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Edited Transcript of TGI earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q1 2020 Triumph Group Inc Earnings Call

WAYNE Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Triumph Group Inc earnings conference call or presentation Wednesday, July 31, 2019 at 12:30:00pm 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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* Audrey Elizabeth Preston

Crédit Suisse AG, Research Division - Research Analyst

* Benjamin Efrem Arnstein

JP Morgan Chase & Co, Research Division - Analyst

* Cai von Rumohr

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Caitlin MacKenzie Dullanty

BofA Merrill Lynch, Research Division - Research Analyst

* Jorge Baptista Pica

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Katie Ann Copouls

Barclays Bank PLC, Research Division - Research Analyst

* Kenneth George Herbert

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

* Louis Harold Raffetto

UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - 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 first quarter fiscal year 2020 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 that your pop-up blocker is disabled if you're having trouble viewing the slide presentation. (Operator Instructions)

On behalf of the company, I would 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 expressed 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 this call is property of Triumph Group, Inc. and may not be recorded, transcribed or rebroadcast without explicit written approval. At this time, I'd like to introduce 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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Thank you, Kevin, and welcome, everyone, to our Q1 earnings call. Early this morning, we reported first quarter results for fiscal 2020 in line with our expectations, demonstrating good momentum as we start our new year. Organic revenue was up year-over-year in all business units as noted on Page 4. Free cash flow and EPS were in line with our expectations. As planned, we had moderate cash used in the quarter and remain on pace to deliver positive free cash flow for FY '20 as we guided. Cash use for the quarter is down year-over-year by $75 million.

Year-over-year operating margins improved in Product Support and Aerospace Structures as a result of the increasing hardware deliveries in Q1. Our structures segment had a strong Q1 as we begin to see the benefits of operational improvement and the exit of loss-making programs.

Integrated Systems margins were lower than prior year due to mix changes, support in new development programs and increasing production rate on both commercial and military programs. These programs are paced by industry-wide supply chain constraints that we are proactively addressing with our customers.

We are confident this business can reach a historical high-teens margins this year against a revenue base that increased by 5% from Q1 FY '19 to Q1 FY '20. Triumph delivered month-over-month revenue increases in Integrated Systems, a trend which has historically preceded periods of cash and margin expansion.

We are working with our customers to retire our remaining red programs. The restructuring charges we've reported in this quarter reflect investments to improve the performance in Integrated Systems. Beyond improving supply deliveries, we are concentrating our efforts on cost reduction, process improvements, inventory management and optimizing workflow through our Triumph Operating System. We are confident these actions will enhance the performance company-wide not just in systems.

A short update on our program transition efforts. Since fiscal year '19, Triumph successfully completed 7 program transfers. Shortly after the quarter closed, the G650 team in Tulsa delivered their last wing box to Gulfstream and now supply kits and parts to Gulfstream Savannah facility.

Having exited the Bombardier Global 7500 program in February, we are now driving the closeout of the remaining transitions including the transfer of the E2 fuselage program to Korea's ASTK and the G280 program to IAI, which are both on schedule. We plan to complete the E2 transfer in the second quarter of FY '20 and the G280 wing move in FY '21. I'm confident in our ability to successfully complete these initiatives on time and on budget.

As noted on Page 5, growing our backlog remains a top priority for Triumph with an emphasis on our higher-margin Integrated Systems to Product Support content with the 2 business units now collaborating to recapture more of our aftermarket tail.

We continue to execute our strategy to increase competitiveness and selectively pursue new work to strengthen our backlog and position the company for sustainable and long-term growth. These results show in our new business win rate, which has grown over the last 3 years, from 23% to 70% company-wide in Q1.

During the quarter at the Paris Air Show, we announced a new strategic partnership with Air France Industries KLM Engineering & Maintenance. This partnership offers exciting capabilities from both companies, bringing together strategic and highly capable maintenance centers in the Americas, Europe, Middle East and Asia. The joint team will leverage Triumph's and Air France's customer relationships, strong MRO centers, cost-effective solutions and turnaround times to support newer fleets entering MROs, such as the 787 and the A320neo, in addition to more mature fleets. Both parties are excited about the possible service offerings of our planned joint venture. Triumph will pursue similar partnerships with other carriers to grow our top and bottom lines.

A few specifics on new business wins in Q1. Integrated Systems team enabled the business jet customer to save cost by modifying off-the-shelf actuation systems for their super midsized jet. We received a $79 million order for the pylon conversion actuation system for the V-22 program as we work to finalize our V-22 multi-year agreement.

Product Support won a contract with a major U.S. carrier to provide maintenance repair and overhaul services on interior components. Triumph's new Atlanta Interior Center of Excellence will provide interior parts such as the maintenance and repair, support for seats, passenger service units and sidewalls for the airline's fleet of narrow-body aircraft.

Our structures group had a strong first quarter, where our Milledgeville, Georgia plant helped to protect Boeing 787 deliveries on composite details, taking on substantial work from a struggling supplier. As announced at the Paris Air Show, we are moving out on our Mitsubishi SpaceJet 100 partnership where our engineering services are enabling critical aircraft performance gains through weight reductions and aerodynamic improvements. Working closely with our teams in the U.S. and Nagoya, our structures engineering team provides OEM-level design, analysis and testing services. We're also engaged on eVTOL engineering opportunities, which may generate future thermoplastic contracts leveraging our growing IP in this area.

At the Paris Air Show, Triumph Group saw a strong interest in our solutions, where we conducted over 200 meetings with existing and potential customers, suppliers and investors. We're pleased to see the interest in our expertise and capabilities in all 3 business segments. We're excited about emerging opportunities to provide innovative solutions to our customers, particularly in MRO.

Turning to Page 6. This quarter's call will highlight our opportunities and actions in the aftermarket space. According to third-party research, MRO services is an $82 billion global market today and expected to grow to $116 billion by 2029, a 3.5% CAGR. By market region, the growth projections reflect the revenue CAGR of approximately 2% to 3% in the U.S., Europe and Asia while China is seeing the strongest projected growth at 9.8%.

Asia is our strongest area of focus. We recently hosted over 120 representatives from 48 customers and 17 countries in Thailand for a technical symposium on our MRO repair capabilities. Thailand is rapidly becoming a global hub for commercial aircraft maintenance and repair.

To support our revenue and margin expansion goals, our Product Support team is changing their go-to-market approach from one-off transactions to one based on strategic partnerships with OEM and carriers. Our Product Support and Integrated System leaders are partnering internally as well to recapture the aftermarket for components where Triumph is the OEM lost to third parties.

As noted on Page 7, Triumph's MRO capabilities across our 14 Part 145 repair centers is 95% component focused. We are pursuing our share of an MRO market that is shifting towards narrow-body support, as expected to grow at 4.9% CAGR over the next 10 years.

Triumph aftermarket sales represent approximately $500 million of our total revenues in FY '19 adjusted for divestitures. By leveraging the repair capabilities we have inside Integrated Systems across the customer base of our Product Support business, we will accelerate Triumph's MRO growth and contribute to margin and free cash flow expansion.

Moving to Page 8. Through our cost-saving partnering and presenting 1 Triumph MRO phase to the market, our aftermarket pipeline is up 60% year-over-year while average pursuit size is up 120%. Aftermarket represents about 20% of Integrated Systems sales such as our electronics and controls business, which provides engine controls and fuel pumps. We quantified the MRO leakage from our Integrated Systems business unit and are sharing best practices across all their sites to claw back spares and MRO services lost to smaller competitors.

The Integrated Systems team benefits from spare sales and product improvements while Product Support engages the airlines operators, engine and system OEMs for repairs and overall work both for commercial and military customers. We're confident we can expand our Integrated Systems aftermarket sales to 30% of revenue. This expansion when combined with our proprietary content, of approximately 60%, enhances Triumph's overall margins and value proposition.

As announced in May, the strategic review of our Aerospace Structures business is well underway. Interest from both strategic and financial parties is encouraging. We are following a rigorous and disciplined process and continue to evaluate all scenarios which include potentially keeping, selling or further restructuring pieces or all of the business. We will continue to move through the process quickly while maintaining close communications with our customers, workforce and suppliers.

In parallel, our Aerospace Structures team continues to perform well, reflecting the value of the team we built and a cleaner backlog. Structures continues to be recognized and engaged by customers as evidenced by recent agreements with Mitsubishi Aircraft Corporation and eVTOL provider, Jaunt Air Mobility.

These projects present exciting opportunities for our engineering team to design major aircraft structures, optimizing weight and cost, and in the future, provide production and aftermarket support on these platforms.

So in summary, having sold 10 of the original 47 operating companies thus far, we're making solid progress on reshaping our portfolio as we pursue our path to the highest shareholder value.

Before I turn it over to Jim, I want to comment on the impact of the delays of the 737 MAX aircraft's return to flight. We continue to remain in close contact with Boeing and our suppliers. We've analyzed the impact of the most recent announcements on our forecast and do not anticipate material impact on Triumph's FY '20 financial performance.

We have minimal structural content on the 737 MAX. Most of the slowdown impact was felt at our interiors business in Mexicali, which provides just entire insulation inducting deliveries, and to a lesser degree, actuator and uplock deliveries from other parts of Triumph. We are using the temporary rate reduction to derisk our supply chain and prepare for higher production rates. Note that we anticipate additional requirements associated with the 777 to lessen any medium-term impact.

The MAX program historically has contributed a single-digit percentage of our annual revenue. We expect the FY '20 revenue impact to be less than 2% of sales, with similar impacts to operating income and cash. Over performance on other programs is expected to offset any MAX impact for the full year. As such, we do not anticipate any changes to our guidance as a result of the situation at this time. A return to flight and ramp-up will provide a tailwind going into FY '21.

Wrapping up, coming off a strong Q4 in FY '19, Triumph maintained a positive momentum in Q1, and I'm confident that we will continue to generate organic growth from our core, improve margins and EPS and achieve positive free cash flow on an annual basis for the first time in 3 years.

Triumph is focused on operational and strategic execution. Through tight working capital and portfolio management and effective resolution of difficult structures contracts, we now have the financial strength and bandwidth to better serve our customers and create value for our shareholders as we improve year-over-year and quarter over quarter.

With that, Jim will now take us through more detailed financial results for the quarter. 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. Our first quarter results are evidence of the improved predictability across our business, with net sales, EPS and cash results all meeting our expectations. I will discuss our consolidated and business unit performance on an adjusted basis. So please see our press release and supplemental slides for the explanation of our adjustments.

On Slide 9, you'll find our consolidated results for the quarter. Net sales increased 6% on organic basis over the prior year first quarter. All 3 business units generated organic growth as well. Adjusted operating income was $42 million this quarter, and our adjusted operating margin was 6%, up about 300 basis points from last year's first quarter.

With respect to the segment results, on Slide 10, FY '20 first quarter sales in our Integrated Systems segment increased approximately 5% organically compared to the prior year, driven primarily by growth in engine components and military rotorcraft sales.

Integrated Systems backlog grew $120 million from the prior year driven by strong increases on both military and commercial platforms. Margins for Integrated Systems were consistent with the prior year quarter. The margin reflected higher OEM sales in the quarter relative to the prior year and some restructuring actions. These restructuring costs, which will support margin improvement as the year progresses, impacted our margin this quarter by approximately 100 basis points. Integrated Systems' first quarter margin also reflects the normal seasonality in this business. We anticipate meaningful margin expansion in Q2 and continued improvement for the second half of FY '20 into the high teens.

Turning to Slide 11. First quarter sales for our Product Support segment were up approximately 7% on organic basis due to accessory component repairs in the U.S. and structural component repairs and increased parts trading in Asia. The Product Support organic operating margin was up a robust 340 basis points year-over-year and reflects cost-reduction benefits, improved product mix and favorable pricing.

Aerospace Structures' results were summarized on Slide 12. Segment sales were up approximately 6% organically due to volume increases on certain programs, including G550, Global Hawk and 787 and new engineering service offerings. Aerospace Structures operating margin of 3% reflects the benefits of the portfolio shaping and cost-reduction actions we've taken as part of our transformation efforts. The group is executing the transition to the E2 and G280 programs as planned, on time and on budget.

Turning to Slide 13. Our $3 million cash usage in the first quarter was a significant improvement over the same period last year and reflects our portfolio and program changes, cost reduction actions and working capital management especially within our Product Support and Aerospace Structures business units. We anticipate modestly higher cash use in the second quarter than in Q1 and a cash positive second half. We remain focused on meeting our objective of positive free cash flow this year and are confident that we will deliver on that commitment.

Capital expenditures were $8 million in the first quarter. We use $44 million of cash in the first quarter for working capital, which in Aerospace Structures include $20 million for advance liquidations and $14 million for the G280 program, and in Integrated Systems for increased inventories on ramping programs. Working capital reduction is expected to generate cash in the second half.

On Slide 14 is a summary of our net debt and liquidity. Our net debt at the end of the quarter was approximately $1.4 billion, and our cash and availability was strong at approximately $520 million. We are in compliance with all of our financial covenants.

Slide 15 is a summary of our FY '20 guidance, which is unchanged from the guidance we provided last quarter. Based on anticipated aircraft production rates and including the impacts of pending program transfers, for FY '20, we continue to expect revenue of approximately $2.8 billion to $2.9 billion. We maintain our expectation for adjusted EPS of $2.35 to $2.95. Our guidance assumes the normalized 21% effective tax rate for the year and has the potential to be reduced in Q4 due to the partial release of the valuation allowance.

Cash taxes net of refunds received are soon to be approximately $10 million for the year. We anticipate cash use in the first half of the year to be more than offset by cash generation in the second half. We expect free cash flow for the full year to be between 0 and $50 million. We expect capital expenditures to be in the range of approximately $50 million to $60 million.

Slide 16 provides some additional detail about our cash guidance. For FY '20, we expect cash flow from operations of $50 million to $110 million, which includes liquidation of customer advances of approximately $80 million in the year. With our first quarter of FY '20 behind us, we are increasingly confident in our ability to generate cash and profitable core growth this year. As we reduce our leverage, we will continue to invest in our core businesses to accelerate that profitable growth and drive meaningful increases in shareholder value.

Now I'll turn the call back to Dan. Dan?

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

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Thanks, Jim. Today, Triumph is defined by our close customer relationships, a pipeline of increasingly profitable programs, a talented, committed employee base and an integrated organization structure, better equipped for execution. Our Q1 results demonstrate that our restructuring and transformation efforts have positioned Triumph for success.

As we move through the year, we look forward to executing on our programs and growing our already strong backlog. We are guided by a clearer strategic plan, and I remain confident in Triumph's ability to succeed, to compete and to drive value creation over the long term.

We're now happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Robert Spingarn with Credit Suisse.

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Audrey Elizabeth Preston, Crédit Suisse AG, Research Division - Research Analyst [2]

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It's Audrey Preston on for Rob Spingarn. And -- so first of all, I just want to address the elephant in the room here. I know that you had -- that there would be a limited impact from the MAX grounding. But I mean with some of the commentary we've heard from Boeing, could you touch on perhaps any impact you would see if production rates were to be cut any further or if production was suspended altogether?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [3]

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Sure. Thanks, Audrey. The overall impact of MAX has really been negligible for us because on the 4 factories that support the MAX, the 3 continue to build at a 52 a month for several months, then they begin to step down. There's a little bit more of the immediate impact on our Mexicali interiors and ducting business because they really do deliver just in time. But that factory supports 7 major platforms, including Airbus, so the factory is not impacted severely. Should Boeing step down their rate below 42, which I have no indication that they intend to do, there would be a proportionate reduction in our revenue NOI. But we have other programs that are ramping including Boeing programs 787, 767 as well as Airbus programs. So we're not concerned about that. Certainly, if there was a full stop, we'd have to reassess the slowdown. But what Boeing asked us to do is to use this temporary flat spot in the rate to derisk the supply chain. That's exactly what we're doing. And by continuing overproduction at the higher rate at several of our plants, we've been able to replenish buffer stock. So for us in the short term, it's a very modest impact, and we're confident that when the rate goes back up, that we'll benefit from that increase.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [4]

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If I could speak to the strength of our diversification across programs and markets that this one program even though it's a significant impact to the program does not impact us in a significant way.

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Audrey Elizabeth Preston, Crédit Suisse AG, Research Division - Research Analyst [5]

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Great. And then can you give us a quick update on the progress of the structure sale?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [6]

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Sure. As noted, we've been working on this for about 3 months since we announced our strategic alternatives, and we really have a good picture now of where we're headed. And we've got a lot of encouraging interest from outside parties both strategic and financial sponsors. And it's a business that's performing well, that helps. Whenever you talk to potential partners, they want to see how you're doing in the 12 months retrospective and also how you're looking. And we continue to win. I mentioned the MHI award and our partnership with Jaunt, eVTOL, is just an example of things we're working on.

And recall last year, we extended some of our franchise programs like 787 and 767 for 10 years. So there's a solid backlog of business that people are showing interest in. And we're working very quickly through the process, and we plan to provide more updates in future quarters.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [7]

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Yes. And I think that we're very pleased with the performance in that business this past quarter. That's very stable business now, it has good liquidity, and so we're positive about outcomes there.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [8]

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Yes. If we've done anything over the last 3 years, I think we've established some track record of being able to divest noncore operations, do program transitions and do restructuring consolidation. So I would say look for more announcements in that regard.

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Audrey Elizabeth Preston, Crédit Suisse AG, Research Division - Research Analyst [9]

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All right. Great. And congrats again on the quarter.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [10]

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Thank you.

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Operator [11]

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Our next question comes from Seth Seifman with JPMorgan.

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Benjamin Efrem Arnstein, JP Morgan Chase & Co, Research Division - Analyst [12]

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This is Ben on for Seth. I guess I just wanted to hone in on the profitability in Integrated Systems here. Even after adding back the restructuring costs in the quarter, we're still hovering at 14% to 15% EBITDA margins. Is there anything for us to consider that has changed structurally about this business in terms of maybe the mix or the contract terms that you're operating on?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [13]

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So no, there's no structural changes to TIS. Internally, we knew this quarter would be soft on margins but we're maintaining our full year -- our margin profile because we've got confidence that we're going to step it up in Q2, 3 and 4. There were some delays in shipment, that was really a pacing item for us. Some higher-margin products that we're supposed to ship that are being paced by sub-tier supplier deliveries. This is an industry-wide challenge that we're working through. Even small items like seals and bearings as well as raw material, if the OEMs try to lock down capacity and sometimes make it tougher for other suppliers to deliver their products.

So we've been working with all of our suppliers as they ramp-up capacity, and as they bring either mill capacity on for raw materials or additional equipment to meet the ramping narrow-body rates as well suppliers like Triumph at Tier 2 and 3. We expect recovery over the next few quarters.

So we know why we were down in margin slightly, not far from where we were in the prior year Q1, and we're confident that we can step that up in the coming quarters.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [14]

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Yes, but it is a seasonally low quarter for this segment in particular. So volume will increase and with that, margin will increase. As I mentioned, we expect a meaningful improvement in the margin in the second quarter.

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Benjamin Efrem Arnstein, JP Morgan Chase & Co, Research Division - Analyst [15]

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Great. And just maybe one more. Can you give us maybe the free cash flow for Triumph excluding the structures business that is up for sale?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [16]

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So we haven't disclosed that, and I don't have that handy to talk about. But the overall cash flow for the business is $5 million positive for the quarter which is a milestone to be positive, and free cash use is only $3 million in the quarter after $8 million of CapEx. So we're not going to be updating our structures core, noncore each quarter, but there's meaningful changes to it, and we'll give you more information.

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Operator [17]

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Our next question comes from Ron Epstein with Bank of America Merrill Lynch.

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Caitlin MacKenzie Dullanty, BofA Merrill Lynch, Research Division - Research Analyst [18]

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This is Caitlin Dullanty on for Ron today. After the deal with the E2 and the G280, what are the remaining red programs in the portfolio? Can you discuss unit profitability and the cash programs per cash profile of these remaining programs?

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

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So in structures and in Product Support, we're running out of red programs. And the reason, our Product Support has got clean performance. It's very close to their plan, in fact, Product Support is growing very nicely. We've been growing at about 6% CAGR since FY '17. We're really approaching 2x the market growth rate, and because of their clean performance, very good quality, turnaround times, we're seeing additional customers partner with us at the Air Show. You've heard about our Air France KLM partnership, and that's because of core performance.

In structures, having resolved issues on the Global 7500, the Bell 525, 767, 747, G650, G280, and now the Embraer E2, we're really running out of problems to solve other than growth and improving margins and cash from operations, which they demonstrated a good performance in Q1. So we feel very good about our structures business.

In Integrated Support, we do have some smaller red programs, and we're working closely with our customer to overcome those. Sometimes, a program is red because of financials. It may have been negotiated at very low price. Sometimes it's a delivery or quality issue. But what I've been encouraged by is our OEM customers are side-by-side with us in addressing these, and as is always the case, there's things they can do to help a program as well as Triumph and some partnership is the key. And we expect to be down to a very small set of programs by the end of this fiscal year in Integrated Systems as well.

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

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And in terms of the cash cadence, Caitlin, that you asked, the G280 program, although it's resolved and actually we're very pleased with the transition, they're on time and on budget, there's still cash to go on that program. As we mentioned before, there's $14 million in this quarter in Q1. And we said there'll be about $60 million of cash use in this fiscal year, and there'll be maybe $40 million of cash use next fiscal year. And we're, of course, always trying to do better on that, but that's the run out for the cash use on that program and that's the largest cash user. The other program, 747, is a little -- modestly cash positive this year, and it's using, I think, around $40 million next year. Those are the 2 big drivers of cash besides the advance liquidations which you know are $20 million a quarter in that segment.

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Caitlin MacKenzie Dullanty, BofA Merrill Lynch, Research Division - Research Analyst [21]

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That's very helpful. And then switching gears. Can you give us more color on your new strategy to partner with carriers on MRO activities? How is this approach different from your current approach? And will your carrier partnership approach increase your overall aftermarket capture rate? Or will you be able to increase margin or both? If you could give us some color there, that will be helpful.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [22]

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Sure. The answer is both, both top line and margin growth. Triumph has historically approached its Integrated Systems aftermarket content, which is about 20% of the $1.1 billion as a bit of an afterthought. And we have these repair centers that were embedded in the OEM factories that we have. But the priority was typically on -- or call it, OEM initial deliveries, not aftermarket. And so by -- under our one-company initiative, our Product Support people, who live and die by quick turnaround, limited backlog, finding new work, are now helping the Integrated Systems people claw back much of the MRO work that they've lost. They've typically focused on spare sales but not as much on repair and overhaul. So we're going to be expanding that. That's going to benefit us.

As far as Product Support, the big shift there is that they used to be very transactional. They would wait for customers to come forward with either accessories, structures, interiors that needed to be repaired. But it was very one-off. And there was a good set of loyal customers, but our penetration wasn't as broad as I liked. So the shift is really going towards longer-term partnerships where we negotiate a complement of certain commodity of product, whether it's heat exchangers, gear boxes, accessories, structures for their entire fleet. And in doing so, we have more annuity-like revenue that we can really optimize our capacity and cost around, and it'll help us on our top line.

So we are already growing at almost 2x the MRO market CAGR, as I mentioned. So we think there's a lot of upside. And I'd like to see our third-party aftermarket business double in the future. That's the mandate I've given to the team. And we have a lot of unaddressed market we think we can pursue, especially in Asia.

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Caitlin MacKenzie Dullanty, BofA Merrill Lynch, Research Division - Research Analyst [23]

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Okay. And one quick follow-up to that. As you increase your aftermarket capture rate, who are you potentially displacing? Is this work that carriers are doing themselves? Or is the type of work that's done by other MRO shops?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [24]

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It's typically the latter. If you look at the big players in MRO and ourselves, StandardAero, AAR, and then the biggest competitor is other. It's a bunch of small companies that have setup shop, they've used the manuals and the spares that they buy from us to create repair capabilities, but they don't have our scale. They don't often have our customer relationships, they compete on low cost. That's a big target for us, and we may ultimately acquire some of those smaller firms over time. But right now, our focus and our track record has all been through organic growth.

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Operator [25]

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Our next question comes from Myles Walton with UBS.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [26]

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Louis on for Myles. So I just want to tackle the pension. So I think you've got a $2 million pension contribution this year. But I think that steps up to $30 million to $50 million over the next few years, if -- I think that's what's in the K at least. And how -- what is the impact to that if -- with the fall in rates that we're seeing at the [bomb] market?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [27]

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Yes. So with that cash payment -- the funding for the pension implies the most important part, and it is only $2 million this year. It's forecast to ramp up over time if the performance of the plan doesn't exceed our assumptions or the interest rates don't change to reduce the liability. Usually, it's only the next year that's the most firm. After that, those numbers fluctuate. But we do put a table on our K for the 5-year funding. And you're right, it has gone up to $39 million over time, over the next year or 2, but that can change. It will be a cash demand on the business, and we have that in our forecast.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [28]

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So given the cash amount of the pension on top of the 747 picking back up next year, the 280 still there and advanced liquidation is actually continuing to next year but maybe stepping down, sounds like the cash you'll make next year is actually -- could be higher than this year.

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

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So we've only given cash forecast for this year, and they're locked in half between now and next year. But certainly, we have growth and you see, we had strong growth this quarter with 6% sales and $120 million more backlog in our TIS group. The combination of sales growth, margin improvement and cost reduction, along with potential portfolio actions are going to improve our cash profile from what you might think it could be right now.

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Louis Harold Raffetto, UBS Investment Bank, Research Division - Equity Research Analyst of Aerospace and Defense [30]

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Okay, great. And then I just want to follow up the depreciation, amortization in the structures business picked up. I guess you guys have sort of guided to that being -- the D&A being down $20 million at least on a pro forma basis. So just not sure what drove that up so much in the quarter.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [31]

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Yes. It's a good observation. But actually took some equipment out of service and held for sale at the end of the program life. So we took some noncash depreciation on that, that wasn't planned.

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Operator [32]

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Our next question comes from Sheila Kahyaoglu with Jefferies. (Operator Instructions) Our next question comes from Ken Herbert with Canaccord.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [33]

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Dan and Jim, I just wanted to first ask, I mean you had good organic growth in the quarter. I know it's obviously only 1 quarter, but could you just walk through the puts and takes considering you've maintained the guidance of sort of flat organic growth for the full year? Is there any specific headwinds you'd call out in the rest of the year? Or is it just conservatism after 1 quarter?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [34]

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No. It's really delivering out any past-due backlog. We've had a number of programs that have been in gestation in the last couple of years in development. An example is the GE lead and the rates have gone up at least for us on the order of 50% year-over-year. So we expect a big step-up in revenue in TIS in Q2. And with that, burn off on the past due backlog, and this is where our customers are in there, helping us solve problems, like raw material availability.

In some cases, we buy raw material under our right to buy agreements from the customers or they source individual components and supply that to us and to other suppliers. And so we partner with them and say hey, we want to get our deliveries ramped up and burn our past due backlog, we need your help. And that's going to benefit us a lot in Q2. So we don't have to go out and win new work to achieve our revenue, cash and margin aspirations for TIS in FY '20. We just have to deliver out the commitments that we've already made.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [35]

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Okay. So I guess it sounds like the full year top line guidance, the revenue guidance, it's just conservatism based upon some puts and takes in the second half of the year.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [36]

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I think that's fair, and Q2 as well.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [37]

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Yes. We would just want to be particularly profitable, and we hold our operating managers to their targets, and a little bit of outperformance in this quarter could adjust the second half of the year. So it's probably too soon to call any changes to the top line. But we understand we're -- we will be leaning towards the top end of the range given our performance for this first quarter.

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Kenneth George Herbert, Canaccord Genuity Corp., Research Division - MD and Senior Aerospace & Defense Analyst [38]

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Okay. Great. And if I could, I appreciate all the incremental detail on your aftermarket and your MRO strategy. And is it fair to assume if you look at sort of a blended aftermarket or MRO growth of components in the total industry as sort of 4%? And I know you've got spare parts and pieces in there as well as MRO and repair and overhaul activity. But as we look forward on this portfolio that you're building and the partnerships, a sort of 2x industry growth beyond this year or beyond the near term, a fair assumption with how you're putting the portfolio in place?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [39]

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That's certainly our aspiration and we're almost already there as mentioned. Our assessment of CAGR is about 3.5%. We've been running 6% a year. So we definitely think there's upside. And with the growth of the fleet that's entering service and some of those fleets now, like 787 and 737, A320, started to get more into their MRO years, it's a nice tailwind for us.

And this is why our Thailand facility is so important. And I mentioned in my remarks that we hosted this symposium over in Thailand, and the turnout was fantastic. We did tours of our operation, 120 customers, 48 different -- reps, 120 reps from 48 different customers. And in the past, Singapore has been a big hub for MRO. Now Thailand with their investments and their infrastructure are starting to grow. So we're excited about it. And we think that kind of growth rate is achievable.

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Operator [40]

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Our next question comes from Michael Ciarmoli with SunTrust.

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Jorge Baptista Pica, SunTrust Robinson Humphrey, Inc., Research Division - Associate [41]

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This is Jorge on for Mike. Congratulations on a good quarter. A quick question to the previous comment on targeting the MRO business. It seems like the partnership that you announced just this month with regard to -- targeted to that U.S.-based carrier focused on interiors, which is kind of a, I guess, a less profitable aspect of the market. As you kind of target clawing back this volume, what is the percentage of the mix that you're targeting between the higher-value components that you highlighted in terms of gear boxes, heat exchangers versus things that are maybe lower profitability like interiors?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [42]

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Okay. First of all, I'm glad you asked because most of the MRO work expansion we're seeking is from Integrated Systems and components, not from interiors. That's point one. Point two is we get good margins on interiors. I was surprised when I came to Triumph to find that, I looked at it as sort of a low-tech business. In our -- one of our first initiatives was to consolidate our 4 separate interior overhaul businesses into 1 down at Atlanta, and we've done that now. And we even looked at potentially divesting it in the past. And because our customers value what we do and we have good financial performance, we're holding on to it.

So it's a growth channel, albeit small within Product Support, but it's really not the beneficiary of the collaboration between Integrated Systems and Product Support. The focus there is on our core actuator, gear boxes, hydraulics, fuel pumps and heat exchangers. And that ties back to the roughly 14 factories that we have in Integrated Systems. So we're going to keep doing interiors, our customers like it. There was a little bit of delay of induction of interiors in Q1 as they fly the legacy fleet a little longer, and we expect that to reverse in the second half of the year.

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Jorge Baptista Pica, SunTrust Robinson Humphrey, Inc., Research Division - Associate [43]

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Okay. And I just look -- focusing and kind of turning the focus over to the defense portfolio, when we looked at the lineup of the defense programs, Apache, CH-47, Black Hawk and the rest, it looks like in the near term, we're going to be experiencing a pretty significant mix shift from these legacy platforms being retired and new focuses on other platforms, specifically future vertical lift and others. How do you feel about that transition? And how are you shaping the product portfolio to follow that trend?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [44]

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Yes. That's a very thoughtful question, and we're on both. We're on sort of legacy programs like V-22 and C-17. We're on, call it, ramping programs like the freighter; and then we're on emerging programs like the T-X, now called the advanced pilot trainer; and the MQ-25; as well as modernization initiatives like the CH-53. We are supporting future vertical lift, we've on several teams there. We've got a really good mix of content. I think the answer is you've got to support both.

There is one missing piece, though, between legacy support and new starts in the DoD, which is foreign military sales. So we're getting a lot of calls from both Boeing defense and Sikorsky to support them on their FMS aspirations. And I think that'll be a gap filler between the two.

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Operator [45]

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Our next question comes from Cai Von Rumohr with Cowen and Company.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [46]

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Yes. Good quarter. So maybe a little bit more on the cash flow. I guess 3 questions. First, I believe the E2 is still red. How is that doing? And what's the profile of its cash use? Do you still expect the $80 million kind of advances, repayments to come in equal amounts of $20 million a quarter? And lastly, give us an update on your cash tax profile for this year and for next year and then sort of longer term.

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [47]

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All right. Thanks, Cai. So on E2, we're transitioning that program to ASTK. The core program is using cash in the tens of millions. It's not that significant relative to the overall programs and the structures. There is some inventory liquidation will occur during this year as we transition the program that'll benefit us. So it's really not a big net cash user with those 2 considered for the balance of this year.

On the $20 million a quarter, that is our expectation going forward not only this year but next. And the cash taxes, there'll be disclosure in our 10-Q, but it starts up a little slow because we had a refund in this quarter of several million dollars. So we think we had a net cash in this quarter, and then the balance will be out over the balance of the year.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [48]

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I think we're down to 3 or 4 E2s left, Cai, to deliver. And the ASTK is ramping up their capabilities. So we can see an end of our build on that program within the next few months.

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Cai von Rumohr, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [49]

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Terrific. And then you'd mentioned having smaller red programs. But you're on the T-X. You're on the MQ-25, both of which Boeing has indicated are going to be losers at the front end. Can you give us some color on the programs that you have that are red or that might be red in the future as a result of kind of tough pricing on the early part of the contract?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [50]

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Although those are large programs to Boeing Defense, our content is not huge and it's derived. In the case of MQ-25, it's mostly hydraulic components to support primary flight controls and landing gear and what-not, and we know how to perform on those.

Both programs, APT and MQ-25, have fairly long development periods. They're not crash efforts to do a highly compressed development with lots of concurrency and risk. So we'll be building first articles and supporting the ground and early flight testing for a few years. So I don't view those as challenging as, let's say, Bombardier Global 7500 was, which took a very intensive and often concurrent development approach that led to a lot of red program losses. Ultimately a successful platform but was expensive to execute. So we are watching it closely. I do weekly reviews on programs that you mentioned. My goal is to get those stabilized and ramped-up in development. In the case of APT and MQ-25, we have monthly calls with Shelley Lavender at Boeing Defense, and I really appreciate her partnership because she wants to catch any -- I'll call it, departures from the plan of record and jump on them quickly. I met with her in St. Louis on the programs and the partnership is very strong. So we'll worked through any development changes we have. I think in the case of APT, all the early risk reduction that was done precontract award on the 2 prototypes, one of which that just had its official first flight, is going to help reduce the overall risk. So I'm not -- I'm paid to be nervous when I've got nothing to be nervous about. So we stay very close to these, but I don't think we faced the same red program risks in the past that we've seen in our structures.

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Operator [51]

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Our next question comes from David Strauss of Barclays.

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Katie Ann Copouls, Barclays Bank PLC, Research Division - Research Analyst [52]

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This is Kate on for David today. Just could you guys talk through the full year guide for Aerostructures for flat to down 4% organic revenue growth? How much is MAX? And then you kind of called out that this is driven by sunsetting programs. I guess the transitioning programs, how much is that weighing down growth? And then what other sunsetting programs are there in areas other than the kind of transitioning program?

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James F. McCabe, Triumph Group, Inc. - Senior VP & CFO [53]

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Sure. Let me take a stab at that. I think we've identified the transitioning programs to start with. I think the G650, if you recall, we just shipped out the last assembled wing from Tulsa in July. So we're moving to a kitting, which is a lower volume, so that's one of the transitioning programs. G280 shipping out this year, so that volume will be going down over time. Other programs that have transitioned out this year, the Global 7500 is part of it that ended in February. So that volume is not here, so in terms of comps against last year. These are the kind of the key ones.

So we obviously, we see that we have reduction in volume, but that was unprofitable cash using volume that we lost. So you'll step -- part of the reason for the -- a big reason for the margin enhancement and positive cash flow is the programs we've lost are the ones we plan to lose when we negotiate out of.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [54]

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There's a couple of programs that are about to ramp up, G500, G600, and also the new Navy Trident variant of the Global Hawk. We built the first few of those wings, and now, the Navy anticipates high rates over time. So there is a bit of a mix change as well.

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Katie Ann Copouls, Barclays Bank PLC, Research Division - Research Analyst [55]

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All right. Great. And then I guess assuming no further major divestitures, when do you think that kind of organic growth could return to AI?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [56]

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So I guess the programs that are already in the backlog helped. The 767, 787 are benefiting our composites business and our steward structural assembly facility where we do the wing carry through structure. And if they extend this, the 777, that's also a tailwind.

I won't attempt to net those increases against the sunsetting programs real-time. I'll ask Jim, maybe close back with you off-line and give you that model. But the focus is not necessarily making structures a bigger business, it's making a positive cash flow and improving its margins. We'd be happy with the business that was 2/3 of the size but had better financial performance.

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Katie Ann Copouls, Barclays Bank PLC, Research Division - Research Analyst [57]

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That's great. Thanks.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [58]

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Just to add one more point. Recall our interiors business, not interior overhaul but original OEM insulation, ducting, floor panels. That's also in structures and that continues to grow and perform well. So there's a solid piece within there that we're going to benefit from.

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Operator [59]

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Our next question comes from Sheila Kahyaoglu with Jefferies.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [60]

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Just to follow up on the last question. You do have a decelerating growth forecast for both IS and AS. It makes sense, what's rolling off and you're divesting cash losing businesses. But can you talk about at a little bit, what are the growth drivers from here? You mentioned A350, 787, 767. How large are these programs? And maybe if you could talk about that profile a little bit more.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [61]

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Sure. We're on -- one of our top programs in Integrated Systems is the A320 family of products. And that rate is stepping up, and again, these are our quantities that the OEM quantities might be a little bit differently. But going from 57 in the last year to 62 this year, there's rumors of higher rates in Airbus that we would benefit from, plus Airbus is doing new versions like the XLR. So we're competing for content that will enable that next gen version, longer-range version of the A320. We're on the A350. That rate -- that ramp is also stepping up from roughly 9 a month, although the A380 is sunsetting, we're still benefiting from new programs that are coming out of Boeing, Embraer, Gulfstream, Lockheed Martin. We're increasing our F-35 content.

So as Jim mentioned earlier, this diversification of platforms is really important. 3 years ago, we were overexposed with the 747, which historically have been a profitable program, and with rates as high as 7 a month, now it's less than 1. So we don't want to be singularly exposed. And as I've mentioned in my remarks, structures on 737 is not a high content for us. It's a more systems content.

So we're going to continue to diversify the base. In the quarter, we had wins with Cessna, as an example. We're going to expand our rotorcraft business, spending a lot of time with Sikorsky. The earlier question about the future vertical lift, so that's going to be a source of growth for us. So I would say that's the theme, is growth comes from diversity of platforms, diversity of customers, and then geographic diversity with more coming out of Asia.

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Sheila Karin Kahyaoglu, Jefferies LLC, Research Division - Equity Analyst [62]

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And then just related to your prepared remarks on the MRO market overall, given you've divested some structures programs, does this change your aftermarket strategy at all?

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [63]

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No, I don't think so. The customers -- I'll use Bombardier as an example since it was high profile. Concurrent with the decision to sell the wing program to Bombardier, we were given 2 awards from Bombardier. One was an MRO award and one was a fabrication award, and we since sold the fabrication business. But there was no break in customer relationships that precluded us from growing on those platforms.

We don't really have any aftermarket content on the G280. And we are in discussions with Gulfstream on G500, 600, 650, but they do a lot of their aftermarket themselves. So I think the growth in aftermarket is going to be more from the commercial OEM carriers and expanding our business with customers we already support, like FedEx and UPS. FedEx operates the largest aircraft fleet in the U.S., and they do it in a very effective way based on closed management of their MRO effort. And they like Triumph's performance, they like our turnaround time. I was in Memphis a few weeks ago, talking about what we can do to better support them. Are there channels beside structures and components and interiors that we can do? And I'm excited about it. So I'd say, less from the structures programs we divested and more from the carrier fleet.

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Operator [64]

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Our next question is a follow-up question from Mike Ciarmoli with SunTrust.

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Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [65]

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Yes. Just one follow-up question on what you mentioned with the FMS. There's several of your competitors are placing them or positioning themselves as kind of turnkey providers in military MRO to countries. One-stop-type contracts to Bahrain and several UAE and several other locations. Can you talk about the military MRO environment as a whole? It seems like it's going to be one of those tailwinds for you that will outperform in the near term and I would say the medium term.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [66]

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Yes. I don't think our approach will be the same as the Tier 1, and I used to do that as a Tier 1. It's either setting up or selling into those markets. And when you control the platform, you have much more influence over its turnkey support.

Where Triumph is, we've got niches that we're very good at. I'll focus on one, thrust reversers. Thrust reversers, we're one of the leading provider in the world on overhaul unit, and we know how to do it well. We bring them in, we induct them, we assess them, and we provide tailored repairs. And some things, we use parts that are reused from on hand and rotable inventories, sometimes it's new parts. But because we do it well and fast, carriers will come to us and ask us to supply those on quick turn.

So we're going to continue to sell in our niches, but we'll also partner with companies like Boeing Global Services. We met with them at the airshow, and we asked them, what are the unsolved problems globally in the MRO market, including military as you asked. And they gave us a list of several subsystems and components for which there's not a robust MRO market. So we're going to focus on expanding our niches into those areas of demand as opposed to going to customers and say, we'll be your one-stop shop. I don't think that's really in our capability set today. And we're going to offer more value by doing what we do well. Does that hit your question?

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Operator [67]

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Ladies and gentlemen, this all the time we have for questions today. I'd like to turn the call back to Dan for closing.

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Daniel J. Crowley, Triumph Group, Inc. - President, CEO & Director [68]

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Well, thanks for, again, supporting our call. We're committed to a strong year in FY '20, and starting to see the benefits of all the restructuring work we've done for the last 3 years. And I appreciate all the investors that stayed with us and the new ones that have joined us over the last year. And we look forward to delivering on them in the coming quarters. Thanks.

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Operator [69]

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Thank you for participating in today's conference. All parties may now disconnect. There is going to be an audio replay of today's conference starting today at 11:30 a.m. Eastern Standard Time and concluding on August 8 at 11:59 p.m. Eastern Standard Time. To access the replay, you can dial 1800 -- sorry, (855) 859-2056 and enter an access code 4958108. Thank you.