of development costs on these programs during the quarter.

Moving on to aerospace systems, sales in this segment were $219.9 million, basically flat compared to the prior-year's quarter. Organic sales for the quarter declined 5%, primarily due to production rate cuts on the V-22 program and overall lower military sales. First quarter operating income decreased 12% from the prior-year quarter to $37.4 million with an operating margin of 17%. EBITDA for the quarter was $43 million at an EBITDA margin of 19.9%.

As Jeff mentioned, we did complete the acquisition of the GE hydraulic actuation business at the end of the first fiscal quarter. The financial statements have incorporated a preliminary opening balance sheet for this business. While there was no material impact on the income statement due to the timing of the closing of the transaction, we still project this business to be immediately accretive contributing approximately $0.07 to our FY15 earnings per share, while it will be neutral from a cash generation standpoint as we make investments to consolidate the overall footprint of the business as we work to consolidate the European elements into our existing actuation and motion control business in the UK. We expect to drive segment average margins from this business in the midterm, and we will see positive cash generation and EBITDA in FY2016 consistent with our expectations. Excluding the impact of GE, we anticipate improved margins of this segment during the balance of FY2015 driven by aftermarket which was light in the first quarter in the segment.

Moving to aftermarket services, segment revenues here in the first quarter were $67.6 million, compared to $74.4 million in the prior0year period. The year-over-year decrease reflected the timing of completion of certain contracts and continued softness in the military aftermarket. First quarter operating income decreased 7% of the prior-year quarter to $10.5 million with an operating margin of 15.5%. EBITDA for the quarter was $12.4 million with an EBITDA margin of 18.3%.

On the commercial side of our aftermarket segment, we have seen an increase in the pace of opportunities which will drive a level of recovery in this segment although weighted to the second half of the fiscal year and offsetting some of the softness we are seeing in the military aftermarket. We anticipate holding margins at Q1 levels in this segment for the balance of the year with some opportunity for improvement driven by product mix.

As Jeff mentioned, during the quarter we did repurchase 750,000 shares for approximately $51 million and effectively repurchased an additional 284,000 shares with the redemption of our convertible notes, bringing the total number of shares repurchased, or effectively repurchased, to 1,334,000 shares. We will continue to tactically repurchase shares as part of a balanced approach to capital deployment and managing our overall liquidity position. For your reference, we have included a pension OPEB analysis for Triumph Aerostructures which remains in line with our previous disclosures. During the quarter, we did contribute $45 million to the pension plan in line with our fiscal year assumptions.

Turning now to backlog, our backlog takes into consideration only those firm orders that we're 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 June 30 was just over $5 billion, up 7.4% year-over-year and did include the incorporation of approximately $230 million of backlog held by the GE hydraulic actuation business which significantly improved our position on the Boeing 787 program and the Airbus A320 and A380 programs.

Same-store backlog increased 1% sequentially and 1% from the prior year. Military represented approximately 26% of our total backlog. Boeing remained our only customer to exceed 10% of total revenue. Net sales of Boeing commercial and military and space totaled 42.6% of our revenue and was broken down 68% commercial and 32% military. For your reference, we have included in the appendix charts reflecting sales by market and sales trends.

Now turning to the balance sheet, during the quarter we did utilize $6.8 million of cash flow from operations before pension contributions of $45.2 million. Inventory for the quarter increased $90.4 million of which approximately $30.5 million was attributable to nonrecurring investments in the Bombardier and Embraer programs, and $48 million was related to the GE acquisition. We also ended the quarter with a significantly elevated level of accounts receivable, which included $135.3 million related to the Eaton settlement, $26 million related to a tax refund due to the completion of the IRS examination of our NOL carryback claim, and $15 million related to closure of a claim from a prior acquisition. These three payments have all been received in July.

CapEx in the quarter was $23.1 million, and we continue to project CapEx for the year to be in the range of $120 million to $140 million, and expect nonrecurring investment in major programs to be approximately $120 million over the year. Net debt at the end of the first quarter was $1.7 billion, a $211 million increase from the end of the previous quarter, reflecting cash use of $51 million to repurchase shares, $65 million to fund the acquisition of the GE hydraulic business, $35 million used to fund the call premiums related to the 2018 higher notes and the convertible debt, as well as financing fees on the new debt issuance, and $45 million in pension contributions. Net debt represented 42.4% of total capital, and total debt to trailing 12 months adjusted EBITDA was 3.4 times.

Although ending the quarter over our targeted leverage position, we anticipate bringing this back within the targeted range over the next two quarters. Based on current interest rates we anticipate a quarterly interest expense including amortization of fees of between $16 million and $17 million for the balance of the fiscal year 2015. The global effective tax rate for the quarter was 36% and reflected the fact that the R&D tax credit expired in December 2013 and has not yet been renewed. In addition, the income tax expense for the quarter was reduced by approximately $1.4 million to reflect the additional tax benefit resulting from the completion of the IRS examination of our NOL carryback claim and the reversal of tax reserves. From a cash tax perspective, we currently expect minimal cash tax to be paid in fiscal year 2015.

In terms of financial guidance, we are reaffirming our FY2015 guidance based on current projected aircraft production rates and a weighted average share count of 51.6 million shares. We expect full year revenues to be $3.8 billion to $3.9 billion and earnings per share excluding the nonrecurring items to be $5.75 to $5.90 per share.

We have good visibility into our business given our backlog and the anticipated benefit from recent activities. Regarding the quarterly flow of earnings, we expect to see strengthening in the quarters as the year progresses, with greater weighting towards the second half of the fiscal year. Driving results will be the realization of the full benefit of the GE acquisition, the Red Oak facility transition, recent wins in the general seasonality of a number of our businesses, increase in the cadence of opportunities in the aftermarket segment, and realizing the full benefits of the share repurchase made to date.

We expect that Q2 will be higher than Q1 contributing 23% to 25% of full year projected earnings excluding nonrecurring items. We continue to project our full year adjusted EBITDA to be $665 million to $680 million which excludes the impact of the Eaton settlement and nonrecurring costs associated with the Red Oak transition, and we expect to generate free cash flow after pension contributions for the year of approximately $385 million which has been increased to reflect the Eaton settlement.

A number of you have inquired recently about the potential impact of further reduction in the 747-8 program production rate, but we currently do not have any indication that production rates on the 747-8 will change. If Boeing where to direct us to reduce production rates on the program which we believe would most likely take the program to a rate of between 1 and 1.25 per month, it would have a negative impact on the profitability of the program. Although we do believe we'd be able to maintain a slight positive margin on the current accounting block, the greater impact would have future accounting blocks for which we would be put into loss positions, forcing us to recognize those projected losses on a current basis.

Given this scenario, our current estimate of the impact would be pretax charge of approximately $30 million to $60 million. Obviously, impact is highly dependent on the level of rate reduction as well as the duration of any rate reduction. We will continue to work with our customer and suppliers and are taking actions to improve our internal cost structure and performance to drive improved margins on these programs and mitigate the impact related to any potential rate reduction. With that, I will turn it back over to Jeff.

Thank you, Jeff. Turning to our outlook, we remain confident in our fiscal 2015 outlook. Our backlog remains strong. It's over $5 billion now. We will remain focused on execution, increasing profitability, expanding our margins, and generating strong cash flow. We know execution is still the key that unlocks our ability to grow even more quickly.

We reaffirm our FY2015 guidance based on the current projected aircraft production rates and our weighted average share count of 51.6 million shares, revenue of $3.8 billion to $3.9 billion, earnings per share excluding the items listed here of $5.75 to $5.90 per share. As both Jeff and I have already mentioned, it is weighted towards the second half of the fiscal year with Q2 slightly higher than Q1. Our adjusted EBITDA of $665 million to $680 million remains intact, and we should have cash available for debt reduction, acquisitions, and share repurchases of approximately $385 million. Although there are certainly challenges ahead, our future remains bright. With that, I'd like to open up the phone lines for questions.

Thank you.

(Operator Instructions)

Noah Poponak.

Hi, good morning. This is Amir filling in for Noah. I believe you have noted in the past that the Red Oak cost saving targets only incorporate tangible and visible achievable opportunities and that potential upside could exist from higher efficiency savings once the facility is live and in operation. Are you now able to better quantify or describe those potential opportunities for us possibly?

Yes. I would say we are still very confident in being able to achieve greater performance than what we've built into our business case. As we said in our statements, we see the facility getting back up and being back at performance levels that we exited Jefferson Street at by the end of the second quarter, middle of the year. From that point forward, we would expect to able to see continued performance improvements. I don't know that I'd be in a position right now to start quantifying additional benefits above the $0.50 that we've previously communicated around Red Oak, but we definitely are continuing to be optimistic of being able to drive additional performance improvements.

Great. Thank you. Then a separate follow up, can you spend some time discussing your overall Airbus strategy? You mentioned it a little bit in the prepared remarks there. What type of content would you guys be potentially interested in, in going for on Airbus products going forward? Is it more the system side, more on the structure side? Do you guys have a preference, or how are you guys thinking about that?

We are really aiming for profitable work on Airbus. I actually say that for a reason. There are an awful lot of companies, particularly due to the fragmented status of the aerostructures business in Europe, there's are an awful lot of companies in the business, not many of them making money. We are looking for the right aerostructures opportunity that fits our capabilities and allows us to perform in a way that will benefit not only Airbus but ourselves, and we are also, at the same time, we're looking and succeeded in achieving systems business wins as well.

One of the reasons we really were favorably viewing the GE acquisition because it had such a significant percentage of Airbus content on the actuation side. It's a blend. I think that we're not really looking at one segment in preference to the other, but at the same time, Airbus is just one piece of our rebalancing strategy. They happen to be one of the two of the duopolies in commercial aircraft production that we don't have as significant a presence in, so it becomes most prominent. It's just one of our targeted customers that we are looking at in order to advance our cause of rebalancing our customers.

That's great. Thank you very much.

Joe Nadal.

Good morning. It's Seth on for Joe this morning from JPMorgan. To dig into the cash flow a little bit further, thanks for the outline of the receivables, I just wanted to follow up. Last year, it seemed like we had been waiting for a receivable from a large customer, and receivables continued to increase through the second half of last year, and then you outlined what drove the increase in Q1 and we that should see that reversed. Is there a bigger reversal happening there? Did we see the receivable? I think it was probably about $100 million from a major customer in the second half of last year, and it got drowned out by other increases. Is there a bigger reversal of that than what you'd laid out in Q1?

Seth, I think what you're referring to is at the end of Q3 2014, we had a significant deferral of payments related to a customer that would have cleared out in Q4 of FY2014. As we said at the end of Q1, I would say that there is a level of, I won't call it slow payments, but timing around payments that we would have hoped to have received in Q1 that are drifting into Q2. I wouldn't say it's a specific customer that we're concerned on there. It was just a general drifting on collections.

From a timing standpoint, I called out three large items that are sitting in that receivables balance at June 30. Those have all been received. The total of those is roughly $176 million that came in here in the first few weeks of July. I would say that we should see continued improvement quarter-over-quarter from a cash perspective in receivables, but it's nothing specific to call out.

Okay. Thanks. Then just in terms of getting to the guidance, probably [work through] but you told us a little bit about the receivables, about the investments, in capitalized inventory, taxes, pensions. Any other working capital adjustments to be aware of in terms of how you get to the guidance for the year?

No. In our guidance we have built in a level of improvements from a working capital standpoint outside of the investments and the nonrecurring programs that are hitting inventory. Part of that improvement comes that we begin to see some additional offsets to the investments as we have milestone payments on those nonrecurring programs that will be inflows from customers which helps us offset some of the impact there, and ultimately gets reflected as a net inventory balance. We see opportunity broadly, primarily in inventory as we go through FY2015 to continue to drive down and see improvements that will drive some of that working capital that were depicting.

Great. Thanks very much.

Sam Pearlstein.

Good morning. Wells Fargo. Can you just help me? How should I think about the proceeds from the Eaton lawsuit? Should that go towards buyback or any other purpose? I'm a little surprised. It doesn't look like you bought back much stock since the Investor Day. I didn't know if you were blocked out for certain periods, or how should we be thinking about the extra $135 million?

I think there's a couple of dynamics, Sam, that came into play in our mind. One, as we think of that $135 million, we view it in line with our broader capital and capital generation we are seeing in FY2015, and would look at a balanced approach deployment of that capital. I think we continue to see a very robust pipeline of acquisition opportunities. Obviously, we're also viewing share repurchase favorably as we look at where our share price is right now.

As you think of activity, as we evaluated capital at the end of the first quarter, we knew we had allowed our leverage ratio to creep up with the share repurchase that we had completed with the expense we incurred with the take out of the debt and with the GE acquisition. As we looked at it, we felt comfortable at a leverage ratio of 3.4 and a debt-to-capital above 40%. We really do want to manage that into a target range on leverage between 2 and 3 times, and really keep that debt-to-capitalization below 40%. We really looked at it in balance and didn't feel it appropriate to continue to extend ourselves in the first quarter. We also knew we were going to have a strong cash generation quarter in Q2 and would look at deployment of capital in Q2 pretty strongly.

Your other observations in right on. Since June 11, our Investor Day, we had about two days, I think, even if we wanted to buy stock back until we entered a blackout period which we're still in. At that point, we could not act. Now we're in, as Jeff said, we're in a position that if in fact we think it's the right opportunity, we'll have the ability to participate.

Okay. That's great. Then just on some of the adjustments between the adjusted EPS and the GAAP EPS, it looks like the Jefferson Street, Red Oak transition costs moved from $0.26 to $0.31, and then the refi cost looked like they move down from $0.32 to $0.28. I don't know, Jeff, if you can help with that?

Yes, on Red Oak, we did see some additional costs that we had not anticipated in the first quarter. All of it was related to relocation activities, primarily additional costs around cleanup and disposal of assets at Jefferson Street that we thought we had fully captured the cost in the fourth quarter. We had a couple of additional activities we had to take care of there. No additional growth in the depiction from a disruption standpoint. We think all of that is behind us, but some additional one-time costs on getting out of Jefferson Street. On the refi, it really is the final calculation based on the timing of taking out of those 2018 notes, where there was a dynamic on the call premium based on timing that came in a little bit lower than what we had been provided guidance to.

If I could just ask one last one, I appreciate you giving us the top 10 programs by the different segments, but is there any way to look at how those have changed since all the prior quarters would have been in aggregate? If I just look at it from three months ago to now, what were the major changes amongst the top 10?

On the aerostructures group, not a whole lot of change. The Bombardier Global 7000, 8000 had moved into the top 10, I believe, last quarter. It is still there. We saw the 787 program move a little bit, but it really was just changing of positions. I wouldn't say anything of great significance on the aerostructures side.

On aerospace system side, the 787 program moving to the top of that list is driven by the GE acquisition with a significant content on 787. That also allowed the Airbus A320 to move up the list, and also move the A380 up the list on aerospace system side. I would say those were really the significant movements we saw in the quarter.

That's great. Thank you very much.

Steven Cahall.

Hi, Royal Bank of Canada. Thanks for taking my question this morning. Maybe one first on the 747, I think the quantification of some of the potential forward loss is very, very helpful. Is the right way to think about the range, the amount of visibility you have, and then also the difference between 1 versus 1.25, is that really the main swing factor? Is there anything else we should be thinking about from a sensitivity standpoint?

Yes, as we went through this analysis, obviously a lot of variables in play. One being if there was a rate reduction, what is the timing of that rate reduction? Then what is the magnitude of that rate reduction? Then for how long do we move forward at a lower rate?

I would say the biggest dynamic impacting the range is really rate. Between 1 and 1.25 drove most of the dynamic between $30 million and $60 million that we depicted. Keep in mind, on this contract we're under contract through unit 1574. We know Boeing hasn't sold all of those planes. Our analysis assumes that we run out through the end of the contract.

That's great. That's very helpful. Then a follow up maybe on the GE acquisition, I think, if I heard correctly you said you expect that be positive EBITDA by FY2016. Maybe two questions, is there much risk to that transition process, or is this really the big contract that you've talked about rolling off, and so there's not a lot of operational risk there? Then with the 787 moving up in aerospace systems, is this part of the issue there, is either coming through learning curve or moving through development contract on the 787 that rolls off next year? Thanks.

Okay. I'll try to remember both parts of the question. I'll answer the second one. The 787 program is fully developed. In any program like this, you typically develop the system and get it qualified, get it delivered, and then there's typically a period of time where you go back and see if there's anything you can do to increase the value engineering possibilities in terms of cost reduction or in terms of weight reduction. There will be minor tweaks to the system in terms of improving it. Any kind of development activity on this program is well behind it.

Let me see. On the first part talking really about operational risk in the integration of this Company, the risks involved here are just those inherent with moving. Anytime you move a product from one place to another, we have to move out of [Suzhou], China, for example. We have to move our operation out of Cheltenham, out of the facilities that we share with GE. There are some risks inherent in moving any of those types of things. We have a lot of experience in doing that.

We don't really expect a great deal of down side to that. We plan for certain capital expenditures and other operational expenditures in order to do that, but at the end of the day, we end up with I think a far more cost effective footprint as we better utilize some of the facilities that we're moving this product to. I think on balance we're looking at a pretty positive experience here.

That's great. Thank you.

Yair Reiner.

Thank you. Oppenheimer. Just going back to aerostructures for a bit, if I take out the impact from the (inaudible) catch-up adjustments it looks like margin in the first quarter was a touch over 13%, which is actually a bit below where you've been trending over the last year. Maybe you can talk about what's driving that and why you expect it to improve as we move through the year?

Yes, I think the main driver that we will see from an improvement in margin will be associated with realization of the Red Oak investment. The dynamic we're in right now is most of the product that we're shipping out of Red Oak today are in accounting blocks that straddled fiscal year 2014 and fiscal year 2015. Many of those box are still burdened with the cost structure at Jefferson Street that's being averaged over the accounting block.

As we get to the second half of the year and start completing the blocks that had at Jefferson Street impacts, we'll get into [peer] account blocks that are just Red Oak, and straddle FY2015 and FY2016. We'll get the full benefit of the cost structure in Red Oak. That will be the primary driver of improvement as we look forward to the second half of the year. The only other nuanced dynamic I would say in the first quarter that we saw is we did see a number of shipments on C-17 shift out of the first quarter into the second quarter. C-17 tends to be a program that we would generally see at or above average segment margins on. We have a little bit of a mix going on in the first quarter that should correct itself in the second and third quarters.

Then just as a follow-up, you mentioned in response to an earlier question that you expect that by the middle of the year, towards the second half of the year Red Oak facility should start to have JSF type margins. I was hoping maybe you could give us a little more detail on that because where to draw the line on what the JSF margins really were is a bit difficult given some of the disruptions that have happened over the last year.

Let me correct my statement if I said margins. I meant to say performance, and performance really is recovery of the labor performance back to where we were what I would depict as pre-move activity. As we transition to Red Oak, getting tools set up, getting employees back on the tools, and back up to, fully up the learning curve, we're still working through that here in the first half of the year. We definitely anticipate, and I'd say that we're there on many programs today, we'll be there on all programs by the middle of the year where our performance levels is at least at the level before the move activity started which has a relationship to margin. The bigger margin driver around Red Oak is really the cost structure in Red Oak versus Jefferson Street there.

Got it. You did the performance. I assumed that to mean margin.

Okay.

My last question and I'll get back into queue, it looks like your guidance assumes that there is going to be some improvement in organic sales for the balance of the year. Can you give us a rough sense of what you anticipate organic growth will be in the final three quarters? Thank you.

It definitely, I would say, as we look at the first quarter it was light from a revenue standpoint. Part of that was just timing of deliveries around C-17 that we will see come back in the balance of the year. I would say other than the C-17 dynamic, we wouldn't see much additional growth from an aerostructures standpoint.

In aerospace systems, we will see the inorganic benefit of the GE acquisition come in, so we will get three quarters of revenue generation there. We had anticipated full-year revenue out of GE in the $180 million range. We would anticipate in the last three quarters between $140 million and $150 million of revenue generation out of the business. We would expect to see what I would depict as low to mid single-digit organic growth within systems.

Much of that is we would expect some pickup in the aftermarket element of aerospace systems in the balance of the year. That tends to be a bit seasonal for us. We definitely saw a light quarter from an aftermarket element of aerospace systems so that will drive a lot of the pickup there. Then in aftermarket services, there I think we're still anticipating a significant improvement from a top line standpoint and being able to hold bottom line margins. We still believe we will return closer to FY2013 top line levels in aftermarket services.

The cadence of opportunities we're seeing primarily in commercial aftermarket has increased significantly, and in that business turning opportunities to revenue happens pretty quickly. We don't have a long lead like we do in our other segments.

Great. Thank you. Very helpful.

David Strauss.

Good morning. UBS. I wanted to ask about the C-17. Last quarter you had a negative (inaudible). This quarter there was nothing, but can you just talk about your ability to cut of manage that program down in risk? Jeff, you mentioned the margins there are above average risk, the margin profile as you manage the program down, and how you're thinking about it, given that I believe Boeing still has about 10 unsold airplanes?

On C-17, obviously we're paying close attention because we definitely would expect a deterioration in labor performance as you get close to the end of production. It's not necessarily folks are working as hard, it's just you tend to run into more issues with the parts flow, and if you scrap a part trying to get another part from supplier, it ends up creating disruption within the line. We are definitely looking at broad performance to degradate.

That said, contractually we believe we have a strong position to ensure that we're at least being [kept whole] for the dynamics of bringing a program to end. I wouldn't expect significant degradation in margin. I would expect some degradation in margin. We think ultimately and we will work with the customer very closely to ensure that we're being compensated as this comes to an end. You also get that dynamic of as it comes to an end, we still are optimistic of seeing a level of postproduction spares requirements that will allow us to at least help keep the line hot, so to speak, that will help us get through some of the tail up issues we would see as the production units come to an end.

Jeff, when would you expect revenues related to new aircraft builds ending?

On the big structure side, it will end pretty much in line with the end of the fiscal year. It starts bleeding in, in early third quarter fiscal year when we get into the detailed parts that we supply in the C-17. You'll start seeing a slow diminishment in revenue Q3, Q4, and it's completely done from a production unit by the end of Q4.

Okay. Then my last question on Gulfstream, the expectation is that Gulfstream is going to announce a refresh, update, whatever what to call it on the 450, 550 program sometime in the near future. Obviously, you have a very large role on those programs. Can you just talk about how you see your role on whatever the future G450, 550 looks like?

Expectations, and I think we've said this publicly, if not we will now, our expectation is we wouldn't see the same level of content on next-generation Gulfstream aircraft that we see today on the G550, where we deliver a fully integrated wing to Gulfstream. That said, with our structure we can play at many levels of the supply chain feeding Gulfstream's wing from a Tier 1, Tier 2, Tier 3. I fully expect to have a high level of participation on any program Gulfstream launches, although it might not be at the same level of supply that we have on the G550.

I would fully expect it to look more like what we do on G450 where we supply a full wing box to Savannah. Not to say that we would be supplying a wing box, but I think revenue stream would look much like what we have on 450. I think we will see a lot of opportunities to play at lower levels of the supply chain in the structures world, and I think there will be a lot of opportunities for us to play on the systems side.

I think all of that goes to say that each customer, as they approach each new airplane, and assuming that Gulfstream actually has airplane as you describe, they tend to go through cycles in terms of what they want to do internally, what they go through their own [make-buys], and our structure enables us to participate at whatever level is appropriate for that customer at that time, and our relationship with Gulfstream is a very positive one. We are very confident that we will play a significant role in whatever new aircraft they come up with.

Thank you.

Ken Herbert.

Good morning. It's Canaccord. I just wanted to ask, first, within the aerostructures business as you look at your footprint, I know you've got a number of other facilities, Hawthorne, Marshall Street, other areas that are very 747 dependent. As you look a couple of years, what are the opportunities within aerostructures for perhaps additional cost savings, either leveraging Red Oak, or maybe some adjustments as some of these other programs like the 47 eventually sunset?

Ken, we are not just thinking about a couple of facilities. We continually look at our entire portfolio of facilities and equipment, and we're continually looking to optimize that. I would say that all options have always been on the table. One of the things I was just thinking about, when Jeff was answering a question on C-17 was the fact that while our revenues at some of our structures, individual structures companies, Tier 2 guys, are going down relative to that program, they are also winning new products on other platforms in order to replace that. At the same time, we're looking at optimizing our footprint relative to that program's decline.

It's something that we go over on a regular basis, and so I'd say that your assumption is correct that we're going to continue to evaluate facilities like Hawthorne and Marshall Street. That just goes for every one of our other facilities as well.

Okay. That's helpful. Then if I could, on the aerospace systems segment, now with GE completed can you just remind us how much of the business now is aftermarket, and specifically maybe the split there between commercial and military? I know you've talked about strengthening on the commercial aftermarket within that segment.

I'm not sure I'm remembering it. I think the aftermarket business is relatively light. I know the repair business is virtually nonexistent, and I would say it's the overall aftermarket business is probably in the teens, in terms of a percentage which it needs to be quite a lot higher than that. The military to commercial breakdown, do remember what that is?

Yes, it's weighted more heavily towards commercial, with 787, 320, and 380 being the largest dynamic there. The content on the military side, largest program is to V-22. I would say the overall weighting in the business is probably 75/25 commercial to military.

(multiple speakers) 80/20, something like that.

80/20.

Okay. Within the entire segment though, the GE business pulls the aftermarket mix down a little bit for the entire segment then?

Yes. The overall segment still runs about 80/20, OEM to aftermarket. You might see initially a slight reduction to that. To Jeff comments earlier, we're very optimistic we can drive a higher level of aftermarket into this GE business, so I would fully expect it now in the midterm not be a reducer of content from an aftermarket standpoint.

Remember that in our aerospace systems group, we have companies that are more [built to] print. Those companies that are more proprietary, we would normally expect to have a higher percentage of aftermarket, and this is clearly one of those. We believe that overall those companies that are highly proprietary, we can in fact drive more benefit from the aftermarket, and we intend to do so.

Okay. Finally, the pick up you're seeing within this segment on the aftermarket, in the near term within aerospace systems, it's obviously the GE acquisition helps because you've got runway there to build outside the business. Within other parts of this segment, can you point to any specifics, whether it be geographically or other areas, where you're seeing some of the pickup? I think you referenced a step-up in cadence of quote activity and other activities that give you confidence on the second half recovery?

Yes, in aerospace systems, definitely expectation of a pick-up on the aftermarket side in the balance of the year. We tend to see a level of seasonality in the aftermarket in this business. We also know we have a couple of what tend to be one-time sales each year that are falling in the second half of the year in that segment. That will get us to where I think you'd expect us to be in this segment. We also have decent positions on programs that continue to see pressures on ramping up such as 787.

Thank you very much.

Julie Yates.

Credit Suisse. Good morning. Jeff, just on GPECS, I think last year you talked about seasonality and aftermarket, and last year you saw a big chunk of that in the fiscal first quarter. Are you seeing similar lumpiness this year? Are you seeing the smoother profile through the year? a then just broadly, how are margins progressing now that you've owned the asset for 18 months?

I guess since we're both Jeff we can both answer it. I think that inherently in our aerospace systems group, we have some lumpiness. We generally see fourth quarter strength in some of our companies because there are some fairly predictable foreign military spares activities that happen at that time. In the earlier quarters, the orders generally come in and the shipments usually come in big bunches. We may not always see in the first quarter some great strength, but we will see some lumpiness in that. We're confident we are going to see that, that we will have strong quarters in terms of that aftermarket business in aerospace systems. Overall, the question on the margin growth?

Yes, I think overall, Julie, as it relates to the engine control business, as we have talked in the latter half of FY2014, we were very pleased with the level of margin improvement we have seen in that business. We continue to see strong margins. What I would depict as above segment margins coming out of that business. Much of that ends up being related to aftermarket, so you do end up having some lumpiness. Our expectation for FY2015 is we would see a continuation of above segment margins coming out of that business.

Okay. Great. Very helpful. Then any more color on the military aftermarket? It's the source of weakness for some time now, and I think the last few quarters you've talked about there being pent-up demand. Do have visibility that any of that demand is starting to break free?

We see the demand, Julia. For example, the reason we see that demand, we have one of our companies that supports the C-17 repair business, and our customer in this case has in fact delivered us all their stored units that they were holding for repair. Now, we have them all. The trouble is that they have not authorized us to repair them because the funding has not been turned loose for that.

We see with the demand is, which is significant. It's just going to be question of whether or not the need for the reentry of these products into the marketplace which may be driven by flight hours on certain aircraft such as C-17, whether that drives a faster pace, or whether we're just going to see a normal ramp back up. There is quite a lot of work out there to do. We just have to find what those triggers are to really get the funding moving.

Then just last question, is there any update on the pipeline of programs that you guys are bidding? Any color on win rate that you can offer?

I don't think we have a lot of color on win rates. I would say that the pipeline is still robust and that we are still participating successfully. We have continued to win things like market share gains, things of this nature, and continuing to maintain our position on most of our programs.

We have a lot of discussions going on, and we would look forward to announcing those large wins when we get them. In an opportunity such as this, a lot of the wins we get usually don't enter the realm of really being worthy volume-wise of a press release, but when you multiply them 47 times, they get to be pretty significant. I guess when we get to quarterly opportunities, it's a good time to talk about some of those as we roll them up. Hopefully we'll be able to do that. I guess the answer in a nutshell is that the pipeline remains robust. We are still winning at least our fair share, and we're confident that we'll continue to do so.

Chris Mecray.

BlackRock. Good quarter, guys. Congratulations on the Eaton settlement. Could you just help us maybe disaggregate the cash flow forecast a little bit, given all of the moving parts? If you take the Eaton settlement out and the other receivables that you got, have you in fact adjusted your outlook for the year and what, if anything, went into that?

As far as cash flow generation, we have updated and reconfirmed what we had depicted previously of generation of roughly $250 million of free cash flow. Obviously, the first quarter was not a strong cash quarter for us. We definitely see the second quarter being much stronger with some of the elements we talked about that were held up in receivables at the end of the first quarter. As we look at the balance of the year, similar to earnings we would generally see the second half of the year from a cash generation standpoint being a much stronger half than the first half. But I would fully expect to see the second quarter being a strong cash generation quarter.

The weakness in the first quarter, which I do recognize is a seasonally normal, isn't any worse than you would have necessarily expected?

No.

One other thing -- (multiple speakers) Go ahead.

I hate to call it timing but there's a lot of timing dynamics in that. With the low revenue in the first quarter there's a little seasonality impact to it.

Yes, okay. I don't know if it's materially or not, but I assume you had not anticipated the elimination of legal costs as of your Analyst Day, and I wonder what kind of tailwind that may provide for the balance of year, next year?

Yes, if you remember what we talked about in the fourth quarter was expectation that if the Eaton activity continued, we're evaluating alternative fee structures with our legal counsel which really, in our mind, was going to make legal fees associated with Eaton zero for the year because we would have moved to some form of contingent basis on settlement. Ultimately we never had an agreement in place there. As you can see, with the netting that we did between $135.3 million and $134 million that we're showing, we did have that legal fees that we're netting out against the settlement. Ultimately you should see zero impact related to legal fees and Eaton in FY2015. That is also how our guidance was built.

Okay. Great. I appreciate it. Thanks.

Steve Levenson.

Stifel. Just to expand a little bit on the future opportunities, do you see opportunities for increased content on a 330neo? I know you pretty happy about the life extension. With the bigger engine, will the parts that you make require strengthening or is there something in addition?

We do see that there will be some change. We think that we'll be able to protect the work statement that we do have, but there are going to be some additional packages that will invariable come out, and we like our chances of increasing our scope of work on that aircraft.

Can you give us a little bit more detail on, not necessarily what you expect to get, but timing on things like 737 MAX and 777X?

The 737 MAX, we're already winning content on that and have announced several things on the system side. The structures pieces, they've announced on 777X, for example, Boeing has announced some substantial awards to some of the Japanese suppliers, for example. We have strong relationships with those Japanese suppliers and invariably those types of decisions as to who is going to supply product in through that channel comes a little bit later.

I would say we're thinking about that we've got maybe within the next year, nine months to a year, something like that, where we will expect to be able to announce what we're going to be supplying on the 777X. I would suspect that we're going to continue to supply whatever is applicable, that we're currently doing on a 777. I would think we would carry that over, but what we're really looking for is additional opportunity on 777X. We have one systems product on 777X as well. We are continuing to make inroads there.

JB Groh.

DA Davidson. I just had a quick follow-up on the backlog slide there. Is the total backlog between those two buckets proportional to the revenue they generate?

Yes.

Structures is 70% plus and aerospace is 20%-some of the total backlog. Is that a fair way to look at it?

Yes. If you think of backlog being really those two segments with little coming out of aftermarket services, it should be pretty proportional between the two, JB.

Structures backlog isn't necessarily disproportionately higher?

No.

Okay, That's helpful. Everything else has been answered for me. Thank you.

Yes Ryder.

Oppenheimer. Just a quick housekeeping question, what is the amortization expense within interest? Also, what is interest rate you're paying now on the revolver?

The total amortization flowing through interest, is that the question?

Exactly, and then also the interest rate on the revolver.

The revolver is running right around 2% today, Yair. The amortization flowing through interest, I want to say it's in the $4 million to $5 million range, but I probably need to come back specifically on that.

That makes sense. Thank you.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2015 first quarter earnings conference call.

This call will be available for replay today after 11.30AM through August 8, 2014, at 11.59PM. You may access the replay system by dialing 888-266-2081 and entering access code 1640970. Thank you all for participating, and have a nice day. All parties may now disconnect.