Triumph Group Inc (TGI) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our FY16 first-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 popup blocker is disabled if you are having trouble viewing this 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 risk, uncertainties and other factors which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release which can be found on their website at www.triumphgroup.com. In addition, please note that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time I would like to introduce Richard Ill, 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. Ill.

Thank you and good morning and thanks for joining our discussion this morning about our first quarter. Before we discuss operational and financial results, I want to provide an update on our business review and actions we are taking to improve near and long-term results.

As previously discussed in our last call, our goals are to improve execution, increase profitability, expand margins, create strong cash flow and leverage the strength of our portfolio. We're moving forward on two fronts simultaneously, tactical and strategic, which we will discuss as we go through this call.

I'm pushing the organization to significantly reduce costs and we are looking at all means to do so. To ensure accountability across companies, each of our Company Presidents and Senior Management are charged with preparing detailed business plans which are currently being updated. These plans take a look at the needs of each one of our companies and identify areas for cost improvement and efficiencies. And it also helps in the Senior Management gain a clearer picture of how each company contributes to its place in the portfolio.

We've taken a number of tactical initiatives. In the short time since returning as CEO, I can tell you that there's a good amount of low hanging fruit that we can and have addressed immediately that requires minimal investment and should benefit results in the near term.

We are taking actions beginning with optimizing our internal supply chain, enhancing sourcing practices, reducing discretionary spending and capital expenditures, reducing personnel and non critical hiring. The expected benefits of these savings and efficiencies are reflected in the FY16 guidance range that we have provided.

On the strategic front we have discussed at our last earnings call that we're currently conducting a comprehensive review of our entire organization. We have a number of strong companies, strong people and a terrific portfolio of products for the aerospace industries. Our structure built company by company has created a flexible organization that can compete and win at any level of the aerospace supply industry.

This structure creates many advantages for Triumph. It also adds a layer of complexity to our strategic review process as there are many moving parts and overlaps. Our strategic evaluation considers the operation of all three business segments. However, we are specifically focused on opportunities in the Aerostructures segment which has not been performing to expectations and has the greatest room for improvement.

As the Management team and I continue to dig into it, I have a clearer picture of our opportunities and our challenges. Some of it is out of our control and a function of the industry, and other external factors we have discussed with you previously. But there is a lot that can be done to make Triumph more profitable. This review is ongoing and will take time.

All of our companies need to be contributors in some meaningful way. Companies not earning their share will be closely evaluated. For example, we have begun to take some action. During the first quarter we initiated the consolidation of three facilities that had redundant capabilities. Although not large in relation to many of our facilities, these actions are indicative of a type of opportunity we have moving forward.

Bottom line, everything is on the table including divestitures, closures or integration where it makes sense. Again, this is a long-term strategic process that will not happen overnight, but it is necessary for the success of the organization. We're confident that this review will enable us to act definitively on growth and profitability platform that we have had in the past.

I'm going to turn to our outlook at this point in time as you've read. As we have said before we expect FY16 to be a transitional year. At this point, we have more clarity into our initiatives and go-forward business plan that we can now provide guidance for FY16.

As you have read, we expect a revenue in the first fiscal year to be in a range of $3.9 billion to $4 billion and earnings per share, excluding the first quarter curtailment charge to be $5.50 to $5.75 per diluted share. Free cash flow will be in the area of $125 million to $150 million. We anticipate our performance to strengthen as we move through the fiscal year particularly in the second half.

With that, I will turn the call over to Jeff to go into more detail on our results.

Thank you, Rick, and good morning, everyone. Turning to page 5 of the slides. I will start with the review of revenue and earnings for our first quarter.

Net sales for the first quarter were $959.6 million, up 7% from the prior-year period. Although organic sales declined 10% reflecting lower deliveries on key Aerostructures programs.

Operating income for the quarter was $107.9 million, which included approximately $2.9 million of a one-time non-cash curtailment charge related to a favorable amendment to our pension plan included in the recently ratified UAW collective-bargaining agreement at our Marshall Street facility outside Dallas. This charge is included in the corporate expense line of the financial statements.

Excluding this charge, operating income was $110.7 million reflecting an operating margin of 11.5% and net income was $64.6 million, resulting in earnings of $1.31 per diluted share. The prior-year's first quarter included a gain of $134.7 million net of legal fees related to the settlement of the Eaton litigation as well as approximately $31.3 million of nonrecurring costs. Excluding these items, earnings per share for the prior fiscal year quarter were $1.19.

The number of shares using computed diluted earnings per share on an adjusted basis for the quarter was 49.3 million shares. Adjusted EBITDA for the quarter was $119.2 million resulting in a 12.9% adjusted EBITDA margin and includes a reduction of $22 million for the amortization of acquired contracts associated with the Gulfstream 650 and 281 programs, for which we previously received an upfront cash payment of $160 million.

Looking at our segment performance, sales in the Aerostructures segment for the first quarter were $611.8 million which included revenue of $87.1 million associated with the G650 and G280 programs. Organic sales for the core declined 14% primarily due to lower year-over-year production rates on the 747-8, A330 and Gulfstream G450 and G550 programs. And the end of the recurring production on the C-17 program which has been partially offset by deliveries of post production spares.

First quarter operating income was $66 million and included $1.9 million of pretax costs associated with the decision to initiate consolidation actions at two of our existing Aerostructures facilities represented closure of roughly 70,000 square feet. As Rick mentioned, we expect these actions will result in approximately $3 million of cost savings per year. Although these facilities are small in comparison to many of our facilities, these actions are reflective of the type of opportunities we are evaluating across the enterprise.

The segment's operating results for the quarter included a net favorable cumulative catch up adjustment on long-term contracts of $1.3 million. The segment's operating margin for the quarter was 10.8%. And excluding the 747-8 program, the segment's operating margin for the quarter was 12.8%.

Aerostructures adjusted EBITDA for the quarter was $70.1 million and an adjusted EBITDA margin of 11.9% and included a reduction of $22 million for the amortization of the fair value of contracts associated with the Tulsa programs.

With respect to the 747-8 program, during the quarter we did not see any material change to our forward loss estimate. We have seen pluses and minuses in performance but remain confident in our ability to execute within our current estimates. We continue to look for ways to mitigate performance risk and drive improvement on this program and are working with our customer on defining short and long-term operating strategies. Our assumption remain that we will be held to a rate of one per month through the duration of our contract.

As we discussed last quarter, performance at our Red Oak facility is back where we expected. C-17 production units are basically complete with a decent level of replacement revenue related to spares for the next couple of years. Generally our business case for the Red Oak facility is holding, but realization of the benefit will be impacted by the completion of the C-17 production combined with the timing of nonrecurring and recurring production efforts on the global 7000/8000 and Embracer E-2 jets. We are beginning -- which will produced in Red Oak but are currently not generating revenue, thus hanging a part of the facility cost benefit in inventory.

The next slide shows the cash flow profile for the Gulfstream G650 and G280 wing programs. As Rick mentioned, we continue to be very pleased with the performance on these programs in Tulsa as well our Nashville facility. Both programs are on schedule from a delivery standpoint and we continue to see improved labor and quality performance.

The actual cash burn for the quarter was lower than expected at approximately $10 million, partially due to timing of receipts from customers but also reflecting favorable performance versus our business case. Our cumulative cash burn since acquisition is now at $32 million.

We have made good progress on transitioning the work currently being performed by Gulfstream on the 650 program in Savannah to our Nashville facility and targeted to have this effort fully transitioned by early FY17. A significant effort continues to be placed on driving value in the supply chain which we have been pleased with successes to date.

We remain confident in turning these programs cash flow positive during FY18 while the G650 program continues to be in much better shape than the G280 program. We also continue to view the $160 million of cash consideration received as being more than sufficient to fund the programs through that period.

In our Aerospace Systems segment, sales for the quarter were $277.6 million compared to $219.9 million in the prior-year period, an increase of 26%. Reflecting 3% organic decline primarily due to the timing of orders on certain military programs and slower commercial rotorcraft demand.

Aftermarket represented 18% of revenue in Aerospace systems for the current quarter versus 18.5% for the prior-year quarter. First-quarter operating income increased 37% from the prior-year quarter to $51.3 million with an operating margin of 18.5%. Organic operating margin for the quarter was 19% as compared to 17% in the prior year. Adjusted EBITDA for the quarter was $52.7 million at an adjusted EBITDA margin of 19.7%.

The integration of the GE aviation hydraulic actuation business continues to progress well. As expected, their margins were slightly dilutive to the segments' margins in the quarter but we continue to execute on plans which will drive segment average margins from this business in the midterm.

Continuing with our segment reviews, sales in the Aftermarket Services segment in the first quarter were $74.7 million compared to $67.6 million in the prior-year period, an increase of 11%. Organic sales were flat for the quarter.

First-quarter operating income was $10 million with an operating margin of 13.4%. Although margins were lower than recent quarters in this segment due to the mix of contracts in the first quarter, we do anticipate full-year margins to be in line with full-year FY15 margins.

Adjusted EBITDA for the quarter was $12.4 million with an adjusted EBITDA margin of 16.7%. Overall we've continued to see strong performance in both our Aerospace Systems and Aftermarket Services segments.

Turning now to backlog. Our order backlog as of June 30 was $4.84 billion, a 3.5% decrease year-over-year reflecting the lower production rates on key Aerostructures programs.

For the first quarter, Boeing and Gulfstream were our only customers to exceed 10% of total revenue. Net sales to Boeing commercial, military and space totaled 39% of our revenue and Gulfstream represented 13% of total sales for the quarter. For your reference, we have included in the appendix charts reflecting sales by market and sales trends.

Turning to the balance sheet on the next slide. We utilized $148.5 million of cash flow from operations in the quarter which reflected the earlier than expected receipt of certain customer payments during the fourth quarter of FY15 as well as the timing of spending on key development programs.

Although the use of cash was heavy during the first quarter, it was in line with our expected cash generation profile for the year where we will see strong cash generation in the second half of the year as spending of the development program begins to ease, stronger second half earnings, realization of benefits related to our cost-saving initiatives and as we recover the growth in working capital we experienced during the first quarter.

Inventory at June 30 reflected an increase of $173.9 million during the quarter which approximately $67 million was attributable to nonrecurring investments in the Bombardier and Embraer programs. $36 million related to the liquidation of advances received in the prior quarter and we also saw a growth associated with build ahead of product which is being done to facilitate the transfer of work packages between businesses.

Capital spending in the quarter was $18 million and net debt at the end of the first quarter was $1.5 billion representing 40.5% of total capital and total debt to trailing 12-month adjusted EBITDA of 3.2 times. Due to the fact that our cash uses was anticipated to be high during the quarter resulting in leverage outside of our targeted range, we chose not to repurchase any shares under our share repurchase authorization or make any voluntary pension contributions during the quarter.

The global effective tax rate for the quarter was approximately 30% and reflected the fact that the R&D tax credit expired on December 31, 2014 and has not yet been renewed. In addition, income tax expense for the quarter was reduced by approximately $4.2 million attributable to a lower deferred state tax rate.

We expect the global effective tax rate for the full fiscal year to be approximately 34% would still assumes that the R&D tax credit has not renewed. From a cash tax perspective, we do expect to fully utilize our federal NOL carry forwards during the fiscal year and expect to have approximately 10% cash tax rate for the year.

Expanding on Rick's comments regarding FY16 guidance. Our top line guidance of $3.9 billion to $4 billion reflects roughly a 5% decline in organic revenue with our Aerospace Systems and Aftermarket segments growing organically at roughly a 5% rate while Aerostructures segment is shrinking organically at roughly a 10% rate.

Projected Aerostructures segment revenue reflects year-over-year production rate reductions on 747-8, A330 and the legacy Gulfstream programs. As well as lower military revenue primarily driven by the completion of a recurring production on the C-17 program. These declines are offset by the Gulfstream G650 and G280 programs as well as continued growth on the Airbus A320 and A350 programs.

Excluding 747, we do project the second half of FY16 to be a low point for Aerostructures revenue with growth returning in the second half of FY17 and FY18 as we begin to bring on global 7000/8000 Embraer E2 Jets, Gulfstream G500 and G600 as well as the impact of continued new business capture within our tier 2 and tier 3 fabrication and structures businesses.

In Aerospace Systems and Aftermarket Services, the organic growth in FY16 is driven by production rate improvements on key growth programs as well as continued growth in both third-party and proprietary aftermarket. Earnings per share of $5.50 to $5.75 reflects continue margin expansion in Aerospace Systems while being negatively impacted by the lower organic revenue in Aerostructures.

The spread in our guidance reflects the level of opportunity being targeted with our tactical spending cuts. We have not Incorporated any potential impact, neither one-time costs or recurring benefit of larger actions that would arise out of our strategic review of the business. We have assumed a global effective tax rate of 34%.

Free cash flow generation available for share repurchase, debt reduction and acquisitions for the year is projected as $125 million to $150 million. Key elements assumed in our cash flow guidance, our capital spending of $120 million to $140 million, net spending on development programs of $80 million to $100 million, cash use associated with the G650 and G280 programs of between $60 million and $80 million and with the 747-8 program of approximately $20 million and a cash tax rate of 10%.

And with that I will turn it back over to Rick.

Thanks, Jeff. In a brief summary, we are in fact taking a hard look at all of our operations and are operating with a sense of urgency on both tactical and strategic fronts.

Over the past few months, there is a new sense of energy and focus. We are aware of our challenges and we said that we face across all our businesses, but we now have a better handle on the key issues and are addressing them head on. There's a lot of work to be done at Triumph, but we feel confident that we'll get it done.

I'll open the call to questions from anybody at this point.

(Operator Instructions)

Sam Pearlstein.

Wells Fargo. Can you talk a little bit more about the 2016 guidance and I know Jeff you just ran through a bunch of different pieces to it but how do we get the confidence that I guess you've taken a hard look and de-risked it? What's in there for restructuring versus savings, some of the moving pieces that might cause that to be reduced over the course of the year.

Sam, that's a tough question. How do you get confidence? We have the confidence.

Well I guess, what kind of conservative assumptions have you made?

Well first of all, we wouldn't give guidance that we don't think that we would make. I think that in the past the Company has made some reaching issues in regards to what earnings should be. That's one of the reasons that where everything I've read this morning by people who got our 6:00 in the morning releases have said that it was below guidance.

Well you all remember that we didn't release guidance, and we're releasing guidance after analysis of what we feel that we can make. And what we've baked into those -- that guidance is issues that we've already talked about. Being conservative in regards to CapEx, baking in some of the low hanging fruit that we've already saved some money which had not had -- it had a small effect in the first quarter but not a great amount. But will have some more impact as the year goes on.

And historically we have had stronger earnings in the second half of the year. And as Jeff said, we expect to do that also. And I think some of the major cost savings that we've identified have not taken effect at all in the first quarter. So that's one of the reasons that we in fact feel confident that we can get this done notwithstanding any other things that happen.

We have a lot of external issues that we're dealing with. Jeff mentioned most of them, the 747, the C-17 issues of that nature. But on the other hand, we also have some positives happening as we see forward -- going forward with programs and efficiencies in our operating plan.

And Sam, just to be clear, as we provided guidance, we've incorporated within the spread of our earnings guidance the tactical measures Rick talked to. We have not tried to quantify in that guidance any significant strategic actions we would take with the business. Neither the cost of those actions nor the recurring benefit of those actions. And the reason there being is we haven't fully defined all of the dynamics around those actions.

Okay, thank you. And then a follow up, has your schedule changed in terms of the Global 7000/8000 timing in terms of when you start shipping or how you ramp that up?

No. We're continuing to work with our customer. There's obviously been speculation publicly around it, but I think Bombardier needs to respond to those questions.

Thank you.

Cai von Rumohr.

Cowen and Company. A follow up to Sam's, you had a pretty big build in the first quarter in the Global 7000/8000 and E2 inventories. Where do you expect those to be up for the full year on a net basis?

Yes, the first quarter spend was heavy. The full-year net spend that we're projecting on those programs is between $80 million and $100 million. And when we say net spend that is net of payments from customers on certain milestones that they will owe us during the year.

Okay, great. And then I think the last call you had indicated that the CEO search, you didn't mention it now. Rick, you seem fairly comfortable being back in the seat. Where is the Company now in terms of a CEO search and what kind of urgency and what kind of time frame are you looking at?

How are you defining comfortable?

How would you define it?

I'll delay that question till next quarter.

But the search itself is proceeding as planned. As I mentioned before, the Board interviewed a number of Search Firms. They've picked a Search Firm. The search is currently continuing.

The Search Firm is proceeding to develop a number of potential candidates, a few of whom are internal and probably a lot more will be external. And those people will be interviewed by the Search Committee and some other people, myself included, during the upcoming months. And we would expect that that would be -- we would finish the search probably no later than -- the goal is to do it no later than the end of the calendar year.

And then we have to make a decision as to how much of an overlap there will be depending on who is chosen as to -- the overlap between me leaving and somebody else taking over. And we're going to have to -- that's hard to predict what that will mean. It depends on who is -- we've chosen and what that person's skills are et cetera, et cetera.

But the Board Search Committee is committed to doing this in what they consider to be the right way and coming up with somebody who can lead the Company and the success of the Company in the years coming up.

Terrific, good answer. Thank you for the detail.

Myles Walton.

Deutsche Bank. Maybe, Rick, the scope of potential strategic actions that you're looking at, is that scope expanding or narrowing particularly as it relates to Aerostructures?

And also you mentioned some of the things hurting the business are out of your control, which sometimes you don't want to be in those kind of businesses when it's out of your control. So is exiting larger portions of Aerostructures actually on the table with the options as well?

Let me refer to the second part of your question, the external issues. I think what we're referring to when we talk about internal and external issues, I'm talking about external issues being the sun setting of the C-17 and issues of that nature. We certainly did not engineer the death of the C-17 being produced. And that's the type of thing that I'm -- and the downturn on the C-17 -- the 747-8, the slowdown of the A330 Wings, items of that nature are the things that I'm referring to as external and out of our control.

In regards to the things that I'm referring to that are strategic in nature really has not changed at all. There are some emphasis that we're looking at internally that are taking priority such as the integration process within the Company. Such as the potential closing and/or sale of some of our companies that are not performing the way they should.

And in addition to that strategically, take a little bit longer term to do this type of thing but we're looking at things such as very broadly talking about them strategic issues such as has been suggested by a number of people. Breaking up the Company. We're not spending all of our time on that. We're emphasizing operational issues, but we really are looking at all the possibilities in the strategic area in all three segments, not just Aerostructures.

We've obviously got to make some moves with Aerostructures to get their earnings up so they contribute something to customer and shareholder value. But that's basically it. That really hasn't changed, Myles.

Okay and then Jeff, admittedly it was an eternity ago, a year ago you gave the $1.5 billion to $1.8 billion cumulative five-year cash flow, free cash will target with a $300 million per year type bogie. You have $125 million to $150 million target for this year, it includes about $60 million, $70 million from Gulfstream. So if we gross that up $170 million to $200 million or so is kind of the implied apples to apples for this year versus the $300 million per year target you had last year. What's changed and how much should we derate that $1.5 billion to $1.8 billion versus what you said last year?

Yes Myles, a couple points. I'm not going to at this point reiterate any longer term guidance beyond FY16 nor have we at this point really thought through where we think we are. A lot will depend on what we do strategically with the business.

As far as the FY15 and FY16 cash flow, we did see a stronger FY15 cash flow as we saw the acceleration of a number of customer payments into FY15 that would have landed in FY16, which is drawing down what our expectations are in FY16.

The two big macro things that have impacted FY16 from where we were a year ago, you called out the burn on the Tulsa. Keep in mind we received $160 million so we're still playing with house money there. But the other one is the additional burn we're projecting on the 747-8 program that we projected at roughly $20 million of that forward loss being cash burned during FY16. And those really are the high level changes.

The other piece of it is that the performance of the business isn't where we thought it would be. And that's not only degradation earnings but it's having an impact on cash.

Okay, all right. Thanks, guys.

Sheila Kahyaoglu.

Jefferies. First on structures, do you expect the operating earnings to improve throughout the year? And then maybe if you could provide an update on your Red Oak savings because it seems like Global is still on track and you're producing despite the delay, so if that impacts that facility at all?

Well first, the answer to your first question is yes we do expect earnings to increase during the course of the year. A great amount of which will come on the back of significant cost savings that we anticipate.

In the second, as Jeff mentioned in his comments Red Oak is essentially back to where we thought it would be when we decided to make the move from Jefferson Street and close Jefferson Street and move over to Red Oak. And the efficiencies there are in fact taking place as we speak. So we feel pretty good about that at this moment and they can get nothing but a little bit better as we go forward.

Yes and Sheila, the comments I made in my commentary, we still have fully verified the business case in Red Oak. The fixed facility cost savings we've realized.

The dynamic we get into when we talk to a $0.50 recurring benefit associated with the exit of Jefferson Street to Red Oak it gets muted to a degree as C-17 goes away and that revenue is replaced in Red Oak with Global 7000/8000 as well as Embraer E2 jets just because we're producing on those programs, well we're not realizing revenue yet. So some of that benefit that we anticipated ultimately gets hung up in inventory and you don't see the full value of that benefit flowing through the P&L in FY16.

Thank you, I appreciate it. And then one more on structures in terms of the 330, what rate are you currently producing at and should we anticipate a further organic decline on that program for the year?

Yes, I'd prefer not talking specific rate. I would say we're pretty close to what we expect the bottom to be on A330. And are starting to see some positive signals of maybe a little bit of recovery in rate from Airbus specifically driven by the order they saw with the Chinese earlier in the quarter.

Sounds good. Thanks.

Ken Herbert.

Canaccord. I wanted again follow up on Aerostructures. You've talked I think Jeff about a 10% organic decline this year obviously the first quarter a little softer than that. Can you talk through as you start to anniversary C-17 and some of the 47 rate reductions some of these other programs, how the top line cadence within Aerostructures looks as we progress through FY16?

Yes a lot of moving parts, Ken.

Sure. Maybe just on the bigger pieces.

Yes, we're still coming down on 747-8 and we expect to get down by the end of the year to the rate of one month which is what we're assuming we work through the end of our contract at. As I just mentioned, we're pretty much at the bottom on A330 with some opportunity to see some improvement as we get close to the end of the year depending on what Airbus does there.

I would say the Gulfstream programs, we've seen year-over-year reductions there. I would expect a level of flatness from where we are in the first quarter there. And I think there's still some opportunity, we'll see some growth on the new Gulfstream programs specifically G650 as we progress through the year.

Keep in mind as we recover work scope that's being done by Gulfstream on those programs, our revenue increases. So as we come up the curve and get Gulfstream out of the business of supporting that Wing program, our revenue will increase. So as I look out through the balance of the year, I think the second half is a little bit lower than the first half, but not much from a revenue standpoint.

Okay that's helpful. And then is it FY17 when you really start to see revenues from the Global 7000/8000 and the E2 program?

Our projections second half of 2017 we start getting recurring revenue. We start getting recurring revenue on Global before E-Jets. We also start getting some recurring revenue on the new Gulfstream programs.

And I alluded to it in my comments, we're also seeing a lot of nice new capture at a tier 2, tier 3 level within our fabrication and structures business. That gets muted sometimes with the tier 1 stuff, but it has a nice cumulative affect as we look out in the out years.

Okay, great. Thanks for the color, Jeff.

Steven Cahall.

Royal Bank of Canada. To follow up on Aerostructures, a bit of a long-term question.

If we think about the stuff that's going down, all the moving parts you just mentioned, Jeff, and we project that out to say FY17, what blended margin can we think about seeing in this business excluding some of the more strategic initiatives that we're not quantifying yet? What's a run rate margin to think about here?

Yes, Rick answered the question I think well. We're going to continue to drive cost reduction with a lot of focus in Aerostructures. And depending on the level of success of us getting cost out of that business, will drive a lot of what we think we can achieve from a run rate standpoint.

So a lot will depend on our successes this year. A lot will then be dependent on the strategic actions we take within that business and what can we do from a consolidation footprint reduction organization structure, cost structure across Aerostructures.

Okay. And then maybe on Aerospace Systems as we're increasingly getting into some pretty good margin performance there. Do you have a blue sky scenario or a target margin towards the end of the year as things continue to improve? Where do you see this going over a longer period?

Yes I definitely expect year-over-year margin expansion in Aerospace Systems. And we talk a lot about focusing on Aerostructures but we're also focusing broadly across the Company as we look at cost structure. So some of that ultimately occurs in Aerospace Systems.

And we also look for continued higher rate of capture from an aftermarket standpoint. Much of that comes as we continue to see improvements in the GE acquisition that we completed last year and we get that fully up to where we think it should be. So there's definitely margin expansion there as we look year-over-year 2015 to 2016. And here again a lot will be dependent on our successes with both our tactical and strategic actions that we're taking.

Okay and then maybe one on supply chain. I think in the last quarter you mentioned you have a new Senior Vice President of Supply Chain. I was wondering with 90 days under that person's belt that there's any quantification you can give us about what the supply chain opportunity looks like in the business?

I think that in the short term he's made some very good moves in the beginning. When you look at that issue on a long-term basis, we're expecting a significant savings in the supply chain, but very difficult to project. I think that some of it will happen in this year, but primarily over time, it'll hit probably FY17 more than it hits this year.

But we've seen significant savings in certain areas that he's already worked on. And in addition to that, I think that we'll have a number of corporate initiatives that will lower our corporate costs, which is also necessary.

And are these the things that are in guidance or not in guidance at this point? Are these tactical or strategic?

They're not really in the guidance at this point in time. We feel confident about the savings that we'll get this year because some of the things that we've done corporately or in the supply chain area will contribute to the guidance that we've given and that's baked in. But longer term it should be much greater than that in the supply chain area.

Great. Thank you.

Michael Ciarmoli.

KeyBanc. Maybe Rick or Jeff, back onto the topic of the CEO search. You guys are seemingly putting in some broad actions and measures as you said both tactical and strategical. The CEO search I guess looks like it's going to run through the remainder of this year.

Is the process -- does it become a little bit more challenging when you're out there looking for someone to come in and execute on a plan you're putting in place versus someone who's going to want to come in and put his own stamp or own blueprint together to chart his own path? Or does it even beg the question that you might be more inclined to look internally for a candidate who's going to be more familiar with the actions you're looking to put into place?

Well, you'd really have to ask the question of the Search Firm, but in my estimation, we are where we are and we've got to do what we've got to do for the betterment of the Company. What the new person does when that person comes up, he's going to have what he has or she has and they can go forward from there.

We will keep candidates that are interviewed abreast of what we're doing and choose that candidate based upon what the Company is and what we feel has to be done. If in fact that person disagrees with it, they may not want to make a transition and become CEO. But I don't think that we have the luxury of -- or I don't have the luxury of being a placeholder and waiting until somebody else comes in. We've got to make a lot of moves now rather than waiting to see what somebody else has to do, wants to do.

Okay, that's fair. And then on some of those moves. I think you mentioned looking at divestitures.

As you look across what is seemingly a pretty big decentralize Company have you guys targeted, do you want to keep build to print businesses? Are those certain businesses you want -- would look to divest that might be margin dilutive or under pressure? Are you looking to keep more proprietary products divest of structures? Can you give us a sense of how you're looking at the portfolio?

Well, I think first and foremost we're looking at companies or locations that are not performing up to speed to either take cost out vis-a-vis integration within the Company or divestiture. I think that basically we're facing -- we're looking at an issue of performance. We're not really -- we don't have any prejudice on who we might divest. If they're not performing, we'll look at that.

If we can't find a fix internally, we have not focused on looking at whether they're proprietary products or nonproprietary. It's a matter of performance and we've got to make some changes whether it be people wise or whether it be operationally or whether it be integration or divestiture. We're going to look at all those without prejudiced as to what those companies are. It's a performance issue plain and simple.

Okay. And in that, last one, in that longer term strategic, does a transformational divestiture spinoff, is that in the cards realistically? Something involving structures or even systems or is it going to be more on the smaller scale when we think about divestitures or any kind of reshaping actions?

No, as I said before on the strategic end of the analysis, everything is really on the table when we look at how we can accomplish something that refurbishes the Company and makes us more successful. If that means we spinoff a large company or a large group and that might be the way we have to go. And that's obviously as you mentioned a little more transformational than the other things that we're talking about.

But what it means is at the end of the day, our Company is going to be more successful and have the ability to grow and be more successful for our shareholders. That's the way we're looking at it.

Got it. Thank you very much, guys.

Steve Levenson.

Stifel. On 747, do you get any price relief from the manufacturer at a lower rate where you expect it to be now?

Yes, Steve, when we recorded the forward loss in the third quarter, we incorporated all of the pricing bands that we have on 747 based on the assumptions of our rate would go to. So the answer is, yes. But it's already been incorporated as we think through the forward loss that we took in the third quarter of FY15.

Okay. Does that potentially create more cumulative catch up, favorable catch ups as opposed to negative ones as had been the case for awhile?

No, since we incorporated in that forward loss calculation, as long as everything plays out in line with that, you wouldn't see either cum catches or positive or negative. Obviously we're still working to figure out how we can drive improvement in that program and if we can get cost out and drive some margin, that would allow us to claw back some of that loss.

Okay, thanks. And second, can you tell us a little bit about the outlook and trends on demand for aftermarket parts from the Aerospace Systems business and how that might impact margins?

Well, obviously that's a mixed bag within our Company in the Aerospace Systems business. As you know, those aftermarket sales are reported in the Aerospace Systems Group not to be Aftermarket Services Group.

Right.

And they've been relatively consistent over time. I can't answer the question in every specific company within the Aerospace Systems Group. But as you can see by their revenues and their margins, they've been relatively consistent and positive in nature.

Okay, thank you very much.

David Strauss.

UBS. Actually it's Matt on for David.

Going back to free cash flow real quick. I know you don't want to give guidance yet for FY17, but could you maybe talk about the moving pieces you see there relative to 2016?

Yes. If you think of the big cash claimants, I generally would look at capital being relatively flat year-over-year. We will continue to see a decline in spend on the development programs as we transition out of 2016 into 2017. There's still some spend in 2017, but I think you see a similar dynamic where it's reducing year-over-year.

Pension obligation, we've talked of a $40 million contribution this year. We've assumed that being flat. It's always a hard one to predict depending on what happens with interest rates and other things within the calculation of funding status and pension.

And then I think the biggest driver is going to be the cost reduction initiatives and how much value we can get or cost we can get out of the business that you should have a full run rate of in FY17 versus a partial year in FY16. So a lot will depend on the launching pad we create going into 2017.

Thanks and then one quick one. On 767, have you guys seen any impact yet from that going back up to two a month?

Yes, we are seeing some nice improvement revenue wise on 67. We were very pleased to see the FedEx order and we think 67 for us is one of those programs that has the potential to grow as we look in the out years.

Great, thanks.

Steven Cahall.

Royal Bank of Canada. A quick follow up on cash. You mentioned that you were withholding buybacks as well as pension contributions in the quarter. Coming out of the quarter are you able to start buying back shares again or should we expect a further delay before you're back in the market?

Steven, nothing's prevented us from buying back shares in the first quarter. It's really is our continued strategy of deploying capital judiciously and managing within targeted leverage ratios and debt to capital ratios. Obviously we'll continue to be tactical as we execute against our share repurchase authorization. But haven't laid out a specific amount or tactic as to how we'll approach it.

Thanks.

Michael Ciarmoli.

KeyBanc. Rick, a lot of talk on the strategy relating to internal operations. Anything you guys are trying to do to increase the probability or capture rate on new business? Is that part of the plan?

It seems like some of these awards that have been in the pipeline have been -- they just haven't come to fruition. So are you guys looking at some wholesale changes there in terms of how you go to market?

Well, what we're looking at is some changes in regards internally and how we go to market in regards to business development and program development and where we should be going after business. Now a lot of this might not be real big programs because, as you know, there aren't any C-17s coming down the pike and there aren't any 747s being built.

So we have to go after, and Jeff mentioned it before, we've been very successful on a number of tier 2 and tier 3 wins which are smaller. But on the -- what I'm referring to is that we have a couple of individuals corporately who are developing program analysis and programs that we should be on. And we will also expand potentially our customer facing sales efforts.

We'll augment that with a leader in that area potentially to augment the people that we already have that are generally doing a very good job both in Europe and in the US. So yes we are looking at that. Talking about specific programs we're going to go after, we've identified some but I'd rather not talk about that. But it's a good question.

Thanks, guys, that's all I had.

Are there any additional questions? Since there are no further questions, this concludes Triumph Group's FY16 first-quarter earnings conference call.

This call will be available for replay after 11:30 AM today through October 27, 2015 at 11:59 PM. You may access the replay by dialing 888-266-2081 and entering access code 1659929.

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