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Executives

Jeffry D. Frisby - CEO, President and COO

M. David Kornblatt - CFO, EVP and Treasurer

Analysts

Julie Yates - Credit Suisse Securities LLC

Rama Bondada - RBC Capital Markets

Yair Reiner - Oppenheimer & Company

Stephen Levenson - Stifel, Nicolaus & Co., Inc

Michael Ciarmoli - Keybanc Capital Markets Inc.

Kenneth Herbert - Imperial Capital, LLC, Research Division.

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

Myles Walton - Deutsche Bank Securities

Peter Arment - Sterne, Agee & Leach

Michael Ciarmoli - Keybanc Capital Markets

Triumph Group Inc. (TGI) Q2 2013 Earnings Conference Call October 30, 2012 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Fiscal Year 2013 Second Quarter Results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast. Please ensure that your pop-up blocker is disabled if you’re having trouble viewing this live presentation. You’re currently in a listen-only mode. There will a question-and-answer session following the introductory comments by management.

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

Please note that the Company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is the property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I’d like to introduce Jeffry Frisby, the Company’s President and Chief Executive Officer; and David Kornblatt, Chief Financial Officer and Executive Vice President of Triumph Group, Inc. Go ahead Mr. Frisby.

Jeffry D. Frisby

Thank you and good morning. I want to welcome you to the call this morning and to thank you particularly due to logistical issues presented over the past couple of days by hurricane Sandy for dialing in.

Before we go any further, I just want to give you a brief update on Hurricane Sandy and how it has affected the Triumph Group. First and foremost, as far as we know everyone is safe and that’s certainly the most important issue. We have several facilities that are based in Connecticut and New York that have in fact lost power and we expect to have power restored shortly, but have in fact incurred no damage in those facilities.

We have one facility on the South shore of Long Island that has in fact suffered some flooding and then we’re currently accessing the ramifications of that damage. We had a pre-storm checklist that we had gone through because we certainly are – as prepared as we can be for situation such as this and we’re currently implementing our plan and we will do so as soon as we’re route back into facility. So all in all, the storm was certainly devastating to the region and we were affected somewhat, but not in a significant manner and have had no injuries, which is good news.

Before I get into the prepared slides, I’m going to take the opportunity to provide a few introductory remarks. Let me start out by saying something that a lot of you already know that Triumph is a special company. Our 2012 annual report declares that we’re designed to be different and built to perform. That statement is certainly true and it’s proven to be true over the course of time.

You’ve also heard us repeatedly describe ourselves as a Tier 1 capable Company. As a reminder, the term Tier 1 capable means that we have the full capability to operate within Tier 1 and to offer Tier 1 integrated solutions, but we’re not limited to only that model. Our costs are low, including a relatively thin corporate cost. And as a result, our companies can compete in and in fact thrive within whatever tier is most advantageous for them.

Our product offering, again as a reminder to many of you is among the industries broadest prior to our acquisition of Vought Aircraft Industries, Triumph was known for its broad product offering often being compared to Goodrich in that regard. When we acquired Vought in 2010, we only added to those broad capabilities. While it is true that the Vought acquisition shifted the balance among our three operating segments, it did not change who we’re and only added to the range of solutions we can provide to our diverse customer base spread across our enviable mix of commercial, military both fixed wing and rotorcraft and business jet markets.

Over time we expect to reestablish the balance that was once so evident. Between now and then, we will continue to look for opportunities to take advantage of our many strengths, including participating in a limited number of large Tier 1 macrostructures projects, when they fit within our core capabilities and meet the economic and risk objectives we set forth. And just a further bit of discussion on that subject with regard to large program risk, we do play in the large integrated program world.

Currently we’ve one major development program in our backlog, that being the Bombardier Global 7000 and 800 Wing. We’re managing that process very carefully and we selected it as a program to pursue as it had the right risk profile. It was a program that was clearly within our customer’s capability. We like to describe it as being right down in the middle of their fairway, it was right down the middle of our own fairway as well capability wise, and did not involve a revolutionary design or technology leap.

We will pursue other opportunities that have the right risk profile. However, we’re certainly mindful that we can’t have too many large scale development programs all or once, and that we need to choose our spots prudently.

Okay, now I’m going to start with slide number 3, I want to remind you that about the slide presentation that should be available along with the audio, I understand that we may have had some technical difficultly, so I’m hoping that, I’m suggesting the right thing. But I’m on slide number 3 now. And that’s the FY13 Q2 in review and as Dave will certainly provide a lot more detail, we had a very strong quarter. The quarter was marked by increased revenue, record operating income and year-over-year operating margin expansion, particularly in the Aerostructure and Aftermarket Services segment and also by record EBITDA.

I also want to note here and we will talk about this a bit later, also note that in the face of uncertainty in the military market, we actually maintained our military sales for the quarter. Actually increased it a tiny bit, but it’s certainly was something that we had hoped to be able to do and at least in this quarter we’re able to do it. The integration of Vought continues to progress well. We still are on track to deliver $50 million a year at that run rate by June of 2013.

Last quarter we described that we’re about at the $3 million run rate. All I can tell you now is that we’re north of that and headed for the – headed for that $50 million a year run rate mark by June of next year. Dave will also provide some detail on different activities that we’ve made in our – managing our pension obligations, which I think we’re continuing to do well.

Our balance sheet is very solid. Our net debt to total cap was down to 35.2% at 930, which is a good number, good progress for us. And it’s also marked by a robust backlog. Our backlog is now eclipse the $4 billion. And additionally I will just point out that we’ve also won some new and important contracts. These are not large individually and we’ve not at this point have not taken to announce the specifics publicly, but they do represent in-roads into new and important programs, including A320neo.

Also of note, in our Aftermarket segment is an additional contract that we’ve won from FedEx for APU support that supplements our previously announced wins. So that was good news as well.

So at this point, I will turn the presentation over to Dave and then I will return for some closing comments. Dave?

M. David Kornblatt

Thank you, Jeff and good morning everyone. I’d like to start with a review of the financial results for our second quarter. Turning first to the income statement, sales for the second quarter were $938.2 million compared to $790.5 million for the prior-year period, a 19% increase almost all of which was organic.

Operating income increased 32% to a record $142.9 million. Included in operating income was approximately $1.4 million of integration costs related to the Vought acquisition and a $2 million charge for early retirement incentives offered to certain Triumph Aerostructures employees.

Income from continuing operations improved 37% to $80.2 million resulting in earnings per share from continuing operations of $1.53 per diluted share versus $1.13 per diluted share for the prior-year quarter. Excluding the integration costs and the early retirement incentives, income from continuing operations was $82.3 million or $1.57 per diluted share.

EBITDA excluding the early retirement incentives for the quarter increased 29% to a record $170.3 million resulting in an EBITDA margin of 18.2%. The number of shares used in computing diluted earnings per share for the quarter was 52.3 million shares.

Looking now at our segment performance, sales in the Aerostructures segment increased 21% to $714 million all of which was organic. Second quarter operating income increased 31% from the prior-year quarter to a $121.4 million and included a net unfavorable cumulative catch-up adjustment of $200,000.

As we’ve previously pointed out, not all the synergies will contribute to favorable cumulative catch-up adjustments. A sizable portion will favorably impact the margins of our heritage companies, which are indeed higher year-over-year. We remain on track to deliver or exceed our synergy target of $50 million annual run rate by June of 2013. The segments operating margin for the quarter increased 130 basis points over the prior-year to 17%. EBITDA for the quarter was a $138.9 million at an EBITDA margin of 19.5%.With respect to SAP, we continue to make progress, but are not yet in a position to see net savings being added to our operating results.

In our Aerospace Systems segment, sales for the second quarter increased 12% to a $150.1 million, all of which was organic. Second quarter operating income increased 14% from the prior-year to $25.7 million with an operating margin of 17%. EBITDA for the quarter was $30.2 million at an EBITDA margin of 20.1%.

The segments operating results included $1 million versus $0.5 million last year of legal costs associated with the previously disclosed trade secret litigation as well as $1.2 million of expenses associated with the Sky Aircraft bankruptcy.

We also thought we should offer a brief note on the status of the previously disclosed trade secret litigation with Eaton Corporation. As we previously reported, Eaton’s claims against us were dismissed in December 2010. And in May of this year the U.S. Attorneys Office, in the Southern district of Mississippi voluntarily dismissed all related charges against the five engineers at our Triumph Actuation Systems, Clemmons subsidiary, who had been formerly employed by Eaton. Eaton has appealed the dismissal of its civil claims to the Mississippi Supreme Court and the parties are currently engaged in the briefing of that appeal. In the mean time we continue to prosecute our counter claims against Eaton before the state trial court of Mississippi.

While there have been press accounts to some of the more recent proceedings of decisions related to this matter, none of these more recent decisions represents a file disposition of our counter claims and we declined to comment on them at this time. To anyone who wants to know more, we commend you to the public record, which now contains many of the pleadings of the parties and the opinions and orders of the court. We prefer to let those documents speak for themselves.

Our Aftermarket Services segment reported sales for the second quarter of $76.1 million, an increase of 8%. Organic sales growth for the quarter was 4%. Second quarter operating income increased 54% over the prior-year to $10.8 million with an operating margin of 14.2%. EBITDA for the quarter was $13.1 million and an EBITDA margin of 17.2%.

The next slide is a pension OPEB analysis for Triumph Aerostructures for your reference. As you can see the table summarizes the pension and OPEB P&L impact as well as the required cash contributions for fiscal ’13 and ’14. The fiscal ’14 amount assumes that all the fiscal ’13 actuarial assumptions are met. With regard to pension at 9/30/12, we estimate that our net under funding would have increased by approximately $22 million since market 31st. This is almost entirely due to a drop in interest rates.

As discussed last quarter, we’ve initiated a few programs with respect to our defined benefit plans. Specifically, we mentioned an early retirement incentive, we offered to certain members of our salaried work force. This program was concluded in the second quarter and resulted in a $2 million charge in the quarter. This charge is reflected on the face of the income statement. For segment reporting, you’ll see that we’ve included it in corporate.

We initiated a similar program with our bargaining unit, in Dallas late in Q2, which will be finalized and accounted for in the third quarter. We expect the charge for that program to be approximately $2 million. However, there are certain variables that are not yet known, so this number is only an estimate. While these actions create expense in the year, mostly non-cash over the long-term it reduce our obligation, reduce risks and volatility in future years.

Lastly, one of our major actions related to the synergies will result in the closure of a portion of our Dallas facility. If approved, this will likely create a pension curtailment in the future quarter, which we currently estimate to be between $10 million and $20 million.

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

Our order backlog as of September 30th, was $4.04 billion, an increase of 8% over the prior-year. Heritage Triumph backlog increased 5.1% year-over-year. Military represented approximately 25% of our total backlog. Our top 10 programs listed on the next slide are ranked according to backlog. In first place was the 747 program, followed by the Gulfstream G450 and G550 programs. Third place was the Boeing 777 followed by the Boeing 787 program in fourth place. In fifth place was the Airbus A330 with the 737 next generation in sixth. Seventh was the Osprey combat helicopter and in eighth place was the C-17 cargo plane. The 767 is ninth and in tenth place is the C-130.

Looking at overall sales, Boeing remained our only customer, which exceeded 10% of revenue. Net sales to Boeing commercial military and space totaled 50.4% of our revenue and was broken down 74% commercial and 26% military.

Looking at our sales mix among end markets, the next slide shows the comparative Q2 of fiscal 2012, commercial aerospace sales increased 34% to $526 million representing 56% of our total sales. While military sales of $263 million were flat year-over-year and represented 28% of total sales. The military decline as a percentage is entirely attributable to commercial growth. Business jet sales increased 15% to $120 million and represented 13% of sales, regional jets remain unchanged at 1% and non-aviation accounted for 2%.

Finishing our sales analysis the next slide shows our sales trends for the quarter. Total organic sales for the quarter increased 18% from the prior-year. Breaking that down by segment, all the Aerostructures and Aerospace System sales for the second quarter were organic. The Aftermarket Services segment same-store sales for the quarter grew 4% to $73.3 million. Export sales for the quarter increased 2% to $113.5 million.

Turning to the balance sheet in the next slide, for the six months ended September 30th we generated $188.9 million of cash flow from operations before we made $56 million of pension contributions to the Aerostructures defined benefit plan. After these contributions, cash flow from operations was a $132.9 million. The calendar was not our friend this quarter, as a significant amount of cash payments that were processed on the last Friday of September were not received until Monday, October 1st, adversely impacting the quarter’s cash flow.

There was modest inventory growth in the quarter. The material portion was attributable to investment in the Bombardier Wing, a reduction in advances and inventory primarily to support new programs. For the full fiscal year we expect cash flow available for debt reduction to be between $150 million and $200 million. CapEx in the quarter was $24.1 million and $61.2 million year-to-date. We expect CapEx and investment in major programs for the year to be approximately $140 million to $160 million.

Net debt at the end of the quarter was $1.1 billion, representing 35.2% of total capital. The global effective tax rate for the quarter was 36.5% and reflected the fact that the R&D tax credit expired back in December of 2011 and is not yet been extended. We continue to expect minimal cash tax repaid in fiscal ’13 and to be increasing to a low to mid teens cash tax rate in fiscal ’14.

One matter that maybe worth addressing here is the status of our negotiations with the new landlord at the Jefferson Street facility occupied by Triumph Aerostructures Vought aircraft division. As of today we’re still attempting to negotiate an acceptable lease with the new landlord. At the same time, we’re developing a back up plan to relocate our operations out of Jefferson Street. In doing so, we’re modeling a number of scenarios that do not compromise customer commitments and balance our need and desire to retain the right skills and work force and the moving risk and costs, both in terms of the move itself and future ongoing operating costs. We’ve not yet made any final decisions in this regard.

All of the various scenarios would involve the significant investment in capital and expense, but would produce significant long-term savings to the Company. While the timing of a near-term move might not be optimal in terms of the programs currently being produced at Jefferson Street, after the move, we will be far more efficient and streamline business. We expect to make a decision in our third quarter.

As you saw in the press release, we reaffirmed our revenue guidance for the fiscal year to be between $3.5 million to $3.7 billion. However, we do expect that revenues in Q3 will be up year-over-year, but down sequentially. This is primarily due to some significant deferral requests by some customers from our Q3 to Q4 and to a larger extend some customer driven acceleration of sales in the Q2.

Please note that our EPS guidance of approximately $5.95 does not include the costs for the pension actions we’ve taken to-date nor does it include the pension actions that may occur in Q3 and Q4.

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

Jeffry D. Frisby

Thanks, Dave. On to slide 15, in the fiscal 2013 outlook as we look towards to the balance of the fiscal year and beyond, we’re encouraged that our backlog remains strong. As it is always the case, we certainly need to remain focused on improving execution, continue to drive the integration benefits and also continue to control our costs. We certainly believe that we’re well positioned to benefit from the increasing OEM build rates and we’re in good position to capitalize on whatever new opportunities arise.

At this time, we’re reaffirming our fiscal year 2013 revenue guidance of $3.5 billion to $3.7 billion, taking into consideration the slope that Dave just referred to. Additionally, we’re raising our earnings guidance, our EPS from continuing operations to approximately $5.95, excluding integration costs and early retirement incentives. And this is based on our year-to-date performance which has certainly been strong, current market conditions.

Now when I speak about the current market conditions, you all are certainly aware of the published commercial build rates and their increases. In terms of the military, I want to talk about our assumptions there for a minute. For the balance of the year, we’ve projected sales to generally continue as they have during the first six months of our year. We’ve seen and expect to continue to see a certain level of inefficiency in the order in shipment cycle as our customers are clearly managing their spend much more carefully.

We may see an uptick in deferral requests from quarter-to-quarter. But we do not expect that to have a material impact on our business for the balance of the fiscal year 2013. With all that said, this portion of our business certainly is being impacted by budget cuts and potential cuts, where this whole sequestration discussion ends up, we still think that there is going to be some downward pressure on the military budget. And it’s different program by program. However, there is clearly less overall certainty in this portion of our business.

And also the current production rates as I’ve mentioned before is something that have been well published and understood, and it’s also based on a weighted average shares of 52.5 million.

That concludes my remarks and I would like to open up the line for questions at this time.

Question-and-Answer Session

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

Julie Yates - Credit Suisse Securities LLC

Credit Suisse. Good morning, guys.

Jeffry D. Frisby

Good morning.

M. David Kornblatt

Good morning.

Julie Yates - Credit Suisse Securities LLC

Can you guys offer some more granularity on the drivers of the revenue strength in both Structures and Systems? I know you had the easy comp from the slippage of the 747s in the year-ago quarter and then you mentioned some customer driven acceleration into the quarter, but was there anything else abnormal in the numbers?

M. David Kornblatt

No. I mean, there were a few – we got the benefit of a few extra Wings in the bizjet area and a couple other small requests out of Q3 and Q2, but nothing abnormal. Certainly you make the valid point Julie that last year was when we had the pause. Certainly some of the year-over-year growth is attributable to that, but nothing highly unusual, no big nonrecurring revenue was relatively flat. There is nothing unusual like that.

Julie Yates - Credit Suisse Securities LLC

Okay. Are you seeing an increase in the 787 shipments and maybe you could let us know where you’re on a run rate – a monthly run rate?

M. David Kornblatt

We are starting to inch towards five, we’re not there yet, but we have seen an uptick generally in the quarter. Some of our companies are still at three as we talk about before. Its not one size, its all for us, given that we sell parts to not only the Boeing, but to a number of other suppliers.

Jeffry D. Frisby

And I think you got – its kind of good news is the more that you hear coming out of Seattle is that the actual number of deliveries that are coming out of there has in fact been increasing. So we’ve been talking about a ramp for a long time and it looks like we’re finally getting one. We will see how successful Boeing is; we certainly are hopeful that they will meet all the projections that they’ve made. But we’re seeing the increase, it’s a question as Dave talks about as to we’ve already talked about how we’re going to lag the build rate in this case because of Boeing having to remove some of the slack in the supply chain with some of the stuff that they’ve pre-bought, things of that nature. But just the fact that they’re delivering the additional aircraft and making good progress is good news for us.

Julie Yates - Credit Suisse Securities LLC

Okay, great. And then last one just, are the customer deferral requests from FQ3 to FQ4 from your military customers, and then how do you get comfortable that these wont slip into FY14 or what’s the risk that they might.

M. David Kornblatt

They’re all military and there is that risk. And so when you look at our revenue guidance, I mean, some of this is purely their own calendar year-end and we’ve had those requests even when times were good. They might be accelerating a little and there’s no guarantee that, that just makes Q4 even better. It usually does, but I think we’re always entertaining deferral request these days in the military side.

Julie Yates - Credit Suisse Securities LLC

Thanks guys.

M. David Kornblatt

Yeah.

Jeffry D. Frisby

Yeah.

Operator

Our next question comes from Rama Bondada. Please state your affiliation followed by your question.

Rama Bondada - RBC Capital Markets

Royal Bank of Canada. I’m glad to hear that everybody is safe at Triumph from the storm, guys. My first question was around the margins, I mean the last two quarters were basically at these record level margins once you take out onetime items. As we look forward, particularly after we passed the – hitting that $50 million synergy goal next June; how should we think about margins in terms of incremental margins or what are the potential peak margins that we could see at Triumph both as a Company and then also the segments too?

M. David Kornblatt

Rama, we’ve continually said that we’re not going to give a peak margin goal. We’ve also repeatedly said that we believe we have multiple 100 basis points of upside from where we are, certainly in Aerostructures, the synergies will be part of that tailwind to get there. But now that the aftermarket group has gotten well passed our long-term target of high-single, low-double I don’t think we’re prepared to give a peak margin. We have a lot of room to still improve at many of our Companies.

Rama Bondada - RBC Capital Markets

And that 100 bps improvement that you guys are talking about, are we talking about one year, three years, ten years. I mean, is this an idea of like, how quickly those – that could come through. Is that based upon the current products rates that Boeing and Airbus have already announced?

M. David Kornblatt

Yeah, I think its current business when we look out, we think with a two, three year time horizon we can continue to add multiple 100 basis points.

Rama Bondada - RBC Capital Markets

Perfect, thanks. And then also on the 777, that’s stepping up on the first quarter calendar year of ’13. Has that begun to flow through to your numbers already that new production rate?

M. David Kornblatt

Very little, but we will get a little tailwind from that in Q3.

Rama Bondada - RBC Capital Markets

Okay, great. Thanks a lot.

M. David Kornblatt

Thank you.

Operator

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

Yair Reiner - Oppenheimer & Company

Yes, Yair Reiner, Oppenheimer & Company. So, first just a quick follow-up on the margins question. It looks like your guidance implies that margins will decrease a bit in the second half of the year compared to where they have been in the first half; can you talk about the drivers that are potentially driving that?

Jeffry D. Frisby

Well, I guess just fundamentally to anticipate that question, I am glad you brought it up early. I think you got to remember that first off we’ve already delivered two great quarters and we expect to continue to perform well in the future. There is nothing fundamental to our business that suggests a change in course. The deferral request that Dave talked about on the military side, we’ve seen for Q3 should provide a tailwind for Q4. But as you know there is some uncertainty regarding this as we’ve just discussed. So we’ve included some level in conservatism there.

In the aerospace systems segment, we’ve already had two strong quarters of aftermarket activity within that particular segment. And so given historical patterns we’re projecting some leveling off of that in the second half. And in the aftermarket segment we’ve also provided some conservatism as some of the new winds ramp up. So, we do expect the second half to be down from the first half, but at this time we just – we want to be slightly conservative on certain issues.

Yair Reiner - Oppenheimer & Company

That’s what I was anticipating. Now just another question on aftermarket, and so if you can give some color to help us try to think about the sequential kind of revenue trajectory from here. You were down I think quarter-on-quarter. In the second quarter obviously a lots of puts and takes with Delta, with FedEx and I guess with the general weakness in air transport. So if you can help us just think through the next couple of quarters and maybe by 2014 that would be helpful.

M. David Kornblatt

Well we’re not giving 2014 guidance today, so I am not going to address that. I would think you’d see given even with Delta winding down I think FedEx ramping up assuming the market stays where it’s at; you’ll see growth sequentially, not monster growth but in the aftermarket in quarters three and four.

Yair Reiner - Oppenheimer & Company

Thank you.

Jeffry D. Frisby

Yeah.

Operator

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

Stephen Levenson - Stifel, Nicolaus & Co., Inc

Stifel, Nicolaus. Thanks, good morning Jeff and Dave.

M. David Kornblatt

Good morning.

Jeffry D. Frisby

Good morning.

Stephen Levenson - Stifel, Nicolaus & Co., Inc

I’m glad nobody is hurt down there. On your balance sheet you cleaned up things quite a bit, since the Vought acquisition you’re sort of down here the range where you’d been doing things before. I know we heard Boeing talking about shrinking the supply chain, so I haven’t seen any deals in a while, I am wondering if you’re looking for something specific, if it’s question of valuations, I know there’s some other guys in the market who’ve been paying up recently, but can you give us a comment on that please?

Jeffry D. Frisby

Well we’re trying to do -- we’re trying to maintain our strategic objective which is to acquire aggressively with another objective which is to remain disciplined, that is it’s kind of a hard place to be right now. But there certainly are a number of acquisitions that are -- that we have a great deal of interest in. And we have been -- I would say we’ve been fairly competitive in some recent deals that have been -- that have been consummated.

So I think that we will be successful at some point in the acquisition game where we are in fact still actively involved in it, and we are trying to make sure that we’re targeting those areas that meet our strategic objectives to continue to increase our product portfolio and to fill some technology gaps or lead that we think that we have. I talked about the fact that we’re going to restore our balance over time; we got to look at that when in terms of making acquisitions. So we’re still playing, we’re still active and we hope to have some success.

Stephen Levenson - Stifel, Nicolaus & Co., Inc

Okay, thanks. And on the Jefferson Street facility, just as a reminder could you tell us which programs are in the building you may sign a new lease on, or otherwise change?

M. David Kornblatt

Yeah. The programs there are C-17, -- some V-22, G-V, little bit of Black Hawk.

Jeffry D. Frisby

Global Hawk Wing.

M. David Kornblatt

And Global Hawk Wing.

Stephen Levenson - Stifel, Nicolaus & Co., Inc

Okay, so it’s not the same as moving all that big 747 related stuff around the corner?

M. David Kornblatt

Correct, that’s Marshall Street. So that’s not impacted.

Stephen Levenson - Stifel, Nicolaus & Co., Inc

Great. Thank you very much.

Operator

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

Michael Ciarmoli - Keybanc Capital Markets Inc.

Keybanc Capital Markets. Thanks guys, great quarter.

Jeffry D. Frisby

Thank you.

M. David Kornblatt

Thank you.

Michael Ciarmoli - Keybanc Capital Markets Inc.

Dave, you didn’t want to comment on fiscal ’14. What about your thoughts on fiscal ’15 given the margins. You’ve got that long-term $6.50 target out there. I mean I could appreciate the conservatism for the second half here, but if all things go well, you could be in position to do north of $6. Any comments or thoughts around updating that longer term target you guys have out there?

M. David Kornblatt

I’ll repeat what Jeff has said repeatedly in the last quarter and that is, if we were holding Investor Day today it’s likely that the fiscal ’15 guidance that we gave would be higher.

Michael Ciarmoli - Keybanc Capital Markets Inc.

Okay.

M. David Kornblatt

Okay. So, that does indeed look fairly conservative now but, we are also not prepared to give fiscal ’15 guidance today.

Michael Ciarmoli - Keybanc Capital Markets Inc.

Got you. Maybe just to probe into some of the new opportunities. Jeff, could you elaborate, you mentioned the A320 new opportunity, can you elaborate on that a little bit?

Jeffry D. Frisby

I can elaborate a bit, we haven’t -- we still haven’t and I’m not clear as to how much of -- I guess how much we can talk about in terms of our customers concurrence with public releases and such. And in fact, I would anticipate we will have a public release as soon as we nail down those things and get that concurrence. But the reason I bring up those A320neo wins is that they were wins within our aerospace systems segment, which and they are proprietary wins, so that they are going to help us not only today but in the future.

I bring that up specifically because we’re talking – I was talking about attempting to rebalance and for those out there who think of us solely as a structures company, it’s another indication and the fact we’re not one, and that we do in fact have a very broad base of product offering as we always have.

Additionally we’ve also noted that in our top-10 backlog that one of the programs or probably the biggest absent program on that list was the Airbus A320 program. So, we have in fact launched an initiative to attempt to regain some market share and to make further inroads into that program and this was furthering of that particular strategic initiative. So it’s for those reasons I mentioned them and so I guess I can go as far as that at this point, but I’d have to say we’d love to make the announcements official with far more detail as soon as we can.

Michael Ciarmoli - Keybanc Capital Markets Inc.

Okay, fair enough. And then last one and I’ll jump off here. How about opportunities with Airbus producing that platform in Alabama. How are you guys kind of planning or posturing for to pick-up some opportunities related to that new facility?

Jeffry D. Frisby

Well we’re always -- we had an ongoing dialogue with Airbus relative to that plan. It’s been their initial position that there’s not going to be a tremendous amount of supply chain opportunity specifically because that facility is in Alabama. They’re looking at building. They save somewhere around four to five aircraft a month which in and of itself does not create a real need for having additional supply chain locally. They will be quick to point out that they already buy a substantial percentage of their aircraft from American suppliers. So, I think if they were going to start building a greater number of aircrafts in Alabama the opportunities would be greater. That being said, there will be some opportunity there and we’re staying as close as possible to take advantage of whatever may come up.

Michael Ciarmoli - Keybanc Capital Markets Inc.

Great. Thanks a lot guys.

M. David Kornblatt

Thank you.

Operator

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

Kenneth Herbert - Imperial Capital, LLC, Research Division.

Imperial Capital. Good morning everybody.

Jeffry D. Frisby

Good morning, Ken.

M. David Kornblatt

Good morning.

Kenneth Herbert - Imperial Capital, LLC, Research Division.

Just wanted to follow-up, aerospace systems really nice margin this quarter. Did you see anything unique in terms of aftermarket part sales there versus original equipment sales or was there anything different sequentially from the second quarter that may have benefited the margin there on the aftermarket side?

M. David Kornblatt

Aftermarket was about flat with Q1 which was very strong. So that was what I just comment about, we usually have two really good quarters with the way our customers order in that segment. So we had a very good quarter in Q2 or deliveries I should say. And other than that I think it’s a matter of our really good companies continuing to be really good and a number of our companies that are moving up the chain and performing better, so that always has the biggest impact on margins is when the lower producing companies improve and so we saw that. Certainly there was more companies improving than going the other way. So, I think it’s good old fashion execution and the aftermarket stayed strong.

Kenneth Herbert - Imperial Capital, LLC, Research Division.

Yeah. Could you typically talk about from the part sales within aerospace systems, the fiscal fourth and first quarter when you see the strongest quarters correct?

M. David Kornblatt

That’s where its typically big, that’s right. Some was military driven, some spares and certainly its one of our initiatives to grow the aftermarket part of our own products and certainly over time we would hope to see that increase. But I think at this point I think it’s just more, we haven’t seen tremendous evidence of that yet, but that’s certainly something we hope for.

Kenneth Herbert - Imperial Capital, LLC, Research Division.

Okay, that’s helpful. And if I could, on the Global 7000, Global 8000, you talked last quarter about some inventory build. Can you just give an update as to where you stand with those programs and did you see, are inventory levels just were tracking sequentially where they were in the last quarter and any change in timing on that program for you?

M. David Kornblatt

Yeah, I mean the -- the inventory was up a little bit overall in the quarter and I think in the -- for the Bombardier Wing was the biggest portion of the increase, I think it was up $17 million or $18 million year-to-date and about $10 million in the quarter. So that’s the biggest portion of our inventory growth and then certainly some for new programs. But probably the spending is a little less than we had thought at this point, that’s mostly engineering by the way, I mean its hardware at this point, it’s deferred engineering, that mostly what's going into inventory. The capital goes into capital.

And we’re working our way through the development program with Bombardier and I think at this point there’s the normal things that comes up in a development program but nothing that’s changing our spend dramatically at this point.

Kenneth Herbert - Imperial Capital, LLC, Research Division.

Okay. So it sounds like that program is pretty much on-track relative to your expectations?

M. David Kornblatt

Yeah, I mean its little behind, but probably we imply on that.

Kenneth Herbert - Imperial Capital, LLC, Research Division.

Okay, excellent. Okay, a great quarter. Thank you very much.

M. David Kornblatt

Thank you.

Operator

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

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

D. A. Davidson. Good morning guys.

Jeffry D. Frisby

Good morning.

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

Just play off the neo question. Could you maybe talk about potential incremental opportunities on the max and that’s obviously, 737 is obviously a great program for you, but is there anything additional you think you could get with the newer generation?

Jeffry D. Frisby

Yeah, I think that there is. I think there are opportunities for us there. I think that there -- actually when they have changed the engine, there is -- they’re changing some, I guess some purchase points on some of the equipment that we had sold to Boeing directly that now there’ll be opportunities to sell to Tier 1 integrators where they being the cell makers or that type of thing. There also are changes that will invariably occur on the structural side, I will call them probably some small changes that there would be really perfect opportunities for us and we’re staying close to Boeing to make sure that we participate in that. So we have a number of different avenues in which we can participate we think. So we think we’ll be successful in adding market share as we go from the next generation to the max.

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

So more opportunity than risk?

Jeffry D. Frisby

I think so, yes.

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

Okay. And then, on this Johnson Street you mentioned that potentially having to make a move and could you -- you might have said this, I might have missed it; potential sort of CapEx investment that would require, I know you said that there would be some significant savings if you were forced to do it, but what sort of CapEx would be related to that?

M. David Kornblatt

I don’t think we want to give the details at this point J.B. I mean we’re looking at; what do we have to move? Where do we have to move, and so the potential range is why, but it’s substantial, its eight figures -- mid eight figures probably.

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

Okay.

M. David Kornblatt

So I mean it’s substantial. Now fortunately the savings, there’s also a lot of moving cost and the savings are also rather significant, so and there’s be some non-cash write-offs, but I think it would -- other than its not, might not be the optimal time to do it. This was something we’ve known would be done since we acquired Vought, it was really just the timing.

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

But all in all it looks like a pretty positive NPV sort of project if you had to put it in those terms?

M. David Kornblatt

Absolutely.

Jeffry D. Frisby

Yeah, definitely.

M. David Kornblatt

Definitely.

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

Okay, good. Okay and thank you for your help. Great quarter.

M. David Kornblatt

Thank you.

Jeffry D. Frisby

Thanks.

Operator

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

Myles Walton - Deutsche Bank Securities

Deutsche Bank. Thanks good morning, good quarter. Maybe to pick up where J. B. left off. So, you had the synergy target for $50 million. I’m just curious what kind of other things like Jefferson Street which sounds obviously like there’d been investment, but a pretty substantial return, Dave you have done a healthy amount of work on the pension side and if you could comment on how much the curtailment might lower ongoing expense that would helpful, if you do take that $10 million, $20 million charge.

But broadly maybe Jeff, could you talk about the $50 million of synergy target in context to some of the other synergy opportunities, I guess the best way to put it that are out there that might require a little bit more investment, a little bit more horizon, but can you scale or at least put in relative terms the kind of opportunity that exist?

Jeffry D. Frisby

Well I think that we have talked about -- any number of times, I know I remember Rick repeatedly describing the fact that we’d be disappointed if we only got $50 million we thought that we were going to be able to deliver far more than that and I think that that’s true. But there comes a time in this all synergy discussion when we really just have to start taking a look at what we’re doing to continue to drive competitiveness and we’ve talked about the fact that we have a couple 100 basis points of margin potential.

And in all the things that we’re talking about doing whether they’d be investments in capital to drive down cost and maybe they’re within Aerostructures or maybe they’re not, maybe we could describe or discuss whether there would be synergy or not. But I think in discussing specifically synergies we’re going to stop doing that and we’re to start talking about the fact that we’re going to make investments to enhance our competitiveness that we’ll be able to grow our business because we will be -- if we’re not world class competitor, we’ll be far closer than we were before because we will have made a lot of these investments.

So, I guess the best answer to your question is that rest assure that the synergies we’re going to deliver are going to be far in excess of the $50 million and they are going to help to ensure our overall competitiveness as we go forward in the years to come.

Myles Walton - Deutsche Bank Securities

Okay. Is there -- that $10 million to $20 million pension curtailment, is there a material impact on the ongoing, your pension expense you presented in the charts?

M. David Kornblatt

I wouldn’t think so Myles, but if there’s ever a time to give precautionary language it’s when you talk about pension accounting, and so we’re focused on the long-term here in reducing the risk. There’s some many of these factors that every time I think I understand it, I figure out that I don’t and -- have you got the carders, the non-carders, when do you recognize that the amortization. All I can tell you is if we're successful in these actions, we're bringing forward some expense there, we’re reducing the people that have a pension, and that’s all about goodness long-term in eventually de-risking the whole obligation. So, I don’t think it has a monster affect in terms of what fiscal ’14 would be, but I don’t want to venture I guess at this point.

Myles Walton - Deutsche Bank Securities

Okay. And the last one is on cash and I’m probably answering it with my own questions, but I think cash available for debt reduction last quarter was $200 million. It sounded like you’re more looking at $150 million to $200 million. The CapEx deferred production target didn’t move, so just kind of thinking what else moves within the working capital accounts or where you’re kind of thinking it’s going to more hedge to the $150 million to $200 million versus $200 previously did?

M. David Kornblatt

Yeah we’re hoping it’s closer to the higher number Myles, but what we’ve seen is with the deferrals -- become big deferrals of advances in the military world and I can tell you our customers are very focused on the quarter ends and which is very easy for very large payments to slip, so we’re starting to account for that in giving a range. But, if everything goes as planned and the sales we don’t have any huge deferrals out of the year and it’s mostly Q3, I would hope we would be at the upper-end of that range.

Myles Walton - Deutsche Bank Securities

Is the military deferrals, is this more a customer specific issue or maybe the customer doesn’t want to commit without an order either domestically or internationally, because I mean it would seem like your shipments, your aircrafts out of the house would have a better schedule if it kind of want to stick to unless they were taking a more conservative approach. Is that kind of what it is, or is it very customer specific?

Jeffry D. Frisby

My take on this is that it is really customer specific and it is more -- it’s more fundamentally that, now they maybe actually sell that helicopter or that aircraft, I mean these things are under contract. It’s more a timing issue in terms what they want to do vis-à-vis their year-end.

M. David Kornblatt

Yeah, there is no discussion of deferral leading to cancellation. It is purely as Jeff said and I think people want to even the largest companies look to their year-end balance sheet and quarter-end balance sheets these days more carefully than ever.

Myles Walton - Deutsche Bank Securities

Okay. Thanks.

M. David Kornblatt

Okay.

Operator

Are there any additional questions? We have a question from Peter Arment. Please state your affiliation followed by your question.

Peter Arment - Sterne, Agee & Leach

Yes, Sterne, Agee & Leach. Good morning guys, nice quarter.

M. David Kornblatt

Good morning.

Jeffry D. Frisby

Thank you. Good morning, Peter.

Peter Arment - Sterne, Agee & Leach

Hey Jeff could you just kind of walk us through a little bit. You continue to differentiate yourself with your solid performance and I am particularly in Aerostructures a peer of yours assembling quite badly on a lot of development programs and you’re embarking on what looks like is going to be a successful program from Bombardier. How are you approaching kind of the risk retirement and how do we think about kind of the milestones going forward?

Jeffry D. Frisby

Well if you were specifically about the Global 7000 and Global 8000 program now in terms of risk retirement because we obviously got a -- we’re just talking about pension which is a whole another risk retirement. But yeah, what -- as I mentioned before this program is one that is not a high-risk program from the standpoint it’s -- talked about it being right down the middle of Bombardier its fair way, it’s not a -- it’s a metal aircraft. It’s not anything that’s, is brand new that has a huge risk of great delays other than normal development delays. It’s in the middle of our fair way and that we have done this type of a product before. We have designed and developed wings in the past and there’s nothing specifically new to this other than some of the, maybe it’s an improved design certainly but there is no technology leak.

So we’re really into managing a specific program here, and what we’ve done is taken a great deal of time in laying out the two main issues that you always look out in these, these things are not to over simply it but it’s your non-recurrent cost and you’re recurrent cost, so you have to have the proper estimates upfront and certainly an estimate of a price that enables you to win, that still enables you to make money. And we have had constant communication that has measured our effectiveness against those internal goals that we’ve set for ourselves, so we can determine whether or not we’re performing according to our cost targets and we continue to discuss that.

When there are changes that come about in the design that come from Bombardier, we have immediate discussions on ramifications to non-recurring and recurring price along those lines. So we’re doing the standard, I guess we’d call it standard program management activities that you would expect us to do.

I think the important thing to remember in this is that it’s a program that we’re very comfortable with and it’s in a product that we’re very comfortable with. We’re staying within our core competency and we are able to manage it because it’s really our only large development program. We do resist the temptation of embarking on five or six of these at once because it’s not easy to develop a new product but to do it five or six times at the same time would be, I think a very high risk, certainly a high risk idea as we’ve seen in evidence. And I don’t want to get into what Spirit’s issues are. But obviously they have had some and they’re addressing them and we’re counting on their continuing to be a viable player in this industry. They’re a very important company for our industry.

Peter Arment - Sterne, Agee & Leach

Now thank you for that. And just Dave, could you just remind us of kind of the CapEx profile for -- what we could expect on this program. When do we peak out related to that?

M. David Kornblatt

We should -- the last year of large sort of just only spending should be fiscal ’14 and it should wrap-up in early ’15 and then we start selling wings and the -- I think ’15 should be a positive net year, but there would still be cumulatively we’ll be negative from an investor perspective. But we have one more year of heavy spending in fiscal ’14.

Peter Arment - Sterne, Agee & Leach

Okay, great. Thank you guys. Nice quarter.

Jeffry D. Frisby

Thank you.

Operator

Our next question is a follow-up from Michael Ciarmoli. Please state your affiliation followed by your question.

Michael Ciarmoli - Keybanc Capital Markets

KeyBanc. Thanks guys. Dave, this 787 program ramping; is that currently dilutive to your current corporate margins, and how should we think about those revenues and those margins as the program continues to mature?

M. David Kornblatt

Currently profitable, currently dilutive, and I’d believe we have consistently said and continue to believe that if after two or three quarters of being in the five to seven per month category we would hope we could bring those margins up to corporate average and then possibly beyond. So, maybe you’re looking out a year from now where perhaps we would expect the margins to be no longer dilutive, but its profitable today and it’s adding the earnings.

Michael Ciarmoli - Keybanc Capital Markets

Okay. Does that factor into the couple of 100 basis points of margin expansion?

M. David Kornblatt

Yeah, but I mean you’re talking about a very small amount of sale today that are being dilutive.

Michael Ciarmoli - Keybanc Capital Markets

Got you.

M. David Kornblatt

Yeah, that’s not what is preventing us from being another 100 basis points higher today, believe me.

Michael Ciarmoli - Keybanc Capital Markets

Okay. And then last one; can you give us a total, you had a new FedEx contract I guess, what sort of the annual run rate for those FedEx revenues?

M. David Kornblatt

I think we’re going to stay away from that Mike, I mean, its – these are nice contracts and they will in and of themselves be impactful, and get some nice tailwind, but we prefer – FedEx is constantly moving their fleet around – we’ve already seen some movements that some of the planes in the first one maybe retired earlier, but they will be replaced by planes in this next win and so its – I don’t want to get into that projection. But these are multi million dollars per year wins.

Michael Ciarmoli - Keybanc Capital Markets

Got you. Okay, perfect. Thanks for taking the follow-ups, guys.

M. David Kornblatt

Yeah.

Operator

Since there are no further questions, this concludes the Triumph Group’s fiscal 2013 second quarter earnings conference call. This call will be available for replay after 11:30 AM today through November 7, 2012 at 11:59 PM. You may access the replay by dialing 888-266-2081 and entering access code 159-3689. Thank you all for participating and have a nice day. All parties may disconnect now.

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