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Triumph Group, Inc. (NYSE:TGI)

Q3 2013 Earnings Conference Call

January 31, 2013 8:30 a.m. ET

Executives

Jeffry D. Frisby – CEO, President & COO

M. David Kornblatt – CFO, EVP and Treasurer

Analysts

David Strauss – UBS Securities

Noah Poponak – Goldman Sachs

Myles Walton – Deutsche Bank

Peter Arment – Stern Agee

Stephen Levenson – Stifel Nicolaus

Yair Reiner – Oppenheimer

Ken Herbert – Imperial Capital

Michael Ciarmoli – KeyBanc Capital Markets Inc.

Sam Pearlstein – Wells Fargo

JB Groh – D.A. Davidson & Co.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Fiscal Year 2013 Third 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’re having trouble viewing this live presentation. You’re currently in a listen-only mode. There will a question-and-answer session following the introductory comments by management.

On behalf of the Company, I would now like to read the following statement.

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

Please note that the Company’s reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is 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 Jeffry Frisby, the Company’s President and Chief Executive Officer and David Kornblatt, Chief Financial Officer and Executive Vice President of Triumph Group, Inc. Go ahead Mr. Frisby.

Jeffry Frisby

Thank you and good morning everyone. I want to add my welcome to our third quarter fiscal year 2013 conference call and webcast. As a reminder, there is a slide presentation included along with the audio portion of this webcast for your use.

During last quarter’s call, I took the time to restate several basic traits of the Triumph Group describing how it’s designed to be different and built to perform. I won’t go through all that again in this introduction but it will be useful to keep these traits in mind as we go through the presentation.

The traits that include how we’re Tier 1 capable that we have a very broad product offering and that our organization is designed to be very nimble and very responsive. I also mentioned last quarter, that since the acquisition of Vought Aircraft Industries, our Aerostructure segment has overshadowed the other two segments. And that over time, we expect to reestablish the balance that was once very evident.

During the quarter, we took strides in that direction with the acquisition of Embee Processing and the signing of the agreement to acquire Goodrich Pump and Engine Control Systems. While the latter acquisition will not likely positively affect Q4, FY14 should certainly benefit.

With that, we’ll go over the financials on our fiscal third quarter.

Let’s start off on slide 3. Q3 was in fact a strong quarter for us. We saw increased revenue, operating income growth and year-over-year operating margin expansion in all three of our business segments. We also exhibited very strong cash flow generation that Dave will also cover. The integration of Vought continues to progress well as it has and we are still on track to deliver $50 million a year in run rate synergies by June of 2013.

In the quarter, we continue to proactively and effectively manage our pension obligations, which once again Dave will touch on. Our balance sheet continues to strengthen. Our backlog is also very strong; it’s up from last year and is now approaching $4.1 billion. And as I mentioned earlier, we completed the acquisition of Embee Processing and signed the agreement to acquire Goodrich Pump and Engine Control Systems.

Now on the next two pages, there are some detail regarding the company’s Embee Processing which is now Triumph Processing-Embee Division and Goodrich Pump and Engine Control Systems. I will not go over these two slides in detail they’re there for your review. I will go over few highlights.

On the Embee Division page, I want to point out that Embee Processing occupies a very strategic place in the aerospace supply chain. Used to be said that, all roads lead to Rome, in many ways, all parts end up at Embee. Embee does a tremendous amount of processing on a broad array of parts and they’re somewhat program agnostic that is regardless of who sells an airplane, who ends a contract, typically those parts end up at key suppliers and Embee is one of those key suppliers. So we’re happy on about that, how it compliments our existing process capability, how it fits within our aerospace systems group since it processes parts that are manufactured within that group, things like lining gear, things like actuation systems and products of that type. It certainly is a well-known and respected name in the industry and has a solid stable management team that will remain in place. So these folks we have in fact acquired and we will – they will have a positive impact in Q4.

On the next slide, Goodrich Pump and Engine Control Systems, we want to just point out there that this acquisition is we’ve signed an agreement to acquire them. They are not in fact closed. We are still waiting regulatory approvals and once we get that, then in fact we can welcome the team to Triumph.

So as a result, we don’t see that there will be a positive impact to Q4 on this acquisition but we do feel it’s a very important acquisition for us. It gives us a new product, this fuel system business is a new product area for us, it matches out very well with our other actuation companies. If you look at the representative engines and platform section, it’s clearly seen here that it helps us to diversify somewhat within the industry and that’s in terms of markets and customers. So it helps us in a number of strategic areas.

It has a good size. It’s nearly $200 million in revenue and a solid management team that will be staying with the company. And as I mentioned before, we’re looking forward to officially welcoming them to the Triumph Group family as soon as we close.

With that, I’ll turn it over to Dave and I will return for our outlook section in a few minutes. Dave?

David Kornblatt

Thank you, Jeff and good morning everyone. I would like to start with a review of the financial results for our third quarter.

Turning first to the income statement, sales for the third quarter were $890.6 million compared to $826 million for the prior-year period, an 8% increase almost all of which was organic.

Operating income increased 14% to $134.4 million. Included in operating income was approximately $300,000 of integration costs related to the Vought acquisition and a $2 million charge for early retirement incentives offered to certain Triumph Aerostructures employees.

Income from continuing operations improved 14% to $75.2 million resulting in earnings per share from continuing operations of $1.43 per diluted share versus $1.27 per diluted share for the prior-year quarter. Excluding the integration costs and the early retirement incentives, income from continuing operations was $76.7 million or $1.46 per diluted share.

EBITDA excluding the early retirement incentives for the quarter increased 14% to $162.5 million resulting in an EBITDA margin of 18.2%. The number of shares used in computing diluted earnings per share for the quarter was 52.5 million shares.

Looking now at our segment performance. Sales in the Aerostructures segment increased 8% to $678.8 million all of which was organic. Third quarter operating income increased 13% from the prior-year quarter and included a net unfavorable cumulative catch-up adjustment of $5.5 million.

As we’ve previously pointed out, not all the synergies will contribute to favorable cumulative catch-up adjustments. A sizable portion will favorably impact the margins of our heritage companies, which are indeed higher sequentially and year-over-year. We remain on track, as Jeff said, to deliver or exceed our synergy target of $50 million annual run rate by June 2013.

The segment’s operating margin for the quarter increased 80 basis points over the prior-year to 17.4%. The segment’s operating results included approximately $300,000 of integration costs. EBITDA for the quarter was $135.4 million at an EBITDA margin of 20%.

With respect to SAP, we continue to make progress, but are not yet in a position to see net savings being added to our operating results.

In our Aerospace Systems segment, sales for the third quarter increased 6% to $141.1 million, almost all of which was organic. Third quarter operating income increased 10% from the prior-year to $20.6 million with an operating margin of 14.6%. EBITDA for the quarter was $25.3 million at an EBITDA margin of 17.9%.

With respect to the quarter’s acquisitions we made in this segment, we expect Embee to be accretive in fiscal 2014 to earnings and further margins to be at or above segment average. With respect to Goodrich, we hope to close before the end of the current fiscal year and intend to finance the acquisition to the issuance of high yield notes. We expect the acquisition to be immediately accretive to earnings, but dilutive to our margins.

With that said, we believe the earnings potential of this business is much greater than what it earns today and we expect the margins to grow in the short to medium term to the point where it reaches at a minimum segment average.

During the quarter, the segment’s operating results included $900,000 of legal costs associated with the previously disclosed trade secret litigation as well as $700,000 of costs associated with the Hurricane Sandy.

As in last quarter’s call, we thought we would offer a brief note on the status of the trade secret litigation with Eaton Corporation. The dismal of all of Eaton’s claims against us remains on appeal before the Mississippi Supreme Court and we continue to prosecute our counterclaims against Eaton before the state trial court at Mississippi. The state trial court has indicated that an intense to set trial on the counterclaims to begin on November 4, 2013, although note order setting the date has yet been entered.

In the mean time discovery has resumed and free trial practice will continue. Our anti-trust claim also remains pending in North Carolina. To anyone who wants to know more, we commend you to the documents filed in the public record and prefer to let those documents speak for themselves.

Our Aftermarket Services segment reported sales for the third quarter of $74.6 million, an increase of 9% over last year almost all of which was organic. Third quarter operating income increased 42% over the prior-year to $9.9 million with an operating margin of 13.2%. EBITDA for the quarter was $12.1 million and an EBITDA margin of 16.3%. Included in corporate this quarter was approximately $1 million of due diligence costs.

The next slide is a pension OPEB analysis for Triumph Aerostructures for your reference. With regard to our pension liability at December 31, 2012, our net under funding has improved slightly since the beginning of our fiscal year. Looking at the components, we estimate our gross liability has increased approximately $120 million, which is almost entirely due to the drop in discount rates.

On the asset side, the combination of large contribution and excellent asset returns has allowed us to more than offset the increase in the liability.

As we discussed before, the rules on recognizing asset returns in excess of actuarial assumptions and the rules on actuarial losses due to discount rate decreases are not in symmetry. As such, we expect that our fiscal 2013 pension income maybe less than what is reflected on the slide.

Under our accounting method for Aerostructures, a portion of this fiscal 2014 unfavorable item will be required to be booked in Q4 of fiscal ‘13. While the equity markets for January have been quite stellar and discount rates have ticked up a few basis points, we estimate the impact on Q4 could be in the $5 million to $10 million range. This could obviously change in either direction based on how discount rates and assets perform between now and March 31st. This potential cost is not reflected in our guidance.

In addition, as we mentioned last quarter, we offered an early retirement incentive to our marketing unit in Dallas, which was concluded in the third quarter and resulted in $2 million charge in the quarter. This charge is reflected on the face of the income statement. For segment reporting, you will see that we included this cost in corporate. While these actions create expense in the year, mostly non-cash, over the long-term they reduce our pension obligations, reduce risk and volatility in future years.

Lastly, one of our major actions related to the synergies will result in the closure of a portion of our Dallas facility. This could create a pension curtailment in the fourth quarter, which we currently estimate to be between $10 million and $12 million.

Turning now to backlog, our backlog takes into consideration only those firm orders that we’re going to deliver over the next 24 months and primarily reflects future sales within our Aerostructures and Aerospace System Groups. The Aftermarket Services Group does not have a substantial backlog.

Our order backlog as of 12/31 was $4.07 billion, an increase of 5% over the prior-year. Heritage Triumph backlog decreased 2%. Military represented approximately 28% of our total backlog. Our top 10 programs listed on the next slide are ranked according to backlog.

In first place was the Boeing 747, followed by the Gulfstream G450 and G550 programs. Third place was the Boeing 777 followed by the C-17 freighter. In fifth place was the Boeing 787 with the 737 next generation in sixth place. Seventh was the Airbus A330 and in eight place was the Osprey combat helicopter. The 767 is ninth and in tenth place is the C-130.

Looking at overall sales, Boeing remained our only customer, which exceeded 10% of our revenue. Net sales to Boeing, commercial, military and space totaled 50.1% of our revenue and was broken down 73% commercial, 27% military.

Looking at our sales mix among end markets, the next slide show that compared to Q3 of fiscal 2012, commercial aerospace sales increased by 22% to $516 million representing 58% of our sales whereas military sales of $243 million decreased 9% year-over-year and represented 27% of total sales. The drop in military sales was attributable to less C-17 deliveries in the quarter as compared to last year, some deferrals in the current quarter at customers request, the continued impact of H-60 being resourced within (indiscernible) and a significant slow down on C-130. Business jet sales decreased 1% to $106 million and represented 12% of sales, regional jets remain unchanged at 1% and non-aviation accounted for 2%.

Finishing our sales analysis, the next slide showed our sales trends for the quarter. Total organic sales for the quarter increased 7% from the prior-year. Breaking that down by segment, all the Aerostructures segment sales for the third quarter were organic. The Aerospace System segment same-store sales for the quarter grew 5% to $139.8 million. The Aftermarket Services segment same-store sales grew 6% to $72.1 million. Export sales for the quarter increased 8% to $126.3 million.

Turning to the balance sheet in the next slide, for the nine months ended December 31st, we had very strong cash generation. Year-to-date, we generated $334.4 million of cash flow from operations before we made $103.8 million of pension contributions to the Aerostructures defined benefit plans.

During the quarter, we contributed over $47 million to the Aerostructures defined benefit plans. After these contributions, cash flow from operations was $230.6 million.

There was inventory growth of 15% since 3/31/12. A significant portion of this growth is attributable to investment in the Bombardier Wing, investment in tanker nonrecurring costs which will be invoiced in fiscal 2014, an increase in unresolved distortions and a reduction in advances and inventory primarily to support new programs. We remain focus on improving our inventory management and believe we can do better.

For the full fiscal year, we expect cash flow available for debt reduction prior to acquisitions, to be between $180 million and $200 million. CapEx in the quarter was $28.5 million and $89.7 million year-to-date. We expect CapEx and investment in major programs for the year to be approximately $140 million to $150 million.

Net debt at the end of the quarter was $1.1 billion, representing 36% of total capital. The global effective tax rate for the quarter was 36% and included a true-up of our tax expense to the actual tax return that was filed in December. We currently estimate the benefit of the retroactive reinstatement of the R&D tax credit to be approximately $4.5 million which will be reflected in the fourth quarter. Therefore, the global effective tax rate for Q4 will be approximately 32.3%. We currently expect minimal cash tax to be paid in fiscal ‘13 and fiscal ‘14.

We are continuing to study the potential move of our Jefferson Street facility. We have made progress with a tentative lease deal with the landlord which, if we decide to relocate will hopefully de-risk the move from a customer perspective.

As you saw on the press release, we expect our revenue for the fiscal year to be approximately $3.65 billion and raised our full year EPS guidance to approximately $6.05. Therefore, this would imply that we expect Q4 EPS to be approximately $1.53, which includes the benefit of the retroactive reinstatement of the R&D tax credit, excludes integration costs and early retirement incentives that we have taken to date are those that may occur in Q4.

In addition, please note that the EPS guidance does not include any unfavorable of cumulative catch-up adjustment and Q4 related to fiscal ‘14 pension expense, any pension curtailment or any deal costs related to the Goodrich acquisition that would be due upon the closing of the transaction.

With that, I’ll turn it back over to Jeff.

Jeffry Frisby

Thank you, Dave. Turning to slide 15, which is our fiscal 2013 outlook. I’ll reiterate that the backlog remains strong. So we’re in position to continue our growth. As always, we remain focused on improving execution, driving integration and controlling costs. We are in fact positioned to benefit from increasing OEM build rates and capitalizing on new opportunities. There are a lot of moving pieces out there and we certainly like our chances to take advantage of them.

Fiscal year 2013 revenue, as Dave pointed out, is expected to be approximately $3.65 billion. And we are raising our earnings guidance, earnings per share from continuing operations, of approximately $6.05, which includes benefits of retroactive instatement of R&D tax credit and excludes integration costs and early retirement incentives. And this is based on our year-to-date performance, the current market conditions, the current production rates and weighted average shares of 52.5 million.

And as a reminder, there is an important day coming up. We have Investor Day scheduled on February 20th of this year in New York City. We hope as many of as possible will attend. At that time, you will learn a great deal about Triumph gaining insight into why we are in fact designed to be different and built to perform. You’ll meet some of our senior executives and learn more about our plans for our Jefferson Street facility. On the financial side, we will not be providing fiscal year ‘14 guidance at that time, as we normally provide that during our May call.

We will, however, be updating our long-term guidance. While short-term uncertainty leads us to be somewhat conservative in the short-term, we remain very bullish on our long-term prospects. And we’re confident that when we way out our view of our future you will share in our optimism.

With that, we will open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from David Strauss. Please state your affiliation followed by your question.

David Strauss – UBS Securities

Good morning. David Strauss, UBS.

Jeffry Frisby

Good morning.

David Kornblatt

Good morning.

David Strauss – UBS Securities

The implied guidance for the fourth quarter on the sales side, when I adjust for Embee in there, it looks like organically you’re expecting revenues to be down a little bit year-over-year. Could you just talk about what’s going on there, is there anything unusual in the fourth quarter?

Jeffry Frisby

I don’t think there is anything unusual, David. I think that it’s a little bit of uncertainty on military and a few more customer deferral requests coming in. So it is consistent with our overall guidance, Embee is not a huge amount of revenue, but nothing overly different than what we’ve talked about before or talked about on the calls in our earlier comments.

David Strauss – UBS Securities

Okay. And Dave on these unfavorable cum catches, you guys have been taking on Aerostructures – in Aerostructures, do they relate specifically to, are they to the same program or they across different programs that you’re taking these unfavorable cum catches?

David Kornblatt

The cum catch is primarily the last two quarters was little bit on C-17 and the balance on 47. There also are some programs where we’re having favorable, so obviously what you see there is a net, but those are the two programs at this point that have contributed the most to the negative. And those are, one is in Jefferson Street and one is across a number of plants.

David Strauss – UBS Securities

Okay. Last question I have, if you look at your top 10 programs list that you give out every quarter. I know 787 is lower margin than corporate average, if you look at that list, are there any outliers there either high or low beyond 787 and just as you look at the margin profile by program relative to the corporate average?

David Kornblatt

Nothing like way out of whack, I mean they all have different margins, but I wouldn’t say any of those are dramatically above or big losers, no.

David Strauss – UBS Securities

Okay. All right, great. Thanks.

Operator

Our next question comes from Noah Poponak. Please state your affiliation, followed by your question.

Noah Poponak – Goldman Sachs

Hi, it’s Noah Poponak from Goldman Sachs. Good morning Jeff and Dave.

Jeffry Frisby

Good morning.

David Kornblatt

Good morning.

Noah Poponak – Goldman Sachs

Dave, just as a clarification, it sounds like the EPS guidance revision for the year is just the tax rate. Is that correct or is there anything else?

David Kornblatt

From your perspective, yes. There is always lots of moving pieces internally, but when you look at $0.09, we took it up about $0.10, so yeah.

Noah Poponak – Goldman Sachs

Okay.

David Kornblatt

Right. And we would hope to beat that number.

Noah Poponak – Goldman Sachs

Okay. So net operationally no change basically?

David Kornblatt

That’s good assumption.

Noah Poponak – Goldman Sachs

Question on the Goodrich Pump and Engine Control deal and a little bit more on what you want to do next and where you want to take the business. So on the topic of that of part of the strategy there to be diversifying away from the revenue mix having shifted so far to Aerostructures, it looks like if I put the revenue in there, you would take that Aerostructures mix down to call it 70 from the current 75. So not to diminish what you’ve done with this acquisition, but the mix used to 40/40/20 or something like that for the three segments.

So basically the question is, where do you ultimately want that revenue mix to be and therefore how much more acquisitive do you plan to be to get there?

Jeffry Frisby

Noah it’s a good question and its one that is certainly part of our long-term view. We will be going over that in a bit more detail at Investor Day. I would say that what we, the direction that we’re going now is the direction that will continue to go, which is reasserting the balance that used to be there and that does not say we’re going to attempt to get to specifically those numbers that we had prior to the Vought acquisition and its also not to say that we won’t continue to make acquisitions in Aerostructures, because there are going to be opportunities there that will provide us other benefits.

And so, I think what you can take from that is that we’re going to continue to grow. We’re going to continue attempt to diversify ourselves in terms of segment balance, in terms of customer balance we will continue to attempt to do all of those things while growing each of our segments. But at the same time, you’ll see them growing at different rates in an attempt to rebalance ourselves. Is that fair?

Noah Poponak – Goldman Sachs

Okay, yeah that’s very helpful. And if I could just sneak in one more, the Gulfstream G4, G5, is that a growing or declining or flat business for you in currently I’m sort of just curious what’s happening with that business given the 650 you’re in.

Jeffry Frisby

Yeah, it’s pretty stable. The 450 and 550 are continuing to sell and continuing to produce at solid rates for us.

Noah Poponak – Goldman Sachs

Okay. Thanks a lot guys.

Jeffry Frisby

Thank you.

Operator

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

Myles Walton – Deutsche Bank

Thanks, good morning. Deutsche Bank. First question is on the military side, I think in the quarter from, I don’t want to look just in the quarter, but it looks like it was down 9% and then if I look at the C-17 in top programs it moves up two spaces. And I guess a couple of things to ask about, one is, this is just a lumpy order coming in from kind of Vought legacy business on the C-17 and number two, what is kind of contributing to the near-term defense down to rough problematic specifically.

And then, the third piece of that question is C-17, when does it start to drive or be a material headwind as that’s kind of program sums up?

Jeffry Frisby

Yeah, Myles. So a bunch of questions there, let’s address C-17 first. During the quarter, we did receive authorization to initiate a long lead procurement on Lock 26, so I think we take that is some indication of bullishness on behalf of Boeing that there will be future orders. And we also got a substantial order on engine kits that will go out many years. And that part of the C-17 program will continue as long as the planes fly. So we are becoming increasingly more confident that we’re going to see meaningful revenue from C-17 at least in the fiscal ‘15. Now that could change, but initiating a long lead procurement on Lock 26 and I would say, the activity in how we’re pricing Lock 26 and 27 indicates a certain amount of bullishness from our customer.

On the revenue drop on military, it is 9%. So you got the math that is correct. One was purely the timing on C-17, so both years or both quarters we have been in a build rate of 10, but we did deliver or actually two more ship sets last year than we did this year. We did have the customer deferrals which were about $8 million or so and as I said, really C-130 sales which we don’t really have a great understanding of yet, have really dropped off in the quarter.

We don’t think the types of parts we produce would be something that would be destocking, but we’re seeing of all our programs, the most volatility in orders probably around that program. Yet build rates are not supposed to go down that much, so that I think will correct itself over time but those are the facts for Q3.

Myles Walton – Deutsche Bank

Okay, now that’s helpful. And then the other question I had was on the margin side for the Goodrich transaction. I think at least the way I was looking at the pump business is kind of high single digit EBIT margins when it was captive at UTX and the implications is that that you’re going to double those margins, which I don’t doubt that you will. I’m just curious when you say the timeline, are we talking within your long-term target planning horizon i.e. the next couple of years.

Jeffry Frisby

Yeah. I won’t go as far to say that we’ll double the margins in the next couple of years, but I will say that that certainly we expect having this company within the Triumph Group family will have a relatively immediate enhancement to their margins and a continuous improvement until we get to those segment averages.

Myles Walton – Deutsche Bank

And when do you think it closes? I know this one can be a little tricky 50 OJ but.

Jeffry Frisby

We’re guessing sometime in March, but that’s the pace and frequency of request we get indicates its not tomorrow.

Myles Walton – Deutsche Bank

Okay, all right. Thanks again.

Operator

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

Peter Arment – Stern Agee

Yes, Stern Agee. Good morning Jeff and Dave.

Jeffry Frisby

Good morning.

David Kornblatt

Good morning.

Peter Arment – Stern Agee

A question really I guess is follows up little bit on Myles that would be the military and related to kind of the Goodrich business. But in general, Jeff, could you give us some kind of high level thoughts how you think Triumph fairs in kind of an adoption of sequestration. I know we’re talking about fiscal ‘14 guidance but just from a high level perspective, how are you thinking about that?

Jeffry Frisby

Sequestration is a question that is one that obviously constantly raised now. The specter is increasing and I still don’t even know what it means. As defined, sequestration is a 10% reduction in all the programs. And I think a definition in anyway is helpful to us because the alternative of having for example continuing resolution and continuing the prior year defense budget which will then limit the amount of money spent on new programs and actually tie the services hands, can be argued to be far more detrimental to us because of the uncertainty.

So I guess we still feel the same way we did in the last quarter about military that that the defense budget is going to be under pressure. We will in fact see a reduction in the amount of spending there, but that we will not be primarily affected because of the reasons that we reasons that we had laid out before that is that we have a far more flexible work – we have far more flexible companies than say the primes do in this area. We talked about the C-130 before and we don’t really understand why our orders are dropping on C-130. We’ve lost no market share. We, it’s either a destocking either our customer has too much of our parts in the short-term or they forgot to order them and we will be getting orders to hurry up.

So I think that what we’re looking at is, is nothing different than we looked at before. So we still see over the next few years, we still see the potential of up to about 10% reduction in our defense business cumulative. And we do see great opportunities out there because we have in fact gained market share in certain military programs that have come about through some of our military customers that have decided to outsource activities that they had previously done in-house. So we still see the mixed bag, we still the opportunity to thrive within this kind of uncertain market and that is largely because of the way that the Triumph Group is designed. We have an awful lot of companies with their ears to the rail and are very responsive to these opportunities that will pop-up in this marketplace.

So while sequestration is an unknown and while we certainly the direction of arrow is points down across the market, we still think that we are in pretty good shape.

Peter Arment – Stern Agee

Okay. And then just related to Goodrich business, I guess all that same analysis applies when you looked at that given the mix that they have seems very similar to what you have in some of your military businesses.

Jeffry Frisby

Correct.

Peter Arment – Stern Agee

Okay. And then just other question just following up on 747. Boeing has been very cautious about they need to get some orders in by the middle of this year to keep production up at two a month for next year. What are your lead times on the 747 program?

Jeffry Frisby

747 program is one that has a relatively extensive lead time from throughout the whole supply chain. It has a pretty long tail, but by and large, we react in the six to nine month time period.

Peter Arment – Stern Agee

Okay, six to nine months. Okay, great.

Jeffry Frisby

I thought Boeing was relatively bullish, Peter, no that yesterday.

Peter Arment – Stern Agee

I’m trying to be class at fold too, but I think there was just some commentary afterwards regarding their thoughts that they still had to fill in some white space for next year. So they were hoping to win some orders, but yes you’re right. Thanks again, good quarter.

Jeffry Frisby

Thank you.

David Kornblatt

Thanks.

Operator

Our next question comes from Steve Levenson. Please state your affiliation followed by your question.

Stephen Levenson – Stifel Nicolaus

Stifel, thanks. Good morning, Jeff and Dave.

Jeffry Frisby

Hi, Steve.

David Kornblatt

Good morning.

Stephen Levenson – Stifel Nicolaus

Since we’re on the Boeing subject, one of the things they shut on their call yesterday was that they are going to offer their supplier partners who step up to the challenge win-win opportunity to share. Sounds like they’re asking for parse reductions, sounds like they’re offering a chance to win something, just curious as to what your approach will be.

Jeffry Frisby

Well, what we hear from Boeing is that they’re affording us an opportunity to retain our margins at a lower price. That sound nice? It’s really, the intent is good and the intent is to work together in a new and collaborative way with their key suppliers to help drive cost out of the system. As we do that, we in fact should both benefit. That’s the theory and in fact early on we have seen in fact Boeing is true to their word and that we have started to see them implement some cost improvement suggestions that we have been making over the last, I’ll even go back 10 years or so that we have been kind of straight-armed and now in fact they are accepting these changes.

So they are serious about reducing costs which will reduce our costs and in return I’m sure we will have to be more aggressive with our pricing. So I think it actually can be a win-win, it just be a question to see how the facts roll out as the program unfolds.

Stephen Levenson – Stifel Nicolaus

Thanks. Do you think that squeezes the smaller suppliers more than companies like Triumph and does that give you either an opportunity to pickup business or to acquire some of those guys?

Jeffry Frisby

I can’t really say whether it affects one group of companies more than another, but I would say to you this that in any time of turbulence, any time of potential change, I like our chances because we do have a group of companies who are very responsive, who are very cost aware and can in fact drive a great deal of value. And it’s part of who we are, so usually in those kind of stable times than the, I guess it’s almost a thing of nature that that in kind of stable times organisms that are, that rapidly change or kind of selected against. But in these kind of turbulent times, our type of organizations are kind of benefiting from the natural selection process because we are in fact responsive, we can act like a small company but at the same time we have the resources of the entire Triumph Group behind us.

Stephen Levenson – Stifel Nicolaus

Sounds good, thanks. One last one for Dave, you did mention that ERP system does that mean it’s now providing benefits or at least breaking even?

David Kornblatt

I would say its approaching breaking even, but its still lot of heavy lifting going on Steve. There is no way to sugarcoat that.

Stephen Levenson – Stifel Nicolaus

Okay. Thanks very much.

Operator

Our next question comes from Yair Reiner. Please state your affiliation followed by your question.

Yair Reiner – Oppenheimer

Yes, Yair Reiner from Oppenheimer & Company. Couple of questions. First on the 787, Boeing yesterday indicated it’s going to deliver somewhere around 60 planes maybe a few more. And it sounded like they maybe planning to also manufacture around that number, although I guess there are statements are not entirely clear. Did you hear anything new yesterday in terms of Boeing’s plans for 787 production?

Jeffry Frisby

I listened to the call, Yair. I was slightly confused, so we look at our orders, we look at the skyline and we’re – most of our companies are in that ramp from five, thinking about seven. And it seems like at those rates, they’re going to be taking parts on at a much greater than 60, but that could be what they’re going to sell and complete. And so we’re seeing shipments sort of in excess of what they’re going to deliver. But they haven’t indicated any indication of slowing down.

Yair Reiner – Oppenheimer

Okay, thank you. And then question on the aftermarket in Aerospace margins, they were up nicely year-on-year, down sequentially, what should we understand from the sequential decline?

Jeffry Frisby

In Aerospace Systems its other than the Sandy costs, its virtually entirely what we’ve spoken about before that it’s a direct result of the aftermarket portion of that business being down, which is where the margins at the highest. So when you look at our sequential drop in revenue in the aftermarket multiply it by fairly stellar margins, that’s the impact. And this is at least the second possibly third year in a row where that quarter seems to be low on aftermarket, particularly on the foreign military side.

And so that explains Aerospace Systems and we think we had a great quarter in Aftermarket. I’ve repeatedly said that I don’t think 13% and 14% is much different in that business. We’re trying to be in that range. It could be a couple items that just don’t get done or get ordered slightly later. I think you’d be mistaken to look at sequential quarterly movements there, good or bad with too much meaning.

Yair Reiner – Oppenheimer

Okay. So 13% to 14% is the range there?

Jeffry Frisby

That’s right. And if we spike to 15%, it could just be a couple of nice orders with very good margins in that particular quarter. So we think we can go higher and I think the better way to measure that is sort of trailing 12 months, but we were very pleased with the performance especially given ramp up of those new FedEx contracts which are always a challenge. So we actually thought that was a great quarter.

Yair Reiner – Oppenheimer

Great, that’s helpful. And then just one more in the margins. Aerostructures, if exclude the cumulative catch-up adjustments and the margins there were a little bit north of 18%. Any reason to think that that is not the right base level for the business going forward?

Jeffry Frisby

I think our margins are going to go higher.

Yair Reiner – Oppenheimer

Okay, thank you.

Operator

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

Ken Herbert – Imperial Capital

Imperial Capital. Good morning.

Jeffry Frisby

Good morning.

David Kornblatt

Good morning, Ken.

Ken Herbert – Imperial Capital

It sounded like Dave, from your comments that you made the decision to or set a timeframe for closing the fabrication shop down on Jefferson Street, which could lead to the pension curtailment. Can you provide any more details on that from a timing standpoint or impact and then broadly just give maybe a little more update on where you stand with Jefferson Street in the broader issue obviously with the ownership. And you mentioned you’re negotiating potential new lease and what we should be thinking about there?

David Kornblatt

Yeah, the fab portion of Jefferson Street was prior to Triumph acquiring Vought was scheduled to eliminate that activity in Jefferson Street. And we expect that to happen during fiscal ‘14 and it’s purely an actuarial calculation that when you trip over a certain threshold that triggers the curtailment. You got to remember a lot of the auctions we’ve been taking over the last year, some of those people were fab employees. So it’s not necessarily easy to calculate when you know you have a curtailment. It will happen, I think it is likely to be Q4 but it’s purely math. So that remains a little uncertain.

And we’re looking at a variety of scenarios of Jefferson Street and we have a Board meeting next week at which that will be debated and probably a decision will be made and that’s why Jeff indicated at in Investor Day we’ll likely have something to tell you that’s definitive.

The lease activity with the current landlord at Jefferson Street really was designed to be able to have the move be at a more manageable pace. So I wouldn’t take that as any indication that we’re staying or don’t take that as some indication that we’ve made a decision on Jefferson Street.

Ken Herbert – Imperial Capital

Okay. So it’s just designed to give you obviously more flexibility and timing as you look to make this because it could be a fairly obviously we’ve talked in the past of fairly significant or potentially disruptive event.

David Kornblatt

Absolutely, yes.

Ken Herbert – Imperial Capital

Yeah. And then I just wanted to follow-up on your discussion earlier and this is, you talked to Jeff about the pricing pressure today and some of what you’re seeing with Boeing. As you look at your, and you’ve talked about this a lot in the past, look at your follow the part strategy, can you talk about in light of the environment today, any change in your appetite on what you’re doing specifically as it relates to the max and the neo and some of the new opportunities there. And have you maybe commented all in terms of some of your desire to push new business or do you see even to see more opportunity now or where is your thinking stand when you look out over these programs in particular?

Jeffry Frisby

Well in terms of max and neo, obviously they’re going to be growth programs and so we want to be a part of that. As with any program, you don’t necessarily just want to or you don’t at all, want to just change chase revenue and at whatever cost. So we have to continually look for opportunities that match our model going forward. And we do think that there are going to be those opportunities. Our appetite has not been for new work has not been decreased because of increased competitiveness. In fact we welcome that and we think that we are, as I said, we are responsive, innovative, creative and I like our chances in a tougher environment.

Every year we talk to our company presidents about raising the bar and it’s for times like this that we’ve done. So I do like where we’re positioned and we’re going to go forward with a continued aggression in the marketplace, understanding that we have to continue to maintain our margins and continue to improve as we go forward.

Ken Herbert – Imperial Capital

Okay. That’s helpful. So it sounds like when you go back a few years, you were very, when you talk with Boeing on the 787 insistent that you weren’t going to take on perhaps what you viewed as an unnecessarily risky profile on that program and weren’t one of the, so-called risk sharing partners perhaps. Do you feel like you’re positioned relative to Boeing now? And I’m not going to say similar but you’re still under pretty good position as you look to maybe take share on newer programs?

Jeffry Frisby

I think so. Yeah we’re not – we haven’t changed our outlook on risk. We’re not now saying that we got to win on a particular project, damn the torpedoes we’re going to win this. We still feel like we’re in great position to continue to operate as we have been.

Ken Herbert – Imperial Capital

Great, thank you very much and good quarter.

Jeffry Frisby

Thank you.

David Kornblatt

Thanks Ken.

Operator

Our next question comes from Michael Ciarmoli. Please state your affiliation followed by your question.

Michael Ciarmoli – KeyBanc Capital Markets Inc.

KeyBanc, good morning guys. Thanks for taking the questions. Most of mine have been covered. I guess, Jeff, just on the Goodrich, they do have a significant portion of aftermarket exposure. What’s the plan? Does any of that revenue shifts into your aftermarket services or is there anyway to leverage that it’d be aftermarket volumes there in the services group or does it just stay as a kind of standalone entity?

Jeffry Frisby

Well, there is an awful lot more I guess that we can get into once I become part of the Triumph Group, but there certainly should be some synergy there. There is some – are some of these products that are repaired in the third-party world that we have capability of doing. But similar to the Vought acquisition, we only want to take advantage of those if it makes sense. And so we think there going to be any number of opportunities to make not only Triumph, but also the Goodrich division which will not be called as Goodrich division by the way. But to make that more profitable, more competitive as we go forward, so we can continue to grow that company.

Michael Ciarmoli – KeyBanc Capital Markets Inc.

Okay, that’s fair. And then just on Embee, you used the phrase all roads lead to Embee. Given that the nature here of volumes increasing maybe an uptick in aftermarket later this year, is there any capacity constraint there that you guys have to address or can they deal with the increased volumes that are presumably coming down the pipe here?

Jeffry Frisby

Well, I guess one of company’s favorite actions, once becoming part of Triumph is filling out capital equipment requests and sending them on in. So we’re already addressing some capacity concerns and really they become opportunity concerns to continue to grow their business. So Triumph has generally been a catalyst for growth for the companies we acquire. Embee is not going to be any exception. I would say that, they have plenty of room to grow and we’ll require some level of investment, but not anything that that’s beyond what we would normally see in a new acquisition.

Michael Ciarmoli – KeyBanc Capital Markets Inc.

All right, fair enough. Great, thanks guys. Nice quarter.

Jeffry Frisby

Thank you.

David Kornblatt

Thanks you.

Operator

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

Sam Pearlstein – Wells Fargo

Good morning, Wells Fargo. Can I ask you just – if you look at the sub-segments in terms of the sales by market where you have commercial and military business jet. Why – I don’t think of anything in business jets is having falling off from the September quarter to December quarter, but why did that sequentially look like a drop $14 million or $15 million?

David Kornblatt

I think we called out in Q2, it could be just the timing of a couple of wings, but you should remember that we called out that we were the beneficiary of some misguided forklift operators around FPO Airports and they crashed into a couple wings. So we had a couple of extra wings that we were able to deliver in Q2. You would normally think of a wing is having an aftermarket, but if somebody on a truck runs into it, it shows up. So I think we had two of those, one or two of those in Q2, which I guess unfortunately did not repeat.

Sam Pearlstein – Wells Fargo

So this is a more normal run rate than is to where it should be…

David Kornblatt

Yeah, I mean keep in mind it was the holiday week, weather or somebody shut us down or it could have been a little bit of pain, but that always happens, but I think that’s right. And then of course as we get into fiscal ‘14 and ‘15 when we start delivering on the Bombardier Wing, this is going to show some awfully nice growth.

Sam Pearlstein – Wells Fargo

Thank you.

David Kornblatt

Yeah.

Operator

Our next question comes from JB Groh. Please state your affiliation followed by your question.

JB Groh – D.A. Davidson & Co.

D.A. Davidson. Good morning guys, I’ve been popping between couple of calls here, so if you’d covered this I apologize, but the 787, I know lead times vary between your different operations. How would you characterize the percent of those that have moved to the seven or eight that Boeing seems to be sticking to? And is there anyone in that list that you would have expected to receive the call to go to seven that you haven’t yet?

Jeffry Frisby

No, I mean some of our companies are still at five, but I think they have seven on their horizon and nothing has changed in that regard.

JB Groh – D.A. Davidson & Co.

So the timing hasn’t shifted to the right or anything like that?

Jeffry Frisby

If you’re talking battery impact, we’re not seeing anything.

JB Groh – D.A. Davidson & Co.

Okay, okay. And then you mentioned available for debt reduction, I mean would say, you’re not overleveraged, is that a lower priority than looking at other deals?

Jeffry Frisby

I don’t think it was meant to indicate a priority of any kind. I think we’re trying to say if we don’t do anymore acquisitions or even ex-acquisitions that sort of the free cash flow, but given that we made commitments post-Vought to reduce debt and we’re certainly in a comfortable place, we think the ultimate definition of cash flow is available for debt reduction. So if a good acquisition come along I don’t think we’re going to pass on that because of the cash reduction target.

JB Groh – D.A. Davidson & Co.

Okay, good. All right, thanks. Everything else has been covered for me, thanks.

Jeffry Frisby

Okay.

Operator

Since there are no further questions, this concludes the Triumph Group’s fiscal 2013 third quarter earnings conference call. This call will be available for replay after 11:30 AM today through February 7, 2013 at 11:59 PM. You may access the replay by dialing 888-266-2081 and international participants may dial 703-925-2533, entering access code 1602339. Thank you all for participating. You may have a nice day and disconnect now.

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