Ladies and gentlemen, thank you for standing by. Welcome to the Triumph Group conference call to discuss our third 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] 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 Q3 earnings call. Earlier this morning, we reported strong results for the third quarter of fiscal year 2020 in line with our expectations. Organic revenue was up year-over-year across all three business segments, with strong sales momentum in the Integrated Systems which grew 9% over the prior year.

The growth in systems this quarter was driven by volume increases on Airbus commercial programs and higher aftermarket demand for military rotocraft. Our Product Support business grew 2% year-over-year as a result of increased demand for engine accessories overhaul. Aerospace Structures delivered strong organic growth of 7% year-over-year.

We continued to wind down legacy programs that have been headwinds in the past and expect margins in future quarters to benefit from this work. Company-wide on a consolidated basis, organic revenue for the quarter was up about 8% while sales of MRO Services and spares was up 15% over prior year. Free cash flow was positive in Q3 and year-to-date.

And we remain on track to deliver a positive free cash flow for fiscal year 2020 as we guided. Triumph achieved these results despite Boeing 737 MAX rate reductions and our Nashville divestiture. Quarterly cash flow improved year-over-year by $46 million. As we exited loss making structures programs and improved cash flow from operations.

Liquidity remains healthy and stable at over $600 million. Our year-over-year operating margins remain stable or were up in all three businesses in the quarter.

Bottom line, our comprehensive restructuring efforts have strengthened Triumph’s portfolio and stabilized our cash flows as reflected in our financial results year-over-year as we become a more focused and cost efficient company.

Given its visibility, I want to comment on Boeing’s decision to temporarily suspend final assembly of the 737 MAX and to provide transparency on the impact on Triumph and our mitigation plans. Triumph remains as a close contact with the Boeing counterparts. And we've taken a proactive approach to managing this issue.

The impact of MAX production pause is minimal to try for a few reasons.

First, Triumph’s diversified platform and product portfolio minimizes the impact of rate reductions on any one aircraft, just six of our 41 factories produce hardware for the MAX and only two of these six derive more than 20% of the revenue from the MAX, demand for other products at these plants remain strong.

Second, we reached agreement with Boeing to supply MAX components at reduced production levels in the near-term to protect continuity of supply and to preserve critical capabilities and suppliers. We have the flexibility in staffing over time and supply chain management to adjust production levels and minimize operational and financial impacts.

As disclosed in last year, the 737 MAX historically represents a single-digit percentage of our annual revenue. With the mitigations above, the company now expects the impact of rate reductions in FY20 to be less than 3% of sales with similar impacts to operating income and cash.

From a cash perspective, we continue to manage our working capital closely consistent with reduced MAX volumes in our fourth quarter and we'll offset these declines through deferrals and liquidation of customer advances.

Our relationship with Boeing remains strong and our company has also agreed to explore balanced solutions to address a number of business considerations including certain fiscal 2021 advanced liquidations for mutual benefit. Our diversified backlog remains key to working through industry and individual programs cyclicality.

Turning to Page 5, in the last 12 months, the company achieved a dramatic shift in the overall quality of its backlog through the divestiture of non-core build-to-print operations the company meaningfully improve the overall profitability of the remaining backlogs.

Our backlog mix and profitability will further improve as we transition development programs into production and sunset loss making programs such as the G280 Wing and the Boeing 747 fuselage later this calendar year.

Last, strong growth in the military and commercial end markets have more than offset recent rate reductions in both total backlog and gross margins. Together, these actions are enabling Triumph to become predictably profitable. I want to touch on our core Integrated Systems and Product Support business units.

We continue to execute our strategy to increase competitiveness, selectively pursue new work to strengthen our backlog, particularly in these segments given their higher margin content. Collaboration across these units on spares and MRO work resulted in a 20% increase in aftermarket sales quarter-over-quarter.

We are evolving from one-off transactions through strategic partnerships with OEMs and carriers and as a result we're winning new business on platforms enjoying strong market growth. Integrated Systems is benefiting from the positive market response to Airbus's new A321XLR.

Airbus announced in December of 2019, that just six months after launch, they've logged more than 450 orders and commitments for the XLR from operators and lessors around the world. Wins for the third quarter on Page 6, include the design and build of a new landing gear uplock system for the A321XLR.

Our solution employs an innovative design which reduces part count and increases reliability to satisfy Airbus's requirement for landing gear up and locked confirmation. This wins builds on our legacy as a premier provider of critical uplocks across military and commercial applications, with more than 50,000 Triumph uplocks fielded today.

In Product Support, we're moving forward with our previously announced joint venture with Air France KLM, which we expect to help fuel growth on newer aircraft, just entering our MRO phase. The global network created through this partnership is already yielding new opportunities with the airlines who recognize our value proposition.

Our combined team is working on several airline proposals with content from both our Product Support and Integrated Systems divisions and this has increased our year-over-year sales volume with Air France KLM by 70%. Our Q3 wins in Product Support also included an onsite support contract with Turkish Technic on their Pratt & Whitney 4000 nacelles.

Our focus on expansion in the aftermarket space is producing tangible positive results and I'm confident this trend will continue. Integrated systems reported revenue growth in MRO and aftermarket sales of 49% over the prior quarter. Reflecting the DoD’s investment in readiness and the benefits of collaboration across Triumph.

Airline customers appreciate the quality and timely delivery of a Triumph repaired part and are choosing Triumph to satisfy the MRO demands of their growing fleets.

Triumph Product Support continues to expand it’s after market presence with the launch of our rotable trading business, which allows us to increase our shop throughput, overhauling components directly for the carriers rather than through third-parties. Triumph now offers one-stop, single-point access to customer support on a 24/7 basis.

Q3 was our first quarter where the new Triumph customer support center was up and running with inquiries up 130% since November. Our recently announced Rotable Warehouse located near the Miami International Airport will better serve the Latin America market and allow us to provide our customers with readily available rotable assets.

Asia remains a strong market for Triumph. In the quarter, our Product Support group received multiple awards from Asia Pacific Airlines for new sales structures including awards at Virgin Australia, Tigerair Australia, Air India, and China Eastern.

We have a growing structures business in Thailand and are expanding our engine accessory capabilities in country to better serve our customers. Across Triumph, our teams are executing in winning new business to drive results. At the same time, we continue to expand margins through higher efficiency and streamlined operations.

We've been on a multi-year journey to standardize our systems and processes, reduce costs and better manage inventory, which has declined by over 40% since fiscal year 2018. While affordability remains important, our customers are raising the bar on product quality and reliability.

In response, we're implementing an enterprise quality system and reducing variability through the adoption of Six Sigma and statistical process control to build quality into the manufacturing process and ultimately enhance product reliability. This important company-wide work is done in partnership with our customers, suppliers and auditors.

And I'm proud to report that all Triumph sites pass their external certification audits held during the quarter. The facility consolidations started in fiscal year 2017 are paying-off. In Q3, we completed the integration of our thermal systems facility in Maryland into our larger Connecticut electronics and control facility.

We expect the cost savings and products synergies to enhance margins across both product lines. The electronics and control side in Forest, Ohio, where we design, manufacture and support specialized heat exchangers and thermal management systems is also helping to improve margins in our integrated systems business.

A few updates on our Aerospace Structures business, which continues to perform well. Growth in our structures business year-to-date was enabled primarily by engineering services, which offset the lost revenue associated with sunsetting programs.

In Q3, we transferred the Boeing 767 work from a large structures plant in Hawthorne, California to the supply base and we remain on track to close the plant in late 2020. Similar wind-down plans are underway at our Grand Prairie, Texas structures plant. These two plants cover over 1.2 million square feet of lease space, which will be exited.

Recall we transfer the E2 fuselage to Korea's ASTK in Q2. In Q3, we completed our last deliveries on the program and now produce only the rudders and elevators under more favorable terms. The wrap-up of the G280 wing remains on-track to complete by the second quarter of fiscal year 2021 with only 27 shipsets remaining on contract.

As they contract Triumph Structures Group continues to reinvent itself and win. They develop innovative intellectual property in thermal plastics. Having recently been granted multiple patents for induction welding of thermoplastic materials, they are now qualified to all Boeing and more than 20 Airbus thermoplastics specifications.

Triumph and Embraer also announced a cooperative agreement to jointly develop and demonstrate the air worthiness of a thermoplastic primary structure in-flight, which will use this technology, a first for the industry.

Our interiors team increased their shipset content for composite environmental control system ducting on multiple Boeing platforms, displacing an incumbent. We remain the leading composite duct provider for Boeing commercial aircraft providing more than 625,000 linear feet annually.

Our Spokane interiors plant recently completed fabrication of its first deliverable part for the Airbus Wing of Tomorrow program. This part is a full scale large primary structure thermoplastic component that will support Airbus's objectives of rate enabling technology while also providing cost and weight benefits.

As part of our strategic review of our structures business, progress continued in Q3 with the divestiture of our Nashville structures business in late December. We are using the temporary rate reductions on the MAX to rightsize our interiors business as well.

As production volumes in our Zacatecas, Mexico plant decline, there's less need for us to maintain a long-term manufacturing presence at this location.

Therefore, we have plans to consolidate the remaining Zacatecas manufacturing activities into our Mexicali facility, which already has composites capability and to our Valencia, California plant offsetting MAX rate reductions. We planned to close our Zacatecas facility later this year.

As our plans progress, we'll keep you apprised of our ongoing commitment to achieve financial predictability and operational performance on our path to value. In summary, Triumph maintains positive momentum in Q3 and remain on-track to achieve positive free cash flow on an annual basis for the first time in three years.

Financial performance continues to improve your-over-year. I'm very pleased with the continued improvements in the quality of our backlog.

The actions we've taken including the divestitures of our build-to-print businesses, the transitioning and sunsetting of our non-core programs, and the increase in military programs have improved our backlog profitability. This speaks to the predictability of Triumph both today and in the future.

These program and operating company portfolio actions and operational improvements allow us to invest in fewer healthier businesses where we can add the most value. With that, Jim will now take us through more detailed financial results for the quarter.

Jim?.

Thanks, Dan, and good morning, everyone. Our third 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. Organic net sales increased 8% over the prior year quarter. All three business units generated organic growth.

Adjusted operating income was $64 million this quarter, and our adjusted operating margin was 9%, up about 440 basis points from last year's third quarter.

With respect to the segment results, on Slide 8, FY 2020 third quarter organic net sales in our Integrated Systems segment increased 9% compared to the prior year quarter, driven primarily by growth in Airbus commercial programs, and increased aftermarket demand from military rotorcraft programs.

Margins for the Integrated Systems segment were significantly higher when compared with the prior year quarter. The margin reflects a 49% increase in MRO and aftermarket sales in the quarter relative to the prior year, improved operational efficiencies and cost-reduction initiatives.

Restructuring actions impacted the segments margins this quarter by approximately 140 basis points. These restructuring costs will help to sustain and expand margins in Q4. Turning to Slide 9. Third quarter organic net sales for our Product Support segment were up 2% even in a seasonally low quarter due to accessory component repairs in the U.S.

and despite deferred maintenance during the MAX grounding. 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.

Organic segment net sales were up 7% due to ramp-up on legacy programs and engineering service. Aerospace Structures operating margin were 5%, is up from a loss of 10% in the prior year reflects the benefits of the portfolio shaping and cost-reduction actions we have taken as part of our transformation efforts.

The group is executing on the program transitions having completed the E2 program transfer to ASTK on time and on budget and still planning to transition the G280 out of Tulsa in mid-calendar 2020. Turning to Slide 11. Our $40 million cash generation in the third quarter was in-line with our expectations.

This is a $46 million improvement over the same period last year and reflects the portfolio and program changes, cost-reduction actions and working capital management across all of our businesses. 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 $10 million in the quarter. We used approximately $11 million of cash in the quarter for working capital, which Aerospace Structures included $20 million for advanced liquidations and $10 million for the sunsetting and G280 program. On Slide 12 is a summary of our net debt and liquidity.

Our net debt at the end of the quarter was approximately $1.4 billion. Our cash and availability were strong at about $635 million, and we are in compliance with all our financial covenants. In the quarter, we used our improved market capitalization and voluntarily contributed $50 million in treasury shares to a defined benefit pension plan.

This contribution eliminates required funding in fiscal 2021 and reduced required funding in fiscal 2022. We also extended the maturity of our cash receivable securitization facility and lower the capacity to $75 million from $125 million. We aligned with our overall receivables borrowing base.

Also during the quarter, we applied the proceeds of $60 million from the Nashville facility divestiture to reduce our revolving credit facility.

Slide 13 is a summary of our FY 2020 guidance, which updates the guidance we provided last quarter for impacts associated with our recent divestiture of the Nashville facility and the plant production rate changes on 737 MAX.

Based on anticipated aircraft production rates and including the impacts of pending program transfers, for FY 2020, we continue to expect revenue of $2.8 billion to $2.9 billion. We narrowed our expectation for adjusted EPS to a range of $2.35 to $2.55.

Our guidance assumes an effective tax rate of approximately 10% for the year, which represents the normalized tax rate of 21%, adjusted for the anticipated reduction through a partial release of the valuation allowance in Q4. Cash taxes, net of refunds received, are soon to be approximately $7 million for the year.

We anticipate the reduced cash receipts in the fourth quarter related to the 737 MAX to be offset by deferrals and liquidation of customer advances. We continue to expect free cash flow for the full year to be between 0 and $50 million. We now expect capital expenditures to be in the range of $40 million to $50 million.

Slide 14 provides some additional detail about our cash guidance. For FY 2020, we expect cash flow from operations of $40 million to $100 million, which includes the liquidation of customer advances of approximately $60 million in the year.

To the first three quarters of FY 2020, we delivered year-over-year improvements in revenue, cash and earnings that demonstrate our ability to deliver on our commitments, to generate cash and profitable core growth.

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. Q3 results demonstrate our restructuring and transformation efforts that position Triumph for success. The quality of the remaining backlog and new wins are indicators of our future performance and I remain confident in Triumph’s ability to compete, win and deliver value creation over the long-term. We're now happy to take any questions.

[Operator Instructions] Our first question comes from Seth Seifman with JPMorgan..

Hey, good morning everyone. This is actually Ben on for Seth..

Good morning..

Good morning, Ben..

Yes. So I guess I just wanted to ask about the 737 MAX.

I mean, can you speak to or give some color on the production rate that you are kind of considering for the Q4 FY 2020 and how you kind of see that progressing through FY 2021?.

Yes. The rates of production were 52. And then last year, they stepped down to 42 a month. The rates that we're looking at running it during an interim period are about half of that. I think that's comparable to other suppliers at Boeing as Boeing tries to synchronize the supply chain with their assembly line.

Of course, each factory has a different work in process and finished goods inventory level. So there's some minor differences. But that rate is more than sufficient to sustain the capabilities both within Triumph and within our supply chain. And then as we go through the calendar year, we'll step that rate up.

And I'll let Boeing speak to the profile of the step up..

Okay. Thanks. And then just one on the cash from ops is down $30 million in the guide after adjusting for the Boeing advances that you are not going to repay. But net income in the guide is down about $10 million.

Can you just kind of square that up for us and where the extra cash flow is down from?.

Yes. Sure, Ben. This is Jim. So CapEx is a little bit lower. And with the divestiture of Nashville, and our CapEx has been running less for $27 million roughly year-to-date. So we're $40 million to $50 million for the year, that's about $10 million down from where we were previously.

And that's really probably the biggest offset to the change in operations..

Okay. Thanks..

The next question comes from Myles Walton with UBS..

Thanks, good morning. Maybe just follow-up on that for a second. So the CapEx, I think the question was on cash. Jim, if you had it. And I think the press release talked about 3% hit to – from the 737 MAX versus previously 2%.

And then also, can you clarify on the tax rate, that 10%, is that flowing through your adjusted EPS as well or just your GAAP EPS?.

Yes. Thanks, Myles. Say, I was addressing what offset that. I think that was Ben's question. Of course, cash from operations is a little lower, and the total is the same because we're able to have less CapEx or free cash flow stayed in the same range.

And the reasons for our many – for the CapEx – for the change in the cash flow from operations, but MAX is part of that. In terms of the tax rate, yes, that is in the adjusted EPS guidance, the 10% rate. And that reflects the reversal of the valuation allowance we expect in Q4..

And so just the implied margins for 4Q in that new – and that new EPS guidance, can you talk about the moving parts in 4Q?.

Yes. So I don't really have a lot of detail about the parts in Q4 right now. I think with the change in the MAX schedule, there's going to be some impacts, but they have offsets, as Dan talked about. So I think what we have out there is our full year guidance. And those parts will be managed, so we can achieve that..

Dan, can you talk about on the strategic side of the portfolio shaping if your counterparties are showing any type of uncertainty as it relates to the MAX uncertainty itself as well as 787 production rates? Just general – just the general climate, which seems a little bit less predictable within that kind of outlook and valuing strategic purchases by counterparties..

Yes. I think the uncertainty is lifting. One, two, three months ago, when the pause was announced, and there was uncertainty around interim production agreements, your comment really applied.

Now with all the suppliers reaching agreements with Boeing and a line of sight towards both return to service and return to production, the confidence that Boeing has, GE has extends to Triumph. And I think people who look at M&A, as we think about divestitures out of our structures business, take the longer view.

And some of these properties only come up for sale every 10 years or so. And so I feel more encouraged that through the course of the year, deal volume will continue.

It really hasn't slowed, and we've made good progress with our investment banks on the planning for various outcomes that I've talked about on the last earnings call, and we look forward to making those announcements as they are completed..

Okay.

And the – by the end of the fiscal year, is that still the right time line? Or has it moved at all?.

So you have to define what you mean by the end of the fiscal year. We are – every quarter, look for Triumph to continue to make progress against our plan. And we've done 13 divestitures. So we've – I think we've built up a track record of being able to execute these.

Nashville was the big one in the quarter for Q3 and through the course of this year, look for additional announcements..

Okay. Thanks..

Our next question comes from Greg Konrad with Jefferies..

Good morning..

Good morning..

Just not to go back to the MAX, but I mean, you mentioned that it impacted the cash flow from ops, but the revenue outlook stayed the same.

Was there an offset on the top line or a business doing better than expectations?.

Yes. One of the strong suits in Q3 was our progress on MRO. And the nice thing about maintenance repair overhaul and spares is short cycle, and I highlighted this as a focus area on our last earnings call.

And one of the changes that we made in the quarter is to put all of the 14 depots that exist across Triumph under our Product Support business' direction, and they're used to moving fast. They're a business with very little backlog, quick turnaround times.

And historically, these depots that were embedded in our OEM integrated systems; it was really a secondary consideration to the deliveries that go to the new deliveries out of those factories.

So just shining a light on both operational performance and channels to market and the TIS depots, we saw some good pickups in the quarter, and we continue – and we'll continue to do that through Q4 and FY 2021. And that's helped to offset that – the delays or the rate cuts on MAX..

I mean, and then just as a follow-up, you sized the impact from the MAX at 3% for the fiscal year. But you also called out some impact in Asia from on-site services.

Does that 3% encompass both of those items? And then just as a follow-up, has there been offset or benefit from the MAX grounding from maybe some aftermarket parts on older aircraft?.

So the 2% doesn't include any, I'll call it, softness in our third-party maintenance as carriers defer their repairs. So I view that as more of a timing issue, Greg, where they've operated the legacy fleet longer, waiting for the MAX to return to service. And so we expect a tailwind in FY 2021 as aircraft are inducted for overhaul..

And then just last question.

I mean, as we true-up our models for the next couple of years, I mean, when should we assume that the advanced repayment start?.

So this year, we've liquidated $60 million, and that's what we anticipate for the full year of advances. As we mentioned, we're continuing discussions with Boeing who's helped us out to offset some of the impact from MAX. And we look forward to giving guidance Q4 next call on what FY 2021 will look like..

Thank you..

Thanks..

Our next question comes from David Strauss with Barclays..

Hi, guys this is actually Kate Copouls on for Dave..

Good morning..

Good morning..

Good morning. So I wanted to talk about IS margins. So I mean, we've talked about the MAX, but I think the MAX is probably one of your most profitable programs within IS.

So I guess, what is – what could margins look like next year in that segment if MAX is down another 40% or 50%? I guess, is it safe to assume that your 2021 IS EBITDA margin targets assumed higher 737 and 787 rate?.

Let me respond and then, first – and Jim can join in. But we're fortunate because of our broad portfolio of brokers to have lots of profitable programs to TIS. Electronic engine controls, hydraulics, heat exchangers, fuel pump metering systems. And so, yes, the MAX is a profitable program.

And yes, it's impacted us in the short term because of the lower volume, but we also have very strong performance out of our engine controls business and our thermal systems business to help offset it, and those have not been affected by MAX.

I mentioned on my script, military rotorcraft, and whether it's the Chinook, the Apache, these platforms continue to make orders in the quarter that carry good margins. So that's really the strength of Triumph is that we're not – we don't have that dependency on any one platform.

Jim?.

Yes. And the other thing I'd mention is that we did assume the higher rates, but it's very manageable because we have such a high materials cost. Over two-thirds of our cost for the MAX program is purchase materials. So we're working with our supply chain to manage that, and that will help mitigate impacts..

Okay. That's helpful.

And then, I guess, continuing with the 787, I guess, will you start to see that impact later in calendar 2021? And then could you just kind of size how much impact 787 could be from a kind of revenue and cash perspective as well?.

Yes. The build rate for Triumph on the 787, it will decline slightly from what was about 13 a month in this fiscal year, down to about 12 in 2022, and potentially down to maybe 11, 11.5 in 2023. So it’s a gradual reduction. It's not a significant or material impact to our throughput. We're helping Boeing make those adjustments.

The factories that produce 787 content, it's a small percentage of their throughput, so it doesn't really have a big effect on us. And as noted in the quarter, we won this A321XLR contract. We hope it's the first of many. And so we pursue work with Airbus and other customers to offset any, any rate reductions coming out of Boeing..

Okay. And then just last one for me. I guess, so you're talking with Boeing about renegotiating advanced payments.

Are you kind of – is there anything broader that you're also kind of renegotiating or just kind of if you could touch on that? And if the advanced payments are those solely tied to the 737 program? Or is there kind of a wiggle room there?.

So we have a lot of touch points with Boeing. Boeing defense, Boeing commercial, Boeing global services. And really, that's one of the benefits of the positive relationships as we work to support each other as they have adjustments in rate or they have new proposals.

For example, on the defense side, we're going through development now in the T-7A trainer. We're supporting the V-22 contract on the defense side. And so when we talk about negotiations with Boeing, we do it. It's a very large set of programs that we work through. It's not just the MAX.

And the advances that we're servicing, repaying are not related to the 737. They go back to primarily the 747. And we're excited about the 747 program. We're delivering to our commitments, and we're wrapping up our contract obligations.

In calendar year 2020, we'll deliver our last 747 fuselage panels and wind down the two plants, Marshall Street and Grand Prairie, Texas and Hawthorn in California. That, combined with the exit of the G280 program in Tulsa, and we – and the sale of Nashville and four of our largest structured plants will wind down.

So good dialogue with Boeing across a broad set of programs and I think we've demonstrated the ability to reach win-win agreements with them..

All right, great. Thanks guys..

Thank you..

Our next question comes from Peter Arment with Baird..

Hey, good morning, Dan and Jim..

Hi..

Dan, you mentioned the Mexico consolidation efforts tied to 737 MAX, the lower volume and we're taking advantage of that. Could you just give us a highlight of what is left on the facility consolidation efforts from the original fiscal 2017 plan? I know that you've done a lot already. I just wanted to know what was left..

Yes. Not much. Not much. We – we're in the process of moving the 767 line from Texas to Florida. A little bit of it goes to a different plant in Texas, but that will happen this year. And we just finished the move of the Maryland heat transfer business into Connecticut, so those are all the planned transitions. We have some smaller ones.

You mentioned that could take us – we're being opportunistic here and also dealing with reality that the work that's done that could take us is mix. There's composite work that readily fits in Mexicali. Mexicali is one of the plants affected by MAX rate cuts. So it will help backfill that losses of volume.

And then they also do some roughing machining, and that will go to our Valencia actuator plant also affected by MAX. So we've got to be agile and respond to market conditions quickly is the right thing to do. But having done those, there's really no other planned consolidations of plants. I think we've done about a dozen, and it's been difficult.

It's cost us a lot of cash. It's been a drag on cash flow. You have to build ahead inventory and then burn it off. You have some loss of learning. In fact, in Q3 and in prior quarters, one of the consolidations that we did in Connecticut was a drag on cash and earnings, and we're now coming out of the other side of that consolidation.

We see a path to positive cash flow and profitability at that plant. So it's been painful. I don't want to do a whole lot more of those. But what it's done for us is it's gotten the work in the right places. And it's got us out of leased facilities, for example, in Grand Prairie, Texas and the Hawthorne.

Those were both leased facilities, so we can reduce our footprint and reduce our fixed cost, and we expect this to benefit 2021 and on. .

Appreciate the color. Thanks..

Okay, thanks..

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

Hi, good morning. This is Jeff Molinari on for Cai today. Thanks for taking my questions. So it looks like the 737 program is listed number one on Integrated Systems, as for your top programs from the deck and kind of fifth on the structure. So I was just kind of curious how you split the MAX sales between the two segments roughly.

And then I have a couple of follow-ups..

Sure. We thought about changing that chart. It has the programs in descending order because normally, it's a little bit of a nonlinear curve, and the first ones are really big. It turns out, they're pretty uniformly distributed revenue across these programs. I mean, we do a good bit on 737 but a lot on the A320, 787, V-22.

So we'll work on a way to provide investors and analysts with more transparency on content. But on the 737 and structures, it's mainly interiors. It's mainly blankets that I mentioned in Mexicali, and that factory is about 2,500 people. They have around 20% that work on the MAX. We're going to continue to produce the MAX at that plant.

There's a lot of blankets that are of a common configuration, no matter how the final aircraft is configured. So – and we can use over time to maintain our workforce and our throughput. So it's not really a structures role on the 737. It's more of an interiors role..

Okay.

So I mean, but just generally, between the two segments, would that imply that more of – the vast majority of that Integrated Systems then per MAX?.

No. Actually, I – the MAX content is – it's pretty evenly distributed between the systems and structures or interiors..

Okay. Okay, that's helpful. And then just switching gears a little bit.

The advanced repayment, you talked about them a bunch, but how much is the actual dollar amount remaining? Is that part of the renegotiations? Or is it just solely negotiating timing?.

I think there's no limitation to what we can negotiate. The – I think there's about $240 million left of advances, and we'll be discussing 2021 ones as what we highlighted in our statement..

Okay, then. That’s helpful. And one more, if I may. What's the latest on the G280 program? I think you said it was $10 million burn in this Q. How much are you expecting it for to be for the full year, the burn? And what will the burn be next year? Thanks..

Yes. So it's $10 million this past quarter. We're expecting $60 million next year in FY 2021..

Yes. It will be good to get this program out of our portfolio. It came over with the Spirit transfer of 650. It was always a loss-making program at that time, and it hasn't gotten materially better. So the decision we made last year to exit and move that work to a low-cost country was the right one.

It's – it has been – we've been executing on the program. It's certainly paced by the supply chain but we have a line of sight to get out of Tulsa and finish the work there this summer and put that chapter behind us..

Let me clarify. The $60 million is for this year, for FY 2020 kind of which within the quarter total. So next year, it was $40 million. That's our estimate..

Okay, thank you..

Thank you..

The next question comes from Ken Herbert with Canaccord..

Hi, good morning. .

Good morning..

Hey, Dan, I just wondered within Integrated Systems, if you can just remind us again what percentage of that segment sales are aftermarket and if you could provide a little more detail on the up 49%.

I know you called out military rotorcraft, but what was the growth maybe on the commercial side and just any more detail around that and if there was anything sort of onetime in the quarter?.

Sure. So today, aftermarket and MRO is about 20% of their total revenue. If we have $1.1 billion of revenue, it's a little bit over $200 million. There was no single one-timers that drove the increase.

When we benchmark our peers on aftermarket, most of them are in the 40% of their revenue, we've been talking to systems companies, that's derived from aftermarket. So we think we've got a big upside. In our last earnings call, I talked about what that could be.

Could we stretch 20% to 30%? 35%? And so we're in the early phases, but the early data is encouraging. The fact that we're able to pick up orders on Apache, on Chinook. This is all a reflection of the DoD putting money into readiness.

And when the Pentagon talks about investment, it's not only in new platforms, but in new starts but also – and sustainment budgets that support the fleet, and that's flowing to Triumph as they work on getting the readiness of all the platforms. So it's a multiple of contracts, and we think there is upside beyond the 20% today.

And the last quarter, it's actually been higher than 20%. We've been running year-to-date. It was 26% in the last quarter. And it's a 49% increase year-over-year in MRO and aftermarket sales..

Okay, that’s very helpful. And just one more question on this.

Of that sort of 26% or 20% for the full year, I guess, how much of that is under long-term contracts versus how much of that is just sort of book and ship or transactional?.

I think we'll have to take that for action so we could get you right numbers. But I'll give you an example of an award in the period. We had the DLA, the Defense Logistics Agency, gave us an award for the T700 engine controls, but this is a mature program.

But they – as they refresh these engine controls, there's over 2,000 out there that needed to upgrade the Black Hawk and the Apache fleet. And so we don't talk as much about this part of Triumph, but it's really where the core value of the company is in our electronics and control business in West Hartford.

It's strong IP, critical components that enable – they're mission-critical, and there's large installed fleets. So in Triumph, we've been – as a leadership team, we've been talking about how do we communicate to our investors all this good content that we have and not just summarize it at sort of a percentage level as we have.

So we'll share more of that in some of the one-on-ones and look for, in the earnings calls in the future, to give more detail on the MRO progress. .

Great, thanks Dan..

The next question comes from Michael Ciarmoli with SunTrust..

Hey, good morning guys, thanks for taking my questions. May be, again, just to stay on the MRO and spares. I think I might have misheard this, but I think you called out maybe 15% spares in MRO growth and then maybe later it was 20%.

What were across the company, I guess? What were – what was MRO and spares up year-over-year?.

So the margin in Integrated Systems reflects a 49% increase in MRO and aftermarket sales in the quarter versus last year's quarter. That was my observation in – about the MRO sales. We still have the TPS overall segment, which is MRO and spares, more MRO than spares. And that growth rate was a little lower for that full segment. It was only 2%.

I think that reflects the impact of the MAX. There's really not a lot of discretionary work being done in interiors or maintenance. It's kind of as necessary..

It was really TIS that saw the uptick in Q3 – MRO and aftermarket..

Okay. And then, just back to the MAX. I mean, a 3% revenue impact this year. I mean, given the timing of your fiscal year, it seems like the units even with holding a rate here with Boeing at a reduced rate, you could see rates down 50%.

I mean, should we expect a more significant headwind from the MAX next year? And I guess, tying in, like you said, that gradual step down on the 787, should we – just how should we calibrate our expectations for organic growth next year?.

So we've been – as reported in this quarter, we've been encouraged by the organic growth, about 8%, and that's in spite of the rate cuts that Boeing made a year ago from 52 to 42. There is some lost volume associated with Max in FY 2021. But because it's, again, one of many programs. It's not a huge contributor.

We don't expect it to have a material effect on our FY 2021 revenue forecast. Remember, Triumph is less about revenue top line growth right now. It's about profitability expansion and improvement in free cash flows.

So we'll manage during this interim rate period to the reduced volume, and we'll use our organic growth on other programs to help offset it. It may take away a little bit of our upside and growth next year. But it's not going to be a huge impact..

Okay. And just one last one on the free cash flow. Just to make sure I'm straight on this. I guess, $10 million cut to operating cash flow offsetting with Capex, but it looks like the advanced liquidations were also cut by $20 million.

And so I guess, it's in the realm of zero to $50 million, but any other moving pieces there? I mean, it seems like that would have given a little bit of a tailwind to free cash flow, offsetting the headwinds from operations..

As I mentioned, on the MAX, we have a high material content. So we have to manage that inventory down. So that's kind of the offset there is the inventory versus the advanced deferral. .

We're working really hard to push out hardware in Q4. We have a past-due backlog balance that we want to drive out, and that's where the cash from operations is going to come. So all the factories of Triumph are working independent of MAX to ship hardware in Q4. .

Got it. Alright, thanks guys. I will jump back in queue..

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

Hi, guys, this is Caitlin on for Ron. Can you provide more color on the puts and takes in the margin assumptions reflected in your updated FY 2020 outlook. And how do these margin assumption changes jive with the operating cash impact for the year? Thank you..

So, we really aren't giving any quarterly margin guidance. I think the margins fluctuate more in structures because of the long-run nature of the programs, but they have been improving over time. So you're going to see some volatility there. But Integrated Systems and Product Support are solid.

And of course, the 37 MAX volume changes will have a modest impact, but that's very manageable because of our high material content because of the actions we're taking internally to redirect the workforce and use the opportunities for consolidation and rightsizing of facilities. .

Alright, thanks you. That’s helpful..

Since there are no further questions at this time, this concludes Triumph's Third Quarter Fiscal Year 2020 Earnings Conference Call. There will be a replay of the conference available later on today at 11:30 A.M Eastern Standard Time, through the 14 of February, 11:30 Eastern Standard Time.

You can access the replay by dialing 1 (800) 585-8367 and entering passcode 1487806. Again you can access the replay by dialing 1 (800) 585-8367 and entering passcode 1487806. Thank you all for participating and have a nice day. All parties may now disconnect..