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

Sheila Kahyaoglu - Jefferies LLC Michael Ciarmoli - SunTrust Robinson Humphrey, Inc. Benjamin E. Arnstein - JPMorgan Securities LLC Jeff Molinari - Cowen & Co. LLC Gavin Parsons - Goldman Sachs & Co. LLC Kristine Tan Liwag - Merrill Lynch, Pierce, Fenner & Smith, Inc..

Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group Conference Call to discuss our Second 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. 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 expected future results, performance or achievements expressed or implied in the forward-looking statements.

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

Thanks, Kevin, and good morning. The main takeaway from our quarterly results is the fiscal 2019 is unfolding on plan. The quarter met our expectations and keeps us on track to achieve our commitments for the fiscal year.

Before I go further, I want to introduce Mike Pici, who joined recently as the company's Vice President of Financial Planning and Analysis and Investor Relations. Mike brings over 20 years of relevant experience to his new role, and we're excited to have him onboard.

I encourage you to refer to the supplemental slides we have on our website, as Jim and I review the quarter and discuss how we are positioning Triumph for the future. In Q2, we advanced on key financial and strategic objectives as reflected in our organic growth, program negotiations, portfolio updates and cash management.

Therefore, we reaffirm our fiscal year 2019 net sales, EPS and cash guidance. Our second quarter results include areas of strength across all three segments of our business.

Integrated Systems, Aerospace Structures and Product Support, each generated organic net sales growth both sequentially and on a year-over-year basis for the second consecutive quarter.

Integrated Systems performed particularly well, posting a 15% organic increase in net sales for the quarter, driven by content growth and rate increases on narrow-body programs. Organic revenues also expanded for our Product Support business over the prior year. In FY 2016, these two business units comprise 35% of the company's revenues.

Over the trailing 12 months, they now represent 40%. This underscores our revenue shift towards more profitable businesses. We continue to forecast positive cash flow in Q4. Cash use was up slightly more than expected this quarter due in large part to the Global 7500 program.

I'll have more on this in a moment, and Jim will outline the path forward on cash through yearend. Operating margins were up sequentially across all three segments, enabled by our transformation efforts, more prudent cash use and our continued focus on operational efficiency.

Strong revenue and margin trends in the quarter reflect our follow-through on our growth programs, which are outpacing the historic pressures of the sun-setting programs. This is leading to a positive impact on consolidated revenue growth. Ramp-up programs include the 737, A320, F-35, 767 Tanker and the Global 7500.

Five of the eight multi-year contract awards for the quarter were in our attractive Integrated Systems and Product Support businesses, building on prior momentum and reinforcing our commitment to growing these higher margin businesses. We expect this momentum to continue in Q3.

I want to emphasize the quality of these awards because this is what gives us confidence in the Triumph's long-term prospects. Wings this quarter reinforced improving customer relationships with companies such as Boeing, Saab, GE, Lockheed Martin, Williams, Airbus and Pratt & Whitney.

We are pleased that our wins now comprise higher intellectual property content versus build-to-print content. This is just one of the proof points of our transformation. We saw this growth trend across each of our segments.

And in Integrated Systems, Saab selected Triumph early in the second quarter to provide the Airframe Mounted Accessory Drives or AMAD for the Gripen E/F single-engine multirole fighter. Triumph Integrated Systems will design, develop, manufacture and provide aftermarket support for the AMAD through the life of this aircraft program.

In addition to this win, our agreement with GE Additive to expand Triumph's use of additive manufacturing technology was announced at the beginning of the quarter at Farnborough. Integrated Systems is adopting Additive now to mitigate the lead times associated with castings and forgings.

We expect to bring our titanium and aluminum machines online in December and to enhance our design for additive capabilities across the company. Military continues to be a key growth area for Triumph Group and our three business units.

As a major supplier to the T-X training jet, Triumph was a key contributor to Boeing's recently announced contract with the United States Air Force. I want to congratulate the Boeing, Saab and Triumph team on their successful capture of what will be a 50-plus-year franchise.

On October 31, we announced that Triumph Integrated Systems had been selected by Huntington Ingalls to supply remote valve actuation systems as part of the scheduled overhaul of the USS George Washington nuclear-powered aircraft carrier, highlighting both the versatility of our Integrated Systems and our growing military portfolio.

Through awards like these, which are diversifying our product portfolio into adjacent markets and our continuing efforts on cash use, we are improving the overall economics of our business.

As part of our path to value, we are wrapping up our restructuring efforts announced in April of 2016 and anticipate completing the majority of the work by the end of the fiscal year to position the company for margin expansion.

We remain on track to meet our committed goal of approximately $300 million in cost savings across the portfolio through consolidations and efficiency gains. I'd like to offer you a few stats on our progress. As noted on slide 8, we reduced head count from 15,600 persons to 13,600 over the last three years.

Over a two-year span, we've reduced the number of Triumph sites from 74 to 51 and we're on track to complete the last two of nine planned consolidations this fiscal year.

By reducing our site count by 30% and our footprint by around 1 million square feet, we've eliminated excess capacity and fixed costs, while simplifying the company so we can focus on what we do well.

We reduced our indirect spend approximately 7% and the number of suppliers by 20% from 3,000 to 2,400 as a result of strategic sourcing and competition. Over 1,290 lean events have been run since 2016 to help us eliminate waste, improve quality and reduce span times. And we're still early on this journey.

We're in the process of upgrading 16 of our 42 enterprise resource planning systems to improve planning, analytics and execution. And taken together, supply chain management, lean and IT improvements are the key enablers to inventory reduction, a top priority for my management team and I and an enabler for positive free cash flow.

Since 2016, we divested companies with approximately $260 million in revenues and anticipate these actions will benefit our margins in future periods. We identified and anticipate completing an additional $300 million of divestitures by yearend, which we expect to provide additional margin expansion.

Further, the net proceeds of these divestitures will help strengthen our balance sheet and allow us to reduce Triumph's net debt position. Beyond these cost savings, each of these divestitures has been and will continue to be catalyst for an optimized portfolio and efficient organization.

Triumph will be a leaner and more focused organization after the last three years of transformation. We've also made progress on partnerships including in Asia at our Aviation Services division in support of the global fleet of V2500 and Pratt & Whitney 4168 nacelles.

We're collaborating with key partners such as FedEx, Southwest, Quickstep, GE Additive, Airbus, Boeing and Aviall to enhance Triumph's growth potential moving forward. While we will not see the benefits immediately, these key program wins and partnerships provide platforms for future growth.

The final part of our transformation program is to ensure that we have the right operational and functional leaders in place across the organization to complete our turnaround. During the last two months, we announced three key leadership appointments.

Bill Kircher joined us as Executive VP of our Product Support business unit, bringing more than 20 years of executive experience and demonstrated achievement in leading multinational businesses in aerospace, repair and services market, including leadership roles at Pratt & Whitney and their Asian aftermarket business.

Frank Dubey will join Triumph later this month as Executive VP of Integrated Systems. Frank also brings more than 20 years of leadership and industry experience from Thales, Parker-Hannifin and Eaton where he managed global factories and supported the same OEMs as Triumph. And we recently welcomed Jennifer Allen as Triumph's new General Counsel.

Jennifer's strong business acumen and extensive legal expertise makes her ideally suited to support our company through the completion of our transformation and into the next chapter.

We've seen from our customers that there's a growing desire to engage Triumph as a systems provider specifically in actuation, fuel systems, hydraulics and gearing solutions as a preferred MRO partner and as a complex structure supplier.

With the right plan and the right leadership in place, we look forward to working with our customers to solve their hardest aerospace, defense and industrial challenges.

Before I turn the call over to Jim, I'd like to provide you with additional color on the Global 7500 program and how we see it contributing to our efforts of becoming cash flow positive by yearend. Let me first expand on the progress we've made in the second quarter in that program and then speak to our ongoing evaluation of supply chain options.

First, we celebrated the successful certification of the aircraft by Transport Canada with Bombardier, a clear indication of development completion and aircraft design maturity. Production is ramping up steadily with 28 wings delivered to Bombardier so far.

We are supporting the completion of aircraft at Bombardier's final assembly line, where traveled work has contributed to higher-than-planned cost. On our most recently delivered wing from our Texas factory, it's fully sealed and pressure tested prior to shipment at first.

As expected, costs for early wings are higher than the price we are paid, contributing to higher than planned cash use in the quarter as production levels increase. We expect this cash use trend to improve substantially in the second half of the year as aircraft and wing deliveries and associated customer payments are realized.

After years of development spending, we are seeing a rapid increase in cash receipts on that program in FY 2019.

Recall, on our August earnings call, we stated that Triumph and Bombardier continued to have programmatic and commercial discussions on the wings scope of work and were jointly analyzing the most cost-efficient supply chain arrangement to ensure continuity of supply and the long-term success of the program and both companies.

While we cannot provide any assurance of successful outcomes to these discussions, we are more confident now that options exist to enhance the success of the program and create shareholder value.

Triumph and Bombardier are committed to the success of the Global 7500 program and our shared goal is to come up with a solution that will be beneficial to all parties. We remain focused on quality and production throughput with inventory reduction as our top priorities for the second half of the year.

In summary, as we wrap up our restructuring efforts and drive predictability in our results, we're further validating Triumph's high-value and differentiated offerings, global reach and trusted expertise.

With the final phase of our restructuring underway, we're confident that our work will position Triumph to improve earnings per share and deliver on its financial commitments for FY 2019, including being free cash flow positive by yearend. Jim will now provide more specifics on Q2 and the outlook for the full year.

Jim?.

Thanks, Dan. Good morning, everyone. Our second quarter results were as we expected heading into the quarter. We continued to make progress toward our financial goals. Our sales were trending upward as projected, and profitability and cash flow improvement will follow in the coming quarters.

I will be discussing 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 were up 12% compared to the prior-year second quarter, and all three of our segments generated organic top line growth. This is our second consecutive quarter of year-over-year organic growth across all three segments. Adjusted operating income of $35 million this quarter is up 9% over last year, and our adjusted operating margin was 4%.

With respect to the segment results, on slide 10, sales in our Integrated Systems segment, after accounting for Embee divestiture last year, increased about 15% organically due primarily to increased volume on several narrow-body commercial programs noted on the slide.

Margins for Integrated Systems were slightly impacted by costs related to our Connecticut facilities' consolidation and early development work on a new joint military program that we expect to benefit future periods. These investments are part of our efforts to enhance the profitable growth of our Integrated Systems business. Turning to slide 11.

Second quarter sales for our Product Support segment were up 5% on an organic basis, driven by stronger demand for structural component repairs and accessories. Product Support operating margins were stable compared to last year. We expect segment margins to improve in the second half of FY 2019 as we improve profitability on some new repair programs.

Aerospace Structures results are summarized on slide 12. After accounting for the divestitures, segment sales were up 11% organically. Their operating margin included a net unfavorable cum catch of $12 million.

This includes a $20 million forward loss charge on the Global 7500 program, partially offset by an $8 million forward loss reduction on a Gulfstream program, which are both adjustments. On an adjusted basis, TAS operating margin was slightly negative and consistent with the prior-year period. Turning to slide 13.

Free cash use was approximately $144 million during the quarter and $221 million year-to-date. This cash use reflects the repayment of customer advances and cash investment in the Global 7500 program. We expect this quarter was our peak cash use quarter for the year.

We expect the second half of the fiscal year to be about cash breakeven with cash used in Q3 similar to cash used in Q1 and positive free cash flow in Q4. Capital expenditures were $12 million in the second quarter and $24 million year-to-date. We invested approximately $16 million in restructuring and $240 million in working capital.

Year-to-date working capital use was driven by – mainly by $132 million of repayment of customer advances and $173 million in the Global 7500 program, partially offset by the benefit of higher accounts payable in the first half of FY 2019. On slide 14 is a summary of our net debt liquidity.

Our net debt at the end of the quarter was approximately $1.6 billion, and our availability was approximately $386 million. We anticipate proceeds from divestitures will help to reduce our net debt, 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 an approximate 17% effective tax rate for the year.

Cash taxes net of refunds received are assumed to be zero for the year. We expect capital expenditures to be in the range of $50 million to $60 million. We continue to expect free cash use for the full year to be between $200 million and $250 million.

Slide 16 is a free cash flow walk showing the key drivers from our first half to the full year free cash flow. Our advance repayments and our Global 7500 program cash use are both substantially lower in the second half. Our Global 7500 cash use for the year is about $50 million higher for the year than we estimated last quarter.

We anticipate Q3 free cash flow use will be similar to our Q1 FY 2019 use and, as previously communicated, expect to be free cash flow positive in the fourth quarter. Slide 17 highlights the second half path forward.

Two keys to achieving our full year cash guidance are an $84 million reduction of advanced repayments and $166 million reduction in the Global 7500 cash use, both compared to the first half.

Specifically, as it relates to the Global 7500 improvement, we anticipate increased deliveries, improved payment terms and reduced travel work, driving the cash neutral position in the second half. We continue to invest in people, processes and systems to optimize working capital throughout the company.

To summarize, for the fiscal year, we continue to expect free cash use in the range of $200 million to $250 million. As we move through FY 2019, we remain confident that we will achieve our cash flow targets. We can either aggressively manage our cash through outsourcing, contract negotiations and operational improvements.

In closing, with half of the fiscal year behind us, we remain solidly on track with the goals we set heading into the year.

We're pleased to have put our top line firmly back on a growth trajectory which when combined with the cost reductions and portfolio reshaping actions we've been taking makes us increasingly optimistic and confident in our prospects for profit generation and positive free cash flow.

Now, I'll turn the call back to Dan who will make some concluding remarks, then we'll take your questions.

Dan?.

Thanks, Jim. To recap our progress, our second quarter results are in line with our expectations. The results we are delivering on our path to value initiatives provide us with a clear path forward as we enter the second half of FY 2019 and position us for improving performance in FY 2020.

Our recent wins are a testament to the actions taken to improve execution, customer relationships and competitiveness through consolidation of facilities, increased R&D and deliberate portfolio shaping. From multiple measures, we know this business has improved significantly from where it was when we started this transformation.

In this competitive landscape, we're confident that the strength of our offerings, collective actions and exceptional team will position Triumph for sustained success. While there remains work ahead, we look forward to completing our turnaround and accelerating our strategic plan to deliver enhanced value to all of our stakeholders.

We're now ready (00:21:56).

At this time, the officers of the company would like to open the floor to any questions that you may have. Our first question comes from Sheila Kahyaoglu with Jefferies..

Hey. Good morning, guys, and thank you for the time..

Good morning..

Dan, first for you. Slide 8, you have some pretty compelling stuff out there with the restructuring program, but it hasn't necessarily showed up in your results. When we think about adjusted margins this quarter, they were around 12%. So maybe if you could elaborate on how we should think about that going forward..

Sure. Thanks, Sheila. So, we spent a lot of money in the first two years, consolidating plants, we plan to do nine, we've got two more to go of the nine, reducing head count and severance-related costs, also implementing some improved IT systems as I mentioned ERP. And so, most of the expenditure has been frontloaded now.

As we look at FY 2020, 2021, 2022, when our restructuring costs are complete or largely complete, we'll start to get the benefit then it really contributes to margins.

So, we didn't expect it to contribute heavily to FY 2019, one of the biggest consolidations we're doing this year has been a big use of cash has been spent to consolidate our 767 program down into Florida for example. But having completed it, at the end of the year, then we'll begin to see it flow through in margins as an example.

So, we're glad to be towards the end of what's been a very comprehensive and fairly costing restructuring. But we expect to see the benefits in 2020 and beyond..

Got it. Thank you. And then, maybe a follow-up for you, Jim. Can you walk through the Global one more time. I think you used $173 million of cash in the first half. We thought it'd be around $130 million for the year and now it seems $50 million higher and slide 17 implies this is essentially net neutral in the second half.

What's changing in the second half? I know you mentioned increased deliveries, but you're already delivering $28 million. So is that going up more.

Any details you could provide there?.

Sure, Sheila. Thanks. So, in the first quarter, we used about $81 million on that program and in the second quarter we used about $92 million. That was more than we anticipated. And so, we updated our forecast for the year. It's really more travel work than we anticipated earlier on.

But we're seeing the turn now and the deliveries – we're talking about the second half versus the first. So, there's more deliveries in the second half than there is in the first half.

The deliveries coupled with – we had some advanced – some progress payment structure in place now that's going to improve the payment terms as well as the fact that we're just going to get paid for those deliveries.

So, that coupled with less travel work in the second half which will reduce costs is the driver for the significant improvement in cash flow. So, we are forecasting it to be about breakeven for the second half of the year..

Got it. Thank you, Jim..

Our next question comes from Michael Ciarmoli with SunTrust..

Hey. Good morning, guys. Thanks for taking the questions. Maybe Jim or Dan just a follow-up on Sheila's question. You know all of the operational progress you guys are making.

Can you give us a sense of how we should be thinking about a normalized margin in the Structures business? And even maybe if you can talk to – you've had some really nice wins especially on the military side with T-X.

How should we think about some of these newer programs as they ramp up with sort of that maybe normalized margin?.

Yeah. Michael, it's Jim. Good question on margin. They were running slightly negative. I think it's about minus 2% we were last year and on an adjusted basis we're about minus 2% this year as well and the big driver is the efficiencies of the development programs moving into production and we're still working through the portfolio there.

As you know, we've renegotiated and restructured many of those programs that weren't making money or weren't generating cash. So, the improvement is going to come from those actions from updating the portfolio, as well as the operational efficiencies we're putting in.

And I think Global 7500 moving into production is very important to improve profitability and cash flow going forward – mostly the cash flow. In terms of what the normalized margin is for our Structures business, we've talked before about high-single digits.

If it's leaning towards commercial or bizjet, if it's more on a lean towards military which is a direction we'd like to head, we could get into the low teens..

Okay. That's helpful.

And then, just any color you could provide on the T-X win? How you think about that program ramping up just puts and takes, working capital and sort of if we should expect any positive or negative surprises as that starts up?.

Sure, I'll start. So, the T-X based on the T-38 it starts out with roughly 350 Air Force orders, but it's going to extend beyond that foreign military sales. Navy will potentially use it as a trainer and because they've designed it with hard points, it could be used as a tactical fighter, light fighter.

So, it's a really exciting platform, and we invested in the program and the two prototypes that Boeing flew which were a key part of the win, we built the tails and the wings for that. And so, we'll be involved in supplying key structures on the aircraft, in fact, most of the structures and we'll also do system components.

And there's three categories of system components. Boeing has asked us to hold off on announcing the names of those subsystems until they have their T-X supplier conference later this month. But we'll provide them in due course and they involve components that have IP and there are also components that have been used on other platforms.

So, there's design maturity. So, I think the main message on T-X is that it's not a 10-year development program with big negative cash profiles. It's a mature design concept. There'll be some refinement.

But the advanced manufacturing concepts that are embedded in the design are going to benefit not only the program, but the rest of Triumph's programs as well and we're glad to have a role on both structures and systems..

Got it..

Yeah. At the moment, we don't see a material financial impact on this year or next year, as it's early on in the program. This is really a foundational program for decades to come..

Got it.

And no – so no material cash investment then we should be expecting a working capital investment then?.

That's correct..

Okay. Perfect. I'll jump back in the queue. Thanks, guys..

Thanks, Mike..

Our next question comes from Seth Seifman with JPMorgan..

Hey. Good morning. This is actually Ben on for Seth..

Good morning..

Good morning..

I wanted to ask a little bit more about the Global program here.

I thought, with the expected cash use going up $50 million this year but you were able to maintain cash from ops guidance, kind of, how are you able to offset that?.

Okay. Operationally, we're finally at the point where we're shipping wings in increasing quantities and getting paid for those wings. Those of you that have followed the story, the program was awarded in 2010, went through a number of redesigns.

About three years ago, the program really was in a bad place in terms of design maturity, and Triumph worked closely with Bombardier to get the design done and it's now been completed and certified. And the early flight test results are outstanding.

But what drives our performance on the second half of this year is wing completions and wing deliveries out of our factory in Red Oak and each of those carry a certain amount of customer payments. And as the rate goes up, we're going to see substantial cash generation in the second half of the year..

And the biggest driver is probably the re-profile of payments that we're able to achieve through negotiation. And we can go back when we have cost increases that we think that the customer should pay for, we talked about those and get some of those.

So, the second half is really shipping out the inventory and getting the benefit of the negotiated payment terms..

The other benefit in the second half is, we're burning off the remaining I'll call it early production build issues that are related to final changes and concurrency.

And we're going to get to a clean build, we estimate by about chip set 42 in which we don't have travel work and we're really able to get the full benefit of all of the automation that we've invested. So, some of the costs that you saw in Q2 reflect that we're not quite to that what I'll call a clean build, zero travel works day..

Thank you. That's helpful.

And I guess, how should we think about the range of cash generation for the program in FY 2020, if you're able to shed some color on that?.

So, for FY 2020, we've said that programs like this tend to not go cash positive until you get $75 million to $100 million. So, there's probably going to be some cash use during FY 2020 on this program. We haven't finished our planning to tell you exactly how much that might be.

But because of the shipment – the surge in shipments and the payment terms we've negotiated, we're expecting cash neutral for the balance of this year..

Thanks..

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

Hi. Yes. This is Jeff Molinari on for Cai. Thanks for taking my question, guys. I was wondering if – going back to the topic of restructuring, can you give – can you please give us the split by segment from the Q and then how much restructuring we can expect going forward? Or any color there would be helpful..

So, I don't have the Q filed yet, so that will be in when we file it.

Is it in the press release?.

No..

So, you'll see that – we're going to file that after the market close today and you'll be able to see the break out there. I don't have it but I can tell you that one part of it is the consolidation with Integrated Systems, which may have been $1 million or $2 million which we're working on.

And the rest is probably focused on the Structures side and it's around restructuring and reducing overheads. So, it's not in one location. It's broad based. It is coming down period-over-period. We expect a lot less of it in FY 2020. It was $16 million in the quarter..

Yeah. Just maybe to add a little bit. We did two consolidations in Product Support. They were fairly small. And then, we did three-to-one consolidation Integrated Systems. But most of the consolidations have been in components – what we used to call components and structures.

I mentioned the 767 is a high-dollar restructuring transition from Texas to Florida. That work will wrap up this year. So, we have a small tail of restructuring costs that goes into FY 2020 mostly related to severance cost since most of the upfront work is done, I'll call it, on brick and mortar..

Thanks. That's helpful guys. And if I can, another follow-up on the topic of the G280 program.

How has it moved to Tulsa progressing? Can you give us some update on expectations for the impact and the timing of that?.

Sure. The G280, we supply wings to IAI at Israel. We then support the aircraft with Gulfstream. And the program was designed and originated from Spirit. It was part of the transition. It was loss-making when it came over from Spirit to Triumph. We've reduced that loss sequentially over time, but it still is not yet profitable.

We're in discussions with IAI and the best path forward on the program. There is no transition of the program. It remained in place in Tulsa. It's a small factory, purpose built for that – quality of the wings is outstanding. IAI is happy with the product.

It really is – it's a commercial discussion about what's the best way to support the program and ensure that Triumph can earn a reasonable return..

Okay. Thank you..

Thanks, Jeff..

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

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

Good morning..

Good morning..

So, looking at revenue, obviously, organic, accelerating nicely, it looks like maybe that's a reflection of the strong book-to-bill you had last year. But I know there's some comparability issues maybe with the divestitures. But looking at backlog, flat year-over-year but revenue up about $100 million. So, I guess, two questions.

One, how do you think about book-to-bill converting to revenue? And, two, how do you maybe think about booking new awards that have longer visibility but weren't necessarily all booked in the quarter or year-to-date?.

Okay. I'll start. So, our backlog accounting rules is two years. So contracts such as T-X which is starting with an EMD, engineering and manufacturing development phase, really don't move the needle on backlog because the orders come in over the life of the program and they are substantial and hundreds of millions of dollars.

The second point is, as we've begun to grow organically, we've been able to do faster conversion within the year like spare sales and aftermarket sales, which has grown typically 6% a year out of our Product Support business, has zero backlog and yet it's contributing to revenue growth. So that's another tailwind for us on revenue growth..

Yeah. And so, it's hard to draw a direct line from book-to-bill to revenue. But the key drivers of revenue – and the perfect example Dan gave was the T-X program, which is going to be mostly outside of the two-year window. The drivers for our revenue right now which is up 5% year-over-year are the narrow-body programs that we're on.

And the Global 7500 as it goes into production is about half of the sales growth..

We recently announced follow-on awards with Gulfstream for the G500, G600 of our fabrication business, that's a multi-year contract. We won a five-year MRO contract with a major carrier to overhaul all their thrust reversers, a similar contract out of the Asiana fleet and these tend to be profitable programs with fairly quick turns.

But we only count the first two years in backlog. I'm really pleased with the organic growth. Most of Triumph's history was growth by acquisitions, roughly two companies a year and there hasn't been an option for Triumph for the better part of five years.

So, now that we're able to relearn how to win, the team is reflecting that in the book-to-bill and has been the biggest driver for our 15% growth in revenue..

Yeah. So, in the second half, we're planning to grow at least around 5% to the midpoint of our guidance range. So, growth continues into the second half..

And beyond the competitive wins, we have a lot of rate-driven increases, Boeing 737, A320s two biggest programs in Integrated Systems, plus we're winning additional content on those platforms that's helping to drive the growth..

Okay. That's helpful.

And then, on G-650 can you just give us an update on where you are on cash and P&L margins and over the next two years whether you anticipate that program volume to be down, flat or up?.

So, you can imagine Gulfstream doesn't like us to talk about rates – on the build rate. But there's a steady build rate on G650. We don't anticipate any major reductions in rate. And because of the negotiations last year with Gulfstream, we swung that program from a cash use, approaching nine figures to a cash positive program this year.

And we still retain the program. We procure all the parts. We're currently building the wing box. That work will transition to Gulfstream Savannah plant in the middle of next year. And so, we've got another 25 or so wing boxes yet to deliver, and then we'll support Savannah Airlines (00:39:33).

So, we're in a much better place on overall cash profile for that program, and we're fully supporting their needs..

Yeah. I think that's the key is that we were cash negative, we're now cash positive on that program and it's a much more stable, predictably profitable program going forward for us..

Okay. Thank you..

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

Good morning, guys. This is Kristine Liwag for Ron. With the forward losses in some programs and changes in working capital from advances and the repayment of those advances, it's a little difficult to back into the underlying core operations and structures.

Could you provide more color on how we should think about net cash margins in the segment? And what is your unit cost accounting margin in Structures today and where you expect to be by yearend?.

Thanks, Kristine. So, as you know and we've discussed before the cash margins in that segment are very challenging because it is complex. We have a lot of different programs. Some are cash users. Some are cash generators. We've talked about G650 for example is a cash generator. And several of the military programs are cash generators right now.

And the biggest cash user is the Global 7500 program. And with us going cash neutral in the second half of the year, I think we're going to have much clear view for you of what the cash margins are in that segment going forward.

But the segment – because it has some legacy programs that are still using a lot of cash, the 747, as you know, we had accrual a couple of years ago, it's tough to pay that out. It's going to be cash negative for the foreseeable future. The amount is lower, and we're improving it.

And with addressing some of these programs, we may be able to turn it cash positive. But for the foreseeable future, until we get through the restructuring, there's not going to be a stable cash margin for that group..

So, is the group still net cash negative on a net basis?.

That's correct..

And the good news....

And then when you mentioned the – go ahead..

Yeah. Just adding on to Jim's point. The good news on Structures is the heavy lifting we've been doing to correct a number of contract issues is going to create a platform for positive cash flow in future years. So, I'll give you an example. I mentioned the G280's negotiations, but also Embraer.

When we decided to outsource that to ASTK in Korea who already makes most of the details, we swung that from what is currently in this fiscal year a cash user to a positive margin and positive cash. And that begins in FY 2020. And G650 we mentioned has already swung to a positive cash flow.

So, we're really looking forward to the end of what's been a high cash use period for this business, as we put the development programs behind us, we ramp up in production and we renegotiate the remaining cash users..

There's a core of cash positive profitable businesses in there, and we're peeling back to get to those..

And when you mentioned the normalized – sorry.

And when you mentioned the normalized high-single digit margin and even low-teens in Structures, is that on a cash margin basis or a GAAP reported basis? And if you're currently negative on the net cash of the segment, when does that swing positive as you kind of forward your restructuring plans?.

So, I'm talking on a GAAP basis essentially, the margins we report for a segment. And we haven't called when the turn is for the whole segment. When we put out FY 2020 guidance, our goal is to be cash positive for our company as a whole in 2020, and that's what we're planning towards.

And we'll give you more insight into where we are with some of the challenged programs and disposition of those to move this towards cash positive. But we're not calling it a day right now..

I'd like to highlight one of the businesses that really drives a lot of value in Structures which is our Interiors business. We make over 1 million blankets for thermal and fire insulation. We do floor panels. We do ducting.

That's a very attractive business, very good margins, cash conversion and that's embedded in with some of the loss-making structure programs that we're dealing with directly..

And lastly for me. A few months ago or, I guess, a year ago or so, you guys discussed – evaluated a possible bankruptcy of Structures and splitting that off from your overall parent.

Where is that thought process today? And then, at what point – if this business doesn't return to cash positive, at what point would that be back on the table?.

So, it's no longer a consideration for Triumph. At the time, we were in those discussions with the primes. It was really a cards facing up dialogue where we said the cash use on various commercial wide-body and business jet programs was just not sustainable.

And through our negotiations and engagement with the customers, we were able to address those primary causes of cash use. We're down to just a few more and they're minor. They don't put us at any risk of bankruptcy of that subsidiary..

Thank you..

Thank you..

Our next question comes from Myles Walton with UBS..

Good morning. This is (00:45:05) for Myles.

How are you?.

Good..

Good morning..

So, I just wanted to clarify two things. I guess, revenue recognition in the quarter was $62 million. I think it was $55 million in the first quarter so – but you then have not material for the full year.

I mean – but is the run rate going to be like $50-million-plus a quarter, so like $200 million on the year?.

So, Lou (00:45:31) you're talking about the impact of ASC 606 on the quarter and the full year?.

Yeah. I mean, on slide 4, you show a $62 million I guess benefit, helping to offset the divestitures. And I think that was $55 million in the first quarter, but then not material for the full year, you say.

So, I don't know if that run rate which again I think it's $55 million in the first quarter, does that just go away in the second half? Or am I looking at something wrong here?.

It turns in the second half..

It does? Okay. And then – sorry. Go for it..

Yeah. That's it – it does turn around in the second half..

Okay. And the $146 million divestitures, just so I'm clear, the G650 work has not completely moved. I think that was going to take time.

But then, all of the other ones that you guys have talked about, the East Texas the long and large all that stuff, the business in Asia that has all now closed?.

So, to be clear the G650, we consider a contract renegotiation not a divestiture. So, it's not in the numbers that you just summarized. But, yes, East Texas and Long Island both closed in the quarter and we have about nine other sites that are currently being marketed.

And then, we also have a small part of our Thailand operation that we expect to close in Q3. So, we're down – we're getting down to, I'll call it, the end of planned divesture so we can get to the future state portfolio of the company. It really will make us a simpler company. Many of these businesses just don't fit with the rest of the business units.

They are better managed by other parties, and they'll allow us to reduce SG&A and overhead costs about 1 million square feet and really get to the right intellectual property, a proprietary product focus that's driving towards.

Many of these businesses, while good businesses, are really built to print in contract manufacturing that we've concluded will be better done..

Yeah. Lou (00:47:44), these are – I think we said about $300 million worth of annualized sales for these businesses that are in our divesture pipeline. As Dan mentioned, they're build-to-print manufacturing. There are some better owners for them.

We've identified who have a lot of interest and the proceeds from this will go to reduce our revolver and increase availability and they're just – they don't generate on a net basis a whole lot of cash for us. So, the proceeds will be helpful..

Okay. Great. Thank you, guys..

Thank you..

Since there are no further questions in queue, this concludes the Triumph Group's second quarter fiscal year 2019 earnings conference call. There will be a replay of this call available today at 8:30 AM, Eastern Standard Time until the November 15 at 11:59 PM Eastern Standard Time.

You can access the replay by dialing 855-859-2056 and entering access code 2154579. Again, you can access the replay by dialing 855-859-2056 and entering access code 2154579. Thank you for participating. Have a nice day. All parties, you may now disconnect..