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Triumph Group, Inc. (NYSE:TGI)

F2Q09 Earnings Call

October 24, 2008 8:30 am ET

Executives

Richard Ill - President and Chief Executive Officer

David Kornblatt - Chief Financial Officer and Senior Vice President

Analysts

Myles Walton - Oppenheimer & Co.

Tyler Hojo - Sidoti & Company, LLC

Stephen Levenson - Stifel Nicolaus

JB Groh - D.A. Davidson & Co.

Eric Hugel - Stephens, Inc.

Chris McDonald - Kennedy Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our fiscal year 2009 second quarter results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you are having trouble viewing the slide presentation. (Operator Instructions)

On behalf of the company, I would now like to read the following statement:

Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Please note that the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.TriumphGroup.com.

In addition, please note that this call is the property of Triumph Group, Inc., and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time I would like to introduce Richard Ill, the company's President and Chief Executive Officer, and David Kornblatt, Chief Financial Officer and Senior Vice President of Triumph Group, Inc. Go ahead, Mr. Ill.

Richard Ill

Good morning and good morning from the home of the Philadelphia Phillies, future world champions, and my condolences to all of you Mets and Dodgers fans out there.

As you notice, we had two press releases come out. The first one was election of two Directors, namely Paul Bourgon, who is President of the Aeroengine Division of SKF USA, and Joseph Silvestri, a managing partner of Court Square Capital. Joe was previously a Director of the Triumph Group and is coming back on the Board, and we look forward to their expertise and perspective when they join the Board at our next meeting.

We are very, very pleased with the results achieved during the second quarter. As Dave will point out, sales increased 16% to $323 million and our earnings per share were up to $1.57, which was up 39%.

Our execution on some of our internal targets was very good, as shown by our increased cash flow, which more than doubled, which is critical in current economic times. I'll note in that regard that our accounts receivable and our inventory were down. Although we're not ready to declare victory in the working capital area, it's a significant milestone that we brought those items down in the same quarter and created the cash flow that we did.

In addition, our backlog continues to rise. It rose to $1.26 million during the quarter despite the fact there was a Boeing strike for a great part of the quarter and we didn't ship some of the backlog.

As you see in the press release, we've raised our guidance for $5.40 for the rest of the year and we remain optimistic based on the backlog mentioned and our execution. But the rest of the year will not be without some headwinds, namely, first, the Boeing strike, which does not look to be settled very soon. And we have factored in a strike that lasts through approximately the end of November, and we feel this will cost us between $0.10 and $0.12 per share.

In addition, we will improve our Phoenix APU operations, but this will affect our earnings to some degree during the balance of the year. As mentioned in the press release, with the exception of these second quarter losses in the APU division, which were related to receivables and warranty issues, the group would have had operating margins well over 10%. That's the Aftermarket Services group.

As mentioned, we have addressed these issues with management and work force changes, and we have positioned the company for future success. But dealing with these issues will reduce margins the balance of the year.

On the other hand, the Aerospace Systems group's margins increased year-over-year quarter significantly to 18% from 14% last year even though the group was affected by the Boeing strike.

This is admittedly a very frustrating period of time for us to be performing and from our point of view, nobody listening. It's also very frustrating to release earnings on a day when the futures are down 550 points. But I think that we're in very good shape for the rest of the year, and I think Dave will give you a little flavor on some of our numbers involved in that.

So Dave, at that.

David Kornblatt

Okay. Thank you, Rick, and good morning, everyone. I'd like to start off with a review of the financial results for our second quarter.

First, turning to the income statement, sales for the second quarter increased 16% to $323.4 million.

Operating income increased 34% over the prior year to $42.7 million, with an operating margin of 13.2%, an improvement of 180 basis points.

Income from continuing operations was up 39% from $18.7 million to $26.1 million, resulting in earnings per share from continuing operations of $1.57 per diluted share versus $1.05 per diluted share for the prior year.

The loss from discontinued operations was $1.1 million or $0.07 per diluted share.

Net income increased 45% to $25 million or $1.50 per diluted share.

EBITDA grew 30%, to $55.1 million, resulting in a 17% EBITDA margin.

Turning to our segment performance, in the Aerospace Systems segment sales for the second quarter increased 17% to $257.6 million. Operating income increased 49% to $46.5 million with an operating margin of 18.1%, an improvement of 28% or 400 basis points. EBITDA for the segment was $55.3 million at an EBITDA margin of 21.5%. The segment's second quarter results included $700,000 of legal expenses net of insurance reimbursement associated with the previously disclosed trade secret litigation.

In our Aftermarket Services segment, sales for the quarter increased 11% to $66.5 million. Second quarter operating income decreased 40%, from $4.8 million to $2.9 million at an operating margin of 4.4% as compared to 8% a year ago. EBITDA in the quarter was $6.4 million, an 18% decrease, with an EBITDA margin of 9.7%. As mentioned in our press release, the operating margin in this segment was hurt by losses incurred at our Phoenix APU operation. Without these losses, operating margins would have been in excess of 10%.

Our backlog increased 7% over the prior year to $1.26 billion, which is a 2% increase sequentially. Our backlog takes into consideration only those firm orders that we are going to deliver over the next 24 months and was not adjusted for the Boeing strike.

I will remind you that our backlog primarily reflects future sales within our Aerospace Systems group since the Aftermarket Services group does not have a substantial backlog. In addition, as we discussed last quarter, the 1% decrease in our 24-month backlog since the beginning of our fiscal year was entirely due to Boeing's revised 787 delivery and production schedule. While our total backlog related to 787 remains at record levels, a portion was pulled out beyond our 24-month window. If you exclude the impact of the 787, our backlog grew 4% since the beginning of the fiscal year. Military represents approximately 35% of our total backlog.

Our top 10 programs listed on the next slide are ranked according to backlog. Remaining in first place is the Boeing 777 program, followed by the 737 next generation in second place. Third is the CH-47 Chinook, followed by the Blackhawk helicopter in fourth place. Fifth place is the Osprey combat helicopter, with the 787 remaining in sixth place. Seventh is the A3-20 family, followed by the C-17 freighter. The 747 program is ninth, and in tenth place is the F-15, making its first appearance in the top 10.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue. Billings to Boeing commercial, military and space totaled 24% of our revenue.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal 2008, commercial aerospace increased to 45% and military increased to 34%. Regional jets increased to 6%, while business jets remained unchanged at 9%. Non-aviation decreased to 6%.

Finishing our sales analysis, the next slide shows our sales trends for the quarter. Total organic growth for the quarter increased 11% over the prior year from $280.6 million to $311.7 million. Breaking that down by segment, second quarter same-store sales for Aerospace Systems was $245.2 million, an increase of 11%. All of the Aftermarket Services sales for the quarter were organic. Export sales for the second quarter were $68 million or an increase of 17%.

Turning to the balance sheet on the next slide, we generated $36.1 million of cash flow from operations in the quarter, an increase of 138% from last year.

CapEx in the quarter was $13.5 million and year-to-date was $24.9 million.

Net debt at the end of the second quarter was $380.7 million versus $406.1 million at the end of March, representing 34% of total capital.

The global effective tax rate in the quarter for income from continuing operations was 34.2% versus last year's tax rate of 33.8%. In our third quarter we will recognize the benefit of the retroactive reinstatement of the R&D credit back to January 1, 2008. This will result in a global effective tax rate for the full year of approximately 32.5%.

With that, I will turn it back over to Rick.

Richard Ill

Thank you, Dave.

The first thing I have to do is I have to correct a mistake I made. I misspoke when I talked about the Boeing strike, which I said would cost us $0.10 to $0.12 per share. That's not true. It's $10 to $12 million, which will be approximately $0.40 to $0.50 per share. So we're factoring that in with the guidance that we gave.

As I mentioned and Dave has mentioned, our company margin went up to 13.2%, and that's partially because our end markets have remained very strong. We do not see, other than the Boeing strike and its related pushback in some of the backlog that we have, we do not see any downturn in our end markets. They remain very strong. I realize that there's a lot of people out there that say how can they remain strong? All we can do is report what we see on our backlog.

Our execution will continue to improve. We are very aware of the current credit markets, which will affect our continued emphasis on our cash flow. And it'll also increase our emphasis on CapEx and CapEx that has to be justified. So we'll continue to execute in those areas.

As I mentioned in the press release and earlier, we are raising our earnings guidance from continuing operations to be in excess of $5.40. That does reflect 16.7 million shares, which is a little bit down from, if you remember, the 18 million shares we were using based on the convert. But we've brought it down to 16.7.

And, as I mentioned before, we're saying that the Boeing strike will last through November of 2008. That's our estimate - we have no insight into that; Boeing giving us no insight, but at some point in time - and the corresponding effect that will have on our company.

So at that, we remain optimistic for the balance of the year. And at that, we'll open it up to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Myles Walton - Oppenheimer & Co.

Myles Walton - Oppenheimer & Co.

I wanted to ask you a couple of follow ups with respect to the strike, in particular. As you look to 3Q, just translating your comments, Rick, it looks like $50, $60 million of sales impact. Is that about right?

Richard Ill

Not far off. Not too far off.

Myles Walton - Oppenheimer & Co.

And then what would be the cash impact for the next couple of quarters, Dave?

David Kornblatt

I think we've done a good job on inventory. I think Boeing did a good job communicating to us, so I think we've been able to not beef up on inventory that we have not been able to produce. Our guys did a very good job in preparing for this. So I would expect that perhaps some of that $10 to $12 million, the lost profit, some of that would fall into Q3 and some into Q4 depending upon what the makeup schedule is and how they pick it back up. But I think it would be slightly less than that, Myles, but there obviously will be a hit as we don't get that profit.

Myles Walton - Oppenheimer & Co.

But you anticipate still running positive free cash flow for the remainder of the year?

David Kornblatt

Yes.

Myles Walton - Oppenheimer & Co.

And then, as you look at your suppliers and, coupling both the strike and the credit situation and the markets, are you seeing or are you getting concerned about any suppliers'0 ability to fund their own businesses and kind of keep your business on track?

Richard Ill

We haven't seen anything yet. It's interesting. We've had those conversations with Boeing because Boeing is, rightfully so, been concerned about our suppliers as well as us being their supplier. So we have gone down to each one of our business units and asked those same questions. We have not seen any problems in that area, albeit we have also, just like Boeing has done, we've held off our suppliers on a relatively significant basis all the way through our company.

So it just sort of shows you that this strike has a pretty big impact on the industry. But we haven't seen any inability to supply us or inability to hold the inventory on a negotiated basis with our supplier base. So it's working fairly well at this point in time. Obviously, there's more strain as the time goes on.

David Kornblatt

It's something we're very mindful of but right now no big problems on the horizon.

Myles Walton - Oppenheimer & Co.

And then on the Aftermarket, two questions. First, it looks like the underlying growth in that market still remains pretty strong for you guys despite the underlying traffic trends. Should we expect that to flatten to potentially decline through the course of the year? And then also if you can talk about the particulars of the plan to get Phoenix back to breakeven and how quickly that happens.

Richard Ill

Well, I think that, in the first question, I don't think we'll see a particular big downturn. As Dave mentioned, the rest of our company, with the exception of the APU division, have actually been in a growth mode, and they've been doing very well. I think that there's going to be some flattening out in regards to that group, but I don't see it decreasing significantly if at all during the rest of the year, number one.

Number two, in the APU division we have taken a number of steps. We got very heavy overhead oriented at the company. We've eliminated that overhead. We've addressed the problems that we see in the company, including the top management at the company. And we're going forward with a new organization at the top there, and I feel very confident that this is a blip in the road for the company.

Correspondingly, interestingly enough, in Thailand, which essentially does the same products on a repair and overhaul basis, Thailand is - Asia's doing very well.

Myles Walton - Oppenheimer & Co.

And so if it was $4 million losses in this quarter, what do you anticipate the losses for the full year that are baked into your guidance.

Richard Ill

We would see that being about breakeven for the rest of the year, Myles, in that operation.

David Kornblatt

Not recovering the losses to date.

Myles Walton - Oppenheimer & Co.

But ex the losses in the quarter, margins would have been 10%, but you're presumably not forecasting 10% for that business for the rest of the year?

David Kornblatt

I think it would be high single digits as that business sort of gets to zero margins.

Operator

Your next question comes from Tyler Hojo - Sidoti & Company, LLC.

Tyler Hojo - Sidoti & Company, LLC

I'm not sure if I missed it, but did you guys quantify what the impact of the Boeing strike was to the current quarter, the second quarter?

David Kornblatt

We did not, and there was a hit. It was a couple cents per share.

Tyler Hojo - Sidoti & Company, LLC

How about on the sales line?

Richard Ill

It was in the neighborhood of $4 to $5 million in revenue and about $0.04 a share in earnings.

Tyler Hojo - Sidoti & Company, LLC

And I was hoping that you could, obviously you're somewhat limited, but just kind of give us as much of an update as you can just in regards to your legal trial and the expenses associated with it?

Richard Ill

There's really nothing to update you. The legal expenses in this quarter were less and we're not projecting a little bit less for the year. Originally we had said it was going to be about $9 million for the year and it looks like it's going to be between $6 and $7 for the year.

But you've got to understand. We don't have much control over that. If the courts say okay, we're in full mode again, full mode means the lawyers' eyes light up. But that's what we're projecting at this point in time, that the fees will be a little less for the year than we originally projected.

Tyler Hojo - Sidoti & Company, LLC

Just in regards to Thailand, you hit on it a little bit in the previous question, but is it safe to say that's running well ahead of your plan or how would you characterize that?

David Kornblatt

I think they're having a good year, Tyler. As we said, we're glad we're there, and all we would say about Thailand is that it's probably a couple quarters behind where our original schedule was this quarter. Because of the margins in the Aftermarket Services group, Thailand was additive to those, not dilutive. But obviously that's off a pretty low base. So they're having a good year. They're meeting their business plan or slightly exceeding it, but they still have a long way to go in getting to where we want them to be. But good progress this year.

Operator

Your next question comes from Stephen Levenson - Stifel Nicolaus.

Stephen Levenson - Stifel Nicolaus

Just in relation to Phoenix, I think you mentioned there was an accounts receivable component. Do you have a mechanic's lien on any merchandise? Is there any chance for any recovery there?

Richard Ill

There's always some chance for some recovery. We don't have officially a mechanic's lien on any of the engines, but there's always some chance for some recovery. But we're not, in our guidance or in our earnings, we're not anticipating that. If that happens, it happens.

Stephen Levenson - Stifel Nicolaus

Coming up in the next year or so I guess we'll start to see things on F-35 Joint Strike Fighter and A350. How might that affect your top 10 list going forward?

Richard Ill

I don't think a lot at this point in time because you're still not going to be, especially in the A350, you're not going to be at the high production mode. It'll be similar to the 787. The 787 is not going to ramp up - I mean, assuming they get off a strike - that's not going to ramp up until 2010 and 2011 now. So the A-350 I don't think will ramp up during the first part of next year.

So I doubt it'll hit the 24-month backlog, because the same thing happened at the 787. We started getting orders and, if you remember, we're producing orders now notwithstanding the strike for the 787, and that is in fact, the margin there is a contributing margin, but it is actually dilutive to our overall margin. So I think the same type of thing will happen on the A-350 and the Joint Strike Fighter.

We're not as heavy on the Joint Strike Fighter as some of our other programs, so I don't know if that will really hit the top 10 soon. The A-350 will but, again, we're doing the same thing on the A350 as we did on the 787. We're somewhat in the second tier. Translate that as good news because we're not paying to get on it.

Stephen Levenson - Stifel Nicolaus

In terms of cash flow, is Boeing still paying according to terms and have they made any billandhold type arrangements with you to keep people at work and to keep the flow of merchandise going?

Richard Ill

Well, they're still paying as to terms but they don't have to pay much because they have us on hold.

Stephen Levenson - Stifel Nicolaus

So they've basically stopped it?

David Kornblatt

They've honored everything they've had to honor. There's been just one or two limited billandhold situations, but most of our Boeing commercial sales for new production has halted.

Operator

Your next question comes from JB Groh - D.A. Davidson & Co.

JB Groh - D.A. Davidson & Co.

I had a question on the Aerospace Systems margin. That was particularly strong this quarter. How much of that is just pure performance and how much of it is maybe absence of a month's worth of probably lower margin OEM shipments? How should we think about that?

David Kornblatt

I think it's really good execution by our team. And, as we said, the sales were $4 or $5 million that didn't go out to Boeing commercial. So that's very little of it. The less legal expenses yearon-year may have been 70 basis points, but it was a really good performance. And similar to first quarter, our best-performing companies are growing the fastest and some of our companies that have been not as strong have some very good improvement. So I think that group gets credit for really good execution.

JB Groh - D.A. Davidson & Co.

And Boeing mentioned a few days ago that they've been held up on some 777 deliveries on some interior stuff. Does that trickle down to you guys at all or you're delivering way before that?

Richard Ill

We're not the holdup.

JB Groh - D.A. Davidson & Co.

I know you're not the holdup, but I'm just curious if that hits you guys at all?

Richard Ill

Well, I think it naturally somewhat affects us in some of our companies. For example, we have companies that have the IAM as a union at our plants, and they're all on layoff because, I mean, it's somewhat ironic that the union in Seattle's on strike and then our guys are on layoff because we can't deliver anything. So it does trickle down, clearly, throughout the system and, as I mentioned before, even to our suppliers, so there are some issues in that regard.

And what we're trying to plan for now and I think we have under control is the fact that, when they go back to work, Boeing's going to need product very quickly. And we've factored in our situation with Boeing to include an immediate ramp up because when they go back to work that doesn't mean that all of a sudden they're going to have everything they need. There's going to be a carryover there.

JB Groh - D.A. Davidson & Co.

So your ramp up happens faster than their ramp up would probably happen?

David Kornblatt

I think they would want us to. Those plans have not yet been communicated, but I assume they're not just going to slide the whole schedule to the right and they're going to try to recover some of those. So not only will we need to ramp up from zero, we may need to ramp up to not just to where we were but ramp up above that if we can.

JB Groh - D.A. Davidson & Co.

And then, Dave, one question on the tax rate. I think to get to your 32.5% full year I'd have to get something like low 20s for Q3. Does that sound right, low to mid 20s?

David Kornblatt

Yes.

Operator

Your next question comes from Eric Hugel - Stephens, Inc.

Eric Hugel - Stephens, Inc.

What's the cumulative catch up that you're going to recognize in Q3 on the R&D tax credit and is that in your guidance?

David Kornblatt

Yes, that's in the 32.5% tax rate that we gave you.

Eric Hugel - Stephens, Inc.

How much of that is going to be that one-time cumulative catch up and then what should we be thinking as a normalized post tax rate after you get [inaudible] if we're looking at fourth quarter also?

David Kornblatt

I think it comes out that the cumulative catch up for the year, you know, the year will have probably $2.5 - $3 million of credit in it, and we'll be able to recognize through Q3 essentially fourfifths of that because we're getting 15 months of credit in this year's 12 month financial statements because, remember, we lost some credit at the end of last year in the fourth quarter.

And I think going forward we've always said the R&D credit is a 1.5% to 2% credit, so as long as the credit stays in vogue, I would think going into next year our rate would be 33.5% - 34%, all things being equal.

Eric Hugel - Stephens, Inc.

Can you talk about, you noted that the F-15 sort of creeped onto the top 10 list. Was there a big win there or what happened, why is that on the list now?

David Kornblatt

It was always - we have about three or four programs there's a couple million dollars between tenth, eleventh, twelfth, and thirteenth. And really, I think, it was more a matter that their backlog held and we had a few more shipments versus orders on some of the other programs. So you may see a new program like the CH-53 next quarter. There's a few of them that are right there around tenth place. It was not a big win but just continued progress there, only a million or two dollars.

Eric Hugel - Stephens, Inc.

Can you talk about what's going on in the M&A front?

Richard Ill

Well, the M&A front is, the opportunities are many because there's a lot of people interested in potentially selling their company trying to hang on to the multiples that were a year ago. And I think the multiples are coming down a little bit although not quite as far as I think they maybe should come down. We're looking at a number of opportunities. I will say that we're attempting to be a lot more disciplined, especially if you look at the multiple that our stock is selling at on what we pay for companies because you can't out pay your own multiple forever.

Eric Hugel - Stephens, Inc.

I was going to say in terms of M&A are you finding your own stock is a better acquisition than buying something in the market?

Richard Ill

Not necessarily. We've looked at the aspect of buying back our own stock, and we have in fact bought back, as we've indicated in the past, some of our own stock. However, we've basically come to the decision - and I don't want to speak for the Board; we're having another meeting very shortly - but so far the decision has been made that long term the better use of our money is long-term growth of our company from the revenue and earnings point of view because the accretiveness accomplished by buying back our own stock doesn't seem to do us that much good in the marketplace.

So we've made the decision to grow our company long term, but at the same time be very disciplined in what we pay and the type of companies we're buying, that think that they can contribute to our long-term growth.

Eric Hugel - Stephens, Inc.

I know Joseph Silvestri, he was on the Board previously but coming from Court Square Capital, a well-known private equity LBO firm, any sort of thought, consideration about, given that you've done a very, very good job executing and the market just doesn't really seem to care, any thoughts on sort of going that route if the opportunity presents itself?

Richard Ill

It could be a long-term strategic process in discussing with our Board. But Joe Silvestri going on our Board, do not - I repeat, do not - read anything into that. Joe's going on our Board because Joe was on our Board before as a representative of Citicorp Venture Capital and we felt he was a good Board member, and now he's unencumbered by Citicorp Venture Capital, so we asked him to come back on the Board.

Eric Hugel - Stephens, Inc.

Are those two new? Are you adding two or did two leave?

Richard Ill

We had, well, both in effect, because we're adding two, but if you remember we had one of our Directors did not stand for re-election. And then unfortunately, as we announced last quarter, one of our Directors passed away.

Eric Hugel - Stephens, Inc.

I noted in the quarter or a couple of months back that you guys put a receivable factoring facility in place. Did you guys sell any receivables in the quarter under that facility? Was that part of the cash flow in the quarter? And if you did, were they sold with or without recourse?

David Kornblatt

We were in the facility; by the end of the quarter we were out because the interest rate you get out of that is highly driven by commercial paper rates, which were obviously in wild fluctuation during the quarter. But that is essentially a loan facility, and it would not show up in cash flow if we were to use it. We are recording it on balance sheet as a loan.

Eric Hugel - Stephens, Inc.

Okay, so that cash flow was real operational, not selling stuff?

David Kornblatt

That's right. And if we do exercise it, that will not help our cash flow because, again, it's just viewed as a financing source.

Operator

Your next question comes from Peter Arment - American Technology Research.

Peter Arment - American Technology Research

I wanted to just get a little more color on the Aftermarket. Rick, I'm surprised to hear you say that you're going to continue to see growth and I know you mentioned that they're in growth mode, but could you maybe just give us a little more, I guess, either color or perception of what that is when we see the ASMs ticking down pretty materially for next year and utilization rates declining also?

Richard Ill

I think that we're commenting that because we look at the individual operations that we have, and the sum of the parts equals the whole.

And what happens there is number one, we see the APU, as we've indicated, we see the APU division coming back up in their efforts in getting to at least breakeven by the end of the year, number one.

Number two, Thailand, when you talk about a year-over-year type of thing, clearly contributes to the growth aspect. And although Asia's not doing quite as well as it did, say, six months ago or eight months ago, it's still very positive.

Thirdly, we have a couple of companies that have gone into some new products and some new rotables type of things that are, because the airlines don't want to keep some of the things in inventory, they've come to us for some rotable issues. So it helps their inventory, and it brings us earnings and cash flow.

So I think all things considered, I think we're looking at some growth there. I think we're trying to really indicate here that the Aftermarket is not necessarily going to grow in double digits, but we think that we have the type of product line that we can in fact continue to grow vis-à-vis the various areas we're in geographically and product-wise.

I think the growth in the OEM area and the Aerospace Systems will overshadow the growth in Aftermarket, but I think all we're trying to indicate here is that we don't have a business that is totally declining. If you remember, over the years a lot of our business was not with some of the socalled major airlines that we have in the U.S., the Uniteds, the Northwests, the Deltas, this type of thing. Our business has been with Continental, Southwest - and our Southwest business continues to be very good. So I think there are issues there that we can continue to, at the very minimum, keep the issue flat there to some growth.

I realize that the ASMs will affect that growth, but I think it'll affect the growth as opposed to having it turn down.

David Kornblatt

The other comment is remember we talked about last quarter the amount of work that our group does on the aircraft that are being parked is very small, driven by the fact that we've not invested in those capabilities over the years. And secondly, as Rick said, those planes were primarily being driven by the airlines who did an awful lot of work in-house. So from our market capability and the part of the market we're attacking, we're not really seeing a huge shrink in what's available to us and might even be growing.

Operator

Your next question comes from Myles Walton - Oppenheimer & Co.

Myles Walton - Oppenheimer & Co.

You talked a bit about cash and you mentioned CapEx, and I think you had previously been talking about a CapEx budget in the $70 million, $65 million - $70 million range. Is that still the case for the full year?

Richard Ill

It happens to still be the budget because we don't change our budget necessarily, but suffice it to say that in these economic times when cash is even more king than it was before, I don't think we'll reach the $70 million. To date we've spent about $22 million, and we have some approvals on the books. And I hate to guess where it's going to end up, but I will. My guess will be about somewhere in the neighborhood of $55 million to $60 million, somewhere in there. So we'll spend less and the justification will become more robust as far as our individual companies are concerned.

Myles Walton - Oppenheimer & Co.

And then on the top 10 list, I apologize if you mentioned it, but the A-380 slipped out and I'm just curious if that's because the 15 backlog increased so much or because the A-380 decreased on lower delivery expectations versus the prior plan?

Richard Ill

Well, sort of both happened.

David Kornblatt

A little bit of both, Myles.

Richard Ill

A little bit of both. But the A-380 - and I think we mentioned this maybe a couple of quarters back - we had a great amount of structural content on the A-380 which was taken back in house a couple of quarters ago for airbus. They brought it back into the U.K. So it was affected - the backlog there was affected then for this period of time, so that's one of the reasons the backlog went down. So it really doesn't have too much to do with the pushback of the A-380 in that respect because it already was affected in the backlog.

Operator

Your next question comes from Chris McDonald - Kennedy Capital.

Chris McDonald - Kennedy Capital

Has the Boeing strike disproportionately impacted any particular Boeing commercial programs? I'm just thinking 787 mix versus the rest.

Richard Ill

I'm going to say no, Chris, it hasn't, not from our perspective. It really hasn't. Obviously, Boeing knows the answer to that, but they haven't indicated to us that it's disproportionately affected any program. Obviously, the 787 has a little more higher visibility because of the fact it was late already, so it's probably worse now. But from our perspective, no.

Operator

Your next question comes from Eric Hugel - Stephens, Inc.

Eric Hugel - Stephens, Inc.

I know you don't disclose content on aircraft, but from a long-term perspective in us thinking about growth out into 2010, 2011, as we get maybe a peak in the cycle around sort of that time and you start to think about narrow body deliveries coming down and 787 deliveries continuing to ramp up, can you give us - I know you're not going to disclose a content number, but in terms of 787 content relative to, let's say, a 737 content - I mean, are we talking double, triple?

How can we think about that in terms of, again, from a long-term perspective, thinking about sort of the growth trajectory even as the market tops? I mean, can the 787 really help to offset any decline in the 37 production?

Richard Ill

I think that's a good question and we've spoken to this issue a number of times. There are those out there who've said that the cycle's gone, but our stance on that has been that we still have to produce the airplanes that are ordered. And we've consistently said that the 787, in our opinion and from our perspective, will hold up the cycle, if you will, and that the aircraft that are being done - the 737 new generation, etc. - might drop off out in 2010, 2011, 2012, but that the 787 will prop up the cycle, if you will.

In our case the content is close to 3 to 1 in the 787 versus the 737, and it will, I think, hold up that cycle significantly as we go down. That's one of the reasons that we keep talking about the 787 being somewhat significant to us going forward. It has the largest content that we've ever had on any of the Boeing aircraft. So that's why our backlog - and somebody's got to remember, some of the 787 business we will get isn't even in our backlog because it's beyond the 24month period of time, so that's one of the reasons that we're optimistic about that backlog.

Eric Hugel - Stephens, Inc.

Yes, I would think that your 787 backlog really barely even has the ramp whenever it comes because that would be out beyond - that's probably more into 2010, 2011.

Richard Ill

I think that's true, and it'll also affect the margins that we had. That's why I mentioned before that our margins are in fact dilutive overall to our Aerospace Systems margins right now as a number that - you know, maybe it's a 2%, 3% type of thing, but when it gets to full production we're looking at margins that are significantly greater than that and will be accretive to our margins.

Eric Hugel - Stephens, Inc.

To that point, can you give us maybe a little more color on the Aerospace margins? What exactly are you doing from the efficiency standpoint? I mean literally, it was almost like a switch was flipped in terms of the margins there. I assume some of that is mix but can you talk about sort of efficiency wise, what kind of plans, what are you doing from a grand scheme of things that's really sort of starting to shift those margins into high gear?

Richard Ill

Well, my cynical mind says I could tell you, but I'd have to kill you. I'd like to think that we have emphasized the proper efficiency techniques, up to and including in many areas, Lean. I'd like to think that the drop in inventory has taken hold and that we're becoming just more efficient.

And I think, very importantly, that our philosophy of doing business in fact helps us a great deal in that respect from the viewpoint of having company presidents who are responsible for their profit center, incentivized for the profit center, and paid for their profit center holds us in very good stead, especially in a period of time like this, where they can control their business better than a huge monolithic type of company. And I think that holds us in very good stead.

Other than that, I'd like to think we have very good managers that are overseen by a very good group and corporate structure. I mean, that's a hard question to answer because we do different things in every one of our companies to affect the margin increases.

David Kornblatt

Just to give you a little color as well, I think in the last year or so we're starting to get better leverage on our SG&A. It is growing but while it's growing, it's growing at far less than our sales. It's clear that our revenue growth is outpacing build rates, and I think that is a great compliment to our group marketing and how we're combining the capabilities of some of our companies to get higher level assemblies or to get better penetration. And certainly there's a little bit of price in there and there's obviously volume. So I think it's just a good job on a number of fronts adding up to a pretty nice result.

Eric Hugel - Stephens, Inc.

If you think about the margin process going through, I mean, is this sort of, what we've seen right now sort of low-hanging fruit type of stuff? I mean, how much more sort of opportunity do you see out there? I mean, is there still, do you think, another couple of hundred basis points over the next couple of years, again, as volumes continue to ramp, efficiency continues to improve?

David Kornblatt

I would hope so.

Richard Ill

I would hope so, but I'd never commit to it.

Operator

Thank you. (Operator Instructions) Since there are no further questions, this concludes the Triumph Group's fiscal 2009 second quarter earnings conference call.

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