Triumph Group, Inc.
Q4 2016 Earnings Call Transcript
Published:
- Operator:
- Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Fiscal Year 2016 Fourth Quarter and Full Year Results. This call is being carried live on the internet. There's also a slide presentation included with the audio portion of the webcast. You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by management. On behalf of the company, I would now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause Triumph's actual results, performance, or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements. Please know that the company's reconciliation of the non-GAAP financial measures to comparable GAAP measures is included in the press release which can be found on our website at www.triumphgroup.com. In addition, please note that this call is the property of Triumph Group Inc. and may not be recorded, transcribed, or rebroadcast without explicit written approval. At this time, I would like to introduce Daniel Crowley, the company's President and Chief Executive Officer and Jeffrey McRae, Chief Financial Officer and Senior Vice President of Triumph Group Inc. Go ahead, Mr. Crowley.
- Daniel J. Crowley:
- Thank you, Stephanie, and welcome to Triumph's fourth quarter and year-end earnings call. It's been a really busy four months since I joined Triumph as President and CEO and my leadership team and I have made good use of the time as we prepare the company for its third decade of growth. We're executing the plan I outlined on our January earnings call while delivering on customer commitments and positioning Triumph for the future. If you go to slide four, in my first hundred days at Triumph we completed our diagnostic of the business and defined the game plan necessary to improve operational performance, deliver a predictable profitability, and drive organic growth. I'd like to share a few highlights. First, we implemented a new operating philosophy around building one Triumph team and increasing accountability for performance. As part of our new biorhythm, previously decentralized and autonomous business units are now reviewed every 30 days at the CEO and staff level against a comprehensive scorecard of operational, financial and new business metrics to ensure we're meeting our commitments. Now out of thousands of programs at Triumph we started the year with 42 red programs and 74 yellow programs. Through our weekly return to green calls at my level as well as reviews at the business unit and operating company levels, we've now reduced the number of red programs by 40% and yellow programs by 20%, helping to reduce losses, improve quality and recover delivery schedules. Our goal is to have no red programs by the end of the year and very few yellow ones. This includes Boeing 747-8 which is now recovered to customer delivery dates and is meeting our quality targets. While sometimes painful for the participants, these return to green reviews are highlighting common areas requiring improvement across multiple programs which we are addressing through Triumph-wide initiatives. Note also we're seeing some positive customer feedback on our improving operational performance. Sikorsky recently selected Triumph Group's Macomb Gear Systems business as Supplier of the Year for their gear shaft and housing work on multiple helicopter programs. And two of Triumph's companies in Seattle and Park City, Utah received the Supplier Excellence Award from the American Helicopter Society International in recognition of the quality innovation and cost effective technology of our products. We will continue our relentless focus on on-time delivery, improved quality and cost reduction as our customers expect and deserve. Now last month many of you read about our new reorganization around four strategic business units. And these include Integrated Systems, a $1.1 billion business that provides actuation, hydraulic, fuel, thermal and geared solutions of our own proprietary designs and those of others. Second, Aerospace Structures, a $1.3 billion business supplying fuselages, control services, wings and other large structures and integrated assemblies for both commercial and military platforms. Third, Precision Components, a $1 billion company that supplies machine, fabricated, composite and interior products for Triumph and OEM customers. And, fourth, our Product Support team, a $300 million plus company focused on full lifecycle support to aircraft OEMs and operators. Note that each of these business areas has five operating companies except Precision Components which has seven operating companies. Why did we do this? Well, this action reduced the number of business unit VPs from six to four, it aligned similar and complimentary product, services and processes, it better matches our structure with the customer needs and their buying organizations, and then it better balances the annual sales and spans of control to manageable levels. And then, most importantly, it allows us to organize, operate and report in a consistent manner. Second, we're consolidating from 47 operating companies to 22 operating companies, a reduction of more than 50%. We combined companies with overlapping capabilities who competed in the same market for the same business. For example, we had multiple fuel system, hydraulic, gear system and high-speed machining companies. Secondly, it grouped similar operating companies to reduce cost, integrate product roadmaps, expand our offerings, increase our supply chain economies, and simplify customer interfaces. Each of the new leaders of these four business units is well along on developing new integrated strategies for their portfolio of businesses. These changes stem from our forensic and initial portfolio review of all our operating companies and product lines. As we continue our portfolio review, we expect to take further action that will focus our capabilities and generate cash for other uses. We will regularly assess the strategic fit, competitive positioning, and market attractiveness around each of our operating companies and decisions related to portfolio changes will be communicated separately as approved by the board and implemented. We'll also reduce the number of locations from today's 73 to 60 in our first wave of consolidations. This will begin to address our capacity underutilization. It will reduce occupancy, SG&A, and indirect labor costs, and create centers of excellence for individual product lines while positioning work in lower cost areas within the U.S. and internationally. Next, we launched a $300 million cost reduction initiative which will reduce our supply chain, labor, facilities, infrastructure, and expense costs over the next three fiscal years. We've already allocated savings targets by color of money to each function and business unit and generated savings will be used to enhance our competitiveness, reduce debt and fund organic growth, and we have a robust tracking system in place to measure our progress. Our next step was to establish the transformation delivery office to manage our restructuring and transformation efforts, including the development and deployment of the Triumph Operating System. Now I talked in our last call about our Triumph Transformation Team. Over the last 12 weeks we identified 26 specific initiatives to turnaround and transform the company from improving cash from operations to Lean deployment to updating our go-to-market strategies. The Triumph Operating System now under development will reflect our new operating philosophy and it builds on the proven enablers and talent from across our companies, including those from legacy companies such as GE, UTC and Goodrich. We'll choose the best practices from across our many companies as well as those from adjacent industries to create a unique operating system that works for us and our customers rather than have multiple ways of doing the same thing. Next, we strengthen our business development team who will focus on strategic partnerships, unmet customer needs and disciplined capture processes to reverse our negative organic growth rates. Our recent win with Airbus on their A320neo landing gear actuation system is worth over $500 million over the life of the contract and we're building a new 150,000 square foot machining center-of-excellence in Kansas City in support of Airbus's A350 production ramp. Our relationship with Boeing, which has been strained in the past, is improving as we do what we say in line with their priorities. And we're proud to be a partner with Gulfstream on the G650 program where our performance on the transition from Tulsa to Nashville has been acknowledged by teams from Savannah. Our progress on the Embraer E2 program continues to accelerate, following the delivery of our first fully joined fuselage earlier this year. We are actively working to expand our precision component and integrated system support for Lockheed Martin as they seek dual sources on the F-35 program. And we've started a new dialogue with Spirit AeroSystems on areas we can support their needs. We also anticipate winning more military orders to complement our strong commercial and business jet backlog. In FY17, Triumph will increase our new business resource investments as a percent of sales for R&D, bid and proposal, and marketing and selling. I know from my recent visits to Boeing in Seattle, Airbus in Toulouse, Spirit, Bombardier, Northrop Grumman and other customers that there's a strong desire to work with Triumph given that we're cost competitive and deliver on time with good quality. I'd also like to note that since January, Triumph also partnered with strong alliances of banks on an amendment to an extension of our credit facility, which allows us to maintain a strong liquidity position to drive our transformation. Also important, we created a new senior leadership team and added new members including a new Executive Vice President for our Aerospace Structures business, a new Senior VP of HR, a new CIO, new Vice Presidents of Internal Audit and Strategic Planning, a new Director of Operational Excellence formally with the Danaher Corporation and new Director of Communications to support our One Triumph company initiative. Combined with the planned addition of a new program management and contracts leaders, I anticipate by our next earnings call that nine of my 16 direct reports will have changed since January. Note that we're well along on our CFO search and expect to make an announcement during our first quarter. At this point, I'd like to thank Jeff McRae for his continuing contributions to Triumph and his commitment to support our year-end 2016 closeout and 10-K certification efforts. If you go to slide five, our top three priorities haven't changed
- Jeffrey L. McRae:
- Thank you, Dan. And good morning, everyone. Before I get into the details of the quarter, let me first give you my high-level views. Obviously, a tough quarter with some significant charges, but I'll talk you through, but also a quarter in which we see the creation of positive momentum going into fiscal 2017. We saw positive growth and strong earnings from the Aerospace Systems and Aftermarket Services segments. As Dan noted, a record quarter for our Systems business, while Aftermarket continued to demonstrate the ability to deliver best-in-class margins. We saw continued improvement in the performance on the G650 and G280 wing programs, which generated $8 million of positive cash flow in the quarter. We also delivered on our cash commitment, generating over $250 million of free cash flow during the quarter. We saw renewed confidence from some of our key stakeholders as our bank group agreed to not only amend the existing $1.3 billion credit facility to provide for our Q4 and future charges, but also agreed to extend the facility out through April 2021. These positives make it overshadowed by the charges announced in the quarter, but even the charges will work to put us on more solid footing in terms of predictable profitability and help to stabilize our balance sheet as we move forward into fiscal 2017 and beyond. Now moving into the details. Please turn to page 10 of the slides. Revenue for the quarter was just under $1.1 billion, down slightly from the prior year period with an operating loss for the quarter of $1.2 billion, reflecting pre-tax charges totaling $1.3 billion of which approximately $215 million represents future cash outflows. The most significant charge is a non-cash impairment of $645 million related to the Aerostructures segment goodwill and tradename intangible. Based on our current evaluation of the market value of the segment, we determined that impairment was required in order to reset the book value of the segment. Going forward, we have also chosen to amortize the remaining balance of the trade name over a 20-year period, roughly $8 million per year. This charge represents our best estimate of the goodwill impairment at this time which we will finalize when we file our Form 10-K. The next largest impact in the quarter relates to the Bombardier Global 7000 program, where we are recognizing a charge of roughly $400 million. Although significant, we believe this is appropriate at this point in the program as we put behind us issues experienced to-date and will better position us as we enter the recurring production phase of the program where we look to drive improvements. Moving to 747-8, we had discussed last quarter that Boeing's decision to move to a lower production rate would put further pressure on the program. While we continue to have productive discussions with Boeing on mitigating risk and working towards an ultimate transition of our work scope, we felt it prudent at this time to recognize the rate reduction impact which results in an additional $161 million forward loss. We have agreed with Boeing to remain at a rate of one unit per month through our fiscal 2017 and then our forward loss cancellation assumes a ramp down to a production rate of one unit every two months, which would be maintained until we exit the contract. From a cash loss perspective, much of the impact will be realized in fiscal 2019 and beyond. Moving onto restructuring. The actions that Dan described relate to the closure and consolidation of a number of facilities as well as the organizational changes underway results in a fourth quarter charge of approximately $76 million. Approximately $55 million of these charges relate to future cash outlays as we execute and complete the restructuring. We are also projecting additional restructuring charges that will be recorded in FY 2017 and 2018 as reflected on slide number 12. These actions will drive run rate savings of approximately $55 million that would be fully realized in FY 2019. Finally, we recorded a pre-tax charge of $34 million related to impairing excess and obsolete inventory associated with certain slow-moving programs in the Aftermarket Services segment that we have now decided to no longer support. From an income tax perspective, we recorded a $142 million valuation allowance against the future realization of the net deferred tax assets. Based on our projection of future taxable income, we believe it is likely we will recognize the tax benefits in the future. However, the relevant accounting rules driven by our recent operating losses require us to establish a valuation allowance. Now, looking at results, excluding charges. Adjusted operating income for the fourth quarter was $122 million, reflecting an operating margin of 11.6%. And net income was $65 million resulting in earnings of $1.32 per diluted share and a modified adjusted EBITDA margin of 12.9%. For the full fiscal year, sales were roughly $3.9 billion with adjusted operating income of $464 million and a margin of 11.9%. Net income for the first fiscal year, excluding the non-recurring items, was $263 million for $5.34 per diluted share, with a modified adjusted EBITDA margin of 13.3%. Looking at our segment performance. Sales in the Aerostructures segment for the fourth quarter were $650 million with lower year-over-year production rates on a number of legacy programs, partially offset by higher rates on the G650 program. As detailed in the next slide, fourth quarter adjusted operating income was $59 million and included a net unfavorable cumulative catch-up adjustment on long-term contracts of $20 million. Excluding the revenue associated with the 747-8 program and the non-recurring charges, the segment's operating margin for the quarter was 9.9%. Adjusted modified EBITDA for the quarter was $64 million at a margin of 10%. The next slide shows the cash flow profile for the Gulfstream G650 and G280 wing programs. During the quarter we did generate $8 million of positive cash flow which reflected continued to improve performance as well as an acceleration of receipts. Moving on in our Aerospace Systems segment, sales for the fourth quarter were $321 million, an increase of 6% versus the prior year period. Fourth quarter adjusted operating income increased 9% from the prior year quarter to $65 million with an operating margin of 20% and a modified adjusted EBITDA margin of 20.9%. Sales in the Aftermarket Services segment in the fourth quarter were $85 million, an increase of 4% versus the prior year period. While fourth quarter adjusted operating income increased 14% to $15 million with an adjusted operating margin of 17.8% and a modified adjusted EBITDA margin of 21.9%. Overall, we have continued to see strong and improved performance in both our Aerospace Systems and Aftermarket Services segments, reflecting a number of actions taken during the year to improve both cost structure and margins. Turning now to backlog, our order backlog as of March 31 was approximately $4.15 billion, a 17% decrease year-over-year due to known declines in key Aerostructures programs to include the slowdown we've seen on the 747-8 program, but does not yet include the future ramp-up of backlog on key growth programs. Turning to the balance sheet in the next slide, for the fourth quarter, we generated $258 million of free cash flow. As we drove significant reduction in our working capital balance, as we closed out a number of open contractual issues with customers, lowered our outstanding receivables through use of customer and third-party receivable facilities, and continue to work down inventory balances and manage accounts payable. The banks supporting our roughly $1.3 billion revolver and term loan facility in the quarter agreed to amend the existing agreement to provide covenant relief for the restructuring and other cash charges incurred in the fourth quarter and projected in fiscal 2017 and 2018. In conjunction with the amendment, our bank group also agreed to extend the facility out through April 2021, which will provide significant liquidity and flexibility as we execute on our restructuring plans and invest in transformation efforts. Additionally, to ensure that we have full access to the credit facility during the fiscal 2017, we will be approaching the holders of our notes issued in 2013 to amend the terms of the indenture to conform with the notes issued in 2014, which allows for a higher level of secured debt. Absent this consent, we could be constrained as to the level of new borrowings under our revolver during fiscal 2017. To mitigate the risk and to ensure we have adequate liquidity available through fiscal 2017, we did choose to make a significant draw on our revolver facility in early April, taking the drawn balance to roughly $800 million versus the $140 million that was drawn as of March 31. We will pay down the revolver once the consent is received from the bondholders. Net debt at the end of the fourth quarter was $1.4 billion and there were no shares repurchased during the quarter and we did not make any voluntary pension contributions. As we look forward to fiscal 2017, we are projecting revenue of between $3.6 billion and $3.7 billion, hitting a low revenue point prior to returning to topline growth in fiscal 2018, as production on key development programs begin to ramp. GAAP earnings per share for fiscal 2017 is projected to be between $4.90 and $5.10 and includes roughly $0.68 associated with expenses supporting restructuring and transformation efforts, $0.15 associated with financing fees related to amending our credit and debt instruments, and $0.12 related to our decision to amortize the trade name intangible. Excluding these adjustments, earnings per share would be between $5.85 and $6.05. The effective tax rate is projected to be 25% during fiscal 2017. We do anticipate the second half of the year will be stronger than the first half based on the timing of our transformation efforts and projected cost reduction initiatives. We are projecting free cash flow generation sufficient to fund the completion of non-recurring efforts on the Global 7000 and E2 Jets programs to fund the G650 and G280 programs and to fund our investments in restructuring and transformation with any excess cash generated being focused on paying down debt. The above earnings and cash flow guidance does not take into account any potential divestitures that would be executed during fiscal 2017. Finally, although I've made a personal decision to leave the company at the conclusion of our reporting for fiscal 2016, I do strongly believe that Dan and his leadership team are doing the right things to drive Triumph forward and get us to a point of generating predictable profitability, driving margin expansion and generating strong cash flows. The actions we're taking in the fourth quarter will work to mitigate future risk and strengthen the performance of the company. And with that, I'll turn it back over to Dan.
- Daniel J. Crowley:
- Thanks, Jeff. We'd be happy to take any questions at this point.
- Operator:
- Sheila Kahyaoglu, please state your affiliation, followed by your question.
- Sheila K. Kahyaoglu:
- Hi. Jefferies. Good morning.
- Daniel J. Crowley:
- Good morning.
- Jeffrey L. McRae:
- Good morning, Sheila.
- Sheila K. Kahyaoglu:
- It seems like you guys have put together a lot in just four months. I guess, Dan, given that this is your first outlook and there's a lot of moving pieces, can you just help us understand how you approach setting up guidance? And maybe a few more of the moving pieces if you can in terms of profitability? And I guess the second part of the question is in terms of the $300 million of cost savings that you have in your plan over three years is that $55 million a year or how do we think about the drop through to the bottom-line? Thanks.
- Daniel J. Crowley:
- Sure. Let me start with guidance and, Jeff, feel free to add in, but we really looked at getting our numbers right as it relates to the charges and our analysis of all the business and their potential to generate earnings and cash in FY 2017 before we got to guidance. And we tried to make sure that we both dealt with issues in the past and then also made sure that we had conservative assumptions going forward because I want to get beyond discussion of adjusted earnings and modified earnings to just pure GAAP earnings and make consensus and not have misses quarter-over-quarter. So, we believe our guidance is achievable. As Jeff laid out, it does reflect the impacts of the restructuring and financing and also the trade name impairment, but when I look at what we've done in terms of revenue assumptions, interest rate assumptions, conservatism and budgeting for SG&A, we believe that these numbers are achievable. It still takes hard work. You mentioned the cost reduction initiatives. We're counting on a contribution in FY 2017 to make our forecast from both the cash improvement actions and also CRIs and those numbers increase in FY 2018 and FY 2019. In terms of the deployment of that $300 million of savings, it will be used for both funding growth, reducing our cost structure for cost competitiveness, and reducing debt. Jeff?
- Jeffrey L. McRae:
- Yeah, I think that's well said. I fully support the plan that we put together. I agree with Dan. I think we've been prudent and conservative in developing the plan and have incorporated all of the relevant aspects of restructuring into it. And ultimately as we begin realizing more of the benefits related to the cost reduction initiatives, I can only see it improving over time.
- Sheila K. Kahyaoglu:
- Okay. So the way to think about it is the $55 million that you laid out, I think you made a comment that it's more weighted towards fiscal 2019. Does that increase or is it $55 million a year?
- Jeffrey L. McRae:
- The benefit that we have projected primarily related to closure and consolidation of facilities – those efforts are under way, and will take through fiscal 2017 and 2018. We'll start seeing some of that benefit in fiscal 2018 but realize the full run rate benefit in fiscal 2019.
- Sheila K. Kahyaoglu:
- Okay. Thanks.
- Daniel J. Crowley:
- Thanks, Sheila.
- Operator:
- Our next question comes from Robert Stallard. Please state your affiliation, followed by your question.
- Rob Stallard:
- Thanks so much. It's Royal Bank of Canada.
- Daniel J. Crowley:
- Good morning, Rob.
- Jeffrey L. McRae:
- Good morning, Rob.
- Rob Stallard:
- Good morning. On slide 20, you've got your usual top 10 programs, I was wondering what your expectations are in fiscal 2017 for the two largest for Gulfstream and Boeing 777? What sort of growth or lack of growth are you expecting in revenues on those two programs?
- Daniel J. Crowley:
- Well, certainly on the G650 we're ramping up in our facility in Nashville, I toured it last month, and I was very encouraged by the progress. We're not only building the wing but we are installing all the systems, something we'll do for Bombardier as well. And we had Gulfstream in to visit and they were very complimentary, because as you know they're still dual sourcing the production of the wing between their own Savannah facility and ours as a risk mitigation. On Friday I'll be meeting with Mark Burns in Savannah to talk about the future of all their platforms and looking at what are areas that are slowing down and which ones will be growing in the future so that we can make our plans. Jeff?
- Jeffrey L. McRae:
- Yeah, and I think the top line Gulfstream includes G650 which definitely positive looking forward. You know G450, G550 we would experience declines looking forward. But then we also will start seeing the inflection of G500 and G600 helping to offset some of the declines in the legacy programs. On 777, as we've talked before, the announced rate reduction from Boeing that will impact calendar 2017. We have fully mitigated based on picking up additional share on existing components on 777 and we think will hold as we look forward there.
- Rob Stallard:
- Maybe just a follow-up, Dan, you were saying you don't want to miss going forward. Do think that some of these assumptions are conservative enough particularly in these two areas?
- Daniel J. Crowley:
- Yes, we went through all the backlog in coming up with our forecast by program, by business unit. And we also made sure that we dealt with known overhang on programs that we're behind on schedule and might be spending more than budget. Always there's new development programs that have their challenges, but we did try to bound those risks going forward. And we also have I think conservative assumptions now around Boeing 747. And they've been quite a great partner here in discussing ways to maintain the rate at the highest possible rate while still staying within their overall sales forecast. So there's no doubt that there's challenges, but I feel much better about the plan that we have now than prior years.
- Rob Stallard:
- Maybe just a final one. You mentioned your ambition of reducing the debt level going forward. Do you have a targeted EBITDA or net debt-to-cap number in mind?
- Daniel J. Crowley:
- We want to get back well below our covenants and we understand exactly what it will take to hit all of the measures.
- Jeffrey L. McRae:
- Rob, I think we still stand by a targeted EBITDA leverage of between 2 times and 3 times is where we think it's the appropriate spot to operate with this business.
- Rob Stallard:
- That's great. Thanks so much.
- Operator:
- Our next question comes from Seth Seifman. Please state your affiliation, followed by your question.
- Seth M. Seifman:
- Thanks very much. Good morning. JPMorgan. I wonder if you guys could talk a little bit more about cash flow and the projection to meet the restructuring cash requirements in 2017. Are those the cash requirements, can we back into those based on what you talk about for the $75 million of restructuring charges last year and the $77 million for 2017 and 2018 and some portion of that being in cash? Is that the full amount that we're talking about? And then maybe as you look ahead more broadly, I know it might be early for this, but is there any way to think about where on a conversion of net income or conversion of sales basis some broad range that you might target over the longer term?
- Jeffrey L. McRae:
- Seth, on the first question I think you're looking at it in the correct way. Keep in mind, the charges that we're taking this quarter, roughly $55 million of that is cash in front of us. Now, some of that is out beyond fiscal 2017. But most of the charges that we're projecting on slide 12 for fiscal 2017 would be cash in fiscal 2017.
- Seth M. Seifman:
- Right.
- Jeffrey L. McRae:
- The guidance was meant to reflect that we would be able to fully fund those efforts, also fund the completion of the development on the Global 7000 and Embraer E2 jets, as well as the continued funding on the G650 and G280 in line with our business case and still have availability to drive down some debt.
- Seth M. Seifman:
- Right. Okay. And anything on the longer term?
- Jeffrey L. McRae:
- So on longer term, I don't know that I want to comment specifically on guidance as we get out there. But obviously, as Dan and the team drives the cost reduction initiatives, as we drive improvement in cash conversion within the business, we believe we can get back to a much healthier cash to earnings conversion rate. You always have to factor in some of the impacts of the amortizations flowing through the P&L. But definitely we get past the development on Bombardier, Embraer, we get cash positive on a sustained basis on the Gulfstream programs, the headwinds are behind us and I don't see any reason that we shouldn't see strong cash conversion versus net income.
- Seth M. Seifman:
- Great. Thanks. I'll stick to that for now, but thanks very much for all the help, Jeff, and best of luck.
- Jeffrey L. McRae:
- Thanks, Seth.
- Operator:
- Our next question comes from Cai von Rumohr. Please state your affiliation, followed by your question.
- Cai von Rumohr:
- Yes, Cowen & Company. And clearly you've been busy, Dan. Organization change looks like it makes a lot of sense. So the Global 7000, you took a large charge there. You did not take a charge on the E2. Could you explain why you did it on one and not the other and how you feel that program is doing?
- Daniel J. Crowley:
- Sure. First, let me comment on your comment about the organization change. What I found coming into the business is that across the six operating VPs, which were really not necessarily advertised from a reporting, we focused on the three segments. But across those six P&Ls, there was lots of redundancy and overlap. Multiple ones had machining, composites, systems and aftermarket work. So we've really done I think a good job of cleaning that up so that the segment reporting is cleaner and I think will be easier for folks to follow and for us to drive strategy and cost reduction. The charge on Bombardier, it largely puts the development work behind us. I spoke with Bombardier's CEO, Alain Bellemare, yesterday. He's interested in a partnership going forward. There's strong support for the program. We certainly are in the final throes of prep for first flight. That's always exciting and very busy. So he and I have agreed that that's our focus. We certainly look forward to working with them as we look at both development and recurring cost. And I think he's approaching it with the same mindset that I am about a win/win partnership. As far as Embraer, Embraer is in better shape in terms of development progress and we didn't see the need to take such a charge.
- Jeffrey L. McRae:
- Yeah, I think as we look as the programs, we did recognize that the pressure on the Bombardier programs based on the level of development spending that we have experienced, we have not seen that level of development impact on Embraer. And I think as we look at that program, we're in a much better position as we begin to look at transitioning to production.
- Cai von Rumohr:
- Thank you. And then last one. Your cash flow, could you give us some guidance in terms of fiscal 2017? What do you expect GAAP cash flow to be? What do you expect the net restructuring, so we can tell pre-restructuring cash flow? And then maybe review for us again the cash out pattern going forward with some specificity, if you can, on the 747 given that it should be better near term because you're staying at the higher rate. Thank you.
- Jeffrey L. McRae:
- Yeah, so let me try to highlight some of the key pieces in fiscal 2017 from a cash flow. We still anticipate on G650 and G280 roughly $30 million to $40 million use of cash. There is still remaining investment on Bombardier and Embraer between $50 million and $60 million to complete the development effort there. On the restructuring effort, the charges we're projecting for fiscal 2017 are largely cash. And then roughly a third of the charges in fiscal 2016 fourth quarter that we're taking related to restructuring would be cash realized in fiscal 2017. The balance of the cash falls out into later years. Those are really the key components of the headwinds we're facing. And we think the balance of the business can generate significant cash flow to fund those efforts and potentially allow us to look at debt reduction as we go through fiscal 2017.
- Daniel J. Crowley:
- And Boeing is working with us on the Boeing 747 cash. We expect to get a few shipsets ahead that will eventually burn off in FY 2018.
- Jeffrey L. McRae:
- Yeah, great point. The charge on 747, the cash associated with that is largely cash that will be incurred in fiscal 2019 and beyond, as Boeing has allowed us to stay at a rate of one per month through fiscal 2017.
- Cai von Rumohr:
- I didn't hear a net cash number. It sounds like it's going to be relatively minor, $25 million to $50 million, if I net all of those items out. Is that a fair guess?
- Jeffrey L. McRae:
- We haven't guided to an absolute number, but a positive number, but a low positive number.
- Cai von Rumohr:
- Thank you very much.
- Operator:
- Our next question comes from Robert Spingarn. Please state your affiliation, followed by your question. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Good morning. Credit Suisse. This is a follow-on to Cai's question there. I think you should be guiding to a cash flow number and I'm not sure why we don't see one. But I do want to get into sustainable cash flow and earnings power, Dan. So when I think about your guidance for fiscal 2017, which I think Jeff just said is in the high $5 range, $5.85 to $6.05 ex items. And then as Sheila pointed out, you've got about $65 million, the $55 million plus the $10 million, in recurring savings at some point. It sounds like that's fully baked in in 2019. When you factor that together with the continued organic pressure in a few of the programs, what is a run rate earnings power for this business based on the current portfolio of programs?
- Daniel J. Crowley:
- Yeah, it's a great question and we've done our own models of what the out-years' earnings potential is possible to be and we're not ready to share it with you. But you're asking all the right questions. First you have to do the hard work to take the cost out. And that's what FY 2017 is about. But we're not waiting until the end of this year or the years that follow to start improving our op margins. So we'll be providing guidance for out-years as we progress. At this point, I'm not ready to provide it. But we're certainly doing all the math that you just laid out. We have our own internal estimates of how the savings are going to flow through each of the four business units and then how it'll translate into earnings, but not ready to share that. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Well, if I take my math a little bit further I think I would get closer to $7 once you realize the $65 million and assuming that you don't have any kind of continues fade in some of the sun-setting programs which would be the wrong assumption because there is a continued aid there. But starting at $7 we then have a cash conversion issue because you still have this contract liability accounting. So when you factor that in, is there an opportunity to rethink that process and eliminate that so at least from that perspective we have cash earnings lining up better with GAAP earnings?
- Daniel J. Crowley:
- The comments you've made, Rob, are perfectly aligned with some of our top investors that own the price, own the stock and we've talked about both those kind of earnings per share targets as well as do we get away from the contract accounting approaches of the past.
- Jeffrey L. McRae:
- Yeah – and Rob, we're not going to change our approach from a GAAP perspective. What you will see as we proceed through the years is much of that contract liability liquidates primarily around the programs in Tulsa over the next three to five years and you'll start getting back to closer to a pure cash view of earnings. At the same time that's happening, we're also driving cash positive margins in those business as we start liquidating out that liability. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) So Jeff, what's the confidence level that those Tulsa contracts are actually have a higher value than where you're booking, which is a presumption in the write-ups, right?
- Jeffrey L. McRae:
- Yeah, so we're very confident in the business case that we've laid out for G650 and G280. We've continued to see the level of performance we anticipated on the programs. Keep in mind, we're beginning to get fuller realization of the revenue as we transition the work that Gulfstream had taken away from Spirit and pulling that back into our Nashville facility. And as we look at those programs, we still believe they're on a path where they'll be generating cash positive generation in fiscal 2018 which we'll continue to see improvement in margin there and will set those programs up for the long-term. More optimistic on G650, which for us is the more important program. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Okay.
- Daniel J. Crowley:
- If I take the longer view, I've looked at every product line in our portfolio as part of our forensic and they're not all equally positioned in terms of the attractiveness of the markets they're in or their ability to compete. So, we're now in the process of picking which businesses we're going to invest to grow and which ones we'll manage for cash and which ones we could potentially divest and that's going to help shape our out-year earnings as well as cash. So, that's part of our reason for not providing guidance now, but as we get further into that process, we'll have more clarity. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Well, that's understandable, Dan, but if I might try one more question related to this. When you look at the current business and understanding, I think, that the negative pressure is really contained in Aerostructures, based on the current portfolio, when would organic revenue bottom?
- Daniel J. Crowley:
- Well, you heard from our earlier comments that organic growth in both aftermarket and systems is not bottoming, it's growing. In terms of what was reported as Aerostructures which included both the legacy bought business as well as our machining businesses, we feel that we are very close to the bottom in the sense that Bombardier is ramping, Embraer is ramping. We have good work on the Global Hawk for Northrop Grumman. And then we're in discussions with – on the machining and fabrication side with all the OEMs, especially on platforms that are ramping like A350 and F-35. So we are optimistic in that regard, but the first thing we need to do is get our cost in line and improve our cash management then we'll be in a better position to forecast growth. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Understood, but with this year down almost 10% organically and again all of that I guess was Aerostructures, are you saying that you think 2017 could be a bottom for Aerostructures or is it 2018?
- Jeffrey L. McRae:
- Yeah, our modeling says that we bottom out in 2017. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Okay.
- Jeffrey L. McRae:
- And as Bombardier and Embraer ramp – begin ramping in 2018 you start seeing some return to growth. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Okay.
- Daniel J. Crowley:
- Just as an anecdote, most of my conversations with customers whether it's Northrop Grumman or Airbus and Bombardier, all swing on, are you ready for the ramp? Okay? The second question is can you help us meet all the short-term delivery dates whether it's first flight or deliveries to their factory. But they're shifting their focus to the ramp and that's going to benefit the Aerostructures business. Robert M. Spingarn - Credit Suisse Securities (USA) LLC (Broker) Okay. Thank you both.
- Operator:
- Our next question comes from Sam Pearlstein. Please state your affiliation, followed by your question.
- Samuel J. Pearlstein:
- Good morning, Wells Fargo. Can I go back to some of the issues in terms of just the cash flow that you mentioned, Jeff? You mentioned the $30 million to $40 million on the Tulsa programs. I thought it was going to be $30 million to $40 million less of an outflow in 2017 than 2016?
- Jeffrey L. McRae:
- Yeah, so if you misunderstood me, we had projected between $60 million and $80 million in fiscal 2016 and have stuck with our projection of $30 million to $40 million in fiscal 2017. You're seeing a little bit of shifting between the years as we've seen improvement and drove positive cash flow in the quarter on those programs. Some of that is timing that slides into fiscal 2017, but the $30 million to $40 million's still a good number.
- Samuel J. Pearlstein:
- Okay. And then when it comes to the Global 7000 I know there was a payment you were waiting for from Bombardier that was originally in 2016. Are you now assuming you'll get it in 2017? Or does any of this change your confidence in getting that amount?
- Daniel J. Crowley:
- No, we believe we will. The milestone is tied to completion of the critical design review for the program, that design review is on track to complete. We're doing all the closeout documentation now. And the whole payment profile with Bombardier will be part of our discussions as we work towards a win-win solution with them.
- Samuel J. Pearlstein:
- But, again, before it was that – I know this obviously delays in the Global 7000, but I thought that some of the spending in total between the Global and the E2 was supposed to be down in 2017 versus 2016 and now sounds like it's actually going to be higher, is that how you described it?
- Jeffrey L. McRae:
- So, we had previously thought that we would see a breakeven of cost equal to payments in fiscal 2017. With some of the additional effort on Bombardier, we will see a net use of cash on Bombardier in fiscal 2017, Sam.
- Samuel J. Pearlstein:
- Right. But, in total, the two programs, if I just look at them what you spend in 2016 and what you spend in 2017, how does that compare?
- Jeffrey L. McRae:
- Significantly down.
- Samuel J. Pearlstein:
- Okay. Okay. And then your discussion on the 747, you're talking about – I guess you're going to get better guidance next year in terms of the go-forward rate and you talked about an impact in 2019, so should I take from that that your agreement still goes through the end of your shipsets and it doesn't actually transfer to Boeing in 2018 as we originally thought back in the fall?
- Daniel J. Crowley:
- That's a great question and we did engage Boeing with a discussion about an earlier exit as to whether that would be in their interest given that they are already planning to take ownership of the assemblies that we're building for the future. And we'll make this decision with them based on the right risk profile, both the transition risk and start-up risk. The work that we do with Boeing, they intend to federate and wouldn't all move to a single supplier. There's some international sources as well as some domestic sources. And so in having those discussions with Boeing, which they were very receptive to, their main point was let's get together at the end of the year and update where we are and at that point we'll be able to discuss whether an earlier exit makes sense based on the market outlook for the freighter replacement. So we're having the right kind of discussions with them while they weren't ready to move forward with an earlier exit plan. At this point, they are open minded to the concept if it represents a favorable cost and risk trade for them.
- Samuel J. Pearlstein:
- Okay. Thank you.
- Daniel J. Crowley:
- And just one other comment on Bombardier that I think is important is, we are in the peak period of concurrency on Bombardier right now, completion of design, ramp up of ground and flight test, and transition to production. It's a very intense period both from a spend rate, but also a risk retirement rate. And so we feel optimistic with the testing we've so far. We have a very elaborate wing flap flat arrangement that provides the aircraft with incredible lift and those tests have gone very well and over the next several months we'll retire further risks. So we commit to give you updates in the earnings calls as to how we're going to retire those risks and then transition to production.
- Samuel J. Pearlstein:
- Okay. That's great. Thank you.
- Operator:
- Our next question comes from Myles Walton. Please state your affiliation, followed by your question.
- Myles Alexander Walton:
- Thanks. Deutsche Bank. Good morning. I was hoping to start with the $300 million cost initiative CRI, Dan, and maybe I haven't got it clear. But I'm not sure if we know all the pieces that add up to that $300 million? I heard the $55 million facilities, the $10 million on the segment realignment, the $30 million on supplier issues. Can you give us the rollup? And then, is it correct that you're thinking your overall cost base is $300 million lower in 2019 versus what it was in 2016?
- Daniel J. Crowley:
- Yeah, the contributions to the $300 million, the largest one is supply chain savings and then there's head count, and then facilities occupancy costs, and then expenses and including SG&A, so all of those together – and the numbers that we quoted make up components of the overall target. And as I mentioned, we've allocated those targets for 2017. We know what we need from every business unit and every function. For 2018 they've got targets but there's still working on the actions. I mentioned the 300 supply chain actions. I'll give you an example. We buy raw material from 130 distributors today because of our prior decentralized arrangement where we had 15 machine shops all doing their own thing. Well, we now know where we spent all that money, we are bringing it together, we're going to reduce the sources of supply, we will have greater economies of scale for negotiation and that's just one example of many. But supply chain leads it, followed by reductions in force and facilities. And our goal is to demonstrate performance quarter-over-quarter against those targets and provide updates as to how much flows back to the bottom line versus reinvestment in the business, that's something that we're going to look at, but we still have to maintain our guidance. That's our first priority and then beyond that we want to increase our spend and new business development to reverse the negative growth rate.
- Myles Alexander Walton:
- Okay. And then the other one is, I'm curious on the 2018 or feeling comfortable about bottoming out in 2017. It seems like a lot of what could happen in 2018 is far beyond your control whether that's the 747 you know is going to be a $100 million headwind, the 777 you don't really know what the conditions on the ground might be, the Gulfstream programs similarly. So I'm just kind of curious why you're comfortable calling a bottom in 2017 given what you know or programs that you don't actually control and they're large enough to make it so that, that may actually be a bad assumption?
- Daniel J. Crowley:
- No, it's a fair question. I mean, we've done the netting of the programs in decline and sun-setting like the C-17 and 747 with those that are ramping up. There is a certain amount of organic need to find. These are – to fill the bathtub in sales. That's primarily going to be done through dual sourcing and takeaway. So, we spend a lot of time these days looking at our business development capture strategies. And that's really been lacking I think at Triumph. In the past it's been periodic wins and then a run out of backlog and everybody who works at the company now knows they're part of the business development team and they have to help us extend the current businesses. Many of the operating companies at Triumph were originally founded by entrepreneurs. Over time there's been a shift to more managers and we haven't seen the kind of organic growth that I'm used to in my prior roles. And I think just by putting an attention on it and a disciplined process around identification of pipeline opportunities, shaping, and capturing new business, we'll see an improvement. So, it will take not just the math around the current backlog, but also some amount of new wins to reverse that trend on revenue, but I'm confident we can do it.
- Myles Alexander Walton:
- Okay. And then the 7000/8000, I mean you didn't just take a charge. I think you wrote-off the entirety of the development expense? Maybe plus some? Are you running a forward loss on the development side and the production side? Have you just written-off the development contract and the production contract would it be a positive margin? Can you talk about that, Jeff or Dan?
- Jeffrey L. McRae:
- Yeah, how we viewed it is effectively taking the development cost and then writing that off. From an accounting standpoint, we view it as a complete contract and view the recurring element net neutral as we sit here today with the charge really reflecting the higher spend on the non-recurring.
- Myles Alexander Walton:
- Okay. And the last one, Dan, so you're making a pretty big muscle movement in facility on the Aerostructures side, if 25% of the total is concentrated on Aero or Structures, it could be a third of the Structures footprint. So how much of this touches programs that are in sensitive profit positions and how much contingency are you baking in that when you close down a facility your learning curves aren't going to go against you and there'll be even more short-term pain to get the long-term gain?
- Daniel J. Crowley:
- As it relates to the large structures, none of the planned consolidations affect programs that are currently profitable. As it relates to some of the precision components business, in doing our analysis of where overcapacity is besides that we anticipate consolidating that have not yet been announced tend to be in areas that are higher cost and have backlog that's declining. So we would move backlog to other facilities that are more efficient and have lower rates and that will help us on the profitability of the programs in backlog. So this is something I've been through and done before. I have been in the industry now 32 years. I've designed and transferred a number of factories and so we know what the risk profile is, what we have to do in terms of customer engagement, employees, planning the work, building ahead, requalification, these are all steps and it's part of why we formed this Transformation Delivery Office is to make sure that these were all planned and executed properly.
- Myles Alexander Walton:
- So these restructuring charges you talked about those are inclusive of disruption charges as well and we wouldn't see those called out separately at some point?
- Jeffrey L. McRae:
- Yes, it's all-inclusive. We've made assumptions in each of the closure and consolidation analysis around disruption and build ahead, time to get things back up and running well.
- Myles Alexander Walton:
- Okay. All right. Thanks.
- Operator:
- Our next question comes from David Strauss, please state your affiliation, followed by your question.
- David E. Strauss:
- Thanks, UBS. Back on 747, I know you talked about pushing the cash burn out to fiscal 2019 and beyond. But at this point you've taken several hundred million in charges against the 747. Jeff, can you help us know what that cash burn out in that period could potentially look like and maybe some color on what the interim period's going to look like on 747?
- Jeffrey L. McRae:
- Yeah, so this last forward loss as we think of fiscal 2017, it's effectively neutral in 2017. Most of the loss from a cash perspective is in fiscal 2019 and beyond, related to this. Keep in mind that it's the last 23 units or so where we have a significant price step-down that is cause for the loss. That combined with operating in those out-years at a rate of one every two months is really driving the majority of it. So as we think of a broad cash profile for 747, pretty much net neutral in 2017. We use a little bit cash in 2018, but then we start burning cash in 2019 and beyond, assuming we build out through the end of the contract.
- David E. Strauss:
- Okay. And any guess what that cash burn is out in 2019 and beyond, roughly?
- Jeffrey L. McRae:
- If you think the cash magnitude of the charge, most of it's out in those years. It builds from 2019 to 2020 and then it's pretty flat and then we see some recovery in the last year of production as you burn off inventory.
- David E. Strauss:
- Okay. And then just a couple housekeeping items. Can you give us a sense of where the pension deficit sits at the end of the year? I know you're not looking at any contributions in 2017, but maybe beyond that. And then I wouldn't think you were paying any cash taxes now, but an update on cash taxes and then what you expect the acquired contract liabilities number to be in 2017? Thanks.
- Jeffrey L. McRae:
- Yeah, on the pension side, we ended the fiscal year at roughly 80% funded, which leaves us a deficit purely on pension of roughly $400 million. On top of that, we still have the post-retirement benefit obligations, that's roughly $200 million. From a tax standpoint, we did not pay any taxes in fiscal 2016. As we think of fiscal 2017, we're looking at an effective tax rate of 25%, which is benefited partially by the valuation allowance we're taking this quarter. We would expect a cash tax rate to be a few points lower than that effective tax rate in fiscal 2017. And then from a contract liability standpoint, year-over-year it's relatively flat with fiscal 2016.
- David E. Strauss:
- Thanks.
- Operator:
- Our next question comes from Ken Herbert. Please state your affiliation, followed by your question.
- Ken Herbert:
- Hi. Good morning. It's Canaccord.
- Jeffrey L. McRae:
- Morning, Ken.
- Daniel J. Crowley:
- Good morning.
- Ken Herbert:
- Dan and Jeff, in particular on your potential savings from the supply chain, can you provide any more detail on, not just from a timing standpoint, but specifically when these contracts roll over, any issues you might see in actually realizing this, considering the natural process here with the massive transformation you're going through to more consolidate the purchasing and bringing the operating companies together as you really push this? So from a timing standpoint, how you see that flowing through specifically. But then also any potential issues around this you may be looking at or what you've maybe hedged against around your supply chain?
- Jeffrey L. McRae:
- Ken, as Dan mentioned, as we have brought forth a centralized organization to attack supply chain, they've identified many initiatives, I would say, spanning the breadth of everything we buy. Obviously, from a Pareto standpoint, they're attacking the larger elements first. Some of it is impacted by timing of contracts rolling off with existing pricing. But that's not necessarily always getting in the way, as the team is approaching many suppliers where we have existing arrangements in place and looking to renegotiate them. I think as we go through the next two years to three years, we'll pick up more and more steam in the process. The benefits Dan talked about for fiscal 2017 that have been realized, what ends up happening is the realization doesn't flow straight to the P&L; there's a turn through inventory that you have to make. So as we're realizing the benefits around supply chain, they start flowing through at a period of time once the benefits flow in.
- Daniel J. Crowley:
- There's also a tie between strategy and supply chain savings. Over time, Triumph Group will do more of its own proprietary designs, especially out of our Systems facility, and that gives you more control over the choice of materials and suppliers, whereas a build-to-print arrangement tends to be pretty prescribed as to where you go. So we're not only looking at our current backlog and spend approaches, but also how we might influence the choice of materials because 85% of cost is determined at the point of design. So we're working on this in a coordinated way with the four product lines to figure out how to take out cost by design, not just by squeezing suppliers.
- Ken Herbert:
- That's helpful. And is it fair to say you'd be looking at make-versus-buy decisions, as you realign the cost structure you could potentially be bringing more work in-house and that could be competitively the smart way to go?
- Daniel J. Crowley:
- Absolutely. One of the things that we found launching what I call our Better Together initiative is that we're now having conversations that we didn't used to have between the businesses. And I'll give you an example. Our fabrication business, which previously was five different operating companies now all integrated under one President. We had our Senior Management Meeting last week and he was talking to all of his peers in the Systems business and Structures business and identifying work that they're currently buying outside that he could do. And so we're going to make those changes. It won't be a wholesale vertical integration, but we'll have areas to fill underutilized capacity in some of our facilities. So, definitely, yes.
- Ken Herbert:
- Great. Thank you very much.
- Operator:
- Our next question comes from Michael Ciarmoli. Please state your affiliation, followed by your question.
- Michael F. Ciarmoli:
- KeyBanc Capital Markets. Thanks, guys. Good morning.
- Jeffrey L. McRae:
- Good morning.
- Michael F. Ciarmoli:
- Maybe just a bit of clarity on the business segment realignment. Can you give us any color in terms of the longer-term margin targets maybe or just directionally how we should be thinking about profitability at Integrated Systems, Structures, Precision Components? And then also in Product Support, are you going to continue to have that just as a services-based revenue stream, or are you going to try and flow through some of the actual hardware sales into that product support unit?
- Daniel J. Crowley:
- Yeah, great question. The directional guidance for margins is higher and we're going to do that through cost reduction and then exiting businesses that are lower margin and then also working on creating more value out of the products that we've got. And that's not always just by running faster. We often can design products that combine two separate boxes in an aircraft to reduce size, weight and power so you get a step function reduction in cost and you get a margin improvement. So it's working smart, not just harder. The business realignment, it really is helping to transform the company. Because we had 45 operating companies flying in close formation, we had size but not scale, we had no integration of our supply chain other than what's happened in the last eight months or nine months. So it's definitely a better structure. And we don't have five businesses, let's say, that all do fuel systems or hydraulics or actuators calling on the same customers. As far as Product Support, our business has traditionally been maintenance, repair, overhaul. I was in Hot Springs recently, it's one of 16 locations that I visited so far. And I saw our thrust reverser business as well as how we repair damaged structural components, like wings and flaps. And it's an amazing capability. They're able to turn things in hours and days that normally in production would take weeks or months. But we want to do more than that. We want to be a partner to the operators and the OEMs over their full lifecycle. So designed for sustainment, spares provisioning, ship side, aircraft side, maintenance and also carrying some amount of inventory. Many of the OEMs are insourcing lifecycle support and yet they want partners to be a delivery agent for some of those services. So I don't want you to think of Triumph anymore as simply a maintenance, repair and overhaul, but as a partner to the OEMs. And our initial discussions with Boeing and Airbus, Bombardier and others, Northrop Grumman, have been encouraging in that regard. We have to show a good value proposition. But the ability to do high mix, quick-turn support to support the aircraft that are out there, is key. We're also looking at how the demand for sustainment is changing. Aircraft are getting more reliable. The old history of doing C checks every few years, now they're starting to retire aircraft at ages as young as seven years to eight years. And so they don't see an extended life in other markets as maybe as done in the past. So the way we approach the market also has to change. And this is just examples of some of the new strategies that are coming out of the four business segments which didn't happen before, because the Operating VPs essentially were a thin veneer over the 45 operating companies and not an integrating function. Now we're going to have true P&Ls that take all of these related businesses and say, okay, how do we go to market? How do we take out costs? How do we add more value? And that will apply to Product Support as well.
- Michael F. Ciarmoli:
- Got it. That's helpful. And then the last one. As part of this process I was wondering if you guys are going to become a little bit more transparent with your dollar content per shipset. I know you always just give us the top 10 programs, but we never really have the clarity into what the shipset content is. Has that been part of the discussions at all?
- Daniel J. Crowley:
- It has.
- Jeffrey L. McRae:
- Yeah, Mike. I mean, we've always been reluctant to provide shipset value. Obviously, we want to provide as much color as we can to help folks understand the business. We still maintain sensitivities around shipset value from a competitiveness standpoint. We'll obviously continue to evaluate why it makes sense and how to present that to the investor community going forward. But as we sit here today, the intent wouldn't be to provide shipset value.
- Michael F. Ciarmoli:
- Thanks, guys.
- Operator:
- Our next question comes from Ronald Epstein. Please state your affiliation, followed by your question.
- Kristine Liwag:
- Hi. Good morning. It's actually Kristine Liwag calling in for Ron and we're from Bank of America.
- Jeffrey L. McRae:
- Good morning, Kristine.
- Kristine Liwag:
- Good morning. Dan, I think a significant driver of the issues facing the 747 today can be attributable to lower than expected production rates of the program. And right a year ago it seemed that the 747 would trough at one unit per month and today we're at half a unit per month. When you look at the 777 backlog today, it seems that there could be downside risk to Boeing's lowered rate to seven units per month. What are some of the lessons learned that could prevent the 777 from becoming like the 747 in the future?
- Daniel J. Crowley:
- It's a good question, Kristine. I think being over weighted on any one platform, one segment, one market is too risky. And you'll see more of a diversification of our business going forward. Even today as we ramp up our business jet portfolio to replace many of, I'll call it the wide-body revenue that we've had in the past. I'm looking at other sources of revenue to make sure that we're not overly dependent on a handful of programs. As far as Boeing, I was in Seattle last month, I toured all of the lines, 737, 787, 777 747, 767 and we have content on all of those aircraft, but we could do much more. I think we could certainly do more in support of the 737, that's why I mentioned that we've approached Spirit Aerosystems for areas we could support them and we're interested in doing more on 787 and there's a number of areas where as part of Boeing's cost reduction initiatives on 787, they're looking at alternative suppliers. So, we're going to have to earn it. It won't be easy. But we're not going to repeat the lesson of having such a big chunk of our sales tied to one platform.
- Kristine Liwag:
- Great. And for the market share win that you mentioned in the 777, how do margins in that incremental content compare to your current 777 margins?
- Jeffrey L. McRae:
- They're relatively in line, Christine. The 777's always been a strong performer for us and the additional work continue in that vein.
- Daniel J. Crowley:
- Yeah. If you go down to our Stuart, Florida facility and you see where we build these huge composite flaps for the 777, that's an area where I'd like to do more and to create a center of excellence around control services, as an example, and not view these programs as one-offs, but rather part of a family of products within a given design.
- Kristine Liwag:
- Great. And lastly to increase your content on some of these existing programs means that an existing supplier is not taking on that incremental content. Can you walk through maybe the logic of why they wouldn't want to do that incremental volume? And why they would be willing to give that to you?
- Daniel J. Crowley:
- Sure, if you look at Lean Thinking and the Machine That Changed the World, all the books around Lean, the idea of dual sourcing and then shifting workload based on which supplier is performing better on cost, schedule and quality is a proven technique and they're all employing it. They want competition. They don't want to be overly dependent. I won't name the competitors, but there's a number of competitors in this space that are raising prices if they have a niche positions on a given product. We've heard complaints from some of the OEMs and so they've come to us for both structures and machining and actuators. So there's an opportunity for us in that desire for competition and in ramp up. I mentioned F-35 as their rates go up, we're in discussions about how to help them from both a supply risk mitigation so that they don't run short on parts and also to come down their price learning curve. So we're going to exploit that, at the same time look for opportunities to get on new platforms as they're started. But it all starts with delivering on our commitments. If we don't deliver, we're not going to get that opportunity. So my initial focus on making sure that all of our businesses are hitting their marks is there for a reason.
- Kristine Liwag:
- Thank you very much.
- Operator:
- Our next question comes from Kyle Lanphear. Please state your affiliation, followed by your question.
- Kyle Lanphear:
- Hi, guys. I'm with J.P. Morgan Asset Management. Will the amended credit facility be an exhibit to the 8-K when that's available?
- Daniel J. Crowley:
- We will file that as an 8-K.
- Kyle Lanphear:
- Okay, as an 8-K. And I'm just looking for some clarity on the need for the consent for the 2013 notes. The indenture provides for $1.175 billion of secured credit facilities. Are you just trying to align with the existing indenture, or do you anticipate that you'll need to draw above that amount?
- Jeffrey L. McRae:
- No, we really want to align it with the current indenture. The 2013 note was entered before we took on the term loan so which was captured in the 2014 note. And what we're looking to is to conform those two notes which would then avoid any risk of having any restrictions on our use of the senior facilities.
- Kyle Lanphear:
- Okay. And does that explain the draw of $800 million on the existing? I was just trying to understand why draw up and then pay down?
- Jeffrey L. McRae:
- Yeah, just a peer risk mitigator if we have any issue with the high yield noteholders that provides us with more than sufficient liquidity as we go through 2017.
- Kyle Lanphear:
- Okay. That helps. Thanks, guys.
- Operator:
- Thank you. Since there are no further questions, this concludes the Triumph Group's fiscal 2016 fourth quarter earnings conference call.
- Daniel J. Crowley:
- I'd like to make just a quick closing comment, Stephanie, if I may. And first, I just want to say that Q4 was really a unique quarter for Triumph Group because we were simultaneously dealing with a lot of past issues as well as restructuring the company for the future. So we don't see this sort of quarter again as we go forward. We've got a new operating philosophy. It's going to be implemented by a new leadership team and an updated business structure and this is going to create the foundation for our profitable growth in our third decade. So I look forward to reporting on our progress against this game plan in July and delivering on our commitment in FY 2017. Thank you all.
- Operator:
- Thank you. This concludes Triumph Group's fiscal 2016 fourth quarter earnings conference call. This call will be available for replay after 11
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- Q3 (2022) TGI earnings call transcript