Daniel J. Crowley - Triumph Group, Inc. James F. McCabe - Triumph Group, Inc..

Samuel J. Pearlstein - Wells Fargo Securities LLC Sheila K. Kahyaoglu - Jefferies LLC Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Bill Ledley - Cowen & Co. LLC Seth M. Seifman - JPMorgan Securities LLC David E. Strauss - UBS Securities LLC Louis Raffetto - Deutsche Bank Securities, Inc. Peter J. Arment - Robert W. Baird & Co., Inc.

(Broker) Douglas Evan Karson - Bank of America Merrill Lynch Kenneth George Herbert - Canaccord Genuity, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to Discuss our Second Quarter Fiscal Year 2017 Results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. You are currently in a listen-only mode.

There will be question-and-answer session following the introductory comments by management. 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 non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is a property of Triumph Group, Inc.

and may not be recorded, transcribed, or rebroadcast without explicit written approval. At this time, I would like to introduce Daniel J. Crowley, the company's President and Chief Executive Officer, and James F. McCabe, Jr., Senior Vice President and Chief Financial Officer of Triumph Group, Inc. Go ahead, Mr. Crowley..

Thank you, Stephanie, and good morning. Triumph had a solid second quarter. We continue to stabilize and improve our performance and execute our planned restructuring actions to position the company for long-term competitiveness and growth. We also began to rebuild our pipeline, win new contracts, and firm up our backlog.

I'm very proud of the team's progress in the first six months since launching our transformation. We're already seeing the benefits in the numbers. And while we have much work to do, we remain on track to our plans and focus on the right priorities.

We reaffirmed our guidance for year-end earnings and cash while adjusting revenue slightly downward due to slowing demand on legacy programs. After my summary, our new CFO, Jim McCabe, will provide a more detailed view into our financial results and outlook for the rest of the year.

Now, since joining Triumph three months ago, Jim has brought a high level of energy, expertise, and engagement to the role, instituting new reviews of programs and financial controls. He is deeply immersed in our program EAC cash and cost reduction efforts. I'm glad to have Jim on Triumph's senior leadership team. Let's start on slide 3.

In Q2, Triumph delivered operating income of $70.5 million on revenue of $874.8 million. Net income before charges was $34.8 million or $0.70 per diluted share. After adjustments for restructuring and divestitures, Triumph earned $1 per diluted share.

Cash flow benefited from the initiatives we launched earlier this year with $47.2 million of cash used in Q2 reduced by nearly a half from $84 million in Q1.

Highlights contributing to our improved financials include stronger performance on the 747-8 program at our California and Texas factories, which have now recovered to schedule and are beating planned learning curves. As a result of our program return to green efforts, we had no large performance-related charges in the quarter.

We're completing development and transition milestones on our largest programs particularly in our Aerospace Structures business unit. We realized early benefits from our cash management initiatives as we scrub our working capital. We're achieving our planned reductions to the head count and footprint as part of our transformation.

On slide 4, I provide more substantiation of our transformation progress. Our first goal is to reduce cost to match our business base and enhance competitiveness.

Through our transformation initiatives that benefit the whole company, most of our restructuring and operational improvements are targeted towards our Aerospace Structures and Precision Components business units.

We've launched over 100 supply chain projects in our raw material and machining commodities area, as well as 75 initiatives in our logistics and indirect spend areas. We've initiated the first five facility consolidations and we continue to right-size our staffing levels towards our goal of 1,200 this year.

We will continue to adjust our head count plans given customer requirements and new business wins. Together, these actions save $22 million year-to-date towards our first year goal of $44 million in savings, keeping us on track to achieve our three-year annual savings goal of $300 million.

Triumph's push to improve cash from operations is also yielding results in cash to cash conversion, payment deferrals, and inventory initiatives. Overall, our cash to cash conversion cycle has shortened 9 days since the start of the year, and 39 days from a year ago.

We also reduced days sales outstanding, days inventory outstanding while increasing days payable. We're also tightly managing our capital spend. Triumph's planned divestitures of non-core operating companies are progressing towards completion in FY 2017 or early FY 2018.

And we'll continue to assess our portfolio of businesses each quarter and identify further actions to enhance shareholder value as part of our ongoing strategic reviews. And Triumph is well-along now on deploying operating excellence across our 22 companies with over 50 Lean events conducted in Q2 as part of our new Triumph Operating System.

We're initially targeting our largest programs with 747-8 being an early win. Our new CIO is integrating our disparate IT systems, and we're deploying common policies and practices across human resources, supply chain management, and business development.

Our new senior leadership team has been fully staffed now with the addition of Vice Presidents of Contracts and Performance Excellence added in Q2 to improve our estimating, contract management, and execution efforts.

Building on our updated compensation practices in Q1, Triumph strengthened our talent development and succession planning processes so that our transformation efforts can be accelerated and sustained. Let's move to slide 5.

As you know, Triumph has a number of development and production ramp-up programs that will help replace our sunsetting programs and drive revenue growth in future years. Performance on these contracts is key to returning to the cash generation and margin levels associated with our legacy programs.

Our execution on the Embraer E2 program was strong in the second quarter. Triumph has completed our design efforts in all three variants and a supporting certification for entry in the service. We've delivered eight aircraft to-date, including our first production article.

Our factory automation is coming online and production learning curves have been improving steadily. We continue to work with Embraer as they analyze the mix of aircraft and prioritize deliveries. Ultimately, we plan to deliver 1,980 aircraft, although we only recognize the next two years of delivery or only 26 aircraft in our backlog.

Now, since transitioning the G650 from Spirit to Triumph 20 months ago, Aerospace Structures delivered over 100 completed wings, wing boxes, and wing kits to Gulfstream. Our two G650 factories are delivering six-wing boxes and one fully assembled wing per month now and ramping up.

The G650 team is rapidly deploying Lean principles in partnership with Gulfstream to achieve our planned learning curves and business case. In fact, last week, we hosted Gulfstream's President and his team in Nashville for a factory tour and discussed our progress on the G500 and G600 development efforts as well.

On Global 7000, our focus remains helping Bombardier to get the test aircraft in the air, complete development and the remaining test articles, and prepare for the transition to production given the robust demand for the platform.

As Bombardier recently announced, they are very close to first flight, ground test results have been positive, and development is beginning to close. Triumph continues to deliver test wings to Bombardier's final assembly line and has started assembly of the first production wing.

Note that we're building our test articles on a production-ready line in our Red Oak, Texas factory, and are spending up the supply chain to support Bombardier's planned entry into service. Recall that Triumph took a large charge in Q4 last year associated with the Global 7000 development cost.

A portion of our development costs are needed to implement customer-directed changes to the original wing to enhance performance, which we affected subject to an adjustment to our contract. Triumph has asked Bombardier to recognize its share in a higher than expected development and recurring product cost.

And we're working towards resolution of our commercial discussions with Bombardier in Q3. Now, stepping back, we expect to see positive cash generation starting in FY 2018 across these programs as we complete development and transition to production.

And while we continue to upgrade our processes company-wide, our enhanced internal controls and operational improvements enable us to surface and mitigate program risks earlier and reduce charges quarter-over-quarter.

On page 6, we're starting to see early signs of progress on winning new orders and extending current business, which increased our book-to-bill to 1.1 in Q2. Our backlog now stands at $4.1 billion, up 2% since June. And when we exclude the sunsetting program, our backlog growth was 4.7%.

Across our four business units, our pipeline of addressable opportunities increased from $14 billion in Q1 to over $17 billion in Q2. This is the result of the strategic planning process initiated in February and the hard work of our new business development team.

Longer-term, our goal is to reduce single program or customer dependence through a diversified portfolio of companies, capabilities, and programs.

In the second quarter, we were awarded several key contracts, a $300 million follow-on award for the Gulfstream G650 at Aerospace Structures that extends the production contract through 2018; a $48 million contract for machining products from SNC-Lavalin, one of Canada's largest engineering and construction firms for nuclear reactor fittings.

This is a really good adjacent market win for Precision Components that leverages our ability to manufacture safety-critical, close-tolerance parts.

Also in Q2, the announcement of the Navy's Triton UAS Milestone C Decision, which approves Northrop Grumman and Triumph to begin low-rate production which continues through 2018 and produces many as 60 wings on the same line we used to produce Global Hawk and NATO UAS Wings in Aerospace Structures.

Our Integrated Systems business unit continued to add key components on the 777X platform while Product Support added new thrust reverser and control surface repair contracts for Delta Airlines, UPS, the KC-135, and the C-17. We are actively supporting RFPs on the major new start defense programs.

These opportunities reflect Triumph's better working relationships with the Tier-1 OEMs as we improve our performance and forge new partnerships. Our restructuring and transformation efforts will only further enhance our cost competitiveness going forward. Now, over to Jim for our financial results..

747-8, the G450/550, and the C-17. In addition, we have a $5 million currency change. Operating income is down 36% but this includes $14 million of restructuring costs and $5 million loss on divestiture of Newport News. So, please note that excluding these two items, operating margin was 10.2% in the quarter.

On slide eight, you can see adjusted earnings per share. We start with GAAP EPS which was $0.70 in the quarter. We adjust for Newport News transaction, which was $0.10 per share, and we adjust for restructuring of $0.20 per share; we broke those down into the non-cash piece of $0.05 and $0.15 cash. The result is adjusted EPS of $1 for the quarter.

This is using our diluted weighted average shares outstanding of 49.4 million. Now, on to our segment results on page nine. Second quarter sales in our Integrated Systems segment were $245 million, down $16 million or 6% compared to the second quarter last year.

Sales decreased due to softness in the commercial rotorcraft market, spares aftermarket, and $5 million from currency, were partially offset by $9.5 million sales from our acquisition of Fairchild Controls last October.

Integrated Systems' operating income and margin decreased slightly as a result of lower sales levels, but operating margin remained strong at 18.7%. We recently announced the consolidation of three operating facilities in Connecticut as part of our transformation. We also expanded the U.K.

facility to in-source certain final assembly and test work for the A320, the A380, and 787 programs. And lastly, the trailing 12-month book-to-bill ratio in this segment is positive at 1.1:1. On slide 10; second quarter sales on our Aerospace Structures segment were $320 million, down $65 million or 17% compared to last year.

The same programs of the theme, the sales decline was to due to the production rate reductions on 747-8, the G450/550, and the C-17 partially offset by increased volume on the 767/Tanker program. Operating income and margin declined as a result of lower sales.

We did have a milestone event in the quarter with the delivery of the 750th G5 (sic) [G550] (15:50) wingset to Gulfstream that you can see in the picture. On slide 11; second quarter sales in our Precision Components segment were down $7 million or 2%, compared to last year.

The modest net sales decline was due to lower Boeing commercial production rates and unfavorable model mix largely offset by increased production rates on the A350 program. In the quarter, we announced the closure of facilities in Everett, Washington; Long Island, New York; and Kilgore, Texas.

We also dedicated a new facility in Kansas that you can see in the picture, which will support the A350 program ramp-up. On slide 12; second quarter sales in our Product Support group were strong, increasing $12 million or 16%. The increase in sales was due primarily to key contract wins for structures, interiors, and accessories work.

Operating income and margin were up substantially as a result of sales growth, reflecting the operating leverage inherent in this business. We also had a milestone in the period in Product Support. We shipped the 100th KC-10 Aerial Refueling Boom to the U.S. Air Force in September, which you can see in the picture.

Also in the quarter, we announced the closure of an interiors facility in Oakdale, PA. Turning to slide 13, cash use in operations was $47.2 million during the quarter. This was an improvement from $84 million cash use in operations in the first quarter.

After deducting CapEx, which is averaging $12 million a quarter and adding back the cash proceeds from the sale of assets including the $9 million for Newport News this quarter, our free cash use this quarter was $49 million, a significant improvement from $96 million free cash use in Q1.

In order to provide more insight into cash use this year, I will highlight some key elements in our year-to-date cash use to consider.

Our investments in development programs used $126 million, incremental customer and vendor financing programs provided $100 million of cash, the G650/G280 program used $47 million of cash, liquidation of customer advances used $65 million, restructuring activities used $17 million, and strike costs used $16 million.

On slide 14 is a summary of our capitalization and some key elements of our recent bank amendment. Our net debt is just under $1.6 billion and 62% our total capitalization. On October 21, we amended our credit facility to provide for greater financial flexibility as we execute our transformation. We are in compliance with all of our covenants.

This amendment was simply to provide additional flexibility and liquidity for our transformation. And, finally, moving on to our fiscal 2017 guidance on page 15. First, I want to address the $80 million of net risk discussed during last quarter's call. This was an area of focus for me when I started, and I reviewed all the risks and opportunities.

I spent time understanding them and then standardized how they were reflected and managed, including making sure they had owners who rated their probability, timing, and cash impact. And we now have collect risks and opportunities monthly as part of our risk adjusted forecast which is used to establish our guidance.

We don't plan on addressing them separately going forward. As indicated in our press release, given the current production levels of the aircraft programs we supply, we're adjusting our net sales outlook range down $100 million to $3.5 billion to $3.6 billion for the year. We reaffirmed our full-year GAAP earnings of $3.15 to $3.45 per diluted share.

We reaffirmed our full-year free cash use of $100 million to $120 million. And we're lowering our full year CapEx to a range of $40 million to $60 million which is net of leasing as we report.

We reiterate our full-year effective tax rate guidance of 18% but with a caveat that there's an opportunity for it to be lower should we be in a position to release some of our valuation allowance against tax assets, which likely could occur in Q4. We've updated our cash tax rate to 5% to reflect expected tax payments in the year.

So, to wrap up, our amended credit facility enhances our confidence that we have ample financial flexibility to fund our transformation initiatives. So with that, I'll turn the call back to Dan..

Great. Thanks, Jim. So, we'll continue to stabilize our performance while we position Triumph for the long-term success. This is a multi-year journey, but the hard work over the last six months is bearing fruit, and my senior leadership team and I are pushing hard to build on the gains already achieved and accelerate our progress.

We look forward to your questions and reporting on our headway in the second half of the year. Jim and I would be happy to take your questions now..

Our first question comes from Sam Pearlstein. Please state your affiliation followed by your question..

Good morning. It's Wells Fargo..

Good morning..

Can I go on talk a little bit about the free cash flow? You reiterated $100 million to $120 million of use, but then you just highlighted, it sounds like the CapEx is about $40 million lower and the cash tax rate would imply about a $20 million benefit relative to prior expectations, and you've got about $10 million of divestitures now.

So, can you kind of take those pieces and compare that to where you would have been before since I thought all of those would have been different than you had in the original assumptions..

Yeah. Sam, it's a good question. There's a lot of moving parts in cash and we're really increasing the accountability on each of those parts. These do tie together and still fall within our guidance. There were moving pieces in both directions.

But I understand that there's some changes and things that you would think will improve cash, there were also some, there was working capital targets that were a little too aggressive. So, we do have accountability on each of those, and the net still does fall within the range..

Okay. And you mentioned that you reviewed the $80 million, I guess, risk or contingency.

How much of that is left with half the year to go? Where would you position that now?.

We were talking about this. The $80 million is really an integral part of the forecast. So, what I can tell you is, it's hard – it doesn't make a lot sense, but it stands alone. The question is, did we integrate into the forecast an estimate for this happening or did we not? And things that are lower probability, we don't put in the forecast.

We just weighed the risk, and then add that into a risk-adjusted forecast. So, having said that, the risks are to the full-year forecast, and they did come down in the quarter because some of them were realized in the quarter. But in fact, the net risks, I can say qualitatively, came down from last quarter-end..

Some were mitigated and some were realized, but on balance, it was a net favorable....

Right..

...change..

So, what we're trying to do is just talk about the combined forecast and to not talk about the risk alone because they're more meaningful in the forecast..

Okay. And one last question, Dan.

Are there any red programs left at this point?.

Yeah, there are. We're still tracking them, but we're down to just three. At my level, we started the year at 10. And those are the Global 7000 and the HALE program, and then 767, which we're watching at our Stuart, Florida plant. And so, those are tracked weekly in my reviews. I feel good about where we are. We put a lot of new management in place.

The factories were those who produced after I got my senior leadership team stabilized. It was intensive focus on Aerospace Structures where we've had some performance issues in the past. But as we retire those risks, we look forward to transitioning those programs to higher rates of production.

So, this process has really been helpful, Sam, because in doing this now for 10 months, 11 months, it gave me insight into common causes of program performance issues that we can then attack at a base process level. And 747-8 was the first program we focused on.

And through a lot of hard work now, we're really performing well and are rated green by Boeing. So, the process is working. There is some that are reviewed at my level, some at the business unit, and some at the OpCo, but we have seen a reduction since the beginning of the year when we started the program.

And we're still on track to convert these by the end of the fiscal year to green..

Thank you..

Our next question comes from Sheila Kahyaoglu. Please state your affiliation followed by your question..

Good morning. It's Jefferies. So, I want to just follow up on the free cash flow question if that's possible. And I guess just in reference to slide 13, you've stated the year-to-date developments as it regards to free cash flow.

How do you think about it for the full year? What are our expectations should be? I mean, it seems like development is a bit higher. Does that include – is that $55 million (sic) [$65 million] (25:01) million from Bombardier? If you could just walk through each of those pieces..

Thanks, Sheila.

Could you repeat the last part of your question about the Bombardier, please?.

Liquidation of customer advances, is that $65 million from Bombardier?.

It's not – there's multiple customer advances in there. So, it's no one customer. In terms of – the cash flow guidance is $100 million to $120 million use for the full year, which implies that we are going to generate net cash for the second half.

As you know, we have reduced spending on development programs we think that we're kind of peaked the spending there. And we are expecting some milestone payments in the last quarter. And we continue to work down working capital as part of our transformation and increased profitability. So, those are the key drivers to the cash flow.

But I don't really have outlook by line item..

Okay.

So, is there continued development expense in the second half?.

There is. There is continued development expense, but it's expected to be at a lower rate..

Okay, got it.

And then just the incremental customer and vendor financing of $100 million, can you clarify that? Is that a working capital item or...?.

It is..

Okay..

This is where we've participated in the vendor and customer financing programs where we can collect earlier for modest discounts..

Okay, got it.

And then in terms of contract, negotiations or performance, can you just update us on the 650, the $300 million extension? What happens beyond 2019 on that program? And then with regards to the 747 program, if you could just talk about the status of that program in your contract there, and what the recent implications of the 14 unit order from UPS means?.

Okay. I'll start with the 747 on the end and then we'll circle back on 650. So, as you all know, we're delivering ship-set 1543 right now towards our contract obligation on 747 through 1574. And there was a discussion about that program potentially ending early.

Right now, the latest news is UPS with 14 additional orders would extend that into the high 1550s. And we've already covered the forward loss in our forward projections to build out that line and whether they exercise the option for 14 additional remains to be seen. But we're partnered with Boeing on this.

And because we were really optimizing our spend on that, we're seeing improvement in EACs month-over-month. So, the program is something that we're going to run out.

And Boeing has announced that they don't intend to keep the Macon, Georgia facility as a facility to take our workload, so they have an alternate sourcing strategy after we fulfill our contract obligations. And that's something that is very important to Boeing and to us and we'll help them in that transition..

Yeah. On G650, I think we put out in the press release what we had to say about that program. That was a follow-on order under our contract. I think it was through 2018. The specifics are in the press release..

Thanks..

Our next question comes from Justin Harnett. Please state your affiliation followed by your question..

Hi. Good morning. It's Rob Spingarn, Credit Suisse..

Good morning..

Two questions. One for Dan and one for Jim. Jim, I'll start with you. You mentioned the net risk of $80 million, which we heard about on the prior call, and it sounds like you're affirming that figure. I assume that implies there were no changes from your review..

Yeah. Thanks for the question, Rob. I'm not affirming that figure. What I'm saying is that we reviewed all those and they continue to burn off. That was a risk figure to the full-year forecast. What we've done is integrate it in the forecast now. But there were no surprises as I went through those.

Those were all reasonably valid risks and, actually when we update monthly, what's happened is it's come down slightly from what it was previously..

I see.

So, you didn't find anything new, nothing material that would change anything?.

Again, there's a lots of risks. There's some new ones but nothing material..

Okay. All right, thanks for that. Dan, you mentioned the pipelines, $3 billion bigger than it was 2014 to 2017. I was hoping you could expand a little bit on what's out there that's new.

Is it – are there new programs, opportunities on existing programs, new capabilities that you want to target, how do we think about that?.

Sure. In the past, Triumph mainly grew through M&A, two companies per year added on average. And that, in some ways, it masked some of the organic contraction. Now, we're in a position to go back and really get more value out of the companies in our portfolio. And there wasn't – what I think needed to be a robust business development focus.

So, we've gone back to basics. We reset in February our strategies. We indentified which platforms we have content and where we wanted to grow that content, particularly in the areas of machine and components, as well as systems, such as actuators, landing gear, gearboxes, transmissions.

So, there's a lot of platforms where we had lower levels of content, and I think we really can provide. By solving some of our red program issues – I'll give you an example. On Airbus A350, we were behind on delivery of some machine products, and we recovered in Q2 to our on-dock need dates and PO dates.

And that's opened the door for us to have discussion with Airbus on a number of their platforms in the areas of systems. And most of those would be their dual sourcing or takeaways from our competitors. Next, we initiated growth in the defense area. Although we've done defense work in the past, C-17, B-22, there wasn't a concerted focus there.

We brought on a VP for military defense program pursuits, and we're looking at, obviously, T-X, but also B-21, Next Generation JSTARS, F-35. And we're looking for both short-term dual-sourcing and production ramp opportunities, as well as rolls on clean sheet, new start opportunities. So, that's a big push.

I'd say the third area of pipeline relates to our Product Support area. Now, that's traditionally been a transactionally-based MRO business with limited backlog. And now, the OEMs are aggregating their aftermarket. They want to own the customer full life-cycle experience.

But they want to partner with companies like Triumph to deliver some of that aftermarket support such as structural repair, flight control surfaces, thrust reversers, accessory drives, gearboxes. And so, we've already had good success with customers like FedEx and UPS.

And now we're adding additional airlines and operators as well as on the military side. I mentioned KC-135 and C-17. And companies like Boeing are putting out large packages, RFPs, for all of their platforms and for the companies that win those contracts, it will be more like an annuity business rather than transactional.

So, doing all of those across the market, commercial, defense and then non-A&D and getting them in our product roadmaps and strategies enable us to increase our overall addressable market portfolio.

Now, we got to convert that, and so we're putting in all kinds of new disciplines around capture that I've done at my prior companies that are best practices that Triumph is now adopting..

And on the third part, the Product Support.

Since you're going through the OEs, should we think of the profitability on those sorts of opportunities as more OE margin or aftermarket?.

Yeah, it's a fair question. Today, our Product Support business generates near 20% kind of margins. And there's no doubt that the OEMs are going into this space to capture some of that value. It goes back to how are we delivering value to them. We're already – we've acquired a company that does flight line support, fuel services.

We have very strong capabilities in APU overhaul also in, as I mentioned, repair of flight control surfaces and thrust reverser. So where we can show them that we hold inventory, we do quick turns on repairs, we pre-position stock, flight line, they're willing to pay more.

For items that are more commodity-type items, there's going to be price pressure from the OEMs..

Thank you..

Our next question comes from Cai von Rumohr. Please state your affiliation followed by your question..

Hi. Cowen & Co. This is actually Bill Ledley on for Cai. I have a couple of questions for you.

First, how should we think about margins in the second half? Is Q2 sort of an appropriate runway, or is there anything we should know about the seasonality of the business mix given the restatement of the segments?.

Good question, Bill. Margins by segment, I think you can look for a modest improvement over our current run rate year-to-date. (34:40)..

All right, thank you. And then going back to the Product Support point, have any of the second sourcing initiatives by Boeing contributed to the backlog growth? I think you mentioned it was up 4.7%.

Have you seen any of those come through? And then on that point also, is there any issues around second sourcing initiatives impacting the owners of the intellectual property?.

Yeah, first of all, the OEMs are all negotiating master terms and agreements or general terms and agreements, Airbus, Boeing and the others, so that when they deal with Triumph and other companies, they have a common set of terms.

And although intellectual property is an area that they desire to have access to, it's not uniformly applied to all commodities. Some items, obviously, it's not a problem to provide IP. Others, we've asked to retain those, and they've been responsive to those requests.

My sense with the OEMs is that once they assess all the Product Support addressable market, they are realizing that they can't do it organically and vertically integrate, and that many of their processes aren't agile enough to support some of the quick-turn work that we do today.

I mean, to give you an example, when we refurbish the interior of an aircraft, we get it on a Friday and we turn it over the weekend and supply it the next week. I mean, these are things that only smaller companies are able to do on a quick turn.

We also have some – because we do the MRO across larger fleets of all the operators, we have the older engineering on file, we've got the materials in stock, and so we can provide the turnarounds that the OEMs are looking for. And we do it with a lower cost structure. So, there is a role for us to play in that market.

Was there other questions, Bill?.

Okay. Thanks..

Okay..

Sorry, just one last one. You mentioned the production rate changes are impacting your sales guidance.

Can you talk about where is the most incremental pressures there?.

Well, G450 is certainly running down, and they've announced that they're going to do their last delivery in the next year. And then we've seen softness in the commercial rotorcraft market particularly tied to oil and gas; that was true earlier in the year and it's continued.

And there's been some softness in spares, but we expect that to start to return as people deplete their on-hand inventory spares and need to reorder..

Okay. Great. Thank you very much..

Our next question comes from Seth Seifman. Please state your affiliation followed by your question..

Thanks very much. JPMorgan. Good morning..

Good morning..

You touched briefly on the work you're doing at the Red Oak facility during the discussion earlier. And so, that's a more or less brand-new facility that you have, state-of-the-art.

And so, is there excess capacity in Red Oak right now that you have to fill, and to what extent does that present an opportunity for you to win new business?.

Sure. So, Red Oak was created after the facilities in Dallas, Jefferson Street were closed a few years ago, and it is a modern, brand-new facility. It has two main buildings. The smaller of the two is going to be completely filled by the Global 7000.

And if you tour that factory today, you'd see all the automated drill, fastener installation wing assembly fixtures. The other building is occupied with the Embraer E2, G550 which is ramping down, G500/600 composite wing skin productions, and the HALE Global Hawk and NATO UAS production as well. And you'll see some residual V-22 work in there as well.

So, I would say that facility has maybe 10% to 15% of additional capacity. And we're not running full shifts, so we have surge there as well. And we are our talking to customers. I mentioned some of the military programs that there's interest in us doing. There's plans for T-38 re-winging, F/A-18 re-winging, T-X as well.

We're in discussions on the rolls on B-21. So, this is a facility that has a broad capability.

And what we're really focused on is driving Lean operations there because in the past, they had sort of mature programs that were in the rhythm, and now, as we begin to ramp up on Embraer, HALE for Northrop Grumman, and then Global 7000, we need to bring a whole new production mindset to support those rates..

All right, great. Thanks.

And then, just as a quick follow-up, is there a visibility to a return to organic growth in Integrated Systems? When do you see that happening? Could it be by the end of this year or is it more of 2018?.

I think 2018 is a more realistic target. I'm excited about what Tom Holzthum, my EVP for that business, is doing. We have great working relationships with Sikorsky. We've been in discussion with them on a number of platforms. I mentioned the Airbus contact.

And one of the great things about Integrated Systems is unlike structure that generally you build at once and it lasts for the lifetime of the airframe, except for maybe control surfaces. Integrated Systems are refreshed two or three times during the life-cycle of the platform.

And increasingly, they're becoming integrated instead of having separate hydraulic and power fuel systems, thermal management systems, now they're becoming much more interwoven. So, Tom's team is working on ways to offer products that reduce weight, reduce costs.

That's really the next frontier for the OEMs is you can only compress cost of the current design and hardware architecture so far, and then you've got to start to redesigning products out, and using new technologies.

In the last quarter, we've been spending a lot more time looking at additive manufacturing and looking at what companies like GE is doing on their passport programs. And that's the real strong path to take cost out through design simplification.

So, you can see that as a coming attraction in our products like valves, actuators, transmissions, gearboxes as well. And we need to do that to help the OEMs get prices down and reduce weight..

Great. Okay. Thanks. Thanks very much..

Our next question comes from David Strauss. Please state your affiliation followed by your question..

Yes. Good morning. Thank you. It's David Strauss from UBS..

Good morning..

Just wanted to follow up on a couple of cash items.

So, I think in the presentation, the $126 million burn on Bombardier and Embraer year-to-date, is that comparable to the $90 million to $100 million guidance that you had given previously?.

This is Jim. Thanks, David. I wasn't here when we gave the guidance previously. But that is the year-to-date amount. It was planned based on the forecast when I got here, so....

Let me provide some color on Bombardier. We've been in an intensive design release in support of the wing that we've provided. And that effort is starting to come down and we're seeing the final design releases and completion of all the artifacts needed for safety of flight certification. And the fifth flight test vehicle is in flow.

That's the last of the five flight test articles we'll build, and then we have a couple of ground test articles for static and durability. So, we're seeing development now after four years into the program start to come to a close. And that will help us on our spend. Now, there is spending that's required in support of the ramp-up.

As I mentioned, our first production article is in flow. But we expect to see payment milestones for both the test articles and the completement of development in the second half of the year. And that will help us offset our expenditures in development..

Okay.

And following up on that, Dan, I think in your prepared remarks, you talked about the development programs getting to cash positive in 2018, is that correct? I would have thought you would see further cash burn as you ramp those programs up particularly the Global given the restructuring or the charge you took there and what it implies for cash burn..

I guess the more accurate way to put it, David, is that we're going to see revenue-bearing articles start to generate cash for us. It may not net to a positive cash generation on the overall program, but it's the first time we're going to see cash coming in. And so, we owe you more transparency around – and the programs are in different staggers.

So, we'll provide more transparency around the programs and when they become cash positive in the net. But my point was, is we're starting to see cash inflows for production deliveries in FY 2018..

Okay. Got it. And then, last one for me. Jim, the incremental customer and vendor financing, the $100 million, is that where you're selling receivables or is that something different..

That is essentially selling receivables. So, we work with the customer under these programs and if we agree to take a modest discount, which is a very low annual interest rate, we get paid immediately instead of 90 days..

Okay.

And what about the opportunity to expand that?.

There is opportunity. We are working on that, but as you can see we did a lot of it year-to-date and we will continue. It's just – obviously, it's not sustainable indefinitely..

Right, right. Okay. Thank you..

Thanks, David..

Our next question comes from Myles Walton. Please state your affiliation followed by your question..

This is actually Louis Raffetto on for Myles. Just had a question on the military business. Looks like we've continued to come down there.

Is this the last quarter of sort of C-17 headwinds? And what do we see driving that going forward, I guess?.

We see uptake on C-17 on the Product Support side. They're calling us and asking us for support, I'll say, on thrust reversers. It's quite remarkable. They cycle the thrust reversers at altitude on that plane based on some of their mission profile. So, they really bang them. And so, we're seeing traffic there.

We're finishing the last few deliveries of our C-17 kits. These were some of the QEC kits that we built over the last year and we expect that to sunset. But in terms of new starts on the military programs, we're having conversations we didn't have six months ago with Northrop and Lockheed and Boeing.

And I've had several meetings at both Boeing Defense and Lockheed Martin Aero, Sikorsky, and Northrop Grumman in El Segundo about what they're doing and how we can support them. We're going to have to add value and compete. We understand that.

But working relationships are now where they're pulling us in and asking us to quote, and I look forward to giving you updates on what we're doing. And on T-X, as an example, we're being solicited by multiple teams that are going forward. And these will be very cost sensitive, high-rate programs but that's the nature of the business now.

What I'm seeing in both commercial and in military is much more sort of automotive-like sourcing strategies. In fact, many of the commercial aviation OEMs have hired ex-automotive types to run their procurement groups. And so, they're bringing in sort of a paradigm of Lean production, efficient flow.

And many of them want us to build factories close to their final assembly lines, so, we have very short lead-times and buffer stocks can be minimized. So, the game is changing. It's changing in the area of Product Support, as I mentioned, going to more life-cycle partnerships and less one-offs.

We're also hearing from the OEMs that after setting up fairly large procurement organizations that source lots of parts to thousands of suppliers, they want to start aggregating their spend to get price reduction, but also to reduce some of their internal cost for managing the supply chain.

So, Triumph needs to align and will align with these changes in the market. They represent both risks and opportunities. And that's something I'm excited about as we reset the strategies as where Triumph has been and where we're going is how do we take advantage of some of these changes in the market..

Great. Thank you..

Our next question comes from Peter Arment. Please state your affiliation followed by your question..

Yes. Baird. Good morning, Dan, Jim. Dan, on the Gulfstream G650 and G280 programs, can you – you spent $47 million was the spending kind of year-to-date. Can you just – but you mentioned you've had some progress recently with the Gulfstream management visiting.

Can you just kind of give us an overview of how you see the cash profile for those particular programs? Thanks..

I know this is something that prior CFOs spent a lot of time on given that we were paid to take the contract, and we're burning that cash down. So, I'll defer to Jim maybe in some of the one-on-ones, we can go further into this. But our first mission was to get the work re-hosted from Spirit's operating system into ours. That's now done.

We finished that in Q2. The second is to become a stable, predictable supplier of these wing boxes and full-up wings. Tulsa is now really performing well. We continue to share the workload between our factories in Savannah. I think long-term, it's Gulfstream's desire for us to take the work that they perform there and do it in our facilities.

But that's got to happen when the conditions have been met both quality and delivery. But it's a very transparent and team-oriented approach with Gulfstream. The 280 will continue. It's at a lower build rate. And we're involved in Gulfstream's new stars, the G500/600. Now, they in-sourced those wing assembly lines during their days with Spirit.

That was a decision they made then. But it's something that we'll maintain dialogue with, and we'll have to earn our performance on new platforms. But we'll continue to improve our learning curve performance. That will affect our cash. Putting a lot of energy into reducing cycle time and improving quality at both plants.

And that will influence what our ultimate cash demands will be..

Yeah. Thanks, Dan. Let me add – this is Jim – that the outlook for cash for the second half is less use than the first half, although I don't want to go down the path of each program's cash use each period. That one, I know, was mentioned before, so I'll tell you that the cash use is declining on that program..

No. That's helpful. Thank you very much, Dan and Jim..

Thanks..

Thanks, Peter..

Our next question comes from Doug Karson. Please state your affiliation followed by your question..

Yes. Hi. I'm with Bank of America Merrill Lynch. Thanks for taking my call. I had a question. It's kind of a kind of big picture on the restructuring that you're going through which it looks like it's been successful, but quite intense.

How much of the cost have you realized so far on the restructuring program? I think you had talked about, like, a $300 million number, if I'm right in remembering that..

Our charge that we took in Q4 associated with the restructuring, I think, was about $74 million. And we're starting to bleed that off now as we close plants and transition programs. I don't have the number at my fingertips as to how much of that we've consumed, but I appreciate you saying we're far along on it. We know where we are, we're on track.

But it's going to continue all the way through the end of the fiscal year to get the plants closed and those divestitures implemented. So, we are where we want to be. And candidly, Triumph had a larger footprint and head count than our business base can support. So, we're dealing with that head-on..

Yeah. Thanks. And I'll add that the numbers that we disclosed here in the period are we had restructuring costs of $17 million in the quarter, and we had year-to-date $22 million of savings.

And we track that savings, but that savings sometimes it gets caught up in inventory because it's savings on procured parts and also it will flow through to the bottom line over time..

Right. And, as far as the cash cost of the restructuring, I know we went through a lot of cash discussion.

Just so I'm clear on, how much is left on just the restructuring part of the cash outflow? Your thoughts?.

I have to take that one away. I don't have that number handy. But you're saying cash restructuring – so the original charge versus what we used so far..

Yeah..

Yeah, I don't have that at hand but I will look into that for you..

Okay. Well, thanks. That's it for me..

The main point is that we're adhering to budgets that we set up when we established them in Q4. And so, it's probably midway through that number based on our progress..

Great. Thank you..

Thanks, Doug..

Our final question comes from Ken Herbert. Please state your affiliation followed by your question..

Yeah. Hi. Canaccord. Thanks for squeezing me in. Dan, just I wanted to ask you a question back on the business development side, if I could. Obviously, painfully, but over the last few years, you've clearly as an organization developed a lot of capability around wings, especially for business and regional jet aircraft.

How do you view, one, your appetite to take on wing programs moving forward, considering probably engineering was one of the most difficult parts of the airplane? But then, second, how do you view the business development landscape here either on a military side in particular or on the commercial side, where there seems to be certainly fewer program starts as you look at taking on risk from a development standpoint?.

We're late in the earnings call sequence, so we had a chance to listen to the OEMs and I know you all do as well.

And it's really mixed messages in the sense that you hear about 39,600 commercial aircraft over the next 20 years from Boeing, over $6 trillion, I think, on the bizjet side, both Gulfstream and Bombardier are very bullish that the next decade we'll see higher levels of especially large bizjets be awarded that could potentially generate over 100, 150 large bizjets per month in terms of the demand profile.

And many of the early forecasts for some of the legacy platforms were understated and ended up building and delivering more. To the contrary, you hear this adverse feedback about bizjets not holding their value and about maybe the end of the commercial aviation super cycle such that there might be a slowing.

This is part of our challenge is to adjust to these changes because in the near-term, we're still in a ramp-up mode A350, 767, Global Hawk on the military side. These are all ramping. So, in the near-term, we're not seeing a slowdown.

Okay? I have people that are over at the NBAA Show this week that are twittering me the feedback from the press conference there, and there's certainly some chatter about the bizjet market. We don't intend to take on any large development programs as we have with Embraer and Bombardier that have been big sources of cash rains (55:22).

So, don't look for that in the near-term. It's really important that a company like Triumph balance the production and development programs and keep them in the right ratios.

We're going through a cycle now of business base mix, where we're seeing the production programs that carry high margin sort of sunsetting and we're at the lower-margin high cash phase on the development programs. And so, if we continue to bid in that range, it's going to take much longer for us to return to the margin cash that we need to.

So, that's why we're putting so much energy into second sourcing and takeaways. And the military side tends to have – albeit there's some requirement for investment, there's not the negative cash profiles that you see on the commercial side. So, that gives you a sense for where we're headed.

We're very proud of the fact that we're probably the world's leading business jet wing provider now with our programs in flow. There will be a demand for those products. And the fact that we've helped create sort of the next-generation platforms is a good thing for us..

Great. And if I could, just one follow-up. Obviously, you've been there about just under a year. You're executing on what you've laid out from a portfolio standpoint. Has anything changed in your view of the portfolio and the operating companies recently? Has your thinking changed at all just with recent experiences? Thank you..

Sure. So, the company, having grown over 20 years, two acquisitions a year, really generated a very diverse, broad set of capabilities. There wasn't a lot of pruning of the tree of the portfolio. So, it's timely for us to step back and say which companies really don't fit and would do better under a different company's umbrella.

And the good news is that we're selling into a market where there's high demand for A&D properties. And so, the investment bankers that we talk to routinely talk about multiples north of 10 and often as high as 13, and you're seeing that in some of the transactions. So, it's a good time to adjust the portfolio.

I will say that coming in, my mandate from the board was to focus on fixing operations particularly in our Aerospace Structures and Precision Components. They're really the target of much of our restructure and consolidation.

And when we finish that work this year, they're going to be more competitive businesses, and we'll continue to assess all of our options with respect to portfolio going forward.

It's such a dynamic market right now between shifts of work to the low-cost countries, to the disruptive technologies like additive manufacturing, new business models like life-cycle powered by the hour that these are all things that Triumph needs to embrace, and that's exactly what we're doing.

So, the next 18 months are going to be exciting time for the company. And when we come out the backside of this transformation, I know we'll be a better company for it..

Thank you very much..

Great. Thanks, Ken..

Okay. Go ahead, Stephanie..

Okay. This concludes Triumph Group's second quarter fiscal year 2017 earnings conference call. This call will be available for replay after 11:30 AM today through November 10, 2016 at 11:59 PM. You may access the replay by dialing 888-266-2081 and entering access code 1677301. Thank you all for participating, and have a nice day.

All parties may disconnect now..