Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our second quarter fiscal year 2020 results. This call is being carried live on the Internet. There is also a slide presentation included with the audio portion of the webcast.

[Operator Instructions] There'll be a question-and-answer session following the introductory comments by management. On behalf of the company, I would now like to read the following statement. Certain statements on this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause Triumph's actual results, performance or achievements to be materially different from any expected future results, performance or achievements expressed or implied in the forward-looking statements.

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

It may not be recorded, transcribed or rebroadcast without explicit written approval. At this time, I'd like to introduce Daniel J. Crowley, the company's President and Chief Executive Officer; and James F. McCabe, Jr., Senior Vice President and Chief Financial Officer of Triumph Group, Inc. Go ahead, Mr. Crowley..

Thank you, Kevin, and welcome, everyone, to our Q2 Earnings Call. Earlier this morning, we reported strong second quarter results for fiscal year 2020, in line with our expectations, providing momentum as we head into the second half of the year.

Organic revenue was up year-over-year across all three business segments, as noted on Slide 3, with organic revenue up 13% in the quarter. Sales growth benefited from increasing aftermarket volume, higher narrow body and engine deliveries, growth in engineering services and expanded opportunities in Asia.

Free cash flow and EPS performed in line with our expectations. As planned, we had moderate cash use in the quarter and remain on pace to deliver positive free cash flow for fiscal year '20 as we guided.

Cash use for the quarter improved year-over-year by $119 million, in large part, due to the exit of loss-making structures programs and improving cash flow from operations. Liquidity remains healthy and stable at approximately $400 million. As with revenue, our year-over-year operating margins improved in all 3 business units in the quarter.

Integrated systems performance is steadily improving, with margins sequentially increasing 500 basis points and 270 basis points higher than prior year. Similarly, our product support businesses improved their margins sequentially and year-over-year to 18% in Q2, while aerospace structures swung from negative to positive margins in Q2.

Midway through our fiscal year, we can measure our progress during the first 6 months compared to our prior year. As noted on Page 5, first half revenue was up 10% year-over-year. We saw gains in EBITDAP of $47 million to $127 million.

By growing our EBITDA, we reduced our leverage from 6.8x to 4.7x, and cash use improved $194 million from the same period last year. This improvement was enabled by a more favorable sales mix, strong internal and supplier performance and ramping production rates on both commercial and military programs.

We are well positioned to extend these gains throughout the second half of the year. Across Triumph, our teams are improving efficiency through cost-reduction initiatives, better inventory management and use of our Triumph operating system.

We've been on a journey the last few years to upgrade our systems and processes, standardizing where possible to reduce costs. At our larger plants, we recently completed SAP ERP system upgrades to reduce operational risk and enable increased productivity and cost reduction.

6 of our smaller factories upgraded their ERP systems in the first half of fiscal year '20, allowing improved visibility to procurement and manufacturing processes. We implemented an enterprise quality system to reduce our cost of quality, which is already less than 1% of sales.

We are working with our customers to retire our remaining red programs, with a focus on lower-tier supply chain performance. Having completed all but 1 of our planned plant consolidations and divested 12 of our original 47 operating companies, management's bandwidth is dedicated to continuous improvement, margin expansion and cash generation.

I'll touch on our strategic review of the Aerospace Structures business shortly. Our program transitions are on track, which will benefit future quarters. We continue to win this quarter, especially in our Integrated Systems business, which posted a 1.2 book-to-bill in Q2.

As noted on Slide 6, growing our backlog remains a top priority for Triumph, with an emphasis on our higher-margin Integrated Systems and Product Support content. These 2 business units are now collaborating on a regular basis to recapture more of our aftermarket tail, with MRO sales up 16% in Q2 over Q1.

We're executing our strategy to increase our competitiveness and selectively pursue new work to strengthen our backlog and position the company for sustainable long-term growth. We continue to evolve from transactional customer relationships to strategic partnerships with OEMs and carriers, and our results from the quarter proved just that.

Our Product Support business has a diversified global customer base and provides over 30,000 MRO services to over 800 customers supporting aircraft operations in over 60 countries. Recently, at the MRO Europe Conference, we announced the launch of Triumph's new customer support center.

This One Triumph center provides single-point access for customers 24/7. The center will field all customer requests from spares for aircraft on ground to part inquiries to overall services. Our partnership with Air France KLM is creating new opportunities with the airlines who recognize our combined value proposition.

Our teams are jointly working on several proposals with content from both our Product Support and Integrated Systems divisions, including power-by-the-hour agreements, which bring together the best of Triumph and Air France KLM.

Our Q2 wins in Product Support included a 2-year wheel and brake overhaul contract from start-up airline, STARLUX, for their A320neo fleet.

This work will be completed in our Thailand MRO depot who are adding engine accessory repair capabilities, including for the high-volume A320 power transfer unit, supporting our growth agenda in the Asia Pacific region. At MRO Europe, we announced plans to expand our aftermarket presence, with the launch of a rotable trading business.

This new venture will sell spare parts and components to meet the large market demand for used serviceable parts. The market for global commercial aircraft aftermarket parts is growing at a CAGR of 6.6% through 2026, and we're excited about the opportunity to link our repair and rotable strategies to speed turnaround times and lower costs.

One of our best businesses is electronics and controls, a former Goodrich plant we acquired at the time of the UTC-Goodrich merger. E&C provides full authority digital engine controls and multi-platform, high-speed centrifugal fuel pumps and bespoke heat exchangers and vapor cycle cooling solutions.

The core of this business is a fielded fleet of Triumph solutions with our IP, including over 30,000 fuel pumps and electronic engine control units, which we continue to actively support, maintain and upgrade, driving sustained growth and margin enhancement within this business.

Recent awards include a 5-year IDIQ for the GE T700 enhanced digital engine control unit from the DLA and a Rolls-Royce award for both engine control unit replacement and fuel pump metering units for the CTS800 engine. By leveraging this fielded fleet, we support global operators with rolling performance enhancements.

We see additional opportunities to apply our fuel pump expertise to new applications such as engines for the Air Force's new T-7A trainer. Our IP in thermal solutions supports next-generation high-density electronics and directed energy weapons.

We recently consolidated the former Fairchild Controls business in Maryland into the electronics and control Connecticut facility, lowering costs while expanding our technology base and cooling systems. And finally, our Mechanical Solutions business marked several milestones in the quarter.

First, our sensor field module, a key component of the fly-by-wire kit, which provides tactile feedback to a pilot, simulating the feel of existing UH-60 Blackhawk mechanical flight control systems, flew on Sikorsky's optionally piloted Black Hawk recently.

And second, we delivered the throttle control system for the XB-1 Boom Supersonic demonstrator aircraft, consisting of the cockpit throttle quadrant, telescopic control assembly, hybrid cables, engine throttle gearbox and pressure bulkhead assembly. As you recall from last quarter, we're focused on expanding our aftermarket presence.

I'm pleased to report that our efforts in this regard are producing measurable results. This collaboration resulted in an award from UAE-based regional MRO provider, GAL, which includes not only integrated systems content but provides product support entry for incremental third-party MRO content.

This work recaptures leakage from several competitors and brokers and serves as another great example of the power of our One Triumph solutions. Integrated Systems reported revenue growth in MRO and aftermarket sales of 16% versus the prior year quarter, another sign that we are driving top line growth in this key area.

Our Aerospace Structures business continues to perform well, with strong organic growth helping to offset the revenue associated with exited programs and a return to profitability in Q2. We completed the E2 fuselage transfer to Korea's ASTK in the second quarter and are working towards the closeout of final deliveries.

On the G280 work transfer, we successfully loaded the first article wing at the new supplier, KAI, where the work is progressing on schedule. Our last factory consolidation, the transfer of our 767 structures work from Texas to Florida, is well underway, and we are ramping up rate.

I'm confident in our ability to successfully complete all of these transitions on time and on budget. Our interiors team was awarded several programs related to composite ducting, and we're very pleased with the continuing market-leading performance in this core business area.

The interiors team also reached a milestone of 100% on-time delivery to Boeing, and our Thailand composites business recorded 100% on-time delivery with 0 defects for the fifth consecutive month. I want to provide an update on the strategic review process for our structures business we launched in April.

The review is focused on the noncore assets in our Aerospace Structures segment, which represented $1.2 billion of sales in FY '19 and excludes our interiors business. We have now assessed each of the 11 sites within the review perimeter and have a game plan to close, sell, restructure or retain each site.

In Q2, we exited the first of 2 Tulsa factories following our completion of the G650 wing box assembly contract and anticipate exiting a second plant now producing the G280 in mid-calendar 2020. We closed a small stretch-forming facility in California, having produced the last 747 skins towards fulfillment of our contractual commitments.

These skins go into the last 747 fuselage panels to be delivered from our large structures plant in Hawthorne, California in the spring of 2020. This plant will close in late 2020. Similar wind-down plans are underway at our Grand Prairie, Texas structures plant.

We recently announced the agreement to sell our Nashville site, a two million-square-foot factory, which first opened in 1938, to TECT, the buyer of several of our machine shops earlier this year. We estimate the sale will close by the end of the calendar year.

This transaction is the fourth divestiture from our structures business of sites identified as noncore operations.

Based on the responses from strategic buyers we have met with over the last 6 months, we anticipate making other announcements in the coming months, where such transactions are accretive to our shareholders following consultation with our customers.

As we pursue our future state, it's our goal to position our noncore assets with firms who are focused on those markets, while ensuring our customers have continuity of supply and our employees have continued career opportunities.

Doing so will enhance Triumph shareholder value and allow us to focus on and invest in fewer businesses where we can add the most value. We anticipate having clarity on all of our structure sites by the end of our fiscal year 2020.

Before I turn it over to Jim, I want to comment on the recent news regarding 787 rates and the 737 MAX having just met with the senior Boeing officials last Friday in Seattle. First, we are staying in lockstep with Boeing as they consider a rate reduction on the 787 from 14 to 12 per month in 2020.

We do not anticipate that such a change will have a material impact on Triumph financials, and our expectation is that margins would be impacted less than revenues. Regarding 737 MAX, we're encouraged by the progress Boeing is making on the return to service, and we continue to support the program across 4 of our 41 factories at a rate of 42 a month.

Capacity is in place to support Boeing's rate increases following return to service. As we noted previously, the MAX program historically has contributed a single-digit percentage of our annual revenue. We continue to expect fiscal year '20 revenue impact to be less than 2% of sales with similar impacts to operating income and cash.

As such, we do not anticipate any changes to our guidance related to the MAX at this time. A return to flight and ramp-up will provide a tailwind going into FY '21. In summary, Triumph maintained positive momentum in Q2, positioning us to generate organic growth from our core and improve margins and EPS.

We are on track to achieve positive free cash flow on an annual basis for the first time in 3 years. Triumph is executing our path to value strategy, and the actions we took during the first half of the year are producing results year-over-year.

As we strengthen our already robust backlog, we look forward to sustainable long-term growth and more profitable product lines in partnership with other firms and our customers.

With improved liquidity, strengthening balance sheet, declining leverage and improved operational performance, I'm confident that our customers and shareholders will benefit from Triumph's transformation. With that, Jim will now take us through more detailed financial results for the quarter.

Jim?.

Thanks, Dan, and good morning, everyone. Our second quarter results continue to demonstrate the improved predictability across our business, with net sales, EPS and cash results all meeting our expectations. I will discuss our consolidated and business unit performance on an adjusted basis.

So please see our press release and supplemental slides for the explanation of our adjustments. On Slide 7, you'll find our consolidated results for the quarter. Net sales increased 13% on an organic basis over the prior year quarter. All 3 business units generated organic growth.

Adjusted operating income was $59 million this quarter, and our adjusted operating margin was 8%, up about 350 basis points from last year's second quarter.

With respect to the segment results, on Slide 8, FY '20 second quarter sales in our Integrated Systems segment increased approximately 10% organically compared to the prior year quarter, driven primarily by growth in narrow body platforms, engine components and military rotorcraft sales in addition to aftermarket and MRO recapture.

Margins for Integrated Systems were significantly higher when compared with the prior year quarter. The margin reflected higher MRO and aftermarket sales in the quarter relative to the prior year, improved operational efficiencies and cost-reduction initiatives, partially offset by some restructuring actions.

These restructuring costs, which will help to sustain the margin improvement as the year progresses, impacted Integrated Systems margin this quarter by approximately 200 basis points. Integrated Systems second quarter margin sequentially increased approximately 420 basis points over the last quarter.

We anticipate maintaining this margin expansion in Q2 and continue the improvement for the second half of FY '20, with margins in the high teens. Turning to Slide 9. Second quarter sales for our Product Support segment were up approximately 4% on an organic basis due to accessory component repairs in the U.S.

and structural component repairs and increased parts trading in Asia. The product support organic operating margin was stable year-over-year and reflects cost-reduction benefits and improved product mix, offset by timing of removals and on-site services of the active fleet due to the 737 MAX grounding.

Aerospace Structures results are summarized on Slide 10. Segment sales were up approximately 16% organically due to ramp-up on legacy programs, in addition to new engineering service offerings.

Aerospace Structures operating margin of 3% reflects the benefits of our portfolio shaping and cost-reduction actions we have taken as part of our transformation efforts. As Dan noted, the group is executing on their program transitions. Turning to Slide 11. Our $25 million cash used in the second quarter was in line with our expectations.

This is a $119 million improvement over the same period last year and reflects our portfolio and program changes, cost-reduction actions and working capital management across all of our businesses. We continue to expect to be cash positive in the second half of the year.

We remain focused on meeting our objective of generating positive free cash flow this year and are confident that we will deliver on that commitment. Capital expenditures were $9 million in the second quarter.

We used approximately $36 million of cash in the quarter for working capital, which in Aerospace Structures, included $20 million for advanced liquidations and $19 million for the G280 program. The $6 million of restructuring expenses this quarter were in our Integrated Systems segment.

Cash usage also included $10 million of additional interest paid this quarter due to the timing of our refinancing. Working capital reduction is expected to generate cash in the second half. On Slide 12 is a summary of our net debt and liquidity. Our net debt at the end of the quarter was approximately $1.5 billion.

Our cash and availability were strong at about $418 million, and we are in compliance with all our financial covenants. In the quarter, we took advantage of the strong debt capital market to cost effectively extend our maturities. We issued $525 million of new senior secured notes due in 2024.

We used the proceeds to redeem our $375 million of 2021 notes and the balance to reduce our revolving credit facility, which we extended to 2024.

Also, during the quarter, we negotiated agreements, which reduced our other postemployment benefit liabilities and related future funding obligations these agreements will not have a material cash impact in FY '20 but will reduce future benefit plan funding obligations, an estimated $5 million to $8 million per year.

Slide 13 is a summary of our FY '20 guidance, which reaffirms the guidance we provided last quarter. Based on anticipated aircraft production rates and including the impacts of pending program transfers, for FY '20, we continue to expect revenue of approximately $2.8 billion to $2.9 billion.

We maintain our expectation for adjusted EPS of $2.35 to $2.95. Our guidance assumes a normalized 21% effective tax rate for the year, which has the potential to be reduced in Q4 due to a partial release of the valuation allowance. Cash taxes, net of refunds received, are soon to be approximately $10 million in the year.

We anticipate the cash used in the first half of the year to be more than offset by cash generation in the second half, with strong cash generation in Q4. We continue to expect free cash flow for the full year to be between 0 and $50 million. We continue to expect capital expenditures to be in the range of approximately $50 million to $60 million.

Slide 14 provides some additional detail about our cash guidance. For FY '20, we expect cash flow from operations of $50 million to $110 million, which includes the liquidation of customer advances of approximately $80 million in the year.

With the first half of FY '20 behind us, we are increasingly confident in our ability to generate cash and profitable core growth this year. As we reduce our leverage, we will continue to invest in our core businesses to accelerate that profitable growth and drive meaningful increases in shareholder value. Now I'll turn the call back to Dan.

Dan?.

Thanks, Jim. Today, Triumph is defined by our close customer relationships; a pipeline of increasingly profitable programs; a talented, committed employee base; and an integrated organization structure, better equipped for execution. Our Q2 results demonstrate that our restructuring and transformation efforts have positioned Triumph for success.

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

[Operator Instructions] Our first question comes from Robert Spingarn with Crédit Suisse..

Just going back to your strategic moves in structures and the $1.2 billion that you called out in noncore. I guess that's everything except for the interiors.

Can I -- when we think about selling versus closing that revenue, how does that split up?.

So we're looking at known closures that have already been announced. So the Tulsa sites I mentioned, our California plants, there's two there. And then there's one in Texas in the Dallas area. So those five are already in process.

In terms of divestitures versus restructure and retaining, I don't want to get into that in detail, but we're having ongoing discussions with potential strategic buyers. So the nice thing at this point is that we're not under the liquidity pressure we were in prior years where there was a lot of pressure to divest assets.

Now we could be more opportunistic in terms of value. But in terms of the ratio of dollars and net revenue of closure to divestiture, we expect it to be sort of in the -- probably in the 50-50 range. But that's all dependent on the results of our final decisions..

And then on the margin side there in structures, you have the sequential improvement. You're doing better than last year.

Jim, how do we think about that margin on a forward basis, at least the profitability of the businesses that you wouldn't necessarily close? It seems like everything is trending up, but are we there? Or is there more to come?.

Yes. There's definitely more to come. I think we had a slight cum catch loss in the quarter, but it was balanced. We had just as many of the programs that were cum catch gains than losses. Yes, this is a business that's 10% to 12% on a stable -- when it's stable, and we still have some loss programs we're working through and some plant closures to do.

The margins do tend to be a little more volatile in this segment because of the long-term contract accounting. And we saw, I think, about 9% margin last quarter. So I think we can look for single-digit margins approaching 10% as we stabilize and look at our options for this group..

Okay.

And just a clarification on the lower corporate expenses, is that just the adjustments running through? Or is there something else there?.

No. We're managing down corporate expense. A lot of onetime things go through corporate, and there's a lot of discretionary expenses there. So we are managing them down. And they'll continue to stabilize at lower levels going forward..

Yes. The key component of that is the restructuring costs, which are coming down quickly year-over-year as we finish all these plant consolidations and put in new process in IT. So that's one of the big enablers of lower corporate expense..

Our next question comes from Seth Seifman with JPMorgan..

This is actually Ben Arnstein on for Seth. I guess I wanted to ask about systems here, and for the first time, I'm not going to ask about the margins. But we saw some pretty good organic growth in the quarter, and you raised the guidance for FY '20 after just a quarter ago pretty significantly.

I guess can you maybe talk about, like, what's driving that and how you think about the organic growth beyond this year?.

Sure. The Systems business reflects the high demand that we see for both ramping production programs as well as retrofit of new systems contents on existing fleets, and we're starting to win more work in the engine area. Rolls-Royce, GE, Pratt & Whitney are all key customers for us. And if we had more capacity, they'd buy it.

An example is in our gear box business. We have two plants that produce loose gears and gear boxes. Their revenue was up 36% from the first half of the year to the coming second half of the year. So it's the diversification of our portfolio as well as the kind of the dual tailwinds of new developments and ramping production programs..

I think it's in the guide that the aftermarket percentage is growing this quarter as well. So we're starting to see some benefits of our collaboration between TPS and TIS..

Great.

And is there anything to note about maybe just like the quarterly cadence of sales and earnings at the company-wide level as we think about kind of Q4 -- Q3 and Q4?.

So our core business is following a seasonal trend, where the second half is generally stronger than in the first half, and the fourth quarter is the strongest quarter in the second half. So I didn't mention that cash flow is forecast to be strongest in the fourth quarter. We did have a seasonal working capital build in the first half.

And you can't have sales growth without more working capital. We're getting more efficient with working capital use, but we did have a growth as we ramp up inventories for the second half..

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

Maybe a back up big-picture question. As we continue down the path of you, how do I say it, like, redefining Triumph.

If you were to look out five years from now, 10 years from now, how should we think about the business? I mean how much of the business at that point do you think is more aftermarket services-related? How much of the business is defense, right? Like what's the ultimate goal when you get there?.

Yes. Thanks, Ron. And you've been following the story, certainly, for the time that I've been here, so it's totally appropriate you asked. So Triumph's aftermarket business is growing. Today, it's about $500 million across Integrated Systems and Product Support, and we think there's upside to that number.

Even without a return to M&A, just organically, we think we could grow that number 2x. I think within a 5-year horizon that, that's a reasonable expectation. And one of the things that we did in the quarter is advancing this partnership with Air France.

That's going to get us on some of the newer aircraft, some of the newer narrow body and 787 that have not really started to go into the, I'll call it, third-party MRO contracts. So that's one of the accelerants that we have for growth.

In terms of systems content, we've got these strong verticals and gears, as I mentioned, and electronic controls and actuation. We're interested in expanding that into other verticals within the system space. In fact, we just went through our strategic review, and we'll present that to the Board shortly.

And we think there's opportunities between product, R&D and some niche product line, M&A to accelerate that as well. Our goal is to grow back Triumph to the size of the company we were historically, but it would be systems and aftermarket and interiors-focused. We don't want to stay a smaller company.

This is a temporary phase for us as we exit some of the noncore businesses. But it'll help us, including SG&A absorption, for us to grow back to a larger company. The main thing is we want to be known as a customer -- I mean the supplier that's solving our customers' hardest problems.

And in terms of defense, you asked about defense spending, we set a goal to increase that from 20% to 30%. And as we exit more and more of the structures and commercial content, you'll see that number come up as well..

And is it something where when you look out way down the road, I mean could the company be approaching 50% defense?.

I think that's probably a little high. Of course, there's some uncertainty on defense budgets with the administration change. But I was just down at the -- in D.C. yesterday in a meeting with the defense officials. And their push continues to be for bringing the fleet up to a high state of readiness, which Triumph can be a partner in.

Today, we do, for example, refuel -- refueling boom overhauls. Obviously, those are substantial MRO efforts. We're supporting the V22, C-17 helicopter fleet. We're excited about the Army's future arm reconnaissance aircraft competition. We're on several of those teams. So as long as defense funding continues to be strong, we'll see it grow.

I think a more reasonable target is probably 30% to 35%, maybe not 50%, but that's just the preliminary..

The next question comes from Sheila Kahyaoglu with Jefferies..

Dan, I guess following up on Ron's question, you mentioned growing aftermarket $500 million to $1 billion, that 15% growth CAGR. How do we think about what stuff do you have to take to grow the business, double after -- double air traffic? Air France partnership is one you mentioned.

What else should we look for?.

So it's -- a key enabler is a higher participation in narrow body because of the rapidly growing fleet size. And the shift to Asia of the fleet needs to be accompanied by a shift in the MRO support infrastructure. In the quarter, I was over in Singapore studying the MRO hub that they have there.

There's over 100 companies that are supporting Asia from Singapore, and Thailand is now launching a similar hub. It's called U-Tapao, and we're already there in Thailand. So in my remarks, I talked about expanding from just doing structural repair in Thailand to doing engine accessories. That's an example of trying to get ahead of need.

So that'll be one of the enablers to growth. As with Integrated Systems, there are other verticals within MRO. Today, we're pretty limited. We mainly do engine accessories and structures and a little bit of interior work. So there's lots of subsystems we can do.

In partnership with Air France, we'll do narrow body and wide body, and we'll expand into other MRO content and support the repair of other people's equipment, not just Integrated Systems. So that's a tailwind. And as Jim mentioned, we haven't recaptured all of our own aftermarket. So I'd say there's a regional strategy.

And pivot to Asia, there's a product offering, service offering expansion and then just more of these partnerships, including with Boeing Global Services. We signed an award in Q2 with them, and we're excited about supporting them as they broaden their sustainment reach..

I think we have over 30,000 repair services that we offer. That's grown about 5,000 in the last 3 years. When I started, it was 25,000. So -- and they continue to grow repairs, which is repair services is the key to that..

This rotables trading strategy we announced in the quarter is also a component. When customers bring back an aircraft, let's say it was damaged by hail or by a truck that hit the nacelle fairing, they need to turn it right away.

And so by having rotable inventory and being a value-added rotable supplier, we can buy something used on the market, used serviceable, upgrade it, replaced the wear items and then provide a quick turnaround time. And we think that's another way to compete..

Okay. That's very helpful. And then, Jim, maybe one for you, and nice job taking leverage down in the quarter by growing EBITDA. You've sold some of the businesses, National being one.

I guess how do we think about cash proceeds? Or is there a target leverage for the business that you're thinking about?.

So we're higher than we want to be. I think we'd hope to be under 3x on leverage. Leverage is measured different ways. I'm reporting the way our bank measures it. That's why we went from 6.8 to 4.7. In the Q, we'll disclose, I think it's about $125 million worth of assets that we sold there.

And I think that the -- so the proceeds will be disclosed when we actually complete the transaction, which is expected to be in this current quarter. But suffice to say that TECT is a good buyer, and they're a strategic buyer, and we got fair value for that asset..

The next question comes from Cai von Rumohr with Cowen and Company..

Yes. So Dan, you talked about Aerostructure sales, excluding interiors, of $1.2 billion in '19. That implies this Interiors business, like, $800 million to $900 million.

Is that the actual size? And what kind of profitability? And what's kind of the game plan for that sector going forward?.

So interiors is about $300 million, and that's outside of the $1.2 billion. And the profitability is strong, double-digit. And it's -- we benefit from having a very good operation in Mexicali that does over 1 million blankets a year, floor panels. It's one of our best lean operations.

And so it's offered cost advantages to both, well, Airbus, Spirit and to Boeing. And then within that $1.2 billion that we're looking at under the strategic review, we'll do, as I mentioned, plant closures. We'll do some divestitures. We may retain some businesses.

We're looking at a case-by-case basis, and we'll know a lot more by the end of our fiscal year. I'm excited about what we're doing, both in interiors and in structures and thermoplastics. Today, if you went to our interiors plant in Spokane, you'd see almost 800 parts a day coming off an automated line that go into the Airbus A350.

And we're posing the use of thermoplastics for the new Jaunt eVTOL offering as well as for retrofit opportunities on commercial aviation, especially on replacement items like control surfaces. So we're still doing great things in that business, and we'll know more shortly about the final disposition..

And just a quick another one on Aerostructures. So it looks like your contract liabilities, amortization went up in the quarter. How come? And then if you take that out, on a consistent basis, it looks like you're basically in the red after being in the black, excluding that, in both the fourth and the first quarter.

Is that correct?.

So the contract amortization did increase because of the increase in the volumes on certain programs, including the G280, which was one that we were losing money on and set up a fair value reserve.

I'm sorry, the second part of your question, Cai?.

So if you take that out, I mean if you -- it looks like, actually, Aerostructures was in the red. I mean lost about $3 million, $4 million if you take -- if you kind of take that out since it's a noncash. Plus, is that representative? Is that correct? ..

Yes. I think that's only one of many moving parts throughout the structures group. And there was -- there's 20 programs that had cum catch adjustments within the period, and they were pretty balanced..

Yes. The big picture is now we're counting months to exiting the 747 program, which has been loss-making. In recent years, it used to be profitable when the rate was much higher and the G280 program by next May. So those have been the biggest margin tailwinds or headwinds for us in structures.

Once we're free of those, the residual business, 767, interiors, defense programs are profitable..

The next question comes from Ken Herbert with Canaccord..

First, I just wanted to ask within the Integrated Systems, the very strong growth within MRO and spares, can you parse that out for us? And any more detail how much of the growth was from MRO relative to spares or maybe the relative contribution from a revenue standpoint from the MRO activity in spares?.

Yes. Spares was a leading contributor to growth in the quarter versus overhaul and repair, but overhaul and repair is coming. The reason that one lags the other is one is an instant spot buy of parts off the shelf. The other, you have to go in there and create the capability and get approved to supply it.

You may have to become the designated engineering repair source for that product. So there is some lead time in growing the overhaul part of the business. And one of the exciting things that happened in the quarter is our Thailand facility was approved by Airbus as a designated repair center.

And we have the engineering expertise as well as production to support their fleet, and we're in competition for a number of large Asian carrier MRO opportunities. So that was -- who fly Airbus. So that was a big deal for us in the quarter. But I'd say spares is the lead MRO coming behind it.

These 14 depots that we have, the Part 145 repair centers, they've tended to be secondary priority to OEM deliveries from those factories. And now they're getting a new -- at least online and collaborating to figure out how to grow together. And we're excited about what it will do for us in the future..

And then if I could -- that's very helpful, Dan. If I could, as you look at -- you called out the $500 million run rate today, growing to $1.4 billion total aftermarket or services.

Can you just help us think about what kind of investment in dollar terms you're making today to support this business? Because I can appreciate building up spare pools and rotables and a lot of the MRO footprint you're putting in place, obviously, requires some capital.

So how do we think about the investment you're putting into the broad aftermarket today, maybe how that moves over the next couple of years to support the top line growth? And when does it become, I guess, a much more maybe meaningful tailwind from a cash standpoint?.

Yes. Thanks. Product Support has always been a good cash conversion business for us, and it had strong cash performance in the quarter. The 2 areas of investment that will help fuel the growth is rotables and then partnerships, including the joint venture we're setting up with Air France.

And so there's a certain amount of administrative costs and priming the pump of rotable inventory so that when the demand, especially for those, I'll call it, newer fleets, and they go into an MRO cycle, we've got the products available. So it's mostly working capital.

Jim?.

Yes. I think partnering with operators and with OEMs, they can also have rotable pools that they can contribute as part of partnerships. So we look for ways to keep capital to a minimum so that we can keep the costs down and continue to grow that business..

We're expanding our Grand Prairie, Texas accessories business. It's bursting at the seams. The building has been expanded 2 or 3x incrementally. We looked at building a new building there. And we have so much work that we don't want to go through a risky transition while we're ramping. So we'll be adding on to that building.

So there's some brick-and-mortar that goes along, but nothing that is a big expense for us. It's all -- we'll be able to maintain our cash conversions as we go through the ramp..

Our next question comes from David Strauss with Barclays..

This is actually Kate Copouls on for David. A couple more questions on your plans for AF.

So could you clarify that you pretty much plan to sell or close everything you consider noncore and that we should pretty much assume that AF will be interiors going forward? And then I would think that there's a substantial portion of kind of long-term contracts and commitments still within that noncore AF bucket.

So how do you plan to get out of those? And how long will that take? And then lastly, is there any sort of estimate that you have for proceeds that you're expecting from these divested plants?.

Sure. So as mentioned, there's about 11 plants we're looking at, and we'll make a decision on a case-by-case basis. So although we've identified them as noncore, we're in a better position to sell them for valuations that reflect their financial value.

And if those strategic buyers show up and demonstrate that and value it at that level, we will divest them. If -- otherwise, we'll retain them and continue to grow and continue to test the market on a periodic basis.

But we've been very clear what our intent was, and we've demonstrated through the first 4 divestitures out of that space and ability and willingness to take those actions. On the other hand, as we've improved operational performance in that business, it's no fire sale. These things are good teams with better management and better process.

We're clearing out the backlog of loss-making programs. So I'll just return to my comment that by the end of our fiscal year, we'll have clarity on each of the sites. As far as long-term contracts, we have a good site picture as to the runout of all the contracts there if they happen to be performed at the site that's divested.

Our customers are mainly focused on continuity of supply. They know there's a consolidation happening in the structures industry. The goal is to help these sites get positioned with companies that are really investing in this market and can invest in the long-cycle structures programs.

And for Triumph, we're going to support those customers through those transitions..

Okay. Great. And then I guess one more, if I may. So I think after the refinancing annualized interest books about $10 million higher. And then -- so there's that. And then refinancing costs this year and then the 737 MAX.

So is it fair to say that Triumph could be trending towards the lower end of the free cash flow guidance range?.

No. No. I think we're holding our range, and the range is around our expectations. So there's no movement in the cash. We have risks and opportunities we're seizing on. So you mentioned a couple of the risks, but there's actually opportunities in there for reduction in working capital and other cash-generating activities..

We're really glad to be -- have made the progress we've made over the last 3 years. 2 years ago, we used over $330 million. A year ago, we used $220 million. And now we're forecasting to be cash positive, and we'll build on that in subsequent years. So we've come a long way. And I know it's been difficult for analysts and investors to model our cash use.

And we're -- the stability we're now getting in our performance is going to make it easier for us to give that guidance..

The next question comes from Myles Walton with UBS..

I was hoping to just start with some of the targeted margins you provided, I don't know, a couple, three quarters ago on the pro forma business, kind of where you're going to get to. And it looks like Integrated Systems, you had a 19% EBITDA margin. It looks like you're actually running ahead of that probably due to spares.

You're probably making progress towards the Product Support margins. And then you have this Aerostructures margin target of 10%. I just wonder, I think that was predicated on the $1.5 billion pro forma business. And obviously, you're talking about now making the moves that are more definitive in scaling that back.

What is the now targeted Aerospace Structures EBITDA margin? Is it a mid teens?.

So we haven't handicapped and provided future-year guidance for the structures business, assuming the divestitures. We're -- we provided that guidance with the business as it existed today. If we exit additional operating companies within that business, we'll provide updated margin guidance, but I think you can assume it would be improved..

Okay.

Would it still be below the other two segments most likely just given the aftermarket presence in the other two?.

That tends to be the trend as the structures is a little lower. It doesn't have that aftermarket upside. I think that's a fair assumption..

Okay. And there's a pretty wide gap between your adjusted EPS and your GAAP EPS. Obviously, the first half is only about $0.10, but the full year gap is pretty wide.

Can you elaborate on what that is and where -- how that's going to flow through?.

Yes. I think that's primarily book losses on divestitures. So noncash losses..

Okay.

That you already kind of know about given pending sales that you'd just be able to close them?.

That's right..

Okay. Got it.

And then Dan, on the 787, as it looks to bring down the rate from 14 to 12, is it fair to think about kind of your proportional exposure revenue-wise to the 87 similar to the 37 so we can kind of think about those two in dynamics?.

Yes. Our portfolio is so diverse now that no single program really impacts us in terms of rate adjustments. We go with the flow, and we generally have more ups than downs. But if they stepped that down by two shipsets, our shipset content for 787 is -- it's about maybe $1.3 million.

And so we're not going to see big swing, material swings in revenue because of it. And I think Boeing has -- still has bright plans for the 787, and we'll look at rate step-ups. And we're excited about 767. They're having deliberations about how high they want to go on 767, especially now that they're making progress.

They've got the freighter and the tanker now in a mature configuration..

That sounds good. And then just one last one on the Gulfstream portion. So this G700 was rolled out. My understanding is the wing is the same wings as the 650. I know your work statement has obviously changed there over the years.

I'm just curious, is that an upper to your profile? Or are you already under contract to execute on that program?.

So we are going to support both the 650 and the 700. There are similarities in the wing. I'll let Gulfstream speak to the nature of the designs. But we were at -- we had folks at Las Vegas when it was rolled out. It was really exciting.

I think Gulfstream has demonstrated a track record of evolving their aircraft, and we look forward to supporting them as they continue to grow their fleet. And I'll let them speak to the rate projections on both 650 and 700..

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

You just alluded to the analyst and investor efforts to sort of solve the puzzle of the free cash flow statement in recent periods. And for sure, what we hear from investors is an effort to calibrate that moving forward. So Jim, I thought about asking about a few pieces, but -- and maybe this is too broad a way to ask it.

But without -- not asking for '21 guidance, but is it possible to just kind of give us a fresh update on the handful of largest year-over-year changing pieces in '21? I mean I know -- we know there's a handful of programs that change a lot, pension matters, CapEx matters, aggregate working capital matters.

Is that something we could do today?.

So of course, you mentioned we have FY '20 guidance out there, and that's all we're giving at the moment. But you can see from our disclosures that we have a couple of different drivers next year. One of them is the ending of the loss programs like the G280. And I think we've -- 47 might get shipped out next year as well.

So we'll have those forward losses that have been accrued, which have been liquidating. In this quarter, we had $19 million of G280. Those will be gone. So that's a tailwind for us. And then, I think, you've got the pension forecast. And you can see in our 10-K once a year, we update that.

But really, the current year is the one we have the most insight to. We're going through a planning process for next year. But if you look at the free cash flow this year, 0 to $50 million is our range. But within that, we've got $80 million of liquidation advances that will be going away in the future, not next year, but in the next couple of years.

And then you get the forward loss payments. It's about $15 million a quarter on the G280, and then I think we still have some cash to go on the 747 as well. So there's balance, and we've done that. We found more balance in our cash risk and opportunities. That's why you see steadier cash flows going forward..

And the final outcomes on our disposition of the structures business will also affect our fiscal year '21 cash forecast..

Do you expect to grow free cash flow year-over-year in 2021?.

So we're giving FY '20 guidance at the moment, not FY '21, but I appreciate the question. Certainly, our goal, and with all of our actions is to improve the cash flow and value of the company over time..

Okay. And then just last one for me. To get into the revenue guidance range, you would need the organic -- so ex the pieces moving out to decelerate pretty significantly back half versus first half. And I think even if I have the divestitures calibrated correctly, a different seasonality than you've had in the past.

Is there -- do you have space in the guidance for incremental divestitures? Or is there something else in there that I'm missing?.

Divestitures don't have an impact on the sales guidance for the second half as well as winding down of contracts, too. So there's no one you can point to, and I think we would trend on the high end of the range right now. But we do have divestitures that could close in the quarter..

Yes. Our second half of the year is not out of family to other years, prior years, in terms of revenue upticks..

Our last question comes from Michael Ciarmoli with SunTrust..

Maybe, Dan, just to go back to Ron's kind of bigger-picture question. You kind of talked about maybe getting defense up to 30% to 40%.

What's sort of the view or expectation in the near term? If you look at your top programs, you've certainly got Apache, Black Hawk, V22, Chinook, both Army, Air Force looking to potentially curtail a lot of these programs. I know you've got some positions you've set on future vertical lift.

But do you think some of these legacy programs, as they see cuts, create a little bit of pressure on defense in the near term before some of the new stuff ramps? Just maybe if you could talk about how well is your positioning for what the DoD is looking at strategically over the next 5 years or so?.

Sure. Great question. So a lot of people have lost a lot of money betting on the end of various legacy programs, A-10, F-16, Apache, and there's a reason for that. There's a lot of inertia and momentum and high cost of switching and upgrading, not only in the platform itself but training and sustainment.

So these platforms tend to go on for longer and longer. The C-130 is the longest-running industrial product in the U.S. I think it launched in the '60s, and Lockheed has done a great job of continuing to evolve that. Our growth in military is across all of our customer fleets. So we're a partner with Northrop on the Global Hawk and the Triton.

We were key to Northrop achieving the Milestone C low-rate initial production award on Triton because we got the wing production back on track. We're supporting Boeing defense. It's one of our largest defense customers. You name the platforms. They've got great FMS prospects for their programs.

We're a big Sikorsky supplier, not just in structures but also in systems content. And we have interest in offload work on F-35, where the rates are ticking up. And we're competing for some of, I'll call it, the subsystem upgrades that they do to improve reliability and reduce costs as part of their blueprint for affordability.

And then you've got the new starts, MQ-25, the Bomber and the new Air Force helicopter. You mentioned the Army future vertical lift. So it's a robust time to be in the defense space, and we intend to win our fair share..

Got it. Helpful. And then maybe just one last one, Jim. The -- if I heard correctly, integrated margins, excluding the restructuring, look to be 20%. I mean it sounds like you've got great drop-through from the spares.

But is that kind of margin level -- maybe not every quarter, but is that something we should think about as the potential of that segment going forward?.

In that range. We have 19% was our target out there in F-21. It was a good quarter. And the mix of MRO and spares are going to change quarter-to-quarter. But we're confident in the high teens for margins going forward..

Ladies and gentlemen, this concludes Triumph Group's Second Quarter Fiscal Year 2020 Earnings Conference Call. This call will have a replay available today starting at 11:00 a.m. Eastern Standard Time, running through the 15th at 11:59 p.m. Eastern Standard Time. To access the replay, you can dial 1 (800) 585-8367 and enter in passcode 5489726.

Again, to access the replay, you can dial a phone number 1 (800) 585-8367 and enter in access code 5489726. Thank you all for participating. Have a nice day. All parties may now disconnect..