Triumph Group Inc (TGI) 2015 Q3 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 third-quarter results. This call is being carried live on the internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation.

(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 unexpected 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 Incorporated and may not be recorded, transcribed or rebroadcast without explicit written approval. At this time, I would now like to introduce Jeffry Frisby, the Company's President and Chief Executive Officer, and Jeffry McRae, Chief Financial Officer and Senior Vice President of Triumph Group Incorporated. Go ahead, Mr. Frisby.

Thank you, and good morning. I will remind you all that there is a slide presentation to go along with the audio portion for your use. As has now become customary, before we get into the slide deck, I would like to make a few opening remarks. At the end of the day, this quarter was indelibly marked by two significant events. And as it transpired, these events happened on the same day.

And it was the day we were all anticipating. The process was arduous, negotiations difficult and multi-faceted, and the amount of due diligence performed was massive. Over a year of effort went into crafting what I have described repeatedly as a win-win win-win scenario. Finally on December 9, 2014, the culmination of all of these efforts was the signing of the agreement to assume production of Gulfstream G650 and G280 programs from Spirit AeroSystems.

This singular transaction marked a significant step forward for Triumph, strengthening an already solid position in the integrated wing business, and adding key products on growth platforms to replace some of our sunsetting production. Overall, a very positive development.

The part of that day that we were not eagerly awaiting, was Boeing's announcement of a production rate cut on their 747-8 program from 1.5 to 1.3 per month. As you know, as close to the profitability edge as we were, any reduction in rate put us into a loss position on the contract, and will require a charge be taken. So when we take the measure of this quarter as I have mentioned, we need to really look no further than December 9, because on that day, the two single largest events in the quarter occurred.

The good news we can all take from these two events is that the negative repercussions of the 747 rate cut, as painful as they are in the immediate term are largely in our rear view mirror. Jeff McRae will take you through in detail the composition of the charges that we recorded. And while no one can guarantee that there will be no future charges on this program, you will see that we have taken a number of important steps that lessen the likelihood of recurrence.

On the flip side, the Gulfstream wing business in Tulsa is in its early stages and will provide benefits to Triumph and its shareholders for decades to come. The pathway from signing to closing was well-executed by both parties, and we have now operated in Tulsa for just about one month. We had hoped for high-level acceptance in the labor force, although we had planned for a more pessimistic case.

On this front, reality was more in line with our hopes, and we have retained a very high percentage of the work force in Tulsa which should in turn lead to less than planned disruption, and a speedier return to the improvement curves already in place. The quality of the delivered products remains high, and deliveries are being made in accordance with our plan. Importantly, we have aligned, cross-functional teams of key personnel in place to validate the synergy assumptions we have made, and to develop and deploy specific plans to attain them. Now certainly, there is more to this quarter than two events, and we will discuss these things in detail as we go.

One more general comment before we get into the slides. Triumph Group through the years, has grown from basically a loose confederation of independent companies to what is now a large group of companies that together are a formidable force in the marketplace. We have now reached the point where we at the enterprise level can leverage the strength of our portfolio to add value and to drive growth. We have engaged experts in several fields to help us identify and quantify value propositions, and develop executable plans to achieve our goals.

These will include a more robust view of the supply chain across the enterprise, the valuation of footprint consolidation opportunities, further capitalizing on tax efficiencies as our global footprint continues to expand, and using more effective means of driving best practices across the enterprise. As these initiatives take form and become measurable, we look forward to sharing them with you.

With that serving as preamble, let's turn to slide 3 titled Q3 in review. Overall, the third quarter delivered a strong cash flow performance, and Jeff will provide color on this. In the aerostructures segment, and we will get into this in some detail, revenues were impacted by decreased C-17 production and lower nonrecurring revenue. If you recall last year in Q3, we had a significant amount of 767 tanker nonrecurring.

The operating results included the $152 million forward loss charge in the 747-8 program, and Jeff will get into that again in detail. And I am sure we will cover some of the details in the call -- in the questions as well. What I want to make sure you understand, is that this charge did not in fact change our commitment to continue to take actions to reduce costs and improve performance. Performance continues to improve on the program, and we will not let up on continuing to drive improvements as we go forward.

In the quarter, we also took a $13.9 million of charges related to lower than expected performance at Triumph Structures International. Jeff will get into some detail on this as well. And importantly, the Red Oak transition to pre-move performance remains on target for the end of the fiscal year.

And as far as aerospace system has been concerned, we had a very good quarter. We experienced positive organic revenue growth with sustainable strong operating margins. And the integration of our newest acquisition in that segment, the GE Aviation Hydraulic Actuation business continues to progress well, currently running ahead of our synergy targets. In terms of aftermarket services, we experienced positive organic revenue growth with sustained strong operating margins.

Now let's turn to slide 4. I have already covered the first bullet, and so I will let that speak for itself. The transition is in fact progressing well. I am happy to announce that we have recently been awarded multi-year work packages at multiple Triumph sites, with combined value in excess of $50 million from Spirit for Metallic Machine parts and subassemblies.

And finally we bought back 336,271 shares for approximately $21.6 million. At this time, I will turn the call over to Jeff McRae. Jeff?

Thank you, Jeff, and good morning, everyone. I will start with the review of the financial results for our third quarter, turning first to the income statement. Net sales for the third fiscal quarter were $917.4 million, up slightly from the prior year period.

Operating loss for the quarter was $61.3 million resulting in a net loss of $39.8 million or $0.79 loss per share. Results for the quarter included $169.2 million of charges in the aerostructures segment, the majority of which were related to the forward losses associated with the 747-8 program. In addition, there were $3.5 million of transaction related costs related to the assumption of the Gulfstream G650 and G280 wing programs that were included in the corporate results.

Excluding these items, net income was $72.1 million or $1.42 per diluted share. The number of shares used in computing diluted earnings per share on an adjusted basis for the quarter was 50.8 million shares. Adjusted EBITDA for the quarter was negative $37 million. Excluding the impact of forward losses associated with the 747-8 program, and the Red Oak facility transition costs, adjusted EBITDA for the quarter was $117.2 million.

Looking at our segment performance, sales in the aerostructures segment for the third quarter declined 12% to $559.5 million, primarily due to decreased production in the C-17 production program, as well as lower nonrecurring revenue on the 767 tanker program. Third quarter operating loss was $102.5 million, and included $3.3 million of costs related to the Red Oak facility transition, and a net favorable cum catch-up adjustment of long-term contracts, excluding the 747-8 program of $900,000. The segment's operating results included total charges of $155 million associated with the 747-8 program, a $152 million of which represented forward losses on the balance of units under contract, and $3 million was a negative cumulative catch-up adjustment.

The next slide shows the components of the forward loss provision. The magnitude of the loss is larger than we had previously indicated. As we fully incorporated the anticipation of future rate variability, we also lowered our expectations of labor and cost performance through the end of the contract, and we adjusted for lower anticipated pension benefit in future periods based on the incorporation of new mortality tables in the calculation of our pension obligations. And we also included incremental overhead absorption resulting from moving non 747-8 programs out of the existing 747 facilities.

The forward loss covers unit deliveries assumed to stretch into FY19, roughly four years of production in front of us, and roughly $1.1 billion of revenue, with actual cash losses being back-end loaded due to pricing breaks provided in the last production line As Jeff mentioned, we will continue to look for ways to improve performance and drive the costs down in the 747-8 program. This will involve continuing to work with our customers and suppliers to identify opportunities, and also engaging third-party consultants to further evaluate opportunities and drive implementation of improvements.

The segment's operating results were also negatively impacted by lower than expected performance at Triumph's Structures International, our composite international facility located in Farnborough, England resulting in $13.9 million of pretax charges. This company lost its NADCAP certification due to systemic issues within their quality system in late 2013, resulting in unanticipated delays in production and deliveries, and delaying our planned transition of work to assist our company in Thailand.

These issues resulted in charges being taken in the quarter related to current and forward losses, as well as an inventory impairment. We have installed new leadership into this organization, and are closely monitoring recovery plans, and would expect full recovery in early FY16, which would then allow us to reengage in product transfer plans. As Jeff mentioned, we continue to make good progress in ramping up production at Red Oak, and expect to meet our target of getting back to pre-move levels by the end of the fiscal year. The only exception is the C-17 program which has continue to experience delays due to part shortages for which we will see some revenue slippage out of FY15, into the first quarter of FY16

Red Oak did deliver the initial test article wing for the Global 7000/8000, and is making good progress on this program. As Jeff mentioned, we are also working on several initiatives which are focused on driving performance improvements, and reducing costs both within the heritage Vought business as well as our tier 2 structures businesses, which will provide a catalyst for margin expansion as we move into FY16 and beyond.

As mentioned earlier, on December 30 we did close on the Tulsa Gulfstream wings transaction, which included the receipt of $160 million, which is included in the cash flow statement within the line, acquisitions net of cash acquired The balance sheet as of December 31 also included provisional balances for the transaction, which will be refined over the next few quarters. We are also working to refine our business plans for these two programs, but based on early indications we are seeing improvements to our base case performance assumptions.

We are still confident that we will be cash positive by the end of FY18 on these programs, with the 650 program being in much better shape today than the 280 program. Adjusted EBITDA for the quarter was negative $81.9 million. Excluding the impact of the forward losses associated with the 747-8 program, and the Red Oak facility transition costs, adjusted EBITDA for the quarter was $72.2 million. The segment operating margin for the quarter was 16% after adjusting for the 747-8 program, as well the costs related to the Red Oak transition, and Triumph's Structures International performance.

Moving on to Aerospace systems, segment sales were $279.2 million, compared to $211.4 million in the prior year period, an increase of 32%, reflecting 2% organic growth and the impact of the acquisition of the GE Hydraulic Actuation business. Third-quarter operating income increased 29% from the prior year quarter to $41.9 million, with an operating margin of 15%. Organic operating margin for the quarter was 16%, as compared to 15% in the prior year. Adjusted EBITDA for the quarter was $42.1 million, and an adjusted EBITDA margin of 15.7%.

As Jeff mentioned, the integration of the GE Hydraulic Actuation business is progressing well, and we are tracking ahead of our synergy realization plan. 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 mid-term. The aftermarket services segment, revenues in third quarter were $80.7 million, compared to $69.6 million in the prior year period, an increase of 16% reflecting 7% organic growth, and the impact of Triumph Aviation Services NAAS division acquisition completed earlier in the quarter.

Third-quarter operating income increased 34% over the prior year quarter to $12.5 million, with an operating margin of 15.5%. Adjusted EBITDA for the quarter was $14.8 million, with an adjusted EBITDA margin of 18.4%. Even with the continued softness in the military aftermarket, we have continued to drive strong margins in this segment, and anticipate holding margins at Q3 levels for the balance of the year.

During the quarter, we repurchased roughly 336,000 shares for approximately $21.6 million. As of December 31, approximately 3.5 million shares remain under the share repurchase authorization, and we will continue to tactically repurchase shares as part of our balanced approach to capital deployment, and managing our overall liquidity position.

Moving on, on the pension front we have included for your reference a pension OPEB analysis for Triumph Aerostructures for FY14 and FY15, which remains unchanged from last quarter. As we said last quarter, we did complete an initial analysis of the impact of acquired incorporation of new mortality tables to our pension and post-retirement benefit plans, and based on this initial analysis we project approximately a 9% increase in the pension OPEB liability as of March 31, 2015.

We only expect minimal impact to our FY15 earnings, and anticipate seeing a slight year-over-year earnings improvement related to our pension benefit as we look forward to FY16, although not at the same levels we would have previously estimated prior to the 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. As mentioned in the 747-8 discussion, we have captured in the forward loss that portion of the mortality tables change impact that would be applied to the 747-8 program.

Turning now to backlog, our order backlog as of December 31 was $4.8 billion, a 1% increase year-over-year. Keep in mind that our backlog takes into consideration only those firm orders that we are going to deliver over the next 24 months, and primarily reflects future sales within our aerostructures and aerospace system groups. The aftermarket services group did not have a substantial backlog. Military represented approximately 23% of our backlog.

For your reference, we have included the top 10 programs by backlog for both the aerostructures and aerospace systems segments. You will note that the with the inclusion of the backlog acquired with the G650 and 280 programs, the Gulfstream programs in the aggregate are now the top program in the aerostructure segment. Boeing remained our only customer to exceed 10% of total revenue. Net sales to Boeing, commercial, military and space totaled 42.8% of our revenue, and was broken down 76% commercial, and 24% military. For your reference, we have included in the appendix charts reflecting sales by market and sales trends.

Turning now to the balance sheet, for the nine-months ended December 31, we generated $365.9 million of cash flow from operations before pension contributions of $55.9 million. After these contributions, cash flow from operations was $310 million. This does not include the receipt of $160 million from Spirit related transfer to the Gulfstream G650 and 280 wing programs. Inventory at December 31 reflected an increase of $178.6 million during the first three quarters of the year, of which approximately $117.9 million was attributable to nonrecurring investment in the Bombardier and Embraer programs, and $121.9 million was attributable to the acquisition of the GE Hydraulic Actuation Business, Triumph Aviation Services NAAS division, and the Gulfstream G650 and G280 wing programs.

Capital spending was $26.1 million in the quarter, and $85.2 million year-to-date. We continue to expect capital spending for the fiscal year to be in the range of $120 million to $140 million. Net debt at the end of the third quarter was $1.4 billion, representing 38.3% of total capital, and total debt to trailing months adjusted EBITDA was 3.48 times.

The global effective tax rate for the quarter reflected the fact that the R&D tax credit was retroactively reinstated back to January 1, 2014. In addition, the effective income tax rate for the quarter was further reduced by implementation of state and global tax planning initiatives. From a cash tax perspective, we currently expect minimal cash to be paid in FY15 The Q4 effective tax rate will be 35.2%, and reflects the fact that the R&D tax credit expired at December 31, 2014.

In terms of financial guidance, based on current projected aircraft reduction rates, we now expect our fiscal year revenue to be approximately $3.9 billion. And Q4, earnings per share to be approximately $1.70 per diluted share, which excludes Red Oak facility transition costs, and is based on a weighted average share count of 50.6 million shares. We now project our Q4 adjusted EBITDA to be approximately $165 million, excluding the nonrecurring costs associated with the Red Oak facility transition.

We expect to generate free cash flow available for debt reduction, share repurchase, and acquisitions for the fiscal year of approximately $300 million, which represents the incorporation of the cash used on a G650 and G280 programs in the fourth quarter, and the impact of the 747-8 program. This does not include the $160 million received related to the Gulfstream programs in Tulsa.

We have reduced overall our earnings guidance to reflect a number of factors impacting our full year results, to include delays in completing deliveries of the C-17 program, lower production rates on certain commercial programs, continued softness in military aftermarket, and the timing and resolution of certain nonrecurring claims with customers. And we have incorporated the projected impact of the G650 and G280 wing programs which positively impact earnings per share, but are currently a drag on adjusted EBITDA and cash.

We are currently in the midst of the planning process for FY16, but are not yet prepared to provide full guidance. While we are still confident in the long-term top and bottom line growth opportunity for this business, we would generally expect FY16 to be a transition year, with production ending on the C-17 program, rate reductions on the 747-8 and A330 programs, and continued uncertainty in the military aftermarket, being offset by the incorporation of the G650 and G280 wing programs, and the ramp on recent wins on the A320 and A350 programs. Though we also complete the development efforts and begin initial deliveries on the Bombardier Global 7000/8000, and Embraer E2 jet programs.

Overall, I expect the top line to reflect a1% to 2% growth year-over-year, excluding any benefits associated with future acquisitions. But the bottom line will reflect margin expansion, driven by the full year benefit related to the Red Oak facility, continued synergy realization on recent acquisition, and capturing benefits associated with a number of improvement initiatives.

We continue to see the business generating positive cash in FY16, although it will be muted from previous expectations driven by the outflows required on the G650 and G280 wings, and the now lower performance expectations on the 747-8 program. We do plan on providing a detailed view on the FY16 guidance as part of our fourth-quarter earnings release. And with that, I will turn it back over to Jeff.

Thank you, Jeff. In terms of the outlook for the balance of the fiscal year, and I know Jeff just went over this in great detail. I would just like to accentuate a few things. We have a strong backlog, and continue to win new contracts on key growth programs.

We remain focused on execution, increasing profitability, expanding our margins, and generating strong cash flow. Our financial guidance is as Jeff just outlined, and that is that our revenue is expected to now be approximately $3.9 billion, and the quarterly EPS of approximately $1.70 per diluted share is something that -- we have just laid out this number, but I think that you can understand that we -- a number like this indicates that we still have a great deal of confidence in our ability to deliver results.

The $1.70 would be in fact be a very solid quarter, and we remain confident in our ability to do so. Then as both Jeff and I have stated, we are absolutely committed to leveraging the strength of our portfolio to drive growth in the near- and the mid-term. So at this time, I would like to open the phone lines to answer any questions you may have.

Thank you. At this time, the Officers of the Company would like to open the forum to any questions.

(Operator instructions)

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

Wells Fargo. Good morning, guys. The 747 in the past, you talked about if were a -- a quarter turn or half a turn, it would be $30 million or $60 million. So this is obviously larger. I mean, are you assuming an even lower rate as you go out to 2019? What are you doing differently than you had in the past, when you provided that estimate?

Yes, Sam. We are assuming a level of rate volatility on 747 as we look forward. Boeing has announced it is going to 1.3. So in our analysis, we think we fully covered any future rate volatility we would see on this program. And as we stepped back and looked at what the magnitude of rate reduction would be, it caused us also take, to look back at what other impacts that there is potential risk on. And we try to provide for those in this analysis.

The primary area being, in the assumption of where our labor performance and overall cost performance will be on this program through the end. And as I mentioned, we still have four years of production in front of us. And I think what we have done now is taken a more risk-adjusted approach of viewing where we think we are in this program through the end.

Okay. And then just on the cash flow. I know in the past you talked about $300 million, $325 million on an ongoing basis. You said it is lower than that because of the 747 and the Gulfstream programs. But is there any way to size the magnitude of that reduction, and how long until you get back onto that kind of a track of $300 million or so?

Yes, what I would say, and as it relates specifically to the G650 and G280, we still see ourselves turning those programs on a net basis cash positive by the end of FY18. We know the cash drain early on will be higher, and it will weigh in as we go through the first three years. As we think of the first quarter of operation, I would look at that being the highest use of cash. It is also hurt by the fact that we did not receive receivables as part of the transaction, so there is a delay in beginning receipts from customers.

As we go through -- at FY16, I would expect the cash used to [wane] and continue to wane as we get through the end of FY18, where we still stay within the bounds of the $160 million we received on the program. On 747-8, as we look at the forward loss, what we have to keep in mind that the cash related to that forward loss is still in front of us. And it is very much back0end loaded to roughly two-thirds of the cash would hit us in FY18 and FY19, which is driven by price breaks we have on the last lot under contract.

So as you feather those two things in there, the timing of those are a little different. But it really creates a greater drain as we think of FY16, FY17, and FY18 than what we previously would have anticipated. And as we have talked in the past, as we look forward, the other significant headwind that we still have, when we begin getting out in FY17 and FY18 is we will become a cash tax payer. So we currently still project 0% cash tax in FY15, roughly 10% cash tax in FY16, becoming a full cash payer in FY17 and beyond which we believe is a rate roughly 28% to 30% in those years.

Okay, thank you.

Thank you. [Steven Cahall], please state your affiliation followed by your question.

Yes, thank you. From Royal Bank of Canada, good morning. Maybe just to follow-up on the 747 program. First I was wondering, as we take a look at this, I am guessing that the big unknown/unknown here is the revised labor and cost estimate. So I was wondering if you could give a little bit more color as to how you come about sizing those? And then you talked a lot about the ongoing productivity improvements, and what sort of risk and opportunity is there as we think about this long-term estimate?

Yes, as we proceed in this program, we have historically assumed a certain level of period-over-period improvements in the labor performance, as well as the broader cost performance. As we have we relooked at the EACs for the balance of the contract, we have definitely flattened our expectation around performance. And most of that is driven labor as well as overhead cost. We think that there is still opportunity that we can derive improvement above what we projected, but we thought this was the appropriate time to really scale back our expectation of improvement through the end of the contract.

So I would say, I think we have at least bracketed the risk, and are still striving to drive opportunity in 747-8. This also assumes that we produce through the end of the contract. As we have spoken in the past, we're confident in Boeing's ability to sell planes, but as we sit here today, they haven't fully filled out the order book through the end of our contract. If they weren't -- if they were to end the program before the end of the contract, there would be some clawback of this loss. I would say that the risk at that point would be then around any facility shutdown impacts that we would have to factor in.

Okay, that is helpful. And then on, if we think about this sort of cascading to where we are on the A330, how would you couch that program in comparison to the 747? Airbus has certainly suggested that rates are coming down, but could come down further. So how does that program sit, versus where you are in the 747?

Yes, completely different dynamics on 330. 330 is built in facilities with a number of other programs, so the magnitude of impact when we see rate reduction isn't the same as we see on 47 where they are pretty much in dedicated type facilities. As we have looked at projections on 330, we have built in the rate reduction expectations that Airbus has already communicated. And as we build business plans without firm direction from Airbus on rate reduction, we have assumed continued step down in rates as we get out beyond FY16 as they transition to Neo. I would say our current margin expectation on 330 comes down a little bit at lower rates, but it isn't to the same magnitude that we are dealing with here on 747.

Yes, and I think another key difference in looking at a go forward view of 47 and 330 is that, if in fact we identified a particular level of capital investment that we might make in order to drive costs down, the runway, the quantity of aircraft in front of us on A330 is as fundamentally different, in fact can provide a business case that can help us drive costs down and pay for those things. 47 is not necessarily -- does not necessarily have that luxury. So it is two totally different scenarios.

And did the 777 look more like the 330 or the 747?

Yes, I would say the general dynamics on 777 would look like 330, right?

So it is not in a dedicated facility like 747?

Correct.

Definitely not.

Yes, 747 is really the one anomaly where it resides in two -- they are not fully dedicated, but it is 90% of the workload in the facilities.

Thank you. I will get back into queue.

Thank you. And our next question is from Myles Walton. Please state your affiliation and your question?

Deutsche Bank. Thanks, good morning. I think, Jeff McRae, you previously had a $1.5 [billion] to $1.8 [billion] cash projection for the five year 2015 going forward. I think the Gulfstream programs are -- let's assume $160 million negative to that, after-tax hit of the 747 hit,$100 million. So are we now looking at $1.2 [billion] to $1.5 [billion], or is the range even lower than that?

Yes, I mean at a macro level, and I haven't run out updated cash flows for five years, Myles. But at a macro level, I think those are the two key impacts that we are looking at. And I would say that Jeff and I are still very optimistic, with some of the other things we are doing in the business that we will be able to recover that cash by driving improvements, and taking costs out of the overall structure within Triumph.

The mortality assumption hit on the 747-8 rather, what you had here in the quarter, was that triggered by the rate decision, and should we expect it to roll through the rest of the portfolio at year-end?

So what happens on 747, because we are in a forward loss position, it really -- what it is doing is pulling forward the change that we anticipate in the next four years from our previous projection on pension benefit to our current projection on pension benefit. So it really is magnifying that impact as we pull it forward in the 747. We still anticipate some year-over-year growth in pension benefit as we move forward. It is just not at the same magnitude that it would have been previously before incorporation with tables.

Okay.

So as I think of impact on other programs, it bleeds in slower because those are still in positive positions, and they tend to just be seeing the impact of a single year versus this situation, where 47 is pulling in four years of that delta.

Okay. And then this question is kind of a high level. It ties the cash back to the portfolio. Jeff Frisby, you've had challenges in the aerostructure. Realistically you will continue to over the next few years, both challenges and execution opportunities on the aerostructure. The aero systems and aftermarket business don't seem to be encumbered by the same dynamics. What if anything, would require you to think about breaking the two? And also are the two kind of cash independent at this point, that is for the next five year projection, or would both be able to function into their projected cash streams independently?

Well, the Company operates as one really. The -- and I would say that the opportunities that are in front of us in, as they relate to the aerostructures business, are still available to us in the systems business as well. Some of the initiatives that we are working on are going to benefit the entire enterprise. So it is going to -- it is one of those things that yes, we have got some difficulty in trying to drive margins back up to an acceptable level in aerostructures, and we are working on those issues and we will succeed in doing so. But it doesn't mean that those same initiatives won't take margins in our systems and aftermarket businesses, in fact it improves those as well.

So I think that it is not a tale of two companies here. We have one company, and a lot of our success comes from the fact that we gain a lot of benefit from leverage we can bring across being a $4 billion company. So that really can't be minimized. So I am not sure if I captured all of the aspects of your question. So whatever I missed, if you want to re-ask I will --

I mean, yes, it looks does look like that certainly the organic differences are materially different. You provided the top 10 programs, and you can see it in the portfolio manifestation, so it does seem divergent certainly in challenges. And then on the cash side, I guess the other point to the question was, is aerostructures kind of in need of the cash generative ability of aero systems -- I'm sorry -- the aerospace systems and aftermarket at this point?

Yes, Myles, I don't think there is great distortion as we look long-term in this business between the segments from a cash generation and deployment. Obviously, with investments required on development programs in the structures world, it tends to be larger investments within the longer-term returns on those investments. So you get a little bit more lumpiness. But we don't view this business as deployment or generation of the cash in systems and aftermarket, then just going to fund structures or vice versa.

Okay.

And long-term, I don't see a great disparity there.

Okay. Thanks.

Thank you, and our next question is from Sheila Kahyaoglu. Please state your affiliation and your question.

Great, thanks. It's Jefferies. Good morning. I guess, how do you -- just to follow up on Steve's question a bit, how do you get the investment community comfortable that whether it is the 747 or A330, that is this sort of one of the bigger -- the biggest charge? And what has changed between today and looking back to September 2013 in terms of cost on the 747 and headcount? Can you maybe talk about -- production rate is difficult I understand, but maybe some of the changes that you have made?

Yes, I mean as we think about 747, from the impacts we saw going back over a year ago, a lot of the impact that we realized over a year ago, although it related to performance within our shop, it was also recognition of the impact of the broader supply chain on the 747 program, a lot of disruption from a quality and delivery standpoint, where we were not meeting the expectations of our customers. There was a lot of expedited freight type of costs that we were incurring at that time.

I would say as we sit here today, and we talk about the forward loss we are now taking, we are back on schedule with the customer. The quality continues to improve in the product we are delivering. The performance has improved over time. It hasn't been at the rate that we would have liked to have seen it improve at.

But I would say overall, that the 747 program is much more stable than it was a year ago. What the variable is, as Boeing reduces rates and potentially as we look in the future at future rate reductions, that has a significant impact on 47, because of how it is produced, and where it is produced in dedicated facilities, where we don't have the luxury of being able to take as much cost out, as we see from the impact and lower revenue coming in on the program.

From a risk standpoint, and I try to talk about it with Steve's question, we think we have bracketed what is a reasonable expectation looking forward on this program, and have fully provided for what we believe would be the impact of future rate variability, as well as a much lower expectation from a performance standpoint. I am never going to say never, especially on this program, but I think, we in this charge have attempted to put our arms fully around what we think is in front of us. And we think as we look at driving improvement and attacking opportunities we see in this program, that this is weighted more so, towards opportunity than future risk.

Yes, and the important statement has already been made that the 747 is a unique program in our Company in that it is the only program that has effectively dedicated facilities. We have always stated that Triumph is far more flexible and resilient in face of rate cuts because of our facilities not being dedicated to individual programs. The 747 is alone in being the exception to that rule. And while certainly, rate cuts will affect us in some way as they affect most manufacturers, we in fact, will not experience the same kind of the impact on other programs as we mentioned in our answer to Steve's question.

Got it. Thank you, that is very helpful. And then I guess just a quick follow-up. How did you think about normalized margins within structures going forward?

Yes, I mean, you are going to have revenue on 747 going forward. And as we look at through the end of the contract, we still have roughly $1.1 billion of revenue on that contract that will flow through the P&L, that will flow through the P&L at 0% margin. So obviously, that is dilutive to margins in the aerostructure segment.

When we exclude the 747 from aerostructures, we still see ourselves operating with operating margins in the mid teens, and we think that that is sustainable. We will see some impact as the Bombardier 7000/8000 program ramps up, as well as Embraer E Jets, because our expectation with those would be at a lower than segment margin in their first accounting blocks, and would grow to segment, above segment margins as we proceed through accounting blocks. So we will have some of that dynamic in structures, but I still think it is reasonable to look at that business as being a mid-teen operating margin business as we look forward. (Multiple Speakers)

Thank you very much. Thanks.

Thank you, and our next question is from Cai von Rumohr. Please state your name and affiliation. I'm sorry, your affiliation and your question. If your phone is on mute, please press star, please press star 61 to unmute your phone. Okay. Are there any additional questions? It looks like our next question is from Kevin Ciabattoni. Please state your affiliation and your question.

This is not part of the Triumph plan. Operator, is there are other questions in the queue, maybe we can move on and circle back to Cai and Kevin.

I sure can, just one moment. It looks like our next question is from Steve Levenson. Please state your affiliation and your question.

Okay. I sense a common theme here. Try to get this fixed.

Okay, I am just going to look into this. If everyone could please hold for just one moment. Thank you. Once again, our next question is from Sheila Kahyaoglu. If you could please state your affiliation and your question? Let's try Kevin Ciabattoni. Please state your affiliation and state your question.

Hi, can you hear me?

Yes, we sure can.

KeyBanc.

And we apologize if we were accusing you of not coming off of mute. I think there was a technical difficulty here.

I figured, thanks. So my first question real quick, I just wanted to touch on the free cash flow. I think you mentioned expectations for next year a little bit muted relative to your prior thoughts. Is that including the $160 million that you guys received from Spirit as part of the Gulfstream package, or are we -- ?

No. What we have done with that $160 million, as we think of free cash flow, we have excluded that $160 million from that equation.

Okay.

So as I think of FY16, my comment is really muted around the known outflows we will have on the Tulsa programs, as well as the impact with the lower expectation on 47-8

Okay, that's helpful. And then, just look at the aftermarket a bit. You saw [7]% organic growth there, just wondering if you could give us some color on what you're seeing in that market? And then on the military side, it sounded like you are expecting things to pick up into the back half of this year, looking at last quarter. And now it sounds like maybe that is not the case. Just wondering what changed there?

Yes, what we're [seeing] in the aftermarket services segment, is most of the organic growth is coming on the commercial side. We are still seeing the same, what I will depict as pent-up demand on the military side, that we keep expecting to free up. When I talk to our aftermarket companies, they talk with the level of frustration, because they can see the product. They have customers on the military side expressing that funding will be coming, and things keep getting pushed out. It is not clear to us if it is budget constraints or other factors there. But even with that softness, we have seen very strong performance within our aftermarket services businesses, but most of it is being driven by commercial work as opposed to military.

Okay. That is helpful. And then, last one from me. Maybe if you guys could provide us with any kind of specific changes that occurred at Red Oak through the quarter in terms of progress there? And then, any potential for further footprint consolidation as we look into FY16, FY17?

Yes, Red Oak specifically, I would say as we sit here today, we have achieved getting back to expected performance levels on most programs. There are a couple of outliers that we are close on, just not there yet. C-17, and I talked to really is the one anomaly there, where primarily because of it coming to it's end of production, we have been experiencing a number of shortages within the supply chain. And that is both our supply chain, as well as customer-furnished product, which has really impacted performance there, and has impacted our ability to complete the program here in the fourth quarter. So we will see revenue slippage into FY16.

But we continue to monitor the performance at Red Oak on a regular basis, and have been very pleased with what we're seeing there. I think all of the kind of instability early on with the work force has worked its way through, and they are starting to really hit, hit on all cylinders. And it is also where we building the wing for the Bombardier Global 7000, and the team there did get out the first wing to Bombardier at the end of December, and will continue to ramp up that program as we look forward in Red Oak as well. We have always made a decision to produce the fuselage segments for the Embraer E jets program in Red Oak, and that activity will be ramping up as we look into FY16 and FY17 as well.

In terms of footprint consolidation, that is just one aspect of what we are currently reviewing. And the reason that I say that, is that while some footprint consolidation just makes sense, and we have in fact accomplished some of that in this fiscal year, and we are continuing to implement the footprint consolidations such as consolidating our two Long Island manufacturing facilities into one, there still is an opportunity I think to expand what we're doing.

In other words, reducing our footprint only makes sense if in fact we have underutilized capacity that we really have nothing to do with. And with the acquisition of the Tulsa wing program, we have a fair amount of opportunity to drive an additional vertical value through the value stream. And so those decisions that we may have made six months ago, may not make sense now with the additional value that we can drive through a far more fully utilized facility.

That said, I will go back to the flip side of that. And we are continuing to look at where our long-term footprint focus needs to be in terms of being competitive in all of our segments. So this is a subject that we are acting on now. We are looking at -- we are in the process of acting on projects that will run through 2016, and that is an area of focus for us not only in 2016, but also what is the long-term industrialization strategy of the Company?

Okay. Great. Thank you, guys.

Thank you. The next question is from Steve Levenson.

Thanks. Good morning. Can you hear me?

Yes.

Okay, great. Thank you. On the cash you received as part of the G280, G650 transaction, are there any restrictions or can you use it as you please?

We can use it as we please. As we viewed it, we received it on 30 of December. It went in, and reduced the outstanding revolver we had at that at that point in time. But really it goes into the bucket of deployment, from looking at opportunities, both organically and inorganically and share repurchase.

Got it. Thank you. Separately, can you give us a little more information on the Global 7000/8000 when you get some relief on that inventory? And can you just give us an idea of how the E2 jet schedule looks?

Yes, so, I mean, we have delivered the first test article on the Global 7000/8000. Most of the deliveries that we have in FY16 are additional test articles going to Bombardier. We would expect to start seeing revenue units on Global 7000/8000 by the end of FY16, but really more so ramping up in FY17. When we start delivering revenue, and this is when we start liquidating the development costs on that, is also when the payments related to development costs flow in on the initial few hundred units on that program.

Okay.

On Embraer, you can generally think of being roughly 9 to 12 months behind that schedule that we talked to on Bombardier. We'll start delivering test units in mid FY16, but wouldn't really start seeing revenue until the end of FY17, and really ramping them up then in FY18

Okay. Thanks. The last one is how much more inventory -- what additions do you think there will be on the Global 7000/8000 program?

So we are effective -- we are not yet done with the development effort from an engineering standpoint, but we are closing in on it. So I would expect by the end of this fiscal year, early FY16, that the engineering activity will be concluded. We would always expect some level of ongoing activity, just as we continue to optimize within the build and design. So most of 2016 though, is that investment in the test articles. I would generally look at the investment required in Bombardier in FY16 to be roughly half of what we have seen in FY15.

Okay. Thank you very much.

(Operator Instructions)

And our next question is Cai von Rumohr. Please state your affiliation and your question.

It is Lucy Guo for Cai from Cowen and Company. Can you hear me okay?

Yes, Lucy.

Good morning. So following up in the previous question, I am interested in learning about the cash requirements on new programs. In the past you have talked about $120 million or so for the Global 7000/8000 and the E2. Where does that stand today? And given it sounds like you are on track for schedule and costs for those programs?

Yes. So if you look at spending to date in FY15, we are slightly under that $120 million mark. I still expect full-year spending on Global 7000/8000, and Embraer to be in the $120 million to $140 million range. I would expect that to diminish significantly as we move into FY16, where I would look at probably roughly half of that spend in FY16.

Right. And I may have missed this earlier. You talked about continued softness in military aftermarket. Are you expecting that to get better at any point? Maybe next year?

We have continued to expect improvement there. We have, in our mind pushed out that improvement in FY16, so I would not expect much improvement in the fourth quarter of 2015. But we are still optimistic we will see spending come back as we go into the FY16.

Yes, that said, the commercial side of that aftermarket business remains robust at this time.

Great Thank you.

Thank you. Are there any additional questions at this time?

Since there are no further questions, this concludes the Triumph Group's FY15 second quarter earnings conference call. As a reminder, a replay of this call will be available today January 29, 2015 at 11.30 AM Eastern Time, until February 5, 2015 at 11.59 PM Eastern Time. The dial-in numbers are as follows. The toll number is 703-925-2533, and toll-free is 888-266-2081. The passcode is 1650287.

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