Triumph Group, Inc. (NYSE:TGI)
Q1 2017 Results Earnings Conference Call
July 28, 2016 08:30 AM ET
Daniel J. Crowley - President and CEO
Tom Powers - Interim CFO
Tom Quigley - VP and Controller
Sheila Kahyaoglu - Jefferies
Sam Pearlstein - Wells Fargo
Robert Spingarn - Credit Suisse
Seth Seifman - JP Morgan
Myles Walton - Deutsche Bank
Ken Herbert - Canaccord
Michael Ciarmoli - KeyBanc Capital Markets
Ron Epstein - Bank of America, Merrill Lynch
Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our First Quarter FY17 Results. This call is being carried live on the Internet. There’s also a slide presentation included with the audio portion of the webcast. [Operator Instructions]
On behalf of the Company I would now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause Triumph’s actual results, performance or achievement 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 our 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 Daniel J. Crowley, the Company’s President and Chief Executive Officer; and Tom Powers, Interim Chief Financial Officer of Triumph Group, Inc.
Go ahead, Mr. Crowley.
Daniel J. Crowley
Thank you, Stephanie and good morning and thank you all for joining us to discuss Triumph Group’s earnings for the first quarter.
Let me start with Page 4. In the first three months of this year, we made solid progress against our comprehensive restructure plan, the one I presented during our May earnings call. As we continue to transform the business and implement The One Triumph operating philosophy, our focus hasn’t changed. We’re focused on delivering on customer commitments and long-term sustainable value creation for our shareholders through growth and predictable profitability.
On a financial level, let me summarize where we have been, where we are now and where we are going. On page 5, in our May earnings call, I summarized the issues we dealt with in Q4 which resulted in charges of 1.3 billion, which addressed development program challenges, goodwill and trade name impairment and slowdown of the Boeing 747 program. Last week’s announcement by Boeing that they will maintain the reduced 747 build rate is already covered in our forward loss assumptions. We have a planned exit point on the program and are in active discussions with Boeing regarding earlier transition to their future supply chain.
For Q1, we had solid revenue of 893 million and good cash performance, and we are maintaining our outlook for FY17 revenue at 3.6 billion to 3.7 billion. However, we are disappointed in our Q1 operating income performance caused by charges related to a strike at one of our plants and excess startup costs on a few of our many programs. This quarter’s charges of $46 million, which are much smaller by comparison than Q4, reflect the increased insider controls that we put in place over the last few months, which are enabling us to surface and mitigate cost risks earlier than before. Excluding these charges, net income was $1.04 per diluted share.
As a result of our increasingly rigorous and disciplined program and operating reviews, and my commitment to transparency, we identified risks of approximately $80 million to our current FY’17 EPS outlook and that resulted in lower earnings guidance for the year of $3.15 to $3.45 per diluted share. As we work to offset and avoid these risks, we will also assess potential upside related to our effective tax rate over the rest of the year.
FY'17 remains a transition year. We expect some level of continued challenges on cash and operating income coming out of our ongoing reviews. However, we don’t anticipate that these risks will have a material impact on out-year results.
The important message I want to share is that while we continue to surface and deal with issues head on, our plans to position the Company for long-term success remain on track. Let’s go to Page 6. I’m halfway into my first year at Triumph, so it’s a good time to look back at all of what we’ve accomplished to achieve these objectives.
First of all, we consolidated from six to four product lines in April, and we are now harvesting the benefits of reducing from 47 to 22 operating companies as we reduce support and indirect labor and link supply chains. We’ve reduced staffing at our higher cost facilities while adding 400 new workers in our lower-cost factories as a result of new wins on 787 and A350, helping to improve our competitiveness. We combined our 2 billion of supply-chain spend across 10,000 suppliers and launched over 400 initiatives to reduce our costs and improve supplier quality and schedule performance. And we launched 300 million cost-reduction initiative in Q1; we’ve now flowed that down to every business unit and operating company with specific targets that are now being tracked on a weekly basis, with savings after one quarter on track to meet our FY’17 savings goal. As planned, we announced and initiated the first of two of five planned FY’17 plant consolidations that will reduce our support cost and footprint by 200,000 square feet towards a goal of 500,000 square feet this year. We’re on track to complete all five consolidations within the fiscal year.
Importantly, we rebuilt our senior leadership team with newly appointed and recruited CFO Jim McCabe and new leaders of HR, audit and IT. We staffed newly created positions for the transformation delivery office, performance excellence, and lean deployment. We also announced a new leader of our aerospace structures business, the legacy Vought business. These leaders bring one-company integration and lean form experience that will help deploy our new Triumph operating system.
During the quarter, we initiated divestitures of five non-core operating companies, having selected investment banks now, two have completed initial indications of interest and progress to offer stages. These actions will help reduce Triumph Group -- or help Triumph Group focus on our portfolio and reduce our debt. So far this year, we’ve base-lined our red and yellow programs and established a new battle rhythm for return to green that has enhanced our on-time delivery and quality performance and received very positive feedback from our customers. And significantly, we resolved long-standing disputes with key customers, opening the door for follow-on work and forming the foundation for new partnerships, including with Spirit Aerosystems and Northrop Grumman.
In the quarter we restarted our organic growth engine by baselining our pipeline and win rates, adding new BD talent, and adding key wins on growing platforms, such as the F-35 and adjacent markets, including machining for the nuclear industry. We completed our restructure of bank financing and long-term debt to provide flexibility to execute our transformation and our growth initiatives. So stepping back, all these actions we have taken so far and the many initiatives now underway, directly address the operational and growth issues Triumph has faced in the last few years and will enable Triumph to improve performance year over year as we move through FY17 into FY18 and FY19.
I would like to thank the Triumph employees for all their hard work and their commitment to our new philosophy. While the stress levels are up as we drive operational improvements and accountability, the workforce reaction to our efforts has been gratifying. Every Triumph member is now aligned around our three key imperatives -- delivering on commitments, ensuring predictable profitability and driving organic growth. These priorities shape our actions in the short-term and our long-term strategic choices for the future. I would like to provide further evidence on our progress against these objectives and our transformation plans and then turn it over to Tom Powers, our vice President of FP&A and interim CFO, who will walk through our financial performance.
On Page 7, first on delivering on commitments, when I arrived in January, I observed performance and contractual issues across many of our sites, which impacted our customers and undermined their confidence in Triumph. Some of these issues compromised our ability to bid and win follow-on business, contributing to negative organic growth, and in some cases creating negative synergies across our four business units. Thus delivering on commitments became our first priority.
The drive since January to eliminate red programs, reduce yellow programs and start new programs off right is paying off. And while we still have work to go, we’ve made significant progress and received positive customer feedback. Here are a few supporting facts. After an intensive focus in our aerospace structures business we are now delivering on time on both the Boeing 747 and 767 programs from our large Hawthorne and Marshall Street facilities. Boeing has commented that this is the first time in years that Triumph has delivered on its recovery plans. The Embraer E2 program celebrated its first flight on May 2, and we have now delivered seven of the planned 109,080 fuselages over the next 18 years, and we have five aircraft in flow and are improving ship over ship labor hours and quality.
The G650 program acquired from Spirit Aerosystems in December 2014 is now delivering one set of wing boxes to Savannah every nine days from our Tulsa and Nashville site. And Nashville is ramping up delivery of completed wings with 26 to be delivered this year. In fact, Nashville delivered its first fully assembled wing in Q1.
Triumph and Gulfstream leaders joined IAI in their celebration of the build of the 100 G280, and we continue, since taking over the program to resolve many engineering and manufacturing challenges that allow us to concentrate on long-term profitability. After several years of slow delivery progress on the Global Hawk program to Northrop Grumman, we have now added needed manpower, strong leadership, additional tooling and expertise to our line in Red Oak, Texas to increase output in support of Northrop’s family of high altitude long endurance aircraft.
While these costs were higher than previously forecasted, it is the right thing to do to enhance schedule confidence. On this program, since January, we delivered two wings and increased weekly factory output by a factor of 4, while reducing quality defects by 45% in support of the six planned wing deliveries this year and nine next year, and we are making progress on ramping up the nationally important Navy Triton program.
Our recently announced partnership with Northrop Grumman on unmanned aerial systems reflects our joint commitment to increase the production rate on their UAS programs, and it also removes Triumph from the no bid list and is opening up new doors, and new opportunities including the B21. We are also actively supporting the completion of the first three Global 7000 test aircraft at Bombardier’s final assembly line in Toronto in support of their first flight in the next few months while we complete the development and certification of the high lift wing in Texas and prepare for the production ramp in FY’18. We are in discussions with Bombardier over our claims and expect resolution this year.
Our customers’ first mindset also extends to our precision components business, where our work to deliver over 1,200 aircraft, unique brackets and structures every week for the Airbus A350 program has allowed us to recover from a substantial behind schedule position in January to meeting on-dock need dates in July. We are now delivering at a rate of 8 ship sets per month, ramping to 13 ship sets, or over 2,000 parts per month. Our recently announced facility in Kansas City will further support the A350 ramp and enhance our machining competitiveness.
The cost of this recovery effort impacted Triumph by 12 million in the quarter as we prime the pump with the suppliers for higher rates. As with Northrop Grumman UAS, taking these actions in Q1 is evidence that Triumph continues to put delivery on our customer commitments ahead of our short-term financial goals, which I view as an investment in our future, as Airbus and Northrop are now inviting us to bid in areas such as machining and structures and systems. Many of you have read about the unexpected strike at our Spokane facility that manufactures ducts, floor panels and composite clips at high rates in support of Boeing, Airbus and Spirit.
The strike has since been resolved and production levels have returned to pre-strike levels. While disappointing and costly to Triumph, we did not let the strike impact our long-term competitiveness or delivery commitments as we hired replacement workers and pulled in talent from across the Company to preclude any line stoppages. Our ability to respond as one Company and maintain deliveries under difficult circumstances was greatly appreciated by our customers, enhancing their confidence in Triumph and we will apply the lessons learned to future collective bargaining agreements.
As we continue to retire red program risks and deploy the Triumph operating system and lean principles across our 22 operating companies, we expect to see further improvement across all four business units. We remain on track to achieve our goal of having no red programs by the end of fiscal year, and very few yellow ones. And as we improve on-time delivery and quality, our focus is now shifting to reducing manpower cost to reduce program write-offs.
I would like to comment now on the next page about our organizational changes. First, let me comment on our new CFO. After an extensive search over the last several months, we selected Jim McCabe, a proven public company CFO with both operating and M&A experience that’s worked in a variety of diversified global holding companies for the last 25 years. Jim is a great fit with my new senior leadership team and his experience with shared services, as well as deployment of lean and the new operating system at Steel Partners, are just a few of the areas where I think he can make an immediate contribution to our Company.
Secondly, we created a new position of performance excellence. This includes oversight of our engineering operations quality and program management functions. This is a role we did not have at Corporate in the past. Mike Holtz joined Triumph this month to lead this effort, from UTC Aerospace Systems’ landing systems business unit. Mike brings over 20 years of aerospace development production and program management experience to Triumph and has worked on commercial programs as well, including Boeing, Bombardier, Gulfstream, Cessna, Dassault and Agusta.
In establishing this new corporate function, Mike will baseline our capabilities in each of these four areas and drive performance going forward and he will also have oversight of all our program execution activities and lead our return to green plan. While we have not resolved all of our operational challenges, we are improving month over month and the changes we are making will allow us to be more profitable.
I would like to touch on our efforts to improve our long-term financial performance and becoming predictably profitable on Page 9. You recently read about our planned closure of two facilities, one located in Everett, Washington and the other in Oakdale, Pennsylvania, totaling about 200,000 square feet. Work performed at these facilities is being transferred to other locations and these facilities are ramping down and expected to close early next year. These are the first two of our planned five consolidations that reduce the workforce by about 150, mostly in the support area.
Our employees remain our key asset and we are committed to working closely with them through this process. We are also on track to achieve our target of consolidating all five facilities this year and we continue to study how to better balance our capacity, while delivering value for our customers. And we’ve also built an internal playbook of consolidation best practices to guide this program based on collective experience of our brought organization. As you know we are working on cost reduction initiatives.
We launched a 300 million initiative in April, which we expect to reduce costs by 10% by the end of FY’19. Progress is on track. It takes a lot of work to drive out costs to cross supply chain, facilities, support labor, touch labor, but we are tracking all of the initiatives on a weekly basis and making good progress. Initial value stream mapping exercises have opened up a broad list of opportunities, and each business is contributing to the fight. We also implemented a new executive compensation plan that emphasizes cash generation and will ensure that our management team is aligned and accountable for increasing shareholder value.
One of the big initiatives in Q1 was launching our cash from operations initiative. First we started with the training program, so that everybody in the Company knows, what is cash from ops, where is it, how do you improve it. This will intensify our focus on cash flow, and all of the training is now completed down through the first and second level of management, and by August we will be down to the 3rd and 4th levels. We’ve energized everyone’s focus on cash management and our Q1 results on cash benefited from our improved working capital management.
Beyond driving improvements in operating income, Day Sales Outstanding, days payable, days inventory, cash to cash conversion, are all now being tracked in our monthly metrics deck by our operating company. We also taking advantage of supplier financing tools and trimming CapEx and changing our material ordering and lot sizes to reduce inventories. This is all basic stuff, but the opportunities are there.
Each operating company has now developed an actionable roadmap to achieve their specific cash flow targets, which we believe will increase our ability to reduce costs and hit our overall cash goals. We’ve also included these goals in our operating budgets to ensure that anyone realizes this is a live drill. Triumph Group is now in the lean deployment journey benefiting from our heritage GE and Goodrich sites experience. In conjunction with the Triumph operating system we developed an operational excellence plan which includes continuous improvement roadmaps for specific facilities. And these roadmaps will help drive our fiscal year ‘17 CRI targets and change the culture to one of continuous improvement. We have done VSM and Kaizen events now at 18 facilities. These are identifying further opportunities. A great example is the work at Tulsa, where our first Kaizen event generated near-term savings of $100,000 per wing, and I look forward to reporting further on this in future quarters. This is a journey, but it will lead to long-term value creation. If you go to page 10, let me comment on our third priority, that of driving organic growth. We’ve set a three year goal to exceed new orders book-to-bill ratio of 1.1, and are now tracking each business unit’s pipeline and win rate. We just returned from the Farnborough International Airshow, where we had a great experience and high traffic through both our booth and chalet and we are encouraged by the trends we’re seeing. Defense in particular remains a bright spot for the industry with ample opportunities for Triumph.
We had great meetings with our customers and explained our new four business unit structure. That was received very well because they now have clear points of contact and we’ve eliminated the overlap across the former six business units. Farnborough 2016 saw a good traffic with our prime customers, with Boeing and Airbus both receiving firm orders and commitments. Borders on the narrow body with Airbus A321neo are also continuing as well. This quarter we announced contract wins with Lockheed Martin, reflecting our ability to compete and win at all levels of the aerospace supply chain, and pursue non-aviation opportunities. The most recent contract on the F-35 provides the opportunity to build key engine and structures components through 2021, contributing to organic growth, which is fundamental to our long-term strategy.
We’ve also increased investments in our new business resources and strengthened our BD teams. We are tracking all of our pursuits online and adding quarterly reviews of must-win programs. Development programs, along with ramp-up and production will generate revenue opportunities to help fill the void of sunsetting programs. I mentioned resolving customer disputes. We are pleased to resolve the dispute with Spirit Aerosystems related to the Gulfstream G650 and 280 wing production program during Q1. As part of the agreement, Spirit also extended several contracts related to content on other platforms, valued at approximately 240 million, and we look forward to partnering with Spirit on these programs. With respect to G650 we continue to see new levels of performance.
We anticipate follow-on business as we transition work from Savannah to Nashville. We also have content on the G500 and G600 and look to win additional work on Gulfstream as our performance improves. These are important steps that reinforce that customers want to work with Triumph, but it is incumbent on us to show we can deliver exceptional products on their current programs. Once that happens we will be in a position to increase our scope with key customers through follow-on and dual sourcing.
At this point, I would like to give Tom Powers a chance to comment further on our financial performance, and then I will come back and address your questions. Tom?
Thank you, Dan, and good morning, everyone. Before I get into our detailed financial performance let me first thank Dan for allowing me the opportunity to serve as interim CFO and I look forward to working with our new CFO Jim McCabe going forward.
Now, allow me to give you my high-level reviews of the quarter. We’re certainly beginning to feel and see the transformation that is underway at Triumph. There is an enhanced focus on reducing costs, improving on time delivery and quality in order to meet customer requirements, while working as one Triumph team. All of these efforts will impact results in a positive manner for the long term and improve how we do business.
During the quarter, we improved our working capital management, resulting in better than expected cash performance, realized the benefits of our new business development efforts with new wins and product support, and continued to deliver strong operating margins in our integrated systems and product support units. But we also completed all debt restructuring activities planned for Q1, which provide the flexibility needed to execute the transformation and drive growth initiatives. While the reduction in guidance will put stress on our covenants as we continue through the year, we currently project we will continue to meet our financial covenants. Despite the nonrecurring charges we incurred during the quarter, we are confident in what we’re seeing and the momentum being created as we move through FY’17. Our hard work continues to ensure Triumph is on track to meet our three key imperatives: deliver predictable profitability, generate organic growth and deliver on customer commitments.
Now, moving into the details, please turn to Page 12 of the slides for a review of revenue and earnings for our first quarter. Net sales for the first fiscal quarter were $893.3 million, down 7 % from the prior year period, but higher than we expected due to the impact of new wins in support and a better delivery rate than we had assumed on certain programs in aerospace structures. Operating income for the quarter was $46.7 million reflecting pretax charges totaling approximately $46.1 million, of which approximately 13 million represents future cash flows.
Now, as detailed on Slide 13, the most significant charge we took, of which all of you are well aware, involved strike costs related to the recently ratified IAM collective bargaining agreement at our Spokane facility, which was not anticipated prior to its occurrence. As Dan mentioned we commend the team for the way they executed our plan and delivered to our customers without interruption during this period. The next largest impact in the quarter relates to the MOU we signed with Northrop Grumman to advance UAS production. The charge, which totals roughly $14 million in the quarter and is reflected in the aerospace structures business unit, represents the estimated cost of the additional support needed on an interim basis to facilitate increased production of compliant wins. From a cash perspective most of the charge will be realized over the next two years. In the end we are confident that this agreement will be instrumental in successfully ramping up UAS production rates.
Now additionally, in precision components we took a $6.1 million charge, all of which was non-cash to account for the write-down related to excess startup costs on a build to print program. Finally, as expected, we recorded charges of $10 million, 3.5 million of which were non-cash, related to our restructuring activities. As a reminder, the actions we are taking as part of our organizational changes are expected to drive run rate savings of approximately 55 million that will be fully realized in FY’19. In calculating results excluding these charges, operating income for the first quarter was $93 million, reflecting an operating margin of 10.4%, and net income was $51.6 million, or $1.04 per diluted share. Adjusted EBITDA margin was 7.3%.
Now, moving on to our segment performance beginning on slide 14, I would like to remind everyone that this is our first quarter reporting in our realigned business structure with four business segments. Starting with integrated systems, sales for the first quarter were $257.4 million, a slight year-over-year decrease compared to the prior period sales of 258.6 million. Despite a decline in organic growth resulting from the timing of deliveries on key military programs and customer deferrals on commercial rotocraft, the segment continued to deliver strong operating margin of 19% during the quarter.
In the aerospace structures segment, sales for the first quarter were 331.6 million, a 16% decline attributable to lower year-over-year production rates on a number of legacy programs. First quarter operating income was $9.2 million and included restructuring charges of $3.1 million and a net unfavorable cumulative catch up adjustment on long-term contracts of 28 million. The cume cash was primarily related to the UAS program charges that we previously discussed, and the A350 program where we were experiencing higher than previously estimated costs on the program prior to its transfer to a lower cost facility within Triumph. Excluding the charges related to the MOU with Northrop Grumman and our restructuring efforts, operating margin for the quarter was 8%. With regards to the cash flow profile for the Gulfstream G650 and G280 wing programs, the cash flow utilization for the quarter was $30 million, reflecting operational cash usage of $7 million with the balance being working capital changes. We now expect net cash spend on the G650 and G280 programs to be between $40 million to $50 million for the full fiscal year. We project the combined programs to be cash flow positive by the end of FY18.
Moving onto precision components, sales for the first quarter were $254.6 million compared to 265.1 million in the prior year period, a decrease of 4%, all of which was organic. Results were impacted by the pretax charges totaling 26.8 million related to the IAM strike, planned restructuring activities and an inventory write-down. Excluding these charges, operating margin for the first quarter was 7%.
Now for our fourth segment’s results, product support generated sales of $84.2 million compared to 74.7 million in the prior year period. Sales were 13% higher than the prior year, due to recent wins from existing and targeted customers. The increase in sales demonstrates the direct impact that our new business development organizational efforts are having with our results, and we look forward to building on this important initiative. Product support delivered solid operating margins of 17% during the quarter. Overall, we have continued to see strong and improved performance in both our integrated systems and product support segments, reflecting a number of actions taken to date focused on improving cost structure, margins and business development efforts.
Turning now to backlog, our order backlog as of June 30 was approximately $4 billion, minimally down from our prior quarter end. The backlog primarily reflects future sales within integrated systems, aerospace structures and precision components and represents orders due over the next 24 months.
Turning to slide 19, we were encouraged that we are beginning to see the benefits of our renewed focus on cash management as the quarter’s cash flow utilization was better than expected at this point in time during the year. This was primarily related to improved working capital management. For the first quarter, we saw a cash flow utilization from operations of $84 million, reflecting continued nonrecurring spending on key development programs of $54 million, the impact of the previously mentioned IAM strike and restructuring efforts. Our working capital management efforts to drive cash performance in accordance with our guidance as we move through the fiscal year. Our current capitalization slide shows net debt at the end of the first quarter was $1.5 billion and there were no shares repurchased during the quarter. We did not make any voluntary pension contributions.
Now before discussing cash flow further, I would like to mention that the global effective tax rate for the quarter was 31%. Our guidance reflects the tax rate for the fiscal year of 18%. The difference is attributable to the complexities associated with deferred tax accounting and tax valuation allowances. We would expect a similar quarterly rate in Q2 and probably Q3, with a corresponding adjustment in Q4. From a cash tax perspective we expect to fully utilize our federal NOL carry forward during the fiscal year and expect to have approximately a 15% cash tax rate.
Next, allow me to briefly touch on the key elements of free cash flow for FY’17 that you can see on Slide 21. We expect free cash flow utilization of approximately $100 million to $120 million. We are now projecting net nonrecurring development spend of $90 million to $100 million to complete the programs with Bombardier and Embraer before they go into the production phase. Our free cash flow guidance also reflects capital spending in the range of $80 million to $100 million and restructuring-related cash outlays of $65 million to $75 million.
Now with regards to guidance, we have updated our full-year expectations reflecting current aircraft production rates, first quarter performance, and an updated assessment of program risks. The guidance takes into consideration increased estimated costs associated with risk for time and initiatives on development and key programs. We are reaffirming our FY’17 revenue guidance of $3.6 billion to $3.7 billion, and now expect our full-year earnings to be in the range of $3.50 -- excuse me, $3.15 to $3.45 per diluted share. We continue to anticipate the second half of the year will be stronger than the first half, based on the implementation of our transformation efforts and projected cost-reduction initiatives.
This guidance does not take into account any potential divestitures that are planned for FY17. And, finally, despite disappointing Q1 earnings performance and a lowering of our guidance, I do personally believe we are on the right path to achieving our three imperatives delivering on our commitments, organically growing our Company and becoming predictably profitable.
And with that will turn the call back over to Dan. Dan?
Daniel J. Crowley
Thank you, Tom. And I also want to introduce our Vice President, Controller and Chief Accounting Officer Tom Quigley, in the event any questions come up for Tom.
Stephanie, we are ready for questions from the audience.
[Operator Instructions] Our first question comes from Sheila Kahyaoglu, please state affiliation followed by your question.
Hi, good morning; Jefferies. I was just wondering, can you walk us through your revised EPS guidance because I don’t think and got all the missing pieces? I guess the way I am thinking about it is at the low-end your EPS was changed by $1.75? And that includes $0.65 from the Northrop and IAM charges and another $0.25 from A350, cume catch up, there’s a bit of a tax benefit but I am still missing a dollar of earnings change?
And I guess the second question is as it relates to this, how much of this disappointing guidance change do you think is transitory versus representing lower through cycle earnings?
Daniel J. Crowley
I will take the second part, and Tom Quigley if you will address the first?
The major change in our guidance versus our prior quarter, besides the charges taken here in the first quarter is an identification of about $80 million of risk that we see in the year. It pertains to a lot of changes in performance that we are looking to improve on, key and development programs, and just retiring the risks associated with that, execution risk, and making investments to meet the expectations of our customers.
Daniel J. Crowley
Let me amplify on that. I’ve been doing these reviews at the program and at the business unit level now every month, and every week in fact at the program level, the last six months and we dealt with a number of issues in Q4. As we continue to go deeper into our forensic of each of the businesses, we’ve identified a few areas where it’s appropriate to maintain a risk reserve and identify what those risks are and try to mitigate them outside of lead time. In the past, there wasn’t the level of rigor around risk and opportunities that I am used to and now that we put that in place we have better visibility to what those risks might be. Now we have time to work them instead of reacting to them in near real-time at the close of each quarter. So identifying those 80 million of risk that are in front of us for the balance of the fiscal year, now we begin the hard work of trying to avoid them and mitigate them. Should we not be able to, we will trend towards the lower end of guidance, if we are, we’ll do better.
I guess to follow up on that 80 million, can you talk about what programs it spans across? You keep mentioning both development and mature programs? If you could just discuss the second part of the question as well at the end? And how you think about it for next year?
Daniel J. Crowley
Sure. There is no singular program that drives it. It’s really a bunch of small risk positions across multiple programs and we see it on some of our development programs as well as some of our production programs. A few machining contracts, we are watching our sub-tier supplier cost. Also risks associated with the G650 to make sure we hit our learning curves. As I mentioned, we are ahead of our planned deliveries for the year and we are coming down a very steep curve delivering wings now every nine days. We carried a risk that we would not potentially hit the curves that we planned to and it is our responsibility to make that happen. We’re also making sure that we achieve all of our cost reduction initiatives. This is a new program for the Company. As I mentioned, every line of business has their discrete plans but we are carrying a small risk that some of those savings would not occur in the year but would incur in the following year.
It’s more a profile change rather than a new risk. We are watching deliveries on all of our legacy programs to make sure we maintain deliveries and don’t have to pay access expedite fees in the case of Boeing 767, and we are watching the early ramp up on new development programs like Embraer and Bombardier to make sure we can deliver on our commitments. That is not an exhaustive list, Sheila, but it gives you a sense for it. What I want to emphasize is you can’t deal with problems if you don’t surface them early ahead of when they are going to be realized. And then the hard work begins to try to deal with them and that allows us to focus our continuous improvement resources and do value stream mappings and use consultants as needed to over drive performance and avoid the risks. This is something that I am doing, my team is doing proactively to try to minimize surprises in the future.
Our next question comes from Sam Pearlstein. Please state your affiliation followed by your question.
Wells Fargo. So Dan, should I think of this $80 million as a contingency that if you actually execute we won’t see any of it flow through?
Daniel J. Crowley
That is the best case scenario. And we -- every Company that I’ve worked for and worked with in the past, tracks both risks and opportunities on a gross and factor level and does the same on opportunities. We just finished in the last few days, our run-through of the four business areas, looking at their are nose. And it is a healthy process, it allows us to handicap where we are going in the future. Obviously I would like to see a positive net balance of risk and opportunity because that generates upside. The fact that we are carrying a negative net position is not where I want to be, but I am not surprised because we are fixing a lot of things at the fundamental execution level and as we do that it allows you to be more of a risk neutral position on going forward costs. I am -- I expect to be in the process and I expect the Company to be and you can expect improvement over each quarter.
Is there a way you can bridge the cash flow? Last quarter you had talked about some modest level of positive cash this year and now we’re talking about $120 million of outflow? What accounted for that significant change?
Daniel J. Crowley
So, first of all we had a good quarter for cash in Q1. We used less cash than we had focused internally and I realize we don’t publish our internal cash use numbers, but I know that we ended up using and consuming less cash than planned. Whether that will extend through the balance of the year remains to be seen. We had a lot of moving parts with the restructure and continued spending on development programs, potentially divestitures to the upside. Mainly the simple answer, Sam, is that we flow through the potential for reduction in OI and it would have a corresponding impact on cash. So rather than be risk-neutral for the year, where our sources and usage of cash were balanced, we are forecasting a range of possible cash use. But that excludes any actions from divestitures and if we could mitigate those OI risks that’s also an upside.
And can you talk a little bit more about the Northrop Grumman agreement? I am not seeing something where you signed an MOU and then a couple weeks later it requires you to take a charge and there’s a hit for that?
Daniel J. Crowley
Sure. I want to be clear on that. End of quarter we did have some costs that were higher than planned and budget to deliver the wings and ramp up. We ramped up from roughly 67 people working on the program to approximately 100. In addition to that we met with Northrop and said -- what are the things we can do in partnership to maximize the probability of success on our production ramp? Because I described the numbers and the rate is roughly going up by 50% in the next year. And we said we could invest in additional rate tools to give us flexibility, we can add key staffing positions. They are providing a program assist team which we have agreed to pay for that will also help us come down the curve more steeply. It is an investment. Some of it is performance and some of it is investment, but what is really important is by addressing Northrop Grumman’s concerns directly and partnering with them, they’ve agreed to take us off the no bid list across three of our four businesses. And once we start delivering ahead of plan for the large Global Hawk wings, I expect to see follow-on work at aerospace structures as well. And there is evidence to back that up. We’ve already been pulled into meetings and met with their supply chain team and I mentioned some awards on V-21 happening outside of the structure space. The main message is you can’t expect to win follow-on when you’re not delivering on commitments. What I found with most of our customers and we are seeing it with Boeing-Northrop-Spirit, once you clear this overhang that has come from past issues and you give them confidence that you can meet your commitments, and we are seeing that now with Airbus having a return to A350 with on-time POs. Then it opens up all kinds of doors.
Do I wish that we were already through those doors and had a lot more tangible bookings to show for it? You bet. That’s not reasonable based on the time it takes for engagement to translate into orders but we are headed in the right direction.
Our next question comes from Robert Spingarn, please state your affiliation followed by your question.
Good morning, Credit Suisse. Dan, on some of the Gulfstream work could you talk about the contract structure and since we go to cash flow positive in ‘18, is that reflective of a new contract starting because the old one completes?
Robert, this is Tom Quigley. No. Our contract is a life of program contract on the G650 program with Gulfstream. And the G280 contract with IAI is in the same circumstance. It is not a matter of a new contract starting, it’s just us continuing to come down the learning curve and get to a point where we are first, cash neutral and ultimately cash-positive at the end of ‘18. Looking forward, we will likely be in a new accounting block beyond the FY18-FY19 timeframe.
Maybe I should have asked it that way. So there is a block change? I remember when it was at Spirit, I think there was something that happened? There was a milestone at that time and I just wondered if that is what triggers a reversal on the cash performance?
The block change is further out into the FY19-FY20 timeframe, but we really expect to be fully down the learning curve at the end of this current accounting block which is at the end of the FY18-FY19.
Okay thank you, Dan, on the guidance and follow up to Sheila’s question? You give us a lot of color there but would you say you talked about the best case scenario? I guess this was Sam’s question? That all goes away, if it doesn’t go away is that the worst case scenario at this point? Or given that you are just early into this process, we are only here a couple of quarters, should we think about these numbers is having some more flexibility than we normally would at this stage?
Daniel J. Crowley
It’s a fair point. You know, Robert, each month as we go through the reviews I gain more confidence that we’ve touched all four corners of the business and people have identified where their challenges are and opportunities. It is somewhat like a ball that bounces less high each quarter and we are substantially down in terms of our charges from the last quarter. I’m sure you recognize that. They are always narrow deep holes you can fall into on large development programs that we don’t try to bound in our forward guidance. However, we do feel like we are taking the right approach now and with the information we have, we have a credible chance of meeting or beating these revised forecasts. We will continue to provide information every month and every quarter on how we are progressing. I think the thing I will emphasize is the process. I do look forward to being in a place where we have more stability and predictability but each quarter we are improving our -- what I call a confidence interval around our forecasting process.
And last question. A little more high-level in terms of the effort to increase revenue, organic growth, et cetera? Can you talk a little bit about something that I think came up at Farnborough, when talking to the Company about your second sourcing strategy and the opportunity that we see today in the sector where primary suppliers are not performing? Where primes are looking for an alternative source for certain parts, whether they be aerostructures or otherwise?
Daniel J. Crowley
Sure. Right now we have customers calling us. And although we have a few customers that in the past have been unhappy with Triumph, they are now calling us and saying we are seeing substantial price increases from some of your competitors, or we have concerns about their ability to make ramp. So we would like to go to dual sourcing strategies and that applies to Airbus, Boeing and Lockheed Martin, Sikorsky, we do a lot of work for Sikorsky. It is an opportunity to fill the bathtub while you work on new starts, because as you know -- and this is a long cycle business, and Triumph missed some of the on ramps for the programs that are driving some of our competitors’ growth.
You know, 737, our content is substantially lower than Spirit’s. But when I look at our programs, we certainly have our sunsetting programs like 747, G450 and 550, and we have some that are going through dips like 777 and A330 but many of them are stable and growing. 787, G280, G650, Global 7000, Embraer Egypt, 767, the family of Global Hawk, A350, GE lead, these are all programs on the ramp that we have roles on. Now, do we have the size role that we had on the 747? No we don’t. But as I mentioned on the last call I really want to federate our business base and not have it so concentrated on singular programs. It’s a fair question and I think dual sourcing gives you a bootstrap in the short term. The awards are fairly small but with good performance, rates could improve over time. And it requires that we are cost competitive and responsive but that’s what we are focused on being.
Our next question comes from Seth Seifman. Please state your affiliation followed by the question.
JP Morgan. Good morning. I wonder if you could talk a little bit more about growth in integrated systems, because I think given the program mix there, it is an area where there seems to be more opportunity for growth, yet there was a decline in the first quarter following on a decline in the prior-year quarter? And you cited some of the headwinds there in the release, but the timeframe we see that bottoming and the potential for return to growth on a sustained basis?
Daniel J. Crowley
Sure. I have high hopes and aspirations for the integrated systems business. It is one that has been profitable with good margins. They have discriminated technology. They own quite a few of their designs. We definitely saw a slowdown in helicopter business associated with oil and gas that hit us and we saw some spares work fall off as well that impacted Q1. But they continue to win work with both the engine providers, as well as the air framers doing engine mounted accessory drives for the V 21, that was an award recently at a Park City facility, roughly 34 million. They are building spares and components for the CFM 53.
We are bidding on F-35 actuators, we are doing E breaks for the 767 tanker. The team is developing new technologies. It’s one of the areas, rather than be built to print and contract manufacturing, which is usually a cost shootout, they are developing new technologies for actuation thermal systems and gearboxes that will allow us to add more value. I am excited about what that business can perform. We did have a soft quarter for them but as I look at their strategies I continue to believe that they will be a leading source of topline growth.
Our expectations for the year is that the decline that we saw here in the first quarter will recover by the end of the year. So on a full year basis year-over-year our organic growth would be flat to slightly up.
Daniel J. Crowley
And that business also raised its year-end OI forecast in the first quarter, so that’s an important message. Two of the four businesses are really performing well. We know where our issues are, we’ve got to consolidate our precision component business, rationalize the excess capacity and reduce footprint and cost. And in the aerospace structures, we have to work out from underneath some of our challenge programs. We know what is in front of us but integrated systems will help lead the pack in the future.
Great. As a quick follow-on, management had talked in the past about being awarded some additional content on 777 that would offset the decline in the rate to seven a month? Is there sufficient additional content there to offset a decline to 5.5? Or is that kind of an incremental decline relative to what you want?
Daniel J. Crowley
I think it is the latter I don’t see in the short term that we are going to offset the rate reduction with new wins on that platform. So we are looking at other platforms. Another integrated system opportunity we are chasing is with Airbus both A320, A321, they are new neo configurations. They pulled us in and said, we want to expand our systems work with Triumph. We are not happy with our current supply base so I think what you will see is a shift to other platforms. We have been discussing with Boeing, where they have recurring cost challenges on a given platform -- let’s say 787.
Could Triumph come in and take over a certain subset of the work if we offered a price discount to their incumbents? And they are looking at some of the opportunities for that. Obviously they have long-term contracts that they have to comply with, with current suppliers. But I think our value proposition has got to be that we come in and we help solve our customers’ problems on affordability. Rather than just bidding on a singular platform, we step back and say what is your biggest problem? Airbus? Boeing? Spirit? Gulfstream and how can we help you solve it? It will take time to bear fruit but it’s a different approach, rather than selling piece parts.
Our next question comes from Cai von Rumohr. Please state your affiliation followed by your question.
Cowen & Company; this is Bill on for Cai. I wanted to follow up on the second sourcing strategy questions? A lot of your competitors who claim to have pricing power also claim they own the IP, so I wanted to get a little more color how you get around that issue? And then perhaps you could talk about how you might be able to help Boeing get more into the aftermarket if the second sourcing strategies are successful.
Daniel J. Crowley
Sure, let me start with the aftermarket business. You know I received inquiries from many of our peers expressing interest in our aftermarket business for a reason. Its strong growth and its strong margin performance and we’ve got happy customers. And you look at how they do that, rapid turn on thrust reversers and control surfaces. At some of the OEMs in source aftermarket, they realize that they can’t create the same capacity that exists at the supply chain and if they did they would not be as agile or efficient. We have been in discussion with Boeing, Airbus and Bombardier on what we can do to support their aftermarket and if you could use the Intel inside these tier one primes and be the provider and delivery of services. Those discussions are happening. As far as dual sourcing and buyer power and supplier power, it is clear that everyone is under tremendous price pressure at the tier one and so they are shifting capacity and supplanting awards and then they are shifting the ratio of who gets how much work based on cost schedule and quality.
We are up for that challenge. In the case of IP, there are new general terms and agreements that Boeing and Airbus are negotiating with the suppliers and it’s one of these situations where you have to work with them. You know if you just tell them you can’t have any IP or you can’t have access to the IP you may not be able to bid but on the other hand it’s not black and white. There are areas where we have discussed with them that we have developed a background knowledge and we’ve developed the content and we need to hold onto that. In many cases, if you give them the IP by the time they actually go to source those products you have moved on to the next generation of products. Is there really a risk? We have to make risk weighted decisions about whether we give up IP in each customer dialogue but right now it is increasingly a price of entry and discussions with customers and I think our challenge is going to be to show them that between technology upgrades and recurring cost reduction that we are the partner of choice. So they don’t get to a point where they are so frustrated that they say the heck with it, we are going to reverse engineer or take your IP and source it elsewhere. That is usually an action they don’t want to take because of risks. They don’t like the cost of switching and the risk but they are protecting their rights to do it. It’s an ongoing dialogue with the OEMs.
Our next question comes from David Strauss. Please state your affiliation followed by your question.
UBS, and it’s Matt on for David. Good morning. I had a question on free cash flow? I guess how you think about a wash to get back to positive free cash flow in the future? What do you think is a normal annual run rate there?
Daniel J. Crowley
Sure. We have a walk down and then a walk-up chart for cash used in the year. You know you start with OI and you add the cost-reduction initiatives which contribute to OI, and then cash. And then you stepped down from there with depreciation and amortization and interest and cash taxes, and changes in working capital, CapEx and any pension contributions so that sort of walks the cash back down. And then we walk it back up by improving OI and by doing asset sales or leasebacks and by doing cash to cash conversion. I mentioned the training program we are rolling out, and everyone is getting into the cash gain. And then divestitures further add to cash so we understand the walk down and the walk up and we have to manage each piece of that up and down. As far as recurring sustaining cash we’ve had a lot of discussions about what percentage of our OI should be a reasonable cash projection between 100 million and 200 million. Tom, I would welcome your comments.
Our target is on a run rate basis would be 100% of OI. We are not seeing that in the near term because we have continued spend in the development programs as we get to the end of the year. Much of that spending will be winding down. It should be very little as we look forward to FY18 and beyond. As we get cash positive on the Gulfstream programs from Tulsa it’s just a further opportunity as we look forward beyond FY17.
Okay. Thanks and I guess one other one. The 300 million in cost savings that’s up by 2019, can you break that out by headcount, production, facilities, supply chain?
Daniel J. Crowley
It’s roughly half supply chain and half other, and it changes a little bit year-to-year in our forecast, But the predominant is supply-chain and then facilities, manpower both support and direct G&A and direct and also expenses. We are turning over all the rocks, as you can imagine given we need to improve our margin. That’s the way I would think about it.
Our next question comes from Myles Walton. Please state your affiliation followed by your question.
Deutsche Bank. I was hoping to go back to the growth pieces here, Dan? Backlog has been declining here the first quarter? You talked about potential for growth in ‘18 you talked about booked to bill targets, so when does the backlog actually trough and re-grow as you look over the next few quarters?
Daniel J. Crowley
That question came up on the first quarter and the ‘17 on the bottom year. And I should not get ahead of myself and predicting bottoms and tops on any metric in the business but what I can tell you, Myles, is we can do a hell of a lot better in win rate and we can do a lot better in capture process. I used to run a business development at Lockheed Missiles and Space in the day and when I took over the win rate was 11% and after putting in the kind of rigor and discipline and gated reviews and win strategies were needed, we reversed that within 18 months and we were at 89%. I can’t make that kind of promise for this business because a lot of it is very cost driven, and contract manufacturing but I know we can do better, so we are doing the basics. We are loading all of our captures into salesforce.com.
We are reviewing the pipeline and where it is, above the funnel, RFP, proposal, award phase, winning is a structured and disciplined process. And what I first believe is you have to eliminate the barriers to even having the conversations with customers. Thus our settlement and focus on delivering on commitments. The overall market for aerospace, especially commercial, you read the same release as I did. Boeing and Airbus are projecting 4.5%, 4.8% annual growth rates. Trillions of dollars of aircraft over a 20 year forecast -- Triumph needs to be a part of that. By performing on what we’ve got and bidding on new work and taking our cost out, many of the losses that we’ve had are attributed to price. We are looking at where the workers performed a lot of large structures going offshore. We primarily do are large structure works in U.S. factories. And they’re good factories with good people but it’s a global market now and we’re competing against Korea and China and India on that work so we have to go back to the basics of both strategy and process I think to reverse the trend in organic growth. I have been there and done it before. It’s very hard work. It starts with getting the right people on the bus to do the work, which we are doing and then getting focus and not bidding so many things that it dilutes your focus. A lot of things will contribute to that and I think we are on the right track.
Okay. Just asking the question, I don’t want false expectations about growth if the backlog doesn’t come back -- unless there is something that I don’t know about. But do think certainly it’s more powerful for you to focus on the cost improvement and the quality and the customers then it is to aspire or set expectations for growth anyway. The second question was on, you mentioned covenants during the discussion. Which are the most restrictive and where do you think you will be by year-end? And are the divestitures part of making those? Or do you have to do the divestitures to make those?
Myles, it’s Tom Quigley. By the end of the year we expect to be fully compliant. We ask actually expect to see pressure during the year. The divestitures are not factored into our plan so that will just be additional relief in the near term if we are able to execute on those timely at the amounts we are expecting. We do expect to be in compliance all throughout the year but are taking all necessary measures to mediate any potential risks of getting even closer to that line. The tightest threshold is our debt to EBITDA metric.
Okay and you also mentioned coming to resolution with Bombardier? Is that a significant swing to the cash flow use of 100 million if you don’t come to resolution?
Daniel J. Crowley
First of all, let me hit on the divestiture part as well. We started that divestiture based on a review of roughly 26 unique product lines in the Company, because some of the OpCos do the same thing. We triaged them all and we talked about that last quarter. And there are just several of them that are either poorly positioned in the Company and are not going to grow under our umbrella, or they are performing very well but they may be reaching their apogee on margins or relative market share so we’ve done the right look. I feel like we picked the right list. We have additional items after we look at our first five companies, if needed so it is something that we can throttle. It would be almost a miracle for Triumph to arrive at our current portfolio of capabilities and say that is the right portfolio for the future of time immortal. It is something that we have to adjust in time as demands rise and fall and overall business cases change. So I feel very strongly about it in fact over a five-year horizon, Triumph will likely substantially change its portfolio as we reinvent the Company to rebuild our brand for performance and then go to areas that have more profit attractability and must less cost pressure its basic strategy. Okay, the second question?
Daniel J. Crowley
I worked on large development programs and they all have challenges. The key is that we communicate clearly with the customer about where we are and the cost that we’ve had to incur to get to where we are and we are having those conversations with them right now. It is not impeding the progress of the program. We have over 100 people up in Toronto right now that are completing wings and as a conscious decision to ship those wings up before they were fully completed and that allows the program to make forward progress. And now we are finishing those wings and we expect to reduce the traveled work on wings ship over ship and that happens in every major program. If you came to Red Oak and you saw our factory it’s one of the few where we have full rate production tooling available for the test articles. Usually you start out on a fast line, prototype line and then you transitioned to a low rate line and then you retool and go to full rate.
We already have the full rate line. Just helping Bombardier close out the development piece, beginning to retire any risks to the flight test program and then ramping up production in FY18 is the challenge. I won’t handicap our commercial discussions on this call but what I will say is we are in dialogue and we expect to resolve it this year.
Our next question comes from Ken Herbert. Please state your affiliation followed by your question.
Canaccord; Dan, I wanted to first ask, you are in a situation today especially in the commercial aerospace side where it seems like pricing pressure is increasing, and you are obviously digging out or coming out from under some difficult contracts and obviously some risk around development programs? And follow-up to some of the earlier questions? Clearly there seems to be new business opportunity now but to what extent does it make sense to scale back pushing new business? Really focus on execution and in a couple of years, a few quarters down the road when you cost structure is theoretically that much more improved, competitively you’re in that much better of a situation? How do you think about those trade-offs now considering the market dynamics in the opportunity for you there to be much more cost competitive moving forward, relative to opportunities today?
Daniel J. Crowley
It’s a great question. I will tell you we are taking a different approach to business development strategy across the core business. It is not a uniformly distributed effort. Some businesses have better growth prospects and will receive a disproportionately large share of our new business resources. The danger in scaling back, however, and waiting out, is you create this map of lost base which contributes to higher overhead rates and you can get into sort of that rate competitiveness base spiral. So it is important that we do two things. First, right size the business to the base that we have and cut costs as fast as base may be declining at any one of the operating companies.
And the second is be more focused and selective on what we bid. There has been past practices of chasing a lot of rabbits and catching few. What I have seen be successful in business development is get focused on where you really can win and then make sure you have the right business case and capital investment strategy. So we are adding more rigor and discipline in that area, but we cannot put it on hold. We may forgo a few large bids until we really have confidence in our ability to deliver. But as I mentioned many of our programs are just ramping up based on rate. I don’t see us taking down our shingle. In fact, most of the conversations I have with Airbus and Boeing 767 and Northrop on Global Hawk and GE leap. They are worried more about can you make the ramp. So it’s dealing with both of those things simultaneously supporting the ramp and getting focus on where you can compete and win.
I know that’s helpful and it makes sense. You certainly do not want to be not as active in the marketplace when you’ve got opportunities. As you look at specifically, and this is may be a question for Tom but on the structures and precision component segments, can you give any color like you did for the other segments on where you see organic growth this year? What is embedded in the guidance from a topline standpoint?
Daniel J. Crowley
Sure. Starting with aerospace structures, obviously we are now shifting from widebodies into business jets, so between Embraer, Gulfstream and Bombardier, they are the big drivers for top line growth in those business. We have content and firm backlog on all three of those customers. Gulfstream would like to shift more of their internal make to buy on wings but we have to show them that we are a reliable supplier and can build the bumper stocks. With Embraer, I described where we are with deliveries in the 1980 aircraft that are in front of us. And with Bombardier, we are right at the very beginning of the ramp. Bombardier has high confidence and backlog has sold out through 2021, and envision a market of at least 50 aircraft a year for a decade. Those are not an official position but I’m talking general rates of production. It is important to be successful on those programs and aerostructures will do that. I think you’ll see more military wins in that business. We tend to perform better in the past on the B22s and C-17s and as we fix the Northrop Grumman program that will open doors. I think doing commercial, large structures out of that business is going to continue to decline. That’s just a fact of life as I mentioned for some of the global sourcing trends.
As it relates to precision components, they have a broad base of customers, 777, 787, A350, they have more content on 737 and by getting rid of the issues with Spirit -- I toured the Spirit plant in Wichita and it was very impressive. As I walked around the plant and see they’re going from 42 to 57 on 737 and I see hardware we could do all over the plant. That is an area where we will bid more. They are also doing work for Sikorsky - we’ve been talking to Boeing defense systems about work we can do on F15 and F18, and we are supporting Bell on some of their new platforms. It’s more of a short cycle, broad customer base and smaller individual contract awards. But to really win in the business against the PCC’s of the world, we’ve got to be more efficient. And many of our plants are going to lower utilization and some of them had older technology -- that’s why I sought approval from our board to build this Kansas City center of excellence for the small high-volume machining. It’s a first start as we close several of our machine shops and consolidate that will help. We are looking at added manufacturing that will eventually take some of this work share in precision components. We’ve got a little bit of work in Nashville happening today. We’ve got a long way to go, so I’m looking forward to helping my leader of that business find synergies between the machining and the fabrication and the composites. That’s why we put all three of those together, as often you see substitutions of machine parts with composite parts, especially in high damage, high heat area so that is our most challenged business of the four I would say now but we are doing the right things to fix it.
Our next question comes from Ron Epstein. Please state your affiliation followed by your question. Ron your line is open.
Daniel J. Crowley
He may have dropped. Go to the next call.
Our next question comes from Michael Ciarmoli. Please state your affiliation followed by your question.
KeyBanc Capital Markets. Thank you and good morning guys. Maybe just on the business jets you guys just said shipping from widebodies to biz jet? Looking at the charges, the $80 million in the quarter, how should we think about rate risk here? It seems like the biz jet market is getting incrementally worse? Can you maybe help us understand if the Global 7000, 8000 rates or total production would come down, do you guys see any risk? Has that been captured in these most recent charges? If Gulfstream steps down production on the 650, does the new updated EPS guidance take those potential rate changes into consideration or the potential for future changes giving the accounting box?
Daniel J. Crowley
I will start and ask Tom Powers to comment. First I will comment on rate forecast for our customers. We certainly watch the same trends you’ve got and there is a lot of uncertainty in the world that would influence demands for those platforms but for us it’s probably the loss of upside rather than a new downside because they are still going to build these at rates that will be economical for us. Unlike 747, where we were facilitized for six a month and we are delivering one and now trending to half an aircraft a month. The jets still have good ramp rates. In the out years if there were to be a softening of demand it may affect top line but we can dial back capacity, both headcount and footprint as these programs contract. Right now most of the ramp on these programs is in front of us, especially Embraer and Bombardier.
Tom, your thoughts?
On the G650, we’re seeing positive movement in FY17 with regards to the additional risks we’ve added into there. We really have not factored any additional changes in G650 rates. It’s more or less a steady-state.
Daniel J. Crowley
Very little book 7000 sales in FY17 that ramp is really in FY18. Not seeing as much in effect from that perspective as well.
Okay, Perfect. Just one more. In terms of the structures decline, the 16% decline, how much of that, I believe you had C-17 revenues in one Q ‘16 if they were postproduction spares, did that contribute to some of the weakness and could you quantify that?
Daniel J. Crowley
Actually year over year, the C-17 sales were pretty comparable as we still had some spare sales here in our first quarter. As we look forward, going forward to Q2 and beyond there will be headwinds from an organic perspective just on the C-17 program, but those are expected to be offset by other uplifts, particularly on the G650 as Tom mentioned earlier.
And our final question comes from Ron Epstein. Please state your affiliation followed by your question.
I am Ron Epstein from Bank of America, Merrill Lynch. Sorry about the technical thing -- picked up the phone and accidentally hung up. Dan, just circle back to the super big picture. The stock is getting crushed right now. The Street tended to be impatient about things, right? So I guess my question is this -- as you look at the plan, you step into this hornet nest stuff and you are trying to sort it out, I think everybody have appreciates that. How do we feel confident as we walk into the next quarter and the following quarter that it’s -- you what, guys, we identified more stuff. The guidance we give you last quarter actually was not right. We have to take it down. There is $40 million more of something. That this is not a recurring thing, right? Right or wrong, it’s kind of how investors are going to look at it, right so as outsiders, we don’t get to see the business units like you do. How can we take some comfort that there is some trajectory here that will stabilize?
Daniel J. Crowley
Thank you, Ron. First of all I came to Triumph with a focus on long-term value creation, and as I look back on the things that I’ve done that usually originates with strong franchises and flywheel programs that generate long-term growth and that is something that we need to build in Triumph over time. The process that we have gone through in assessing the risks in the business, obviously we could not bound in Q4 a strike that occurred after the quarter ended or a decision to put more gas into the Northrop Grumman program to get ahead of the ramp -- these things happened and that constitutes two thirds of the charges that we took for the quarter. We really do not have a process where you can just bury reserve and prior charges for unknown unknowns. Some of this is a process as you work through and you take a closer look and dial-up the intensive reviews that we have been doing and that you find additional charges. And we will work through that.
It will get smaller over time and my goal is to make this Company more predictable on its performance. And that in turn leads to predictable profitability and forecast and that builds confidence. But when I talked about the timeline for turn around with our board and also on our prior earnings call, it’s a two-year journey and we’re one quarter into it. Would I have liked to have had no charges in the first quarter? You bet. For the people that rent the stock and are not long-term investors, I can understand their behavior but that is not what A&E stocks dividends are about. We are about creating long-term value.
As we update our portfolio, I look forward in the future after we de-lever the Company and focus the portfolio on getting on back to M&A, but we have to start with first things first that is delivering on commitments which is what we are doing. The process of turning around a performance and becoming predictably profitable will not be a linear one, but we are doing what we said in terms of the restructure and each one of these changes will improve our potential to create long-term value.
Maybe as a follow-on about long-term value, when you think about -- if you’re comfortable saying this - if you’re not, obviously don’t - say no. When you think about the four segments of the business in aggregate, and you look out five years from now, generally speaking, what can this company get to? What is the goalpost down there? When investors think about and they are sitting on a quarter like this, the wind is blowing around and they can see the sunlight. If you were to give maybe broad terms of what that sunlight is, what are you thinking?
Daniel J. Crowley
You know I think each of these four business units we meet with investment banks and analysts and we talk about the value of the Company from a sum of the parts and discounted cash flow and cash multiple. And obviously the performance and what was aerospace structures when we had them combined. It created negative economic value in terms of what the Company ought to be worth and there are some ceilings on what margins you could probably expect to return. But we are well below peer averages in both structures and precision components so that is our responsibility to drive those two businesses back towards peer averages and just doing that unlocks a lot of value. At some point you hit ceilings and you can conclude as market demands change you want to be in different businesses, it may be we will look at it every year.
I am not married to any one capability within the Company. We will make business decisions, so in five years time it may be a question that you should ask is what will be your fifth business unit? And no, I won’t answer that today because we are working on that.
Daniel J. Crowley
That is my goal to make smart strategic decisions rather than continue to push at the same.
Great. Thank you so much.
Daniel J. Crowley
You bet. Let me go ahead and wrap up. Thank you, Stephanie for fielding all those questions. If I may employ an aircraft analogy.
Triumph has been in a bit of a nosedive the last two or three years, but we pulled back the stick and while the nose is up, we will continue to settle and sink a little before we gain airspeed and altitude. As mentioned, the process will not be linear but one quarter in, I am encouraged by early results and appreciate the effort of our teams. Customers are already commenting on the benefits they are seeing and they want to work with us.
I do remind our team that we need to balance the urgency for short term results with the fact that this is a multiyear transformation to achieve a vision that we have for the future Triumph. As we transform the Company, I want you all to look for communications each month to validate our recovery efforts and I look forward to providing further updates on our next earnings call. Thank you all.
Thank you. Ladies and gentlemen this concludes Triumph Group FY17 earnings conference call. This call will be available for replay after 11:30 AM today through August 4, 2016 at 11:59 PM. You may access the replay by dialing 888-266-2081 and entering access code 1674396. Thank you all for participating and have a nice day. All parties may now disconnect.
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