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Edited Transcript of TGI earnings conference call or presentation 7-Feb-19 1:30pm GMT

Q3 2019 Triumph Group Inc Earnings Call

WAYNE Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Triumph Group Inc earnings conference call or presentation Thursday, February 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel J. Crowley

Triumph Group, Inc. - President, CEO & Director

* James F. McCabe

Triumph Group, Inc. - Senior VP & CFO

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Conference Call Participants

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* David Egon Strauss

Barclays Bank PLC, Research Division - Research Analyst

* Jeffrey Joseph Molinari

Cowen and Company, LLC, Research Division - Research Associate

* Kenneth George Herbert

Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst

* Krishna Sinha

Vertical Research Partners, LLC - Analyst

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Myles Alexander Walton

UBS Investment Bank, Research Division - Research Analyst

* Noah Poponak

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Peter J. Arment

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Robert Michael Spingarn

Crédit Suisse AG, Research Division - Aerospace and Defense Analyst

* Seth Michael Seifman

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Sheila Karin Kahyaoglu

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our third quarter fiscal year 2019 results.

This call is being carried live on the Internet. There's also a slide presentation included with the audio portion of the webcast. Please ensure your pop-up blocker is disabled if you are having trouble viewing the slide presentation. (Operator Instructions)

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

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 a property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval.

At this time, I would like to introduce Daniel J. Crowley, the company's President and Chief Executive Officer; and James F. McCabe Jr., Senior Vice President and Chief Financial Officer of Triumph Group, Inc. Go ahead, Mr. Crowley.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [2]

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Thanks, Kevin, and good morning. The key takeaway from today's call is that Triumph is executing on its fiscal 2019 plan and positioning the company for a return to profitability and positive cash flow with a mix shift towards higher-value, more profitable businesses.

Over the past few weeks, we announced a series of divestitures that are game changers for Triumph. These delevering actions combined with the operational and business development progress leading up to this point improve the future state of the company, both structurally and financially.

Importantly, the payoff for our restructuring investments that we've made over the last 3 years accelerates in our fiscal year '20, which begins this April.

I'll share more about these actions in a moment, and I encourage you to the refer to the supplemental slides we have on our website, as Jim and I review the quarter and discuss Triumph's path forward as a more focused and efficient company.

Overall, the quarter met our expectations, while reinforcing our strategy to exit noncore programs and businesses. In the third quarter, we advanced on key financial and strategic objectives. We reaffirm our fiscal year 2019 sales, earnings and cash guidance. Integrated Systems and Product Support once again generated organic sales growth on a year-over-year basis. When accounting for divestitures, Aerospace Structures also generated year-over-year organic sales growth. This is the third consecutive quarter of top line growth for the 3 segments.

Integrated Systems reported 6% organic increase in sales for the quarter, driven by content growth and rate increases on narrow-body programs.

Quarterly organic revenues also expanded for Product Support by over 5% over the prior year and by 8% in our structures and interiors business.

Operating margins on an adjusted basis increased sequentially across all 3 segments of our business, enabled by the strategic actions we took across our portfolio and our continued focus on operational efficiency.

We forecast positive cash flow in Q4, which will be the first time in the last 7 quarters. Cash use was better than expected this quarter due in large part to improved working capital, mainly due to the timing of payables and partially offset by additional spending on the Global 7500 program, which will now cease following the divestiture. More on this shortly.

Key components of the transformation we launched in 2016 included divesting noncore operations, fixing the program backlog, reducing costs and upgrading talent. We advanced on all of these enablers in Q3.

We assembled a management team that took control of Triumph's future, with the last 2 P&L executive positions filled in Q3. At the most basic level, we enhanced efficiency, instilled focus and discipline into all that we do and built a pipeline of higher-value opportunities to create a future company that can achieve profitable growth.

We chartered our path to value to Triumph 2.0.

We undertook a $300 million cost-reduction initiative with a goal of completion by the end of this year, which we are on target to achieve. The purpose of this effort was threefold, enhance competitiveness, drive margins and fund growth. Since that time, we divested 10 companies with approximately $570 million in combined revenues, with a minimal loss of EBITDA. Collectively, we streamlined the company by reducing the number of sites from 74 to 40 and shedding over 4 million square feet. When combined with planned headcount reductions in Q4, we will have reduced total headcount from over 15,000 to just over 10,000. We fully expect these actions will benefit our margins in upcoming periods.

Regarding the recent divestitures, the decisions to transition the Global 7500 back to Bombardier and sell our Fabrication and Machining businesses are critical to our transformation. We are positioning Triumph for the future, one focus on our core Integrated Systems and Product Support business units that have higher value added, higher margins and better cash generation.

On the Global 7500 program, we mentioned on prior calls that Triumph and Bombardier have been engaged in programmatic and commercial discussions on the wing scope of work. Having matured the wing design and supply chain and delivered over 25 production wings to Bombardier's final assembly line, Triumph's performance was a clear enabler to the Global 7500's entry into service in December of 2018.

We're proud of our work on this state-of-the-art wing, and our recently announced agreement with Bombardier marks the successful conclusion of our work on the program.

Specifically, Triumph is transitioning the wing manufacturing operations and assets to Bombardier, who will continue operations in the Red Oak, Texas factory. While we are not to receive any proceeds for this transition, exiting the program frees Triumph from further investment, significantly de-risks our portfolio, improves free cash flow and expands margins in FY '20 and beyond.

In reviewing our options on where to invest our cash, we concluded that the expenditures needed to bring the program through to profitability in the years ahead are better spent in our core business areas. We're pleased to have reached this resolution, which enables Triumph's return to positive cash flow and profitability.

More broadly, in our industry today, we're seeing OEMs and suppliers work together to optimize their global supply chains, and in some cases, in-source items that were previously procured outside. At the same time, these OEMs are sourcing work with Triumph that's a better fit with our capabilities and strategies.

Additionally, we announced the planned divestiture of our Fabrication and Machining operating companies from our Aerospace Structures business unit. The impact of divesting these 2 noncore manufacturing businesses results in a reduction in our site count by 11 and our square footage by 1.7 million square feet. These businesses combined generated approximately $310 million in trailing 12 month sales. The combined effect of these transactions will be neutral to margins in FY '20 and beyond.

In total, the gross proceeds from all the FY '19 transactions, which include the sale of 11 machine shops, 2 metal finishing facilities, 6 fabrication sites as well as our residual engine APU repair line in Thailand were $220 million, subject to customary closing adjustments and transaction fees. The proceeds will support our delevering initiative.

These Q3 announcements, combined with the preceding transactions and initiatives, reposition our portfolio away form commercial build-to-print and contract manufacturing work to our core Integrated Systems, which benefits from higher IP and aftermarket sales. They leave us with a portfolio of businesses more able to consistently generate cash with lower risk and higher growth potential.

For context, the portfolio now shifts from where historically almost 2/3 of revenue came from structures to less than 50% over the planning horizon. We expect this trend to continue.

While the divestitures and Global 7500 transition will result in potential onetime losses, we anticipate significant margin expansion in FY '20 and beyond. To assist you in modeling Triumph going forward, Jim will provide pro forma trailing 12-month financials reflecting these business decisions.

Turning to other cash users in the quarter. We now have a line of sight to address the 2 remaining cash-intensive structures programs, namely the G280 and E2. We're driving to resolve both of these contracts by the end of our fiscal year '19. These actions are not yet included in the pro forma results.

To rationalize the company and meet our $300 million cost-reduction goal, we identified an additional 600 headcount reductions beyond the divestitures to improve our EBITDA by $50 million to $75 million beginning in FY '20.

As we approach our future state configuration, we believe these actions will position the company to optimize the opportunities that lie ahead.

Turning to new wins. In Q3, we entered into a key strategic channel partnership agreement with Honeywell on the T55 engine program. Integrated Systems benefits by extending our contract for electronic controls through 2023, which will allow us to expand our aftermarket business.

Our Product Support business has been selected to supply repairs to Honeywell under a long-term agreement across multiple platforms.

Integrated Systems received follow-on orders for the C-130H propeller pumps in support of the Japanese Navy. And finally, Integrated Systems' mechanical solutions, our business in France, was awarded a contract extension for legacy mechanical controls through 2022 on Airbus' commercial fleet. We were also awarded a 3-year contract with a major domestic airline for MRO support of heat transfer products, and we significantly extended our nacell and flight control overhaul coverage to an existing agreement with a major freight carrier.

Last, we were awarded a contract for electrohydraulic power generation and actuation content on a major U.S. Military drone program.

In summary, we are maintaining our full year guidance. Work remains in Q4 to close the year. We're committed to reducing inventory and past due backlog in Q4, so we can enter fiscal year '20 with momentum and fewer headwinds.

On our Q4 earnings call in May, we will provide guidance for FY '20. However, to assist you in modeling the new Triumph, we provided pro forma trailing 12 months financials in our materials this morning.

Directionally, these changes benefit all 3 segment margins and free cash flow over the planning horizon, while avoiding the capital spending required in metallic components and the large negative cash investments required for commercial structures programs.

So overall, Q3 was an important step on our path to value. We are rapidly approaching our future state portfolio. And after achieving inflection points on revenue in FY '18 and cash use in FY '19, we look forward to improving margins and free cash flow generation in the years ahead.

Jim will now provide more specifics on our Q3, our portfolio actions and the outlook for the full year. Jim?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [3]

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Thanks, Dan, and good morning, everyone. Overall, this is a solid third quarter for our core operations, and our cash flow was better than we expected.

More importantly, the recently announced divestitures of the Global 7500 program and our build-to-print Machining and Fabrication businesses will improve our cash flow and profitability going forward as we planned.

Our full year sales, profitability and cash flow remain on track to meet our guidance.

I will be discussing our consolidated and business unit performance on an adjusted basis, so please see our press release and supplemental slides for an explanation of our adjustments.

On Slide 9, you'll find our consolidated results for the quarter. Net sales were up 4% compared to the prior year third quarter, and all 3 of our segments generated organic top line growth. This is our third consecutive quarter of year-over-year organic growth across all 3 segments. Adjusted operating income was $38 million this quarter, and our adjusted operating margin was 5%, consistent with the prior year.

With respect to the segment results. On Slide 10, sales in our Integrated Systems segment increased about 6% organically, due primarily to accelerating volume on several narrow-body commercial programs noted on the slide. Margins for Integrated Systems reflected higher OEM sales in the quarter relative to the prior year and reflects costs related to our consolidation of our Connecticut facilities, which we anticipate will be complete by the end of the fiscal year. These consolidation costs reduced our margin by approximately 47 basis points. Sequentially, the margins improved another 50 basis points from Q2.

Turning to Slide 11. Third quarter sales for our Product Support segment were up 5% on an organic basis, driven by stronger demand for accessories and structural component repairs. The Product Support operating margins reflect increased sales on next-generation platforms compared to last year. Sequentially, the margins were stable. We expect to improve the profitability on newer repair programs, as we exit FY '19, to be more in line with historical performance.

Aerospace Structures results are summarized on Slide 12. After accounting for the previously disclosed divestitures, segment sales were up roughly 8% organically. The operating margin included a net unfavorable cumulative catch-up of $47 million from the programs we were exiting. This includes a $40 million forward-loss charge on the Global 7500 program, $9 million forward-loss on the E2 jet program and $3 million on the G280 program. On an adjusted basis, TAS operating margin was breakeven.

Turning to Slide 13. Free cash use was approximately breakeven at $6 million used during the third quarter and $228 million used year-to-date. The performance this quarter reflects the repayment of customer advances and additional cash investment in the Global 7500 program. This was partially offset by a benefit from timing of payments to suppliers. This benefit drove the lower cash use in Q3. We still anticipate Q4 to be free cash flow positive and to meet our full year free cash flow guidance.

Capital expenditures were $11 million in the third quarter and $35 million year-to-date. We invested approximately $18 million in restructuring and $214 million in working capital. Year-to-date working capital use was driven mainly by $177 million of repayments of customer advances and $206 million in the Global 7500 program, partially offset by the benefit of higher accounts payable due to $125 million in customer advances not currently tied to deliveries.

On Slide 14 is a summary of our net debt and liquidity. Our net debt at the end of the quarter was approximately $1.6 billion, and our cash availability was approximately $417 million, an increase of 8% over the prior quarter. The proceeds from the divestitures will be used to reduce our net debt. We are in compliance with our financial covenants.

Slide 15 is a summary of our FY '19 guidance. Based on anticipated aircraft production rates and excluding the impacts of pending divestitures, we continue to expect fiscal '19 revenue to be approximately $3.3 billion to $3.4 billion, which represents a year-over-year increase of approximately 5% at the midpoint of our guidance range.

We expect adjusted EPS of $1.50 to $2.10. Our guidance assumes an approximate 17% effective tax rate for the year. Cash taxes, net of refunds received, are assumed to be 0 for the year. We expect capital expenditures to be in the range of $50 million to $60 million. We continue to expect free cash use for the full year to be between $200 million and $250 million.

Slide 16 is a free cash flow walk showing the key drivers from our year-to-date to full year free cash flow. Our advance repayments and our Global 7500 program cash use are both substantially complete through Q3. We don't anticipate any significant impacts in Q4. I'd like to take a moment to discuss the Global 7500 transaction. We do not anticipate a material impact to our FY '19 guidance as a result of this transaction. As you recall, we were anticipating cash breakeven a few years out, at chipset 75 to 100. We estimate that this transaction will result in approximately $100 million to $150 million less cash use in FY '20 and approximately $75 million to $125 million less cash use in FY '21. This reduction is in support of our stated plan to be free cash flow positive in FY '20 and beyond.

Additionally, this program was in a forward-loss position and was dilutive to our margins. We anticipate annualized FY '20 margins to benefit by approximately 200 basis points as a result of this transaction.

We continue to focus our efforts on optimizing working capital throughout the company. This is a key area for us, as we drive toward positive free cash flow in Q4 and beyond. To summarize, for the fiscal year, we continue to expect free cash use in the range of $200 million to $250 million.

Slide 17 is the pro forma trailing 12 month financials when accounting for the divestitures during the fiscal year and the transfer of the Global 7500 program.

On a pro forma basis, TGI consolidated trailing 12-month sales were approximately $2.8 billion. Adjusted EBITDAP was $186 million, and free cash flow use was $72 million.

On a segment level, pro forma financials are as follows: Aerospace Structures sales of $1.5 billion and adjusted EBITDAP of $55 million; Integrated Systems sales of $1 billion and adjusted EBITDAP of $165 million; and Product Support sales of $288 million, adjusted EBITDAP of $50 million. This results in adjusted EBITDAP margin improvement of approximately 270 basis points on a trailing 12 month basis.

We are providing this information to assist you in understanding the financial makeup of the business because of the actions we have taken.

These pro forma results do not include the impacts of future rightsizing activities or any resolution of open program actions we are undertaking.

We'll provide any relevant updates on these initiatives and any potential impact on the Financials along with our view of FY '20, when we reduce our FY '20 guidance on our fourth quarter earnings call.

Following the filing of our 10-Q, we will be issuing an 8-K providing the pro forma financial statements for the 9 months ended December 31, 2018, and the fiscal year ended March 31, 2018.

As we move through FY '19, we remain confident that we will achieve our cash flow targets. We continue to aggressive manage our cash through outsourcing, contract negotiations and operational improvements.

In closing, we remain solidly on track with the goals we set headed into the year. We are pleased with the cost reduction and portfolio reshaping actions we've been taking. We are increasingly optimistic and confident in our prospects for profit generation and positive free cash flow.

Now I'll turn the call back to Dan, then we'll take your questions. Dan?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [4]

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Thanks, Jim. In summary, the actions we've taken and those still underway underscore the determination of the Triumph team to deliver on our commitments, complete our turnaround and deliver enhanced shareholder value. There's more work to be done as we close out the year, but we're firmly on track for a cleaner FY '20.

With that, Jim and I will now take your questions. Kevin?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Krishna Sinha with Vertical Research Partners.

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Krishna Sinha, Vertical Research Partners, LLC - Analyst [2]

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Can you just help me with the guidance. You said -- you reiterated guidance, and you said, it's excluding any of the divestitures. Can you outline exactly what you're excluding from guidance? Is it -- are you excluding the Global 7500 divestiture and excluding the Machining and Fabrications work that you divested? Or are you just talking about future divestitures that you could make in the fourth quarter?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [3]

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Sure, Krishna. This is Jim. The Global 7500, which closed yesterday, is included in the guidance, but doesn't have a material impact for the balance of the year. So without it, we're still within the guidance range. The Fabrication and Machining divestitures, which have been announced, have not closed yet. So we anticipate they're going to close before the end of the quarter. But because of the short period between closing end of the year, we don't anticipate a material impact from them either.

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Krishna Sinha, Vertical Research Partners, LLC - Analyst [4]

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Okay. So there's no implicit change in the guidance based on -- if those were to -- so in other words, if those were to have closed already, you would have changed the guidance? Is that correct?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [5]

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Well, they haven't closed, so we haven't changed the guidance. I don't think it would've had a material impact either way. They're important actions, but they're really taken for their full year effect and not for the short-term effect this quarter.

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Krishna Sinha, Vertical Research Partners, LLC - Analyst [6]

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Okay. And then can you just talk about the -- I see that your top 10 programs have changed over time with these divestitures, and you've got a lot of narrow-body content that's now shifted upwards. Can you just talk about your exposure on MAX and Neo versus the NG and the CO?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [7]

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Yes. Triumph has got content on both, I'll call it, the legacy variants as well as the new variants. The new variants, in some cases, are not as high, but the story is not fully written because the OEMs continue to compete subsystems, and we're picking up work incrementally. So I would say check back with us as those systems mature and get in production, to get, what I'll call, steady-state content on platform. We did lose some structures content, for example, some of the flaps and control surface that Boeing decided to in-source, but we're getting more on the actuation and systems content.

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Krishna Sinha, Vertical Research Partners, LLC - Analyst [8]

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Okay. And then one last one. Is there any more divestitures that you have planned? I think the Global 7500 one was a bit of a surprise. So can you just talk about what else you could be negotiating with the OEMs, or with any other potential acquirees out there?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [9]

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Yes. In my remarks, I mentioned that the E2 and the G280 were programs that we were looking at. So we're in discussions with customers on those 2 programs. And then we're also looking at a couple of more operating company divestitures that could potentially close in Q4 or in Q1 of FY '20. But we're really getting towards the end of the portfolio reshaping, both programmatically and from an opco point of view.

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Operator [10]

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The next question comes from Sheila Kahyaoglu with Jefferies.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [11]

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I guess, just, Dan, a follow-up on that last question. How do you think about the Aerospace Structures business evolving as you divest some of these programs? And then just given some of your recent wins within Aerospace Structures, how do you bridge that to expanding profitability from 3% today to, I think, 12% in '21?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [12]

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So there's no doubt that Structures is evolving and what were big contributors to revenue in the past, like 747 and C-17, V22, G450, those have sunsetted or are in the process of closing out. And in some cases, they are still loss-making programs. So the evolution of structures is towards its more profitable core, which is based on the G650 now renegotiated, the work we do on G500 and 600 and military structures. Our T-X program, it's early in its development, but over time, that will add value. We're now winning content on some of the new start programs such as military drones. And then we have our program and support Northrop Grumman on the Global Hawk, which has been awarded the Navy Trident variant follow-on. So you'll see a shift from commercial wide-body to more military structures and some business jet structures as well. And within the Structures business is our interiors. That's where we do insulation and ducting. And that's a very profitable, positive cash flow business that supports commercial aircraft. We do over 1 million blankets a year from our factories as well as thousands of different ducting that -- and air plenums that distribute air within the aircraft. And so that's a really good business for us, and it's going to help drive the margin improvement over time in Structures.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [13]

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So it's just like a shift away from large fuselages or wings to more interiors? That's really driving the profitability?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [14]

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That's right. That's true. I mean, we're still a solid player in the 767, for example. But in that case, we build a very complex wing center-body, which is difficult to produce. Other structures that we do, typically, I'll call it, barrel section fuselages, those can be done in other locations that are more cost competitive, and over time, we'll exit that type of work.

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Operator [15]

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Our next question comes from Seth Seifman with JP Morgan.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [16]

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I guess, maybe staying on Structures. The kind of targets you talk about, if we assume revenue is fairly stable, looks like about $180 million or so of EBIT there in fiscal '21. How do we think about how that converts to cash? And what's remaining as a cash drag at that point?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [17]

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So Seth, as you know, the programs that we've divested, including Global 7500, have been the biggest users of cash in that Structure segment, and the bit of the remainder much more working capital efficient. So I think you're going to have a high conversion rate on the EBIT. And we'll give you more indication of that when we come out with our FY '20 guidance but look for less volatility, more stable, steady profitability and less working capital needs in Structures going forward.

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Seth Michael Seifman, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [18]

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Great. And then when you think about, in Integrated Systems, the return on sales going from the 15% this year to 20-plus. How much would you say that the, I guess, cost related to your transformation efforts are weighing down the margins in Integrated Systems this year?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [19]

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I think it's -- the reduction from our, I'll call, historical levels of profitability, 19% to 20%, is probably half related to restructuring and half related to some performance issues in 2 of the 15 factories that we're laser focused on to fix. And once those factories catch up with the backlog, they're both shops that are ramping up quickly with rate, and they've taken on a lot of new work. And so we spent more money to recover that past due backlog, and that's been a contributor to margin erosion as well. But it's a fixable challenge that we're all over with our customers. And then the other part is the restructuring, which will sunset in the next 6 to 12 months.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [20]

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And I think we're going to see an increase in the aftermarket piece. We're going to be growing that as a percentage of our total over time, and that's going to help enhance margins as well.

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Operator [21]

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Our next question comes from Michael Ciarmoli with SunTrust.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [22]

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Maybe just a follow-up right on that point, on the product support and aftermarket. I think, Dan, you may have mentioned, improving margins on some of the new repair programs. I mean, what are you guys doing differently to drive that margin expansion there? Is it just more efficient? Does it have to do with the contracting terms? Maybe if you can just elaborate on that.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [23]

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Sure. So we have a new EVP we hired for that business, Bill Kircher, and he's really helping a lot. He came from Pratt & Whitney. He ran their Asian MRO business. And as we've looked at how we supply products to customers, we've decided to invest cash in rotable inventory that we can quickly turn for their on-demand repairs. Secondly, there are certain products that we can overhaul and repair parts and take parts from used, thrust reversers for example or landing gear that are serviceable, and in doing so, meet the mission requirement but do it at a lower cost and higher margin. And customers are fully on board with that sort of approach rather than buying all brand-new parts when serviceable parts will meet the need. And then the last piece of margin expansion is increasing revenue with existing customers. We do a lot with FedEx, UPS, Southwest, American, but we could do more. And the cost -- the incremental cost of supporting their repair needs are lower than acquiring new customers. So it's all those things together, but it's taking, I'll call it, a traditional repair overhaul business and taking new approaches to the actual inventory repair approach and then partnering with the carriers.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [24]

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Got it. That's helpful. And then just one more on this sort of margin walk that you detailed on Slide 7 into fiscal '21. Should we think about a linear progression there? I mean, I know you didn't give fiscal '20. But are there any items, more restructuring spending or adjustments we should be thinking about in fiscal '20? Or is it just going to be sort of as some of those existing programs you have, you take out costs, should we just expect sort of a continuous margin improvement toward those '21 targets you've laid out?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [25]

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Yes. I think it's a fairly linear trend. As we've put the restructuring behind us, we got more momentum from our operational improvements. There's not a single step function where an individual contract suddenly becomes the dominant contributor. Jim, your thoughts?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [26]

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Yes. There's diversification in the actions we're taking, so I think it'll be smooth improvement over time.

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Operator [27]

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Our next question comes from Robert Spingarn with Crédit Suisse.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [28]

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Jim, you gave us the cash flow relief figures for 7500 for the next year and the year after. But how should we think about advance payments during that period given that they were a big drag in '19. And then are there any other major moving pieces, cash flow-wise that we should think about as we -- longer term?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [29]

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Yes. Thanks, Rob. And we have benefited from advances and the support from our customers which we appreciate. The current expectation is that advance repayments will be about $80 million next year, and there'll be about $62 million the following year. And then I mentioned, we have another $125 million of advances that we haven't scheduled repayment of yet, but the customers have been very supportive and flexible with us on the repayment schedule. We are -- cash flow positive assumes that we're going to repay that $80 million next year.

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Robert Michael Spingarn, Crédit Suisse AG, Research Division - Aerospace and Defense Analyst [30]

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Okay. And then, Dan, on the strategic side. Just curious, your exit from Machining, kind of reconcile that with your largest competitor in structures building that business? Or are they just very different businesses? I wanted to just understand the logic there.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [31]

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Sure. So -- and I know which competitor you were referring to. When I came here and I looked at the portfolio of 75 locations, and I looked at where we could afford to do the modernization and capital upgrades and candidly, where there was macro trends towards offshoring and also consolidation. I concluded that build-to-print contract manufacturing really wasn't Triumph's forte, wasn't going to be an area we could be competitive at. And yet, there are a lot of companies out there that this is their mission and this is what they do well, and they have the capital to invest and upgrade these machines over time. So we've exited it. In the case of the competitor you're referring to, they largely do that work now, I believe, in Malaysia. It's a vertical integration play, so they can provide feed to their own shops. Many of the shops that we had were merchant suppliers. They were competing broadly across lots of platforms, not predominantly feeding into Triumph's facilities. So our need to maintain them in the portfolio, I think, was lower than other competitors. So the owners of that -- of these new facilities are the right owners. In many cases, they already owned a lot of shops. They're going to gain scale benefits and are committed to investment and supporting the customer base, including Triumph. They'll be suppliers to us. But doing this allows us to reduce our debt and then begin to invest in systems and aftermarket. And systems hasn't been invested in at the levels we'd like over the last few years because the money going into structures, and we're looking forward to reversing that trend.

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Operator [32]

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Our next question comes from Myles Walton with UBS.

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Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [33]

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The -- starting the fiscal '20 cash flow being positive. I think you, prior to the G7500, had talked about it also being positive. And then you obviously mentioned that your previously plan had $100 million to $150 million cash use on the 7500 in fiscal '20? So I'm just curious, is $100 million to $150 million kind of now the new baseline or did the other things move against you?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [34]

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Yes. Thanks, Miles. We had to take actions to achieve our plans. And these actions including the 7500 transition were all in support of our plan to be cash positive. So it's not incremental to it. These are necessary actions, and they are going to get us to cash positive..

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Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [35]

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So when you previously talked about cash flow positive, you'd already considered the disposition of the 7500 in that.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [36]

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That was one of the options go get there. There could have been a lot of other outcomes here, but this is the one -- the path we took.

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Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [37]

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Okay. And then the payables benefit that you put in the Slide 13, I guess it was. Is that something that reverses fully on you in anyway? Or is that just something that's an absence of the benefit we should think about going forward?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [38]

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Yes. Included in the payables is the $125 million of unplanned advances that will be repaid at some time in the future, probably a few years out. So we benefited this year in that. We don't expect any more of that going into next year. But that's what -- why payables is increasing during the year.

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Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [39]

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Okay, got it. And then just one last one on margins, just a clarification. So the 1,000 basis points of EBIT margin expansion that's implied over the next 2 years, is that like likewise to drop through on EBITDA margins. I know, obviously, you could have contract liabilities or other things moving around. So if you can just kind of clarify or confirm that?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [40]

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Yes, it's seems too early to give you good information on that. Look for May when we give our guidance. We'll try to provide more clarity on the drop-down of that.

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Operator [41]

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Our next question comes from Cai Von Rumohr Lanphear with Cowen.

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Jeffrey Joseph Molinari, Cowen and Company, LLC, Research Division - Research Associate [42]

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This is Jeffrey Molinari on for Cai. I'd like to ask about the remaining cash-losing programs within Structures? Can you walk us through the expected drags for the G280, the Boeing 747 program and E2? What do you expect that drag to be going forward? And how you will get those to be positive? Or when do you expect to exit those?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [43]

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Yes. I'll start with 747. At one point, Triumph made, I think, 7 fuselages per month, and I think you all know, that rate has dropped to about 1 or less per month. And we have line of sight now to completion of our contract obligations on that, and we're fully supporting Boeing. In fact, we're building a little bit ahead of need in order for them to maintain a buffer stock and for us to exit the facilities where the work is performed today. So the cash remaining of the program are some incremental recurring losses, but -- -- and then the cash wind-up, shut down of the facilities, we have that bounded in our forecast. On E2 and G280, we did the outsourcing decision with Korea's ASTK on E2. That's going very well. They just conducted a review with the Embraer customer, went very well. We'll continue to evaluate the best long-term owner for that program, but we're fully supporting them and excited about the progress that Embraer is having an interest in the platform. G280, it's a program that was known to be a loss-making program when it was transferred from Spirit. We've done all we could to reduce that loss. We delivered quality wings to IAI, who's the end-user customer. And we're in discussions, again, with that program, given Triumph's shift away from, I'll call it, large commercial structures towards our systems and aftermarket, what's the best plan for that? Because it's my understanding that IAI and Gulfstream have big plans for that platform longer term. So you reach points periodically on programs where you reassess based on the future forecast, is the current arrangement optimal or is there something that's better. So I'd say, look for feedback on that in the next quarter.

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Jeffrey Joseph Molinari, Cowen and Company, LLC, Research Division - Research Associate [44]

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Okay. And if you were to exit those, what would kind of the benefit be from removing those drags? Could you quantify that in any way either altogether or separately?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [45]

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So on 747, I think when we provided our FY '20 forecast, that will give more visibility to the runout on that program. And then on E2 and G280s, those transactions are different, and so the financial consequences will be different. And I'd ask that you just give us time to complete them and then announce the results, but you could expect them to help us reduce cash losses and generate proceeds as well.

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Operator [46]

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Our next question comes from David Strauss with Barclays.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [47]

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On the G7500 transfer, is there any compensation for the working capital that was in place, that was in flow? Or is that all-in included in the net 0 proceeds?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [48]

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Yes, Dave, so during the last couple of quarters, we talked about how we had favorable payment profiles and progress payments we were getting. And we get to keep all those as part of the process. But there was no consideration at closing for any of the working capital. But we did get paid for a good portion of that as progress payments leading up to it.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [49]

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Okay. And -- so do I interpret the pro forma cash use, $330 million actual versus $72 million pro forma. So including that, it looks like there's about a $50 million, if I just exclude the 7500, the businesses, the divestitures in total, the cash use is kind of in the $50 million range?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [50]

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Yes, that's roughly correct. I think, what you're going to find in our 8-K, and you'll get more clarity around the historic impact for these -- for the 9 months ended December and the full fiscal year last year. So we'll file an 8-K, with pro forma financials, taking out not only G7500 but the pending divestitures as well. And you'll get to see that in the next day or so.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [51]

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Okay. So are the pending divestitures in this pro forma $72 million burn or not?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [52]

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Yes, they are.

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David Egon Strauss, Barclays Bank PLC, Research Division - Research Analyst [53]

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Okay. And then last one I had on pension. How are you thinking about, I guess, your returns year-to-date, fiscal year-to-date, how you're thinking about potential -- the potential pension contribution in fiscal '20? What are your kind of contemplating?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [54]

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Yes, we're doing end-year review of the plan. So getting prepared for our fourth quarter disclosure, where we'll give a new 5-year accounting forecast. So you can see in the supplemental data table, Page 22 of the presentation, our cash pension contribution is $5 million and the OPEB contribution is $12 million for FY '18, and it went down to $2 million and $12 million in '19. So in going forward, I think you look to last year's disclosure, there is some increases in the funding, but it's very manageable. And we don't pay attention to short-term changes in the assets because the fact is, the assets can change but also the liability changes, so we have to wait for the actuaries to do their work annually. And then we'll see what the funding forecast is going forward. But it's not something that we're concerned about.

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Operator [55]

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The next question comes from Peter Arment with Baird.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [56]

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Dan, given the pro forma kind of reset that you provided, and thanks for all the details. The kind of the $2.8 billion, how are you thinking what kind of organic growth from that going forward just given all the changes?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [57]

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The organic growth, we focused on, since I got here is really starting to fall through. If you looked at some of the early slides in the deck, we showed the quarter-over-quarter and year-over-year growth across all 3 segments. And we're especially excited about the bookings in our Integrated Systems business because that's the leading edge for us, and it's our biggest source of value. But Page 4 in the deck, you can see in the quarter, we were 5% to 8% depending on the business unit in growth, and for the full year, those ranges were 4% to 9% with the higher ranges being in Integrated Systems. So we think we can sustain that, and one of the side benefits of this portfolio shaping is management bandwidth and the ability to focus on the residual business. We put a tremendous amount of time and energy into resolving contractual issues and pricing challenges in structures business for the last 3 years. And with the reduction in the number of sites from 75 down to about 40 and fewer operating companies and fewer loss-making programs to work through with our customers, our ability to pivot back to our growth agenda and to our margin expanding -- expansion agenda is going to be greatly enhanced, and we're all excited about that for FY '20.

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Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [58]

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And just a clarification. You mentioned the, I guess, it was $220 million in total proceeds or that still -- is that tied to the $570 million in revenue that you kind of had mentioned on the divestitures? Or are those numbers different?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [59]

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The $570 million is all divestitures in the last 12 months or so. The $220 million is just for the most recent transactions we've done, which are machining, fabrication, our Thailand RPL facility. So net gross proceeds -- the net proceeds will be a little bit less, but it's still the right thing to do. We really had no reduction in EBITDAP to speak out, as we exit that business, and it's the right thing for Triumph and our shareholders.

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Operator [60]

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The next question comes from Ken Herbert with Canaccord.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [61]

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I just wanted to follow-up on one of the earlier questions on when you start to provide some of your pro forma '21 margin assumptions or opportunities, how much of that on the revised base of the business is captured in -- the improvement is captured in the contracts you're signing now versus how much is maybe based on sort of incremental cost reductions? I guess, I'm just trying to get at with the new business you're announcing now and the wins you're pulling through, both in Structures and obviously, Integrated Systems and across the board, are those materially supporting the margin expansion? Or is there really further things from a restructuring that is cost take-out push you need to execute on?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [62]

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Yes. That's -- you're asking me to integrate a lot of data across lots of contracts, but it's a great question. And I would say that a lot of the follow-on work that we're winning already carries good margins. And when we talk about narrow-body ramp rates, that's mainly extending work that we already have for which the development's been completed, and they're in rate production. So that's a big tailwind for us for margin expansion, especially as we put the restructuring cost behind us. And then you asked about, are we also doing cost take-out that enhances margins, absolutely. In Q3, in my comments, I mentioned that we'll be doing a 600-person reduction, which is on the order of 6% of our workforce in the next 60 days or so. And that reduction, although painful, helps position the remaining company after these divestitures for improved margin performance over the forecast period. Last contributor-- yes, just one last contributor is -- Triumph, historically, had a higher contribution of spares and aftermarket sales. As I've worked with our new leaders to look at recapturing more of our tail, our aftermarket, we're now doing more collaboration between Product Support and Integrated Systems to go after not only their -- products that we produced for the OEM for, but other manufacturer's parts, and this Honeywell partnership we announced in the period, allows us to do MRO on other manufacturers hardware as well, so look to aftermarket to also contribute to margin expansion.

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Kenneth George Herbert, Canaccord Genuity Limited, Research Division - MD and Senior Aerospace & Defense Analyst [63]

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Okay, that's helpful. And Dan, strategically, it sounds like you're talking about a shift towards more -- when I think about new business, certainly more on the military side, certainly more maybe on the business ship side, selectively. How much are you strategically de-emphasizing certainly wide-bodies or even commercial transports as part of that mix moving forward? How should we think about sort of the capture rate in those areas relative to military for instance?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [64]

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So the wide-body business has largely been sourced. There's no new starts other than potentially 797. It's mostly contract extensions with existing suppliers. So when we look at our -- call it, our annual operating plan horizon, we just don't see any new big wide-body programs that would change Triumph's fortunes. And candidly, if they were out there, we wouldn't necessarily be producing them in the U.S. just because of the trends in labor costs. But the team we have is doing a great job executing the backlog. We do have good wide-body content on 767, as I mentioned. And now with the successful rollout of the first 2 tankers at Boeing, we expect those rates up as well as for their freighter variant. But you're right, strategically, we're focused on military and complex structures that don't require the level of nonrecurring investment that we had to do for programs like Bombardier, or in the past, 747. So that's our stated strategy. And now that our revenue is trending towards 50-50 systems and aftermarket versus structures, that trend will continue towards -- a bias towards systems and aftermarket.

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Operator [65]

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Our next question comes from Noah Poponak from Goldman Sachs.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [66]

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So if I'm looking at Slide 16 with the 2019 free cash flow breakdown, and if I just sort of -- everything that's in the zone of $200 million, if I just round it to $200 million to make the question here a little easier. So a use of $200 million for the year as reported, if I add back the advances, a little less than $200 million, but just call it $200 million, gets me to breakeven. And then if I add back the Global 7500, a little more than $200 million, but call it, $200 million, gets me to I think, a positive $200 million, which for some time, you had been discussing as sort of a normalized level, ex advances. And so I had read that slide as I should take that level and then have a view on things that grow or decline in the future. But your answer to Myles' question kind of confused me in saying that the 2020 just being positive included the release of the Global 7500. Does that imply that something is worse elsewhere in the business? Or -- do see what I'm saying there? I can't square those 2 items.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [67]

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Sure, Noah. It's Jim. There was a lot of onetime items in the last couple of years. And there's fewer and fewer of them in this last quarter, and there will be going forward. So we did benefit from things like increases in payables during the year, as we talked about earlier today. But what I'm telling you that our goal to be cash positive next year, the actions we took with the Global 7500 and divestitures were all actions that were necessary to get to that goal, and they weren't incremental to it. There no one thing I can point out. There's a lot of moving parts. I think we can help with your modeling questions subsequent to this. But the data is all there. We're going to put out our FY '20 guidance in May. I think if you go back to the core operations and kind of build it from a 0 base, you're better off than trying to roll forward from a year that had a lot of noise in it. So wish I can give you a more crisper answer to that, but it's not a simple story.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [68]

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Is there a new number that you think of as the normalized, ex advances, recurring free cash flow of the business that's associated with the '21 numbers you've given today?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [69]

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Not yet.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [70]

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I think that's something we're going to save for May. Because we still have actions going on to achieve our plans going forward. Our plan is not approved yet. We want to have plan we're working on. As we develop those actions, we're going to come back to you with guidance that we have high confidence in, in May.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [71]

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And I think the good news is, Noah, as we don't have some of the big swingers on cash that have really made it difficult for us to answer that question on recurring, the loss-making programs, restructuring costs, advance repayments. Now that those things are damping out, I think, all of your modeling is going to become easier.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [72]

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Right. You're narrowing your range of outcomes, I suppose.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [73]

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Yes. that's right.

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Noah Poponak, Goldman Sachs Group Inc., Research Division - Equity Analyst [74]

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Just one other thing I wanted to ask you. In a few of the sales and divestitures you're making, you've made the comments of finding a better owner or the company that's taking it being a better owner. In the case of the 7500 wing, do you think the OEM is a better owner? Do you think they'll have a better chance of containing the cost there as they take over that product?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [75]

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Well, first of all, the division of Bombardier that's buying our Red Oak facility in the program is their aero structures business from Belfast, which has a track record of structures development and production that is very good and their leaders are on-site now in our plant, having closed the transaction yesterday, got a seamless transition yesterday, and so I think they're going to bring a lot of capabilities. They also, because they are buying for their legacy business jets at a very high rate, they have economies of scale and supply chain scale that allows them to negotiate material prices also very tightly. And then as they evolve the design, being the design authority as well as the production source, they can incorporate change without going through the arms length transactions that they've had to with the third parties. So there are several things that I think positioned them to be successful. But I'd ask you to the pose that question to Bombardier. But we're not concerned at all about the transition. We're proud of what we've done. This program, 3 years ago, was really in a place where success was not a given as an outcome. And for us to work together, to certify the wing and get entry into service and ramp up the production line, Triumph worked to ensure we protected our customers just as we've done with G650, E2 and other programs. And that's part of what customers value in Triumph is that we don't leave them hanging. We support them. And if we're going to make a transition, we get it to a natural breakpoint and then we do a deal that's acceptable to both parties.

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Operator [76]

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Ladies and gentlemen, this is all the time we had questions today. This concludes Triumph's Group Third Quarter Fiscal Year 2019 Earnings Conference Call. This call is scheduled with a replay that will begin today at 1:30 p.m. Eastern Standard Time and run until the 14th of February till 11:59 p.m. Eastern Standard time. You can access the replay by dialing 1 (800) 585-8367 and entering access code 9986125.

And ladies and gentlemen, you may now disconnect.