Triumph Group Inc (TGI) 2017 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 third-quarter FY17 results. This call is being carried live on the internet.

(Operator Instructions)

On behalf of the Company I would now like to read the following statement. Certain statement 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 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 the website at www.www.triumphgroup.com. Please note this call to property of Triumph Group, Inc. and not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, would like to introduce Daniel J. Crowley the Company's President and Chief Executive Officer, and James F. McCabe, Junior, Senior Vice President and Chief Financial Officer of Triumph Group, Inc.

Go ahead Mr. Crowley.

Thank you, Stephanie good morning. Welcome to our third quarter conference call. Triumph's performance continued to stabilize Q3. Building on a solid second quarter as part of our commitment to predictable financial performance.

Since announcing Triumph's One Company integration efforts a year ago, we are ahead of the cost reduction goals for the year. And winning new business at higher rates quarter-over-quarter. We delivered another quarter of improving cash usage as a result of working capital management. However we are updating our full-year cash guidance to reflect delays in customer payments.

As we approach the end of our fiscal year in March, we reaffirm our full-year guidance for revenue and earnings. While integrated systems and product support remain our biggest drivers of shareholder value, we are seeing early benefits of our turnaround efforts in aerospace structures and precision components.

Starting on slide 3, our results for the quarter were in line with our expectations. Triumph generated $55 million in operating income on net sales of $845 million. Net income was $29 million while earnings per share were $0.59. When charges for previously announced divestitures and restructuring are excluded, adjusted earnings per share were $1.01.

We continue to tightly manage cash and used $37 million of free cash flow in the third quarter down from prior quarter levels. Our operational highlights include, continued strong margins and integrated systems and product support, recovery of all corporate level [red] programs and integrated systems, precision components, and product support business areas.

We continue to make progress in aerospace structures. With only two remaining red programs G650 and Global 7000. We've seen improving execution on programs, resulting in a net positive change in our program EAC positions in this quarter. This is an important financial inflection point.

We've only had one forward loss in the quarter limited to a $5 million overrun on an engine component production option that was bid aggressively in 2013. Our backlog remains about $4 billion, in spite of customer rate reductions on several platforms. As we succeed in dual sourcing and takeaways. Triumph will exceed our FY17 cost reduction goals and is now focused on FY18 and FY19 initiatives.

Turning to page 4. We are doing what we said we would to restructure and transform the Company. And are seeing the benefits in the numbers towards our goal of long-term profitability and growth. Q3 was an intensive quarter for the transformation with plant consolidations, divestitures, headcount reductions and lien deployments all happening in parallel.

The bottom line is that we forecast to exceed our FY17 cost reduction goal of $44 million by $12 million. Or about 25% towards our three year goal of $300 million. And we're now developing plans to step up these savings in the out years.

A few highlights. Our five facility consolidations are proceeding. Which will eliminate over 450,000 square feet, and save $25 million annually. With five more planned for FY18. And while our current year earnings reflect the impact of restructuring, the payback on our consolidations is less than 13 months on average.

We continued headcount reductions to match our business base and enhance competitiveness. And we've staffed the senior leadership team, upgraded 8 of our 22 operating Company leaders. And staffed to the four business unit functional teams to drive accountability for performance across Triumph.

Year to date, triumph has included its cash conversion cycle from 71 days to an average of 50 days. The supply chain initiatives we've implemented across all spend categories are now benefiting new bids. During the quarter, we announced sale of the Triumph Air Repair, our APU business in Asia and Tempe. And the sale reflects our objective to divest non-core businesses and shape our portfolio around businesses that align with our long-term strategies.

We've also conducted over 204 lean events and trained over 100 change agents in the third quarter, who are streamlining the way we do everything from closing our financial books to repairing thrust reverses. These events have been key to improving cost, quality, and on-time delivery.

On slide 5 we provide highlights from our business units. Though our large structures programs get the headlines, two business units generate a majority of our Company's shareholder value. Integrated Systems and Product Support. And while our efforts to drive more value out of Precision Components and Aerospace Structures are bearing fruit, Integrated Systems and Product Support are the biggest flywheels of revenue, cash, and earnings for the company. In fact some 40% of Triumph's revenue and 74% of our operating income comes from these two business units.

Let's look at Integrated Systems first. Excluding corporate costs, Integrated Systems generated 29% of our revenue and 57% of our operating income year-to-date. Their Q3 operating margin was 20%, up year-over-year. They participate in a broad array of military and commercial platforms. From aircraft like the A320 and 321 the Boeing 737 and 787, to helicopters, including the CH47 Apache H64 and the UH60. Two engines, including the CFM 56 and leap series.

From hydraulics to gear boxes to landing gear actuators to engine and thermal controls, integrated systems designs, builds, and supports the parts that make take off flight and landing possible. They have roles on programs that are accelerating in rate including the A320 737 and A350 and F35. And they've got significant content in the CH53 program. And are bidding new work on the B21 bomber, [DX] Trainer and M225 refueling drone.

Although [Sparus] has always been a key revenue component, integrated systems is teeming with product support to capture more of the aftermarket for their own systems. And, as customers refresh systems such as the FADEC or Full Authority Digital Engine Controls for obsolescence and capability upgrades we benefit. Integrated Systems is active in dual source opportunities. Including the F35, A320, and A350. All driven by affordability pressures. And we're developing products that were plug-and-play in the new electric aircraft, just as cars are adopting electric steering racks in lieu of hydraulic ones.

We view Integrated Systems as an area to invest. Including product R&D, product line acquisitions and [Niche] Technology firm M&A. So in closing, Integrated Systems is well positioned in multiple markets and platforms. Is driving shareholder value. And is a candidate for growth on dual sourcing and new starts.

Now shifting to Product Support, the demand for aftermarket services is well documented in the press. As thousands of new aircraft enter service each year, this is drawing OEM attention to the $67 billion market. Triumph is already well-positioned in MRO. And is now expanding into longer-term partnerships with OEMs and carriers to ensure aircraft ability and provide top and bottom line growth.

Product Support generated only 10% of our revenue year-to-date, but delivered 17% of our operating income. In Q3, operating margins were 17% up from prior year. Product Support is also strong contributor to our top line growth, with a 6% revenue cagier over the last three years. Which is projected to grow to 9% in the coming years. Their strong customer support is enabling them to win new MRO work and expand their customer base.

Some recent wins include the KC10 and C-17 on the military side. And overhauling of the CF 56-3 fan reverser, which has over 3500 units in the field. We're partnering with FedEx and UPS. And our sales with them are up over 20% in the last two years. In fact, I recently visited Fed Ex's Memphis Hub to see the sort and received accolades on Product Supports' work there.

Over time we expect to partner with the OEMs on long-term agreements for sustainment. For example we're doing thrust reverser's and flight controls for Boeing and Airbus out of our Thailand facility. And we're supporting discontinued fleets as well. And last, we're partnering with word class distribution companies like Aviall and Satair on distribution. We will be making investments in product support and following areas; acquiring rotable inventories to support out of production aircraft, and pursuing acquisitions to take advantage of the fragmented aftermarket supply chain.

Moving to slide 6, and looking at our precision components portfolio. As you recall, as part of our April 2016 reorganization, we consolidated 10 separate machine shops and 5 separate fabrication facilities into centers of excellence. For the Composites Business, we've combined our Milledgeville, Farm Bureau, and Thailand businesses to further develop our low-cost source supplies and offer a blended rate to our customers.

While operating results have been way down this year by restructuring the strike in Spokane and Ford losses, without which they would've earned 6% this quarter, they've now recovered on schedule and the demanding A350 cabin bracket program, and are delivering on schedule for the Boeing 767 landing gear contract. We're closing three of our machine shops and relocating equipment and work to larger, more cost-efficient sites. This will save over 380,000 square feet and 35% of our machine footprint will go down.

This consolidation savings are already being bid into our new proposals. And have enabled Precision Components to have the highest win rate across our four business units. Precision Components reduced their headcount by over 480 people in Q3. While improving our leadership team and reducing management layers. We're outsourcing less profitable work and we're starting up new awards that been recently added.

We're targeting business development where they can be competitive. Achieving a trailing 12 month book to bill of 1.2, and expanding the revenue base. We're also pleased to have received the 2016 Partner of the Year Award at the Mitsubishi Heavy Industries supplier conference for the work performed by our Interiors Business.

Now a few comments about Aerospace Structures. No doubt this business has been the source of our financial challenges over the last two years, as a result of rate reductions, high development costs, overruns, and impairments. And while they generate 36% of our revenue year-to-date, they contributed 23% of our operating income, and earned about 8% operating margin in Q3. However, customer relationships are improving. As we stabilize performance across all seven sites.

In addition to getting the Boeing programs on track, our recovery efforts on the Global Hawk Triton programs were key to winning the DOD support for Milestone C or LRIP authority to proceed for the US Navy's Triton variant. And this is expected to lead to over 60 wing orders over the next 15 years.

Our E2 and Global 7000 programs are close to completing their development efforts and transitioning to production. In Q3, Triumph continued to execute on the Global 7000 wing development contract and transition to production. Triumph continued to deliver wings for flight test vehicles to Lombardi A's final assembly line in Toronto. And we're close to delivering all development test articles. Lombardi A has flown the first test jet, FTV1 numerous times. Helping to validate structural and aerodynamic models used to design the wing. And our Supply Chain and Red Oak factories have begun work on the first several production wings.

On G650 we're now fully into production, having transitioned from Spirit in 2015. Aerospace structures has now delivered 95 wing boxes and completed wings to Gulfstream. And with good performance we expect Gulfstream to award other wing work to Triumph over time. We've also delivered the early G600 composite horizontal tail skins in support of their latest platforms. And in the quarter, we delivered the 500th G550 wing last month. Note that Aerospace Structures is actively bidding new military programs. Including the TX Trainer, V22 Multi year Three and the H60 Black Hawk.

A short update on the Lombardi A Global 7000 dispute. In prior calls, I discussed the need to dissolve long-standing dispute with Bombardier over development cost growth. After meeting with their leadership extensively for several months, we were unable to reach an acceptable resolution of our nonrecurring and recurring claims.

In January, we disclosed that Triumph Aero Structures, LLC, a wholly-owned subsidiary of Triumph Group, initiated legal action against Bombardier in late December in Quebec. Specifically, the lawsuit relates to Bombardier's failure to pay Triumph Aero Structures for completed work, and customer directed changes to the proposed wing configuration. As well as Bombardier's delay, disruptions, acceleration, and interference in connection with its contract with our subsidiary. Triumph Aero Structures is asking Bombardier to recognize its share in the significantly higher than expected development costs, and to honor its obligations under the contract to compensate Triumph on a timely basis.

As been reported, Bombardier has responded with potential claims against Triumph Aero Structures, which we believe to be without merit. In the meantime, we continue to support the Global 7000 program. And we'll provide an update on these matters in future earnings calls if not sooner.

The bottom line, on our four businesses, is we are maximizing value out of our higher performing businesses, while we restructure and drive operating excellence in the others. We look forward to being on the other side of our development production balance point, and seeing our new wins translate into revenue growth in the core businesses we retain.

Last, I'd like to touch on our organic growth plans. Turning to page 7. As Triumph's performance has improved, and as we bring our cost down to enhance competitiveness, we are seeing the benefit in the area of new bid opportunities. In the challenging market environment, Triumph is finding ways to win and grow. Especially in our shorter cycle product support and precision component business units. While we position to win new contracts in the longer cycle Integrated Systems and Aerospace Structures.

As shown on slide 7, across our four business units, our pipeline of addressable opportunities continues to expand. We're tracking over 800 active opportunities worth over $16 billion, a majority of which are in the later customer evaluation phase. In Q3, Triumph had 55 competitive new business wins, worth over $350 million. And this excludes normal follow-on business, which is higher in value. This equals our wins in Q1 and Q2 combined.

In our efforts to upgrade the business development team and instill discipline in the capture process, have led to month over month increases in our win rate, with December being the highest month year to date, in terms of competitive wins and follow-on awards. Given our backlog has remained around $4 billion for four quarters, and new wins are offsetting the effects of [some setting] programs, we are demonstrating the effectiveness of our drive to grow organically.

Key wins in Q3 included Cessna's longitude machining contract with revenue estimated to be over $100 million during the next 10 years. We also finalized an eight-year agreement worth $52 million with Rolls-Royce to supply their thrust links for the Trent XWB engine program. We were selected by Raytheon to provide 31 servo control systems in support of the US Navy's NextGen Jammer program. And this helps to demonstrate how our ability to provide highly engineered, yet costly effective solutions is valued.

We won the KC10 refueling boom and thrust reverser repair work in support of L3. And we won over $70 million of work in Q3 on F35 dual sourcing machining work. And we continue to have a strong backlog of work with Sikorsky Aircraft on the Black Hawk, the Combat Reconnaissance Helicopter and the Presidential Helicopter.

I'm excited about our support to a number of new start and ramp-up programs including B21, TX, and the MQ25. Rate engine programs with Pratt, Rolls, GE, and [Saffon]. The joint multi-role helicopter, DARPA's Term Demonstrator, and the AETP Advanced Engine transfer program.

My team and I recently met with Northrop Grumman executives to discuss opportunities related to the MOU we signed last year. For UAS opportunities. And we posted the Lockheed Martin Concourse team in Red Oak. And visited their Palmdale Facility to discuss new opportunities. So in conclusion, in Q3 we made solid progress on our top three priorities of delivering on commitments, becoming more predictably profitable and driving organic growth.

Jim will now take us through the financials for the quarter. Jim?

Thanks Dan. Good morning everyone. On slide 8, our consolidated results for the third quarter. Net sales of $845 million were down approximately 8% from last year. This was driven by rate reductions on the 747, the G450, 550, and C17 programs, unfavorable model mix, lower demand in commercial rotorcraft, and foreign exchange rates. Which were partially offset by increased production on the 767 tanker program. And stronger sales from our product support segment.

Operating income was $55 million or 7% for the quarter. Last year included a $229 million non-cash impairment charge. Operating income includes $14 million of restructuring costs and a $14 million loss on the assets held for sale, related to the APU engine repair business being sold. Adjusting for these items, operating income was $84 million and operating margin was 10%.

Turning to slide 9 is earnings-per-share. We start with GAAP EPS, which was $0.59 for the quarter. We adjusted a the loss on assets held for sale, which was $0.21 per share. And we adjust for $0.21 of restructuring costs, of which $0.16 is cash. The result is adjusted EPS of $1.01 for the quarter.

Now onto our segment results on slide 10. Third-quarter sales in our Integrated System segment were $256 million, down 6% compared to the third quarter of last year. But operating margin was up 90 basis points to 20%. And our adjusted EBITDA margin was 22%.

Sales decreased due to softness in the commercial rotorcraft market, $6 million was from currency. Primarily the British pound. $5 million was from our Q2's to divestiture of Newport News. And those were partially offset by $1 million from Fairchild Controls acquisition, a year ago October. Integrated Systems has strong margins and is working on profitable growth.

On slide 11, is our Aerospace Structure segment. Sales were $304 million, down 12% from last year. Sales were down due to production rate reductions on the 47 G450/550 and C-17 programs. Partially offset by increased volume on the 67 tanker program. Operating income was $24 million, and operating margin was 8%. And last year included that $229 million non-cash impairment charge.

Adjusted operating income excludes last year's impairment charge, and shows adjusted operating margin this quarter is comparable to last year at 8%. In the quarter, we had net favorable EAC adjustments of $2 million. Reflecting net favorable for performance against our program cost estimates for which we continue to enhance accountability. Aerospace Structures is stabilizing and improving its operating performance.

On slide 12, third-quarter sales in our Precision Components segment were down 10% compared to last year. The sales decline was primarily due to lower Boeing commercial production rates, an unfavorable model mix, partially offset by increased production rates on the A350 program. This segment is in the process of closing three facilities. Washington, and New York and Texas. And starting up a new facility in Kansas. Restructuring expense of $5 million in the quarter and related inefficiencies impacted its operating income and margins.

We also recorded a forward loss of $5 million in the quarter in one of our engine programs, which is included in operating income. Looking forward, our trailing 12 month book to bill ratio is a favorable 1.2 to 1. Including new winds with Rolls-Royce and Textron that Dan mentioned earlier. Overall, Precision Components continues to win work and meet customer's expectations during its restructuring.

On slide 13, third-quarter sales of $87 million in our product support group was a 12% increase over last year. The increase in sales was primarily due to key contract wins with Regional Jet and Commercial Operators, and accessory repairs. Our operating margin of 17% is an increase over last year driven by strong sales and cost reduction initiatives including a facility consolidation.

We announced the pending sale of the AP1 engine repair businesses last month and the transaction's expected to close before our year end. Product Support is healthy growing and taking market share.

Turning to slide 14, free cash use was $37 million during the quarter. This was an improvement from $49 million last quarter and $96 million in the first quarter. Free cash flow is net of capital expenditures at $9 million and includes $13 million cash proceeds for the sales in real estate in Q3.

In order to provide more insight to our cash use, here are some key drivers this quarter. They include $48 million cash used for development programs. $11 million for restructuring. $22 million for the G650 280 programs. And $12 was million provided by customer advances the quarter.

On slide 15 is a summary of our capitalization, leverage, and liquidity. Our net debt is just over $1.6 billion and 63% of our total book capitalization. Total leverage based on our trailing 12 month adjusted bank EBITDA is approximately 4.3 times our net debt. And our senior secured leverage is 2.6 times. We're compliant with all our financial covenants we have $284 million of cash and availability.

Finally moving to our FY17 guidance on slide 16. As Dan mentioned earlier, we are reaffirming our FY17 revenue guidance range of $3.5 billion to $3.6 billion. And our GAAP EPS range of $3.15 to $3.45. We're updating our free cash use guidance range from $100 million to $120 million to the use of $190 million to $210 million. The change in cash guidance is substantially all due to the anticipated delay in expected payments and higher inventory in our major development program.

We are reaffirming our capital expenditures range of $40 million to $60 million. We are also reaffirming our full-year effective tax rate guidance of 18% with the caveat in the footnote that it could still change significantly based on year-end circumstance, but this is non-cash. That's for cash we have updated our cash tax rate from 5% to 7% to reflect expected tax payments in the year.

So to wrap up from a financial perspective, our $37 million cash use is another step in an improving cash trend. Our cost reduction initiatives are expected to exceed our $44 million target this year. Operating margins are strong and increasing in our Integrated Systems and Product Support segments and we are reaffirming our revenue and EPS guidance.

With that I'll now turn the call back to Dan.

Thanks, Jim So FY17 continues to be a transition year. But as the year has gone on, we are demonstrating stability in our operational and financial performance. And our cost reduction efforts are exceeding plan as we right size the business. We've improved program execution and cost-cutting. They're both leading to new opportunities and new wins. And my team and I will continue to find ways to drive shareholder value.

With that let's turn it over for Q&A.

(Operator Instructions)

Cai von Rumohr, Cowen and Company.

Can you give us a little bit more help? That's a pretty big change in your cash flow guide. What were the circumstances why it went up? Is it basically that you're not hitting the milestones? That they're not paying? Any color there would be very helpful. Thank you very much.

Sure, Cai. We are at the peak period of concurrency of a development, building test articles, supporting safety of flight, and then transitioning production. So the expenditure rates are high on the program. And we certainly expected a certain amount of cash to be coming in during the quarter. And that's part of our basis for our claim with Bombardier. I'd refer interested parties to our legal complaint that was filed in Quebec in December for more information but that's really all I can say on the call.

Okay. Is it in terms of they are giving you -- having money coming in? Is it that you are not hitting contractual milestones? Or just a disagreement that you guys have? If you could explain that.

Yes I really can't go any further subject to the litigation that's ongoing. What I will say is that we continue to support the program. Although we continue to assert our belief that we are due payments for work that's been completed over the last five years.

Thank you very much.

Robert Spingarn, Credit Suisse.

I want to thank you for slides five and six. I thought the worst were particularly helpful. Both Dan and Jim. High-level question for you both. Where do you expect those percentages of revenue and profit for the four businesses to be at the end of your planning. Let's say five years for now. How should those lineup?

I'd say there's an imbalance right now. That's a reflection of this cyclicality of especially Aerospace Structures. Their margins are declining as a result of profitable material legacy programs running out. And programs that really bear no fee at this point such as the E2D and Global 7000. Those should come back in the balance. And over time their contributions of margins should go up. As well as Precision Components.

Precision Components has had a tough year this year. Some things that we didn't expect as mentioned, with the strike and cleaning up of older programs. And also the impact of restructuring, so they should continue to operate at that low of a contribution.

But what we're excited about is the growth that is coming out of both systems and product support. I've been traveling around to customers and there's a reason why Boeing has stood up third product line for global support. It's with all these aircraft going into service, they've got to be supported.

I expect a question related to whether the OEMs are taking away our aftermarket business. So I'd like to touch on that. It's my view that you either get in line and work with them, and become a service provider within the OEMs overall sustainment model. Or you're on the sidelines. And fortunately because we've got a good reputation and support with Boeing, Airbus, and also with the carriers. Such as Delta, FedEx, UPS, they are pulling us in as they come up with strategies on how to support things under programs like Boeing's gold care. We expect that to be a source of growth on top line.

So just to tie the loop on that Dan. Do we look at the manufacturing businesses as being roughly equal in size in five years? And then what with the support business be relative to that.

And then for Jim, on cash flow. What is normalized cash flow going forward? Let's say once we get through the heavy lifting and 2017 and maybe 2018, what is the normalized cash flow look like? And as an addendum to that. Dan how do you do any M&A? You mentioned M&A at some point in the monologue. How do you do that given the leverage right now and the negative cash flow we have today? Thanks.

I'll pick out of couple of those questions to hit. On Product Support, we do expect their revenue contribution to be higher over time as the shift towards sustainment of the fleet increases. And as we sign up long-term agreements for partnership for repair of control surfaces and thrust reversers and accessory drives you name it. So we do look to them as a growth area.

In terms of M&A, and I'll throw it back to you Jim, on the normalized cash question. Right now, we can only really do small bolt on and product line acquisitions. That is part of our focus for organic growth is to grow from the assets that we already have. But we are looking ahead. And as we complete divestitures and create more firepower to go back to the market, something that Triumph demonstrated over 20 years of doing successfully. We are looking at those candidates now. We are not ready to pull the trigger on anything big of course. But over time, it's part of our growth strategy Jim.

In terms of cash flow, I know it's a confusing cash story. There's a lot going on. I look to adjusted EBITDA that's why put that on the slides. If you start with adjusted EBITDA, estimate our CapEx, then that's the best estimate going forward. Because were looking for 1 to 1 cash conversion over time. But cash is a challenging story, when you have a lot of investments in big development programs.

We have been successful in managing our balance sheet very tightly. With really a focus on working capital and taking advantage of all the opportunities we have to generate cash without impacting our ability to generate profit.

And what kind of growth rate do you see on the adjusted EBITDA?

I think that depends on the underlying businesses. We are in the middle of our planning processes now. So, we will see what our portfolio is going to look like when we come out of the planning process and what guidance we can put out for years to come.

Thank you both.

Sheila Kahyaoglu, Jefferies.

As a follow-up on free cash flow. As shorter-term, how do we think about free cash flow maybe a framework for 2018? Just thinking about development expense. Because that's really been the biggest change for 2017. How do we think about development expense in 2018 as it relates to the global program? And maybe inventory buildup on production aircraft? And if you could comment on pension as it relates to cash?

Sure. Touching on Global 7000 we expect to complete the development work in FY18. We're declining month over month on the work that's required for engineering releases as an example.

And then as far as buildup of inventory for production. We're seeing that in the numbers now as we've ordered the first lot of production article components from the supply chain. And then as the rate ticks up year-over-year, we'll continue to expend in support of the long lead parts and ramp-up. So that is in our calculus for when we build our FY18 and FY19 cash forecast. Jim on the pension.

Yes. So the pension there's no material required pension payments the next couple of years. And you'll see in our year-end the full analysis of pension plans. But there is no cash requirements to worry about.

Okay. Thank you Jim. Dan just to follow-up on the development expense. So it would still be an outflow and maybe like half the magnitude? Or is there any sort of range you could give us?

So, I won't try to quantify the magnitude. What I will say is that there is still an outflow in development and early production spending. The uncertainty is around flight tests and any items that might have to be corrected coming out of that. That's true of all development programs. So far Bombardier has been encouraged by the flight test results of the first article. So I won't speculate into those costs, but it's something that we are looking forward to retiring in FY18.

Okay understood. And then if you could just comment a bit more on the 650 program? It still being one of the two red programs within Aerospace Structure. How do you think about the improvement in the progress there?

It's a high up tempo program right now. Every four days were pushing out a set of wing boxes from our Tulsa Operation. And we fully re-hosted the program within the Triumph systems. Our quality levels continue to improve. We've got a lot of focus on building these wings with zero foreign object damage. And no scratches, and perfect wing alignment.

And because Gulfstream is still coproducing wing boxes and finished wings in Savanna, we're working with them to transfer best practices. Things they've learned. And it's really not their intention to stay in their business. Once we've got ahead of our learning curves, we've already achieved the buffer stocks that they've asked us to maintain to sustain the line. We see them transitioning that work back to Triumph.

So we're doing well. We had some stability issues at our Nashville Plant as we rolled folks from the G450 program onto G650. That's now behind us. And we're coming down our learning curves well. So, we'll provide more color on G650 performance. Schedule is there now we're focused on driving down cost.

Thank you very much.

David Strauss, UBS.

Dan, following up on that question on the 650. I think, at the beginning of the year, you were talking about a $40 million to $50 million burn there. It's well above that already through Q3. And then you used to show a chart that I think had you getting pretty close to breakeven in 2018. Can you just talk about what changed that profile that we were supposed to be on, on the 650.

I'd say that the early data, before we built very many wings, we didn't have a tight confidence interval on the hours per wing. That we're required to deliver. Now we do. Now that we've delivered approaching 100 wing boxes and wings, we're coming down the steep part of the learning curve. The first hundred always have learning curves that approach 70% to 80%. And then you flatten out into the 80%s and 90%s as you get beyond that point.

So it's really a focus of our lean deployment efforts. We've been running value stream maps and [kaizen] events repetitively in that area to take costs out. And they're showing a lot of benefit. So yes the burn rates are higher here on the first build out. But we're coming down the curve nicely. We believe we can recover to our overall program profitability goals. Jim.

I understand that there was a question earlier about cash on this program. That's why I highlighted the amount we used was $22 million in the quarter. Our expected turn, so that we're [no longer] using cash this program is 2019 at the moment. But we're making a lot of efforts that may improve that. But that's our current view.

Thanks that's helpful. I wanted to turn to the 747. You have talked about the progress you've made there. I think you're reversing some of the forward losses that you've taken. You'd previously talked about I think it being a pretty significant cash drag as we get out to 2018 and 2019. Can you just update us on that?

I think both 747 and 767 are harbingers of what we're going to do on G650. When I got here a year ago, Boeing was very unhappy with our delivery performance and quality on 747 and 767. We weren't meeting the on dock [knee] dates. We threw a new team at it, we used lean processes to drive out waste. We got focused. We got more employees involved in improvement. And that program has turned now.

And at one point Boeing thought without we were going to have to add 200 people more to hold schedule. We have actually been able to reduce about that many folks, and improve schedule adherence. So that's the challenge is to do it now on G650.

We're in discussions with Boeing about the end of the 747 program when will it come. They had planned to offload some of our work to Macon, Georgia. They've stepped back from that plan. And now, based on the market demand for that platform they're going to decide does the program go beyond our current contract obligation, or end early.

So we'll support them in doing some what if's. As they attest the market for follow-on opportunities. Should we be required to build out everything under our contract, then we've got that covered in forward losses, including any tail up costs. Yes, they'll be cash to outlay in support of those [end] builds. Now should they truncate the program sooner, we would benefit from both the reversal of the forward loss and avoidance of that cash outlay.

Okay. And the last one I had was, I think before you had been talking about $65 million in milestone payments from Bombardier this year. Can you just update us what your guidance assumes in terms of milestone payments?

I can't discuss details of the contract itself. What I can say is that we're not assuming any further payments in the fiscal year. And we're focused now on getting our claim resolved through our path in litigation. And we're still hopeful that we can resolve it through other means.

Thanks very much.

Sam Pearlstein, Wells Fargo.

If I could just follow-up on that last point. Now that you include the $13 million for the sales, it looks like the total free cash flow change for the guidance was now a little over $100 million. And knowing roughly where the milestone payments were, what accounts for the remainder of the increase? Is that is development spending on the Global 7000 running ahead of schedule? Like what else is there that striving cash a little bit worse?

Hi Tim, it is Jim. It is its inventory related to that program as well which is primarily development cost at this point. There is some production inventory there too.

Okay and given you are negative $183 million for the first nine months, it implies the fourth quarter's roughly breakeven on free cash. But there still a $20 million swing. What would account for you to be either at the low-end or the high-end?

As you see, we define free cash flow and include some of these discrete events like real estate sales. And we're continuing to do that. So, our guidance does include those kind of things. And for the fourth quarter, we're looking at all options as to how we achieve our cash goals. We're going to do as much as we can through operations and working capital management. But we still have one-off opportunities for assets that we don't need going forward to turn those into cash.

Okay. And then one other thing as you talked about foreign exchange, you mentioned the UK. How are you thinking about one, foreign exchange going forward? And then two, any of the discussion around border adjustments given your tie facilities? And how to think about that.

Yes that's a good question. We do have some natural hedges in obligations in pounds. But we're not selling completely in pounds. So we don't anticipate big movements right now in the currencies. But we are reviewing our hedging options to make sure we can mitigate any potential future impact.

Thanks.

Peter Arment, Baird.

Dan maybe not a lot of discussion on how the E2 program is going. But it obviously is going to be a major program for you. So, could you give us little color on how you're looking at the outlook and bracketing the risk there? Thank you.

Sure. Thanks Peter. So we are in good shape on the E2 program. Our development is complete now we built some nice factories that build the fuselage components and empennage. There is a slowdown in the program at Embraer's level as they work through some of their entry into service certification challenges.

They are unrelated to the structures, and so we've cut back spending on that in terms of we're ahead of the game so to speak. But we expect them to return to the ramp-up that was planned. It's about 12 month delay that several months of which are already behind us. So we're are looking forward to that ramping back up in the fiscal year.

We'll use the time to focus our energies elsewhere in Aerospace Structures. I'm not concerned about the program. The feedback from Embraer on their first flights has been very positive. And they're happy with the work we're doing. Although it's delayed on its ramp-up, we do have revenue bearing units in queue ready to go when ready.

I appreciate the color. Thanks.

Myles Walton, Deutsche Bank.

I was wondering if you could help us with the fourth quarter walk that's implied. About $120 million of EBIT inclusive of restructuring. So a couple of different questions. One is the confidence to get to that level of profitability. If you think that's a reasonable jumping off point for 2018.

And then likewise on restructuring. I think the target for restructuring a bid is $65 million to $75 million of cash restructuring. I think year to date it's only around $28 million. So is there a big lump coming in the fourth quarter? Or are you finding a way to spend less and is that helping the cash flow?

Good question. There is a little lumpy because some of the plant closures there's expenses that are accrued in advance when we announce them. And there's another slug that we have to expense when they occur. When the actual closure happens. And a few of those are coming up. So we're on track with the program, but it is back ended with the restructuring costs.

And then the fourth quarter implied EBIT.

So I don't have the exact number for restructuring in the fourth quarter. But it's all in the mix for the guidance that we have put out there. So you have the full-year midpoint of around $3.30 on EPS. I can go back and do some work so we can share more details of that next quarter. But is there a specific question about EBIT a piece of it you're worried - -?

It looked like a pretty significant margin expansion sequentially into fourth quarter that's all. A couple hundred basis points inclusive of infrastructure.

The fourth quarter is usually our strongest quarter. And we are seeing the impact of a lot of cost reductions we've done year-to-date. So as we do them, they accumulate and we expect a good pickup in the fourth from them as well.

Okay.

There are a lot of moving parts here. What we do have is a very rigorous forecasting process. And I'm feeling confident that each quarter we're getting better and better about the accountability for the delivery of the forecast that we put out there.

And then when you look to 2018 Dan, on the mature programs the 47 rate the 777 rate the 455-50 rate. Is it a few hundred million dollars that you have tabled for those programs that you are going to have to overcome? Is that the right ballpark of those mature declines that you're facing and then offsetting with the rest of your business?

So the rate reductions on this programs are not just future challenges. We've been dealing with them for the last two years. Believe it or not we used to build the 747 at 7 a month and it set down over time on my watch. I think we started at maybe 2, 2.5 and then it was 1.5. We're now building at 0.8. Which is above their published rate of 0.5 so we've been dealing with it.

That's why I think it's important to emphasize the backlog stability. Even in the presence of the V22s and C-17s and 747s coming down. And 777 so that's impacted some of our sites that build let's say in board flaps. We've known these were coming, some were surprises. But we've planned for it and that is therefore the emphasis on growth.

But we're on a lot of platforms that are going up in rate. Both defense programs like Global Hawk and Triton. F35, G650. We're in discussion about rate increases. And then I'll work on the A350, A320, [one EO's]. These programs are increasing, and that's helping to offset the ones you mentioned.

Okay. Is it a relative size though? I mean at Precision in particular number one program there is 777. And I would imagine that's going to be challenged on the rate reduction in particular.

It is our number one program. But they have a very broad base of programs. And we're really winning more work outside of commercial. You read about our nuclear machining work. We just announced Cessna award. That's a large award for us. Engine work is ramping up. Helicopter work. So we get the need to balance out their portfolio and the fact that they're leading our book to bill is our response to that.

And what Boeing has said to us about machining in particular, is you really have to be competitive with low-cost countries and up your automation. So we've been investing in some of the high-speed aluminum machining facilities. We've just open up our new Kansas City plant. That's going to support the Airbus A350.

And really the challenge in Precision Components is to find those niches where we can compete. We have some of the longest gantry machine tools in the United States. We have probably the largest number of these high-speed aluminum machining cells in the US. And we have some of the best fabrication, chemical milling, titanium forming capabilities. So we're not going to compete with every low cost country. Let's say in small volume machining of parts, but where we can compete we are winning.

Okay. Thanks.

Kristine Liwag, BofA Merrill Lynch.

With the moving pieces of the production rates and your restructuring actions, can you just provide us some clarity on your expected cadence of cash flow? And what year do you expect to be net cash positive?

So as you saw in the slides we are improving our cash flow. Maybe not at the pace we would like. But it is quarter-over-quarter improved the last two quarters. And we're forecasting with our full year guidance to approve it again next quarter. But we haven't given cash guidance for next year or further, but we do intend to continue to improve that. What year in particular we're going to go cash positive I couldn't tell you today. But hopefully will have updates for that in the future.

Can you provide some sort of cadence? Should we think about the sequential improvement in cash this quarter? And do we forecast that in a similar pace?

Well you can interpret what the fourth quarter cash is just by looking at our full-year and subtracting our year-to-date. That's as far as we're forecasting cash right now. I would love to tell you exactly what it is going to be next year. We haven't finish our process and I need everyone to make the commitment so that we know we can make it.

Great. And on your slides you said your compliant with all your financial covenants. Are there specific covenants we should be aware of in the period where you may not be generating cash?

Our most restricted covenant is our total leverage ratio, which is 5 times right now. And we're at 4.3. So that's the one I watch the most and that we're cognizant that's the limitation on our availability which is $284 million at the end of the period.

Thank you.

Michael Ciarmoli, KeyBanc Capital Markets.

Thanks for taking my questions. Just to stay on the cash, how big of a headwind. And maybe even revenues too. How big of a headwind will the 777 be? I mean are you guys seeing the full impact of that yet on the top line and bottom line? Or does that may be exacerbate into FY18 given the timing of your fiscal year the timing of the step down there?

Sure. The 777's monthly build rates are dropping from, and these are the numbers that we use because we have a set back from the Boeing's deliveries. But from about 7.7 a month in FY17 down to 4.75 in 2018, and then down to 3.5 for 2019, 2020. So it does step down over time, and we have time to offset that with new wins.

We know it's coming. And you don't think of Triumph as being a big player on 737, which is increasing in rate. But that's the number two program for our Integrated Systems business. And we're also on the 787. So yes, some programs are going down others are going up. And we have enough visibility and time to work offsets against the 777.

Do you think this is the trough year for revenues? Or is it going to be some headwind next year? And then maybe we start to see organic growth in 2019?

So the early signs of that is the book to bill. And then how quickly we can convert that into revenue. And as I mentioned, the shorter cycle businesses like Product Support and Precision Components that is a fast turn.

When we win work, let's say on integrated systems. If we take away the landing gear, or we take away the nose wheel steering or some of the hydraulic systems from a competitor, it may take them a year or 18 months to cut in that change. Or if you get on the new start, there is the design development phase. So those take a little bit longer but the fact that we've been around $4 billion now for four quarters and we are winning, gives us encouragement for the next two years in terms of revenue.

And we will adjust revenue. Just one other point Michael, we'll adjust revenue consistent with our divestitures. But from the businesses that we've retained we're looking forward to top line growth.

And just to get on that Product Support, I've always felt about that business as being obviously shorter cycle limited visibility. But I think you called out getting to a 9% CAGR in the coming years here. Is that based on the new wins that you've recently had? You seem pretty confident in that growth rate accelerating.

Yes there's really three legs to the stool. One is traditional MRO work where the truck backs up and it's got three thrust reverses in it and they say fix these fast.

The second is expanding our customer base. So we go from Delta and UPS and FedEx and we add Express Jets, as we have. And the third is going to more annuity long-term agreement with the OEMs that are taking ownership of their aftermarket.

And so you sign an agreement that says I'm going to repair all of the damage control surfaces for your entire fleet. If it comes in, it is coming to us. And they see that as a better way to operate then parsing all of those control services to 30 or 40 different suppliers. They'd rather have fewer that have more critical mass and are better at it. And based on the feedback we've gotten, and them pulling us into meetings I'm encouraged about our prospects there.

Got it. Thanks a lot guys. That's helpful.

[Ben Armstead], JPMorgan.

I just wanted to ask about Integrated Systems quickly. It seems to be doing pretty well. Just wondering how much runway there is to expand margins there? And how do you feel about getting back to organic growth next year?

Thanks, Ben. We think we can do more on margins there when we went from 17 companies to five. We've begun the work of combining the product road maps for all of the different fuel system companies into one. And the gearbox companies, the thermal systems, the fluid hydraulics, they're now under a common management. But we haven't fully driven all the cost out from consolidating those businesses. In part because they were all in separate financial reporting systems, so Jim's been working hard to integrate those. And then to look for areas that we can produce support costs.

But what I'm excited about in that business is the conversations we're having with Airbus. They're not happy with the number of their current suppliers. We've been investing to upgrade our technology and [solenoids], actuators, valves FadeX, thermal systems. And so they're pulling us in and asking us for alternative proposals. Sometimes to meet rate, sometimes to reduce costs.

So that's the work. Whether it's fixed wing or helicopter or military, I think we'll drive their top line. And then we'll continued to work on the cost side. By the end of FY18 will have finished the first integration of TIS and be in full stride.

Thank you.

Since there are no further questions, this concludes Triumph Group's third quarter FY17 earnings conference call. This conference will be available for replay after 11:30 AM today, through February 9, 2017 at 11:59 PM. You may access the replay system by dialing 855- 859-2056 and entering access code 56908608. Thank you all for participating and have a nice day. All parties may disconnect now.