Triumph Group Inc (TGI) 2016 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our FY16 second-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.

(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 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 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. Good morning, everybody and thanks for joining us on the call to discuss our second quarter results.

Since returning to the CE role at Triumph, I had the opportunity to gain a thorough perspective on the organization both on what we're doing well and the areas which we have much room for improvement. Triumph today is a strong company with a terrific product portfolio that can compete and win at any level of the aerospace supply industry. While there is more to be done to return Triumph to a high level of performance, I'm very confident we can get there again.

I want to begin with some of the key issues impacting results and how we are addressing them. Costs, we're taking steps to significantly reduce costs and are looking at all means to do so. This begins with investing and strengthening our supply chain capabilities and our sourcing practices and enduring accountability, plans which have already begun to have an impact on our earnings.

The global general economy and the industry dynamics continue to present headwinds for our business. We're seeing softness in the after market in addition to slower commercial rotorcraft and military demand. We are dealing with these external factors including some setting programs and those that have significantly slowed down production in our operations.

We've talked before as to the C-17 sunsetting, the 747-8 and the military business has significantly reduced spending and declining spares and manpower in the military sector which has affected some of our business. We're well aware of the declining programs in our profile particularly in the Aerostructures business and we're doing what we can do to have programs in place to replace loss in sales, and I'll return to this momentarily. We're taking action to drive results in Aerostructures segment which has not been performing to expectation and has the greatest room for improvement.

We had significant customer facing problems, things such as on-time delivery, some quality and our costs. We've invested in experienced Management Team, we've hired a Vice President of Business Development which is helping us solve and address the customer facing issues. All of which is ensuring that we're competitive in the Aerostructures and Aerospace businesses.

Recent acquisitions -- we have a long track record of successfully acquiring and integrating companies to significantly increase Triumph's capabilities and competitive position which has been one of our milestones as we've grown our Company. We've been pretty clear that some recent acquisitions have not performed up to expectations for a variety of reasons. There's no surprise internally where the issues are coming from.

We're in the midst of fixing these problems. I have spoken with each Management Team on implementing actionable plans to improve execution and performance and reduce our costs. This adds a level of complexity to our tactical and strategic initiatives. We are confident in our ability to right-size the portfolio and focus on our key growth drivers.

I've had contact with many of our customers and one's that I have not spoken to, our new Vice President of Development has. And we have without a doubt confirmed that we're viewed as a company with a significant and diverse product offering that they would like to work with.

We had a number of new wins in the fiscal year to date. And they come up to approximately at this point in time, $200 million in annual revenue. These are new wins, as I mentioned. And we over $1 billion a year in new business proposals in the pipeline at the present time.

Updating our tactical initiatives -- as mentioned last quarter, we're moving forward on two fronts simultaneously; tactical, which is near-term in nature and strategic, which is longer-term in nature. I'd like to update you all on the progress we are making on a number of tactical initiatives. We have as I mentioned, optimizing our internal supply chain and enhancing our supply sourcing practices. We've reduced discretionary spending and capital expenditures and we are working on and have reduced personnel throughout the organization.

These are activities that we should be pushing to get Triumph to where it needs to be as a top-tier supplier and competitor. We are confident in FY16 revenue and earnings per share guidance, as the benefits of these tactical initiatives are realized in the latter half of the year, which we have said consistently from the beginning of the year. And we've exhibited that in the past for our second half of the year, is projected to be higher. We are also confident that the performance will improve earnings and cost reduction in the second half of the year.

During the quarter, we made meaningful progress on improving the supply chain, as I mentioned. This should make an intangible impact on FY17 as inventory turns and current supply agreements expire. We see many opportunities to save costs and enhance our delivery to our customers. There should be a reasonable expectation to take out about 1% to 2% of our total spend, both direct and indirect, of approximately $2 billion.

Importantly, we have established a centrally led collaborative supply chain and an operating structure to streamline our operations which has already identified efficiencies and eliminating redundancies in the organization. This group takes a total company approach to facilitate better decision making and communication across the operating companies supply chains. We've developed specific targets and reporting metrics for supply chain Management and we're holding the team accountable to reaching these goals.

We focused on strategic commodity and category management so we can negotiate standardized longer-term and more favorable agreements with key suppliers for benefit which will benefit the entire enterprise. The bottom line is that we are changing how we do business. We are taking a lean approach to leveraging the resources and the reach of our Triumph enterprise.

Strategically, we're making good progress on our footprint reduction effort. In addition to the four facility consolidations we have already initiated, this quarter we have identified additional facilities that can be consolidated or materially downsized. We have identified approximately 15% to 18% of our total square footage in the Aerostructures footprint, not including Marshall Street and the Hawthorne facility, that can in fact be consolidated.

We have also begun to integrate facilities where advantageous throughout the transfer of work product. These initiatives will take time and will spill over into FY17 before we can realize the full benefits of what we are doing. We continue to move ahead on the comprehensive business review to identify areas of improvement across all three business segments. While we are focused in particular on finding opportunities in the Aerostructures segment, we continue to evaluate the full portfolio.

Turning to our results for the quarter, we reported adjusted earnings as you know, per share of $1.32 and net sales of $955 million which were in line with our expectations. Triumph, the Aerospace Systems group and the Aftermarket Services group sustained strong operating margin despite some decline in sales. Integration of a GE hydraulic actuation business and the NAAS acquisitions continue to progress very well.

The results in the Aerostructures segment were consistent with our expectations. Results were impacted by a production rates cuts on certain programs about which we've spoken in the past such as 747-8, C-17, A330 wing program, et cetera. We continue to focus on improving execution and expanding margins.

The Gulfstream wing program continues to progress very well with cash burn much lower than we had expected at this point in time. We are rebalancing our portfolio and continue to evaluate opportunities to enhance competitive and profitability of all three business segments.

As I mentioned earlier, fiscal year-to-date new wins were approximately $735 million over the next one to five years. And we have approximately $1.2 billion in new business opportunities that we are pursuing which we expect shortly will be awarded by our customer base. Last week, we announced a strategic acquisition of Fairchild Controls Corporation which positions Triumph as a one-stop shop for design solutions.

This does a couple of things for us. It reflects our commitment to investing in our business and building new capabilities and balancing the segment. This complements our very strong product portfolio and in addition, as I turn the page on my notes, adds approximately $45 million in revenue and is immediately accretive to earnings. This aligns very well with our existing Thermal Systems business and we will be looking at ways to maximize efficiencies between those two companies and others within our portfolio.

Another development during the quarter was a five-year contract signed with Airbus to provide maintenance and repair service for the A320 and A330 and A340 programs in the Asia-Pacific region. This further strengthens our long-term relationship with Airbus.

A quick note on the CEO search process. We remain very pleased as how the search process is going. It's being led by our search firm and the search committee of our Board.

I'm very pleased with the quality candidates we've interviewed and we're committed to finding a strong successor who can lead Triumph in the future. We are targeting identifying, and this is a reiteration, a new CEO by the end of 2015 which we've said in the past.

In the meantime, we have a strong and talented team in place and do not need to wait for a successor to keep moving forward with our strategic and tactical plans. With that, let me turn the call over to Jeff to discuss the results in more detail. Jeff?

Thank you, Rick, and good morning, everyone. Turning to page 5 of the slides.

I'll start with a review of revenue and earnings for our second quarter. Net sales for the second fiscal quarter were $954.8 million, down 4% from the prior year period with organic sales declining 12% primarily reflecting lower deliveries on certain Aerostructures programs.

Operating income for the quarter was $110 million which included approximately $5.4 million of a one-time non-cash charge related to a facility consolidation in the Aerospace Systems group. Excluding this charge, operating income was $115.4 million reflecting an operating margin of 12.1%. And net income was $65.1 million, resulting in earnings of $1.32 per diluted share. The number of shares used in computing diluted earnings per share on an adjusted basis for the quarter, was 49.3 million shares.

Adjusted EBITDA for the quarter was $122.2 million resulting in a 13.2% adjusted EBITDA margin and includes a reduction to earnings of $17.7 million for the amortization of acquired contracts associated with the Gulfstream G650 and G280 wing 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 second quarter were $604.9 million which included revenue of $77.4 million associated with the G650 and G280 programs. Organic sales for the quarter declined 17% primarily due to lower year-over-year production rates on the 747-8 and A330 programs and the end of recurring production on the C-17 program which is partially offset by deliveries of post-production spares on C-17.

Second-quarter operating income was $67.1 million and included a net unfavorable accumulative catch-up on long-term contracts of $6.8 million. The segment's operating margin for the quarter was 11.1%. Excluding the revenue associated with the 747-8 program, the segment's operating margin for the quarter was 12.4%. Aerostructures adjusted EBITDA for the quarter was $72.2 million at an adjusted EBITDA margin of 12.4% and included a reduction of $17.7 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, Boeing announced that they will be transitioning our work scope on the 747-8 program to their Macon, Georgia facility and other suppliers at the end of our current contract. Which at current production rates, would be completed in late calendar 2018 to early 2019. The impact is net neutral for us in the short-term with no material change in our assumptions related to our forward loss position on this program.

We continue to evaluate long-term impacts of the potential to finish our contract early and the timing around potential facility closer risk we had previously identified much of which will depend on how Boeing can facilitate ramp up in Macon and elsewhere. We continue to look for ways to mitigate performance risk and drive improvements on the 747-8 program.

The next slide shows the cash flow profile of the Gulfstream G650 and G280 wing programs. As Rick mentioned, we continue to be pleased with the performance on these programs in Tulsa as well as 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 $16.5 million reflecting favorable performance versus our business case. Our accumulative cash burn since acquisition is now at $48.7 million.

We continue to make good progress in transitioning the work currently being performed by Gulfstream in Savannah on the G650 program to our Nashville facility and target to have this effort fully transitioned during FY17. And we remain confident in turning these programs cash flow positive during FY18 with $160 million of cash consideration received upfront being more than sufficient to fund the programs through that period.

In regards to our key development programs, we continue to work closing with Bombardier and the development of the wing of the global 7000 8000 and we're making good progress and believe this will be a very successful program. The announcement of Bombardier of a delay of entering into service for the global 7000 until the second half of 2018 will impact the timing of certain receipts previously anticipated for FY16 that are now expected received in FY17. This could be up to a $65 million shift between FY16 and FY17.

We're also estimating a higher level of spending on our design efforts which we now anticipate will extend out through mid to late FY17. Our current estimate is additional spending to complete the design and development activity of between $80 million and $120 million of which $50 million to $70 million will occur in the second half of FY16.

The Embraer E2 jets program has continued to progress well and we have shift initial test articles for the fuselage sections, rudder and elevators and we remain on schedule to complete development efforts in FY17. We currently project spending to complete the design and development effort of roughly $35 million to $50 million of which $20 million to $30 million will occur in the second half of FY16.

Overall on the development programs, we are now projecting $110 million cash flow headwind in FY16 versus our previous projections of which $65 million is timing of receipts that will now fall into FY17. For FY17, we project the design development efforts to be roughly cash flow neutral with receipts from customers offsetting the estimated spending.

Moving onto our Aerospace Systems segment. Sales for the second quarter were $280.2 million compared to $288.9 million in the prior year period, a decrease of 3% primarily due to lower aftermarket sales, the timing of orders on certain military programs and slower commercial rotorcraft demand. Aftermarket represented 17.3% of revenue in Aerospace Systems for the current quarter versus 18.8% for the prior year quarter.

Second quarter operating income was flat compared to the prior year quarter at $46.1 million with an operating margin of 16.5%. Excluding the one-time non-cash impact of the facility consolidation, operating income would have been $51.5 million with an operating margin of 18.4%. Adjusted EBITDA for the quarter was $50.4 million and an adjusted EBITDA margin of 18.6%.

As Rick mentioned, the recently announced acquisition of Fairchild Controls broadens our thermal systems offering to customers and adds to our technical capabilities. In addition, with its large global install base of more than 3,500 systems, it provides meaningful proprietary aftermarket opportunities.

The business sales mix is approximately 60% military, 40% commercial with aftermarket representing approximately 27% of revenue. It aligns well with our existing thermal system business and provides opportunities to maximize efficiencies. The business is expected to add approximately $45 million in annual revenue and will be immediately accretive to earnings and cash flow.

Continuing with our segment reviews, sales in the Aftermarket Services segment in the second quarter were $73.8 million compared to $74.3 million in the prior year period, a decrease of 1%. Organic sales for the quarter declined 11%, primarily due to decreased demand on commercial aircraft.

Second quarter operating income was $9.1 million with an operating margin of 12.4%. These results included expenses of approximately $1.1 million associated with a customer bankruptcy. Excluding this charge, operating income would have been $10.2 million with an operating margin of 13.9%. Adjusted EBITDA for the quarter was $11.6 million with an adjusted EBITDA margin of 15.7%.

Turning now to backlog. Our order backlog as of September 30, was $4.82 billion, approximately a 1% increase year-over-year. For the second quarter, Boeing and Gulfstream were our only customers to exceed 10% of total revenue.

Net sales to Boeing commercial, military and space totaled 39.3% of our revenue and Gulfstream represented 13.2% of second quarter FY16 total sales. For your reference we have included in the appendix charts reflecting sales by market and sales trends as well as our top-10 programs by segment based on backlog.

Now turning to the balance sheet. We utilized $30.1 million of cash from operations in the quarter which reflected the continued spend of the Bombardier and Embraer development programs and broader growth in working capital. Some of which was related to the resolution of a supplier dispute which although resolved favorably, did require the payment of outstanding payables that were being withheld pending resolution of the dispute.

Although the use of cash has been heavy year-to-date, we still expect to generate positive cash flow in the second half of the year as we realized stronger second half earnings, realization of benefits related to our cost saving initiatives and as we recover the growth in working capital experienced during the first half of the year.

Inventory at September 30, reflected an increase during the first half of the fiscal year of $276.2 million which included approximately $119.6 million attributable to nonrecurring investments in the Bombardier and Embraer programs. $51.5 million from the reduction of advances from customers that we realized in the fourth quarter of FY15 and $26.5 million in spending on the G650 and G280 programs. In addition, some of the growth we are seeing is associated with build ahead of product in order to facilitate the transfer of work between businesses as part of our strategic initiative.

Capital spending was $38.1 million year to date and net debt at the end of the second quarter was $1.6 billion representing 41% of total capital and total debt to trailing 12-months adjusted EBITDA was 3.4 times. We did not refer to ascending shares under our share repurchase authorization or make any voluntary pension contributions during the quarter.

The global effective tax rate for the quarter was 34.7% and reflected the fact that the R&D tax credit expired on December 31, 2014, and has not yet been renewed. We expect the global effective tax rate for the fiscal year to be approximately 34% which does assume that the R&D tax credit is not renewed. From a cash tax perspective, we expect to fully utilize our federal NOL carry forward during the fiscal year and expect to have a cash tax rate of approximately 8% to 10%.

As Rick mentioned, we are holding our revenue guidance of $3.9 billion to $4 billion and our earnings per share guidance of $5.50 to $5.75 per diluted share. We are lowering our free cash flow guidance to reflect the timing of receipts and higher level of nonrecurring spending on the development programs. We're now projecting cash flow available for debt reduction acquisitions and share repurchase of between $25 million and $50 million.

This guidance reflects spending in the second half of the year of between $70 million and $100 million on the key development programs, $30 million to $40 million on the Gulfstream G650 and G280 programs, capital spending of $40 million to $60 million and a cash tax rate of between 8% and 10%. This guidance does reflect a significant improvement in working capital driven primarily by finalization of certain customer agreements, completing deliveries on certain contracts, timing of projected receipt of open receivables and restructuring terms with key suppliers.

And with that, I'll turn it back over to Rick.

Thank you, Jeff. Just to summarize my comments and a few of Jeff's.

The actions that we're taking to centralize and improve supply chain management, reduce our portfolio footprint are in fact influencing our execution, our margins and our costs. We're aren't seeing all the benefits of our actions immediately but they're putting us in a much better position from a cost standpoint to drive performance and improved profitability going forward.

We now have a strong grasp on the top issues that we are operating and are operating with a sense of urgency and focus to ensure that our stated plan is being implemented in a thoughtful and precise manner. The Triumph today is a very strong company with a terrific product portfolio that can compete and win at any level of the aerospace supply industry. While we have some ways to get the return to our level of expectations, I am confident that we're on track to get there.

With that, I'd open the call to any questions.

(Operator Instructions)

Sheila Kahyaoglu

Hi, good morning. It is Jefferies. Taking a step back a bit, there are number of external factors that continue to impact Triumph's results. How is the enterprise now identifying some of these risks on the development programs going forward to regain a bit more control on the cash flow?

Well, we've talked about all the programs and added a few more headwinds in this particular call. The 747-8 is clearly a program that is one that's affecting us and has affected us. And to reiterate and be perfectly clear, when we move, when the 747-8 moves out, that is a positive issue for Triumph.

I've had telephone calls where people said boy, I'm really sorry you lost that 747-8 because that's a big program for you. Well, it is not a profitable program for us and going forward, it's a good thing for us.

Some of the other issues are external factors that we really can't control. Military spending is significantly down. Everybody knows that we are redoing the process of reducing our military from 590,000 military personnel to 330 on the basis of we can be a more mobile military and at the same time we're eliminating the plane the flies them around on the C-17.

So those are issues that are external factors that we can't do anything about. In addition to that, military spending in general, especially in the spares area, has decreased in the first six months of our year. So we're facing headwinds in that regard.

In addition to that, the general economy, we don't see the general economy as in fact booming in regards to growth of jobs and growth of programs that we see and quote. And aside from that, we are quoting, as we mentioned, a number of new jobs and we feel good about the programs that we're getting bids on and the programs that we've already won. But these are issues that are outside our control and we're putting that aside and we're addressing the operations as we see them that have to be addressed both from a strategic and tactical point of view.

Sheila, I would also add on the two key development programs. We're obviously working very closely with both of those customers. We still believe those two programs, the global 7000 8000 and the Embraer E2 jets will be very successful programs looking forward.

And obviously, with the delay in the global 7000, we're working closely with Bombardier to ensure we are doing all the right things to support the program and ultimately get a plane in the air and ensure that it meets the requirements that they've put forth. And that we ultimately will see a long-term revenue flow from it.

Okay, thank you. And then, I guess on the 747 point given the move in FY18, how would you characterize that cash savings? Is it about $50 million from working capital and maybe some of the call back?

The cash savings on 747-8?

Yes, and the move back to Boeing in FY18.

The dynamics that we're going to see at the completion of the program, there definitely will be a draw down of working capital as we finish out our work scope. I would generally say that it is probably mitigated by potential risk if we make a decision to close those two facilities, which we've highlighted before. So I think you can probably look at that as generally being a net neutral as we look forward.

Got it thank you.

Sam Pearlstein

Wells Fargo. Good morning. Can you guys talk first, you highlighted a resolution of a supplier dispute. Can you just add any color and would that have been anticipated in the prior cash flow outlook?

Yes so, we had a dispute with the supplier in one of our key programs that have been ongoing. We had incorporated a certain level of resolution into our projections. Although the resolution was favorable, we did not get as much as we had hoped to and ended up having to refund certain levels of withholdings to the supplier. We had not incorporated that into our FY16 guidance. A bit of a headwind.

Because I guess what I'm trying to figure out is, is we know the global timing shifted from this year to next year but I'm trying to think about what else is timing and what else is gone forever that you don't recoup next year?

Yes, the biggest element is the roughly $65 million that we have at risk from a timing standpoint of shifting out of 2016 into 2017. The supplier resolution I would depict as a one-time and that would not be repeated. The balance of the lowering is spend that we've seen on the development programs in excess of what we had previously projected.

And is that higher spend on, I'm assuming, on the global? Is that because what you have to do has changed? Was there something that was done improperly and is any of that development additional spending changes that get reimbursed in any way?

Yes, Sam, what I would generally say is we're doing everything to support this program to get a plane in the air. Any time a development program shifts out to the right, it gives you the great opportunity to spend more money to make sure we're getting everything done. And ultimately, there will be certain elements of this that will be commercial discussions with the customer. But at this point in time, our focus is getting a plane up in the air.

Alright, and then the last question is, with this Boeing agreement on the 747, does it change any of the potential $75 million in cost that you've highlighted before?

That's still a risk depending on what we choose to do with those facilities at the end of the contract.

But the amount doesn't change?

No.

Okay, thank you.

Cai von Rumohr.

Cowen and Company. This is Lucy Guo calling for Cai. Good morning. I want to follow up on the net design spend or net inventory build. For 2016, you said you would be neutral in the global 7000, 8000 (technical difficulties) but can you update us I think it was previously $80 million to $100 million net build?

Yes, so I mean the net build in the first half of the year has ended up being roughly $119 million. We're projecting additional spend for the second half of the year of roughly $70 million to $100 million. Which then also reflects the fact that the payments we had expected to receive have shifted out to the right in the FY17.

FY17 we think overall, it will be net neutral from a cash flow standpoint whereas the payments received from customers will offset the projected spend of the development programs.

And you gave a great outline of the tactical initiatives potential tailwinds out going forward. Is any of this factored into your guidance for the second half in terms of how much of an estimated cost of the restructuring and potential tailwinds?

Some of the numbers in the guidance that we've given, some of our cost savings has in fact been built into the especially the higher end of our range. Some of the tactical things will take a little bit longer period of time and blow over into FY17 and those numbers obviously, are not baked into our guidance for this year.

And Lucy, if we had other charges associated with facility closures or things along those lines, we have not factor those into the guidance. We've always said that those are outside of the guidance.

Understood and lastly and then I'll pass it on, is just a follow-up on the 747. From what I've read, there may have been some transference of work also to ABiC in China after the President's visit in Seattle. Has there been any talk between Triumph and ABiC on that?

I think that's probably a question you'd have to post to Boeing. We're not aware of that.

Alright, thanks very much.

David Strauss

UBS. Hi, it's actually Matt on for David. Good morning. A couple of others on 747, with that work transferring over, how do think of the revenue stepping down over time? Is it abrupt at the end of the contract or is it more gradual than that?

And then, can you give us any guidance on what the cash burn looks like on 747 over the next couple of years?

Yes. We're still anticipating holding at a production rate of one per month through the balance of the contract. So from a revenue standpoint, it should be relatively flat as we think out through the end of the contract. At the very end you have a little bit of step down based on delivery of certain elements. But that's the last three to six months where you see that dynamic.

From the cash, we're still looking at the same projection as we thought of the forward loss we took in Q3 of FY15. Two-thirds of that cash still relates to roughly the last 23 units that would be delevered in our FY18 and FY19. The other one-third of the impact is occurring in FY16 and FY17.

Okay, thanks. And then one other one on the contract amortization, looks like a step down a little bit this quarter. Is that -- are you still on track for the guidance for the full-year, I think you said $130 million?

Yes, the guidance has not changed for that. The step down are just certain programs primarily in Aerostructures that are falling off with the completion of the amortization.

Okay, thanks.

Myles Walton.

Deutsche Bank. This is actually Lou on for Myles. How are you? Rick, I know you mentioned the 1% to 2% takeout of the total spend, I think that was in the supply chain. What percent of the total cost savings do you see there versus SG&A in other areas?

We're actually including, our total spend, we're including SG&A. What we've done is we've focused on cost of goods sold and SG&A. Internally, we have separated that and put targets on issues on our spend in SG&A in our spend in cost of goods sold.

Obviously, there are items that we cannot and the way we presented it to our -- all of our locations and all of our managers has been, there are certain things that we can't do too much about; cost of goods sold, taxes on factories that we have. Generally speaking, we can't do a lot in that area although we have in the past. But that's an example of it's not in that number and basically, we're looking at personnel issues, some of which are in cost of goods sold, some of which are in SG&A. So it's a total cost reduction that we're looking at in the combination of both.

And how far along is that progress?

Well I think that in personnel issues for example, in a lot of cases when we have to reduce our personnel, there are severance issues we're dealing with. So in the short-term, that's an increase in cost and in the long-term, it goes away. I think that we are doing very well in that regard and it's one of the reasons that we have not changed our guidance going forward.

Great, thank you. And just one for you Jeff. The performance in Aftermarket probably the weakest we've seen in quite some time. I know you mentioned just demand on commercial aircraft being down. Any additional color?

Yes, the only other earnings dynamic that I mentioned is there was a write-off of $1.1 million related to a specific customer and a pending bankruptcy there. I would say we still believe we will see recovery in the second half of the year both top line and from a margin standpoint. It tends to be lumpy on a contract by contract basis as far as what we realized from a margin standpoint. And some of the weakness we saw was on contracts that we tend to do a little bit better on.

Great. Thank you very much.

Ken Herbert

Canaccord. Hi, good morning, Rick and Jeff. Just wanted to ask, you talked a few times, Rick specifically, about the military market and the spares market in particular. What's your visibility for the rest of 2016 and into 2017 and do you see specifically on the military spares, do you see that business bottoming anytime soon? Or do you think this is going to be down again into your FY17?

Our visibility is in fact limited in that regard. It's the only segment that we have that does not have a backlog. Our backlog is essentially what comes in in the 30 days between when we start working on a project and out. So our visibility is in fact less.

But our customer base, that tells us that we are. We should see some sort of a pickup toward the end of the year. And as Jeff just said, that's what we're counting on and I don't think we'll see further deterioration of our sales in that area for the whole segment. But we don't have a lot of visibility in our commercial and/or our military business that we do in that segment. What we're doing now is we're estimating that that will increase and that's what our people are telling us.

Okay, that's helpful. And it sounds like just broadly, you've got specifically on the cash flow side and then of course as well as on the earnings side, an earnings and sales side, a recovery factored into the guidance in the second half of the year. What would you identify maybe as to how well you think that's derisked? Do you think that there's specifically some other areas that could potentially surprise to the downside? Or how do you think about the second half risk with what's embedded in the guidance and the recovery that's baked in?

I really don't see any further risks in the marketplace. Again, we thought long and hard about whether we'd keep our earnings per share guidance the way it is and we feel confident that we're going to reach that. We have some work to do. We have to take more costs out of the business, it's very clear.

And what we feel good on the wins that we had so far. We've never focused before on those wins but we've had some people say oh my God, your business is going away. Well, it is not.

Our business is actually very strong in certain areas and our customer basis speaking to us that they want to grow with us and they need us to succeed also. So there's nothing that I see other than properly executing our taking cost out of the system and properly implementing our tactical issues on the consolidation of locations and reduction of footprint.

Yes, Ken, on the cash side specifically, we're also working on a number of fronts to drive working capital out of the business. And as we think about those initiatives, I think timing ends up being the dynamic that we're going to pay very close attention to. We're very confident in being able to achieve what we put forth. But there's a lot of work to do in different agreements with different parties to make sure we get there. And a lot of it then also is ensuring we take the cost out of the business that we're projecting to be able to take the cost -- to take out.

Yes, okay. That's just to my final question. Historically, you've built a company that's tended to give a lot of autonomy and entrepreneurship to the different operating companies. Clearly the supply chain issue, strategic sourcings, other things you're taking more out of a necessity perhaps more of a centralized approach.

To what extent are the various Triumph companies on board? What resistance are you facing? And how might that impact timing of some of these initiatives you're pushing?

Starting with your last question, I don't think it's going to change any of our timing in regards to our initiatives. What we're attempting to do is maintain the entrepreneurial spirit within the Company at the same time, maintaining the accountability at the local level.

But in many cases such a supply chain and some others, the individual locations have been slow to realize that there are centralized, to use that word, issues that we can deal with going forward that will take cost out of the system and do a better job of taking advantage of being part of a larger company.

And that's exactly what we're trying to accomplish due to the individual locations like everything that we pushed down that would be very naive to think that that would be the case. But I think we're overcoming that. I think that our people realize the necessity to change some of the thinking, think more on a lean basis and take cost out of the system and they realize that has to be done.

Alright. Thank you very much.

Michael Ciarmoli.

KeyBanc Capital Markets. Thanks and good morning guys. Maybe just to stay on the line of questioning that Ken was on there. Looking at that second half short of acceleration to maybe meet your guidance, you talked about the end marketplace, Rick, but what about internally? You guys clearly got a lot of balls up in the air; cutting headcount, cutting facilities. Is there any risk of an internal disruption as usually created when these things take place where you might not forecast or see some internal disruption coming and that being a threat to the forecast at all?

I don't know how to answer that question because I don't see that. Is there a challenge that some of the costs that we're projecting? And we've met with every single company President within our organization and they have made presentations on how much cost they will take out of their companies. And the Vice President on the Senior level within the Corporation have done the same thing and we're in the process of pushing some more savings in certain areas.

We've talked to some of our suppliers outside of the commodity suppliers, to reduce costs. And I think that will that cause some disruption? It will cause some challenges within the organization. I don't think it will cause any issues in regards to them taking their eye off the ball and accomplishing what they have to accomplish.

It's always a tough issue. I'm not belittling the challenge, but I don't think it's going to disrupt the organization in doing what we have to do and that's serving the customer and getting the job done.

Okay, fair enough. And then just on -- you're obviously making a lot of changes as well. You just made the acquisition of Fairchild. What changes on your integration process as you go through future acquisitions?

It's become clear that there's a lot of overhead and room for facility reduction, headcounts. So did you do anything differently as you look to integrate Fairchild here?

I don't think we'll do anything differently. I think that as a referred to in some of my remarks, Fairchild is a perfect example of a bolt-on acquisition in that we're already in the thermal business. And I think that the synergies and the things that we can do together with those two companies will be significant.

We've said before in regards to acquisition, that we're not going to make a lot of acquisitions and the acquisitions that will be made will be relatively small in nature, and of a bolt-on nature going forward. And we're looking at no large acquisitions and very few even smaller acquisitions until we achieve what we want to achieve tactically and strategically.

Got it. And then the last one I had. Earlier in your prepared remarks, you talked about some recent acquisitions, the track record, but you also talked about deals that have not worked. You fixed issues or you are fixing issues. Can you just elaborate there?

I mean it sounded like with some of the recent deals, whether it's GE or Goodrich, the pumping control business, they've all been going well. Can you just spell out which acquisitions have caused problems and maybe what those issues are?

Well it's clearly much easier to talk about the acquisitions that have been very successful. And the reason that we've called out the GE acquisition, the Goodrich acquisition and things like that, because it would be, they have been very very positive and I think we wanted to make everybody very aware of the fact that those have been very good acquisitions for the Company.

We've had a few relatively smaller companies made in the last couple of years that have been less successful than we had projected. We do have -- we're making some major changes on moving product for example, from a company that we acquired in England and we're moving product to a low-cost production. And that will take place over the next probably year, or a little more than a year, to get that fully in place and become as profitable as we expect it to be. Right now, we're not on -- we're in the negative end of income in that area and that's a concern to us.

And there were issues that were some minute and some major issues that happened in that acquisition that we're still working on. I don't necessarily want to get into every little issue there but we're trying -- what I was trying to do in those remarks is, come up and say where we've had some problems, customer facing issues, and hiring a new Senior Manager there and some of the acquisitions that haven't done well.

That's helpful. Thank you very much

Also some that have done very well.

Got it. Thanks, guys.

Steven Thal.

Thanks, good morning. Royal Bank of Canada. First, just a follow-up on the development spending. If we take what you said on FY17 and we take that receipt and net it out of the neutral, is that what we can think of as development spending going forward? Or is there somewhere that it makes a step change up or down based on where either you see global or E2 moving?

No, we're looking at completing development on both of those programs in FY17, Steve.

So that goes to then pretty low run rate, close to zero after that?

Correct.

Okay. And then stepping back on the cash flow picture overall, do you have a sense of, maybe excluding Gulfstream, where you think free cash flow bottoms for the entire group? Are we there this year or do you think it's going to be in a future year?

Yes, I think -- we're not going to guide towards future cash at this point in time, but we've tried to call out those elements that will still impact what ultimately should be a run rate. It really is, as you mentioned, the spend we'll see in FY17 the G650 and G280.

It's the negative cash that we've talked to on 747 that we still have in front of us. You're then really dealing with increasing from a cash tax perspective and what we choose to do around funding the pension plan. But beyond those elements, I think you could start thinking of getting closer to what should be a run rate expectation from cash.

Okay. And then on 777, Boeing announced on its earning call that it would consider a rate as seven a month. How significant would that be as a negative for you all maybe in terms of cash or EPS impact?

Yes, we're at a rate of 8.3 a month right now. What we see and everything we've heard from Boeing is we don't see a risk in the near-term of a rate reduction. We think it's still a ways out.

The one dynamic we have on 777, when we get out into lat FY17, FY18, is we do end picking up additional share on the products reproduced in Aerostructures. So is where we are dual-sourced today, an agreement we made going back to last year with Boeing converts us to the sole-source on those products that we think would at a minimum, offset any rate reduction risk and potentially drive and little additional revenue for us. So from a cash earnings standpoint, I don't think there's a significant level of risk if Boeing chooses to reduce rate out a couple of years.

Okay and then a final question. I didn't see anything in the release on share repurchase. I'm guessing you didn't repurchase any shares in the quarter. If you look at the value of your stock price today, maybe vis-a-vis future bolt-on acquisitions, how do we think about what you might do on the share repurchase front?

And then, if you can maybe just also remind us of any upcoming significant debt paydown that you've got? Help us think about cash deployment versus debt reduction.

Yes, on the latter half of that question, the only debt paydown that we have in front of us still is just the paydown on the term loan. We have no debt coming due in the next couple of years. Our credit facility comes due in FY18. So nothing significant there.

On share repurchase, as we've consistently said, we're going to continue to be balanced in our approach to capital deployment. It's going to be balanced with ensuring our balance sheet is maintained at a level we're comfortable with. The last couple of quarters, the leverage within the business due to the cash use we've seen, it has been higher than where we would like it to be and we're going to continue to evaluate all those factors. We built into our plan a certain level of share repurchase and we're continuing to evaluate it.

Thank you.

Steve Levenson.

Stifle. Thank you. Good morning, Rick and Jeff. I think you mentioned in your comments that you might complete the 747 program early and I'm guessing you're looking forward to that. But would that be because you build out the last units early to help bone with the transition or is that because they don't have all the units you have under contract in backlog yet?

That's a question really you're going to have to ask Boeing because they're the ones that have chosen where they're going to move it. They've announced that they're going to move it to Macon.

We have a hard time answering that question because we're not familiar with their total customer base in that regard. Russian Airlines have recently filed for bankruptcy and they had some of those aircraft in there and we really don't know what's going to happen in that regard. So it's really more of a Boeing issue than it is a Triumph issue.

This is probably one that there's a little bit of hope they don't sell all those planes we have under contract, Steve.

Okay. Do they still have to pay you for those units then?

No, but what it does for us if they don't sell all these units, is we don't spend the money and incur the losses associated with them which if we didn't have to build all of the units, that gives us the opportunity to recoup some of the forward loss we took.

The other dynamic is trying to work with Boeing to see if we can build ahead if they do sell all those aircraft and that creating some potential benefit for us if we can get out of the production earlier than what we're currently projecting.

Okay, thank you. And then one on 777X, are you in the hunt there for increased content or things changing that could keep you out of competition there?

No, we're continuing to pursue a number of different pieces on 777X. We knew based on Boeing decisions of pulling some work in house that we would have some impacts on the structure side of our business where they've made some decisions that will have some impact on our content and structures. At the same time, we're seeing other opportunities Boeing's presenting to us that could more than offset some of the losses we're seeing.

Got it. Thank you very much.

Are there any additional questions? Since are no further questions, this concludes the Triumph Group's FY16 second quarter earnings conference call. This call will be available for replay after 11:30 AM today through November 4, 2015, at 11:59 PM. You may access the replay by dialing 888-266-2081 and entering access code 1664229. Thank you all for participating and have a nice day. All parties may now disconnect.