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Executives

Richard C. Ill - President and CEO

M. David Kornblatt - SVP, CFO and Treasurer

Analysts

Myles Walton - Oppenheimer & Co.

Eric Hugel - Stephens Inc.

Ronald Epstein - Merrill Lynch

Stephen Levenson - Stifel Nicolaus & Company, Inc.

J. B. Groh - D. A. Davidson & Co

David Strauss - UBS

Triumph Group, Inc. (TGI) F3Q08 Earnings Call January 25, 2008 8:30 AM ET

Operator

Welcome to the Triumph Group conference call to discuss their fiscal year 2008 third quarter results. (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 involved known and unknown risk, uncertainties and other factors which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Please note that the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their web site 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 re-broadcasted without explicit written approval.

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

Go ahead, Mr. Ill.

Richard C. Ill - President and CEO

Good morning, everybody. Before I get into some comments and before Dave gets into some comments in regards to the quarter, I have a few other comments to make.

This morning I called Boeing, Airbus, Cessna, Lockheed Martin, Sikorski, Bombardier, Northrop Grumman, Raytheon, EmbryAir, Saab, Messier-Bugatti, Gulfstream, and GE, among others. Amazingly, they all answered the phone and they're still in business, and they have not cancelled one order they have on the books with Triumph Group. In fact, we have a record backlog, as Dave will cover in a moment, and we remain very optimistic as to the future of our company, especially over the next two to three years.

We are not in the subprime mortgage business, and we don't feel that the orders on our books will be affected by the current economic conditions. In fact, the execution of our strategies and our business plans continues to get better each year, driven by the dedication of the people in our organization.

As a result, we remain amazed at the magnitude of the drop in our share price. Some have suggested and hinted that the aerospace cycle is over, and that orders may be lower in 2008 than in the record years of 2006 and 2007.

But all those orders have to be executed over the next five years, and as I have mentioned in the press release, fiscal year 2008 continues to be strong, marked by a sustained growth in revenues, operating income and earnings. The markets we serve continue to expand our robust backlog, and our robust backlog bolsters our confidence in the outlook for the remainder of fiscal year 2008 and beyond.

Some may say that the delay in the Boeing 787 is cause for concern. Yes, we have invested heavily in the 787, and yes, the delay has cost us in the short term. But we believe that the aircraft is a very good and efficient aircraft which is needed in these days of close to $100 per barrel oil, and a brief delay will not hurt the industry or the Triumph Group. As John Plueger of International Leasing Finance said, "Take the time and build it right."

Specifically in the third quarter on the slide presentation that you have if you have the - if you're looking at that and turning to those slide, we have a very strong yearonyear revenue growth within the corporation, we have continued improvement, as you note, in operating margins. We have a very strong growth and a continuing growth in our backlog. We have improved cash flow from operations, and our earnings per share from continuing operations have increased 40% over last year.

At that, I'll turn it over to Dave for some financial performance conversation.

M. David Kornblatt - SVP, CFO and Treasurer

Thank you, Rick, and good morning, everyone.

I'd like to start with a review of the financial results for the third quarter ended December 31, 2007.

First, turning to the income statement, net sales from continuing operations increased 16% to $275.1 million compared to $237.8 million for the prior year period.

Operating income from continuing operations increased 17% over the prior year to $28.7 million, with an operating margin of 10.4%.

Income from continuing operations was up 53%, from $11.7 million to $17.9 million, resulting in earnings per share from continuing operations of $1.00 per diluted share versus $0.71 per diluted share for the prior year quarter.

The number of shares used in computing diluted earnings per share for the quarter increased 9.4% to 18 million shares, primarily due to the dilution associated with the convertible debt as a result of the increase in our stock price during the third quarter.

The loss from discontinued operations was $1.2 million or $0.07 per diluted share.

Net income increased 55% to $16.7 million, or $0.93 per diluted share versus $10.8 million or $0.66 per diluted share from the third quarter of the prior year.

EBITDA grew 18% to $39.5 million, resulting in a 14.4% EBITDA margin.

Turning to our segment performance, in the Aerospace System segment sales increased 13% to $213 million versus $187.8 million in the prior year. Operating income was $26.1 million, same as the prior year quarter, with an operating margin of 12.2%.

EBITDA for the segment was $33.5 million at an EBITDA margin of 15.7%.

These results were achieved despite a $3.2 million increase in legal expenses.

In our Aftermarket Services segment, sales increased 24% to $62.7 million versus the prior year's $50.5 million.

Operating income rose 102% from $3.2 million to $6.5 million at an operating margin of 10.4% as compared to 6.4% a year ago.

EBITDA in the quarter was $9.8 million, a 76% increase over the prior year period, with an EBITDA margin of 15.6%.

Our Thai operation was profitable in December, and we expect our fourth quarter to be positive as well.

Our order backlog continues to grow, increasing 14% over the prior year to $1.23 billion, which is a 9% increase since the beginning of the fiscal year and a 4% increase sequentially.

I will remind you that our backlog takes into consideration only those firm orders that we are going to deliver over the next 24 months and primarily reflects future sales within our Aerospace Systems group. The Aftermarket Services group does not have a substantial backlog.

Our top ten programs, listed on the next slide, are ranked according to backlog. The 737 program remained in first place, followed by the Boeing 777. Third was the Boeing 787. Fourth is the CH-47 Chinook helicopter, followed by the Blackhawk helicopter in fifth place. Sixth is the A320 family. Seventh is the C17 freighter, followed by the Boeing 747 in eighth place. The A380 program is ninth, and in tenth place is the Osprey combat helicopter.

Looking at overall sales, Boeing remains our only customer which exceeded 10% of our revenue. Billings to Boeing Commercial, Military and Space total 23% of our revenue.

Looking at our sales mix among end markets, the next slide shows that compared to fiscal year 2007, commercial aerospace decreased slightly to 44% and military remained at 33%. Regional and business jets remained unchanged at 5% and 9%, respectively, and non-aviation increased to 9% versus 8% last year.

Finishing our sales analysis, the next slide shows our sales trends with total organic growth for the company increasing 13% over the prior year, from $232.3 million to $262.3 million. Breaking that down by segment, same store sales for Aerospace Systems segment was $207.6 million compared to $181.8 million in the prior year period, an increase of 14%.

The Aftermarket Services segment had same store sales of $54.7 million, an increase of 8% over the prior year period of $50.5 million.

Export sales were $57.8 million or an increase of 8% over the prior year.

Turning to the balance sheet on the next slide, we generated $21.9 million of cash flow from operations in the quarter.

Capex in the quarter was $16.7 million, up from the prior year's third quarter. We expect Capex for the year to be approximately $60 million.

Net debt at the end of the quarter was $312 million versus $309 million at the end of March, representing 31% of total capital.

The year-to-date tax rate was 32.2% versus last year's tax rate of 33.7%. For the remainder of fiscal 2008, we expect the tax rate to be 33% to 34%, which reflects the fact that the R&D tax credit expired on December 31, 2007.

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

Richard C. Ill - President and CEO

Thank you, Dave.

Just wrapping up before the questions, hopefully I've made the point that our major end markets remain robust, and we feel strongly that our performance will continue to improve.

Will we in fact have some headwinds in regards to the legal area, as Dave has pointed out, and some minimal impact on the 787 in the very short term, but basically our performance is going to continue to improve.

Our EPS guidance for the year is changed and we haven't changed this since the beginning of the year other than the fact that our guidance will be to the upper end of a previously announced range of $3.95 to $4.10. And I know that makes some of you think that is conservative, but so be it.

At that, I'll entertain any questions.

Question-and-Answer Session

Operator

At this time, the officers of the company would like to open the forum to any questions that you may have. (Operator Instructions) [Bryan Zimmerman], please state your affiliation followed by your question.

Bryan Zimmerman

I don't have a question.

Operator

We will proceed to the next question from Myles Walton. Please state your affiliation, followed by your question.

Myles Walton - Oppenheimer & Co.

Oppenheimer & Company. Good morning, guys.

Richard C. Ill - President and CEO

Good morning.

Myles Walton - Oppenheimer & Co.

A few questions for you. First on the sales in Aerospace Systems, there was a sequential decline there, and I know that the 737 was ramping up in the fall. I'm just curious, what was the offsetting feature that caused the sequential decline? Did it have to do with the Airbus Power8 or was it something else?

M. David Kornblatt - SVP, CFO and Treasurer

Yeah, Myles, it's Dave.

We had a little bit of a slowdown in some of our businesses, not all, with respect to 787. There was a little bit of a holdback at the end of the year and, you know, frankly, in December, a lot of our companies sort of stop shipping around the 18th. A number of our customers did close down their operations much earlier than in prior year, and so we saw - we probably lost four to five shipping days there at the end of December. It's not a lot of money.

More importantly, when we look at our Q4 forecast, I think you'll the long-term trend is continuing, escalating revenue will be re-established.

Myles Walton - Oppenheimer & Co.

And 4Q would be the highest sales quarter of the year, is that right?

M. David Kornblatt - SVP, CFO and Treasurer

Correct. Correct.

Myles Walton - Oppenheimer & Co.

And you had a great 3Q booking quarter and historically 4Q booked to bill has been strong as well. Is that a trend we should expect here in the fourth quarter?

Richard C. Ill - President and CEO

Don't expect any change, Myles.

Myles Walton - Oppenheimer & Co.

Okay.

Richard C. Ill - President and CEO

From history, you know, historical. We don't expect any change going forward.

Myles Walton - Oppenheimer & Co.

Okay. You know, maybe the legal costs deserve a little bit of extra attention just from a standpoint of flushing out what we expect in terms of increase, decrease, flat into the fourth quarter as well as kind of the timeline of the criminal case you see today and how that rolls into the civil proceeding.

Richard C. Ill - President and CEO

Well, obviously it's very difficult for us to discuss any of the specifics in regards to the legal case, but let me try to address that in two different ways.

Dave indicated some of the legal costs to give you an idea of the magnitude of these. The end of quarter last year's expenditures legal-wise were about a half a million dollars on this Eaton case. This quarter it was $3.8 million. Year-to-date, last year it was $3.1 million, and this year it's $9 million.

Over a four-year period of time, we've spent approximately $17.7 million on this particular case, and I won't go into some of the ramifications with the customer base, et cetera, but suffice it to say that we now look at the criminal trial proceeding with the engineers somewhere in May, the spring type of thing, and the civil case after that. We really don't know, okay?

Myles Walton - Oppenheimer & Co.

So is there, at this level, this $3.8 million run rate, it shouldn't go up from here? Are we into the - kind of the peak spending, or can it escalate from here as well?

M. David Kornblatt - SVP, CFO and Treasurer

I would think, Myles, we'd start to see some relief from these levels. I think we'll take this one quarter at a time, but I would think this was a high watermark. We were expecting an earlier trial. We had a lot of discovery crammed into a short period of time, only to then have it delay. So we are expecting some measure of relief in the fourth quarter.

Richard C. Ill - President and CEO

Having said that, going forward, Myles, I mean, that's a very hard thing to project, I mean, as we go forward in the fourth quarter and then into next year.

Myles Walton - Oppenheimer & Co.

Okay.

Richard C. Ill - President and CEO

You know, I mean, you know as well as I do it doesn't - you know, that's a hard thing to project. I don't know what's going to go on.

Myles Walton - Oppenheimer & Co.

Sure.

Richard C. Ill - President and CEO

But I would agree with Dave.

Myles Walton - Oppenheimer & Co.

Okay. And then I guess as a bit of a follow up, a resolution in the criminal case against the defendants, would that necessitate a reserve for the civil case or are they separate enough that that wouldn't necessarily occur?

Richard C. Ill - President and CEO

No. I mean, we a) I can't comment, and b) I don't believe so.

Myles Walton - Oppenheimer & Co.

Okay.

M. David Kornblatt - SVP, CFO and Treasurer

And Myles, I think, just to give you a little color just to - on the backlog and the - that growth in backlog was achieved despite a reduction in our overdue backlog, which we've talked about before. So I think there's a little bit of execution improvement, and the actual backlog grew despite sort of that reduction. So it's just another evidence of robust order flow.

Myles Walton - Oppenheimer & Co.

Okay. And the last one for me and then I'd definitely get out of the way, is on the 787. You mentioned it in commenting on the sales in the quarter, but going forward, are the indications that Boeing is going to continue to slow the delivery pace at which they're accepting, or are your suppliers telling you to slow your pace at which you're delivering.

Richard C. Ill - President and CEO

We really don't get any indication from Boeing that, you know, there's any slowdown. In other words, the slowdown is not long enough for Boeing to say, okay, stop - for example, if we look at the A380 and things like that, we stopped delivery on some products. In the 787, we've had some slowdown in delivery, but it's not a noticeable type of thing.

So I don't, you know - and I'm really not worried about it from the perspective of delivering 787 product other than on a very short-term basis.

Myles Walton - Oppenheimer & Co.

Okay.

Richard C. Ill - President and CEO

You know, it's short term. We've invested some money upfront, we've expensed that money upfront, and those numbers are in this quarter. But going forward, the 787's going to be a very strong program for us.

Myles Walton - Oppenheimer & Co.

All right. Thank you.

M. David Kornblatt - SVP, CFO and Treasurer

Thank you.

Operator

Thank you. Eric Hugel, please state your affiliation, followed by you question.

Eric Hugel - Stephens Inc.

Hey, good morning, guys. It's Eric Hugel from Stephens.

Richard C. Ill - President and CEO

Good morning.

M. David Kornblatt - SVP, CFO and Treasurer

Good morning.

Eric Hugel - Stephens Inc.

Just to follow up on your last comment with regards to you expensed some Boeing 787 money, can you sort of talk about sort of magnitude here in terms of just sort of what the impact was on your margins in the quarter that, I guess, we shouldn't see next quarter.

M. David Kornblatt - SVP, CFO and Treasurer

Yeah, I think the 787 sales were profitable in the quarter at a minimal level, so it was additive from a net income. It was clearly dilutive to Aerospace Systems' margins, not dramatically, maybe 50 to 100 basis points to them over the quarter. And, you know, that will probably be a headwind in decreasing amounts for maybe another couple quarters, and at some - you know, I think within a year that business will be growing and will be at least at Aerospace Systems' average margins.

Eric Hugel - Stephens Inc.

Okay, so you're not talking about you actually invested huge R&D. You're talking about production, just climbing up the learning curve, right?

M. David Kornblatt - SVP, CFO and Treasurer

Yeah. More production. There's been some items we've expensed. We'll continue to invest in that, but from a headwind perspective, you know, I think it's minimal - in the 100, 50 to 100 basis points.

Eric Hugel - Stephens Inc.

Okay. Can you talk about the lower - the tax rate dropped down to 29.5% this quarter? I mean, we were looking for, you know, baselining at 34%. I mean, was there a tax benefit or something like that in the quarter?

M. David Kornblatt - SVP, CFO and Treasurer

Yeah, we filed our tax return in this quarter, and we reconciled how we closed the year when we did our financial statements to the actual results. And we, you know, there was some good work by our tax department in terms of additional R&D credits that were claimed and other things.

So it's typically the quarter where we have a settling up. After that, it should return back to the normal rate.

I would say the one piece of hopeful good news which would be an upside if it happened would be if Congress reinstated the R&D credit and the president were to sign it in the fourth quarter. That would be a little bit of a tailwind.

Eric Hugel - Stephens Inc.

What's sort of your impact to the R&D tax credit? Sort of what kind of magnitude is that in terms of what it does to your tax rate?

M. David Kornblatt - SVP, CFO and Treasurer

Yeah, I would say 1% to 2% for a full year.

Eric Hugel - Stephens Inc.

Okay. Can you talk about - I guess we've talked about in the past sort of the timing of, I mean, I guess 787's a little bit of a question mark, but maybe if you talk about sort of, you know, business still based on the current plan, when you really start to sort of see production ramping up sort of late in the fourth quarter, beginning in first quarter. And same with the A380, when do we really start to see that in terms of the top line? Is that still sort of on track there?

Richard C. Ill - President and CEO

Yeah. I think - I don't think there's been really any change in that other than, obviously, the announcements by Boeing on the 787. And as I said, I don’t look at that as being a long-term problem. If anything, it'll have some benefit in the next fiscal year.

M. David Kornblatt - SVP, CFO and Treasurer

I also think that certainly our ability to get those margins up to, let's say, company average and then above that will also be dependent upon when we get the full rate.

So I think it's moved slightly to the right, but not dramatically.

Eric Hugel - Stephens Inc.

Okay. And what about for the A380? Is that sort of still on track for, you know, sort of really starting up production again, late Q4 and really into next year?

M. David Kornblatt - SVP, CFO and Treasurer

Yeah. We're starting to see that backlog grow, even incrementally, and shipments start to go out the door.

Eric Hugel - Stephens Inc.

My last question, I won't ask you for particular guidance for next year but maybe, you know, in terms of looking at your backlog and looking at Aerospace Systems' sales, you know, what, based on your backlog - you know, again, it's over a 24month period so it's kind of, you know, kind of hard to sort of see. But, I mean, based on sort of where you are in your backlog, and you should have very good visibility into what you should be shipping in '09 based on sort of what's in your backlog today.

I mean, what kind of organic growth - I mean, you're looking at, you know, you did 23% in the first quarter, 20% in the second quarter, 14% in the third quarter, and it looks like you're talking about that sort of, you know, staying flat to stepping up in the fourth quarter, I mean, should we expect to see a reacceleration of that growth rate going into '09 as really production rates and these new aircraft - the A380, 787 - start to kick in? Is that sort of safe to assume?

Richard C. Ill - President and CEO

I think that you'll see some growth. I'm not really prepared to give you - I mean, the percentages you gave, and you continue to grow, are good growth rates. I'm not prepared to tell you what's going to happen in the next fiscal year at this point in time.

But it definitely will, in fact, be growth, as I think I've indicated a couple times. We're very optimistic about that growth.

Specific numbers in the growth rate, I'm really not prepared to give you, nor are we prepared to give you the guidance for next year, which we have historically done at the end of the year conference call - end of this year's conference call.

Eric Hugel - Stephens Inc.

All right. I'll get back into queue. Thanks.

M. David Kornblatt - SVP, CFO and Treasurer

Thank you.

Richard C. Ill - President and CEO

Thanks.

Operator

Thank you. Ron Epstein, please state your affiliation, followed by your question.

Ronald Epstein - Merrill Lynch

Yeah. Good morning, guys. I'm with Merrill Lynch.

Richard C. Ill - President and CEO

Good morning.

M. David Kornblatt - SVP, CFO and Treasurer

Good morning.

Ronald Epstein - Merrill Lynch

So if I'm understanding what you said, Dave, in the quarter, Aerospace Systems was down because of 787?

M. David Kornblatt - SVP, CFO and Treasurer

I think if you were - are you talking about revenue, Ron?

Ronald Epstein - Merrill Lynch

I mean, how much - yeah, I mean, how much per ship set is that? I mean, you guys didn't ship that many.

M. David Kornblatt - SVP, CFO and Treasurer

No. All I was saying was that in response to the comment that our revenue dropped a little bit, the things we saw as revenue headwinds were we did have some sort of - hold some shipments near the end of the quarter, a little bit on 787, not a huge amount. The bigger item was really that a number of our factories were effectively shut down on the 18th of December, that Friday. I think it was a Friday, or the Friday before the holiday. And normally we'd be shipping up until about the 23rd.

So those are the only items. We are not concerned about the revenue flow in our Aerospace Systems segment. It was a comment to try and bridge what I think Myles was expecting.

Ronald Epstein - Merrill Lynch

Yeah, no. Me, too. But I guess what I'm trying to dig down on, I mean, are you guys having some sort of production difficulties?

Richard C. Ill - President and CEO

Let me answer that question. Absolutely not, okay? What I was trying to indicate before, we are very optimistic about it. The Aerospace Systems sales in the fourth quarter will rebound probably robustly. We're not worried about it at all.

You know, are we perfect in every one of our plants? Of course we're not. But it's not a systemic problem. It's not a problem that you can look at happening in the fourth quarter and going through next year.

Ronald Epstein - Merrill Lynch

Okay. Can you give me any more color because, you know, how can we feel comfortable with that, right? I mean, that I guess is -

Richard C. Ill - President and CEO

Because our backlog is up -

Ronald Epstein - Merrill Lynch

No, no. I'm not questioning your backlog. I mean, it's just - I guess to Myles' question is kind of where I'm going. We sit on these calls for days at a time, and kind of everybody in this quarter has seen their aerospace revenues, particularly those who are tied to OEs, go up except you guys, and I guess we're trying to figure out why.

M. David Kornblatt - SVP, CFO and Treasurer

Yeah. What I - you know, I did - when we look at the arithmetic, Ron, you look at our average shipments for the fourth quarter, bill it by shipping days, cut off four shipping days, and we're bang on your estimates.

So 787 was provided to give you a little color on that particular program because of the focus on it. If you want to get to the estimated revenue, it was purely a result of less shipping days than we normally would have had in any other quarter. If you do the arithmetic, it's spot on.

Ronald Epstein - Merrill Lynch

Okay, so it's shipping days.

Now when we think about it from a margin perspective, right, I think my estimate on margins - I don't know if other folks were ahead of where you guys ended up  I mean, when we think about a run rate for margin as you go through this - as you ramp up or if we think about incremental margins for the business, how should we think about that?

M. David Kornblatt - SVP, CFO and Treasurer

I think if you look at the incremental margins, you know, I think we're generating them in the well above company average in the 20s - 20% range going forward. I mean, that's traditionally what we've been able to deliver.

I think if you back out just sort of the dilutive effective of 787 and the legal, margins in Aerospace Systems would have been up again this quarter.

Ronald Epstein - Merrill Lynch

Okay. All right, I'll just jump back in queue. Thank you.

Richard C. Ill - President and CEO

Thank you.

Operator

Thank you. Steve Levenson, please state your affiliation, followed by your question.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Thanks. Stifel Nicolaus. Good morning, Rick and Dave.

M. David Kornblatt - SVP, CFO and Treasurer

Good morning, Steve.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Can you tell us a little bit more about Thailand? I understand from the comments it was profitable in December, and could you give us an idea about what you think the prospects are over the balance of the fiscal year?

Richard C. Ill - President and CEO

I think that, as Dave said, you know, we expect Thailand to continue to, you know, improve. We're certainly not satisfied with the fact that it was profitable in December. We continue to think that it will continue to grow.

Dave and I were over there a short time ago. We're enthused with the plant. We're enthused with the product flow through the plant, and we think it'll continue to grow both in the revenue and the profitability on the products that we have over there.

So I have nothing but, you know, positive things going forward to talk about there.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Does your experience with Thailand lead you to think you might do some other plants outside the United States, maintenance plants like that?

Richard C. Ill - President and CEO

It's a possibility.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

And in terms of things like APU repair, what are the trends you're seeing and how's that impacting the overall picture?

Richard C. Ill - President and CEO

I don't think - the trends are, you know, somewhat the same as they have, in fact, been. We, for example, in Thailand, the issues in Thailand were not revenue issues in getting APUs in for repair and overhaul in Thailand. That was not the problem.

It was a simple ramp up problem. It's a greenfield operation. And we had to work on the efficiency of our operations, which we have not done.

So from a revenue point of view, that would point out that the trends in Asia in regards to APU repair are very, very positive.

So I don't see any change from our history in APU or component repair or in the issues in the Aftermarket Services group, certainly in the short term and as far as we can see out. I mean, our planning cycle - we're right in the middle of our business planning cycle as we speak. We're about to visit all of our locations, and we'll have a better answer to that shortly.

But the original plans we see for next year and that APU and repair and overhaul in [inaudible] business is very positive.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Okay. Thanks.

And in terms of - through the whole company domestically and internationally, Aftermarket Services represented a little bit bigger portion of revenue than it has in the past. We know what the backlogs are on new planes. Have you done a calculation of what's out there that you see potentially coming in, how that's going to impact the revenue mix between Aftermarket Services and Aerospace Systems going forward?

Richard C. Ill - President and CEO

I don't necessarily see any significant change in the mix. If you look at the last two or three years, our mix has not changed all that much. It's been as high as 33% sales in Aftermarket Services and as low as probably 27%. I don't see that, within that band, I don't see that changing in any great extent.

Stephen Levenson - Stifel Nicolaus & Company, Inc.

Okay. Thanks very much.

Richard C. Ill - President and CEO

Thank you.

Operator

Thank you. J.B. Groh, please state your affiliation, followed by your question.

J. B. Groh - D. A. Davidson & Co

Good morning. J. B. Groh from D. A. Davidson.

Richard C. Ill - President and CEO

Good morning.

J. B. Groh - D. A. Davidson & Co

Glad to hear you guys are not in the subprime market. I had a question on the legal. You know, you sort of have an implied guidance number for Q4, and I was wondering what sort of legal costs that implies for the fourth quarter? Is it kind of 

M. David Kornblatt - SVP, CFO and Treasurer

Slightly less.

J. B. Groh - D. A. Davidson & Co

Less?

M. David Kornblatt - SVP, CFO and Treasurer

Slightly lower.

J. B. Groh - D. A. Davidson & Co

Slightly lower, okay. And then when you look at this backlog position of 787, you know, number three, that's still two years worth of production there, so you're really only covering maybe 10% or 15% of what's in Boeing's backlog, correct?

M. David Kornblatt - SVP, CFO and Treasurer

Say that again?

J. B. Groh - D. A. Davidson & Co

So for 787, what you have in the backlog is two years' of estimated production, correct?

Richard C. Ill - President and CEO

Right. Well, two years' worth of orders that we have in hand.

M. David Kornblatt - SVP, CFO and Treasurer

So if they haven't ordered past the year for certain products, it's not in our backlog.

J. B. Groh - D. A. Davidson & Co

Okay, that's - okay, good. That's what I was trying -

Richard C. Ill - President and CEO

I think what you're driving at is correct. Boeing puts in their backlog all the planes - the 787s - that they have on order. We only include the first two years' of orders that we have in hand.

And by the way, I think it's a very, very important question because if you look at the aerospace industry and you look at the aircraft that are going to be produced between now and 2013 within Boeing, aircraft such as the 737, new generation 777, et cetera, et cetera, they are being produced for a relatively long period of time going out.

And at the same time there will be production, there'll be an overlap of the production of the 787 and, in fact, then the 787 proceeds long after those other aircraft are producing less.

So from an industry perspective and our backlog perspective, as the backlog rolls out over a number of years, it's a very positive signal.

J. B. Groh - D. A. Davidson & Co

Is it safe to say that the margin potential on any parts you make for 787 is better than it is on legacy programs, just do it a different way that Boeing's asking you to do work?

M. David Kornblatt - SVP, CFO and Treasurer

I think it has the potential to be above average. I mean, there are certain - you know, our margins are not straightlined. We have some products that are, you know, extremely good, others that are slightly challenged. But we certainly don't view 787, you know, once we get into full production rates, to be in the challenged category.

J. B. Groh - D. A. Davidson & Co

Okay. And then on Aftermarket Services, I think you've had a goal of hitting a double-digit rate there. You came pretty close in Q1. Have you moved the bar upward there? It sounds like you're not content with what you've got. What should we look at as a long-term goal for that business?

M. David Kornblatt - SVP, CFO and Treasurer

Our commitment going into the year was high single-digit, low double-digit. That's our commitment to finish the year, and I think as Rick said, we'll give guidance on that as we go forward.

But as I've said to many of you, we are very proud of the improvement in our Aftermarket Services group. We're not necessarily proud of the absolute number, so there is clearly upside to those numbers going forward.

J. B. Groh - D. A. Davidson & Co

Okay.

Richard C. Ill - President and CEO

Sort of an answer to one of the questions - the question - we will also in going forward raise that bar, you know. That's what we have a commitment to do.

J. B. Groh - D. A. Davidson & Co

Okay. Thanks, guys.

Operator

David Strauss, please state your affiliation followed by your question.

David Strauss - UBS

David Strauss with UBS.

I think I recall that your revenue guidance - back to this revenue issue again - your revenue guidance for the year was $1.1 to $1.2 billion. Can you talk about where you're tracking within that? Are you tracking towards the high end similar to the EPS size things?

M. David Kornblatt - SVP, CFO and Treasurer

I think we're spot on with that guidance, probably - in that $100 million band, we're probably right in the middle of it.

David Strauss - UBS

Okay, so that would imply about 20% top line growth in the fourth quarter. Is that correct?

M. David Kornblatt - SVP, CFO and Treasurer

I haven't looked at it that way, David, but we're tracking right on those original projections.

David Strauss - UBS

Okay. And then on 787, how many ship sets have you delivered to your customer at this point, and what kind of rate are you delivering at at this point? Are you one a month?

Richard C. Ill - President and CEO

It's a very difficult question for us to answer because we have so many of our locations that are delivering different parts and different components and different assemblies to the various people that produce the larger components for the 787.

So I can't really answer that question without some more research, if you will. I'm not avoiding it; I just don't really know the answer.

But it's clearly ramping up and will continue to do so over the next six, eight months.

David Strauss - UBS

Okay. And the implication to margins, we obviously know about the legal issues, but just looking at 787, Dave, between your development spending and then the diluted nature of the initial shipments, is that going to be more of a headwind than what we saw in the third quarter or is that going to mitigate, do you think, based on obviously that it would appear at this point that Boeing's delivery schedule's going to be mitigated somewhat?

M. David Kornblatt - SVP, CFO and Treasurer

Yeah, I think it'll be around the same level for another couple quarters. I would say the one thing that's hard to predict there is that there are a number of scope changes and negotiations that have to go on with regard to certain changes that were made. And so the exact timing of when those would be made and how they're done is very difficult to predict.

But I think its staying about where it is for the next couple quarters is a safe bet.

David Strauss - UBS

Okay. So just thinking about margins, with higher volumes they should move higher off of what we saw in the third quarter depending on what the flow of legal expenses is?

M. David Kornblatt - SVP, CFO and Treasurer

Agreed.

David Strauss - UBS

Okay. And then my last question, on the cash flow side, cash flow was pretty good in the quarter. Looking specifically at inventory levels, they were up a little bit but not as much as what we've seen in the past couple quarters. How do you feel about inventory levels here, Dave?

M. David Kornblatt - SVP, CFO and Treasurer

I think that we're making some progress. They're still too high. Some of that investment, actually, you're seeing is in some routable assets which is something we're investing in and we'll probably give you some guidance on that in the future.

But it's still a big challenge for us, but we're starting to chip away at it, I think. And as you noted, I think it was the first quarter in a long time where sort of our receivable inventory mix was positive. It was a source of cash. You'll see that when we file the Q.

So good first step; a long way to go there.

David Strauss - UBS

And how do you feel about cash flow looking at the fourth quarter, you should be positive on a free cash flow basis?

M. David Kornblatt - SVP, CFO and Treasurer

Yes.

David Strauss - UBS

Thank you very much.

M. David Kornblatt - SVP, CFO and Treasurer

Thank you.

Operator

Thank you. Eric Hugel, please state your affiliation followed by your question.

Eric Hugel - Stephens Inc.

Hey, it's Eric Hugel again from Stephens.

Can you comment on sort of what you're seeing on the M&A front?

Richard C. Ill - President and CEO

Well, there's a number of companies that we're looking at, and there's a number of companies that are still coming in over the transom. The aerospace industry is still in a - a lot of the companies are in a sell mode. Some of them are very good.

Commenting on the multiples is a little difficult to do right now. Clearly in these current conditions, it would indicate that they'd probably, the multiples, would start coming down a little bit.

I haven't seen specific indication of that, but there are a number of companies that, in fact, are available and we're working on very hard.

Eric Hugel - Stephens Inc.

A follow up from some of the revenue questions. With regards to the fewer shipping days, I guess that sort of made sense. I sort of did some quick math and if you just sort of ballpark it, it looks like you guys ship somewhere on average $3 to $3.5 million of product a day, and missing four to five days would sort of basically give you the shortfall that I think most people were looking at.

Is it safe to say that once basically things opened up in the beginning of January, all that product was pretty much all built and it just sort of shipped in one big lump in the beginning of the month?

Richard C. Ill - President and CEO

Yeah, I'm not sure it all went out the door on January 2.

Eric Hugel - Stephens Inc.

But you're going to get a big lump - basically, whatever was missed at the end of December is going to ship in the fourth quarter, and you should have a very, very robust fourth quarter because you're making up for three or four or four or five shipment days that should have been in last quarter. Is that safe to assume?

M. David Kornblatt - SVP, CFO and Treasurer

I think we'll get those sales, but keep in mind it was driven not by like we couldn't get it out the door. Our customers were shut. So only if they would ramp up to make up those four days would it be additive to Q4.

But I think your arithmetic is what I was talking about, is accurate, and I think the fourth quarter, as I said, will rebound nicely.

Eric Hugel - Stephens Inc.

Okay. I guess my final question, obviously you guys are dissatisfied with the share price. Should we expect to see you guys buying stock, either the company or personally?

Richard C. Ill - President and CEO

At this point in time, I can't answer the question personally because I can't. I'm not allowed to do that for another two days, nor can Dave answer that at this point in time.

From the company point of view, we're always looking at whether in fact buying back stock - we have a Board meeting in February. We'll probably talk about the issue at that point in time as to whether it's the best expenditure and most accretive way of going forward.

Personally, I think my opinion would be we're better off - the question was asked a few minutes ago about acquisitions - I think that we're - a better expenditure of our cash would be in the acquisition area.

But we will, in fact, consider it, Eric. I don't see it happening personally, but that's  we'll consider it.

Eric Hugel - Stephens Inc.

Actually, just one final question. With regards to your guidance, are there, you know, the $3.95 to $4.10, you're pointing to the top of the range, but are there, within that range, sort of key risks and key opportunities that could sort of move things one way or the other or be better? I mean, things that we can sort of think about?

Richard C. Ill - President and CEO

I think that they - first of all, as I said, what we meant to do guidance-wise is indicate it's certainly going to be toward the $4.10. Secondly, all the issues that we've been talking about - 787, the ramp up of some revenue in the fourth quarter, the potential ramp down of some of our legal costs, et cetera, will all be a positive.

To be honest with you, I don't really - I am optimistic and I don't see any significant down pressure on the guidance that we're giving you.

Eric Hugel - Stephens Inc.

All right. So you're $4.10 type of range is a pretty low risk type of thing, but you're just sort of conservative? I mean, there's risk but -

Richard C. Ill - President and CEO

I've sort of always been conservative. A low risk, I'm not sure that's a terminology - we'll always have risk - but the quick answer to your question is yes, I feel good about that number.

Eric Hugel - Stephens Inc.

Okay, great. Thanks a lot, guys.

M. David Kornblatt - SVP, CFO and Treasurer

Thank you.

Operator

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

Myles Walton - Oppenheimer & Co.

Oppenheimer & Company. Just a follow up. I want us to tie a couple loose ends together.

Dave, it sounds like you're talking about the midpoint of the sales guidance, and you're talking about the top end of the EPS range. And so just from an implied margin standpoint in the fourth quarter, it doesn't look like a sequential improvement despite the Thailand moving to profitability for the full quarter and peaking legal expenses.

Is there something else that we should be thinking about to kind of offset that? Is there higher unallocated corporate expense or something else?

Richard C. Ill - President and CEO

Myles, there really isn't. You know, from the - I don't want to belittle $100 million of sales, okay, because I'll obviously take it any day of the week. But what I think Dave was trying to do is hit the center end of that thing.

I would be probably - say that the margins that we will have will be well within line of where we were, okay? I don't see any margin deterioration.

Myles Walton - Oppenheimer & Co.

Margins where you were in the third quarter or where you were in the first half before some of these other things popped up.

Richard C. Ill - President and CEO

I'm not looking at the numbers, but I think that you'll see - certainly in Aerospace Systems, I think you'll see things sequentially going up.

Myles Walton - Oppenheimer & Co.

Okay.

Richard C. Ill - President and CEO

And I'd have to take a look at the numbers in Aftermarket Services. I think a long story made short, there may or may not be some conservatism in there, but I don't think we have margin deterioration at all.

Myles Walton - Oppenheimer & Co.

Okay, and then last one. The guidance still assumes a 17.9 million share count for the full year, is that right, Dave?

M. David Kornblatt - SVP, CFO and Treasurer

18 million.

Myles Walton - Oppenheimer & Co.

18 million.

M. David Kornblatt - SVP, CFO and Treasurer

Well, 18 million in the fourth quarter.

Myles Walton - Oppenheimer & Co.

18 million.

M. David Kornblatt - SVP, CFO and Treasurer

Which obviously, as you pointed out in your note yesterday, if our stock price were to remain where it's at would be - it would not come anywhere close to that number.

Myles Walton - Oppenheimer & Co.

Yeah, about a million too high, is that about right?

M. David Kornblatt - SVP, CFO and Treasurer

You're in the right ballpark, yes.

Myles Walton - Oppenheimer & Co.

Okay, great. Thanks.

Operator

Are there any additional questions? Since there are no further questions, this concludes the Triumph Group's fiscal 2008 third quarter earnings conference call.

This conference call will be available for replay today, January 25, 2008, at 11:30 a.m. through February 1, 2008 at 11:59 p.m. You may access the replay system at any time by dialling 1-888-266-2081. International participants dial 703925-2533. Enter the replay code 1187893. Once again, those numbers are 1888-266-2081 and 703-925-2533. Replay code 1187893.

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

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Source: Triumph Group, Inc. F3Q08 (Qtr End 12/31/2007) Earnings Call Transcript
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