Daniel Crowley - President and Chief Executive Officer James McCabe - SVP and Chief Financial Officer.

Matthew McConnell - RBC Capital Markets Samuel Pearlstein - Wells Fargo Sheila Kahyaoglu - Jefferies Seth Seifman - JP Morgan Peter Arment - Robert W. Baird & Co Robert Stallard - Vertical Research Partners. Ronald Epstein - Bank of America Merrill Lynch Cai Von Rumohr - Cowen and Company Noah Poponak - Goldman Sachs.

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Third Quarter Fiscal Year 2018 Results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast.

Please ensure that your pop-up blocker is disabled, if you're having trouble viewing the slide presentation. You are currently in a listen-only mode. There will be a question answer session following the introductory comments by management. On behalf of the Company, I would 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 property of Triumph Group, Inc.

and may not be recorded, transcribed or rebroadcast without explicit written approval. At this time, I would now 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. Please go ahead, Mr. Crowley..

Okay, thank you, Brian, and good morning. Welcome everyone to our conference call on Triumph's third quarter results. We had a solid quarter in Q3 and are maintaining our fiscal year 2018 full year guidance for revenue and earnings while improving our cash forecast for the year.

Our customers are seeing the benefits of Triumph’s transformation and I am confident about our ability to translate this progress into shareholder value creation. Now before we get into the details of the quarter on Page 3, I’ll recap the five imperatives we set for FY 2018 towards our objectives of predictable profitability and positive cash flow.

First, eliminate program cost overruns; Q3 was the second consecutive quarter of positive cume catch-ups reflecting net favorable program performance.

Two, ramp down development program spending; we are on track to complete the Bombardier Global 7000 engineering work in Q4 after six years of challenging, but ultimately successful design and development work.

Three, fix Triumph’s aerospace structure’s backlog through improved execution, contract renegotiations, outsourcing of less profitable programs and new wins that carry higher margins. We made measurable progress in Q3. Four, reverse the trend of increasing inventory.

We set a goal of cutting $100 million in physical inventory in FY 2018, and we are confident we can achieve this target. And then, fifth, increase our new business backlog to reverse our revenue contraction. Our backlog now stands at $4.36 billion year-to-date and backlog is up 9.5% year-to-date.

Now each of these initiatives required intensive effort in changes how we operate at the process level. They are making a difference in our overall financial health and create the conditions for predictability in FY 2019 and beyond.

Now regarding our results, our revenue of $775 million in the quarter supports our previous guidance of full year revenue of $3.1 billion to $3.2 billion.

We anticipate revenue growth in FY 2019 after what we expect to be a trough year in FY 2018, as we convert backlog and replace sun setting programs and transition development programs into production. When we account for adjustments cited in our press release, our earnings per share was $0.76.

We did have a non-cash impairment of our Precision Components’ goodwill in the quarter, in part because of the consolidation with aerospace structures and due to competitive challenges in the build to print market, reinforcing the need to further reduce cost to improve margins and cash generation. Jim will discuss this further.

We are maintaining our full year adjusted earnings per share guidance of $2.25 to $2.75 and are focused on year-end deliveries to make our fourth quarter earnings.

Free cash use of $92 million in the quarter cover the liquidation of customer advances, $22 million of development program spending, and inventory investments, primarily on the Global 7000 as we transition into production.

We are improving cash use guidance from $450 million to $500 million to $325 million to $375 million as a result of inventory reduction efforts and customer advances.

Turning to Page 4, on the cost reduction front, we are on track to achieve our goal of $96 million for FY 2018 and $300 million through the end of fiscal year 2019 through our supply chain initiatives, consolidation, lean deployment and where advantageous, outsourcing work better performed by our supply chain.

The example of this strategic outsourcing is the recently announced placement of the E2 Regional Jet fuselage work to Korea’s ASTK a proven supplier of Embraer and Boeing Aircraft structures, who already built many of the E2 piece parts.

Doing so, will free up aerospace structure’s resources for other production programs and new starts, while fully satisfying Embraer’s delivery and quality requirements. Our E2 development is now complete and we are in the early stages of production ramps.

So the timing is right to make this transition and we plan to reallocate the factory space in Red Oak used on E2 to wing production on other platforms, a better use of both Triumph and ASTK’s capacity and resulting in improved business case for both firms while derisking our backlogs.

We also captured significant material savings in Q3 on the Bombardier Global 7000 program through competition. We will continue to outsource work where there is a better match between the programs’ needs, suppliers’ capabilities and Triumph’s financial goals as we ensure the right parts are built at the right places at the lowest possible cost.

Another important action in the quarter to enhance profitability was the consolidation of our Precision Components and aerospace structure’s business units. Recall, in April of 2016, we integrated 47 operating companies in overlapping business areas to create four focused business units.

At that time, Precision Components was about $1 billion business with 19 operating companies in 27 sites. We since streamlined the group and reduced the number of OpCos to seven and are on our path to close five sites.

We put the right teams and process in place, which led to better operational results, fewer red programs and higher customer satisfaction. Operationally, we fixed red programs such as the Boeing 767 landing gear machining, the A350 bracket machining, and Global Hawk composite part production.

We invested and reinforced thermoplastic laminates and Precision Components also won new business such as the Canadian Nuclear [SNC] [ph] program, [indiscernible] of two parts and Boeing 777X interior and composite components.

So having stabilized and right-sized Precision Components, and jumpstarted their growth, combining the two business now makes sense to improve profitability.

Components and structures have a $110 million of intercompany work, they serve the same customers, they source from the same suppliers and they are both headquartered in Orleans and Texas where the staffs are going to be combined.

So, the combination is among a number of critical steps we are taking to better position aerospace structures by reducing cost and improving overall competitiveness. We will also continue to pursue opportunistic divestitures of non-core capabilities that are better aligned with best-in-class pure play companies.

Now taken together, these cost reduction activities derisk and strengthen our backlog and profitability as we focus on higher margin programs with growth opportunities.

Q3 highlights include early results from our inventory attack team who were tasked to reduce our physical inventory levels from their peak in December by over $100 million by the end of this fiscal year, which we are on track to do.

Along with our lean operating system events, these actions get at the heart of how we plan programs, manage our supply chains in factories and will benefit FY 2019 and beyond.

The combined benefits of customer advances in the quarter and our inventory reduction efforts improved our overall liquidity, even as we increase inventory levels associated with production ramp ups.

As we closed out FY 2018, our second full year of the transformation, we’re beginning to see the benefits of our operational, new business and financial improvements, which we expect to benefit our out years. So turning to Page 5, let me give you an update on our progress on organic growth.

After three years of revenue contraction, we are now seeing the impact of our new business development team and processes. You can see a few of our competitive wins in the quarter for Triumph’s Integrated Systems division including the Landing Gear System for the Sierra Nevada Dream Chaser, engineered components on the 737 and 787.

A key takeaway of our Pratt & Whitney Military Engine Mounted Accessory Drive and our selection to provide propeller gearbox for a new Lockheed Martin program. In product support, we are awarded interior refurbishment program from a major U.S.

carrier and a contract from innovative solutions and support to provide line labor in the removal and replacement of cockpit equipment for multiple aircraft types.

Touching on follow-on awards, Bell awarded Triumph Aerospace Structures a five-year extension of our metal bond support on the AH-1Z program and our recent announcement on the Boeing 767 contract extension spanning all variants over a ten year period built on our partnership with our largest customer and this partnership continues to gain momentum, not just with Boeing Commercial.

But also Boeing Defense and Boeing Global services where we were recently notified of our selection to provide MRO services that supported Boeing Aircraft to our Thailand facility. Our new business pipeline stands at $12 billion, roughly half of which is Military, while our win rate and book-to-bill now at 1.15 year-to-date are both up.

We are well placed on numerous military pursuits and are driving to increase our military content to at least 30% of our sales. I recently visited customers including Honeywell, General Atomics, Northrop Grumman, Boeing Commercial and Boeing Defense. Each of these visits left a positive impression on both parties.

And what I take from these visits is our relationships with our long-term customers continue to improve building the recent partnering agreements, Triumph is no longer on any legacy customer no bid list.

OEM difficulties with other suppliers on price negotiations or performance is creating RFP opportunities for Triumph and while price remains a strong factor, they appreciate our responsiveness and willingness to align with their supply chain strategies.

Also, competition for new start military programs is heating up and we are offering greater value-added through Integrated Structures and System Designs at multiple primes. And then last, the partnerships for aftermarket are the future including new business models and contracting arrangements.

It’s all about adding value and discriminators, but encouragingly, we are being pulled in, not pushed out. Turning to Slide 6, I provide my take on the market trends, which influence Triumph’s longer term outlook.

The recent continuing resolution ended the government shutdown and it’s mainly through an agreement on defense budget which appears to be converging around $621 billion, plus of $66 billion plus OCO of $66 billion.

Within this budget are marks for key programs such as CH-53, CH-47 and V-22 where Triumph holds substantial content and JSF F-18, B-21, T-X Trainer, the OAX Light Attack fighter, many other programs that are vital to the security of our country.

Triumph is bidding on System Components for the B-21 Bomber and JSF structures and components for the MQ-25 refueling drone and life extension programs for the T-38 and F-15. To quickly grow our military portfolio, we are also aggressively targeting takeaways on existing programs.

On the Commercial side, you are all well aware that the rate increases on the narrow body programs and the revenue lift, they will provide to our Integrated Systems business unit. But I want to highlight our work on narrow body engines. Triumph is well-engaged in the engine market overall, where GE is our fourth largest customer.

We are also building substantial content with Rolls Royce and Pratt & Whitney. Triumph provides the internal gearboxes for both the CM CFM56 and the LEAP engines through our Integrated Systems division and we anticipate increases in revenue as LEAP rates increase.

On the structure side, demand for large cab and business jet market remains robust and Triumph is well-positioned within the market segment.

We support five Gulfstream aircraft programs today and with our restructured Global 7000 contract and improved customer alignment, Triumph is ramping up productions of wings in support of anticipated deliveries as this exceptional aircraft prepares to enter the market later this year.

I want to congratulate Bombardier and our dedicated teams on Tuesday’s first flight of flight test vehicle number 5 called the Masterpiece, which joins the test fleet as it’s flown over 1300 hours now.

This fifth aircraft will allow final validation of test results today and with our design and certification efforts completing in the coming months, these flight tests represent significant risk reduction events for both Bombardier and Triumph.

As Airbus announced, the A-380 program received the anticipated order from Emirates and this will provide greater out year revenues for Triumph as well. Finally, we are following developments related to the vertical integration of the OEMs, the most recent being the JV between Boeing and Adient to provide aircraft seating.

These actions reinforce my perception that commercial markets are adopting automotive approaches, while military markets are adopting commercial practices.

When taken with recent OEM actions in cockpit and cabin electronics and the cell wing integration, it reinforces the importance of maintaining partnerships in the industry to preserve Triumph’s platform content. To better understand, customer and market trends on the corporate governance side, we recently added two new directors to the Triumph forum.

General Larry Spencer is a retired four-star general who had a distinguished career in the U.S. Air Force and brings extensive leadership experience including in logistics and MRO.

Dan Garton is the former American Eagle CEO and American Airlines CFO and has extensive experience working with many of the aerospace OEMs we serve, as well as the Tier-2 major component and engine suppliers and aftermarket providers.

These appointments add financial acumen and extensive experience in the growing markets we serve and underscore our commitment to refreshing and adding expertise to our already strong Board. So, in conclusion, Q3 is another step forward towards our overall recovery.

We are seeing the improvements with each new quarter as we continue to do what we said we would do. Jim McCabe will now provide highlights on our current performance and full year outlook.

Jim?.

Thanks, Dan, and good morning, everyone. Our third quarter continued to show progress with our transformation as evidenced by the sequential improvement in our results that makes us increasingly confident in our prospects to deliver year-over-year growth in fiscal 2019. On Slide 7, you’ll find Triumph’s Group’s consolidated results for the quarter.

Our net sales of $775 million improved sequentially and on an organic basis, declined modestly from last year as higher production rates on the 767 tanker largely offset the impacts of the completion of production on two large legacy programs, the gradual wind down of several others and the timing of deliveries on certain programs.

Notably, our sales comps are improving as the year-over-year decline in Q3 was our smallest in over a year. As we indicated in our last call, we believe that the second quarter of fiscal 2018 was our sales trough and then we made the turn in the trajectory of our consolidated net sales.

Adjusted operating income improved sequentially to $62 million representing an 8% adjusted operating margin.

As noted on the slide, our adjusted operating income include the few items – exclude the few items, the most significant of which is a $190 million charge for impairment of goodwill in our Precision Components segment related to our decision to combine this segment and our Aerospace Structures segment.

We view this as an important strategic decision that will enable us to maximize the profitability of the combined operation. Looking ahead, we will impair the remaining $345 million balance of goodwill in Precision Components in the fourth quarter when the segments are combined.

Three quarters of the way through fiscal 2018, our sales remain on track with the expectations we set at the beginning of the year and we continue to anticipate that our rank in the fourth quarter will be our strongest in the year. Turning to our results by segment.

On Slide 8, Integrated Systems, after accounting for the divestiture of our Embee business, posted an organic sales decline of approximately 3% due predominantly to rate reductions on the 777 A-380 as well as the timing of deliveries on certain other programs.

Segment operating margin including $1.3 million of restructuring costs remains strong at 18% and improved sequentially including the impact of our cost reduction initiatives.

Integrated Systems continued to expand its backlog during the third quarter, the segment’s year-to-date book-to-bill ratio was 1.3 to 1 driven in part by wins on the Dream Chaser, which is pictured here on the slide and wins on the 737 MAX and 787 programs.

Turning to Slide 9, continued robust demand from OEM customers for accessory components led to growth in sales in our product support group. After accounting for the divestiture of our engines and APU repair businesses, segment sales increased by more than 9% over the third quarter of last year.

Product supports already healthy profitability improved further in the third quarter on both the sequential and year-over-year basis. Segment operating margin of 18% included operational efficiencies from our transformation initiatives.

Product support is a high potential opportunity for Triumph as we anticipate continued top-line growth in the business, coupled with mid to high-teens margins to translate into increasingly meaningful source of cash generation for the company.

Moving on to Slide 10, decline in sales in our Precision Component segment was a result of continued lower production rates comprising on the 777, in addition to lower pricing on the 787.

Segment margins, adjusted for the previously discussed goodwill impairment improved slightly, both sequentially and year-over-year reflecting the benefits of our cost reduction initiatives and lower consolidation spend. Slide 11, summarizes the third quarter results for our Aerospace Structures segment.

Rate increases on the 767 tanker were largely offset with the anticipated impacts of the continued rate reductions on certain Boeing and Gulfstream programs. Also worth noting, segment sales increased sequentially and reached their highest level this fiscal year.

Aerospace Structure’s year-to-date book-to-bill was 1.1 to 1 supported by the Global 7000, 767 Tanker and V-22 programs. During the third quarter, Structures had a net favorable cum catch-up adjustment of $5 million, reflecting both our improved operating performance and our enhanced customer relationships.

Segment operating margin included the impact of R&D investments, and increased amortization expense on certain intangible assets, as well as reduced fixed cost absorption on lower volume. Our Aerospace Structures operation has made tremendous progress overcoming numerous challenges since we began our transformation nearly two years ago.

Additionally, we expect our decision to combine the Precision Components segment and Aerospace Structures to yield synergies that will enable us to better serve our customers while improving margins. Turning to Slide 12, free cash flow was $92 million during the quarter.

This includes $250 million of customer advances, which will liquidate over the next several years. These advances like the advances we negotiated last year are evidence of our strong customer relationships and our improved working capital management.

Our revised FY 2018 cash use guidance reflects the receipt of the customer advances during the third quarter along with the liquidation of these advances and the previously received advances. Also impacting our cash use expectation for the year is the extended timing of deliveries on certain development programs.

Looking beyond the current fiscal year with respect to cash, we are increasingly confident that we’ve taken the steps necessary to make a dramatic swing from the cash use that we had in the past two years to a healthy level of cash flow by FY 2020.

As we enter our annual planning process, we are using the previously stated planning targets of at least breakeven free cash flow in FY 2019 and in the range of $200 million in FY 2020. Normalized means excluding the impacts of customer advances.

We expect to provide our guidance for FY 2019 on next quarter’s call after we complete our planning process. On Slide 13 is a summary of our net debt and liquidity. Our net debt at the end of December was approximately $1.3 billion.

Our cash availability are our sufficient for our needs at about $780 million and we are in compliance with our debt covenants. Regarding our outlook on Slide 14, we are maintaining our previous guidance ranges for sales and adjusted EPS. We are improving our outlook for free cash use to range at $325 million to $375 million.

We continue to expect that our fiscal 2018 quarterly sales and adjusted earnings per share will peak in the fourth quarter.

With regard to the new tax law, we recorded a provisional net benefit during the quarter of about $22 million, of which $24 million was due to the remeasurement of our deferred taxes at the new lower rates, partially offset by approximately $2 million of tax imposed on unremitted foreign earnings.

Excluding this estimated impact of the new tax law, on a full year adjusted basis, we are reducing our effective tax rate to approximately 1% for the year. We’ve also modestly reduced our expected CapEx range to $45 million to $55 million.

So, in closing, we continue to take numerous large and small steps down our transformation path and the results to-date are consistent with our expectations.

At this point, the actions we’ve taken with respect to cost reductions, operating performance improvements, divestitures of non-core businesses, and business development and backlog replenishment, have put us in an excellent position to establish a growth trajectory and begin delivering sustained profitability and positive free cash flow over the next 24 months.

Now I will hand it back over to Dan to wrap up after which we will welcome your questions. .

Okay, thanks, Jim. So closing out on Slide 15, our Q3 performance reflects our continuous improvement mindset as we improved sequentially quarter-over-quarter and see the leading indicators of recovery and execution on new business wins. Consolidating our structures and components will save money and it will allow us to better support our customers.

As investments in development spending and restructuring begin to payoff, we expect FY 2019 to be an inflection point for Triumph as we celebrate our 25th anniversary as a standalone company. At this point, Jim and I would be happy to answer any questions you have..

[Operator Instructions] Matt McConnell, please state your affiliation followed by your question..

Thanks, good morning. RBC Capital Markets. .

Good morning. .

So, you've announced a bunch of wins with Boeing over the past few months or really few quarters, not many of them have much, I guess, financial information.

Could you just size what these wins have kind of totaled? Or how much your content has changed on some of these platforms, maybe 767 in particular? And what's the typical lag between when you announce these wins and when they start hitting your revenue?.

Sure, the 767 is one of our biggest programs with Boeing. It’s performed at two sites in our Grand Prairie, Texas and Stuart, Florida facility. We make structures like the large wing center section which is essentially the cruciform, the wing and the fuselage are built on and we do approximately $14 million per shipset worth of content on the 767.

So what this contract extension does is it allows us to build not only the tanker variant, but follow-on for commercial which was otherwise going to come to an end and potentially could be competed. So it extends the program now for a full ten years.

And this is consistent with Boeing’s desire to create centers of excellence as they call it, both inside Boeing and at their supply chain that focus on the set of products and perform it well and we are investing cash right now to consolidate the work from our Grand Prairie plant down to Florida and that will further improve our business case.

So, you can think about that program as being worth over the life of the program that extension over $100 million worth of work. The other work that we have from Boeing coming out of Integrated Systems, and our Precision Components, I won’t attempt to dollarize them here on the contract. They tend to be smaller.

They are in the sort of a $10 million to $15 million range depending on the individual contract.

But the most important thing I’d takeaway is that, we were in the doghouse with Boeing two years ago and we had struggles to deliver on time and with quality on 747, 767 and the turnaround of these programs is really opening the door to follow-on not just with Boeing Commercial but with Boeing Defense. .

Okay, great.

And then maybe just to follow-up on cash, it's the second year in a row of pretty sizable customer advances and would it be fair to consider that almost a new normal? Or just a fundamental change in the way you are trying to get paid on these programs? I know last time you had a big inflow of advances, we said, okay, it's going to reverse over the next 12 to 18 months.

Could there be a continued stream of these advances just from a structural change in how you are getting paid?.

Yes. In the past, Triumph was often a source of vendor financing across multiple OEMs to the point where it was putting our liquidity under great pressure.

And so, in having a cards facing up discussion with prime saying, we need operating cash to support our supply chain cost and payroll and making investments in capital equipment, we got great responses and the expression I use is better a borrower than a lender be, and we were a lender at very high levels for a long time. So, it’s the right thing.

It’s in the interest of the primes, because I mentioned the 767 consolidation. They are going to get improvements in performance on 767, we’ll benefit on cost, we’ll make investments in tooling and automation that allow us to do all three versions on the same line. So, it’s a win-win.

Not just doing it for charity and we have to earn it through performance.

Jim?.

Yes, it’s an optimization of cash. If you think about the OEMs’ cost of borrowing is much less than ours. So, as part of the mix we can negotiate that which we are trying to do all the time. We are going to do that. It’s going to improve our working capital and it’s going to lower the overall cost of making parts..

Okay, great. Thank you..

Thank you. Sam Pearlstein. Please state your affiliation followed by your question..

Good morning. Wells Fargo..

Good morning. .

Can we talk a little bit about the advances? I just – you’ve got a $250 million advance, but cash flow only went up by about $125 million.

So, what’s the difference here? I know CapEx dropped by about $5 million, but what actually changed for the worse, like working capital in terms of the overall cash flow picture?.

We ended up spending more on production on a couple of programs, Global 7000 was one, and also one was transition cost I mentioned. However, those are temporary and as production deliveries accelerate on Global 7000, we will see that inventory position unwind as well.

So, that’s really the net of the two advances versus additional spend on working capital. But it was still the favorable adjustment and we expect it to continue to improve in FY 2019..

Yes, and within the quarter, absent the advances, we did better than we were planning internally. For the full year, though, as you saw our guidance is a little lower net of the advances. That’s why we got the advances, so we could have better guidance.

But the way I look at it is, this is really the timing of deliveries and it’s a lot better than a year ago when we were putting money into development we weren’t sure we were going to be able to collect it. So it’s just timing. .

Sam, we are also not as efficient, I think in some of our material and supply chain processes as we need to be. This inventory attack team is finding some low hanging fruit on the way that we issue purchase orders and accept parts from suppliers and lot sizes and min/max quantities.

And so, that’s contributed to $100 million improvement in working capital that we would not otherwise have had if we had launched it. So, watch for follow-through on that next year. .

Okay. And then, just to think through into next year, into fiscal 2019, I know you are not providing guidance at this point. But Jim, you talked about a normalized level of cash excluding advances.

So if I think about just on a reported basis for fiscal 2019, will you actually now be cash negative, because now you are paying back some of these advances even if on a – I guess, excluding advances, you might be close to that breakeven level?.

Yes, that’s good question and that’s why I said excluding advances, because, we do anticipate getting new advances going forward. I just don’t know what the timing and magnitude of them might be. As we said earlier, we are looking to this to be the new normal.

We are managing our business to use working capital from the customers which is less expensive, benefits us both. So, if we didn’t get any new advances, I think that would be the case. But we are always working towards this. .

Sam, I’d ask you to recognize that this will be the second year in a row where we outperformed out planned cash for the year and we are going to continue to pull all the levers and find all the ways to meet cash every year, that’s our commitment. .

Great. Thank you. .

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

It’s Jefferies. Good morning everyone. .

Good morning. .

Good morning. .

Another one on cash flow, I guess that, you spend about $90 million on the development programs as it regards to the Global mainly, can you maybe give us an update on how you are tracking there versus your target of 65 to 100, where you are in the program’s progress?.

Yes, thanks, Sheila. So, it’s great to be looking at the end of the development spending on the Bombardier Global 7000 and over the last quarter, the team has been furiously wrapping up all of the engineering artefacts, the documentation that support entry into service. And for our work, that will complete in Q4.

So you can look back now over years of trade studies to create this high performance wing, the design of the wing box, all the control surfaces, all the harnesses, brackets, fuel systems, lighting protection and that work is all done now. And I mentioned 1300 hours of flight time now on Bombardier test fleet.

The feedback we are getting is very positive from them in terms of the wing performance.

So, coming to an end on development spending and then positive feedback on performance it retires significant risk that would have future development spending in the future on the program and now our energies are shifting entirely towards both supply chain readiness and the factory ramp up.

So we are excited to be where we are in the program after several years of hard work. .

Sheila, we are at the high end of the range like we said last quarter and the good thing is that, it really hasn’t changed much, where we are now focused on the hardware managing that physical inventory that goes with ramping production as development winds down. .

So does the program become cash positive in 2019? How do we think about that?.

We haven’t talked about when it’s going to be cash positive. I think when we give guidance; we might be able to giving more outlook around that..

All right, getting ahead, some, and then, just to clarify on, not to beat a dead horse on the advances issue, it seems like it’s the normalized course of business.

Do we expect sort of $250 million runrate every year with advances and paybacks over time or is this just a transitional period?.

So, that number as a percent of sales is not unreasonable, but we are not going to speculate. They tend to be episodic between across different OEMs based on the timing of negotiations or new starts. So it’s little difficult to model, Sheila. But, as an aggregate, that level of advances wouldn’t surprise me.

We are not going to see billion dollar advances, not should we just see $10 million. It’s probably that order of magnitude. .

Okay, great. Thank you..

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

JP Morgan. Thanks, and good morning..

Good morning. .

If you could talk a little bit about Integrated Systems and were sales down organically on a year-on-year basis if we adjust for the Embee divestiture? And if so, is there something that is keeping sales declining there? I might have thought, especially given the exposure to the narrow bodies in that segment, but by this point, we might have seen some growth?.

Yes, Seth, this is Jim. The Integrated Systems, when you exclude the fact that the divestiture at the Embee coating business was down about 3% year-over-year. And what drove that was rate reductions on 777 and A-380 as well as deliveries of certain programs.

We didn’t guess much out the door this quarter as we’d like to and we hope to make it up in the fourth quarter. So we do have a little bit of H2 backlog. But, looking forward for that group, the book-to-bill is very strong at a 1.3 to 1 year-to-date. So, we are still very bullish on this group. We think it’s just timing in the quarter. .

All right. And was some of that delivery timing, the margin was also little bit lower than it has been or some of that related to delivery timing as well. .

Yes, delivery timing, but also, we had $1.3 million in restructuring cost running through as well in that. So, if you look at it on an adjusted basis, they feel a little different. .

They consolidated three Connecticut plants into one and they are consolidating the Maryland plant into Connecticut. So, they are spending this year on that is to greater the margins and cash..

Right. .

If the pay okay, it comes in FY 2019. .

And then, maybe as a follow-up.

Can you talk a little bit more about what’s happening with the E2? And I guess, the outsourcing that you talked about there and what that means in terms of the financials of the program for you going forward?.

Yes, I can. So, E2 developments all done now and we are building both vertical tails and the fuselage and performing well on the contract and we are ready to ramp up the line.

And as we began to look at both our factory space needs and our business case on the program, as well as our supply chain, we concluded that Korea’s ASTK, they already build most of the details that go into our fuselage. So logistically, they are going from Korea, to Texas and then back to Brazil.

And we did a trade study with them and found it was economically better for us and for ASTK to do that work there. So our business case will improve and then logistically, ASTK is going to put a facility in Brazil and they’ll near Embraer’s plant to make sure they maintain buffer stock on fuselages.

So, really it’s a win-win-win and you are going to look to us to make similar trades and we’ll put work that is higher complexity, wing work in its place in that same factory and not have to expand as we up to rate on programs like Global 7000. .

Okay, great. Thanks very much. .

Thank you. Robert Spingarn, please state your affiliation followed by your questions..

Credit Suisse. Good morning, and this is Joe on for Rob. .

Good morning. .

A quick question that I just wanted to clarify on your earnings guidance. You’ve got two months left here in your fiscal year and saw $0.50 range in the earnings guidance and Dan, I know you mentioned that there was some – potentially some timing of deliveries during the fourth quarter.

But just wanted to see if there are any major puts and takes or risk items that will get you to the high-end versus the low-end then how we should think about that?.

No, it’s mostly deliveries. You said it right and it’s not any one program. It’s a lot of small deliveries across mostly Integrated Systems and Precision Components. So, those leaders are working weekends and through the holidays to finish the year consistent with their plans. .

Yes, and Joe, as you know, we see - it can be volatile when you do an update estimates going forward. So, I think that acts as a caution. We want to leave the range wider. But we are targeting the midpoint. .

Got it. Okay, and then just one more if I may.

Daniel, you mentioned that OEM difficulties with some suppliers on price negotiations is creating new RFP opportunities for you and I just wanted to ask if that’s a – well, first, if that’s a go-forward comment, or has in terms of future RFPs and bids that are in the pipeline now or if that’s already been driving some of your recent new business wins? And then the second part of the question is, is it really just a price-driven discussion or are there any other considerations that are bringing the OEMs to the table?.

So, I’ll start with the second part. The OEMs value right now a continuity of supply, it’s the number one thing.

That what gets buyers fire to sit on parts on dock, price is second and then third is line it with their terms and conditions and one of the reasons that Triumph created a common operating system is, these primes wanted to have a single set of terms and conditions and they didn’t want to deal with all these different entities.

So, we are much more easy to deal with now and there is fewer points of contact.

And they do value responsiveness and so, where we’ve seen suppliers gap their lines and Airbus and Boeing and others have had to pay ex guide fees, the phone rings for us or where they feel like they are not getting the price concessions year-over-year from some of the competitors, the phone rings for us.

And then lastly, when they do some of these changes in aircraft architecture like the cell wing integration, or electrification of systems, we can comment and propose new solutions that take out weight and cost and step functions and the phone rings for us. So, it’s really all of those things together.

We got to earn it every day, but I think Triumph is a much more easy deal with companies than we were in years past. .

And has that dynamic, just the first part of the question, has that already been one of the drivers behind some of your impressive recent new business wins? Or is that more of a kind of going-forward?.

I’d say the takeaways that we’ve had so far mainly been, the third category of design improvements. But we have to see more RFP traffic as a result of – with the OEMs proceed as price gauging by others. So, I look for that to be a tailwind for us going forward..

Understood. Thank you very much. .

Thank you. Peter Arment, please state your affiliation followed by your questions..

Yes, Baird. Good morning, Dan, Jim. .

Good morning. .

Hey, Dan, maybe if you could just give us one – an update on how things are progressing on the cost side for the G-650 and the outlook there? And then, Jim, if you don’t mind, maybe you could just give us an update on the expectations around the adoption of the revenue recognition with 606? Thanks. .

Sure. So, one thing, on the G-650, it followed our production on G-450 and G-550 and both of those programs were profitable and 550 continues to be so. 650 is a really a stretch forward in terms of production tolerances and quality standards. It’s a very challenging wing to build, because the performance is high.

And when we did the transition from Spirit to Triumph, it didn’t go very well. And so they were – it took us much longer to get into groove and production. But we’ve recently recovered the purchase order dates, our labor hours are coming down, they are not coming down fast enough to suit me.

Know that the work is performed at two locations, the wing box in Tulsa and then wing completion in Nashville and we recently revamped the national line and they are making very good improvements ship-over-ship. So we are excited about those hours coming down and now we are focusing intensely on getting the Tulsa labor hours down as well.

So we are not yet positive. We are not yet positive cash flow on that program, but we are working hard to get there..

Peter, it’s Jim on the second part of the question about 606. So, actually we put in the slide deck in Page 20 you can see a few notes about it, but we are not putting on the quantification of the impacts yet. That will come next quarter. You’ll see some disclosures in our Q about it.

But generally, as you know it’s likely to accelerate revenue for us, because you go to a cost-to-cost method instead of a units delivered method. But it could also trigger some non-recurring forward losses as a result of the change in the way we recognize revenue. So we will have to quantify that for you in the fourth quarter.

So you’ll know what to look for going forward. .

Thank you. Robert Stallard, please state your affiliation followed by your questions..

Thanks, so much. Good morning. It’s Vertical Research. .

Good morning. .

I thought we got to stay on the couple of issues that have been discussed already, cash and pricing.

First of all on these advances, if you don’t get any advances next year, which may seem like an outlandish chance, what do you think the actual free cash flow burn will be? And then, secondly, on the pricing, how confident are you that with these more aggressive pricing terms you are signing up together with cash up front that you are actually be able to make free cash flow and profits on these contracts over the life of the contract? Thank you..

So, Robert, on the first part on the cash flow, so we are not going to give cash guidance on next year until we finish our planning process. But, as I told you, certainly forward looking towards much improved cash flow next year, over the past three years. The advances will impact with the operating cash flow would otherwise be.

And the advances, if they aren’t replaced, there is probably about 180 of what’s out there now, that would burn off next year. So, as we get closer to next year when we give guidance, we’ll tell you what’s in the guidance and what portion of that is advances that are burnt. .

Jim and I are focused on the cash components that are within our control. So, headcount, facilities cost, working capital and we are putting a lot of time into those items. Advances do help. We are going to continue to seek them.

What we are seeing with the primes, Robert is that they are flushed with the cash and they are using it to help drive both capacity and price reductions in the supply chain. So, they are not shy about deploying their cash to improve their supply chain efficiency. .

But in terms of your profitability and cash flow, given that they are effectively doing you a favor on the cash side, are you still confident that over the length of the full contract that they will be cash breakeven and profitable?.

Yes, especially contracts that negotiated of late like Bombardier, and the Boeing 767, these are programs that we put a lot of time and energy into the business case. We didn’t just take cash and give up margin to the point where the business case no longer closes, absolutely not. .

And then, just a quick follow-up maybe, Jim, on the tax, as those stuff moving around at the moment.

But do you have an idea of what the stable underlying tax rate will be going forward, maybe looking into next year?.

We don’t yet. It’s very dynamic. Actually, the law itself needs some interpretation by treasury. So, we should have better guidance for that next quarter. But overall, we believe it’s a positive for us and that the lower rate more than offsets any disallowed deductions..

Right, thanks so much. .

Thank you. Ronald Epstein, please state your affiliation followed by your questions..

Yes, and good morning guys. Ron Epstein, Bank of America Merrill Lynch. .

Good morning. .

Following up on one of the Rob’s questions. So, to get the business case to close on some of the wins that you’ve gotten and assuming this is new business to you, so you’ve taken it from somebody else.

What gives you the confidence that you can make money doing it? That’s one and then the follow-on is, because I am not so confident that Triumph, before you guys to be fair could, what have you changed to make that happen?.

So, we have to start, Ron. Leadership has changed, especially in structures and components. The processes by which we estimate and bid have changed. New product introduction, the levels of reviews, I review all four in our three business areas every 30 days in detail in much the same fashion we did at Raytheon.

We’ve upgraded program managers and we are fixing our IT systems. We got stronger culture of accountability. I’ll say the biggest lever in terms of where we’ve seen improvement is in the leadership area.

An example is, I recruited a President from one of the companies I used to work at, to come in and run our Stuart Florida operation and immediately put in a management control room of all the key metrics. He brought in additional talent. He engaged the workforce, the workforce was drifting. There were some morale issues at that plant.

Their quality issues, he understands how to build structures. So he immediately began to work on the produceability and tooling issues that were contributing to a non-conformance. So, there is no magic wand.

It’s hard work and competency in the right roles is being the biggest lever, because some of the people in various roles in the company, they weren’t bidding the work right, they weren’t starting it up right and they weren’t running it right and the results showed, as you indicated.

So, that’s probably the biggest lever, but, the close scrutiny that my EVPs, and I and Jim have on the programs, the risk and opportunity register which we didn’t have before. So we do a look ahead just to where problems might bind us and try to mitigate them has done.

It’s all of those things and that’s what’s allowed us to reduce the number of red programs and get to a positive queuing catch-up in the quarter. Now, two quarters in a row. So, it’s a lot of hard work, not in the detail level, but it’s starting to payoff. .

Thank you. Cai Von Rumohr, please state your affiliation followed by your questions..

Yes, thank you very much. Cowen & Company. So, Dan, you mentioned a $180 million burn-off next year.

I guess, at the end of this quarter, it looks like progress payments for $409 million and they’ve been burning about $20 million a quarter, which would suggest, ex any new advances that, you still have a substantial number, it’s a $200 million area on the books at the end of 2019.

Is the burn-off in 2020 the same or does it kind of feather out, so that that’s less of a burden of your cash flow as we think about 2020 and 2021?.

So, Cai, it’s Jim. In terms of the advances, the burn-off of the ones received this year is primarily in next year. So it would tend to feather out, but I think we have to look at the – take a holistic look at the cash flows and give you the guidance next quarter for 2019 and maybe we’ll have some indication of ranges beyond that..

Terrific. And then, if I look at this quarter, it looks like contract liability amortization was up $7 million sequentially.

Why was that? And maybe you can detail the EACs by the divisions, how big they were?.

So, I have to take a look at the contract liability. Typically, that’s going to be on a unit basis, as we ship out. So that will mean higher shipments than previous periods on those units that were in a loss position and we are amortizing fair value..

And we are looking forward to getting beyond the fair market contract liability amortization. It’s really been difficult for analysts and investors to follow and understand earnings and that’s something that is going to sunset over the next two years or so. .

Yes, and we certainly exclude that as we are looking internally at plants we’ve taken to account that that’s not cash income. .

Thank you. And our last question will come from the line of Noah Poponak, please state your affiliation followed by your question. .

Hi. Goldman Sachs. Good morning everyone. .

Good morning. .

Good morning. .

Can you just go back to exactly what happened with the Global 7000 that drove the change in the cash guidance ex the $250 million advance? I heard you saying, extra spending, I heard you saying delivery timing.

Was it the program itself or whether your products or can you just give us more detail on what happened there?.

What I can say, of course, Bombardier should speak for the program level and what I’ll say is that we are working jointly with them to complete development and to ramp up early production. And if you came to our factory at Red Oak, you’d see a large number of wings that are in flow and the clip at which we are shipping these is accelerating it.

So, Bombardier is now starting to deliver production aircraft to their completion center in support of their entry into service. So, this period is unique and it’s concurrency of development, flight test, ground test and production transition. So, next year, for us, FY 2019, it’s going to be more of a clean build process.

We won’t be doing any engineering change or we won’t be supporting completion of the aircraft up at the final assembly line in Toronto will be shipping wings at less travel work, which is always common in new programs. So, those are some of those non-recurring startup line priming issues that we are working through and it’s going quite well.

And Bombardier is very pleased with our performance. We are in a better place from a working relationship. We are making joint decisions every day and once the lines moves out, you will see us burn-off that working capital and have more predictable cash. .

Thank you. Ladies and gentlemen, at this time, this concludes the Triumph Group’s third quarter fiscal year 2018 earnings conference call. A replay of this call will be available later today by toll free number (800) 585-8367 or our toll number (404) 537-3406 by using code 6995048. Again those numbers are (800) 585-8367 and (404) 537-3406.

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