Daniel J. Crowley - Triumph Group, Inc. James F. McCabe Jr - Triumph Group, Inc..

Robert M. Spingarn - Credit Suisse Securities (USA) LLC Seth M. Seifman - JPMorgan Securities LLC Samuel J. Pearlstein - Wells Fargo Securities LLC Krishna Sinha - Vertical Research Partners LLC Cai von Rumohr - Cowen & Co. LLC David Strauss - Barclays Capital, Inc. Gavin Parsons - Goldman Sachs & Co. LLC Peter J. Arment - Robert W. Baird & Co., Inc.

Michael Ciarmoli - SunTrust Robinson Humphrey, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group's Conference Call to discuss our First Quarter Fiscal Year 2019 Results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast.

Please ensure that your pop-up blocker is disabled if you're having trouble viewing the slide presentation. You are currently in a listen-only mode. There will be a question-and-answer session following the introductory comments by management. On behalf of the company, I would 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 involves known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

Please note the company's reconciliation of non-GAAP financial measures to comparable GAAP measures is included in the press release, which can be found on their website at www.triumphgroup.com. In addition, please note that this call is the property of Triumph Group, Inc.

and may not be recorded, transcribed or rebroadcast without explicit written approval. At this time, I 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. Go ahead, Mr. Crowley..

Hey, thanks, Kevin, and good morning. During the first quarter of fiscal 2019, we continue to execute on our turnaround and demonstrate progress on our operational and financial objectives.

Key takeaways from the first quarter on page 3 are top line growth, decreased use of cash and significant risk retirement on our Structures programs, allowing us to enter the final phase of our transformation on a growth trajectory.

We're maintaining full year EPS, and given our clear line of sight, we're providing cash guidance with reduced cash use year-over-year. We're confident we're taking the right steps to advance Triumph on our path to value.

Turning to page 4, total net sales for the first quarter were up 7% and organic net sales were up 3%, both year-over-year, excluding divestitures and the impact of ASC 606, with all three segments showing organic growth.

The organic sales increase of 6% in Integrated Systems was due to accelerating Apache helicopter component deliveries as well as ramp rates on the A320 and 787 while product support increased 13% year-over-year enabled by strong KC-10 fleet support for accessories and thrust reversers and C-17 nacelle overhauls, and aerospace structures revenue benefited from initial production deliveries on the Global 7500.

Our top line growth in the quarter is a leading indicator that our operational turnaround is delivering results. It reinforces that fiscal year 2018 was a trough year for revenue and that we anticipate returning to top line growth this year. We expect improved cash and earnings to follow in the second half of FY 2019 and to expand in FY 2020.

While growing the top line, we are doubling our efforts to enhance margins through price improvements and reductions in overhead and SG&A. Aerospace Structures' adjusted operating margins also was up versus the first quarter last year, reflecting the positive impact of our restructuring activities.

We've essentially completed development spending on the Global 7500 program, accelerated our facility consolidations – only two of which remain at the company level and renegotiated contracts to further derisk our backlog.

On the growth front, we're taking a disciplined approach to competitive wins to ensure we fill our backlog with high-quality orders that will contribute to better margin performance. On page 5, backlog for the first quarter was up 5% over the prior year.

Orders are traditionally non-linear given award timing and we view the year-over-year improvement in backlog as a really positive step forward. During the first quarter, Triumph Airborne Structures was awarded a three-year contract to provide engine nacelle component repair and material services for military cargo aircraft.

As announced during this year's Farnborough Airshow, Triumph Integrated Systems was awarded a contract with Saab for Gripen Airframe Mounted Accessory Drives. At Farnborough, Triumph held more than 200 meetings and shared our progress with customers, advancing partnerships and new business opportunities.

It's clear there's growing desire in the industry to engage Triumph as a preferred MRO partner, as a systems provider with strengths in actuation, fuel hydraulics and gearing solutions, and as a complex structure supplier. Triumph's new business pipeline remains robust at $12.8 billion, of which $6.8 billion is military.

We look forward to the imminent awards of the U.S. Air Force's T-X trainer competition where we are teamed with Boeing Defense Systems, and the Navy's MQ-25 refueling drone where we are supporting all three competitors. We anticipate opportunities with long-term value north of $3 billion to be decided in the second quarter.

As such, we expect bookings and backlog to pick up throughout the fiscal year. On page 6, Triumph's focus for growth remains on our core areas where we can provide higher-value and differentiated offerings to our customers through innovation and IP.

In Integrated Systems, for example, our recent agreement at Farnborough with GE Additive to broaden Triumph's use of additive manufacturing technology is indicative of our investment priorities and our partnerships.

Our additive R&D will advance our prototyping and design competencies and accelerate our ability to design and build optimized system components for our customers. We are investing in proprietary processes for thermoplastics used in structural applications to reduce weight, cost, and lead time while improving impact resistance.

Not susceptible to moisture or aircraft fluids, thermoplastics don't require the autoclaves and clean rooms of the past while enabling large unitized structures.

In Q1, we announced our strategic collaboration with Quickstep, Australia's leading independent manufacturer of advanced carbon fiber composite components to expand our position within growth markets and provide high performance and differentiated products to commercial and military OEMs.

The latter are just two examples of what we're doing to reinvent our Structures business. The commercial narrow-body jet remains an important growth platform and one that continues to ramp up.

We have strong positions on system components on both the A320 and Boeing 737 and are in discussions with Boeing and Airbus to expand our content as they develop their new aircraft versions. We met with the top leaders from both firms at Farnborough and are aligning our portfolio and R&D efforts with their supply chain needs.

Triumph Product Support continues to perform well on their traditional repair contracts as we transition towards a more partner-based business model using joint ventures and performance-based programs such as power-by-the-hour and performance-based logistics.

Awards in the quarter for nacelle component MRO from a domestic 737NG operator as well as an A320 operator in the Asia-Pacific region reflect our success in reducing turn times and cost. We are engaged in a number of partnering discussions with Boeing Global Services, Bombardier and Airbus, building on our success with China Southern Airlines.

Triumph continues to engage engine OEMs, an important market for us as we supply fuel pumps, metering, controls, actuation gearboxes, acoustic panels and high-temperature composites inducting on new applications. Our investments in additive, thermoplastics, digital factory and automation will increase our market value within the space.

In June, the U.S. Navy procured its first 53 CMV-22 Ospreys for use as carrier onboard delivery aircraft as part of a $4.2 billion contract mod announced by the Pentagon. We congratulate team Osprey for this achievement, and Triumph is a key member of this team providing critical actuation, gearing and structures.

We continue to expand our efforts to broaden our scope of military programs and continue to target 30% of revenues to be generated from military end markets over the next three years. T-X, MQ-25, Light Attack and multiple aircraft life extension programs will help us meet our targets.

We're using our footprint in Europe on two recently announced sixth-gen fighter programs, Tempest and the Future Combat Air System, combat platforms aimed at replacing existing fighter aircraft in European air forces. As we win, we will enhance margins through price improvement and cost efficiencies.

We are deploying the Triumph Operating System to deliver increased revenues at lower staffing levels. In Q1, we made further progress in reducing supply chain costs using low-cost countries as we did in FY 2018, and we will pursue outsourcing on Structures' programs opportunistically.

Moving to page 7, I want to highlight our cash improvement efforts during the quarter and provide an update on key programs. We are increasingly confident that we are nearing the point at which we will begin to generate positive cash flow as we retire program risks.

While we are seeing compelling growth in our Aerospace Structures, we're also actively addressing our cash, usage particularly on the Global 7500 program. As you know, Triumph Aerospace Structures design, develop and produces the advanced wing for the Global 7500 program in collaboration with Bombardier.

Awarded in 2011, both firms worked together through challenges to meet enhanced performance requirements which have now been satisfied and validated through rigorous flight testing. The joint team has completed virtually all wing development milestones in support of entry into service. This is a huge technical and cash risk retirement.

Our supply chain is ramping up and moving the work to lower cost sources. The factory in Red Oak, Texas has now supplied 18 production wing boxes which will come out of inventory as wings complete and aircraft delivered this year.

That said, the cost to complete these wings at Bombardier's final assembly line has been much higher than anticipated in last year's settlement and is the primary contributor to Triumph Aerospace Structures' cash use over the last several quarters.

To give you a general sense of the outsized impact of the program, its impact on our cash usage, in the first quarter, Global 7500 alone used more than 100% of the total Triumph Q1 cash use. Without these costs, Triumph would have been cash positive in the first quarter.

We believe that program concurrency will peak in the first half of this year and expect spending to decrease in the second half of FY 2019 as the program completes wings in station and comes down the learning curve.

Bombardier and Triumph continue to have amicable programmatic and commercial discussions on the wing scope of work and are jointly analyzing the most cost-efficient supply chain arrangement to ensure continuity of supply and enable Triumph to return to a more predictable cash flow and profitability.

While we can provide no assurances of a successful outcome to these discussions, we expect any changes from the baseline to enhance Triumph's shareholder value and we'll provide updates when we have greater clarity.

Elsewhere, we are on track to transition the G650 assembly work from our Tulsa and Nashville facilities to Gulfstream's coproduction facility in Savannah, while retaining overall program management and supply chain responsibilities. The G650 is now cash positive for the first time since the transfer from Spirit.

Planning for the transfer of the E2 program from our Red Oak plant to Korea's ASTK facility is well underway and progressing well. Our continued participation in programs like these enables us to maintain revenue with significantly improved cash and margin profiles.

Note that we're also working with the G280 customer, IAI, to determine the optimal supply chain arrangement as well given its historical cash use. And last, our transition of the Boeing 767 structures from Texas to Florida is proceeding well with the first articles coming off the new tools below targeted hours. Moving to page 8.

As we clean up our program portfolio, we are making equal progress on our operating company portfolio. During Q1, we signed agreements to divest two non-core businesses. And once completed, we expect these asset sales to positively impact our profitability and cash flow in the subsequent quarters and years.

Jim will provide more color on our progress here. So, looking back on the last two years, we've simplified our company's organizational structures, improved underperforming businesses to position them for sale and in some cases, for growth as part of Triumph. We now have 20 operating companies today which is less than half the 47 that we had in 2016.

Over the same two-year period, we reduced the number of Triumph sites to 56 from 74 and occupancy by over 1 million square feet. And once all these consolidations are complete, these actions will support sustainable profitable EBITDA growth.

Taken together, these path-to-value actions move us closer to achieving our goal of improved margins and reduced debt as we delever the company and swing from high cash use to positive cash from operations over the next year.

And having achieved greater stability in the business and de-risk our Structures contracts, we're now able to provide cash guidance. Just as we've done in the past two fiscal years, we will continue to explore all paths to meet our financial targets. Jim will now provide more specifics on Q1 and our outlook for the full year.

Jim?.

Thanks, Dan, and good morning, everyone. Our first quarter results were largely as we anticipated. More importantly, we continue to set the stage to grow our sales and improve our profitability and cash flow moving forward. On slide 9, you'll find our consolidated results for the quarter.

Our net sales were up compared to the prior year first quarter with all three of our segments generating organic top line growth, and this is our second consecutive quarter of organic growth.

Operating margin, adjusted for the impact of the pension accounting change, restructuring costs and the loss on assets held for sale, increased 130 basis points to 4%.

With respect to segment results on slide 10, sales in our Integrated Systems segment increased nearly 6% organically after accounting for our Embee divestiture last year, due primarily to increased volumes on several commercial programs noted on the slide.

Integrated Systems operating margin was approximately 15%, down from last year due to a favorable settlement of customer assertions in fiscal 2018 combined with higher costs this year related to the consolidation of businesses within this segment.

We expect these consolidation cost to be behind us in FY 2019, which will allow us to return to historical levels of profitability. Integrated Systems expanded its backlog for the sixth consecutive quarter with a book-to-bill ratio of just over 1:1.

Turning to slide 11, first quarter sales for our Product Support segment were up 13% on an organic basis after accounting for last year's divestiture of the engine and APU businesses, driven by stronger demand for structural component repairs and accessories.

Product Support operating margins were down slightly compared to last year as we come down the learning curve on a new repair program. We expect to return normal segment margins going forward. The Aerospace Structures results are summarized on page 12.

After accounting for the divesture of Long Island's build-to-print machining business, segment sales were up 12% organically as we ramped production on the Global 7500 program.

Aerospace Structures' operating margin, adjusted for the adoption of the new pension accounting standard, as well as restructuring costs, was 2%, a year-over-year improvement, driven by the actions we've taken over the past two years.

Aerospace Structures had a book-to-bill ratio of 0.84:1, which is reflective of the significant revenue growth for the segment in the quarter as we increased deliveries, particularly against our Global 7500 backlog, coupled with the timing of order flow. Turning to slide 13, free cash use was $78 million during the quarter.

This was a significant improvement on both a year-over-year and sequential basis. While we have much left to accomplish, we're pleased with the steady progress we're making towards predictable free cash flow. Capital expenditures were $12 million in the quarter.

We used $4 million for restructuring and $81 million on the Global 7500 program, $10 million of which was development expense. On slide 14 is a summary of our net debt and liquidity. Our net debt at the end of June was approximately $1.5 billion.

In July, we negotiated and executed an amendment to our revolving credit facility which has enhanced our compliance margin while we progressed with certain cash-consuming programs, particularly the Global 7500 program.

With this amendment in place, we have increased financial flexibility, with availability of about $543 million, and we are in compliance with our financial covenants. Slide 15 is a summary of our FY 2019 guidance.

Based on anticipated aircraft production rates, we continue to expect fiscal 2019 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. Our guidance assumes a 17% effective tax rate for the year. Cash taxes will be about $11 million for the year.

We are expecting capital expenditures in the range of $50 million to $60 million. We're expecting free cash use for the full year to be between $200 million and $250 million. If you turn to slide 16, you'll see that the first quarter included repayment of advances received in prior years of $53 million, and the Global 7500 program used $81 million.

Adding these items back to our reported cash use, results in a pro forma positive free cash flow of $56 million in the quarter.

For the fiscal year, our expectations for free cash use, which we currently forecast to be in the $200 million to $250 million range, assumes liquidation of $180 million of advances and net spending on the Global 7500 program of $130 million.

Adding these items back to our guidance, our pro forma free cash flow guidance is between $60 million and $110 million positive for the year. We expect to use cash through the third quarter and be cash positive in Q4.

As you can see on this slide, the actions taken to-date and currently underway in our Aerospace Structures' cash-consuming programs through outsourcing, contract negotiations, and operational improvements have given us confidence in achieving our cash flow objectives.

After the end of the quarter, on August 1, we announced the sale of Triumph Structures-East Texas, another build-to-print machining business. We anticipate divestitures will generate cash this year.

We have announced divestitures totaling approximately $130 million of annual sales, and we have another $300 million of annual sales of divestitures in the pipeline for this year. So, to wrap up, one quarter into our fiscal 2019, we are tracking with our expectations headed into the year.

We are pleased with our revenue growth and are confident that with the cost reduction and portfolio reshaping actions we've been taking profitability and positive free cash flow will follow. Now, I'll turn the call back to Dan who will make some concluding remarks and then we'll move to your questions.

Dan?.

Hey. Thanks, Jim. So, as we entered the follow-through phase, we're really focused on profitable growth and positive cash flow. We're executing our plans, derisk the programs that Jim mentioned.

With the financial benefits resulting from consolidations, divestitures and investments starting to come in, we're confident our actions are helping us to achieve our goals. Our restructuring and transformation efforts are paying off in top line growth.

This sets the stage for year-over-year cash improvement and a return to historical margins over our planning horizon. While progress is not linear, we are on an upward trajectory; and I want to thank the men and women of Triumph Group as they overcome our customers' hardest challenges.

Our team is up for the last push on the transformation this year, and we expect to be in a stronger competitive and financial position in FY 2020. As Triumph employees celebrate our 25th anniversary this year, we look forward to completing our turnaround and accelerating our strategic plan to deliver enhanced value to all of our stakeholders.

Kevin, I'll now open the call for Q&A..

At this time, the officers of the company would like to open the floor to any questions that you may have. We ask that you limit yourself to one question and one follow-up to give everyone an opportunity to participate. Our first question comes from Robert Spingarn with Credit Suisse..

Hey. Good morning, guys..

Good morning..

I wanted to ask [Technical Difficulty] (00:22:02) we're in the last couple of innings of this turnaround as [Technical Difficulty] (00:22:06) the themes that stood out for me today in reading your materials and listening to your monologue is that Triumph is sometimes finding a better outcome when work gets transferred either between factories or to the customer, G650 to Savannah, the E2 to Korea, the Global 7500 up to Canada in what is turning out to be very expensive traveled work.

And then you mentioned the Boeing 767 moving internally.

What's going on in these facilities to cause these issues? And is this an argument for more insourcing at the customer level and/or at least collocation of your work with the prime?.

So thanks, Robert. And I didn't catch the beginning of your question, but I got the second half, so I'll try to cover it. Getting the right work in the right place is so important, and sometimes work when it's originally bid years ago, these are multiyear programs.

They have assumptions of what base would be in a certain facility or what their cost structure would be. And by the time it gets through to development, you conclude there's a better way to do it, potentially moving the work offshore. In the case of the E2, ASTK already makes all of the fabricated details that go in the fuselage.

So having them assemble it and ship it to Brazil is a much lower-cost option. So just as water finds its own level, we're making sure that each of these programs is performed at the right location. In the case of Boeing 767, we had two facilities. Our facility in Grand Prairie is a leased facility. We'll be exiting that over the next two years.

And the facility in Stuart, Florida does the Boeing 767 wing center section already. So combining that work gets base benefits and rates. We haven't made any decisions yet on Global 7500. We're continuing to execute. It's true that the cost of doing traveled work were much higher than doing it in station.

So ship over ship, we're reducing that traveled work content, and that's part of how we're going to reduce cash (00:24:12). As far as insourcing to the prime, I think many of the primes have concluded that having the wing close to their factories and having design control of the wing is to their advantage.

In some cases, they've decided that they may have outsourced too much. They're bringing it back. But they're still coming to Triumph where it makes sense. For example, on the T-X offering for the new trainer, we are the source for the wing, fuselage and the empennage and it's the right answer for Boeing Defense. So it's not a one size fits all..

Yeah.

But does this mean that your current – your new business, you're thinking this way with the location of development production so that you don't repeat what seems to be happening on an awful lot of programs?.

So I think we're being more thoughtful about where we place work in terms of long-term cost structures. And the world has changed a lot from, let's say, 5 or 10 years ago when the legacy Vought business had seven factories in different locations, many of them higher cost areas. And so we're dealing with that in a direct way..

Okay. And then just lastly for Jim, I just wanted to see if you could give us a little bit more detail. You've talked about it all morning.

But how does the Global 7500 cash burn – you say it improves sequentially throughout the year, but can you put some numbers around that?.

Well, the numbers we have are actually what happened in the quarter, which was $81 million of usage, of which $10 million is development expense and the balance is inventory primarily. For the full year, we've said $130 million. I don't have a particular spread, but the trend is down. So, full-year $130 million (00:25:57).

So, sort of draw a straight line or maybe it's an accelerated line down?.

I think it's going to improve more dramatically in the second half and certainly in the fourth quarter..

And did you say which unit you'd become cash positive?.

We haven't said that. And we've said before that in between $75 million and $100 million is when you'd see a typical program become cash positive..

Okay. Okay. Thank you both..

Thank you..

Our next question comes from Seth Seifman with JPMorgan..

Good morning..

Hey. Good morning and thanks very much. Good quarter. So, just wondering as we think about the Aerospace Structures business, longer term when we're done with the divestitures, let's put on hold a second some of the new opportunities that are out there.

Are we thinking about that being, let's say, a $1.7 billion business in terms of sales? And what kind of EBITDA margin do you think you can do there in the future when you're through the transformation?.

Seth, its Jim. We've said that we've got $130 million of sales worth of divestitures we have announced this year and $300 million more that are targeted for this year. And I would say that more than half of those are in that segment.

We've said for this segment, Structures in general, is kind of a high-single-digit normalized margin and that's what we would look for. And you can do the math, but $1.7 billion is in a reasonable range for adjusted sales post divestitures..

Okay. Okay. And then following up on the G650, is there incremental improvement in the cash flow on G650 as we look out to 2020 relative to the improvement? I assume there's a decent amount of improvement baked into fiscal 2019 versus fiscal 2018..

There was a big swing in cash from 2018 to 2019, and in part because of our negotiation in payment terms with G650 and also because we've continued to come down the learning curve on the operation at Tulsa and in Nashville.

So we're confident about the performance of the program going forward and we expect the cash performance to continue to be strong in FY 2020 and beyond, and we're on that program for the long term. Gulfstream has very good prospects for the platform and continues to look at derivative aircraft and we will be part of that success..

Great. And maybe just finally just want to confirm, the $180 million of cash advance burn this year that, A, that's a net number; and B, you've kind of talked in the past about advances being a logical way to finance the business which I think does make a certain amount of sense.

And has your thinking on that evolved at all or is it still the same?.

I think some of the larger discrete advances we had in prior years have become just changes in terms, getting paid quicker, have modest smaller advances on a number of programs. The $180 million is a gross number because we don't have any other big advances right now. So that's the gross burn off of prior years' advances during the year.

But we're continuing to seek advances, but they're not that large a magnitude and they're more built into the terms of contracts..

And I think the range that I estimated a couple of quarters ago of $100 million to $200 million of sort of nominal advances each year still rings true. It's still episodic and tied to new awards or extensions or if they ask us to take on work from another supplier, we may ask for an advance to facilitate that.

So, it's not linear smooth but it's in that order of magnitude..

Thank you. Our next question comes from Sam Pearlstein with Wells Fargo..

Good morning..

Good morning..

Just to follow up on that last question, after the advances are repaid this year, are there any that linger into 2020 or are they complete once this year is done?.

There's a modest amount that lingers into 2020. I don't know the exact amount, but it's nowhere near the payback. Majority is payback this year..

Okay. And earlier in the year, if I remember right, and I think, Jim, you had said that there was going to be no significant increase in net debt this year which implied that I guess the divestitures would offset the free cash outflow.

Can you just update us here? You've talked a lot about the sales that you're going to divest, but just in terms of the proceeds, how should we think about the proceeds relative to the free cash outflow?.

We don't have the proceeds yet because we're in the process with some of the ones that are in the pipeline. But the nature of these businesses are that they're build-to-print businesses. We're finding strategic owners for them that are willing to pay a premium because they have synergies.

So, I think you have to just look at the market value of build-to-print businesses with that kind of sales. As we get closer, and we have more clarity around that, we'll certainly disclose the amounts that we expect. But that was the premise for the offset to the operating cash use was from the proceeds from the divestitures..

But it doesn't sound like just based, the build-to-print businesses and the sales you've talked about, it would seem like it's not going to be sufficient to offset all of the free cash outflow.

Is that fair?.

Sam, as I said, we don't know how much we're going to be able to get yet. We don't say that we're going to sell something definitely, we explore sales. So if we don't get the proper amount, then we're not going to follow through with those sales. But we have multiple opportunities for sales in the pipeline..

We have sufficient pipeline to exceed that number..

Thank you. Our next question comes from Krishna Sinha with Vertical Research..

Hi, thanks.

Just on your restructuring, can you just talk about how much restructuring or how or when the restructuring will flow through to the margins or how much you've already taken on that? I'm just trying to get a sense now that rev rec has come and disaggregated the pension, how much of a sequential improvement are we going to see in margins and how much more is still to go in terms of restructuring and flowing through to margins?.

Well, let me first thank my finance team because they've all had serious brain cramp for the last four months dealing with both pension accounting and rev rec and they got through it very cleanly with the help of the E&Y. So we're really looking forward to our FY 2020 forecast as being a clean year.

And FY 2020 is when we expect to see the contribution of the savings from the consolidations. Most of them took about 12 to 18 months to do and have paybacks within a similar period, 18- to 24-month payback. So, that's the first year we see the benefit.

We did get some savings in the first two years, but most of it went to pay for price concessions and cost growth on red (00:33:23) programs. And we're disappointed about that, but we're glad we did the savings initiative. Otherwise, we wouldn't have been where we were.

Jim?.

Yeah. In the quarter, we saw $4 million of restructuring. Majority of that, over $3 million, was in the Structures group and the balance was Integrated Systems. It's consolidation of facilities. And the costs go beyond the out-of-pocket cash costs. There's also setup and startup costs of a new facility and getting the new teams to work together.

So we moved three facilities to one last year in Integrated Systems. We're consolidating another facility this year in Integrated Systems. And we're seeing some of the benefits of the prior actions, but they're all embedded in the margin trends which we expect to be positive in both those segments..

Yeah. I'll add to that. These facility moves are not for the faint of heart. You have to build ahead. That drives up your working capital. You usually have a saw tooth in the learning curve. So temporarily, things cost more but then you get the benefits. So I really want to get to a stable number of sites. I mentioned 56 sites now in our notes.

When we're done with the divestitures, that number could drop by at least 10 or 15 more. So we're going to get down to a smaller, more manageable company, one that we have more IP and more proprietary process and candidly can manage better..

And then just a quick follow up, so how close would you say, now that pension has been disaggregated, your P&L sort of operating EBIT is to your cash EBIT? I mean, are there other moving pieces now because of the way the accounting is done? And I know you've taken some contract amortization.

So I'm just trying to get a sense of how close underlying EBIT is to cash EBIT..

Yeah. It isn't clear always because of the long-term programs. As you know, we have EACs that gets into estimates for longer periods. And there's certain income that you're booking that you're not receiving the cash yet. So there's not a one-for-one relationship to that.

And that's why really when I came in here, it's been two years now today, I said, let's look at cash. Let's now continue to look at EPS and OI. Let's focus as our primary objective to be the cash flows here because ultimately the EBITDA has got to turn to cash. And that's what we've been doing.

And that's why we talk about programs, the simplest way to look at them is what's the cash flow from that program and when is it going to go positive again. And yes, we have to do the GAAP accounting, but it just gets more complex with ASC 606, where we're setting up these contract assets, recognizing revenue before getting paid for it.

So you have to look through it to the cash. I don't think there's a direct relationship we can give you, a particular percentage and a particular period for EBIT. You've got to consider both and then look at our commentary in the MD&A about what's been driving the cash relative to the book income..

Thank you. Our next question comes from Cai von Rumohr with Cowen & Company..

Yes. Thank you very much. So for the first time, you mentioned cash flow in fiscal 2020 and the only thing you said was that you expect the cash drain in Structures to decline. You did talk about the fourth quarter being cash flow positive.

Should we be cash flow positive in 2020 on both a cash flow and ops basis and the free cash flow basis?.

So, Cai, yes, I said that we are forecasting to be cash positive in the fourth quarter of this year and we do intend to be cash positive in FY 2020. We haven't given any specific guidance to the magnitude yet, but that is our plan. And the fourth quarter is going to be a launching point for that..

Got it.

And then, so when you say cash positive, do you mean cash flow from ops or free cash flow after CapEx?.

I would look at free cash flow because that's what we've been reporting..

Okay. Super. And then – so if we look at the – it looks like below the line of the $78 million that there was a use of about $6 million.

What did you get for proceeds of the divestitures in the first quarter? And East Texas, what do you expect to get from that?.

So East Texas is very modest. In our press release, we said it was only $20 million of sales in that business. So it's not a material impact on the cash we see from that. It's really about divesting a noncore business that draws attention and modest cash. So the other part of your question was the divestures.

So we announced two divestitures around the time of last earnings call. They haven't closed yet. We expect them to close this quarter. And then when we do, we'll disclose the amount of that..

Thank you. Our next question comes from David Strauss with Barclays..

Thanks. Good morning..

Good morning..

Good morning..

On the Global 7500, can you give us any sense of your learning there, what kind of learning curve you're achieving, maybe adjusting for all the traveled work, what kind of learning you're seeing and what kind of learning you're assuming from here within your $130 million cash burn forecast for this year?.

So I'll talk in general terms. The programs typically run a compound (00:39:01) learning curve, steeper in the first 50 or so shipsets, and then it tends to flatten out, with automation making that even flatter. The more you automate, the less you get. And you tend to get step functions as you put new automation in.

Right now, the program has a, I'll call it a bit of a disrupted learning curve because we finished the wings to about an 80%, little slightly higher percent of completion at the Red Oak facility, and then we ship them up to Bombardier's Toronto facility.

And up there, they continue to install components and hang control surfaces and whatnot, and do it on a noninterference basis after they've mated the wings and the fuselage.

And we're in lockstep with Bombardier on driving that back to the left and driving it upstream, because the premium you pay for doing that work out of station can be as high as 7 to 10 times as much as you do it in station. So, it's in everybody's interest.

It has benefited the program because it's allowed aircraft to flow from Bombardier to ramp up and retire risk (00:40:11) on the final assembly line. But it's come at a cost, and we disclosed that.

So, our goal – and now we've brought that traveled work now down to essentially just the external control surfaces which can be installed at less of a labor hour premium. So, we know our learning curves; we're tracking them.

When we get to a completely clean build in Red Oak where the wing is 100% complete, we expect to be running curves that are in the front end of the line that are in the 70% to 80% range. And then those curves will flatten out over the later shipsets..

When you ship the wing sets to Bombardier at this point at 80% completion, do they come off your books and go on Bombardier's books, or are you still holding them on your books until they've reached some sort of level of completion out there?.

So, yeah, I won't discuss the specifics of our contract payment profile. What I will say, it's been part of our commercial discussions with them. And until the wing is fully certified, we retain oversight of the wing.

But because we're working as an integrated team up there on the line, they know exactly where we are on every wing, its status, multiple times a day and – but once it has a certificate of compliance, then it's officially turned over to Bombardier..

Yeah. And from an accounting standpoint, it's when title transfers is after the certification at the end of the line up in Toronto. So even though it's stripped (00:41:40), it's still in our WIP then..

And that's been part of why our working capital has grown over the last four, five quarters is we've primed the line up in Toronto and then we've had wings flowing in Red Oak. But they don't get bought off and shipped until aircraft deliver offline. And that's looking much better now for the second half of the year..

Okay. That's helpful. Last question I have, the $130 million cash burn that you're forecasting for the full year on Global 7500, so another $50-or-so million.

Are you assuming any adjustment in contract terms or some sort of settlement with Bombardier within that number, or are you assuming what you have today in terms of contract terms hold?.

We're assuming what we have today in terms of contract terms. It's that simple. And we'll look to improve it but that's where we're at..

All right. Thank you..

Thank you..

Our next question comes from Noah Poponak with Goldman Sachs..

Hey. It's Gavin on for Noah. Good morning..

Good morning..

Good morning..

I think you'd said you weren't going to give fiscal 2019 cash guidance until you had more visibility on the contract terms, and I think following a bit on David's question, it still shows Global 7500 and G280 in negotiations on the deck. But it sounds like those are done for the year.

So is there a potential upside to fiscal 2019 cash guidance from further contract negotiations for the year, or is that – or is there upside in fiscal 2020 or are those locked in for this year?.

So I view it more as upside for FY 2020 than 2019 only because when you negotiate a change in approach, you do the agreement, the planning and then the implementation done over a longer period. For example on the transition of Tulsa to Savannah on the G650, that's a yearlong transition.

Now, in that particular case, we did improve our cash terms, so that helped us in the current year. So it'll be a function of what the specific conditions are of a given transfer, but it tends to be – the benefits tend to come in the second year after the agreement. But every case is different, Gavin..

And given you do have a bit better visibility now but you also have the divestitures coming up, you've had some restructuring, can you give us an update on what you think normalized free cash flow ex advances is?.

Well, I don't think we've given anything other than insight into the cash flow, and so people can make their own judgment around what normalized is. But what we presented on page 16, the pro forma free cash flow in the quarter of $56 million positive is the most recent period's adjusted normalized free cash flow.

It just takes out the repayment of advances of $53 million and the Global 7500 cash burn which is not going to go on forever..

Okay. And the – I'm sorry, go ahead..

So for the full year, you see that we have a range of $60 million to $110 million of normalized taking out those two adjustments..

Okay.

And then last for me, the fiscal 2020 number, is that ex advances or with advances – free cash?.

Yeah. So we didn't give a number. We just said we want to be positive free cash flow next year as a planning target. So we're not giving guidance for 2020, but it would be free cash after everything, including advanced repayments..

Okay. Great. Thank you..

Our next question comes from Peter Arment with Baird..

Yeah. Good morning Dan, Jim. Thanks for all the color.

Dan, hey, maybe you could just – on the divestitures and the consolidation program, you gave us a lot of color and there's been a lot of progress since fiscal 2016, but can you help me square up kind of the where the facility consolidation efforts kind of – you've disclosed, I think, you've reduced footprint by 1 million square feet but in the 10-K, you've kind of got a much larger footprint target out there.

Maybe you could just give me a little more color on when the timing is on that..

one in Hawthorne, California and L.A., and the other is in Grand Prairie, Texas. And those two programs, those two sites complete the 747 program over the next two years, we plan to exit those sites. The teams there know that. They're working incredibly hard, even though they know it'll eventually come to an end.

We'll fulfill our contract obligations, and we're certainly going to follow Boeing's lead on the timing for that. But they've allowed us to build ahead to maintain a more economic production rate and our quality and on time delivery continues to be very strong.

So, when those facilities are vacated, then we'll eventually step down another roughly 1 million square feet beyond what we've done..

Got it. That's helpful. And then just a clarification. Jim, on the debt levels, kind of – did you say that debt levels remain relatively stable throughout fiscal 2019 or should we expect them to kind of continue to rise a little bit, and then you'll offset them with any proceeds on asset sales? Thanks..

Yeah. I think the latter is a better characterization. We have $1.5 billion of net debt at the end of last quarter. And moving forward, we've given you $200 million to $250 million for the full year of cash use.

And the divestitures, while we close on the ones we announced or planning closing this quarter, and the balance of divestitures will close near the end of the year. So it will go up a little bit before it comes down from divesture proceeds..

Appreciate it. Thanks..

Our next question comes from Mike Ciarmoli with SunTrust..

Hey. Good morning, guys. Thanks for taking the questions here. Maybe, Dan, can just talk back on the facility consolidations? You've kind of mentioned on this supply chain, I guess, how you're looking at some of these new arrangements, you're moving work out of your current facilities.

How much excess capacity are you looking to free up? And then what are you doing with that free capacity? Are some of those facilities looking to be consolidated, or are you targeting – kind of you mentioned the $13 billion pipeline. I'm sure there are some big programs in there.

But maybe can you just speak to some of the capacity you're freeing up with the supply chain arrangements and what the plans are there?.

Sure. In many cases, the facilities we're going to vacate are going to be closed. So, Tulsa is an example, and our facilities I mentioned in L.A. and Grand Prairie, eventually those will be closed. And that has savings, and we'll offer employees jobs at other plants if they have that interest.

There are a few plants that we have moved work between locations. For example, our Spokane facility that does interiors, we've moved some of that work down to our facility in Mexico. That's a very high-performing organization, great lean activities, great cost structures. As products go up in volume, they tend to do a great job at that work.

And then we backfilled Spokane with more automation.

Some of our investments in thermal plastics and actually manufacturing your own extrusions starting with plastic pallets, and that investment in automation went into the Spokane plant to better use the workforce and talent there, and we've seen a lot of interest from Airbus and Boeing in that capability.

So I'd say on the structure side, it's more of a net decrease in capacity. But in the component and system side, it's allowed us to improve the capabilities of a given site.

Our new facility, Windsor, Connecticut although we're having some startup issues there is going to be a much better facility than the three we closed in order to save money last year..

Got it. That's helpful.

And then just on that pipeline, that roughly $13 billion, are there any programs in that pipeline that would require a significant amount of cash for starting up a new program, or are you just going into these opportunities with an entirely new mindset where you're going to look for those customer advances (00:50:11)? Just trying to calibrate if there's any programs that you win that could change the cash flow profile one way or the other..

It's the latter. The days of Triumph throwing long bombs with negative cash on commercial structures programs are over and we're going to both have a more diversified business base. And as we pivot to defense, I mean, if I look at the defense portfolio, there's 15 programs we're going after that are worth over $100 million each.

And those programs, they have non-recurring, but often, you can bid the non-recurring or amortize it over the deliveries. And the cash wells (00:50:55) tend to be a small fraction of the total contract value and that's by choice because Triumph just doesn't want to go back to where we've been in the last two years on high cash usage on programs.

And so I'd say that – when I talk about a disciplined capture process, Jim and I, that's one of the first things we look at in the deck. I brought from Raytheon and Lockheed a very structured, gated approach to business development.

And we brought the big ones up to corporate review, whereas a lot of contracts in the past were bid locally, and some of them have bit (00:51:29) us and our customers. So, fixing those but at the same time putting in process, so we review them.

And we flip to the cash burn page and we ask, under what conditions could we reduce this cash use profile, price trade with the customer, potentially share it with our supply chain? But it's an active part of our discussions, and you won't see us do big negative cash programs going forward..

Got it. That's helpful. Thanks a lot guys, appreciate it..

Our next question is a follow-up question from Cai von Rumohr with Cowen & Company..

Yes. Thank you very much. Actually, a follow-up to that.

Given what you've said about OEs probably in the future are going to have greater design control over their wings, does that imply that you're essentially getting pretty much out of the wing design and build? You're just going to be a build-to-print shop? And if so, does that also apply to other aerostructures?.

So, no, it doesn't apply that, Cai. For example, on some of the new start programs T-X, MQ-25, we're a design build partner with the OEMs, and often we're integrating system components. For example, MQ-25, when it operates on the carrier deck, it's got a folding wing, and we do folding wings and actuators and uplocks routinely already.

For example, on the V-22, we do the conversion mechanism. It swings the pylons into the vertical orientation. So, where we have expertise – this has not happened in the past cross-selling and joint offerings to customers. They don't always buy that way.

Sometimes they just buy pure structures but our goal is to promote offers to customers where they see the value added to Triumph, and it's not simply a low cost structure because that work is increasingly moving offshore. But where there's advanced materials or embedded mechanisms, Triumph can be a good fit with their needs..

Thank you..

Thank you, Cai..

Our next question is a follow-up question from Noah Poponak with Goldman Sachs..

Hey. Thanks for the follow-up. I know it's probably too early to comment, but just given the importance of the E2 program, I was just wondering how you're thinking about the potential Boeing and Embraer tie-up and how you're planning for that..

So we have talked to both Embraer and Boeing. I know all the senior leaders there. They had a great show at Farnborough, very excited about the prospects for the platform, John Slattery and Paulo Silva.

The closure on the relationship with Boeing, I understand, is still many months away but they are thinking through how do they work together in the interim.

And in Triumph, knowing both customers is going to align with that and we think we're ahead of the power curve by already moving some of this work to low cost countries and doing it at the front end of the ramp so that as they have success in the market, we're not having to move the program, while it's under way.

But we look forward to working with them once they joined forces..

Thank you..

Since there are no further questions in the queue, this concludes Triumph Group's first quarter fiscal year 2019 earnings conference call. There will be a telephone replay of the conference that will start today at 11:30 AM Eastern and it'll end on the 15 at 11:59 PM Eastern Standard Time.

To access the replay, you can dial 1800-585-8367 and enter in code 2361117. Again, that phone number is 1800-585-8367 and enter in code 2361117. All parties may now disconnect..