Triumph Group Inc (TGI) 2015 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 FY15 first quarter results. This call is being carried live on the Internet. There is also slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation. You are currently in a listen-only mode. There will be a question-and-answer session following introductory by management.

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

Please note that the Company's reconciliation of non-GAAP financial measures to comparable 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 property of the 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, and good morning. I would like to take this opportunity to add my welcome to this second quarter FY15 Triumph Group conference call. I will remind you as well that there is a slide presentation for your reference, as well as the audio portion. As has become customary, before I get into the slide deck, I would like to make a few comments about where we are as a Company and where we're going.

Back in June of this year, Triumph hosted an investor day in New York City. At that time, I laid out our long-term vision for the rest of the decade. That vision portrayed a Triumph Group that was better balanced across end markets, customers and segments. One that achieved balanced sales growth through strategic acquisitions and organic initiatives while optimizing margins and cash flow.

Underpinning this growth is our continued commitment to fiscal discipline and a conservative approach toward risk. We've now moved another 90 days away from that date in June, and I'm comfortable in saying we're still on track to deliver those strategic objectives described at that time. The completion of the acquisition on the early stages of integrating the GE hydraulic systems businesses have provided a significant benefit to our aerospace systems segment. Our recent acquisition of NAAS adds new capability, depth, as well as improved delivery channels to our after market services segment. Organically, yesterday's announcement of the G500, G600 products we're supplying on Gulfstream's newest aircraft, as well as new awards from across the customer spectrum, provide us with reason to be confident that we're on the right track.

What gives me the most confidence, however, is our people and our operating philosophy. I'm sure that over the course of our conversation this morning we'll talk about macro-type issues such as current versus future aircraft build rates and changing market dynamics, and well we should. What none of us should overlook, however, is that while we discuss our industry and world from the top down, we have 46 companies and many more locations than that across the globe working very hard from the bottom up, focusing on satisfying their customers, reducing costs, thereby gaining market share and growing their businesses.

Throughout our history, that is been a key strength and differentiator for Triumph Group. An empowered group of companies providing customers with large company capabilities and small company responsiveness and innovation. This operating model has been a key factor in getting us to where we are today, and it will play up vitally important role as our future unfolds. It is at the heart of what we mean when we say we are designed to be different and built to perform.

I have one other statement to make prior to getting to the slides. There continues to be media reports and industry discussion about where things stand with respect to a possible deal for certain assets owned by Spirit Aerosystems in Tulsa. We remain interested in the Gulfstream Wing programs in Tulsa. That being said, and I have said this often, this is a multi party discussion that adds complexity to the situation and something that all parties have been considerable time carefully evaluating. From Triumph's perspective, we are committed to pursuing a transaction that makes strategic sense for us and delivers value to our shareholders; and that is the extent of our comments on this subject.

With that, let's turn to the slide titled Q2 in Review. We had a solid second quarter. We achieved record quarterly net sales, very nearly reaching the $1 billion quarterly revenue mark, which would have been a milestone for us. We delivered earnings for share in line with our expectations and generated strong cash flow. In aerostructures, our operating revenues were impacted by lower 747-8 deliveries, Gulfstream and B22 program production rates.

Our Red Oak transition to pre-move performance levels was slower than anticipated, although we remain confident we will achieve our planned productivity levels. Importantly, we've booked a $5 million customer settlement charge in the quarter. This has been a contested charge for some time, and we voluntarily abandoned our position on this and returned for an extension and expansion of some of our 777 work statements. Depending on the number of 777s ultimately produced, we estimate the value of this award to be in excess of $250 million. This charge we took in Q2 is clearly a one-off that will provide significant benefit downstream.

Our aerospace systems segment reported positive organic revenue growth with sustainable strong operating margins, and the integration of our new GE aviation hydraulic actuation businesses is, in fact, progressing well. In terms of our after market services segment, we saw positive organic revenue growth with sustained strong operating margins.

As previously mentioned, we were awarded the wing structural components and nose wheel steering system for the new Gulfstream 500 and 600 and have been supplying these parts since the beginning of the program. As I mentioned earlier, we successfully completed the acquisition of Triumph Aviation Services NAAS division, and we are excited about the impact this acquisition will have on this segment of our business. And finally, we executed 636,740 share buyback for approximately $42 million. Jeff will provide some context on this. We will remain opportunistic buyers of our own shares in conjunction with a properly laid out capital deployment strategy. With that, I will turn this over to Jeff McRae.

Thank you, Jeff, and good morning, everyone. I will start with a review of the financial results for our second quarter. Turning first to the income statement. As Jeff mentioned, we had a record sales of $994.1 million for the second quarter compared to $967.3 million for the prior-year period, an increase of 3%. Operating income for the quarter increased 23% to $114.7 million and included $7.8 million of costs related to the Red Oak facility transition. Excluding these costs, operating margin was 12.3% for the quarter. The prior fiscal year's second quarter included approximately $5.6 million of Jefferson Street move-related costs. Excluding the Jefferson Street/Red Oak cost, operating margin was 10.2% for prior year second quarter.

Net income was $67.4 million, resulting in earnings per share of $1.32 per diluted share versus $0.94 per diluted share for the prior-year quarter. Excluding the non-recurring items for both periods, net income was $72.5 million, or $1.42 per diluted share, in line with our expectations, versus $53.2 million, or $1.01 per diluted share for the prior year's quarter. The number of shares used in computing diluted earnings per share for the quarter was 51.2 million shares. Adjusted EBITDA was $138.8 million, resulting in an adjusted EBITDA margin of 14.2% for the quarter.

Now, turning to our segment performance. Sales in the aerostructures segment for the second quarter declined 8% to $632.1 million, primarily due to lower production rates versus a year ago on the 747-8 Gulfstream and B22 programs. Second quarter operating income was $72.2 million compared to $64.4 million for the prior-year period and included $7.8 million of pre-tax charges related to the Red Oak facility transition and net unfavorable cumulative catch-up adjustments of $6.2 million.

The segment's operating margin for the quarter was 11.4%. Excluding the Red Oak facility transition costs, the segment's operating margin was 12.7%. Adjusted EBITDA for the quarter was $92.2 million with an adjusted EBITDA margin of 14.7%. While we continue to make progress in ramping up production at Red Oak and getting fully back on schedule, the pace at which we are recovering to pre-move performance levels is slower than we originally anticipated, resulting in lower than expected margins in the quarter. As Jeff mentioned, this does not change our view on the ultimate benefit we will realize from the Red Oak operation.

We are also working on several initiatives which are focused on driving performance improvement and reducing cost, both within the heritage Vought business as well as our tier 2 structures businesses to ensure that we meet our operating goals across the aerostructures segment.

As Jeff mentioned, the segment's operating results were also negatively impacted by a $5 million claim settlement on the 777 program which was agreed to in conjunction with an agreement to expand our work scope and extended the duration of the existing 777 contract.

On the 747-8 program, we continue to maintain a low single-digit margin and remain focused on improving scheduled quality and labor performance. That said, that we continue to be cognizant of the potential for a production rate reduction on the 747-8 program and are actively engaged in evaluating alternatives to manage costs and mitigate risk at a lower production rate. Our assessment of the impact of a potential rate cut remains unchanged.

Moving to the aerospace systems segment, sales were $288.9 million compared to $205.5 million in the prior-year period, an increase of 41%, reflecting 2% organic growth, aided by improved after market spares sales and the impact of the acquisition of the GE aviation hydraulic actuation business. Second quarter operating income increased 46% from the prior-year quarter to $46.2 million with an operating margin of 16%. Adjusted EBITDA for the quarter was $47.3 million and an adjusted EBITDA margin of 17%. The integration of the GE hydraulic actuation business is progressing well, and we are tracking ahead of our synergy realization plan for this business. As expected, their margins were dilutive to the segment's margins in the quarter, but we continue to develop and execute on plans which will drive segment average margins from this business in the midterm.

Moving to after market services, segment revenue in the second quarter were $74.3 million compared to $73 million in the prior-year period, an increase of 2%, all of which was organic. Second quarter operating income increased 15% over the prior-year quarter to $11.6 million with an operating margin of 15.6%. Adjusted EBITDA for the quarter was $13.5 million with an adjusted EBITDA margin of 18.2%. We have seen some recovery in the military after market during the second quarter but continue to see a level of pent-up demand and optimistic that we will see additional recovery in the second half of our fiscal year and into the next fiscal year. Even with this softness, we have continued to drive strong margins in this segment and anticipate holding margins at Q2 levels for the balance of the year. This segment will also benefit in the second half of the year with the integration of the NAAS acquisitions.

Corporate expenses in the second quarter of $15.4 million were $2.1 million higher than the prior-year period primarily due to elevated spending on due diligence and other acquisition-related activities. As Jeff mentioned, during the quarter, we repurchased 636,740 shares for approximately $42 million. As of September 30, approximately 3.8 million shares remained under the share repurchase authorization, and we will continue to tactically repurchase shares as part of a balanced approach to capital deployment and managing our overall liquidity position.

On the pension front, we have included for your reference a pension OPEB analysis for Triumph aerostructures for the FY14 and FY15, which remains unchanged from last quarter. During the quarter, we did contribute $10 million to the pension plan. We also completed an initial analysis of the impact of the incorporation of new mortality tables to our pension and post retirement benefit plans. Based on this initial analysis, we are projecting approximately 9% increase in the O - pension OPEB liability as of March 31, 2015.

We only expect minimal impact our FY15 earnings and anticipate seeing a slight year-over-year earnings improvement related to our pension benefit as we look to FY16, although not at the same level as we would have previously estimated prior to incorporation of the new mortality tables. These calculations are highly dependent on a number of factors such as year end discount rates and loss amortization methodology and will be finalized as part of our fiscal year end valuation process.

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 sales within our aerostructures and aerospace systems groups. The after market services group does not have a substantial backlog. Our order backlog as of September 30 was $4.8 billion, down 1.4% year over year primarily due to the rate reductions experienced in the second half of last year on the 747-8 program and the upcoming termination of production on the C-17 program.

For your reference, we have included the top 10 programs by backlog for both the aerostructures and aerospace systems segments. Boeing remained our only customer to exceed 10% of total revenue, net sales to Boeing commercial, military and space totaled 45% of our revenue and is broken down 74% commercial, 26% military. For your reference, we have included in the appendix charge reflecting sales by markets and sales trends.

Now, turning to the balance sheet. For the six months ended September 30, we generated $313.8 million of cash flow from operations before pension contributions of $55.4 million. After these contributions, cash flow from operations was $258.4 million which included the receipt of $135 million from Eaton related to the legal settlement. Inventory at September 30 increased $124.8 million, of which approximately $68.7 million was attributable to non-recurring investment on the Bombardier and Emery Air programs; and $47.9 million from the acquisition of the GE Aviation hydraulic actuation business. We do continue to make good progress on both Bombardier and Emery Air development programs and remain on track to deliver initial test articles to Bombardier this fiscal year and initial units to Emery Air in mid FY16.

Capital spending was $36 million in the quarter and $59.1 million year to date. We continue to expect capital spending for the fiscal year to be in the range of $1.20 to 140 -- $120 million to $140 million. Net debt at the end of the second quarter was $1.5 billion, representing 39.3% of total capital and total debt to 12 month -- trailing 12 month adjusted EBITDA was 2.7 times, putting us back within our targeted range on both metrics. The global effective tax rate for the quarter was 35.6% and reflected the fact that the R&D tax credit expired in December 2013 and has not yet been renewed. In addition, the net income tax expense for the quarter was reduced by approximately $2.7 million, primarily attributable to lower deferred state tax rates. From a cash tax perspective, we currently expect to pay minimal cash tax in FY15.

In terms of financial guidance, based on current projected aircraft production rates and a weighted average share count of 51.3 million shares, we reaffirmed our revenue guidance of $3.8 billion to $3.9 billion and maintained our full-year earnings per share guidance, excluding the non-recurring items, of $5.75 to $5.90 per diluted share. GAAP earnings per share guidance also remained unchanged. This guidance assumes that the R&D tax credit will be retroactively reinstated by the end of the fiscal year resulting in a 34.7% effective tax rate. Driving results will be the realization of the full benefits of the GE and NAAS acquisition, the Red Oak facility transition, recent wins and the general seasonality of a number of our businesses, and realizing the full benefits of the share repurchase made to date.

We now are projecting our full year adjusted EBITDA to be $635 million to $645 million to reflect underperformance in our aerostructures segment and updated to reflect current projections for depreciation, amortization and fair value of contract amortization. The adjusted EBITDA guidance excludes the impact of the Eaton settlement and non-recurring costs associated with the Red Oak transition. We continue to expect to generate free cash flow available for debt reduction, share repurchase and acquisitions for the year of approximately $385 million. With that, I will turn it back over to Jeff.

Thank you, Jeff. In terms of our FY15 outlook, we continue to benefit from a strong backlog. We remain focused on execution, increasing profitability, expanding our margins and generating strong cash flow. Now, Jeff has just described our FY15 guidance, so I am not going to reread this to you. I will just confirm his comments. We are nearing the start of our FY16 business planning cycle, so over the course of this, the third quarter, we will get a good idea of what FY16 will look like. It is our intention to provide a sneak preview of what we are seeing in next quarter's call. Full FY16 guidance will be provided in conjunction with our year end call as usual.

Before taking questions, I want to return to the subject of execution. Triumph's focus on execution is ongoing in all areas of our Company. I have already described how our Companies are individually pursuing their objectives, but execution is also a priority at the corporate level. Whether we are talking about enterprise-wide supply chain initiatives, global infrastructure cost improvements, or taking full advantage of our international presence to optimize our future effective tax rates, we'd be assured that Triumph is making the moves necessary at all levels to ensure that the future vision we laid out in June becomes a reality. At this point, I will open the phone lines up for questions.

Thank you.

(Operator Instructions)

Please stand by for your first question. Our first question comes from Cai von Rumohr. Please state your affiliation followed by your question.

Yes, thank you. Cowen and Company. Congratulations on the G500, 600. Quick question, do you have any opportunity to increase your share there depending on things that might happen? I.e., with Spirit?

Yes, in Spirit, in terms of the 6 -- 500 and 600, let me just -- I think the 500 and 600 discussion is a good one because there are, in fact, opportunities. We are having, in fact, discussions currently with some significant opportunities to an increase our share of those new aircraft. And we believe that at this point in the development of the aircraft, that there are any number of opportunities for us to gain market share there. I am not sure that directly relates to the Spirit discussion.

Okay, and then a follow up, could you tell us what sort of ramp, given that it doesn't deliver until early 2018? Some sense of the profile of the ramp that you will see?

Cai, I would generally look at our ramp being, call it 12 months ahead of Gulfstream's ramp on the program as we think of deliveries. Obviously we will deliver more units than they are delivering early on and then as they start delivering production units, you should generally be looking at what I would depict as a 12-month lead that will shorten over time as they start ramping that program up.

Terrific. And the last, a technical one, could you tell us for the full year what you expect for contract amortization of contract liabilities for both aerostructures and systems?

Yes, the -- through the first half of the year, we saw a roughly $23.8 million of value of contract amortization across TJI. Expectation for the full year with the incorporation of GE will be roughly in the high 40s, low 50s. It is still a little dependent on finalization of the purchase accounting around the GE acquisition. I do not have the segments handy in front of me.

Okay, great. Thanks.

Our next question comes from Sam Pearlstein, please state your affiliation followed by your question.

Wells Fargo. Can you just talk a little bit about the adjusted EBITDA change, the $30 million reduction? I'm assuming it is the $6.2 million unfavorable cum adjustment and the $5 million settlement are in there, but what else is changing? And then what is the offset since the EPS stays the same? Is it tax rate, what is really the offset to that change?

At a high level, Sam, the underperformance in aerostructure is reflected by the cum catch and the claim. We have lowered with that cum catch some margin expectations, primarily on the Red Oak programs, as we look out through the balance of the year. And then we have what we looked at as a true up on insuring we had the full fair value of contract amortization incorporated profitability around GE. As you think about the offsets, the two primary offsets are the tax rate, which we are projecting a lower effective tax rate for the full year and then share count, which we are projecting a lower share count for the year.

And in terms of Red Oak, is this C-17 related, or is it more across the board?

Yes, it has some C-17 dynamic there. I would say it is more across the board. A lot of it is just the incorporation of new workforce in Red Oak. That worked for us not coming up as quickly across the Red Oak business. Part of that is the dynamic of C-17 also ramping down and having additional movement within the facility of workforce.

Okay, and in then if I could go back on the Gulfstream programs. I know you don't like to discuss ship set value book, can you help us think through how does your ship set value today on the 500, 600 compare to say, 450, 500s that ultimately get replaced? And I know there are still going to be more awards to come. And then, as you are thinking about your longer-term planning, given that Gulfstream seems to want to build the 450 and even the 550 a little bit longer, does the tail off of the existing programs, does that happen later than you originally were projecting when you are giving us long-term outlook?

Yes, just as general, from a ship set value standpoint, on G550 today, we deliver a fully integrated wing to a Gulfstream. On G450 we deliver a wing box. The scope we will have on a G500, G600 would be closer to where we are on G450 versus 550. It is not at the same level we see on 550.

I think you touched on what we have seen as a bit of a positive out of GE's launch whereas they view the 450, and even to a degree, the 550, still being part of the family of offering they have. As we thought of rate reductions looking through the end of the decade on 450, 550, I think we will see a bit more revenue than we had assumed. Obviously, it will be dependent on how well the 500, 600 sales and how many 450, 550s are left to sell out there. But I think net/net, one capturing content on 500 and 600, and we have been engaged with Gulfstream since the beginning of this program and assisting them on this program. We think that is a positive and we think probably getting more 450s and 550s than what we originally assumed is a positive out of this.

And Sam, I think one other thing we have to remember is that our global 7000 and 8000 wing program, which is a parallel development here, is something that we really had viewed as something that could help offset reductions in the G4 and G5 rates and revenues as we go forward. There is more of a wider -- there's a wider scope here than just looking at adjusted Gulfstream programs.

Thank you.

Our next questions comes from Julie Yates, please state your affiliation followed by your question.

Good morning, Credit Suisse, thanks for taking my question. I just wanted to go back to the 777 comment on the claims settlement and on the increased work statement. When do you expect to see that additional content, and what is the nature of the increase? Is it in terms of, are you taking content from an incumbent or was the customer outsourcing more content to you?

That is something at this point I would really not like to get into for competitive reasons. There's -- I'm not entirely sure that all of the affected parties are really incredibly aware of all of the future impacts, so I really would like to not get into that so much. I think in terms of timing, we are looking at expanding in, what time frame was that, I think it's --

Yes, I think we would start seeing some benefit, really not to FY17 and into FY18 and beyond.

In terms of the expansion of that work statement, we are looking at a little bit downstream.

Okay. Understood. And then just on the $5 million, was that expected? Was that embedded in your guidance, or should we be treating that as a one time that should basically be excluded?

We had not planned on it in our previous guidance; we have not excluded it from our current guidance. It obviously is a headwind as we think of FY15, but it is not included in the exclusion.

Right, we had not planned on taking that charge. But in light of the fact that we could actually get this large award, we decided to take it. In that sense, it was not in our guidance and it is a one-off.

Okay, and then just back to the EBITDA guidance, and forgive me if I missed this, but did you actually size the portion of the $30 million to $35 million that was related to the underperformance from aerostructures?

I did not. What I would generally say is probably roughly half of that is performance, the balance is truing up the depreciation and amortization.

Okay. Great. Thanks very much.

Our next questions comes from Myles Walton, please state your affiliation followed by your question.

Thanks for taking the question, it is Deutsche Bank. Maybe just to pick up and clarify on that one, Jeff, so the true up on depreciation and contract liabilities, why is that affecting EBITDA, which would be excluding them anyway to start with?

It really, Myles, is making sure we had the right value assumptions primarily as we looked at the truing up purchase accounting on GE acquisition. What I would say is that we had probably not appropriately viewed the purchase accounting around GE in our previous guidance.

Okay, so maybe you had not added back contract liabilities on that isolated acquisition?

We had not treated it in the way that it had ended up.

Okay, and then the other one, just from a clarification on the V22, where are you in the wind down? Is this the last quarter where you have the year-on-year headwind, or does that anniversary, ends it early next year?

We should be getting pretty close to having a comparable bottom. Certain parts of our businesses were producing at a little bit higher rate through the third quarter last year, so I would expect to see some variance in the third quarter. But we should be clean once we get into the fourth quarter. I think everyone was pretty much at the bottom on production rates in the fourth quarter.

Okay. Good. Then you mentioned the pension into beyond 2015. I imagine it also helped you on the funding side beyond 2015. Is $40 million still a good place holder, or will it be even lower than that for contributions?

From an assumption standpoint, we have not changed our assumptions as to contributions, Myles. Keep in mind, both what we are contributing this year and the $40 million that we have assumed in FY16 is all voluntary contributions. What this -- effectively the MAP21 change probably gives you a little bit of extension. If you were pushed into required contributions, for us in the next couple of fiscal years, it won't hit us at all, just because we were in a voluntary mode.

Got it. Okay. And then the last one for me, maybe Jeff Frisby, can you comment a bit more beyond Tulsa, which you've talked about, but acquisition environment beyond that and in particular, capital deployment. You paid back $200 million worth of debt here on the good cash flow you had in the quarter. But looking forward, I understand the balance between the tactical share repurchase, M&A, but are there -- to get to your organic growth thinking of 4% or 5%, I think you are going to have to probably buy things that have organic growth, such that in the future years, that is actually what is feeding the pipeline. Is that the right way to think about it, and does that mean the deal flow will be pretty robust here in the near term?

Can I just say yes? I think that is correct, that we -- the deal flow is still robust. We are going to remain disciplined in the prices that we will pay for these opportunities. We want to make sure that we are just not out there grabbing growth where ever we can. We want to make sure that we are achieving our strategic objectives of the proper balancing of our market or segments, all of the things that we have already talked about.

I think there are opportunities that do that. And where we really get the sweet spot of our acquisition is where we are able to acquire companies, and we have done this recently, where we actually can make them a lot better and become a catalyst for their growth. And they actually can help other Triumph Companies in fact grow more quickly as well.

There's -- because we have gotten relatively wide spread in terms of our capabilities, there are opportunities for synergies beyond just the engine of growth of the Company being acquired. I would say yes, it's going to be an important part of our growth going forward, but we will remain disciplined and will still have a balanced strategy in terms of how we deploy our capital, which should be in a very positive. Cash flow, we still project to be very positive.

The only reason I ask is if -- the programs did land in your lap, I imagine that's going to take an enormous amount of management attention and integration. I did not know if that was going to derail a bit from M&A flow beyond that.

I think we would have to play that as it comes.

Okay, thanks.

Our next questions comes from Joe Nadol, please state your affiliation followed by your question.

Good morning, it is Seth on for Joe this morning from JPMorgan. Moving back to the changes to the outlook or the transition at Red Oak, are we still looking at the $0.50 of the recurring benefit next year?

Yes. We are not getting off of that, Seth. And keep in mind, most of that benefit was based on the elimination of fixed costs from the operation at Jefferson Street as we moved to Red Oak. The only area that we are still seeing some lagging to our expectations is really in the labor performance that we have seen at Red Oak and coming back to what I would depict as pre-move performance levels. Which does not say that we are not optimistic we can drive right through those and drive improved performance even from that point. But we are still confident as we think of FY16 in the benefit of Red Oak.

Forgive me if you mentioned this, but was there an update to the GAAP guidance for the year?

Yes, GAAP guidance does not change from previous.

Okay, so the Red Oak costs are still the same?

Yes. Save [advac] for Red Oak, same advac for Eaton.

And then one more question about aerospace systems and just resetting our expectations following acquisition. The acquisition contribution looks like it was maybe a little bit high in the quarter relative to the $140 million, $150 million that you previously indicated. Was that a quarterly anomaly, or is that a run rate where we are now? And then when we think about the margins, you previously talked about growing aftermarket proportions through the year, do we still see that in front of us?

Yes. On the GE, we did see a strong revenue month from GE this quarter. I do not know that we would expect to sustain that through the balance of the year, but it was definitely a positive as we think of the first quarter of our ownership. On GE, we have talked to margin expectation there would be dilutive to segment margins, and we would say that during FY15.

As we think broadly on aftermarket within systems, we continue to drive to increase what I would depict as capture on aftermarket of those things that we think we should be capturing. We saw some of the organic growth in the second quarter driven by aftermarket sales within the aerospace systems segment. And I would expect us to see that continue through the balance of the year.

Thank you.

Our next question comes from Sheila Kahyaoglu, please state your affiliation followed by your question.

It is Jefferies, good morning Jeff and Jeff. Just on the 747, you have been very helpful in sizing that opportunity at different volumes. Can you give us a bit more qualitative color on how you have been taking actions to mitigate risk on the downside?

Yes, for us, it really is looking at how we execute on 747. Really, in our two large facilities at Marshall Street and Hawthorne, so the focus is around those two businesses. Much of it is looking at opportunities that we could drive cost reductions in those two facilities, as well as if there are opportunities from the supply chain standpoint that we could capitalize on in a greater way for the balance of 747. Part of it will come down to evaluating footprint at lower production levels, which would include a supply chain element there, as well.

Okay. And then just on the A330. Can you maybe let us know where you are in production rates for that and how you have been positioning to meet the demand there?

On what program, Sheila?

The A330.

We are still producing roughly 10 a month. Obviously, Airbus came out with their guidance on a rate reduction going to 9 a month, which did not necessarily surprise us. We had been building into our planning a level of rate reduction on 330 looking forward.

It might have come a little bit earlier than what we had assumed, but not unexpected. And I think as we think of 330, with the new announcement this summer from Airbus, we are definitely in a much healthier long-term position there than we would have thought a year ago.

And then just one last cleanup item, and I apologize if I missed this, you mentioned organic decline in the quarter was partially due to Gulfstream. Was that just a timing of rate on current programs or any sort of change in content?

No change in content. It was just rate on current programs.

Got it, thanks.

Our next questions comes from David Strauss, please state your affiliation followed by your question.

UBS. Just following up on that last question, could you give us a little bit more color on Gulfstream? Because from our vantage point, I do not know of anything that's going down.

Yes. I always apologize when I talk Gulfstream just because Gulfstream asked us not to talk specific programs. But what we have seen generally on the legacy programs is slightly lower production rates than where we were a year ago.

Okay. C-17, can you talk about where we are, have you started to come down at all and the progression of the ramp down as you see it?

Yes. C-17 it impacts different businesses within Triumph at different times. We actually, in some of our tier 2 businesses to include structures and processing, we are pretty close to being completed for production units. We are still on the tier 1 structure side producing with anticipation of completing most of the structure this fiscal year.

I think we will see some risks that some of the production will slip into FY16, partly just due to the cadence of getting customer-furnished materially for aircraft. But I would say the biggest piece is still producing; some of the smaller pieces have completed or will complete here in the third quarter.

Okay. And then on Red Oak, I think you said that the outlook for savings, excuse me, for 2016 is still intact. But is the progression slower, or are you looking at a -- you'd talked about a $30 million, $31 million or so pre-tax benefit in (technical difficulty). Is the number different now, Jeff?

Yes. It's -- what we are not fully getting is the labor performance. When we looked at the $30 million, most of that was achieving the fixed cost benefit. We had also built in some labor performance improvement from where we were exiting Jefferson Street with a move to where we thought we would be. That is not as significant as a piece as the fixed cost is, but it is trailing a little bit.

But can you give us an idea of what is that $30 million number look like now?

I think that $30 million is probably in the mid $20 millions right now for FY15.

Okay, great. My last one on the inventory side, I think you have built 120 or so year to date; I think that is pretty close to what you thought for the full year. Is that full your guidance for inventory build still unchanged?

Yes. The -- what we had assumed on the non-recurring programs was roughly $120 million. Obviously, you will see the dynamic of the acquisitions impacting inventory growth. But absent the acquisitions, we are still looking at roughly $120 million on the two development programs.

All right, great. Thanks a lot.

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

Stifel. Good morning, everybody. In terms of the smaller size business jets, where do you expect to be a year from now? Do you think you will be at the same level? Or are there signs of life there?

I think the -- I think at NBAA, there was renewed optimism there in terms of things picking back up. I'm always just -- there is a shorter lead time on those types of things. Things tend to turn up and turn down a little bit more abruptly. So, I would anticipate that we would be in better shape. But it is one of these deals where you are -- once you have been burned, you are twice as shy. Right? I think we are trying to be cautiously optimistic about the smaller end of the business jets, but we do see signs of life.

Okay. Thanks.

And in terms of overall aftermarket revenue, it is climbing up a bit; part of that at least is from the acquisitions. What do you see as the trends there, and what is your goal for the mix between OEM and aftermarket revenue?

I am not sure what we're -- if we're talking about overall aftermarket in terms of -- we have got an aftermarket services segment, as you know, and that is --

Right, no, I mean about the part coming from aerospace systems particularly.

I'm not sure -- we're looking at --

As we sit here today, aftermarket is still roughly 20% of the content within aerospace systems. With the Goodrich acquisition, we are now getting the full benefit there, which increased from where we were prior to Goodrich. As we think of incorporation of GE, I think we are optimistic that we can grow that aftermarket business from where it was when we acquired it three months ago. Not necessarily going to see significant growth as we think of FY15 there, but I think as we think long term, we would continue to drive to capture a greater content that is available to us from an aftermarket standpoint, and we should see that 20% grow.

I think that, Steve, if you think about it, I not sure we'll -- because of the, I want to say mix and everything, right? But because of the mix of companies in aerospace systems and some of them being -- not having quite as great an opportunity in the aftermarket world as others, I think achieving a 30% number might be a stretch. But I think we can get up higher into the -- in the 20%s.

Okay, thanks very much.

Our next question comes from Steven Cahall. Please state your affiliation followed by your question.

Steven Cahall from Royal Bank of Canada. Maybe a question on the aftermarket services segment. The margins here have been looking very, very strong. Can we expect these to stay at the level they are at or even go up from here, particularly if you continue to make acquisitions? Or is there anything in the market right here that is pushing them up into levels that may not be sustainable?

Steve, there is no reason for us to believe that we do not have further ability to grow our margins in that segment. And I think that the addition of the folks at NAAS will, in fact, help us do that. One of those acquisitions that is going to make the rest of our aftermarket companies more effective and, in fact, we will be able to provide benefit to them as well.

Okay, that is very, very helpful. And then on the cash tax aside, Jeff McRae, you mentioned a little bit of that for FY15. As we start to think going forward, can we continue to expect relatively low cash tax payments going forward?

Yes. As I mentioned, FY15 is minimal. FY16, I would think, in a 10% cash tax range. And then as we go beyond that, based on what we have in front of us today, would expect to become a full cash taxpayer in FY15, which, in my mind, is a cash tax rate in the mid to high 20s.

Okay. Thank you. Good quarter.

Thanks.

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

Hi, Canaccord. Jeff McRae, the incremental margins, very soft in aerospace systems this quarter. Was that all due to impact of GE, the acquisition, or was there anything else going on there in that segment?

There is a couple of moving parts within the segment. I would say the majority of the degradation of margin, it comes from the incorporation of GE. We did see some growth on the aftermarket side within aerospace systems. Obviously, that growth comes at a healthier margin than the segment average, but the preponderance of it was the incorporation of GE.

Okay. Just based on your earlier comments, it sounds like -- is it fair to assume that by the end of this fiscal year or is it at some point in FY16 that GE is up to segment margins?

I would not see it this year, Ken. I think when I think midterm, I think two to three years out.

Okay. No, that is fair. That is reasonable.

And just finally, within -- again, within specifically aerospace systems, as you increase more aftermarket content, to your point earlier, as you incorporated GE and the benefits there, how should we think moving forward over the next few years, what is a good assumption for incremental margins in this segment?

Because clearly, it is a segment of the business, as aftermarket grows, you are seeing -- when I look at the backlog, by this particular segment you have good exposure to some growth profile, growth programs. Are incremental perhaps stepping up relative to what we've seen historically, or how should I think about that?

Good question, Ken. It is always a tough one to analyze because obviously, if it can get driven by aftermarket incremental margins, it wouldn't be very healthy. I would think -- thinking the OEM business, definitely incremental margins getting better over time. If you view our backlog in aerospace systems, obviously, there is some inherent growth we will see just because of our placement on 787 and the single aisles. I think we should see healthier incremental margins as we look forward as that segment's top line grows.

Okay. That's helpful.

If you think about the fact that we are continuing to make acquisitions in that segment, it seems like we have reset the deck on a recurring basis on this, because we are making significant acquisitions there and I would anticipated that we would continue to do so over time. That said, I think we have historically, and I'm thinking, and I'm really going off of my memory now, which is becoming a dangerous thing, that this particular part of our Business had been in the range of 16% to 19% operating income percentages.

There is no reason to think that over time that we are range bound in that area, because I think that fundamentally, when you are looking at some of these businesses that have such a high ability to control their aftermarket with those kind of margins, that we can, in fact, expect to be north of that. I think we have got some ability to move up.

Yes, that is good to hear, because it seems like, to your point, Jeff, this segment has typically had higher margins. And it is typically, with the acquisitions now, seems like the incrementals could be -- you have got a lot of leverage in this business, especially with the aftermarket push. I just wanted to get a sense moving forward how that might reset. So, it sounds encouraging.

Right.

Our next question comes from Kevin Ciabattoni. Please state your affiliation followed by your question.

KeyBanc, thanks for taking my questions here. You talked about the fact that you have got 46 separate companies now. Big picture, maybe if you could to talk a little bit about why you might or might not look at integrating some of those businesses and how you're making sure best practices from one company are translating to the others?

That is an interesting question, and one that we could talk for a half hour about because it is an important part of how our Company is evolving. We started out with obviously quite a lot fewer companies, and they were not very closely related, and so there was an awful lot of independence.

As we have moved forward, we have stitched our companies together in a tighter and tighter manner while we are keeping the independence because we think it is really important to have independent companies, independent accountabilities, to be responsive to this type of marketplace, which is absolutely key. At the same time, there are inherent benefits to being our size and to working together on any number of things and not having wheels invented at 47 different places that we are continuing to pursue.

So, we're, through each independent function that we have, we continue to share best practices, make sure that we are in fact taking advantage of them, gaining advantage through improved supply chain of leverage through a global quality program. We've -- and in terms of footprint and actual different locations, when we feel we will be benefited by in fact not having the kind of global presence and global reach at the specific locations we have, then we will take action on that.

We have done that in the past, and there is no reason we will not do so in the future. But it's a good question, and it is at the heart of how our Company is evolving and changing. And it is one that I think deserves a lot deeper answer, but we just do not have time to get into it at this point.

Okay. I appreciate the color.

Turning to 777, you mentioned the current gen, obviously. Looking at 777X, it looks like Boeing is maybe looking to bring some more of that work in house. Just wondering how you are looking at that and whether that could be a potential headwind going forward?

Boeing bringing some of that work in house, it could be a potential headwind if, in fact, we are looking at the time period out at the end of the decade. But this is not anything that is particularly new. When Boeing, and I'm obviously not Boeing's strategy guru, but when Boeing, and they are just one of many customers, they go through cycles of times that they want to build everything in house and certain times they want to outsource everything.

787 was the step in the direction of send everything out, and I think we can safely say that program did not go seamlessly in terms of that. So, there is a natural reaction to tend to want to control more of this stuff.

There is -- this is not something that -- and this cycle has been relived over the years. And so the decisions made today by Boeing is to, in fact, bring some more of this stuff in vertically. I do not have any doubt that in the future they will, in fact, get to a position where they say, why in the world are we making these kind of products? This is what we have suppliers for.

We are always looking at these things as more of a cyclical customer-by-customer decision, and any change that they are going to make in this arena, which is many years out, gives us plenty of time to adapt and make the changes that we need to replace whatever revenue we might lose from such a decision. And all of this stuff is, again, very early in the process, and we just do not have any idea what ramifications this decision may have on us.

Okay. Thanks. And then just one last quick one, on military aftermarket, it sounds like you are still expecting a pickup in the back half here. I'm just wondering what is driving your confidence there. Sounds like in the quarter, it may not have come back quite to the level you thought it would.

We saw some come back this quarter. Our confidence is getting driven by the fact that we actually have products sitting in our facilities that we're effectively storing for customers that they have not given us yet the green light to proceed on. I think as we start seeing the cadence, flight times on aircraft pick up, as we continue to see the activities in the Middle East become unsettled, I think ultimately we will see some of that product sitting in our shops turn into revenue. I think we are pretty confident we will see some pickup in the second half of this year. I think we probably have more confidence talking toward FY16.

Great. Thanks.

Our next question comes from Chris Mecray, please state your affiliation followed by your question.

Blackrock. Great quarter, and clearly a highlight here is the cash flow. Would you mind maybe just disaggregating that touch, given the 400% conversion? I guess it includes Eaton, can you take that out, and then also highlight any other large chunks that might have fallen in the quarter? And also perhaps whether that drew forward any cash flow from the fourth quarter, which is typically strong, or not, as the case may be.

Yes. I think, Chris, that the two big elements, and we talked to them, I believe on the first quarter call. Is one, we had Eaton, which was sitting as a receivable at the end of the first quarter, which was $135 million that came in, in July. We also had $26 million related to a tax refund that was sitting on the balance sheet at the end of the first quarter that was received in the second quarter. Both of those, obviously, aided the cash flow in the quarter.

I would say we actually ended the quarter with a little higher receivable balance than we had expected and we had two customers that did not quite get in, in the quarter that we had anticipated landing in the second quarter. It is always amazing how systems break down at customers on the last day of the month.

As far as the fourth quarter, I do not see anything that we did in the second quarter being a pull-in from either the third or the fourth quarter. We are still anticipating a strong fourth quarter from a cash standpoint. We generally see a strong fourth quarter and obviously, still seeing a strong second half of the year versus the first half of the year.

Okay, so really, the first half collectively cumulatively is on track, albeit on the strong side, and going forward it should be as normal. Are there any anticipated large caption inflows from any individual programs you want to highlight in the current quarter, or is it pretty normal operationally?

It is pretty normal as we think of third quarter. We will have milestone payments that are recurring milestone payments that we would anticipate here in the third quarter. But nothing out of the ordinary.

Okay. Great. Nice job. Thanks.

Thank you.

Our next question comes from Ron Epstein, please state your affiliation followed by your question.

Bank of America Merrill Lynch. Just a follow-on to some of the line of questioning around potential M&A. When you are looking at potential deals, are there any specific verticals that you are more interested in, in terms of broadening out the portfolio or not? What kind of framework as outsiders looking in can we think about when you think about how you want to add to the portfolio? Not just from a price perspective, but what your business is doing? Does that makes sense?

Ron, we look at it from a segment standpoint, we are looking for -- as you probably know, we are looking for additional capabilities if we can get them. We actually look to see some type of tangential capabilities as opposed to something that is so far afield that we can gain no synergy and no attachment. Although we just have to see if a unique opportunity that doesn't fit that mold comes up. We are looking for different technologies, depending on the segment we are in.

We are looking for different parts of the market that we think we need to grow. If there is a company that can, in fact, give us a boost in that area and speed up our penetration in a particular part of the market we're not in now, we will look at that. In terms of verticality, I think you're correct in thinking we are looking for opportunities that we can enhance the value that we can capture through our existing supply chain, as well. Again, depending on whether we are looking at structures, or whether we're looking at aerospace systems or looking at an aftermarket services, the criteria are somewhat different. But they are always viewed as -- in terms in the value we are going to get versus what we're paying and whether or not it makes sense in terms of our long-term strategy.

Okay, and if I can, just a follow on to that. And I understand, if this is too sensitive to talk about, forget it, one area where it seems like you could potentially build out some technology more is in the area of composites and composite structure. Is that a potential area where you are looking?

We look at a lot of places, and composites is certainly an area that is one that we are interested in pursuing.

Okay, great. Thank you very much.

Our next question comes from Peter Arment, please state your affiliation followed by your question.

Yes, Sterne Agee, good morning Jeff and Jeff. A clarification, you mentioned, and I'm sorry if you -- I joined late, the Gulfstream, the lead time, I think you mentioned was 12 months. Could you clarify, is that fairly uniform across all of your aerostructures business in general about the similar lead time?

It varies, depending on the nature of the element we are supplying. If I think of -- specifically to wings, what we do on the G5 wing, the lead time is much shorter to delivery to ultimate customer out of Gulfstream just because of the condition of assembly we are providing it in. If we think of the capture on the G500, G600, it is a little bit longer just because it is a lower tier feeding Gulfstream and UTC here, so you would expect a little bit longer lead time. Certain aspects of our business could broaden even beyond 12 months, depending on the nature of the product.

Yes, it always depends on where in the build cycle your product is installed. In some cases, it is installed at another company and then gets shipped down to Gulfstream. It's not one-size-fits-all there.

Okay, that's helpful. And just one follow-on, Jeff Frisby. On the aftermarket services business, you really hit tremendous market progression, but we have not seen a lot of growth from that. If I just look back the last few years and if I think about when you expanded internationally going back a few years ago, you've had -- or brought a new debt facility online. I believe in Asia we saw a lot of growth. What is the hold back on growth? Is it just we're seeing a lot of retirements out there, or just mix? Maybe a little color there.

We have actually seen a lot of good opportunities in -- specifically in Asia, and we're seeing that company continue to grow and expand its product offering. The Asia region is certainly dynamic, and there are an awful lot of customers over there that are attempting to develop their own capability. It is a changing marketplace, but one that we see opportunities to continue to grow. In fact, we are expanding that facility to be able to take on more business.

The overall outlook for the aftermarket business remains strong. I think we are getting more and more opportunities with some solid long-term customers. Our wins that we announced, I want to say it was a year ago, maybe a couple years ago now, with FedEx on several different packages, I think that is translated into additional work scope with FedEx. And those type of things are long-term positive foundations for the business that we can build upon. I think the Asian business is going well, and I am comfortable we will be able to continue to grow, certainly a good portion of our domestic business.

Appreciate the color. Thanks, Jeff.

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's FY15 first-quarter earnings conference call. This call will be available for replay today after11:30 AM through November 6, 2014 at 11:59 PM. You may access the replay by dialing 888-266-2081 and entering access code 1645741. Thank you all for participating, and have a nice day. All parties may now disconnect.