Triumph Group Inc (TGI) 2016 Q3 法說會逐字稿

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

This call is being carried live on the Internet. There's 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 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 the 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 this call is the property of Triumph Group Incorporated, and may not be recorded, transcribed or rebroadcast without any explicit written approval.

At this time I would like to introduce Daniel Crowley, the Company's President and Chief Executive Officer; and Jeffrey McRae, Chief Financial Officer and Senior Vice President of Triumph Group Incorporated. Go ahead Mr. Crowley.

Thank you, Cat. Good morning, and thank you all for joining us to discuss Triumph Group's earnings results for the third quarter. I'm really honored to join Triumph Group as President and CEO and represent the 14,000 men and women of our Company who support our nation's military in the world's premier commercial aviation companies. It's exciting to lead Triumph, and I'm really appreciative of the confidence of the Board in selecting me to succeed Rick Ill as President and CEO. Rick's many contributions as Founder, CEO, Chairman and Board member have helped create a highly respected and capable company.

Now since my appointment as President and CEO of Triumph earlier this month, I received a warm welcome from the team and from our customers, and used my first few weeks to hit the ground running. It's been a pleasure to speak with many of the analysts and inspectors who follow and own our stock, and reconnect after our past work together. Your questions and observations are helping to shape my perspectives as I lead Triumph towards predictable profitability. I believe you'll find myself to be one based on the principles of engagement, candor and transparency.

Now, before Jeff walks you through the third quarter results, I'd like to share my initial impressions and some early thoughts on transforming our Company. My early reviews and travels reinforced my rationale for taking the job. Namely, that my experience and background align very well with the work that Triumph does and what's needed to position the Company for success. I will draw upon my experience leading many large and complex aerospace and defense programs at Lockheed Martin and Raytheon, two of the premier Tier 1 OEMs, to drive operational improvement and growth at Triumph.

Having spent most of my 32-year career in manufacturing, I'm very familiar with the ins and outs of Triumph's products and factories and the OEMs we serve. I won't need much on-the-job training on the product side.

The lessons I've learned running multi-site, multi-billion-dollar businesses apply directly to Triumph as we pursue integration, rationalization, and updated growth strategies. I look forward to enhancing customer satisfaction and driving shareholder value in my new role, drawing from a playbook that has worked well for me in the past.

Since onboarding this month, I've had productive meetings with our largest customers, analysts, investors, my senior leadership team and many Triumph team members that have helped shape my 100 day plan. Upon arrival I immediately established a new battle rhythm of operational and strategic reviews that underscores the close attention we will pay to commitments and accountability. My senior leadership team and I conducted our first set of business reviews this past Monday covering all of our product lines, and we identified areas where we can improve our performance from quality to on-time delivery, inventory and cash management, and our new business pipeline.

As mentioned in the earnings release, we initiated a top to bottom strategic review that will form the basis for any portfolio changes, strategy updates, organizational redesign, and ultimately improve company performance. I meet weekly with the Triumph Transformation Team, or T-3, leaders driving this effort. A team with participants from within and outside the Company to challenge the status quo and make decisions based on facts and data.

A few of these changes such as supply chain optimization and excess facility closures are already underway and will be expanded to other areas of the Company. I expect to complete this comprehensive review within my first 100 days, seek feedback from our Board and immediately take action where possible, so that we can start FY17 on stride towards predictable profitability.

Now here are a few insights and imperatives coming out of this review. First, while Triumph has had industry-leading growth rates over the last two decades, we have the opportunity to build a better company, not just a bigger one. Delivering on customer commitments will be my first priority. The transformed Triumph will be characterized by performance well above what is considered acceptable today, with higher levels of quality, on-time delivery and aftermarket support. From our recent calls with our OEM customers, I know they demand, and we owe them, nothing less.

Second, we need to improve our financial performance, especially operating margins and free cash flow. While we compete in healthy markets and deliver good operating returns today, we need to right-size the business, eliminate overlaps and return all red programs to green to improve margins and generate the cash needed for growth. Triumph's traditionally decentralized structure will evolve to one that is more connected and cost efficient, where the whole is more valuable than the sum of the parts.

Third, we need to accelerate our organic growth within each business and across the Company, through focus on cost competitiveness, higher value-added solutions, and increased collaboration. We will create a more integrated company that benefits from our scale and leverages both operational and go-to-market synergies. By tapping Triumph's entrepreneurial spirit to meet our customers hardest challenges, we can grow our backlog and invest in our future.

To ensure that we invest our discretionary resources in the areas of highest return, we will assess each business' ability to compete and win and the relative attractiveness of their markets. Our strategic review will identify actions we will take to strengthen our portfolio and drive profitable growth.

Though I'm only a few weeks in, I see several trends they give me confidence in Triumph's future. First, we are beginning to see the results from the cost saving initiatives Rick and the team implemented over the past nine months. This is most evident in the aftermarket and aerospace systems segments, which delivered strong margin growth in the quarter. We will accelerate these cost reduction initiatives and deploy them as standardized best practices across all of our business segments.

Second, by starting to break down silos within our company, my team and I have already surfaced opportunities to work better together, to close out development program risk, reduce cost, and offer combined solutions. We will take a one company approach to completing major development programs in aerostructures, and given our broad capabilities and over $2 billion of outside spend, we're revisiting our make-or-buy policies, with an eye towards reducing dependency on more expensive suppliers and optimizing our spend on raw materials, hardware, shipping and infrastructure.

The third area of strength that I see is Triumph's talented and experienced team. Over the past three weeks I've met many employees who are excited about updating our operating philosophy and working as one Triumph team to integrate previously separate businesses and win together. They know it won't be easy, but those I've met so far are committed to the true spirit of the word triumph to achieve victory over the course of a long and challenging contest.

Now over the next few months, we will complete our comprehensive review of the Company and define the actions we must take to deliver enhanced shareholder value. I have the full backing of the Board to look at all options and we'll deal with our challenges head-on and quickly. I'll work with my team and the Board to formalize our detailed plan to drive Triumph forward and share our progress as we go. I look forward to your questions today and hearing your feedback on our plan to transform Triumph in the months ahead.

I'd now like to ask Jeff to provide more details for the third quarter and a review of our financial results. Thank you.

Thank you, Dan, and good morning, everyone.

Turning to page 6 of the slides. I'll start with the review of revenue and earnings for the third quarter. Net sales for the third fiscal quarter were $913.9 million, down slightly from the prior-year period, with organic sales declining 11%, primarily reflecting lower deliveries on certain key aerostructures programs.

Operating loss for the quarter was $126.3 million, which included a non-cash impairment charge of $229.2 million related to the Vought trade name, and a charge of $12.4 million pre-tax related to legal settlements, of which $10.5 million was related to the resolution of the previously disclosed lawsuit regarding the closure of the Jefferson Street facility.

During the quarter, we performed an interim assessment of the fair value of goodwill and intangible assets due to indicators of possible impairment, such as decline in our stock price along with prior production rate reductions and previously noted delays on our development programs. Based on our evaluation, we concluded that the Vought trade name had declined to approximately 50% of its carrying value, resulting in a non-cash partial impairment charge of $229.2 million.

Excluding these impairment and settlement charges, operating income was $115.4 million, reflecting an operating margin of 12.6%, and net income was $68.6 million, resulting in earnings of $1.39 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 million, resulting in a 13.9% adjusted EBITDA margin.

Now looking at our segment performance, sales in the aerostructures segment for the third quarter was $553.6 million, which included revenue of $89.6 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, the A330 and G450 and G550 programs, and the end of recurring production on the C17 program.

In addition, there were approximately $27 million of shipments that were deferred to the fourth quarter due to a supplier quality issue that has been corrected in January. While the aerostructures segment continues to be impacted by the sunsetting programs, we remain focused on improving execution and expanding margins.

Excluding the revenue associated with the 747-8 program and the nonrecurring charges, the segment's operating margin for the quarter was 10.6%. We are confident in the strength of the underlying aerostructures business and recognize that there is plenty of room to drive improvement. Aerostructures adjusted EBITDA for the quarter was $54 million, and an adjusted EBITDA margin of 10.2%, and included a reduction of $22.9 million for the amortization of the fair value of contracts associated with the Tulsa programs.

With respect to the 747-8 program, Boeing recently announced they will be lowering the production rate on the program to one airplane every two months to match supply with near-term demand in the cargo market. We will be working with Boeing regarding their expectation for implementation of the rate reduction, as well as the timing of the transition of our work scope on the 747-8 program to their Macon, Georgia facility and other suppliers. It is premature to project what the outcome of these decisions will yield. In the meantime we continue to look for ways to mitigate performance risk and drive improvement on this program.

Additionally, Boeing has announced a rate reduction on the 777 program from the current rate of 8.3 units per month to a rate of 7 units per month. This is in line with our expectations, and we will have minimal impact on our near-term financial performance. Looking forward, the rate reduction will also be mitigated based on prior agreements with Boeing that will shift 100% of production requirements to Triumph and certain elements our work scope.

The next slide shows the cash flow profile for the Gulfstream G650 and G280 wing programs. We continue to be pleased with the performance on this programs in Tulsa, as well as the transition of the work currently being performed by Gulfstream to our Nashville, Tennessee facility. Both programs remain on schedule from a delivery standpoint, and we continue to see improved labor and quality performance.

The actual cash use for the quarter was $38.7 million, which included roughly $15 million of one-time inventory build, as we progressed the work scope transition on the G650 program to our Nashville facility. We remain confident in turning the program 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 closely with Bombardier on the development of the wing for the global 7000 and are pleased with the progress and still believe strongly in the long-term outlook for this program. During the quarter, development related spending was $35.1 million, which was slightly higher than our expectations as we are applying the critical resources required to ensure the program success.

The Embraer E2 Jets program has also continued to progress well, as we've reached a key milestone with the delivery of the first fully joined fuselage on-time to Embraer. During the quarter, the development spend on the program was $17.8 million. We remain on schedule to complete development efforts on both programs in FY17, and project that we will be roughly cash flow neutral during FY17, with receipts from customers offsetting the estimated spend as we work to complete the development phase of the program.

Moving on to our aerospace systems segment, sales for the third quarter were $288.3 million, compared to $279.2 million in the prior-year period, an increase of 3%. Organic sales were essentially flat as compared to the prior-year period, reflecting continued softness in commercial rotorcraft demand as well lower non-aviation review, offset partially by a higher level of aftermarket spares.

Aftermarket represented 18.3% of revenue in aerospace systems for the current quarter, versus 17.4% for the prior-year quarter. Third-quarter operating income was $52.8 million, an increase of 26% as compared to the prior-year period, with an operating margin of 18.3%. Adjusted EBITDA for the quarter was $54.9 million at an adjusted EBITDA margin of 19.7%.

Continuing with our segment performance overview, sales in the aftermarket services segment in the third quarter were $78.1 million, a decrease of 3% from the prior-year period. Organic sales for the quarter declined 6%, primarily due to decreased demand on commercial aircraft.

Third-quarter operating income was $12.4 million, with an operating margin of 15.9%. These results did include the legal settlement expense of approximately $1.9 million. Excluding this charge operating income was $14.3 million, with an operating margin of 18.3%. Adjusted EBITDA for the quarter was $16.8 million, with an adjusted EBITDA margin of 21.5%.

Turning now to backlog. Our backlog as of December 31st was $4.53 billion, a 5% decrease year-over-year. Due to the known declines in key aerostructures programs as well as the timing of orders in other commercial and business jet platforms.

Triumph is a company with a strong portfolio of products and customers served. We continue to evaluate opportunities to enhance the competitiveness and profitability of our business segments, and are confident that we will continue to compete and win business at all levels of the aerospace supply chain, as demonstrated this quarter with a strong margin generation in our aerospace systems and aftermarket services segments.

Now turning to the balance sheet and the next slide. We generated $3.7 million cash flow from operations in the quarter, which reflected the continued spend on development of programs, as well as the 650 and 280 programs and partial payment on the legal settlements. Inventory at December 31st reflected an increase of $381 million during the fiscal year, which included approximately $171.2 million attributable non-recurring investment in the Bombardier and Embraer programs, $35.5 million of reduction of advances from customers, and $65.2 million in net spending on the G650 and G280 programs.

As previously mentioned, some of the growth we're seeing is associated with build ahead of product in connection with the transfer of work currently being performed by Gulfstream on the G650 program in Savannah to our Nashville facility, as well as the transfer of work between businesses as part of our strategic initiatives.

Capital spending was $63.4 million-year to date, and net debt at the end of the third quarter was $1.6 billion, representing 43.2% of total capital and total debt-to-trailing-12-months adjusted EBITDA was 3.47 times. We did not repurchase any shares under our repurchase authorization or make any voluntary pension contributions during the quarter.

The global effective tax rate for the quarter reflected the fact that the R&D tax credit was retroactively reinstated back to January 1st, 2015. In addition, the income tax expense for the quarter was favorably impacted by the true up of our financial statement tax expense to the actual tax return was filed in December. From a cash tax perspective, we now expect minimal cash tax to be paid in FY16. The Q4 effective tax rate will be 31.5%, and reflects the fact that the R&D tax credit was made permanent.

For the full fiscal year, we are now expecting revenue to be approximately $3.9 billion, and earnings per share for the fourth quarter to be approximately $1.50 per diluted share. This guidance does not include any potential cost resulting from our comprehensive business review, or the impact that may result from transitioning to lower production rates on the 747-8 program. We expect to generate free cash flow in the fourth quarter of between $200 million and $250 million, reflecting significant improvement in working capital and earnings, demonstrating the initial impact of our cost reduction initiatives.

And with that, I will turn it back over to Dan. Dan?

Great, thanks Jeff. I'd like to open it up now for questions.

At this time, the officers of the Company would like to open the forum to any questions that you may have.

(Operator Instructions)

Seth Seifman, please state your affiliation, followed by your question.

Thanks very much, and good morning, from JPMorgan.

Dan, maybe if you could just talk a little bit more about your plans and your review? And I don't know if the timing might be better next quarter, but just to share a little bit of initial thoughts about where you are seeing kind of the core competencies lie here, and any targets you might be thinking about?

You bet. Certainly, it has been a great onboarding because I have been drinking through the firehose and I learned a lot about the Company before I started, during my countdown period. But once I got inside the firewall, I had full access to all the program and financial operational data. So, I have been pouring through that.

My goal is to use a facts-and-data approach. I have no biases towards any business. Being an outsider, I wasn't involved in building the Company, so I can look at them, I think, with an unbiased eye.

And so, I have asked for detailed data. We have a team, that I mentioned, the Triumph Transformation Team, that is going through financial performance, operational performance, looking at the markets that we serve. You can imagine, with 47 companies across 73 locations, there's got to be a logical grouping of those businesses around natural markets, and then assessing what the health of those markets are from both the size and growth rate and profitability, as well as how all of our businesses can compete within that market.

I'm looking at win rate data; I'm looking at performance to program EACs; we're looking at cost of poor quality, and all of these things give us a complete picture of where our businesses stand today. Once we have that data, we can begin to make decisions about portfolio, about organization, about consolidation, but I first want the facts and data. It won't take long to get it, and we're going to move with a sense of urgency, but we will be informed by the data in making the right decisions to shape the future of the Company.

Great, thanks very much.

Maybe as a quick follow-up for Jeff: The rate cut on the 747 -- does that have any impact on the transition plans for you to move that work to Boeing?

Yes, at this point, it's too early to tell, Seth. We're in discussions with Boeing, and reviewing with them all of the options. Until we have a firm understanding of their expectation on our timing of transitioning to a lower rate, as well as the timing around transitioning the work to their Macon, Georgia, facility, we really don't know what impact it might be.

Thanks very much.

Sheila Kahyaoglu, please state your affiliation, followed by your question.

Hi, it's Jefferies.

Dan, congratulations on your appointment, and it is clear you have studied the Company, so we appreciate you sharing some of your initial plans.

I guess just to follow up on Seth's question a bit, the Systems and Services businesses did have a good quarter on low organic growth. Can you talk about some of the best practices you have found throughout the Organization?

Sure. As you can imagine, I haven't hit all the locations yet, but I have been out to several. What I found, particularly in our Systems business, is they have the design ownership of a number of their products. And that intellectual property really helps because we can add more value to our customers.

We can look at, not individual components, but a subsystem approach. Because we influence the design, we can have more control over the supply chain, and drive economies through that, as opposed to when you are primarily in this build-to-print contract manufacturing, and the designs are largely specified. So, I like that feature.

Last week, I visited our engine controls facility in West Hartford, Connecticut, and it's really an impressive shop. Very tight operating system; a full, lean deployment from the Company goals all the way down to the factory floor. All functions have visible metrics. I was very impressed with the engagement with the workforce.

I'm not ready to declare them the best practice, but it's really a tight system that I think we can replicate at other companies. And that's one of my goals is I want to have Triumph firing on all cylinders. And if we can bring the level of performance across all of the locations up to the same level across each domain, we can really have a high-performance organization.

You bet.

Jeff, a follow-up for you: On the 777, you mentioned minimal impact from the rate decline. Can you elaborate a little bit on that? And would you have more [scope] as part of the contract?

Yes, really two dynamics here. We had previously reached an agreement with Boeing that would allow us to take over 100% source on elements of 777 that we are currently dual sourced on. So, ultimately, with the rate reduction, we still are able to mitigate the top-line impact as we take on a higher percentage of the work scope.

The other element is, as we look at 777, and the facilities where we produce the major elements for 777, unlike 747, these are facilities that are multi-program-based facilities that we have much greater ability to manage through rate reductions on any single program, and manage through any absorption type dynamics that we might have. We think we will be able to manage through the top line with taking over full sourcing. We think we will be able to manage through any margin impact within those two facilities through ensuring that we are managing cost effectively.

Thanks.

Sam Pearlstein, please state your affiliation and your question.

Wells Fargo. Good morning.

Jeff, I want to go back just on the 747 -- just in terms of -- is your agreement with Boeing based on a certain unit number, or is it based on a certain time, or is it just not definitive in terms of the agreement to move the work back?

At this point, as we've talked before, we have a defined contract that takes us out through a specific ship set. That said, we've also been working with Boeing on defining the transition to their facility in Macon, Georgia, as well as supporting their efforts of moving other elements through the supply chain.

I'd like to comment as well, Sam. We have a strong partnership with Boeing. They represent some 7 out of the top 10 programs at our Aerostructures group, and many of our Systems group as well.

I've been on the phone with senior leaders at Boeing over the last few weeks, as I started my new role, and we've talked about the Boeing partnership for success. And they understand that we want to make a decision that is in the interest of Boeing, their customer, and Triumph, and we would like to invest our discretionary funds in helping them win new business. I like the level of dialogue we're having. And while there is working teams that are assessing the best plan to make the transition on 747, we are having a broader discussion with Boeing about how we can partner in the future.

Okay, that's great.

And then, if I could just follow up, in terms of the cash flow projection for FY16, it looks like -- given what you say you're going to do in the fourth quarter, it seems like you're about $40 million or $50 million less than where you were originally guiding, especially if taxes now look like they're less. What's shifted there?

It's really a couple of things. We are seeing a little bit increased spending on the development programs, as we are applying the resources required to ensure that we are driving success on those programs. We're also seeing shifting in some of the working capital improvement that we have been targeting that I would generally define more as timing than anything else.

Thank you.

Thank you. Cai Von Rumohr.

Dan, let me joint everyone with congratulations.

You've just started taking a quick look. From what you've seen, do you feel that Triumph's 42 divisions are too decentralized, and might benefit from greater consolidation?

The answer is yes, from what I've seen. Granted, I still want to see all the sites, and finish the forensic, but we have a number of sites with sort of a common capability or addressing a similar market, and this is where we need to look at whether we can gain both cost and go-to-market synergies.

I don't think it's a matter of centralization, Cai; I think it is more a matter of standardization. There are a number of things that occur out in the businesses that I think are duplicative, and I really want my businesses to be outward-facing, engaging customers, developing solutions, and executing on their commitments. And a lot of sort of the back-office infrastructure processes, I think, can be made common, and achieve both higher quality of service and more affordability.

This is a bit of a shift in the operating philosophy. It is something I'm going to be engaging all of my leaders in talking about and moving forward on. I think we reached a point where we have grown, and we have the scale or the size, but we don't have all the benefits of scale. So, that is what I'm after.

Dan, that's great, and just one last one: How are you going to approach the process of deciding what changes might be in order or might be beneficial?

Sure -- as mentioned, facts and data. When we have the information on all of the companies, all of the sites -- we are looking at utilization, occupancy costs, whether or not they're in markets that are growing or contracting. What's been their performance on programs?

It is a really rich data set, so that we make the decisions that take the Business in the right direction. We'll have this data in the March time frame, and be working towards recommendations to the Board in the April time frame.

We have the data. It's a matter of bringing it into focus, and then doing the trades in terms of which areas have the potential for the highest returns and which divisions are the most competitive in their markets. That's the way I intend to approach it. And having met with my senior leadership team at our first off-site after the first week here, they are on board and already thinking about the best way to reshape the Company.

Terrific. Thank you very much.

Thank you. Myles Walton, please state your affiliation, followed by your question.

Thanks, good morning -- Deutsche Bank.

Maybe just to lead off, maybe I missed it, too -- the sales outlook for the year, $3.9 billion, it's a tick down from where it was, and even that level -- in precise terms, $3.9 billion, would seem like a pretty high hurdle to achieve. So, if you can talk about the drivers to the lower outlook, and then the pathway to the $150 million or $125 million sequential growth?

So, Myles, the $3.9 billion is at the bottom end of the range that we have been providing during the year. It is reflective of the continued softness we have seen in commercial rotorcraft, as well as in broader aftermarket, primarily seeing it in our third-party aftermarket business, where we thought we would see more growth there and recovery during the year.

We've also seen some impact, although it's not as significant within our Business, in non-aviation sales, which primarily is a direct impact with oil and gas. So, those things, all combined, are driving us to the lower end of the range.

We are seeing a strong fourth quarter, which is historically in line with what we've seen, where you'll have roughly $1.1 billion brought in during the fourth quarter.

Myles, I'll only add that this is why I made increasing our organic growth one of my top three imperatives, because we can do better. We have been contracting in that category. We have a lot of great capabilities, and the overall market that we participate in does have a positive growth rate. We ought to be growing as well, so you will see a laser focus on that.

So, on that theme of growth, you obviously have some specific items that directly work against you, and are pretty significant in size and scale that will probably preclude you from having organic growth for the next couple of years, I would imagine. Do you not see that being the case?

I don't see a multi-year headwind on organic growth. There is some process improvements that we can make in defining opportunities, shaping the pipeline, doing very rigorous capture reviews, and then making sure we start programs on the right foot. But the first path to growth is through execution. And we have a number of programs that we need to improve our performance; and when we do, these customers have follow-on work to give us.

I have met with the head of procurement at Airbus, at Boeing, my counterparts at Gulfstream, Northrop Grumman, and they all want to see Triumph deliver on our commitments and have more work for us. And of course, acquiring new customers or going to farther adjacencies is always more difficult than just working and partnering with the customers you've got. So, that's my initial focus, and there is work out there to be captured. It starts with performance.

And, Jeff, on the Global 7000/8000, how do we get comfortable that -- I hear that you want to put resources towards ensuring that everything is on scope and on schedule, but you are clearly running well ahead of where the pace would otherwise have been contemplated. How do you get comfortable that [2017] -- on net basis, everything normalizes, and this kind of, whatever, $200 million, $175 million growth in inventory net doesn't persist?

It's all about execution on the development activity. As I look at it, we are completing a number of the milestones on both the Bombardier and Embraer program, one of which we announced with the delivery of the first joint fuselage in Embraer.

It is paying close attention to the progress, to the completion through a number of checks through the process. And I think, as we go forward, we're going to be paying very close attention to it. And at the same time making sure that we bring the right resources to bear, so that we get it right on those programs.

To get to neutral, is it that the 7000/8000 actually is positive, and the E2 still has another year of growth?

They are both roughly neutral from a spend being offset by milestones from customers.

Okay, thanks, guys.

Thank you. Ron Epstein, please state your affiliation and your question.

Ron Epstein, Bank of America Merrill Lynch. Good morning, guys, and welcome aboard, Dan.

Just a really big-picture question, be it that it is still early days for you: When you step back and you look at Triumph today, what went wrong?

We are a large Company with -- generating good op margins, so we are not a broken company. But what I will say is that, after the Vought acquisition, the Company had a great three-year run as some of those programs came to completion. There hasn't been a rapid enough replacement of that revenue, and that has contributed to some of the sales and margin pressure that Jeff has outlined.

Having said that, we have good franchises in Aerostructures. The transition out of Jefferson Street to Red Oak was the right thing to do. It is a very modern plant. We are putting in new practices there that allow us to be more efficient.

The programs that we are going through are more in the development phase, so we have had a mix change from the traditional 747, C-17, V-22 production work, towards development programs like Bombardier, G7000 and Embraer. So, it is natural that there is some margin pressure there.

But we are excited about our role on the 7000. I don't know if you have looked at any of the marketing data on that platform, but it is an amazing aircraft that is really going to change that segment, and we're glad to have the key role of producing the wing on that.

Similarly with the Embraer E2, I walked the line, looked at all the initial hardware on that, and we are excited to be on that platform. But we have got to do more to grow that business.

I also view that the Company has now matured, now some 22 years on, and created this very broad set of capabilities, that we have the opportunity to create some synergies that maybe didn't exist before. This is my change in the operating philosophy to really drive a one-company approach, drive out some cost, and start to win together, rather than to go into customers as separate divisions. I think it's more a matter of bringing the Company into alignment, as opposed to fixing it.

Maybe as a follow-on to that, and if it's too soon to answer, that is fine. That's an okay answer, too.

Does it really make sense to have the Aerostructures business and the Systems business under one roof? They really do seem like very, very different businesses.

It's a fair question. What are the synergies within our three segments today? And we are looking at that closely.

Today, they have different customer sets in some of the aftermarkets from maybe the Systems and Aerostructures, which have more of a common customer set. And we'll look for opportunities to do cross-selling, to do more aftermarket support to systems, but this will be part of the strategic review and I'll provide more comment on that on our next earnings call.

But my first focus, Ron, is to make sure that they're performing to their potential. Then we assess their markets, and then we will make the right decisions on portfolio after we've got them running properly and we have a good outlook of the future.

Great, thank you so much.

Thank you. David Strauss, please state your affiliation and your question.

UBS. It is actually [Matt] on for David. Thanks for taking my question, and congratulations, Dan.

General Dynamics talked about G450, G550 rate cuts yesterday. Is that totally reflected in your Q3 results, or is there further stepdown that's on there?

I think we are pretty well lined out with Gulfstream as to projections on rates going forward. We've been experiencing a year-over-year decline there, and we've also built that into our forward view of the Business.

Okay, just one other one on cash, I guess. Looking beyond this year into 2017, how do you think about cash taxes, and then also where your pension contribution could go?

Matt, we haven't guided to cash for FY17. But specific to forward-looking cash tax rates, we will burn through the NOLs during FY16, and become a full cash tax payer in FY17, which we still believe is a rate between 28% and 30%.

On the pension side, any contributions to the pension plan currently would be discretionary. There are no required payments. This year, we had looked towards a potential contribution, but it's all driven by the cash generation and other parts of the Business.

We'll take the same approach next year. And depending on the strategic evaluation of the Business, how we're deploying capital, pension is one of those things that -- it's a choice we can make of whether to contribute or not, if it makes more sense than other deployments.

That's helpful, thanks.

Thank you. Ken Herbert, please state your affiliation and your question.

Canaccord. Again, let me just echo -- welcome, Dan.

The margins in Aerospace Systems, again, very nice this quarter, even with what sounded like maybe a little softer aftermarket demand. Was there anything, Jeff, unique to the margins this quarter in Aerospace Systems in particular?

Anything else you can comment on, on what really drove that? You mentioned earlier as part of the prepared remarks, where you are seeing some of the benefit of some of the other actions you've initiated, but any more detail there would be great.

Ken, first, maybe a clarification: Aftermarket within Aerospace Systems was stronger year over year, where we saw total revenue of roughly 18.4% of the total versus prior year, which was in the 17%s. So, year over year, we did see a little bit more volume there within the aftermarket. That does benefit the margin.

But it's also definitely benefiting from some of the cost reduction initiatives that we've been undertaking through the year. And as we continue down that path, I think we'll continue to see opportunities to expand margin across the Business.

Okay, that's helpful.

I guess to the bigger question -- Dan, obviously this gets to what you've talked about, but with what you are learning within Aerospace Systems and some of the benefits there on the margin, how much of that do you initially think you can apply to an Aerostructures business in terms of best practices, or maybe to get a little bit more specific on some of the synergies and opportunity you might see between those businesses? Obviously, it's early on for you, but any thoughts there would be great.

Sure. Even though the product sets are different between building gear systems, hydraulics, fuel systems, whatnot, compared to some of the large structures, the underlying processes of business development, of doing engineering development and design, supply chain management, factory efficiency -- those processes convey.

And one of the initiatives that I've launched is building what I call the Triumph Operating System that will capture the standardized best practices on how we will operate through the whole value stream. And today I'm seeing best practices at some locations that I think we can lift, as mentioned. And even though Aerostructures might apply that to the production of a Global Hawk wing or an E2 fuselage or the Bombardier 7000 wing, the underlying operating process can be the same.

This is something that has not been the case. All of these companies have different heritages. They required a different timeline, and there hasn't been a singular push to drive standardization, and I think that is a real upside for the Business.

I certainly saw it at Raytheon. Raytheon had, I think, one of the tightest operating systems of the tier 1 primes. I feel very fortunate to have worked there, and been immersed in it and contributed to it, and I see parallels with the Triumph Group.

Okay, thank you very much.

Thank you. Steve Levenson, please state your affiliation and your question.

Stifel, thank you. Welcome, Dan, and good morning, Jeff.

Good morning.

Dan, in your conversations with your customers, can you give us a little bit more detail? Tell us some of the things that you found encouraging, and if you heard things that were in any way discouraging?

Sure. It is a mixed scorecard. I will be straight with you, Steve. Some of the customers that got on my calendar right away have concerns of things they want us to address head-on. There's a reason why I traveled on my first trip to Aerostructures to make sure we are doing the things necessary to recover on red programs there.

Some of the calls were very encouraging. Gulfstream is very happy with the transition of the wing in Tulsa, even though we have a few challenges on one of our Airbus programs. They have additional work that they would like to partner on us with. Honeywell was very complimentary of our support. So, it is a mixed scorecard, and that is directly to my point about getting all parts of Triumph to fire on all cylinders.

It's been my experience that you can make your most difficult and disappointed customer your biggest advocate if you'll perform to your commitments and adopt their agenda. And for some of our big OEM customers, their agenda is quality with no traveled work and supporting their ramp-up rates. For others, it's providing high reliability of the components that we provide in the aftermarket.

So, we are going to get aligned with these customers, and we are going to measure it. It's not just going to be based on sort of a qualitative assessment. I have a process I use to measure customer engagement and support on a quantitative scale, and the breadth and depth of that relationship. But it does start with performance.

I'm optimistic. Most of the customers I've talked to have said -- we like Triumph; we want to work with Triumph; you can do better on a number of programs. One of my first acts was to do a call for all red and yellow programs across the Business, so that we know what they are and we can begin to triage them. And I'm personally reviewing about 10 red programs every week. We are doing 30-minute run-throughs to make sure that the recovery plans are in place, the dates for return-to-green are partnered with the customer, and we're taking the actions required.

And I think that's a new operating approach for the Company. It will help me learn more about where the strengths and weaknesses are. It will also set the tone of how I want to operate, and my expectations on accountability.

Got it, thanks. And one follow-up: In relation to that, do you think there will be any supplier impediments to cost-cutting efforts that include facilities consolidations? And among your big customers, particularly Airbus, now that they have got a new US plant, but they do have a differential between the dollar and the euro, do you see an ability to build business there? Thanks.

Certainly, many of our contracts have terms and conditions that require us to coordinate with customers, should we choose to transition the work. But they all understand this is a dynamic market.

And as we did with a recent conversation with Airbus on one product transition, we explained to them that we're going to create a true center of excellence for that product, and invest in a new building and new equipment. So, they can expect higher performance out of that division. And we've got to manage the transition and mitigate the risks, but they were on board with it, and I expect to have those kind of conversations with a number of customers.

As far as Airbus in the US, it's been a great conversation because their Head of Procurement has an automotive background, and we've talked about what BMW and other companies have done in the US -- what we can learn from commercial supply chain management techniques. So, I think we will learn from our customers and from some of our suppliers. I don't have the notion that I or the Triumph Company has the corner on all the best practices, and so we will learn from other industries, and quickly incorporate them into our habits.

Got it, thank you for your candor.

Thank you. Robert Spingarn, please state your affiliation and your question.

Good morning, Credit Suisse.

Welcome, Dan. I wanted to ask you a couple of high-level questions, based on your answers so far. You talked about a lot of highly sensible steps in managing your programs and performance. Things that, to me, and probably to many others, make a lot of sense, but sometimes it seems odd that these actions weren't taken by the prior team. Would it be correct to draw the conclusion that the reason for that is you need a cultural change?

Through the interview process, I got to know the Board. We have a really strong and capable Board that has run organizations much larger than Triumph. And we talked about culture, and where the legacy Triumph Group has been, where the Vought division acquired in 2010 has been.

What I'm excited about is building a new culture that builds on the best elements of both, but is not the same as either. This will be part of this Triumph Operating System that we'll deploy. There are things happening in both businesses that are areas of strength, but there are also areas that both can improve.

So, culture will be part of it. I've worked in both decentralized and more centralized cultures. There is no perfect model; it really does relate to the unique circumstances of the business. But it's pretty clear that Triumph has been more towards the decentralized model.

I view that as an opportunity, Robert. If I came into the Business and they had already done some of the things that we are going to do, I'd be in a much more difficult spot. But the fact that there is opportunity to build on what has already been created, which is quite remarkable, because you look at Triumph Group growing from $60 million in 1993, 40 acquisitions, a 25% CAGR, and all the amazing capabilities under one roof, it's a great Company. But it can be better, and that is why I'm emphasizing capturing the benefits of our scale.

Following on to that, how do you factor in the restructuring that Rick had talked about over the past year or so that they were implementing before your hiring? And they explained it to us in the past as, we are going to commence on this program, and the new guy is basically going to feather into that. Is that the way this is going to work, or do you really need to clean slate this thing?

I don't think feather in maybe is the right term. I would say accelerate and expand.

And we will be looking at the decisions that we need to take over the next few quarters to favorably impact our future. And some of these have been discussed in prior earnings calls; things that we have been waiting to see how certain programs played out. So, many will not be a surprise to you.

But we are going to go broader and deeper with the change. And we'll be disclosing the cost and timing of any restructure-related charges with you over time, as well as the anticipated benefits. So, I think it's more building on what's been done, and going farther.

Okay. And then just one last one, and maybe a little soon for this, but long term, and I'm sure you've at least thought about this personally, long term, what kind of free cash flow conversion can these two Businesses -- I'm taking about the two larger Businesses. What can they drive?

Rob, it's all about getting past a lot of the headwinds we've experienced over the past few years. And part of what we're doing through the T-3 effort is really looking at all of the levers that we should be pulling to generate cash in the Business. And definitely driving towards a much higher conversion rate, as we get out to a run-rate basis.

But is this ultimately -- if it's operating the way you both want it to, is this 100% conversion business, or is that just not natural here? Is 90% the bogey?

We don't have a number yet, Rob. As you know, there are some implied nuances with some of the fair value of accounting running through revenue and earnings. So, there are some difficulties to get to 100% there, but we are going to drive and pull all the levers that we see in front of us to get that number as high as possible.

And I'll add that we've done some benchmarking on how Triumph compares to our peers in accounts payable, accounts receivable, cash-to-cash conversion, and we lag. One of the work streams within the Triumph Transformation Team is improving our cash management and margin, so you can expect to see progress in that regard.

Thank you, both.

Our next question comes from the line of Michael Ciarmoli. Please state your affiliation and your question.

KeyBanc -- good morning, and congratulations, Dan.

Maybe to stay on that free cash flow topic -- as we think about some of the planned rate increases by Boeing and Airbus here on the 87, the 37, the 320, are you guys adequately facilitized to meet those elevated narrowbody rates, or should we expect to see some level of additional investment going forward?

Our largest content on those programs is in our Aerospace Systems business. And we believe we are fully supportive of both Airbus and Boeing on achieving their rate desires within those facilities, with little or no additional capital required.

Okay.

Dan, maybe just one on the new business: You guys, obviously, premier structure company; Airbus is notably lacking from the portfolio. At this point in the cycle, with so many work packages and scope awarded, how realistic is it that you guys can go out there and get some high-quality business? Should we be thinking about new wins, more build-to-print? I'm just trying to get a sense of expectations about how realistic it is for you guys to go out there and secure wins when a lot of stuff has already been awarded for most of these programs.

It's a good question. The facts are: Airbus, especially the A330 and the A340 -- it represents a substantial part of our backlog in Aerostructures. So, we are a player. They have given us some additional work now in the A350.

And in my conversations with their senior leaders, they want to give us more. They do want to see lower cost, but certainly competitive expectation. But they are also looking for areas where they leverage some of our design capabilities.

Maybe unlike some of the military platforms where you either get in at the beginning, and there's not much of an opportunity to get on the platform, Airbus has the strategy of multi-sourcing many assemblies to reduce risk, to increase capacity. I'm traveling to Toulouse in the next few weeks to meet with their senior leaders. I'm optimistic that we can build on what we have, and grow more.

Sounds good; thanks a lot.

That is all the time we have for questions today. I'd now like to turn the call back over to Mr. Crowley to provide his closing remarks.

Thanks, Cat. Thank you, everybody, for your insightful questions and your interest in Triumph.

I'd just like to reinforce a couple of points. Triumph really has demonstrated an amazing growth rate over the last two decades, and now we are focused on right-sizing and capturing the benefits of our scale.

You heard my top three priorities: delivering on commitments, improving our financial performance, and accelerating organic growth. And we're going to do this with a focus on the highest-return opportunities. All of these are driven towards our goal of predictable profitability.

We're going to build on the improvement initiatives already under way. And as part of our top-to-bottom review of our markets and our businesses, we'll provide the insight we need to transform the Triumph Group and position the Company for the next decade of growth.

My leadership team and I look forward to providing updates in the coming months on the changes we will be making to better serve our customers and shareholders. Thanks for dialing in. Have a great day.

This concludes the Triumph Group FY16 third-quarter earnings conference call.

The replay for today's conference will be available today, January 28, 2016, from 11:30 AM Eastern Standard Time until February 2, 2016, 11:59 PM Eastern Standard Time. Please dial in on either 703-925-2533 or 1-888-266-2081. Please use conference ID 1668039.

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