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Triumph Group Inc. (NYSE:TGI)

F3Q09 Earnings Call

January 30, 2009 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.

Peter Arment – American Technology Research

Stephen Levenson – Stifel Nicolaus & Company

Eric Hugel – Stephens Inc.

Tyler Hojo – Sidoti & Company

Karl Oehlschlaeger – Macquarie Research Equities

Ronald Epstein – Bank of America-Merrill Lynch

Operator

Welcome to the Triumph Group conference call to discuss the fiscal year 2009 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 insure that your popup 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 statements. 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 involved known and unknown risks, uncertainties, and other factors which may cause Triumph’s after 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 exclusive 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

I’m assuming you’ve all read the press release we are in fact very proud of our quarter. In a very uncertain environment our company and our people have executed and produced growing earnings and cash flow, despite the Boeing strike and the headwinds of an economic downturn. Reviewing the slides and making some comments, as you’ll see, we had a very strong quarter year-over-year gross and sales. Our operating income and earnings grew despite headwinds of, as I mentioned, the Boeing strike, which actually had a longer affect than we had estimated after our second quarter earnings call, and a delay in the 747-8 and the 787 production.

Our backlog rose to $1.28 billion despite push outs of the 787, which since the beginning of the year has equaled $80 million. Translated, what’s happened there, as you remember, we have a backlog that’s 24 months of purchase orders in hand, $80 million of that backlog since the beginning of the year has moved out beyond the 24-month period of time. So despite that, our backlog has risen.

Our aerospace systems operating margin is up significantly from the prior year. We do have lingering problems in the aftermarket services group, which continues to be impacted by losses at our Phoenix APU operations. I will note here that outside of the AP unit, the rest of that group is operating successfully, including Thailand that you may recall we had some problems with the end of last year, and that is operating profitably.

Our cash flow from operations was $25.8 million in quarter three and $76.8 million year-to-date. Our balance sheet remains strong and our earnings per share from continuing operation increased 33%, of which we are very proud.

With that I will turn it over to Dave.

David Kornblatt

I’d like to start off with a review of the financial results for our third quarter. First, turning to the income statement, sales for the third quarter increased 4% to $285.2 million. Operating income increased 6% over the prior year to $30.4 million with an operating margin of 10.7%. Income from continuing operations was up 22% from $17.9 million to $21.9 million resulting in earnings per share from continuing operations of $1.33 per diluted share versus $1 per diluted share for the prior year. The loss from discontinued operations was $818,000 or $0.05 per diluted share. Net income increased 26% to $21.1 million or $1.28 per diluted share. EBITDA grew 7% to $42.2 million resulting in a 14.8% EBITDA margin.

Turning to our segment performance, in the aerospace system segment sales for the third quarter increased 5% to $222.8 million. We estimate that the Boeing strike had about a $26 million impact on the quarter sales. Operating income increased 31% to $34.3 million with an operating margin of 15.4%. EBITDA for the segment was $42.8 million at an EBITDA margin of 19.2%.

The segment’s third quarter results included $600,000 of legal expenses net of insurance reimbursement associated with the previously disclosed trade secret litigation. As we said in our press release, the segment’s operating income was impacted by a number of unusual items including the Boeing strike, a charge to standardize the accounting of non-reoccurring engineering costs, a charge to terminate a defined benefit pension plan, and a favorable retroactive pricing settlement. The net unfavorable impact of these items on operating income was estimated to be approximately $2.8 million.

In our aftermarket services segment, sales for the third quarter increased 1% to $63.1 million. Third quarter operating income decreased 66% from $6.5 million to $2.2 million at an operating margin of 3.5% as compared to 10.4% a year ago. EBITDA in the quarter was $5.4 million, a 45% decrease. As mentioned in our press release, the segment’s results continue to be significantly impacted by losses incurred at our Phoenix APU operations. Year-over-year revenue growth, excluding these operations, was 15% and operating margin was an excess of 10%.

Our order backlog increased 4% over the prior year to $1.28 billion, which is a 2% increase sequentially. Our military backlog increased significantly and now represents approximately 41% of our total backlog, up from approximately 34% over the past couple of years. I will remind you that our backlog takes into consideration only those firm orders that we’re going to deliver over the next 24 months and reflects future sales within our aerospace systems group since the aftermarket services group does not have a substantial backlog.

I think it is important to note, as Rick said earlier, that the increase in our backlog is net of a decrease in our 24-month 787 backlog of approximately $80 million since the beginning of the year due to the push out in the production schedule. Our overall 787 backlog continues to grow.

Our top ten 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 Osprey V-22 Combat Helicopter in fourth place. During the quarter, we conducted our periodic update of ship-set values and at this point the V-22 has replaced the 787 as our largest ship-set value.

To avoid any confusion on this point, this is all attributable to our success on the V-22 and is not attributable any loss of 787 content. In fact, as I said earlier, our 787 content is stable and is actually growing. In fifth place is the Black Hawk Helicopter with the C17 Freighter moving up to sixth place. The 787 dropped to seventh place with the A320 family in eighth place. Making its first appearance in the top ten is the Cessna CJ series in ninth and the F-15 remains in tenth place. Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue.

Billings to Boeing, commercial, military and space totaled 23% of our revenue. Looking at our sales mix among end markets, the next slide shows that compared to fiscal 2008, commercial aerospace decreased to 39% while military increased to 38%. Regional jets increased to 6% and business jets increased to 10%. Non-aviation decreased to 7%. If you adjust for the Boeing strike, however, the quarter sales mix would return to our traditional levels.

Finishing our sales analysis the next slide shows our sales trends for the quarter. Total organic growth for the quarter increased 1% over the prior year from $275.7 million to $278.7 million. Breaking that down by segment, third quarter same store sales for the aerospace system segment was $215.6 million, an increase of 1%. If you take the Boeing strike into consideration, the organic sales growth was estimated to be approximately 9%. All of the aftermarket services segment sales for the quarter were organic. Export sales for the third quarter were $64.7 million or an increase of 13%.

Turning to the balance sheet and the next slide, we generated $25.8 million of cash flow from operations in the quarter. CapEx in the quarter was $7.9 million and year-to-date was $31.3 million. You may have noticed that we changed the balance sheet classification of our rotable assets. As the footnote suggests, in the past we classified some of these assets in inventory and some were classified in fixed assets.

During the quarter, we standardized the treatment of all of our rotable assets onto a separate line within current assets. Our rational in classifying these assets separate and distinct from our regular inventory was twofold. One, we managed these assets separately and we are planning to increase our investments in rotables, particularly thrust reversers in the future. And two, we believe that separating these assets gives the public greater transparency in how we are progressing in our inventory control initiatives.

Net debt at the end of the quarter was $360.1 million versus $406.1 million at the end of March representing 32% of total capital. The global affect of tax rate in the quarter for income from continuing operations 24.1%, which reflects the benefit of the retroactive reinstatement of the R&D credit back to January 1, 2008. For the remainder of the fiscal year 2009, we expect the global effective tax rate to be approximately 33%.

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

Richard Ill

I’ll repeat a couple of things here. Future outlook on that slide, our backlog, particularly our military, as Dave mentioned, remains very strong. We remain very focused on improving execution and controlling our costs as we go forward. We are, as the press release said, affirming our earnings guidance and that our earnings per share from continuing operations will be in excess of $5.40, which reflects 16.7 million shares and a continuing delay in the 747-8 and 787 productions.

We do see headwinds in pressure coming as we approach our business planning. We’re in the middle of doing that right now for next year and we approach everything with cautious optimism when most of the world is very pessimistic at most levels. We are not insulated, we realize, from the economic downturn, but we are not prepared, like many others, to make the downturn a self-fulfilling prophecy.

We don’t, as you remember, give any guidance at this time. We will at the end of our fourth quarter call this year. So, with that I’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.

Very good cash flow performance in the quarter and curious if you can give us, Dave, an update on your outlook for the full year and noticed you pulled back on the CapEx and just wondering how much that is sustainable at that pulled-back level on a go forward basis.

David Kornblatt

I think our cash flow should remain strong in Q4. We’ve been pretty steady throughout the year so I’d be disappointed to see us not deliver a solid amount of cash flow in the fourth quarter, and we will continue to dial back the CapEx from maybe our original guidance. I think we would see ourselves coming out in that $40 to $50 million, perhaps, for the year. But we clearly have dialed back some of the spending.

Myles Walton – Oppenheimer & Co.

You had previously talked about maybe a $40 or $50 million sales hit from the Boeing strike and I think year-to-date we’re looking at $30. Is there lingering effect to come in the 4Q period in the $10 to $20 million range or did it kind of under run what your expectations were going to be?

Richard Ill

I don’t think it was $40, $50 million I think it was $0.40, $0.50 per share, and I think that there has been that’s why I referred to a little longer lingering affect on the two months we had projected on our last call. And as anything like this, it took Boeing a longer time to ramp us up and tell us to start delivering again after the strike ended. And I think there’s still somewhat of a lingering effect there but it should not, barring anything new, should not affect us any in the fourth quarter.

David Kornblatt

I think what we’re seeing, Myles, there will be a little bit, as Rick said, nothing significant in the fourth quarter, but I think what we’re seeing is some of the product we sell indirectly to Boeing, it appears to us that perhaps either they’re a little slower to gear up or perhaps they’re managing their inventory levels. But there’s a couple of our clients that their production won’t be at the same level that Boeing’s production is at maybe until February, and in one case, March. So there are some linger affects, but nothing even remotely close to what we saw Q3.

Myles Walton – Oppenheimer & Co.

With both the Phoenix issues and the strike now kind of sized, do you think you’re still in the bottom end of your previous sales guidance range?

Richard Ill

I think we should still be for the year 1.25 to 1.35.

Myles Walton – Oppenheimer & Co.

Moving over to Phoenix, can you gauge us as to what to look forward to in terms of improvements there? I think you implied about a $5 million loss versus $4 million loss last quarter and kind of what does that look like for the next few quarters and kind of give us the exit plan there.

Richard Ill

Well, the business plan, as I mentioned, we’re going through our business planning process right now, which involves confirming the fourth quarter for each one of our companies and our groups and then next year’s business plan. I think that what we’re finding is that the APU unit expects to be back into the breakeven area by the end of this year. We haven’t been there yet we’re going there in two weeks to confirm whether we believe that or not.

I read your report that came out this morning, Myles, and you say there are aftermarket trends adversely affecting the APU business. I think that what’s affecting the APU business is the APU business. They’re not executing the way they should be executing and that is clearly our fault, whereas the aftermarket trends and the rest of that group are relatively strong and they’re performing very well in most of those companies, so it’s the APU unit that is the one that is hurting us and we’re working very hard on that, as I mentioned last quarter, with management changes and proper execution and removal of overhead.

David Kornblatt

We still would project a loss for the Q4, but as Rick said, we hope we would enter April 1st in closer to a breakeven mode at that business. That’s the way we see it now.

Myles Walton – Oppenheimer & Co.

Last one more of a clarification, you had the Cessna enter the top ten and Cessna’s production seems to be on the downward side of the cycle. Is this a reflection of market share gains because it’s just surprising to me that your 24-month outlook there would have increased as opposed to decreased?

David Kornblatt

I think it’s a little bit of market share gains, Myles, but as I said on a couple calls, when you get to number 9, 10, 11, 12, 13, 14 in our top ten programs it’s a couple million dollars, so it’s always been in that range. It didn’t spike that much it just spiked enough to get ahead of a few programs. So I think we have had market share gains there. We read what you read but it’s not some monster gain that we had in the quarter.

Operator

Your next question is from Peter Arment – American Technology Research.

Peter Arment – American Technology Research

The military business looks like a very strong 22% I think year-over-year comparison and looks like CH-47 and the Blackhawk continue to be big drivers there. Can you give us a little better outlook whether you think that kind of growth can continue or just was this a particular strong shipment this quarter?

Richard Ill

Well, I think if we've gained market share in any area I think it has in fact been the military area. So I think I can say that we're very optimistic that our share of our business will remain up in the 40% plus level in military for the foreseeable future. I'm not sure I would be willing to project another 10% increase of our business being in military because it's an unknown. It's uncharted territory. We don't know what the new administration's going to do about some of the programs that we're on.

As we view it right now, the programs that we're on, we think, are going to be surviving programs and we've gained some market share on those programs. So we remain optimistic, but I don't necessarily see it growing any more than that.

Peter Arment – American Technology Research

Rick, maybe if you'd talk more about macro and I know you're obviously getting into your planning right now, but how do you approach the planning from a strategic perspective versus previous beginnings of a down cycle, from your experience? Could you just give us maybe a little insight on how you're approaching it?

Richard Ill

Well, we're not really approaching it any differently than we have. I think that what we've seen so far at a number of our companies they read the same things that we read. And everybody reads in the morning, you open up and you read all the reports and you read how Boeing led off 10,000 people, or is going to, Cessna let off thousands of people, this, that and the other thing.

Our employees, when I go around and speak to all our employees, are asking what's going to happen to our company. And as a result, when they sit down and do their reviews, they have a tendency of being very conservative in their point of view. Our job, at that point in time, is to understand from all facets of their company, their sales people, their production people, etc., as to how much we should believe a downturn type of thing in there forecasts or not.

At this point in time, our business plan or our forecast, which we haven't finished yet, is relatively optimistic across the board and where we'll come out on this thing, they submitted that in the middle of December. And then we review it every month, going forward, with the group presidents and other people. So that's really the way we view it and we do it from the bottoms up, and like any other company, we have people who are very optimistic and project big numbers, and then we have the people that fall in the sandbagger category.

Operator

Your next question is from Steve Levenson – Stifel Nicolaus & Company.

Stephen Levenson – Stifel Nicolaus & Company

I know you mentioned Cessna before. Do you think that's something that'll stay on there for a long time, or is this something that is fairly short order shipments?

Richard Ill

Well, I think, as Dave mentioned, I think it'll stay either in just in our top ten or in our top 13 or 14, if you will, because it goes back and forth in current backlog. We all read that Cessna led some people off and Cessna's a very good customer of ours. So I would expect that a lot of the programs that Cessna will remain very significant to us, and that some of the things we would be concerned with going forward. But we don't see any end-of-the-world situations at Cessna.

Stephen Levenson – Stifel Nicolaus & Company

On the APUs I guess what, last quarter, you said you changed management and so this quarter it's just a function of the decreases in capacity and less hours on the units that are out there?

Richard Ill

It’s a matter of working your way out of digging yourself out of a hole, Steve. As I mentioned last quarter, one of the things that we've done is that we've changed and eliminated a lot of overhead. And that changes the functions of the people in the operation so we can become more efficient, and build an operation that is, in fact, profitable with less overhead and that just takes time to accomplish.

Stephen Levenson – Stifel Nicolaus & Company

The balance sheet, obviously looking really good, what do you see in the acquisition pipeline, and is there news about valuations? What you're seeing these days?

Richard Ill

The acquisitions are clearly there. We're working on any number of them. The valuations, at least from our perspective, we're being very, very careful on the valuations because, even though the government has given a lot of bailouts to a lot of people, the banks aren't rushing to the fore to lend money at this point in time. So one of the reasons that we're being very judicious in regards to the multiples we pay, and the fact that we're working very hard on our cash flow and our working capital management, is to produce that cash so we don't put ourselves in a position where we're out of the cash to make judicious acquisitions.

I think, in the multiple area I think the sellers, this may be overly obvious, the sellers are not so quick to reduce their expectations of the multiple they should receive, especially when they're advised by investment bankers. So we're being very careful on that and they're coming down, slowly but surely.

Stephen Levenson – Stifel Nicolaus & Company

Last is a question for Dave. The few FASB regulations come in on the convertible next year. Could you tell us a little bit how that may or may not impact Triumph?

David Kornblatt

It will impact Triumph and I think you would be pretty close if you used about an increase of 400 basis points on, I guess, now $191 million of debt. That's all non-cash but we will have higher interest expense of a significant amount next year as the new provision applies and basically saying that has to carry what would have been a normal interest rate at the time you did the deal. So will not affect our cash flow, but will be a headwind on the earnings per share.

Stephen Levenson – Stifel Nicolaus & Company

We saw you did buy back some of those notes. If the acquisitions were expensive, do you see the repurchase of any of those notes as a continuing program?

David Kornblatt

I think we would continue to be opportunistic there. I think the prices we were able to get those at made that very compelling, with an instant payback. That's a real gain. That's an amount we won't have to refinance one day or pay down. So I think we would be opportunistic if those bonds were to get back into what I call silly territory. To be able to buy a Triumph bond at $0.80 on the dollar with an imbedded equity upside for three years seems like a pretty compelling investment.

Operator

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

Eric Hugel – Stephens, Inc.

You talked about in the aerospace business you had a laundry list of sort of, charges, but one of them you talked about is the Boeing strike. When you talk about that, are you talking about costs associated with the Boeing strike? Like, I know you had to shut down or lay off some people temporarily. In that number, are you estimating, sort of, profit that you would have made delivering the $26 million of revenue that you didn't deliver?

Richard Ill

Yes.

David Kornblatt

It's really more focused on the latter, Eric. It's really the lost sales and our typical gross margin that we would have got. That's why you saw, in our comments and the press release that we used approximately, whereas normally on actuals we're pretty precise. That's not an exact science. We have not tried to capture all the inefficiencies and all the other things that would have impacted us. That's clearly a negative that we did not throw into that number. We were really looking at the loss sales and margin.

Eric Hugel – Stephens, Inc.

I'm assuming then that the favorable retroactive pricing settlement was a sizable number to offset that.

David Kornblatt

It was a good number. It didn’t offset it. All of the impacts but it was a good number.

Eric Hugel – Stephens, Inc.

With regards to the Phoenix APU business, I'm just trying to get my arms around why the business all of a sudden just seemed to fall on its face. I'm just trying to figure out it seems like did business sort of drop off and then just you were left with too much overhead? And is that a function of sort of the Thailand facility because I know Thailand was really built to sort of keep work locally and it probably a lot of that work came at expense of Phoenix because a lot of that work was being done in Phoenix before Thailand. Is that sort of close to what's going on here?

Richard Ill

I think that there are times, Eric that we all try to read too much into certain things. Yes, we have somewhat of a problem with competition and macro issues within that parent overall industry, a.k.a. the airlines parking aircraft and, therefore, you have some fewer throughput through the plant and that hurts.

But the bottom line and the very direct thing we had management there that built way too much overhead. So when you have a little sinking business, like I referred to, and too much overhead, the throughput is significantly less profitable and in the case goes to a loss and that has to be changed.

That's why I tried to say the fact is it's not a big issue in regards to the industry necessarily. It was systemic with us and our management did not execute the way they should execute. I mean it's that simple I don’t know what else to-

Eric Hugel – Stephens, Inc.

I understand, I guess my final question I'll get back into the queue, is I think I know the answer but I just sort of want to hear you say it pretty much. With regards to the in excess of 540, I guess if you use just over 540 the implication is that fourth quarter earnings are going to be, let’s say, around a buck. You talked about the Boeing work versus third quarter being better.

Is there anything that you're thinking about potentially? What are some of the potential issues that you're looking at? I know traditionally you've always been conservative but I'm trying to figure out is this your natural conservative or are there real headwinds in other places that we need to sort of think about?

Richard Ill

Well I would admit to being naturally conservative. We didn’t say just in excess of 540 also we said it'd be an excess of 540. We're not building any specific item into that by the end of the year. I’ve used when, I’ve talk to people a lot, I've used the thought that I'm sitting in my desk sitting in a chair and reading all the reports every morning and I'm expecting the anvil to come through the ceiling and hit me on the head because there's nobody that has much to say that's optimistic about the aerospace industry. We on the other hand are trying to be cautious but at the same time be optimistic and not have all these reports be a self-fulfilling prophecy.

Operator

Your next question comes from analyst Tyler Hojo – Sidoti & Company, LLC

Tyler Hojo – Sidoti & Company, LLC

I guess you made it pretty clear what the sales impact or what the perceived sales impact was from the Boeing strike, but what was it on an earnings base in the quarter?

David Kornblatt

We put it in that category. It's a lot of moving pieces. So I think we would prefer not to dissect that $2.8 million. It was $26 million approximately of sales. We used our standard margins and, as I said, we did not try and goose that number up by sucking in every inefficiency and every medical cost that we had to occur for a furloughed employee. We really just tried to keep it at the gross margin level. So undoubtedly the number would be higher than that but we tried to just bring up the largest piece of that.

Tyler Hojo – Sidoti & Company, LLC

To kind of follow on to Eric's question just a second ago, you look at the fourth quarter and seasonally it's always been kind of your strongest quarter of the year, due I guess to year end incentive plan you guys have. How do you look at that weighing some of the delays you guys mentioned in the press release and in the prepared comments?

Richard Ill

How do we look at, could you repeat the end of that? How do we look at what?

Tyler Hojo – Sidoti & Company, LLC

How do you look at kind of that being your seasonally strongest fourth quarter against what you kind of indicated with the push outs in Boeing and some of the concerns that you have?

Richard Ill

The last month specifically, and the last quarter and the last month of the quarter and the fourth quarter has always been a very strong period of time. Years ago our year end was a different month and it was still the strongest month of the year. So I think that it's a fact. It's the end of the year and there is an incentive package overrides some of the issues with Boeing.

I think that we would have seen any further push backs with Boeing by now with two months left essentially. So I don’t see that that's going to be a big issue. What we have on the books and what we're producing right now I don’t see any downturn at all. If anything, I’d see an upturn on what the military wants to produce and some of the other things, but I don’t think it's a big issue.

Tyler Hojo – Sidoti & Company, LLC

Just on one other item here, I know you guys don’t like to talk about the legal trial, but there actually was an article that hit earlier in the month just in regards to a potential hold being sought on Eaton's suit against you guys. Could you maybe just comment on that and what the implications are for legal expense going forward?

Richard Ill

Our general counsel is sitting across the table with a gun pointed at my head. There's really nothing more for us to comment on. We certainly want to have a hold on the civil trial, Eaton certainly doesn’t and that's what the article said in the paper. That's really no change from the last six months or whatever it's been. It's a very frustrating thing for us and I'm sure Eaton will probably tell you it's frustrating for them. I don’t think there's any change in that. We haven’t had any different rulings and the lawyers got to go through their stuff. They got to budget.

David Kornblatt

With regard to the expense, we now project the annual expense will be about $5 million and there's been $2.7 incurred thought the nine months for this year, so essentially $2.2 to $2.3 in the last quarter.

Richard Ill

This is simply an indication that not a lot has been happening that's the only reason for the drop. We haven’t been expending any money because not a whole lot has been happening.

Operator

Your next question comes from Karl Oehlschlaeger – Macquarie Research Equities.

Karl Oehlschlaeger – Macquarie Research Equities

You talked about the anvil versus cautious optimism earlier, Rick. When you think about some of the data we've seen on the traffic side we had basically capacity cuts in December but your aerospace, your aftermarket business that segment increased 1% on the quarter and, I’m not sure how much visibility you have and what is after market in your aerospace systems business? But when you think about after market trends versus traffic and capacity trends, how do you reconcile the two?

Richard Ill

I think that we look at certain areas of the country and the airlines that we serve, I referred to the fact that there are and we follow the reports of aircraft being parked, and there’s no doubt about the fact that that has affected our business and other businesses within the aftermarket group and our aerospace systems where we have aftermarket.

And we look at that very much but I think the other thing that we’ve seen recently is just subjective conversation with the Asian airlines, which we serve in Thailand, and they’re not particularly optimistic going forward, except some of the major airlines like Singapore and Thai and some of the others that are the larger ones.

We’re concerning that and we are concerned about that, but we also have specialty products, some of them are cell work that we do, on thrust reversers etc. and we’re working with customers that already have orders for certain things going through the fourth quarter. That’s why we remain optimistic in a lot of those areas.

You also have to remember a lot of the companies in our aftermarket services group are relatively small and they have a tendency of being specialized in certain products. We’re concerned about that and we’re not eliminating that from our thought process, certainly, and we follow those statistics airplanes parked, seat miles flown etc., but just don’t, not quite as pessimistic about it as some others are.

David Kornblatt

I think another way to look at it, and we’ve been very candid about our Phoenix operation and that has a whole lot more to do with execution than market, the rest of our businesses grew significantly in the third quarter and whether that’s because we’re gaining share consistent with our philosophy of a broad range of products and services.

The airlines and the cargo companies want to buy more things from less people and we can offer an awful lot and we still see the opportunity to gain share and we’re making the right investments, as Rick said, in thrust reversers and things where we think we’re best in class and, again, we don’t see a doomsday scenario.

Richard Ill

We’re also doing some business militarily in the repair and overhaul area, which has become a bigger part of our business in the last year.

Karl Oehlschlaeger – Macquarie Research Equities

Yes and talking about the share gains and maybe can you talk a little bit about what it is on the V-22 where you’re gaining share there. Is there any sort of overhaul work that’s happening there that you’re gaining share, your saying that the ship-set value increased so I guess that’s on the OEM side.

Richard Ill

It’s basically in the ship-set value and some of the things I mean we provide for example a high lift actuation system that the tilt rotor on the V-22 and the program’s doing well and we’re garnering more ship-set value.

Karl Oehlschlaeger – Macquarie Research Equities

How are you doing that, was the incumbent dropping the ball or what’s driving that ability to gain share?

David Kornblatt

I think it’s a little bit of both. I think that we’re gaining share because we’re performing well and some others are not and also I think we’re proposing in certain cases that we go to a higher level assembly and given our performance I think Boeing and the government have confidence that we can do that, so I think it’s a good triumph story our success there.

Karl Oehlschlaeger – Macquarie Research Equities

Are you transitioning or trying to apply that success you’ve had on the V-22 with other military programs too, can you talk about that?

Richard Ill

Well it depends on whether it will apply to the other military programs but surely, yes, our helicopter business across the board has done very well in the last year and continues to do very well.

I don’t know this for a fact, but I think it’s a very good guess that our increase in revenue, despite the downturn, is to a great extent due to the helicopter business and that manifests itself in our top ten programs and has virtually all year long.

Karl Oehlschlaeger – Macquarie Research Equities

Last question, the military is obviously doing well, commercial a little bit more uncertainty in the outlook. Disregarding the leverage impact of higher sales or lower sales, what do you think you have left to do in terms of chopping wood on the margin side, regardless of volume operating leverage?

Obviously, you talked about the Phoenix APU business but beyond that and the rest of the business overall maybe in terms of an overall company EBIT margin percentage, how much wood do you have left to chop?

Richard Ill

I would probably stop short of saying how much higher can we go with our margins, but I think that’s what we were referring to when we talk about addressing cost in the system, addressing becoming more efficient, notwithstanding to become more efficient with more throughput, as you said, but I think that we work on that we work on the working capital management. All of our companies have done a better job in working capital management this year.

There are things happening in the market place, which are unusual some of the big companies, I know this is a shock to everybody, but some of the big companies are paying us slower today than they did before. I will purposely, at this point in time, eliminate Boeing in that regard because they don't do that, we’re on another program with them, but it’s working on the working capital area and working on the efficiency in the plants.

The APU situation’s an extreme example of we’re working more efficiently, but I think all our plants are looking at that. We have initiatives throughout the company up from training to a lot of other initiatives that are lean in nature to get better at what we do.

David Kornblatt

I think our margin improvement, particularly in aerospace systems, Karl, has been it’s been somewhat volume, of course, but it’s also been execution and to a certain extent price. So I think the execution price formula can continue and if volume holds margin should continue to get better. If volumes drop, that’s a serious headwind, but I think it’s been way more than a volume story, we have done a better job period.

Operator

Our next question comes from Ron Epstein – Bank of America-Merrill Lynch

[Christine Lewog] for Ron Epstein – Bank of America-Merrill Lynch

This is actually [Christine Lewog]. My question is from Ron Epstein. I’m calling from Bank of America Merrill Lynch and following up on the Cessna question from before. When do you expect to see a slowdown in business jet production?

Richard Ill

Damned if I know. I really don’t know. Clearly with two things happening, number one an economic downturn and the government discouraging private aircraft, you’ll note that the last TARP bill initially included any private planes for anybody who took TARP money. When the bill came out it didn’t have that in it and that was as a result of a lot of people in the industry working very hard to stop the punishment of an industry that supplies a lot of high paying jobs and growth going forward.

Having said that, I think two things are happening. Companies are tightening their belt and I think the use of private aircraft will, in fact, go down because of that which in turn affects Cessna, Gulfstream I mean you go on and on. So I think that clearly the deliveries in 2009 calendar will be a lot less than they were in 2008.

But I think again they’ll probably be delivery levels that were equivalent to 2007, say, which we’re still at very high levels. So I think they will drop down from last year, certainly, or last year meaning the year we’re in now fiscally, next year but I think it’s still an industry that is in fact needed and will continue to grow over time, although perhaps not in the next year or so.

David Kornblatt

Keep in mind its impact on our backlog remains to be seen because it's 24 months and at this point I would say we don’t have the visibility as to whether some of those drop-offs on Cessna are more deferrals or cancellations. So it could very well be that our backlog holds in there but perhaps slides to the later part of the 24 months, so we just don’t have that visibility yet.

Operator

Your next question comes from Eric Hugel – Stephens Inc.

Eric Hugel – Stephens Inc.

Following up on the bizjet exposure, I guess we know that’s Cessna. Are you heavily exposed to any of the other bizjet manufacturers or is it primarily Cessna?

Richard Ill

I think it depends on what you mean by heavily. We do a lot of business with Gulfstream and do, obviously, a lot of business with Cessna. We do business with virtually all of them, Eric, but when you use the word heavily the answer is no. I think Cessna’s our biggest exposure there and Gulfstream to a certain extent, a lesser extent.

As Dave said, we don’t really have much visibility on what’s going on there but, one of the reasons that I think we’re in decent shape with Cessna, we might fall down a little, but with the most of the business we do with Cessna we have plants right in Wichita, and Cessna historically has liked to do business locally.

So we think we can help them out if they’re coming down a little bit, so it will have some affect, certainly, in the next year but I don’t look at it being disastrous.

Eric Hugel – Stephens Inc.

You noted in your press release, also, that you took a $500,000 hit for some kind of acquisition cost a deal didn’t go through. Is that pre-tax, after tax and where is that in the corporate expense item?

David Kornblatt

Pre-tax and corporate.

Richard Ill

It’s in corporate. It’s worthy of a comment. When we make an acquisition, we use outside suppliers, if you will, to help us with the due diligence and we’re using law firms and outside accountants and in both cases that translates to a lot of money. When you get up to $500,000 for a decent sized acquisition, if you don’t do the acquisition, well you got to expense all that.

Eric Hugel – Stephens Inc.

Can you give us an update as to how things are going with the sale of the casting business?

David Kornblatt

It’s been a while.

Richard Ill

Well, it’s probably been entirely too long. We’re still working very diligently on it. We have customers that we have to deal with in regards to finishing projects for them and the different buyers we talked to, some of them want certain customers, others they don’t want certain customers. So it’s pushing one button or one side of the water balloon and something happened on the other side of the water balloon, but we’ll get it down.

Eric Hugel – Stephens Inc.

Finally, maybe just more philosophically referring back to your anvil falling on your head sort of waiting in your office, do you have notions of being maybe more proactive in terms of trying to anticipate a potential downturn and really going after maybe some of the fat ahead of a potential slowdown and hey if it doesn’t happen great, but you’re sort of ahead of the curve if it does.

Richard Ill

I think the answer to that is yes, but the other side of the coin is, any growing company has initiatives that they may or may not want to take to grow their business. So our major job is to figure out where do we cut some of the fat, if you will, and be diligent in the costs at our company, while at the same time we have any number of initiatives that are potentially costly that will benefit our company in the future. So we’re not letting them go by the wayside either.

So we’re always trying to be proactive in what products make sense, what costs don’t make some sense, etc. and that’s what we try to do all the time. And it’s going to be even more so now with everybody telling us that the world’s ending by next Friday.

Eric Hugel – Stephens Inc.

Can you give us a guesstimate with your top ten programs in your backlog? What percentage is that approximately of your total backlog?

David Kornblatt

Seventy to eighty.

Eric Hugel –Stephens Inc.

The top ten are 70% to 80% of your backlog, great.

Richard Ill

I’d go down towards the 70 range. We can give you our top 100 if we wanted to but I think that those are the big numbers.

Operator

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

Myles Walton – Oppenheimer & Co.

One quick modeling question if I could, sometimes the unallocated corporate expense pops in the fourth quarter as incentive comp and I guess insurance, maybe self-insurance, costs run through the P&L. Can you give us some sense as to whether or not you expect that to happen in 4Q and kind of the magnitude there?

Richard Ill

It should not.

Myles Walton – Oppenheimer & Co.

It should not?

Richard Ill

Only on a minor basis if there are things that we haven’t considered. Most of the things we try to accrue all during the course of the year.

David Kornblatt

It won’t be comp that drives it up. It may be surprise on workman’s comp, surprise on IB&R on the health insurance or perhaps another due diligence type cost, which we certainly hope doesn’t happen, but it won’t be on the compensation front. It should be a little less than Q3, hopefully.

Operator

Since there are no further questions, this concludes the Triumph Group’s fiscal 2009 third quarter earnings conference call. This conference will be available for replay starting today, January 30, 2009, until February 6, 2009. You may access the replay system at any time between those dates by dialing 1888-266-2081. International participants dial 703-925-2533 enter the access code 1323587. Once again, those numbers are 1-888-266-2081 and 703-925-2533 access code 1323587. Thank you all for participating and have a nice day. All parties may now disconnect.

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